The Vulnerability of Sub-Saharan Africa to Financial Crises: The Case of Trade

Abstract

Motivated by the 2008-2009 financial crisis and the trade collapse, we analyze the effect of past banking crises on trade with a focus on African exporters. We show that they are particularly vulnerable to a banking crisis in the countries they export to. We distinguish between an income effect (during a banking crisis, income and exports to the country fall) and a disruption effect (a banking crisis disrupts the financing of trade channels). For the average country, the disruption effect is moderate (a deviation from the gravity predicted trade of between 1 to 5%). We find however that the disruption effect is much larger and long-lasting for African exporters as the fall in trade (relative to gravity) is 10 to 15 percentage points higher than for other countries in the aftermath of a banking crisis. This vulnerability of African exports in the short-run does not come from a composition effect, i.e. from the fact that primary exports are disrupted more severely than manufacturing exports. Instead, we provide suggestive evidence that the dependence of African countries upon trade finance is an important determinant of their vulnerability to banking crises in partner countries.

Global economic and financial crisis: Exploring the transmission channels and impacts on sub-saharan african economies

“…Some studies suggested that trade was considered to be the most important crisis transmission for the region (see, for example, ODI, 2010;Berman and Martin, 2012). There are two mechanisms through which a financial crisis in the developed countries can affect the export of other countries.…”

“…The first one is the income effect due to the sharp economic recession brought by the crisis. The second one is the disruption effect in the form of fall in trade finance (Berman and Martin, 2012). In the case of the sub-Saharan African countries, Berman and Martin (2012) found that African exports were more sensitive to large decline in income of their trading partners.…”

“…The second one is the disruption effect in the form of fall in trade finance (Berman and Martin, 2012). In the case of the sub-Saharan African countries, Berman and Martin (2012) found that African exports were more sensitive to large decline in income of their trading partners. They also found that the disruptive effect was more severe and long lasting for African countries than the exporters of other regions.…”

International Crises, Characterization of Contagion and Social Well-Being in Developing Countries: A Theoretical Model

“…H4: the income, price and monetary shocks of (A) and the price of raw materials shocks impact the external variables enumerated in H3 [32][33][34][35][36][37][38][39].…”

Decomposing the Great Trade Collapse: Products, Prices, and Quantities in the 2008–2009 Crisis

“…While the financial crisis originated in high income countries, its effects on trade were rapidly transmitted to low-income countries. It has been hypothesized that the effects of constrained trade finance could vary by exporter income (Malouche 2009, Berman andMartin 2010) and by geographic region (Berman and Martin 2010 Table 4 and figure 6 present the main decomposition along these income definitions.…”