Trade and the financial crisis: a focus on developing countries
The global financial crisis has significantly reduced demand for African exports, and this is not the first time, according to recent IGC research carried out by Nicolas Berman (Graduate Institute, Geneva) and Philippe Martin (Sciences Po). The study finds that while trade among all countries has taken a hit since 2008, in the US the largest fall in demand for foreign goods has been for those coming from Africa. This is an on-going problem for African exporters. Looking at the period from 1976 to 2002, the research shows that African exporters are particularly vulnerable to a banking crisis in the countries they export to. While a fall in trade is to be expected when incomes fall, the authors argue that African exporters are particularly hard hit by what they call a ‘disruption effect’, whereby the financing for trade dries up. Exporters often need to move goods around the world at high cost but typically they will only receive payment once the goods have been delivered. To cover their costs in the meantime, a lot of exporters rely on short-term credit and guarantees from banks – such as the so-called ‘letters of credit’. Since the financial crisis, these lines of credit and guarantees have been in less generous supply, thereby forcing some exporters to reduce the amount they trade or to stop trading altogether. The authors point out that this is particularly damaging for exporters of primary products, such as coffee or sugar cane, which many African countries specialise in. For the average country, the disruption effect is moderate (a deviation from the gravity predicted trade of around 3 to 5%), but long lasting. It is apparent that the disruption effect is much larger for African exporters as the fall in trade is around 15 percentage points higher than for other countries in the aftermath of a banking crisis. One reason given for the reduction in trade finance is that during a banking crisis when uncertainty is high, trust is low, and many have pulled their money from the markets, banks and firms in the importer countries first cut exposure and credit to countries that are seen as more risky. In many cases this has been African countries.