This paper studies how output fluctuations in Russia are transmitted internationally. Using vector autoregression (VAR) and dynamic panel models, the paper finds that Russia’s output fluctuations are an important driver of output fluctuations of countries in the region, especially for oil importers, and are transmitted increasingly via trade and market confidence channels. The magnitude of cross-border spillovers is larger for countries with relatively high bilateral trade concentration, low export diversification, and weak external buffers. The paper also finds evidence that stronger public institutional quality- especially in the fiscal area- may help insulate countries from volatility in the Russian sovereign debt market.

Raising long-term growth and resilience and improving living standards and inclusion are the top economic policy priorities for countries in the Caucasus and Central Asia (CCA). The region responded strongly to the COVID shock, which unavoidably caused a contraction in output and an increase in poverty and inequality. While the region is at the crossroads between the West and the East as it is facing heightened uncertainty due to Russia’s war in Ukraine and the rising risk of global fragmentation. Climate change is an additional challenge that could have a significant negative impact on CCA countries in the long term. These challenges, however, also offer an opportunity for the region to develop a new growth model that could strengthen long-term resilience, accelerate income convergence with more advanced country peers, and improve human development and social outcomes. The paper argues that a more market-based allocation of limited resources is needed to channel capital and labor to their most productive use. The private sector needs to become a key driver of economic activity while the state provides a competitive and market-friendly business environment, delivers essential public goods and services, addresses externalities and market failures, and mitigates systemic risks. The state also retains a critical role in mobilizing public support and resources for climate policies and protecting the vulnerable. Well-designed social safety nets play a key role in reducing poverty and inequality and are essential to the new economic growth model to support human capital development and alleviate the impact of structural reforms on the most vulnerable.

This paper assesses the stance of monetary policy in eleven Sub-Saharan African (SSA) emerging and frontier market economies. We estimate neutral real interest rates using a range of methodologies, and find a broadly declining trend in most economies since the Global Financial Crisis, consistent with patterns observed in advanced and major emerging market economies. We document significant heterogeneity in monetary policy stances—measured by the interest rate gap—even during common global shocks. We also examine the consistency between signals from the intended monetary policy stance and broader financial conditions. To this end, we construct financial conditions indices (FCIs) and analyze their relationship with interest rate gaps. We find that this relationship strengthens during periods of highly accommodative or restrictive monetary stances, particularly in economies that have adopted or are transitioning to inflation-targeting frameworks. Moreover, contractionary monetary shocks tighten financial conditions more in these economies than in those operating under other regimes.

North African economies are characterized by a significant share of informal activity and employment. About two-thirds of workers in North Africa operate without any formal arrangement and social protection, and about 30 percent of GDP is estimated to be produced by informal workers and firms. This paper finds that while a few key structural characteristics could explain “normal” informality in North Africa, policy distortions explain a large share of excess informality. Among the structural factors that can lead to high informality, the relatively lower level of human capital and younger population help explain the high informality in the region, as low-skilled and young people generally find it more difficult to operate in the formal sector. At the same time, gaps in a set of policy indicators also explain the relatively high informality in North Africa. In particular, this paper finds that gaps in the quality of governance explain about half of the excess informality experienced in North Africa compared with advanced economies. In this context, the expansion of the informal sector in Algeria and Tunisia from the mid-2000s partially reflects the deterioration in a few indicators of their governance and regulatory frameworks. In contrast, the decline in informality observed in Egypt, Mauritania, and Morocco over this period also reflects improved business regulations, governance, and tax systems, in addition to continued progress in economic development. While informality has traditionally buffered regional labor markets against the impact of recessions, the COVID-19 crisis has been different. North African economies have generally exhibited relatively stable unemployment rates, including during recessions, largely owing to their high levels of informality. However, informal employment has fallen significantly in North Africa during the pandemic, as lockdown measures have particularly affected high-informality service sectors. As the pandemic subsides and the lockdown measures are removed, the recovery of regional labor markets could exhibit a stronger-than-usual rebound of informal employment. Ensuring an inclusive recovery from the pandemic would call for renewed efforts to construct more modern (digitalized), more efficient, and fairer systems of social protection, building on the progress achieved in the region during the pandemic in extending safety nets to informal workers.

Employment informality is widespread across North Africa. This paper aims to shed light on the role played by the informal sector in labor market adjustments over the business cycle. It finds that the response of labor markets to output fluctuations is more muted in countries with higher informality levels, like the North African economies. The analysis also confirms that informal employment is countercyclical and acts as a buffer during economic downturns in countries with relatively higher informality. However, contrary to what took place in past recessions, informal employment contracted sharply during the 2020 pandemic recession in high informality economies, suggesting that it did not play its traditional countercyclical role. By contrast, employment informality tends to fall modestly or increase during economic upturns, including the post-pandemic recovery. This finding presages the persistence of a large informal sector in the post-covid era in medium- and high-informality countries.

Повышение долгосрочного роста и стойкости к потрясениям, а также повышение уровня жизни и инклюзивности — главные экономические приоритеты стран Кавказа и Центральной Азии (КЦА). Регион принял активные меры в ответ на шок, вызванный COVID, который неизбежно вызвал сокращение производства и рост бедности и неравенства. Регион находится на пересечении путей между западом и востоком и сталкивается с повышенной неопределенностью вследствие войны России в Украине и возрастающего риска глобальной фрагментации. Изменение климата является еще одной проблемой, которая может иметь значительные негативные последствия для стран КЦА в долгосрочной перспективе. Однако эти трудности также предоставляют региону возможность разработать новую модель роста, которая повысит его долгосрочную устойчивость, ускорит сближение уровней доходов с более развитыми сопоставимыми странами, повысит степень развития человеческого потенциала и улучшит социальные результаты. В документе утверждается, что для направления капитала и рабочей силы на их наиболее продуктивное использование необходимо распределение ограниченных ресурсов на более рыночной основе. Частный сектор должен стать одной из основных движущих сил экономической активности, а государство должно создавать конкурентную и благоприятную для развития рынка деловую среду, предоставлять жизненно важные общественные блага и услуги, компенсировать внешние эффекты и недостатки в функционировании рынка и смягчать системные риски. За государством также остается принципиально важная роль в мобилизации общественной поддержки и ресурсов для мер климатической политики и защиты уязвимых слоев населения. Хорошо продуманные системы социальной защиты играют ключевую роль в уменьшении бедности и неравенства и принципиально необходимы в новой модели экономического роста для поддержки развития человеческого капитала и смягчения воздействия структурных реформ на наиболее уязвимые слои населения.