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

European Report on Development The European Report on Development (ERD) is a multiannual process, which is framed within the initiative “Mobilizing European Research for Development Policies“. The objective of this initiative is to enhance a European perspective on development issues in the international arena, on the basis of knowledge excellence, innovation and building of common ground between the European research community and policy-makers (Member States and Commission). Moreover, this initiative will improve the visibility of the EU at a global level, help shape the international agenda and feed the EU internal debate on development. The ERD Team Leader is Prof. Giorgia Giovannetti. The multidisciplinary team is based at the Robert Schuman Centre of the European University Institute and is interacting with a broad network of scholars, from both developed and developing countries.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