Banking Crises and Exports: Lessons from the Past, L Iacovone and V. Zavacka, World Bank Policy Research Working Paper No. 5016, August 2009
For the first time since 1982, in 2009, global trade flows will not grow. According to the latest IMF projections global trade in goods and services is expected to drop by 11% during 2009 and to stagnate in year 2010. The recent collapse in exports following the unfolding of the financial crisis has generated new pressing questions about the relationship between banking crises and exports growth. Are the supply shocks due to the collapse in the banking system responsible for the falls in exports? Or is what we observe completely attributable to the demand side where we have also observed unprecedented drops particularly in developed countries? In Iacovone and Zavacka (2009) we explore these questions using data, below, from 23 past banking crises episodes involving both developed and developing countries during 1980-2000.
Our results, summarized below, show that during a crisis the export growth of a sector with a relatively high reliance on external finance, such as electric machinery, is reduced on average by 4 percentage points compared to a sector like footwear whose dependence is relatively low. We also find that exports of industries that tend to have more tangible assets grow relatively faster during a banking crisis confirming the hypothesis about the importance of collateral in a context when access to finance becomes scarcer. Finally, using a proxy for trade credit dependence (Fisman and Love,2003) we show that exports of industries relatively more reliant onon inter-firm finance are not affected by a banking crisis more than others. A potential explanation for this finding is that if importers do not face a crisis themselves they might be willing to accept less favorable payment conditions and extend trade credit to their suppliers in order to allow them to overcome their temporary credit constraints.