Can Bulgaria catch the digital wave? Defining the policy priorities

Bulgaria is on the periphery of Europe, both geographically and economically. Could the wave of new digital technologies help bring the country closer to its European peers?

While access to the internet has greatly expanded in recent years and the ICT sector has grown to become the country’s top export in services, Bulgaria still lags the rest of Europe when it comes to the adoption of digital technologies. Poor digital literacy and skills, low levels of investment in research and development (R&D), and incomplete digitization of public services are holding the country back.

This might paint a grim picture, but there is huge potential for improved growth and productivity should such digital transformation occur. The seeds of this transition are already growing in technology-based Bulgarian firms like Nexo, a cryptocurrency fintech startup; Gtmhub, a SAAS OKR platform with clients across Europe and the U.S.; and Dronamics, which launched one of the first drone delivery UAV fleets in Europe. But is that enough?

Leveraging the framework developed by the World Bank’s recent flagship report “Europe 4.0: Addressing the Digital Dilemma,” we can identify some of the key policy priorities for economy-wide digitization. The report distinguishes between three types of digital technologies, each of which requires a different policy approach to accelerate digital adoption among firms, while ensuring that smaller firms are not left behind.

Figure 2. Policy priorities for addressing the digital challenge facing Bulgaria

Source: Authors’ own compilation

Transactional technologies, such as e-commerce platforms, lower information asymmetries and provide digital infrastructure to match supply and demand. With fewer than 15 percent of Bulgarian enterprises selling online, well below the European Union average of 26 percent, e-commerce is one of the most promising growth sectors given the small size of the domestic Bulgarian market.

• Bulgaria should first prioritize improving digital literacy and building trust in digital transactions, which are factors that greatly limit the size of the domestic e-commerce market. Almost one-quarter of Bulgarians have never used the internet, and consumers still lack trust in online transactions.
• Resolving last-mile delivery challenges is the next step for unlocking the e-commerce market. Delivery markets have only recently started to support local e-retailers with dedicated domestic and cross-border services. Bulgaria is the only EU member where the national postal service is not among the top three carriers of business-to-customer deliveries in the domestic market.

Informational technologies, such as artificial intelligence, big data analytics, and cloud computing leverage the exponential growth of data, falling costs of computing, and improved access to digital infrastructure to offer new services. Bulgarian firms have low rates of adoption of informational technologies, with only 6 percent of firms using cloud computing and 7 percent using big data in 2018, both well below the EU averages.

• First, Bulgaria should focus on opening up public data and finishing the digitization of government services. The country has recently established a new state agency for e-government (SEGA) and set up an open data portal, but the implementation of both proved to be challenging. These priority areas have the potential not only for improving public service delivery, but also for expanding the domestic market for local digital service solution providers.
• Second, develop the digital startup ecosystem to help Bulgarian entrepreneurs grow their startups, raise risk capital, and access technical and managerial talent and new markets. The Bulgarian ecosystem, while developing and vibrant, is far from maturity. Risk capital is generally available, but the pipeline of new investable startups developing advanced digital technologies is still relatively small.

Operational technologies, such as smart robots, 3D printing, and the Internet of Things (IoT), lower the costs of production by integrating data with industrial equipment. While employment has been growing in Bulgaria’s technology-intensive industries, robot intensity (as measured by the number of robots per 1,000 workers) is less than 1 percent, one of the lowest rates in the EU, which makes this category the most challenging for the country.

• Bulgaria should double its R&D funding to meet its targets; it’s currently at 0.7 percent of GDP, well below the 1.5 percent target of 2020. Bulgarian public research institutions are underfunded, their researchers are underpaid, and few resources are available to tech transfer.
• Technology adoption support policies have delivered and should be continued. In the last 10 years, the country has achieved large productivity improvements driven by technology adoption, yet Bulgarian firms are still among the least digitized in Europe.

Finally, the country needs to improve the supply of basic and advanced digital skills. In 2019, only 30 percent of Bulgarian adults had basic or above basic overall digital skills compared with an EU-27 average of close to 60 percent. Investing in digital skills is likely to be increasingly important going forward, especially as the country reports a net loss of skills to emigration and the competition for frontier digital skills in Europe is only expected to intensify. The COVID-19 pandemic has further uncovered shortcomings in Bulgaria’s digital readiness; over 10 percent of the pupils in the country did not have devices that would allow them to fully participate in distance learning.

Bulgaria has an opportunity to deepen its integration with European peers and upgrade its economy through embracing the digital wave. The incoming government (following the upcoming spring 2021 elections) will have an array of competing investment decisions and policies to kick-start the post-pandemic economic recovery; digitization must be top on the list.