Edited by B. Mak Arvin and Byron Lew
Chapter 13: Foreign aid, international trade, and financial crises: a developing country perspective
The twin crises of the credit crunch and the economic slowdown severely hit export flows from emerging and developing countries, which dropped by 12 per cent in 2009 compared with 2008 (IMF, 2010). According to the International Monetary Fund (IMF), the decline in trade flows was triggered by both a fall in international demand and a contraction in available trade finance (Thomas, 2009). International demand, on the one hand, dropped as reduced incomes and increased exchange rate volatility led to a decline in consumer spending in the developed world and in particular in the US and Europe. On the other hand, the distress in the international banking system and the deterioration of the relationships between firms due to the growing market uncertainty led to declines in trade financing. The International Chamber of Commerce (2008) reported that the credit crunch was raising concerns about the availability of trade finance especially in developing countries, and this fact was confirmed by a survey conducted by the IMF jointly with the Bankers’ Association for Finance and Trade which showed that trade finance transactions in developing economies have fallen on average by 6 per cent (Auboin, 2009; IMF, 2009). Previous historical episodes suggest that crises are associated with a decline in available trade finance. For example, the 1997 Asian financial crisis witnessed a 16 per cent decline in trade financing (Herger, 2009).
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