Economic Update
As Bulgaria’s teachers’ union ends the fourth week of its strike, a political crisis looms for the government. On October 11, police cordoned off the streets of central Sofia as approximately 50,000 teachers from across Bulgaria took part in the country’s largest strike for ten years. At the core of the teachers’ demands are wage increases of nearly 100% by July and a greater proportion of national wealth to be spent on education.

There can be little doubt teachers in Bulgaria are poorly paid, not just by EU standards but also by those of the country’s Balkan neighbours. Currently a young teacher in Bulgaria earns just $204 per month, while a teacher with twenty-five years of experience fares little better, receiving $285. Compare this to teachers’ average salaries in Greece ($1284), Romania ($485), Macedonia ($430) and Serbia ($570) and it is easy to see why many teachers resort to giving private lessons in order to make ends meet.

Bulgaria only spends 3% of GDP on education and the teachers’ demands for this figure to reach 4.7% are still well below the Organisation for Economic Co-operation and Development average of 5.7%.

The teachers’ syndicates roundly rejected the government’s initial offer of a 32% pay rise and negotiations are ongoing. Prime Minister Sergei Stanishev said an increase of 100% would lead to high inflation and a widening of the country’s trade deficit that could ultimately cause the state to “burst like a bubble.” Stanishev said, “Bulgaria is at a crossroads now. We can either press on with our efforts for higher growth rate and incomes without pursuing unrealistic goals or slide in a direction that will incur huge damages to everyone.”

Although the ruling coalition is led by the Bulgarian Socialist Party, the government has run a tight, pro-business fiscal policy in recent years.
Albert Jaeger, International Monetary Fund mission chief for Bulgaria and Romania, has backed Stanishev’s stance, saying a substantial increase in public sector wages would lead to further overheating of the economy. Research by the Institute for Market Economy (IME), the oldest independent think tank on economic policy in Bulgaria, claimed a 100% increase in teachers’ salaries would result in inflation of over 35% per year and a current account deficit in excess of 30% of GDP. The current account deficit currently stands 20% of GDP.

However, Ivaylo Ditchev, professor of cultural anthropology at the University of Sofia, said the choice facing Bulgaria was a different one. “The outcome of this conflict will decide whether we become a country of waiters and cleaners protected by a strong army, a tax paradise for European capital of dubious origin, or a European country with an educated population and a well-developed public sector,” he said.

With both sides so entrenched and with the topic of discussion volatile, there is real potential for a political crisis for President Georgi Parnavov. Although the leader of the education syndicate, Pleven Boriana Genova, denies the strikes have a political agenda and has refused to meet with mayoral candidates, the dispute is providing a boost for opposition parties. On October 23 parliament will vote on a motion of no confidence in the government. Sixty-three members of parliament signed the motion last week.

Although the ruling coalition’s strong majority in parliament means that the motion is highly unlikely to succeed, the approaching municipal elections could present a threat to the political status quo and the future direction of the Bulgarian economy.

A capital markets analyst told OBG, “One of the biggest fears amongst brokers at the moment is that, should the right wing opposition parties led by the Citizens for the European Development of Bulgaria (GERB) achieve good results in the forthcoming municipal elections, which seems likely, they could manipulate the teachers’ dispute to spread strikes to other public sector groups. In the worst case scenario, a sustained period of strikes in Bulgaria could lead to changes to the flat corporate tax and calls to float the lev, ending the currency board.The results would be disastrous for the economy.”

The possibility of the teachers’ strike spreading to other areas of the public sector was increased on October 14 when Pavel Hristov, head of the transport workers union, said the union was prepared to go on an open-ended strike as a show of solidarity.

This puts the government in a very difficult position. Should it capitulate and offer the teachers better pay, it would surely be met with similar demands from other sectors. A compromise deal is perhaps the only short-term solution. The IME predicts a 68% increase in teachers’ monthly wages by the end of 2008 could be possible without an adverse effect on the national economy but it would have to be introduced with a 50% cut of non-pedagogical staff and a 30% cut in the teacher work force and education ministry regional inspectorates. So far the teachers’ union has refused to accept any redundancies as part of an improved wage deal.

While the government will need to proceed with caution, it should be remembered that it raised pensions and the minimum wage in the last twelve months. The government is running a tight fiscal policy that will pay dividends in the long term but the current situation should lead them to look for more long-term reform for the country’s education system.