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

Abstract

In the early stage of the 2008-2009 financial crisis, the conventional wisdom was that financial underdevelopment of sub Saharan African economies may have been a bless-ing in disguise because it insulated 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 where they export. In the 2008-2009 financial crisis, we find that African exports to the US have been hit more than other countries. On past financial crises (1976-2002), we find that African exporters are more vulnerable to recessions in partner countries. Hence, African countries seem more affected by the income effect of financial crises. In addition to this income effect, we find that, for the average exporter, the disruption effect due to a financial crisis in the partner country is moderate (a deviation from the gravity predicted trade of around 2 to 8%) and 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 the crisis. Only a part of the vulnerability of African exports comes from a composition effect as primary exports are hit more than manufacturing exports. We also provide evidence that African countries more dependent on trade finance are hit more badly.