The Global Financial Crisis, LDC Exports and Welfare: Analysis with a World Trade Model

Changes in international trade flows and world prices are major channels through which the global financial crisis will hit developing countries. The recession in the ‘global North’ triggered by the financial crisis and the resulting slowdown of growth in China and other major emerging economies will generate declines in demand for exports from developing countries, along with a reversal of the beneficial terms-of-trade trends that have favoured net exporters of primary commodities over the last few years. How these trade shocks and terms-of-trade trends affect economic performance and welfare in low-income countries depends on country-specific characteristics and requires a differentiated analysis across countries. This study uses a multi-region computable general equilibrium (CGE) world trade model to gauge the impact of a slowdown in economic activity in the OECD on trade performance, world prices, and aggregate welfare in the rest of the world with a particular focus on the least developed countries (LDCs) in sub-Saharan Africa and Asia. The results of the simulation analysis indicate the degree of vulnerability of different developing countries and regions distinguished in the model to impacts arising from the recession via the trade channel.