The African financial sector was pretty much isolated from the financial crisis that wreaked havoc in the developed countries’ financial sector. All good. But, if the African exporters are dependent on external trade finance, then the real cost of the global crisis on Africa may actually be high, argue Berman and Martin.
African exports has nosedived after the financial crisis. The interesting question is how does the financial crisis in one country affects exports of another country? To find this out, Bernam and Martin study past financial crises (1976-2002) and its impact on bilateral trade flows. The explore the deviation of exports from their ‘natural’ level generated by financial crises.
Two channels through which financial crisis affect exports: income effect (leading to drop in demand of exported items) and disruption effect (leading to fall in trade credit). They find that the largest disruption effect occurs when the financial crisis hits industrialized countries. The African countries are affected more by income effect than disruption effect. In addition to the income effect, they find that, for an 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). For African exports particularly, due to disruption effect, the fall in trade (relative to gravity) is at least 20% more than for other countries in the aftermath of the crisis.
Fig: Exports after financial crisis in partner country, Africa. It shows the deviation of sub-Saharan African exports after a financial crisis that takes place in year t = 0, with respect to the average disruption effect. A positive (negative) excess trade ratio means that the effect of a financial crisis in the partner country on African exports is more positive (negative) than the average effect on exports.
Conclusion: “The underdevelopment of financial systems in Africa is not a "blessing in disguise" in the current crisis. If the cost of such low development is that African exporters are very dependent on external trade finance, then the real cost of the financial crisis on Africa may actually be higher due to the underdevelopment of financial systems.”