The vulnerability of sub-Saharan Africa to the financial crisis: the case of trade

In the early stage of the 2008-2009 financial crisis, the conventional wisdom was that financial under-development of sub Saharan African economies may be a blessing in disguise because it insulates them from the direct effects of the crisis. This paper argues that this may also make African exporters, dangerously more dependent on the health of financial institutions in countries they export to. On past financial crises (1976-2002), we find that for the average country, the disruption effect on exports due to a financial crisis in the partner country is moderate (a deviation from the gravity predicted trade of around 2 to 8%) but long lasting (around 7 years). We find however that the disruption effect is much larger for African exporters as the fall in trade (relative to gravity) is at least 20% more than for other countries in the aftermath of a financial crisis. Part of the vulnerability of African exports comes from a composition effect because primary exports are hit more severely than manufacturing exports. We also provide evidence that African countries more dependent on trade finance are more vulnerable to financial crises.