Bulgaria's integration into the
            Pan-European economy and industrial restructuring
# WPS3863

## Bulgaria’s Integration into the Pan-European Economy and Industrial Restructuring<sup>•/</sup>

Bartlomiej Kaminski University of Maryland, College Park and World Bank Francis Ng Development Research Group – Trade, World Bank, Washington, D.C.

**Abstract** :   This paper looks at Bulgaria’s industrial restructuring through the lenses of its evolving specialization in international division of labor and integration into international markets with a special emphasis on EU markets. Its major findings can be summarized as follows: (i) Developments in Bulgaria’s exports, its major drivers and factor content, during the ‘second transition’ following the 1996 crisis have become reminiscent of developments in the early 1990s in European transition economies that have stayed the reform course. (ii) Evolution of Bulgaria’s total exports in terms of factor intensities before the ‘second transformational’ recession was a testimony to aborted economic reforms. It not only defied expectations derived from the experience of CEEC-10 economies and its production factor endowments but also dramatically increased the cost of adjustment to market conditions for the economy as a whole. (iii) Exports of unskilled labor intensive products continue towering over other exports even during the current expansionary phase. The composition of top performers in EU markets indicates, however, the shift toward natural resource and capital intensive products. Bulgaria’s export offer in EU markets has budged toward more processed goods, mostly products of electro-engineering sectors. Subsequently, Bulgarian producers have made some strides in information communication technology products and automotive parts. Trade in parts and engineering products has also displayed strong growth.

The returns usually associated with liberal reforms, i.e., gains in competitiveness combined with a shift toward products in line with the country’s endowments in production factors began to surface only recently. In contrast to the period preceding the second transformational recession, gains in competitiveness derive from corporate and industrial restructuring and not from subsidies.

**Key words** : integration, foreign trade, network trade, parts and components, production sharing, factor intensity, foreign direct investment, industrial restructuring, PanEuropean markets.

World Bank Policy Research Working Paper 3863, March 2006 _The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org._

> • / Background report prepared for _Bulgaria: Country Economic Memorandum_ . The authors are grateful to Rosalinda Quintanilla, Stella Ilieva, Gallina Vincelette and Juan Carlos Ginarte for long discussions, useful comments and suggestions.