Europe and Central Asia Studies – serie

During the 1990s, Emerging Europe and Central Asia (ECA) chose a model of rapid financial development emphasizing bank credit expansion often funded by foreign capital. Although boosting financial inclusion of firms and households, the model was accompanied by lower efficiency and increased financial vulnerability. After two waves of crises, in the late 1990s and after 2008, ECA’s banking systems again face major stress. The crises and stresses have eroded trust in banks and job creation in credit-dependent firms. ECA’s shallow and illiquid capital markets offer no additional support. Stagnating income growth, particularly of middle- to lower-income earners, has led to increasing dissatisfaction with low productivity growth and limited opportunities. This frustration provides the impetus for reshaping financial policies. A healthy and balanced financial sector could strengthen structural adjustment in ECA’s eastern, oil-dependent economies and innovation in its western countries. Risks and Returns: Managing Financial Trade-Offs for Inclusive Growth in Europe and Central Asia argues for reaching beyond increasing access to credit. ECA countries must build integrated financial systems, enabling prudent financial inclusion in a region significantly lagging in the use of saving products. Striking the right balance across all dimensions of financial development (stability, efficiency, inclusion, and overall depth) is crucial for achieving and sustaining inclusive growth. Redesigning financial policy involves addressing trade-offs often overlooked in the past. Too much credit and imprudent financial inclusion have led to banking crises. Overly stringent regulation to foster financial stability has hindered inclusion and efficiency gains. Both shortfalls have had negative consequences for shared prosperity. Risks and Returns discusses tools and approaches to help policy makers achieve balanced financial development.

Critical Connections examines how trade, investment, migration, and other linkages among countries are drivers of economic growth in the Europe and Central Asia region. The study breaks new ground by using a multidimensional approach that recognises how each connectivity channel for growth is likely to be affected by the strength of other channels. A multidimensional view makes it easier to see that diversity in country connections and balance in all channels of connectivity are critical for achieving the greatest impact on growth.Europe and Central Asia provides a great laboratory for observing the role of multidimensional connectivity in action. Its 30 countries vary widely in the openness of their economies. The region's collective experience shows how the various elements of cross-border connectivity work together to accelerate progrowth knowledge transfers, which boost productivity through participation in today's global value chains. A country's economic partner might be just as important as the type of connection. Being well connected to highly connected countries can provide benefits beyond being well connected to comparatively isolated countries.Although greater connectivity can expose countries to external shocks, this book presents fact-based arguments for policies that seek to build deeper and more diverse connections within the Europe and Central Asia region and globally. The message is timely. Europe's once-confident march toward economic integration has slowed over the past decade, with voices in many countries questioning the wisdom of opening to the global economy. Critical Connections serves as a reminder to citizens and policy makers that greater regional and global connectivity has been a tremendous “convergence machine,” raising living standards of lower-income countries to those of wealthier middle- to high-income countries.

This book seeks to enhance the understanding of migration in Europe and Central Asia, and to propose policy solutions tailored to the diversity of migration experiences and challenges in the region, to better leverage labor mobility for all parties.

This companion report to the 2024 World Development Report, The Middle Income Trap, uses the '3i' framework-Investment, Infusion, and Innovation-as a strategic approach to address these challenges and provides policy options on how to grow to high income.