Jackson Hole 2023: Messages for Ukraine

First, the central banks continue to be committed to delivering low inflation (currently most advanced economies experience inflation levels above their targets, therefore their central banks increased interest rates in 2022-2023). The talks repeatedly emphasized that price stability is the key objective for central banks. Other considerations – financial stability, full employment, etc. – follow. There is little indication that there is any plan to revise inflation targets or to be opportunistic in other dimensions. For example, Jerome Powell, the Chairman of the Federal Reserve, repeatedly stressed the 2% inflation target and the imperative to hit the target. This communication strengthens the message that the leading central bank will likely keep interest rates elevated or even raise them further to ensure that inflation is defeated. Ukraine is now effectively excluded from global capital markets and the lending is done by official creditors (the European Union, International Monetary Fund, World Bank, etc.). So Ukraine is somewhat insulated from interest rate hikes. But post-war Ukraine will re-gain access to global capital markets and the cost of borrowing in the short- to medium-run can be fairly high even for emerging economies that do not face immediate security risks. Hence, it is important for Ukraine to maintain access to official bilateral and multilateral credit that tends to be cheaper.  In practical terms, this implies implementing the conditionality of the IMF program and EU macro-finance support.

Second, the central bankers identified a number of challenges for the global economy in the coming years: the lingering dislocations after the COVID19 crisis, Russia’s invasion of Ukraine, adjustments in the labor market, climate change, fragmentation of international trade and capital flows, and technological disruptions (for instance, artificial intelligence). The outlook is rather uncertain and central banks have to be humble about what they can forecast and what they can achieve. Obviously, Ukraine has to deal with the Russian invasion directly, but other challenges are relevant too and may create opportunities. For example, the fragmentation of trade means that there is a unique opening for Ukraine to take over the economic niche of China, Russia and similar countries, i.e. to become a new manufacturing hub. Ukraine is well positioned to benefit from friend-shoring (that is, reallocation of production to countries friendly to the West) but to realize this potential Ukraine should provide the right regulatory environment and institutional reforms to make the country attractive to foreign investors. 

Third, in light of the challenges, central bankers emphasize the critical need to keep the economy ready for adjustment. Christine Lagarde, the President of the European Central Bank, observed that flexibility and resilience are key. Again, the Russian invasion makes these needs much more acute for Ukraine. And this is not just about making Ukraine’s energy infrastructure less vulnerable to Russian missile attacks. This is about making the economy agile and adaptable more broadly: more flexible labor market, more reinforcement in the architecture of capital markets, more diversified production chains. This matters not only during the war but also in the post-war period as Ukraine will have to undergo massive transformation and reallocation of resources. 

Fourth, large public debt in advanced and emerging economies creates vulnerabilities for the financial system and the broader economy. There are no easy solutions here and reducing public debt can take many years. However, government spending financed with borrowed money should not be wasted. For example, public programs can help address climate change, improve human capital and supply chains, etc. This means that Ukraine should aim to restructure its debt as much as possible and as soon as possible to have a clean slate for the post-war reconstruction. It also means that post-war government borrowing should be about investment into modernizing the country rather than covering current spending.      

Finally, nearly every presentation brought up the Russian invasion of Ukraine. The tone of the conversations suggests that the central banking community—at least the one present in Jackson Hole (Russia was not invited as far as I know)—is firmly on Ukraine’s side. This goodwill is an incredible resource that can be highly instrumental in modernizing Ukraine and integrating the country into the global economy.