No pain, no gain: market reform, unemployment, and politics in Bulgaria
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Journal of Comparative Economics 32 (2004) 409–425
www.elsevier.com/locate/jce
No pain, no gain: market reform, unemployment,
and politics in Bulgaria
Neven Valev
Andrew Young School of Policy Studies, Georgia State University, Atlanta, GA 30303-3084, USA
Received 28 June 2003; revised 29 April 2004
Available online 2 July 2004
Valev, Neven—No pain, no gain: market reform, unemployment, and politics in Bulgaria
In 1997, a new center-right government came to power in Bulgaria with a mandate to accelerate
market reforms. By the time of the next elections in 2001, 75 percent of GDP was produced in the
private sector, compared to 45 percent in 1996. However, the government lost the elections. This
paper uses unique survey data to determine whether the high unemployment associated with market
reform contributed to the election outcome. Although high unemployment did influence popular
opinion, the effect was relatively small. Many people, including those unemployed, believe that high
unemployment is a necessary price for future prosperity. Journal of Comparative Economics 32 (3)
(2004) 409–425. Andrew Young School of Policy Studies, Georgia State University, Atlanta, GA
30303-3084, USA.
2004 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights
reserved.
JEL classification: D72; E24; E61
1. Introduction
In most cases, the benefits of market reforms do not accrue instantaneously. Transition
economies experienced rapid growth in unemployment at the start of reforms; in many
cases the unemployment rate increased from zero to double digits within a few years.
In models of transition economies, e.g., Blanchard’s (1997), the decline in output and
employment is reversed gradually as labor relocates from the state sector to a new private
sector with higher productivity. This U-shaped pattern has been observed in the Central and
E-mail address: nvalev@gsu.edu.
0147-5967/$ – see front matter 2004 Association for Comparative Economic Studies. Published by Elsevier
Inc. All rights reserved.
doi:10.1016/j.jce.2004.04.003410 N. Valev / Journal of Comparative Economics 32 (2004) 409–425
Eastern European economies where reforms were implemented relatively early. In other
transition countries, the high level of unemployment has remained desperately stagnant
(Boeri and Terrell, 2002).
The literature devotes significant attention to the political economy of the delay in
benefits; Roland (2000, 2002) provides surveys of this literature. Reforms may be resisted
ex ante because of individual uncertainty about the potential winners and losers (Fernandez
and Rodrik, 1991) and also due to aggregate uncertainty about the reform outcome for the
entire nation. When enacted, reforms may face ex post political opposition from those
who experience economic hardship. Fidrmuc (2000) shows that high unemployment is
associated with less support for market reform in the transition economies. Roland (2002)
discusses the importance of keeping unemployment as low as possible, of sequencing
reforms to build supportive constituencies, and of providing compensatory payments to
the losers of reform policies. Experiences vary substantially across transition economies
but despite high unemployment, turbulent politics, and occasional policy reversals, reforms
march forward in most countries (Hellman, 1998).
This paper investigates the political consequences of implementing tough market
reforms in Bulgaria. In 1997, after a severe financial crisis, a new center-right government,
i.e., the Union of Democratic Forces or UDF, came to power with a mandate to accelerate
market reforms. By the next elections in 2001, massive privatization and enterprise
liquidation resulted in 75 percent of GDP produced in the private sector, compared to
45 percent in 1996. However, the immediate outcome of these policies was a sharp
increase in unemployment. Although economic growth increased, a sustained improvement
in employment was not achieved and UDF lost the elections. Superficially, the 2001
election outcome appears to be a backlash against the reforms due to the sharp increase
in unemployment. Although intuitively plausible, this hypothesis is challenged in the
literature. Using US data, Kinder and Kiewiet (1979,1981), Kiewiet (1983), MacKuen et
al. (1992), and Mutz (1992) find that voting decisions are influenced primarily by national
economic conditions, i.e., sociotropic voting, and much less by individual economic
circumstances, i.e., egocentric or pocketbook voting. The survey data from Bulgaria
provide further evidence to reject the pocketbook hypothesis. Although the unemployed
were less likely to vote for UDF in 2001, the effect on the election was small.
This paper extends the earlier analyses on unemployment and voting by allowing for
heterogeneity among the unemployed in terms of their support for reform. We test the
hypothesis that, although unemployment may spur political opposition to a reformist
government in general, some of the unemployed may demand more, rather than less,
reform. Rodrik (1995) argues that unemployed people consider further reform to be the
long-term solution to their economic problems. The survey data from Bulgaria reveal
that personal unemployment is associated with more, rather than less, support for UDF
in villages and small cities where unemployment has been both very high and of long
duration. Thus, the Bulgarian data reveal that the unemployed people are a heterogeneous
group, not a homogeneous one as in the theoretical literature, and that Rodrik’s claim about
unemployment leading to greater demand for reforms applies in certain circumstances.
The Bulgarian data provide unique evidence on public beliefs about the reasons for
high unemployment. The literature is vague about how voters explain high unemployment,
e.g., Kinder and Kiewiet (1979). For example, do they blame national government policy,N. Valev / Journal of Comparative Economics 32 (2004) 409–425 411
themselves, or local business conditions? In the context of a transition economy, high
unemployment can be attributed to deliberate market reform policies that are expected
to produce a short-term increase in unemployment. The issue is whether voters perceive
unemployment in this manner. The survey data reveal that about half of the population
believes that high unemployment is a necessary short-term price that the country must pay
for future prosperity. Even more striking, a large percent of unemployed people believe in
the necessity of unemployment. Politically, such beliefs are important because they reduce
the opposition to reforms.
This paper complements earlier research on reform and voting in transition economies,
which has used aggregate country or regional data, e.g., Fidrmuc (2000) and Warner
(2001), by studying voting at the individual level.1 For each respondent, the survey
indicates the party chosen in the 1997 election and which party the person intended to
vote for after much of the reform package had been implemented and unemployment
had increased. Hence, we can test whether the employment status of individuals and
their views on the reforms contributed to the rapid decline in political support for UDF.
Holding constant earlier voting behavior is important to capture ideological differences in
the population, which tend to be strong in transition economies. We draw parallels between
our results and recent work by Doyle and Fidrmuc (2003) and Hayo (2004) using survey
data from several transition economies. The next section provides a brief discussion of
some major economic developments in Bulgaria over the last few years. The two following
sections present the data and report the implications for the political economy of market
reform. Section 5 concludes with final remarks.
2. Delayed market reform in Bulgaria
Bulgaria was a laggard in the transition process in Eastern Europe until 1997. According
to the EBRD (1998), only 20 percent of total state enterprise assets were privatized between
1992 and 1997. Aslund (2002) argues that Bulgaria illustrates the danger of patently
inconsistent policies and erratic policy reversals in which vested interests are a greater
threat to economic policies than is disorder. The delay in reforms contributed to relatively
large budget deficits, to a rising public debt, and to growing contingent claims on the budget
from guarantees on state-firm credits. Under the government of the Bulgarian Socialist
Party (BSP), these problems culminated in a crisis. By 1996, most of the banking sector
credits, which had been extended under government directive in many cases, were non-
performing. Confidence in the banking system reached low levels and deposits left banks,
as Dobrinsky (2000) describes. As the exchange rate depreciated and prices spiraled out
of control, political unrest grew and, in early 1997, the BSP government called early
parliamentary elections. The elections were won by UDF, which came into office with
1 Important differences in results occur depending on whether macro and micro data on voting are used. Using
macro data, Fidrmuc (2000) explains actual election outcomes by regional and national economic conditions and
finds a strong effect of unemployment. Duch et al. (2000) provide a discussion on these differences and argue in
favor of micro data because the aggregation of votes may produce systematic biases in the voting data.412 N. Valev / Journal of Comparative Economics 32 (2004) 409–425
Table 1
Macroeconomic developments, Bulgaria 1992–2001
Year CPI inflation Budget Gross fixed Real GDP Unemployment
(percentage balance capital growth rate
change in the (percent of formation (percentage
CPI) GDP, (percent of change)
−deficit) GDP)
1992 79.2 −2.9 −7.3 15.3
1993 63.9 −8.7 −1.5 16.4
1994 121.9 −3.9 9.3 1.8 12.8
1995 32.9 −5.7 14.6 2.1 11.1
1996 310.8 −10.4 8.9 −10.1 12.5
1997 578.6 −2.1 12.2 −7.0 13.7
1998 1.0 0.9 11.6 3.5 12.2
1999 6.2 −0.9 15.9 2.4 16.0
2000 11.4 −1.1 16.3 5.8 17.9
2001 10.4 −1.5 19.9 4.6 17.3
Sources: EBRD, various years; BNB, various years.
a mandate to accelerate structural reforms. These reforms were supported strongly by the
IMF and other international institutions.
According to the Bulgarian Privatization Agency, the government completed 654
privatization deals in 1998 alone whereas in the prior five years only 694 deals were
consummated. After the elections, direct and implicit subsidies to enterprises were cut
(Brixi et al., 2000), the government closed down 110 of 140 loss-making state firms, and
many banks were privatized. The private sector share of Bulgaria’s GDP increased from
45 percent in 1996 to 75 percent in 2001, which ranks Bulgaria in line with the advanced
transition economies in this regard (EBRD, 2001). A significant part of the reforms was the
introduction of a currency board to achieve macroeconomic stability. The currency board
provided a nominal anchor by fixing the domestic currency to the German mark, lowered
inflation, and made it impossible for the government to finance budget deficits by money
creation.2 The strong impetus to put public finances in order provided an incentive to the
government to reduce subsidies and to liquidate or privatize firms. In essence, maintaining
a credible currency board requires structural reform.3
As Table 1 shows, the introduction of the currency board led to a rapid decline in
inflation into single digits. Relatively stable prices, privatization, increased competition in
financial markets, and opening the economy contributed to increasing investment levels
and higher growth rates. For the first time since the beginning of transition, Bulgaria
experienced sustained positive economic growth after 1997. Nevertheless, the effect on
2 A currency board is a fixed exchange rate regime with a provision that the central bank maintains foreign
exchange reserves that are sufficiently large to cover the monetary base. The currency board removes discretion
over monetary policy, as Schwartz (1993) asserts. Valev and Carlson (2003) discuss the Bulgarian currency board.
3 Analogously, a reversal of structural reforms would have come at the high price of financial instability.
Roland (2002) points out that high reversal costs may be associated with greater ex ante opposition to reform
if aggregate uncertainty is high. However, once the reforms are enacted, high reversal costs may sustain them.
Dewatripont and Roland (1992) is a formal treatment of the effect of reversal costs on reforms.N. Valev / Journal of Comparative Economics 32 (2004) 409–425 413 employment over the initial years was small and the positive growth was not sufficient to compensate for a loss of jobs. By 2000, the official unemployment rate had increased to 17.9 percent compared to 12.5 percent in 1996. Along with enterprise liquidation, UDF adopted the Unemployment Security and Employment Incentives Act in 1998. This act reformed the unemployment benefits system reducing somewhat the generosity of benefits and strengthening incentives for re-entry into the labor market. In addition, several initiatives were introduced to facilitate job search and retraining. In general, the reform encouraged the transition of workers between jobs and discouraged generous compensatory payments. By contrast, political economy models on economic reform usually support compensatory payments to reduce individual uncertainty and to maintain the political support for reforms (Roland, 2002). However, economic reform was not the only reason for high unemployment. The World Bank (2001) points out that the adverse labor market experience in Bulgaria is linked not only to fast labor shedding but also to a chronic inability to create jobs. Contributing factors are policy uncertainty, administrative burdens, corruption, and lack of credit, which also led to lower foreign direct investment (FDI). Although FDI has been high after 1997, much of it is linked to privatization. After large-scale privatization was substantially completed by 2000, FDI inflows declined significantly. External factors, i.e. the war in Kosovo and the financial crisis in Russia in 1998, led to a decline in exports and also depressed the inflow of FDI. The political movement that defeated UDF and took office in 2001 had no clear economic agenda until late in the election campaign. The movement began only a few months before the elections when Simeon Saxe-Coburg-Gotha, the last czar of Bulgaria before socialism, announced his intention to return to Bulgaria and run for office.4 The economic team was not formed until a few weeks before the elections. The economic plan, which was put together rapidly, included a mix of proposals for lower taxes and greater government spending and promised large inflows of foreign direct investment and rapid growth in incomes. The movement did not use high unemployment as a rationale for a slow-down or reversal of economic reforms. Given this political platform, their election success suggests that Bulgarians were not poised for a backlash against reforms. 3. Description of the survey data The survey consists of personal interviews conducted by a national polling organization in August 2000, three years after the elections in April 1997 and 10 months before the elections in June 2001. The sample size of 1000 individuals, ages 16 and over, and its demographic structure are considered to be representative of the population of 8 million. Our analysis excludes respondents who were not yet 18 in 1997 because this is the voting age in Bulgaria. The survey asked respondents which party they voted for in the 1997 elections and which party they would vote for if elections were held today. The survey also probed respondents’ views on the reform process by asking them whether 4 Simeon Saxe-Coburg-Gotha acceded to the throne as a six year old child in 1943 after the sudden death of his father King Boris III. He was forced into exile two years later.
414 N. Valev / Journal of Comparative Economics 32 (2004) 409–425
they strongly agreed, agreed, disagreed, or strongly disagreed with the statement that high
unemployment is the price we have to pay for future prosperity. This question investigates
whether Bulgarians believe that high unemployment is a part of the reform process as
suggested by theory and the experiences of more advanced transition economies (Boeri
and Terrell, 2002). In other countries, primarily the former Soviet republics, rapid growth
in unemployment was avoided but output and employment levels stagnated.5
The survey also asked respondents whether they were employed, unemployed, retired,
students, or fell into a category denoted “other.” In the survey, 28.9 percent of the
individuals in the labor force, defined as unemployed plus employed people, report that
they were unemployed, which is higher than the official unemployment rate of 17.9 percent.
Hence, the survey probably includes some discouraged workers who left the labor force
but consider themselves to be unemployed. Differences between registered unemployment
and unemployment obtained from labor market surveys are often quite large in transition
economies. The United Nations (2002) reports that, in Croatia and Slovenia, registered
unemployment is higher than indicated by surveys because of a misuse of public welfare
schemes. However, in Bulgaria, Estonia, and Ukraine, registered unemployment is less than
indicated by surveys. That labor force survey records an unemployment rate of 18.7 percent
for Bulgaria in 2000, which is higher than registered unemployment but much lower than
the unemployment rate obtained from our survey. The survey also includes questions about
demographic characteristics, e.g. age, education (higher education, high school or lower),
gender, income (in leva), and place of residence (villages, small cities, big cities, which
include the regional administrative centers such as Bourgas, Plovdiv, and Varna, or the
capital Sofia). Appendix Table A presents summary statistics for all variables.
To determine how closely the survey responses on voting match the actual election
outcomes, election results were obtained from a database compiled by the Department of
Government at the University of Essex with the help of the International Foundation for
Electoral Systems and the Association of Central and East European Election Officials.
The database provides detailed historic information on voting in transition economies.
Before discussing the distribution of votes, we point out that voter turnout, i.e. the percent
of eligible voters who did vote, reported in the survey is somewhat different from the
actual turnout. In the survey, 78 percent of respondents report that they cast a vote in
1997 but, in the actual elections, only 55 percent of the people voted. Overreporting is a
common problem in surveys on voting and is analyzed extensively in the political science
literature.6 The difference between actual turnout and that reported in surveys is attributed
to either social desirability according to which survey respondents claim they voted even
5 Several strands in the literature relate to this question. First, because the question is forward looking, it
reflects to some extent prospective as opposed to retrospective attitudes of voters. MacKuen et al. (1992) find
strong evidence for prospective sociotropic voting, i.e. votes are driven primarily by expectations of future
national economic conditions. Second, answers to the question may provide evidence of a preferred reform
strategy. Respondents who did not believe that high unemployment is a necessary cost of reforms may simply
prefer a more gradual reform process with a smaller increase in unemployment. Third, answers to the question
reflect beliefs about the final outcome of reforms, i.e., unemployment followed by prosperity, and thus reveal the
degree of aggregate uncertainty.
6 Burden (2000) finds that the discrepancy between actual voter turnout in the 1996 presidential elections in
the US and the election turnout reported in the 1996 University of Michigan National Election Study, which isN. Valev / Journal of Comparative Economics 32 (2004) 409–425 415
Table 2
Matching survey responses and actual voting outcomes
1997 elections 2001 elections
Actual election Survey Actual election Survey
results results results results
Union of Democratic 49.15 51.94 18.18 31.80
Forces (UDF)
Socialist Party (BSP) 22.40 31.73 17.53 36.03
Euroleft 5.57 3.08 – –
Bulgarian Business Bloc 5.27 1.20 – –
Movement for Rights 9.44 7.10 7.45 7.17
and Freedom
Coalition Simeon – – 42.74 –
Notes. 1. UDF was in office from 1997 to 2001. 2. The table includes only political parties that received votes in
excess of the 4 percent threshold needed to enter Parliament. 3. Coalition Simeon did not exist in 1997 and at the
time of the survey.
if they did not, to faulty memory, or to oversampling of voters. Some combination of these
factors explains overreporting in the Bulgarian survey.7 Interestingly, the survey predicted
a 56 percent turnout in the 2001 elections and the actual turnout was higher at 67 percent.
This discrepancy may be easier to explain because the movement that won the elections
was not even formed in August 2000. As the elections approached, more citizens may have
decided to vote for this new party rather than not to vote.
Table 2 presents the actual distributions of votes in the two elections and the percentages
reported in the survey. The actual percent of votes for UDF in 1997 is very close to that
reported in the survey, differing by less than three percent. However, the survey overstates
the percent of votes for the socialist party BSP, which was in office until 1997, by a margin
of over 9 percent. The remaining percentages for the 1997 elections are reasonably close
to each other. In the 2001 elections, the percent of votes for UDF and BSP predicted by
the survey are higher than the actual outcomes, which reflects the shift of votes toward
Coalition Simeon once it entered the political scene.8 Before investigating the various
influences on voting, we discuss public views concerning the cost of reforms in the
beginning of the next section to ascertain whether or not Bulgarians believe in the tradeoff
between short-term costs and long-term gains.
the most widely used data on turnout in the US, was 24 percentage points. Swaddle and Heath (1989) discuss the
same problem for elections survey data in the United Kingdom.
7 Validation studies from the US where survey responses are matched with actual recorded voting show some
systematic patterns, e.g., a greater propensity of more educated voters to overreport (Silver et al., 1986). However,
Traugott and Katosh (1979) and Singelman (1982) find that empirical results from multivariate analysis based on
self-reported and validated voting do not differ substantially.
8 In 2001, the Union of Democratic Forces contained fewer small parties, e.g., an agrarian party, that were
members in 1997. However, these parties received a very small fraction of the votes in 2001 so that their
withdrawal had no appreciative effect on UDF. The Movement for Rights and Freedom (MRF) is associated
with the Turkish ethnic minority in Bulgaria. Neither of the two smaller parties that received votes above the
four percent threshold in 1997 has a distinctly pro-reform or anti-reform agenda compared to UDF.416 N. Valev / Journal of Comparative Economics 32 (2004) 409–425
Table 3
Cost of market reform
High unemployment is the price we have to pay for future prosperity
All respondents Unemployed Employed
Strongly agree 17.71 16.22 17.98
Agree 21.15 18.38 21.86
Disagree 23.33 20.54 23.93
Strongly disagree 24.69 24.32 24.84
I don’t know 13.13 20.54 11.38
Note. All numbers are in percent of total.
4. Unemployment, beliefs about market reforms, and support for UDF
This section investigates the effect of unemployment and views about economic reform
on the decline in political support for UDF between 1997 and 2001. We begin with
a discussion of views regarding economic reform, which is followed by an empirical
analysis of voting in the 2001 elections. Table 3 indicates that about 39 percent of the
population surveyed believes, more or less strongly, that high unemployment is the price for
future prosperity, whereas about 48 percent disagreed with this statement. The remaining
13 percent did not express an opinion. Although similar data are not available from
other transition countries to make a comparison, a reasonable number of Bulgarians think
that high unemployment is necessary for the economic reform to succeed. Furthermore,
differences in beliefs among unemployed and employed people are not large. Thirty-
five percent of unemployed people believe that current unemployment is necessary for
future prosperity and a remarkably high 16 percent agree strongly with this claim.9 The
unimportance of employment status to beliefs about the cost of reform is corroborated
below.
Table 4 reports the estimates of a probit analysis of the characteristics of individuals who
agreed with the statement that high unemployment is necessary for reform. Employment
status is captured by a dummy variable that equals 1 if a respondent was unemployed, and
0 otherwise. The equation includes two variables for education, namely a dummy variable
that equals 1 if a respondent had a high school education, and a second dummy variable
that equals 1 if a respondent had higher education. The respondents’ gender, age, income,
and place of residence, designated by a dummy variable equal to 1 if a respondent resided
in either a village or a small city, and 0 in a big city or the capital, are also included.10
9 From a policy perspective, the formation of these beliefs is important. According to analysis by the
Institute for Marketing and Social Surveys in Bulgaria (Capital, 1999, p. 16), the communication strategy of
the government regarding the costs of reform could be characterized as an effort to be honest with the Bulgarian
electorate and to convey the message that there are no alternatives. The study highlights the role of the media as
one of the most progressively-thinking social groups. By insisting on rapid privatization and the liquidation of
loss-making enterprises, the journalists were on the side of the government even when they were critical of it.
10 The models reported were also estimated with age and income squared to capture nonlinearities, which have
been detected in earlier work by Hayo (2004), but the estimations did not produce statistically significant results.
The models were also estimated with various variables for place of residence in terms of villages, small cities, big
cities, and Sofia (the capital). The reported results provided the best fit. The models were also estimated with aN. Valev / Journal of Comparative Economics 32 (2004) 409–425 417
Table 4
Explanation of beliefs about the cost of market reform
Variable Coefficient
Unemployed −0.031
(0.046)
High school education 0.146***
(0.045)
Higher education 0.182***
(0.055)
Female −0.050
(0.033)
Age −0.001*
(0.001)
Income 0.023
(0.002)
Villages and small cities −0.019
(0.034)
Pseudo R 2 0.030
Number of observations 940
Notes. 1. The dependent variable is coded as one if an individual agrees or
strongly agrees with the statement that high unemployment is the price we
have to pay for future prosperity. 2. Standard errors in parentheses.
* Significance at the 10% level.
*** Idem., 1%.
Respondents with more education are more likely to consider unemployment as a necessary
short-term cost, which may reflect a better understanding of tradeoffs between short-
term costs and long-term gains or the market advantage of more educated people during
transition. The World Bank (2001) reports that the unemployment rate for individuals with
higher education was around 5 percent throughout the 1990s, which is substantially lower
than the unemployment rate for the entire population.
Older respondents may be less likely to believe that unemployment is a necessary cost
of reforms, perhaps because they experienced disproportionately more employment uncer-
tainty with the restructuring and liquidation of state firms or because they spent a larger
portion of their lives under socialism with zero unemployment. However, the statistical
significance of the coefficient is low and its magnitude is small. Interestingly, personal
unemployment has no statistically significant effect so that education appears to be the
primarily determinant of people’s beliefs.
To investigate the decline in support for UDF, we report a cross-tabulation of votes in the
1997 parliamentary elections reported in the survey and the expected distribution of votes
in the 2001 elections in Table 5. Respondents were placed in three categories according to
their vote in 1997, namely, those who voted for UDF, those who voted for another party,
and those who did not vote. The cross-tabulation shows a large withdrawal of votes from
dummy variable for retirement, which did not produce significant results. Including those variables did not change
the coefficient estimates on the remaining variables in significant ways. All results are available on request from
the author.418 N. Valev / Journal of Comparative Economics 32 (2004) 409–425
Table 5
Cross-tabulation of votes in 1997 and expected voting in 2001
In 1997: Individuals who planned to:
Vote for UDF Not vote Vote for another Totals
party
Voted for UDF 161 155 69 385
(41.8) (40.3) (17.9) (100)
Did not vote 3 185 25 213
(1.4) (86.9) (11.7) (100)
Voted for another party 3 93 266 362
(0.8) (25.6) (73.4) (100)
Totals 167 433 360 960
(17.4) (45.1) (37.5) (100)
Note. The numbers in parentheses are percentages.
UDF within only three years. Only about 42 percent of the respondents who voted for
UDF in 1997 intended to vote for this party again, and 40 percent of those people did not
intend to vote in 2001. Only six respondents who had not voted for UDF in 1997 report an
intention to vote for that party in 2001. To explore the reasons for this decline in support
for UDF, we estimate a probit equation explaining the likelihood of a respondent intending
to vote for UDF in 2001 depending on employment status, the beliefs about the necessity
of unemployment, captured by a dummy variable that equals 1 if a respondent agreed or
strongly agreed with the statement on economic reform and 0 otherwise, along with other
characteristics. The pocketbook hypothesis suggests that personal unemployment would
be associated with a lower likelihood of voting for UDF. Respondents who believe that
current high unemployment is a necessity cost of reforms are expected to be more likely to
vote for UDF because that party espouses this view.
Beliefs about the necessity of unemployment in market reform may simply be partisan
rationalizations. If the model does not control for unobserved respondent characteristics,
which capture general political attitudes and are also correlated with views on the necessity
of unemployment, the estimated effect may be upward biased. To address similar problems,
Kinder and Kiewiet (1979) and Doyle and Fidrmuc (2003) include a variable on self-
reported general political attitudes to control for partisanship. They find that economic
variables, including people’s views on the national economy, remain statistically significant
in voting equations although the size of the effects decline after controlling for partisanship.
The Bulgarian survey does not offer such a control variable; as a proxy, we use voting in
1997 and also control for education, gender, age, income, and place of residence. Table 6
reports marginal effects that can be interpreted as the direct influence on the probability
of voting for UDF of each variable evaluated at its mean. In the case of dummy variables,
the reported coefficient estimate equals the probability of voting for UDF if that dummy
variable were one minus the probability of voting for UDF if it were zero. For example, the
coefficient 0.389 on voting for UDF in 1997 means that, controlling for other effects, the
probability of voting for UDF in 2001 was 38.9 percentage points higher for a respondent
who voted for UDF in 1997 compared to a respondent who did not vote for UDF in 1997.
The first two columns in Table 6 report coefficient estimates for the entire sample.
Unemployed individuals and those who do not consider unemployment to be a necessaryN. Valev / Journal of Comparative Economics 32 (2004) 409–425 419
Table 6
Explanation of voting behavior
Overall survey sample Sample of individuals who voted
for UDF in 1997
(1) (2) (3) (4)
Voted for UDF in 1997 0.389*** 0.378***
(0.026) (0.027)
Unemployed −0.033* −0.024 −0.181*** −0.139*
(0.017) (0.019) (0.060) (0.072)
Agree with statement 0.065*** 0.054*** 0.183*** 0.156***
on reform (0.019) (0.019) (0.051) (0.052)
High school education 0.053** 0.203**
(0.025) (0.080)
Higher education 0.057* 0.192**
(0.036) (0.091)
Female −0.031* −0.095*
(0.016) (0.053)
Age 0.001 0.003
(0.001) (0.002)
Income 0.005 0.029
(0.007) (0.026)
Villages and small cities −0.003 0.017
(0.016) (0.059)
Pseudo R 2 0.354 0.366 0.046 0.069
Observations 940 940 380 380
Notes. 1. The dependent variable equals one if an individual intended to vote for UDF and 0 otherwise. 2. Standard
errors in parentheses.
* Significance at the 10% level.
** Idem., 5%.
*** Idem., 1%.
cost of reforms are less likely to vote for UDF, although the effect of unemployment is less
significant statistically. However, the magnitudes of the coefficients are small. Columns (3)
and (4) report estimates using only the sample of respondents who voted for UDF in 1997.
For this group, the likelihood that an unemployed individual will vote again for UDF is
18.1 percentage points lower compared to other individuals. In terms of a number of votes,
the coefficient indicates that 15 unemployed individuals in the survey who had voted for
UDF in 1997 would not vote for this party in 2001. This number amounts to only 4 percent
of the electorate of UDF in 1997, which is a relatively small fraction of the votes lost.
Hence, the impact of employment status on voting behavior is small.
Those who believe in the necessity of unemployment for successful market reform were
18.3 percentage points more likely to vote again for UDF. Among the 385 individuals who
voted for UDF in 1997, 187 believe or strongly believe that unemployment is a necessary
cost of reforms, which implies that UDF received 34 more votes due to this effect.11
Interestingly, these additional votes are more than twice the votes lost because of personal
11 The number of votes is calculated as 187 times 0.183.420 N. Valev / Journal of Comparative Economics 32 (2004) 409–425
unemployment.12 As Fidrmuc (2000), Doyle and Fidrmuc (2003), and Hayo (2004) also
find, our results indicate that support for reformist parties increases with more education.13
Consistent with this literature, we also show that each increment in education is associated
with greater support for UDF. Similar to the results in Hayo (2004), we find that female
voters are less likely to support the reform party, perhaps because of their labor market
experiences during transition. According to the World Bank (2001), female labor force
participation rates have declined rapidly in Bulgaria.14
Although the magnitude of the effect is not very large, personal experiences with
unemployment in Bulgaria did contribute somewhat to the growth in political opposition,
in contrast to the thesis of Rodrik (1995). However, experiences with unemployment have
not been the same across either social groups or locations in the country. Unemployment
has been much higher in rural areas and small cities than in the capital and other big
cities (World Bank, 2001). Perhaps, unemployment contributes to, rather than diminishes,
support for reform in stagnant labor markets. Moreover, unemployment among older
workers has been lower than among younger workers. However, younger individuals have
more recent education and are better suited to find employment in the newly expanding
sectors of the economy. Hence, they may support more rather than less market reform.
To explore those issues, we interact the dummy variable for unemployment with place of
residence and age and include the interaction terms in a probit equation that explains voting
in 2001 among UDF supporters in 1997.
Although the coefficients on unemployment are negative and statistically significant
in Table 7, as in Table 6, the interaction term of unemployment with location is positive
and statistically significant. In addition, this coefficient is larger than the coefficient on
unemployment and the difference is statistically significant. Hence, unemployment in small
cities and rural areas contributed to stronger support for UDF, consistent with Rodrik’s
hypothesis, while it contributed to political opposition in urban areas.15 As Table 7
indicates, the interaction term with age does not yield a statistically significant coefficient.
12 However, the data have limitations. The survey asks about unemployment in 2000 but it is conceivable that
some respondents experienced unemployment after 1997 and were employed at the time of the survey. Some
might have been unemployed even before 1997. Such experiences may strengthen or weaken the reported effect
of personal unemployment on voting. In addition, although the data allow us to test the pocketbook hypothesis,
they do not allow us to test the sociotropic hypothesis. Many employed voters might have voted against UDF
because of the high national unemployment. Kinder and Kiewiet (1979) distinguish between these effects using
surveys from the US, which ask voters both to report their personal employment status and to rate the health
of the national economy. Hence, personal unemployment and views on the national economy can be entered
independently in their empirical equations to explain voting.
13 Hayo and Seifert (2003) find that the self-reported wellbeing of citizens in transition economies increases
with education, even after controlling for positive economic experiences during transition.
14 Hayo (2004) uses data from opinion surveys conducted in several transition economies, including Bulgaria,
to explore factors determining support for market reform. In those estimations, unemployment has a negative
effect on support for reform but the coefficient is relatively small. It is substantially smaller than the coefficient
on education and roughly equal to the effect of gender.
15 Using survey data from several transition economies in the early 1990s, including Bulgaria, Hayo and Seifert
(2003) conclude that reported economic wellbeing is higher in more rural locations, after controlling for income,
employment, and wealth. This finding may explain why unemployment has a less negative effect on support for
UDF in those areas but it would not explain the positive effect that we report.N. Valev / Journal of Comparative Economics 32 (2004) 409–425 421
Table 7
Employment status and voting behavior by region and age
Variable (1) (2)
Unemployed −0.407*** −0.414**
(0.084) (0.141)
Unemployed ∗ (Villages and small cities) 0.487***
Unemployed ∗ Age 0.009
(0.006)
Agree with statement on reform 0.162*** 0.153
(0.052) (0.052)
High school education 0.194** 0.189**
(0.081) (0.081)
Higher education 0.168* 0.166*
(0.094) (0.095)
Female −0.090* −0.091*
(0.053) (0.053)
Age 0.003 0.002
(0.002) (0.002)
Income 0.028 0.024
(0.026) (0.026)
Villages and small cities −0.075 −0.011
(0.059) (0.055)
Pseudo R 2 0.090 0.074
Number of observations 380 380
Notes. 1. The dependent variable equals one if an individual intended to vote for UDF
and 0 otherwise. 2. The sample is respondents who voted for UDF in 1997. 3. Standard
errors in parentheses.
* Significance at the 10% level.
** Idem., 5%.
*** Idem., 1%.
In summary, the effect of unemployment on voting is not one-dimensional. Although
high unemployment reduces somewhat the support for market reforms, unemployed people
demand more, rather than less, reform in locations with a stagnant labor market. This
result suggests that a significant deterioration of economic conditions may reduce the
opposition to reforms. Furthermore, recognizing that high unemployment is a necessary
part of economic reforms also reduces the opposition to the reforms. Thus, convincing the
population that short-term hardship is unavoidable to achieve long-term economic gains is
an important part of a market reform policy.
5. Conclusion
In this paper we investigate the loss of political support for a reformist party,
i.e., UDF, in the 2001 Bulgarian elections using data from a national survey to
determine whether its election defeat can be explained by the increase in unemployment
produced by market reforms. Similar to results in earlier literature, unemployed people422 N. Valev / Journal of Comparative Economics 32 (2004) 409–425 did not vote their pocketbooks and become political opponents to UDF in large numbers. Moreover, many voters among the unemployed believe that high unemployment is a necessary short-term cost of market reforms and voted for UDF. Thus, the expected growth in political opposition to reform produced by personal experiences with unemployment at the micro level can be ameliorated to some extent by appealing to voters’ recognition that high unemployment is necessary for market reform to succeed. Furthermore, we find some support for Rodrik’s hypothesis that unemployment may strengthen rather than weaken support for reforms in locations experiencing very high unemployment. Our results have important implications for the debate on the optimal speed of transition (Roland, 2002). They support a rapid rather than gradual reform in circumstances similar to those in Bulgaria. The effect of high unemployment in generating opposition to reforms may be small, at least in the first years of reform when the population believes that unemployment is a necessary but temporary part of the transition to a market economy. However, as Blanchard (1997) points out, reforms may be reversed if economic gains do not accrue soon enough. Doyle and Fidrmuc (2003) show that unemployment began to have an effect on voting in the Czech Republic during the later stages of transition when the winners and losers of the reforms were identified more clearly. If there isn’t opposition to the reform, what explains UDF’s loss of the 2001 elections? Ivan Kostov, the leader of UDF explained the 2001 election defeat in the following way: “We have taken a lot of unpopular decisions and also made mistakes.” (CNN, June 17th 2001). The mistakes to which Mr. Kostov refers are his governments inability to fight corruption and criminal activity. The widespread perceptions of unfairness and the slow pace of some reforms may go a long way toward explaining the defeat of UDF. Although the new government continued on a similar path of reforms, they promised a substantial improvement in incomes within 800 days. As economic conditions failed to improve significantly, support for Coalition Simeon declined. A follow-up survey in June 2002 revealed that only about 10 percent of Bulgarians intended to vote for the new government if elections were held on that day. Just as had UDF before it, the government lost support rapidly. Is this evidence that Bulgarians oppose market reform? Perhaps they think that reforms should be designed better and that six years is too long to be considered a short-term period of high transition costs. If unemployment remains high in Bulgaria, opposition to reforms may grow. Acknowledgments I thank Jamie Boex, Franziska Bieri, Bogdana Dimitrova, Jan Fidrmuc, two anonymous referees, and the editor for valuable comments and suggestions, and Valentin Zhechev from Fact AD for providing the survey data. I also acknowledge the financial support of the National Science Foundation Grant SEC 0234664.
Appendix Table A
Descriptive statistics
N. Valev / Journal of Comparative Economics 32 (2004) 409–425
Variable 1 if would 1 if voted 1 if un- 1 if agrees 1 if high 1 if higher 1 if female, Age Income 1 if
vote for for UDF in employed, with state- school education, 0 if male (hundreds resident of
UDF in 1997, 0 otherwise ment on education, 0 otherwise of leva) a village or
2001, 0 otherwise reform, 0 otherwise a small
0 otherwise 0 otherwise city,
0 otherwise
Mean 0.17 0.40 0.19 0.39 0.52 0.25 0.51 46.11 1.21 0.58
Standard deviation 0.38 0.49 0.39 0.48 0.49 0.43 0.50 15.94 1.05 0.49
Minimum 0 0 0 0 0 0 0 22 0.00 0
Maximum 1 1 1 1 1 1 1 86 10.00 1
Correlations
UDF vote 2001 1.00
UDF vote 1997 0.52** 1.00
Unemployed −0.07** 0.01 1.00
Agree on reform 0.19** 0.15** −0.04 1.00
High school 0.04 0.02 0.08** 0.06 1.00
Higher education 0.08** 0.10** −0.17** 0.08** −0.60** 1.00
Female −0.05 0.01 0.01 −0.06 −0.07** 0.07** 1.00
Age −0.03 −0.09** −0.24** −0.09** −0.23** −0.05 −0.03 1.00
Income 0.12** 0.08** −0.40** 0.11** −0.02 0.26** −0.18** −0.10** 1.00
Residence −0.08** −0.10 0.14** −0.06** 0.06 −0.30** −0.02 0.01 −0.19** 1.00
** Significance at the 5% level.
423424 N. Valev / Journal of Comparative Economics 32 (2004) 409–425
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