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

World Bank – OSI Conference, Sofia, October 19, 2009

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 agendao Social assistanceo Labor market reformo Pension reformo Education reformo Health sector reform The main message: GO DEEPER (capitalize on

achievements and continue reforming)

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Human capital is instrumental for country’s long-term prosperity

Dual objectives of investment in human capital in the post-accession period

o Overarching objective• accelerate and sustain growth, • enhance competitiveness and • advance convergence with the EUo Short-term objective• mitigate the adverse impact of the economic crisis on

human capital

Human dimensions and costs of the crisis

The crisis has human dimensions and costs o Losses of jobs and incomes create health and pension

insurance coverage gaps; o Raise the likelihood of worsening nutrition…o … and lower school attendance for the most vulnerable

segments of the population; o Reduce remittances and other informal transfers while

the role of such transfers increase as a coping strategy.The share of vulnerable households increases

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

Structural reforms for long-term growth and convergence

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

Social assistance achieves high coverage of the poor with limited resources

Roman

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Poland

Russia

Belarus

Bulgari

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Azerba

ijan

Serbia

Kazak

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Uzbek

istan

FYR Mac

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Ukraine

Kosov

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Moldov

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Armen

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Albania

Bosnia

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ina

Monten

egro

Georgi

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10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

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1.5

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4.5

COVERAGE AND FISCAL EFFORT: Total Social Assistance

COV Q1

%GDP**

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 crisisThe 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

0 10 20 30 40 50 600

10

20

30

40

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Kazakhstan TSA

Uzbekistan SA

Estonia SB

Bosnia CPA

Lithuania SBP

Ukraine XPCroatia SW

Montenegro MOP

Poland SW

Georgia TSA

Romania GMI

Kyrgyz UMBSerbia CA

Turkey CCT

Albania NE

Armenia FPB

Kosovo SAB

Macedonia SFA

Russia CA

Turkey GC

Coverage, Targeting and Generosity of to Poorest Quintile

Hungary SA26.9

Targ

etin

g ac

cura

cytin

g A

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Coverage

Comparative performance of last-resort social assistance

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

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

Social assistance structural agendaThe need for effective crisis response triggers

advancing a structural reform agendaLast-resort income support / GMIo Strengthening the linkages between cash benefits and

activation services, and at the same time …o … trying to strike a balance between investing in

activation and providing cash benefit, for most effective use of funding

o Shifting the focus of social workers: from exclusion to inclusion of deserving poor in the GMI program

o Improving GMI beneficiary registry and record keeping

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

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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)

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

Pensions: sustain the pension reform model and go deeper with the reformThe Bulgarian pension system has undergone

significant and well designed reform since 2000o Multi-pillar systemo Fair benefit formulao Retirement age adjustmentso Limits to early retirement……but still no fiscal sustainability, despite the

relatively high contribution rateso The demographic crisiso Certain departures from the initial model

Pensions: sustain the pension reform model and go deeper with the reformHave automatic sustainable pension indexationIncrease effective retirement ageStrengthen disability certification processesStrengthen 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

EducationBulgaria 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

o per-student-financing and delegated budgetso concerns remain as to the accountability of

schools to the local community

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

Education

Avoid cuts in the education budgetPromote 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

Health: current statusBulgaria has undertaken several significant

health sector reforms during the past decade, …but a large unfinished policy agenda remainsCompared 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

Health: current statusRapid growth of the hospital system endangers

the sustainability of the sectorThe 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

Health: policy directionsProtect 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

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