Last week, central bankers gathered at Jackson Hole, Wy. for a conference to discuss pressing matters and share their vision for future policy responses. While this conference may be little known to the public, it rivals the Davos forum in its influence. The list of participants includes heads of nearly all major central banks such as the U.S. Federal Reserve, European Central Bank, and the Bank of Japan.
Janet Yellen, the chair of the Federal Reserve Board, and Mario Draghi, the president of the European Central Bank, gave keynote speeches. The main themes of their talks as well as the whole conference were how to stimulate economic growth. The focus of Janet Yellen’s remarks was whether regulation introduced after the Global FInancial Crisis creates barrier for economic growth, while Mario Draghi concentrated on how calls for protectionism can hurt the capacity of advanced countries to generate productivity growth. Both topics are highly relevant for Ukraine.
First, similar to other countries, Ukraine introduced tighter regulations (e.g., standardized contracts traded on centralized exchanges, stress testing, higher capital requirements) on the banking system to ensure that the system can withstand large shocks. Obviously, there is a potential cost to these regulations as banks have to carry more capital and thus likely provide less credit to the economy. Chairwoman Yellen defended these new measures and observed that the system in the U.S. is much safer now and there is little indication that new regulations inhibit liquidity or credit. Indeed, by many metrics the credit is back to the U.S. economy. She also warned that although it may be tempting to roll back these regulations to provide a possible boost to the economy, one should not forget how costly the crisis was. At the same time, Chairwoman Yellen suggested that regulation may be differentiated across different types of financial institutions. Specifically, there is little reason to impose capital requirements on small banks as tough as one should impose on systemically important institutions. In the Ukrainian context, the price of bailing out and nationalizing banks was more than dear. Although the banks may be concerned about the private cost of regulation, it is likely a fraction of the public cost of what may happen if banks are not properly supervised.
In short, the first lesson for Ukraine is that the National Bank of Ukraine and other parts of the government should maintain regulations implemented after the crisis.
Second, President Draghi echoed many of the points made by Janet Yellen. In short, his view is that lax regulation is always bad and one should not use lax regulation to stimulate economy. He also emphasized that one of the success stories since the Global Financial Crisis is coordinated effort of regulators across countries to ensure consistent approach to risk assessment and management. Financial Stability Board and Basel III epitomize some of the key achievements in this area.
Given that Ukraine is a small open economy and its financial system will be highly integrated into the global financial architecture, the government should direct its efforts to implement international standards for financial institutions.
Third, President Draghi observed that globalization brought large improvements in productivity. In the current environment of slow productivity growth, it would be short-sighted to succumb to protectionist urges. He cited a number of studies documenting that trading with countries that are at the technological frontier is highly beneficial. This has important implications for Ukraine. Since Ukraine is technologically behind many countries in the European Union and economic growth is disappointing, the government can accelerate the growth rate of output by fostering greater integration of the Ukrainian economy into the EU economy.
In addition to the standard trade measures such as low tariffs and nontariff barriers, the government should facilitate flow of capital and technology into Ukraine. This means that restrictions on some types of capital flows should be lifted.
Fourth, many participants of the conference discussed distributional aspects of inequality due to globalization. While research shows that globalization itself is a small contributor to rising inequality, the public perceives globalization as the main culprit. Indeed, globalization often means destruction of traditional jobs and reallocation of workers to new sectors is painful as geographical and occupational mobility of workers is limited. Although governments tried many programs to help workers with reallocation (e.g., re-training, severance payments), the effectiveness of these programs appears to be quite modest. The consensus view emerged at the conference is that providing education accessible to broad spectrums of population (e.g., education should be cheap so that even poor and liquidity constrained workers can afford it) is likely the best response. To maximize the effectiveness of this investment into human capital, one should complement it with investment into new physical capital.
These discussions suggest that the Ukrainian government should amplify (or at least maintain) its contribution to public education and, perhaps, implement other programs to help displaced workers.
In summary, central bankers view regulations on the financial sector as critical for providing macroeconomic stability and globalization as a key source of economic growth in the future. Since 2014, Ukraine has made a number of policy steps consistent with this view. The country has learned from its mistakes as well as mistakes of others. However, after the initial push, there is a reaction and the hard-fought gains may be reversed. Everyone should understand that the price of going back to pre-crisis practices of lax regulation and protectionism is too high.
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