The fall in output and employment, and the rise in unemployment, during the transition in Bulgaria have been exceptionally severe. This paper examines possible causes, including the role of the financial stabilisation package, collective bargaining and the excess wage tax, the gradual emergence of the private sector, and the unemployment benefit system. The paper concludes that economic activity in Bulgaria has been depressed relative to other transitional economies by weak export growth as a result of its unfortunate geographical location. On the supply side, there has been a continuing vulnerability to wage inflation resulting from the slow privatisation of state enterprises and the continuing political; strength of the trade unions. A small-scale private sector (some of it "informal") is flourishing, aided in part by the very restrictive unemployment benefit regime, but remains of secondary importance. A sustained recovery will depend both on a return to economic stability in neighbouring economies and on more determined domestic policies, in particular on privatisation, to complete the transition to a market economy.
