Political Risk and Export Promotion: Evidence from Germany

Abstract

Political risk represents an important hidden transaction cost that reduces international trade. This paper investigates the claim that German public export credit guarantees (Hermes guarantees) mitigate this friction to trade ows and hence promote exports. We employ an empirical trade gravity model, where we explicitly control for political risk in the importing country in order to evaluate the eect of export guarantees. The idea behind export promotion through public export credit agencies (ECAs) is that the private market is unable to provide adequate insurance for all risks associated with exports. As a consequence, rms' export activities are limited in the absence of insurance provision. Using a novel data set on guarantees we estimate the eect of guarantees in a static and dynamic panel model. We nd a statistically and economically signicant positive eect of public export guarantees on exports which indicates that export promotion is indeed eective. Furthermore, political risk turns out to be a robust determinant of exports and hence should be taken into account in any empirical model of trade.

Export Credit Guarantees and Export Performance: An Empirical Analysis for Germany

“…This point estimate hides the fact that only about 2 to 3 per cent of German export markets (destination × industry cells) and approximately the same share of aggregate trade volume are covered by guarantees. Compared with Moser et al’s (2008) random effects (RE) exercise, our estimate is only half as big. It follows that controlling for unobserved heterogeneity, which affects both the incidence of guarantees and export volumes, is crucial.…”

“…Our paper is most intimately related to two studies that test for the effects of public export credit insurance schemes. The only paper on the German export credit guarantees is by Moser et al (2008). Our approach differs from theirs in several ways.…”

“…The first difference relates to data: our analysis covers the period 2000–09 while theirs covers 1992–2003; we work with data on the two‐digit industry level while they use aggregate data. The second difference concerns econometric methodology: We find that the Hausman test forces us to use fixed effects estimation; Moser et al (2008) use RE models. The additional industry dimension allows us to include country × year (sector) effects into the analysis to account for multilateral resistance terms.…”

Public export credit insurance in the Netherlands: An input–output approach

“…Egger and Url (2006) in particular show that the public ECIF is positively correlated with exports in the longer run, whereas Felbermayr and Yalcin (2013) find an instant and one-time relationship between the public ECIF and exports and no long-run effects. Moser et al (2008) also find a stronger correlation between exports and public export credit insurance in their static model specification, in which they also control for the political risk of the destination country, relative to their dynamic model. Considering the nature of the publicly insured export transactions, frequently spanning a period of years, the lack of long-run effects is surprising.…”

“…Studies of the latter type are generally conducted within the framework of the standard gravity model | 2777 van den BeRG et al of international trade. Examples of research employing the gravity model of trade include Egger and Url (2006), Felbermayr and Yalcin (2013) and Moser, Nestmann, and Wedow (2008). These studies tend to reveal a positive correlation between the supply of public export credit insurance and exports.…”