The Vulnerability of Sub-Saharan Africa to Financial Crises: The Case of Trade (IGC Working Paper)
Motivated by the 2008-2009 financial crisis and the trade collapse, we analyze the effect of past banking crises (1976-2002) 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 around 3 to 5%) but long lasting. We find however that the disruption effect is much larger for African exporters as the fall in trade (relative to gravity) is around 15 percentage points higher than for other countries in the aftermath of a banking crisis. Part of the vulnerability of African exports in the short-run comes from a composition effect because primary exports are disrupted more severely than manufacturing exports. However, the dependence of African countries on trade finance also explains the vulnerability of African exporters to banking crises in partner countries.
Also published in IMF Economic Review 60, 329-364 (September 2012) [doi:10.1057/imfer.2012.13]
Berman, N.; Martin, P. The Vulnerability of Sub-Saharan Africa to Financial Crises: The Case of Trade (IGC Working Paper). International Growth Centre (IGC), London, UK (2012) 33 pp.