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Top Five Takeaways from 7th Annual Research Conference of NBU and NBP: Economic Policies during Wartime and Post-War Recovery

Top Five Takeaways from 7th Annual Research Conference of NBU and NBP: Economic Policies during Wartime and Post-War Recovery

The Seventh Annual Research Conference – Economic Policies during Wartime and Post-War Recovery – which took place 22–23 June 2023, gathered more than 100 leading experts and representatives of central banks, think tanks, and financial organizations from 60 countries.

During the two days of the conference, which was hosted in Krakow by the central banks of Ukraine and Poland with IMF support, experts discussed various issues that are important for both Ukraine and the rest of the world, as the consequences of the full-scale war unleashed by russia have been felt at the global level.

The conference focused on assessing the effects of the war on the economy, recipes for quick and sustainable recovery, priorities for post-war reconstruction, as well as the need for the international community to support Ukraine and ramp up sanctions against the aggressor state.

“Regrettably, there are no pre-existing textbooks or theories outlining the optimal economic strategy in conditions of external military aggression of such scale. However, it is evident that under such conditions, we cannot afford any missteps. Especially taking into account that russian narratives, fakes, populist rhetoric, and propaganda advocating for simple solutions have been spreading around the globe like a virus. This makes this year’s research conference an event of pivotal importance. This event is intended to bring us closer to answering an important question: What actions can we, as central bankers, government officials, academic representatives, experts, and members of international organizations, undertake to triumph over our shared enemy, mitigate the fallout from this war, and assure prosperity following victory?” said NBU Deputy Governor Sergiy Nikolaychuk as he opened the conference.

Here are the five most important conclusions made by the speakers at the event:

The full-scale invasion by russia has had profound adverse consequences that extend far beyond Ukraine’s borders

Given the significant shock and limited access to official statistics at the outbreak of the full-scale war, to assess the russian assault’s initial impact on the Ukrainian economy, it was necessary to deploy the full spectrum of analytical and research capabilities made possible by scientific and technological progress.

In his speech, Mihnea Constantinescu of the NBU presented estimates of the contraction in economic activity in Ukraine since 24 February 2022 that were made by looking into alternative data sources. Such research methods include the analysis of Google search queries and the assessment of nighttime luminosity as captured by NASA satellite images.

Vahram Stepanyan of the International Monetary Fund emphasized the importance of doing research even under martial law. He noted that the study of the specifics of how the economy operates in conditions of war has become increasingly relevant.

The full-scale war has brought significant destruction and has considerably subdued Ukraine’s potential. However, the war’s consequences have been spreading far beyond Ukrainian borders. The russian invasion has disrupted global supply chains, exacerbated geopolitical fragmentation, caused energy shocks across the world, and triggered a wave of migration not seen since the Second World War.

John Power of the Bank of England said in his presentation that the growth in global fragmentation is not the type of problem that central bankers can resolve. The supply shocks that it creates, however, have the potential to complicate policy decisions, and so central banks cannot ignore it. While talking about supply chain disruptions in Europe due to russia's full-scale war on Ukraine, Jakub Mućk of Narodowy Bank Polski said that monetary policy can restrain inflationary pressures even if they come from the supply side.

The fallout from the war has been sending supply shocks throughout the labor market, and not only in Ukraine. Tho Pham of the University of York mentioned this as she talked about the case of Ukraine and Poland. One takeaway from her speech is that labor demand in Poland followed changes in labor supply, instead of the other way around, which is more typical for labor markets.

Liberal democracies have no alternative but to support Ukraine militarily, financially, and through humanitarian aid

Supporting Ukraine today is not only about giving it a chance at victory, but also about ensuring “peace dividends,” as well as about developing a global immunity to the economic and military influence of autocratic terrorist regimes.

Torbjörn Becker of the Stockholm School of Economics said that the world cannot afford to stop supporting Ukraine. The amount of aid that Ukraine has received from the EU and G7 is relatively large for Ukraine but relatively small for the donors. At this time, the cost of support is only a small fraction of the price that Europeans will pay if Ukraine loses.

Piotr Żuk of Narodowy Bank Polski said that such support should include military and humanitarian aid, as well as economic, financial, political, and institutional assistance. All countries will benefit from an economically strong Ukraine, he said. In addition, Ukraine’s victory will make it possible to ensure security for the whole of Europe.

Anyone who has given it any thought understands that discontinuing aid to Ukraine today or, as Luis Garicano of the London School of Economics pointed out, recognizing russia’s territorial gains and freezing the war can only lead to more war.

Referencing the findings of a study that involved NBU experts, Sergiy Nikolaychuk emphasized that aid to Ukraine, inclusive of military support, not only bolsters the potential for the global security order and the free world to prevail, but also requires a significantly lower cost than suggested by opponents.

Efforts to impose more sanctions on the aggressor and tighten existing sanctions are bringing the world closer to defeating the common enemy, the influence of autocratic regimes, and resource dependence

The push to stop the aggressor should not be limited to the zeal and bravery of Ukrainian defenders. Sanctions – trade, financial, and personal – are the tool that thwarts the enemy’s capability to perpetrate aggression.

During the conference, fierce discussions took place about whether “sanctions are working.” Luis Garicano said that EU oil and gas sanctions are working and that the EU still has plenty of room to expand them. However, even what little was accomplished last year is a significant achievement.

The results of a study by Luigi Palumbo of the Bank of Italy, which he conducted by monitoring online prices, indicate that the imposed sanctions have been reflected by inflation in russia. He also noted that in most cases, financial sanctions are more effective than trade sanctions.

According to Fabio Gironi of the University of Washington, for financial sanctions to really work, all russian banks must come under sanctions. Financial sanctions also grow more effective when their impact affects a larger share of households.

A paper on trade sanctions presented by Beata Yavorcik of the European Bank for Reconstruction and Development indicates that after the sanctions were introduced, exports from the EU and the UK to russia more than halved. At the same time, exports from these countries to Armenia, Kazakhstan, and Kyrgyzstan, which along with belarus and russia are members of the Eurasian Customs Union, increased significantly. This may mean that russia has learned to circumvent trade sanctions, and that it therefore is extremely important to strengthen control over firms that export “sensitive” products.

Post-war recovery is a long process for which we should prepare now

Discussions on post-war reconstruction have already become relevant. Already it is necessary to discuss potential models of post-war recovery and ways to ensure fast and sustainable growth.

According to Boris Vujčić, Governor of the Croatian National Bank and keynote speaker of the second day of the conference, the post-war development experience of Croatia, Germany, and Japan shows that it takes approximately 9–10 years to reach the pre-war level of GDP. Specifically, after a period of dynamic post-war recovery, economic growth in Croatia slowed significantly. Among other things, this was due to a delay in the country’s EU accession and in tangible structural reforms. However, growth accelerated again after Croatia joined the EU.

In his speech, Stefan Ingves of the Toronto Centre emphasized that post-war reconstruction will be a difficult task that will require financing in the form of grants or long-term loans, international coordination, structural reforms, transparency, and improvements in the quality of public administration. He noted that the united Europe has sufficient capability to continue to help Ukraine.

Barry Eichengreen of the University of California, Berkeley, keynote speaker of the first day of the conference, said that Ukraine may face the need to strike a balance between the amount of international financial aid and the capacity to absorb such investments. Stefan Ingves also said that macrofinancial stability will require an understanding of how much money is coming in, how Ukraine will use it, and whether the country will be able to absorb all of it.

According to Jan Svejnar of Columbia University, the recovery strategy should focus on grants instead of on loans. It is dangerous and unfair to significantly increase the debt burden of a country that has suffered so greatly from the war, he said. In addition, today it is necessary to create the concept of a recovery office, to speed up Ukraine’s European integration processes, and to put in place a system of guarantees and insurance against war-related risks. Furthermore, it is important to launch active trade with the EU: the sooner the better. Although Ukraine has EU candidacy status, not full membership, Ukraine already needs full access to EU markets, said Jan Svejnar. 

The role of the central bank during the war and in the period of post-war reconstruction is crucial

When the full-scale war broke out, the National Bank of Ukraine was able to ensure the smooth operation of the financial system, keep inflationary processes in check, and stabilize the exchange rate.

As John Power pointed out, NBU experts have invaluable experience to share, especially in cybersecurity. The stability of Ukraine’s financial system in wartime can teach central banks around the globe an important lesson. Speaking at the conference, Vahram Stepanyan said that the IMF is impressed by the efficiency of cooperation with the NBU and the government of Ukraine, their efforts, and the stability of the economy.

At the same time, many challenges await the NBU going forward. Alexander Pivovarsky of the EBRD noted that Ukraine is already facing the following questions: What to do with NPLs? What is the state’s role in the banking system? What are the roles of market-based funding, the EU, and European and international banks? How to develop financial inclusion?

In talking about the Croatian experience, Boris Vujčić said that even during war, a central bank should concentrate on price and financial stability. Price stability can be achieved in times of hostilities. War adversely affects banks’ balance sheets, and this problem should be resolved as soon as possible, as soon as active hostilities end, he said. With this in mind, it is particularly important to ensure the central bank’s independence, something that Aaron Mehrotra of the Bank for International Settlements talked about as he presented his research.

As highlighted by Sergiy Nikolaychuk, the NBU remains committed to the principles of price and financial stability. It is precisely a low and stable rate of inflation and an operational, well-capitalized, and liquid banking system that should provide the basic necessary conditions for rapid and sustainable economic development after Ukraine wins the war.

Boris Vujčić said that war, even a very destructive one, does not bring permanent ruin. Economic growth tends to recover rapidly, immediately after the war ends, he said. We therefore believe in Ukraine’s defenders and are making joint efforts to bring closer Ukraine’s victory over the aggressor. After all, as Paweł Szałamacha of Narodowy Bank Polski suggested, this episode of russian aggression against Ukraine will go down in history as one of the biggest military blunders ever made, such as the defeat of the Persians at Marathon and the rout of Napoleon’s army.

This year’s Annual Research Conference of the National Bank of Ukraine was held jointly with Narodowy Bank Polski and with support from the International Monetary Fund. The NBU is grateful to colleagues from NBP and the IMF for their support in making this important research event possible.

Useful materials from the conference:

A number of the NBU’s open research seminars were also held as part of the conference. Economists conducted three seminars: 

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