The Impact of Financial Crises on Trade Flows: A Developing Country Perspective

The global financial crisis has hit hard international trade that dropped below levels not seen since the Great Depression with disastrous consequences for the developing world. This paper estimates an extended gravity model of trade on a sample of 83 developing countries over the period 1990-2007 to shed light on how banking crises and global economic downturns affect bilateral exports flows from developing countries. In addition to traditional variables, we include a trade finance variable and foreign aid among the regressors. Differences between developing regions are taken into account. Our results show that (i) trade finance has a positive and significant impact on bilateral export flows in all developing regions except Latin America; (ii) foreign aid matters in all regions; (iii) global economic downturns exert a negative and significant impact on export flows in all developing countries, and especially in Latin American and Sub-Saharan African economies; (iv) banking crises appear to have no significant impact in most regions.