Financial riders vital to boost trade: IMF

Written by Sanjay Jog | Mumbai | Updated: Mar 18 2009, 05:15am hrs
The International Monetary Fund (IMF) paper titled Financial Markets & Emerging Market Trade suggests that financial conditions play a significant but not dominant role in stimulating trade volumes among emerging market countries. The estimates presented in this paper suggest that the combination of zero net private capital flows to emerging markets and a domestic banking crisis could lower import volume growth by between 5% and 6% immediately, with a slightly lower effect on export volumes. This is less than suggested by anecdotal evidence in the current global financial crisis and likely reflects the fact that the initial withdrawal of financing eases relatively quickly as alternative sources of financing are discovered.

According to the IMF data, trade finance is not the only form of credit with implications for trade volumes. Conditions in credit markets more generally, including working capital and long-term investment financing also have an impact on international trade, including through their impact on industrial production more generally. As such, it is probably sensible for policymakers to support credit flows in general rather than to focus specifically on increasing trade finance in particular. The country sample comprises 36 emerging market economies (classified as middle-income countries according to the World Banks World Development Indicators) and two lowincome countries (India and Pakistan, chosen for their importance in world trade and their access to market financing).

For this paper, the most interesting issue is the results for the financial crisis/trade finance variables. Both the crisis dummy and private capital flows ratio are significant at or above the 90% level of confidence. The coefficient on the banking crisis is -0.021 so that when a country experiences a banking crisis, import volume growth declines by over 2% immediately, all else equal. Given the size of the lagged dependent variable and small coefficient on the lagged crisis term, this effect rises rapidly over time.

The short-run coefficient on the private capital flows ratio is around unity. The private capital flows ratio has fluctuated between -0.2 and 3.1% of GDP over the historical period with the trough occurring in the mid-1980s and late 1990s. Therefore the coefficient suggests that at its trough, when net private capital flows were slightly negative, import volumes were, some 3% less than at its peak, with the effect again growing rapidly over time.