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 o Social assistance o Labor market reform o Pension reform o Education reform o Health sector reform  The main message: GO DEEPER (capitalize on achievements and continue reforming) 2

3. 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 EU o 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 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

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 o 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

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 14

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 o Multi-pillar system o Fair benefit formula o Retirement age adjustments o Limits to early retirement…  …but still no fiscal sustainability, despite the relatively high contribution rates o The demographic crisis o 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 o per-student-financing and delegated budgets o 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