Multi-dimensional economic connectivity: benefits, risks, and policy implications

Various types of international connectivity serve as channels for the transmission of knowledge, which, in turn, is critical for long-run economic growth. However, how much knowledge is transmitted to a country is not only the result of the overall level of connectivity, but also to whom a country is connected. For example, being well connected to an economy with wide-reaching global connections is likely to be a stronger conduit for knowledge transfers than being connected to an isolated economy. Likewise, connections are likely to complement each other. This wider definition of connectivity, referred to as multi-dimensional connectivity, is explored in this study as it applies to Europe and Central Asia (ECA). This paper shows that multi-dimensional connectivity is an economically and statistically important determinant of future economic growth. The paper further discusses the potential risks and transfer of shocks that can result from cross-country economic connectivity. Furthermore, it provides some examples of how policy tools can be designed to leverage the benefits of connectivity channels and mitigate their risks.