Investing in Human Capital: Reform Challenges after Bulgaria’s Accession to the EU

1. Investing in Human Capital:Reform Challenges after Bulgaria’s Accession to the EU World Bank – OSI Conference, Sofia, October 19, 2009

2. Contents • The importance of investing in human capital: summary of main messages of policy notes • The short-term challenge of crisis and recovery • The medium term structural agenda • Social assistance • Labor market reform • Pension reform • Education reform • Health sector reform • The main message: GO DEEPER (capitalize on achievements and continue reforming)

3. Human capital is instrumental for country’s long-term prosperity • Dual objectives of investment in human capital in the post-accession period • Overarching objective • accelerate and sustain growth, • enhance competitiveness and • advance convergence with the EU • Short-term objective • mitigate the adverse impact of the economic crisis on human capital

4. Human dimensions and costs of the crisis • The crisis has human dimensions and costs • Losses of jobs and incomes create health and pension insurance coverage gaps; • Raise the likelihood of worsening nutrition… • … and lower school attendance for the most vulnerable segments of the population; • Reduce remittances and other informal transfers while the role of such transfers increase as a coping strategy. • The share of vulnerable households increases

5. The crisis: doing more ‘with less’ or ‘with the same’ • The crisis increases the demand for government immediate actions to preserve existing jobs; strengthen the safety net; ensure access to education and health services … • … while at the same time recognizing the increasing fiscal constraints and the need of keeping social spending under control

6. Structural reforms for long-term growth and convergence

7. Social assistance with capacity for social risk mitigation throughout the life cycle • Bulgaria has a seasoned social safety net with a comprehensive set of programs, but the system needs a fresh look to improve its ability to respond fast to the negative impact of the crisis on the poorest, and to promote social inclusion of the poor and vulnerable • Social assistance overall is well targeted to the poorest 20% of the population and achieves high coverage while spending less than the average in ECA

8. Social assistance achieves high coverage of the poor with limited resources

9. The LRSA/GMI program is well positioned for response to the crisis • Bulgaria has a well-targeted last-resort social assistance program – the GMI, and also a well targeted heating allowance • They can be scaled up in response to the crisis • The targeting accuracy of the GMI and the HA is 74% of Q1, and 73% of Q1 respectively (share of program budget captured by the lowest welfare quintile) • In terms of targeting, GMI performs well in comparative (ECA) perspective

10. Comparative performance of last-resort social assistance

11. GMI’s coverage is small and declining • However, in recent years eligibility for GMI has been restricted and the program heavily linked to activation, which reduced GMI spending and number of beneficiaries • As a result, the GMI is with small and declining coverage – only 13.3% of the poorest 20% of the population receive it • …and relatively small generosity – 23.5% of the pre-transfer consumption of the poorest 20% of the population

12. Challenges to social assistance in the short-term • With increased and prolonged unemployment, the demand for GMI benefit will be increasing. In September 2009, the number of beneficiaries is 38,200 – the highest for 2009, and higher compared to September 2008 (36,000) • The GMI starts behaving as an ‘automatic stabilizer’ – to expand in crisis as more households become vulnerable and therefore eligible for social assistance

13. Social assistance structural agenda • The need for effective crisis response triggers advancing a structural reform agenda • Last-resort income support / GMI • Strengthening the linkages between cash benefits and activation services, and at the same time … • … trying to strike a balance between investing in activation and providing cash benefit, for most effective use of funding • Shifting the focus of social workers: from exclusion to inclusion of deserving poor in the GMI program • Improving GMI beneficiary registry and record keeping

14. Labor market: improvements pre- and shortly after EU accession • The Bulgarian labor market has seen remarkable improvements in recent years and has contributed to strong economic growth • Record low unemployment and big gains in employment through 2008, edging close towards the Lisbon target of an employment rate of 70% • More than 400,000 new jobs were created 2003- 2007, but with reported shortages of skilled workers • In 2008, activity and employment rates for workers aged 25 and above in Bulgaria reached parity with EU15

15. Labor market: challenges of unfavorable demographics, low skills and employment • Bulgaria has significant untapped domestic labor reserves… • … but skill mismatch and shortages are barriers to employment • With the demographic decline, growth requires sustained increase in labor productivity and new skills • However, the education system does not equip students with skills and competencies to compete in an innovation economy • Skills gap might increase inequality (OECD)

16. Labor market: reforms for productivity increase • During crisis make efforts to keep workers in employment • Address skills shortages both to tackle unemployment and to help the recovery • With low productivity in a European comparison, intensify investments at all stages of education - from early childhood to adult education • Urgently look at promoting the transition of young people from education to labor market

17. Pensions: sustain the pension reform model and go deeper with the reform • The Bulgarian pension system has undergone significant and well designed reform since 2000 • Multi-pillar system • Fair benefit formula • Retirement age adjustments • Limits to early retirement… • …but still no fiscal sustainability, despite the relatively high contribution rates • The demographic crisis • Certain departures from the initial model

18. Pensions: sustain the pension reform model and go deeper with the reform • Have automatic sustainable pension indexation • Increase effective retirement age • Strengthen disability certification processes • Strengthen long-term financial planning, including revision of contribution rates which would be more compatible with long-term fiscal sustainability • Consider exit strategy for formalized Government contribution to the scheme

19. Education • Bulgaria has recently introduced reforms of secondary education system to promote more autonomy and accountability of schools for better learning outcomes • Positive results are already showing but more remains to be done to reap the full benefits of the reforms • per-student-financing and delegated budgets • concerns remain as to the accountability of schools to the local community

20. Education • Dramatic challenges in terms of unsatisfactory learning outcomes, early school leaving and considerable inequities • Vocational education and training system remains un-reformed • Issues with unreformed, low-participation higher education

21. Education • Avoid cuts in the education budget • Promote accountability for learning outcomes and results as the key policy direction for both secondary and tertiary education • Recognize teachers as the key determinant of the quality of education

22. Health: current status • Bulgaria has undertaken several significant health sector reforms during the past decade, • …but a large unfinished policy agenda remains • Compared to other EU countries, the share of out-of-pocket spending is significantly higher, while government spending is relatively low • Low public satisfaction with the health system: various indicators of reported satisfaction in Bulgaria are frequently the lowest in the EU

23. Health: current status • Rapid growth of the hospital system endangers the sustainability of the sector • The primary health care system is well established, but still to reach its full potential to provide efficient, high-quality care • Some measures taken on the pharmaceutical (spending) side, but many risks still remain

24. Health: policy directions • Protect health spending in the short term to mitigate the impact on the poor; and stabilize the drug budget; • Initiate hospital sector restructuring in line with the master plan; and consider changing the financial incentives for hospitals • Improve the quality of services provided by strengthening the instruments of licensing and accreditation, and the costing/payment mechanisms for services

25. Health: policy directions • Consider introducing stronger pay-for-performance measures at the primary care level and changing regulative standards to re-define the responsibility of primary care physicians • Fine-tune health insurance in line with available lessons and initial strategy