Florian Misch: Structural reforms can offset up to 20% of losses from external shocks

Countries of the Caucasus and Central Asia should focus on structural reforms rather than industrial policy and export subsidies to diversify trade and increase resilience to external shocks, Senior Economist of the IMF's Middle East and Central Asia Department Florian Misch said at the presentation of the fund's regional economic outlook for the Middle East and Central Asia held in Uzbekistan, Report informs.

According to him, the region still lags behind in one of the key indicators of trade diversification - the variety of exported products.

"Countries with a more diversified economy generally show less output volatility and have greater resilience to external demand shocks," Misch noted.

Assessing the effectiveness of state support tools, the expert pointed out the high cost of export subsidies provided as part of industrial policy. According to him, although such measures can provide a short-term increase in production and income in individual sectors, they simultaneously increase inflationary pressure and create a significant burden on the state budget. As a result, the combined effect of their application may turn out to be negative.

In addition, IMF empirical studies show that industrial policy either does not provide a significant increase in the level of trade diversification, or its impact on this indicator turns out to be virtually zero.

As a more effective alternative, Misch highlighted structural reforms, in particular deregulation and the reallocation of public spending, which do not require significant budgetary expenditures.

"According to the fund's models, 15% to 20% of potential consumption losses resulting from external shocks, such as changes in US tariff policy, can be offset solely through such reforms. In the long term, trade diversification is also facilitated by investments in higher education and increasing labor market flexibility," he stated.