1 First draft only for comments Credit Contraction and International Trade: Evidence from Chilean Exporters * Ari Aisen International Monetary Fund Andrés Sagner Central Bank of Chile Roberto Álvarez Central Bank of Chile and University of Chile Javier Turén University of Chile Abstract An important consequence of the recent financial crisis was the collapse of global trade. Using data of Chilean exporting firms, this paper studies the main factors behind the exports fall in the aftermath of the crisis. We find that export contraction was generalized across firms, industries and destination markets, but penalized larger firms more. Our results show that both overall financing and export credit were significant determinants of export contraction in the Chilean case. However, the effect is highly heterogeneous. The evidence shows that larger exporters belonging to industries more dependent on overall credit have suffered disproportionately more. This has important policy implications as public policy aiming at stimulating trade credit may not be effective if overarching credit conditions remain subdued. Keywords: Global Trade, Export Finance, Firm Size JEL Classifications: F14, F19, F34 * We thank Germán Moya for invaluable help in processing the data used in this paper. We also thank attendants to internal seminars at the Financial Policy Division of the Central Bank of Chile for useful comments and suggestions. The views expressed in this paper are those of the authors and do not represent those of the Central Bank of Chile and the International Monetary Fund.
2 1. Introduction As a consequence of the recent financial crisis there has been a notable reduction in global trade. According to the World Bank (2010), the value of world trade plummeted 31 percent between August 2008 and its low point in March Baldwin (2009) labels this episode "The great trade collapse" given its reach, abruptness, severity, synchronicity, and the fact that it was the steepest fall of world trade in recorded history and the deepest fall since the Great Depression. There has been a debate over the reasons for such a spectacular fall in global trade. Among the probable culprits, three stand out: (i) economic recession, (ii) credit contraction, and (iii) increased protectionism. Since protectionism seems to be more a consequence rather than a cause of the falling trade, as argued in Baldwin and Evenett (2009), the first two are the most plausible causes for the trade collapse. In this context, this paper uses a detailed dataset with monthly observations covering all Chilean exporting firms during the period to investigate how firms diverse characteristics (size, industry, financing dependence and export credit) affected the magnitude of export contraction during the recent financial crisis. In particular, we introduce a novel measure of export credit dependence using direct information on the share of exports that are credit paid. This measure can then be contrasted with more indirect ones such as Rajan and Zingales (1998) external financing dependence measure 1. Comparing how firms in industries differing in financing and export credit dependence were affected during the crisis allows us to determine the type of credit constraint that most negatively affects international trade. 1 To be clear, the use of external financing in the terminology of Rajan and Zingales (1998) makes reference to the financing that is external to firm. This is, investment which is not financed with own resources.
3 Moreover, we exploit the dataset to study how financing dependence varies across sectors and size. We also examine whether smaller exporters who are potentially more exposed to credit constraints are more affected during the crisis in those sectors where export credit is more important. This is, in spirit, similar to the identification strategy developed by Rajan and Zingales (1998), who show that financial development affects industry growth more positively in those industries that are for some technological reasons - more dependent on external finance 2. We believe this paper is an important contribution to the literature, in particular, because of the unsettled contest for finding the main factor behind the trade collapse: credit constraints or external demand contraction. Amiti and Weinstein (2009) find that trade finance constraints account for one-third of the decline in Japanese exports in the financial crises of the 1990s. In the same vein, and using data on French exports, Bricongne et al. (2009) find that firms (large and small) in industries structurally more dependent on external finance fared worse during the recent crisis. Conversely, Levchenko et al. (2010), using data on U.S. imports and exports, find no support for the hypothesis that trade credit played a significant role in the recent trade collapse. Another contribution of this study derives directly from the wealth of our dataset which allows us to track firm response to credit restrictions, a relevant piece of analysis not contemplated in the articles mentioned above. Finally, there are some studies exploring the issue of export decisions and financing (Grenaway et al. 2007), but questions relate more to issues such as what type of firms have access to credit and 2 This identification strategy has been widely used in the empirical literature of finance and international trade. See, for example, Beck and Levine (2002) and Manova (2008).
4 whether credit access facilitates exports. To the best of our knowledge, there is no previous evidence on how exporters finance exports and how they respond to changes in domestic and trade-related credit conditions. Ultimately, one of our paper s main contributions is to document the Chilean exporting firms responses in the face of the challenging circumstances brought about by the recent financial crisis. Our analysis of Chilean data shows several interesting stylized facts on export growth during the last financial crisis. First, export contraction was significant and generalized across firms, market destinations and sectors. Second, a large proportion of the Chilean export variation during 2008 and 2009 can be attributed to the intensive (as opposed to extensive) margin, which means that most of the fall in trade was due to a reduction in the average value of trade per firm-product, and not to a reduction in the number of exporters or products exported. In fact, we show that almost 60 percent of contraction in non-copper exports was driven by the intensive margin. Third, we find that larger exporting firms were more negatively affected than smaller ones during the crisis, independently if they belong to an industry with high or low financial/trade credit dependence. Finally, a noteworthy and unique result is related to the trade financing. We find that export credit is not the key to explain differences in firm export performance. Our results suggest that overall credit (not specific to international trade) was economically more important and that larger firms in industries more dependent on overall credit were more negatively affected during the recent crisis. The export contraction of larger exporters is close to 60 percent in the top more financing dependent industries, but only about 30 percent in the top more export credit dependent industries.
5 The paper continues as follows: section 2 describes the dataset with emphasis on some stylized facts; section 3 presents the empirical methodology; section 4 shows the econometric results; and section 5 concludes the paper. 2. Data and Stylized Facts This study uses a detailed firm-level dataset with monthly information on exports by product (at the eight-digit level of the Harmonized System) and destination country for all Chilean exporting firms between 2006M1 and 2009M12. The data is collected by customs and covers all exporting firms during the period. This paper uses only information for all non-copper products based on the Harmonized System (HS) classification. For each year the dataset contains exports by firm, destination and product. We first show some stylized facts on the export performance of the Chilean economy during the crisis. Similar to the experience of other economies, Chile experienced a huge trade contraction during the financial crisis (Table 1). The annual average fall in Chilean trade was 22.6%, a comparable figure to what happened to world, advanced, and developing countries international trade. For all these groups, the magnitude of the reduction was around 20%. Then, with the exception of some countries such as Colombia, Paraguay and Uruguay, the case of Chile is not an isolated phenomenon. As we concentrate in non-copper exports in the empirical part of the paper, we discuss the evolution of those exports below 3. Figure 1 shows the evolution of Chilean exports since 2006 through December of After almost of three years of consistent 3 Copper is the most important exported product by Chile, but the variation in export value has been heavily driven by huge variations in its international price. For this reason, we concentrate in the non-copper Chilean exports.
6 positive growth, the Chilean exports started to collapse in September The average annual nominal exports growth in the period previous to the crisis (2006M1-2008M9) was 18.4% and, between 2008M10 and 2009M12, this average growth was -21.4%. The export contraction was generalized across destination markets and increased significantly over time. Figure 2 shows the evolution of the distribution of annual export growth over time. As it can be appreciated, during the first months of the crisis, the distribution of export growth is even between expansions and contractions. As the crisis evolved, the evidence shows that export contracted in most of destination countries. This strong fall in exports was also generalized across industries 4. Before the crisis, the percentage of industries with negative export growth was between 20 and 40 percent. As the crisis evolved, this percentage increased rapidly up to reach almost each exporter sector (Figure 3). Note that during 2009 the percentage of industries with negative export growth was close to 100%. At the end of that year, there was a reduction in this indicator which is consistent with a slow recovery in international trade. Note, however, that at the end of 2009 annual export growth of Chilean exports is still negative (Figure 1). Similar evidence is found when looking at firms. The number of firms with negative export growth increased from about 40 percent of total exporters before the crisis up to more that 60 percent in the third quarter of The negative effect of the crisis is generalized to both large and small exporters. In fact, it seems that large exporters those in the third and fourth quartile of the sectoral export distribution 4 In this paper we refer to industries or sectors using the 3-digit ISIC classification..
7 were most affected by the crisis. The increase in the percentage of firms with negative growth is more pronounced in those exporters (Figure 4). Given that we have information on exports by product and markets, we can explore how the negative impact of the crisis affected these different margins. We follow Bernard et al. (2009) and decompose the aggregate Chilean non-copper trade with partner country c in period t ( x ) in the number of firms that trade with the country ( c t c c f t ), the number of products traded with the country ( p t ), and the average value of trade per firm-product, x c c / ( c c t xt ft pt ) =. Thus, total trade to country c in each period is simply the product between the number of unique trading firms, the number of unique products traded and the average value of non-copper exports: x = f p x c t c c c t t t or in logarithms where y = log ( y ) t t x% = f% + p% + x% c c c c t t t t %. The above equation is the basis for the annual variation decomposition of Chilean non-copper trade, ~ ~ ~ x = f + ~ p + x, where c t c t c t c t c c c f% t f% t f% t 1 and p% c c c t p% t p% t 1 reflects annual changes due to the extensive margin c c c and x% = x% x% 1 due to the intensive margin. As shown in Figure 5 and Table 2, the t t t intensive margin explains most of Chilean export variation during 2008 and Our data shows that, previous to the crisis, the intensive margin accounted for almost 80% of total annual change in overall Chilean exports across destinations. In the crisis period (2008m m12), this figure drops dramatically to around 57%, but remains important. The number of firms and products (the extensive margin), in turn,
8 explains roughly 20% and 23% of total variation, respectively. As the intensive margin is the most important component of export expansion (and contraction) we concentrate on this margin in the following empirical section Empirical Approach Given that several prior studies have emphasized the potential importance of credit driver on trade contraction, our empirical methodology is aimed to identify how the impact of crisis in Chilean exporters depend on assumed exogenous sector-specific differences in exposure to trade credit financing. To do that, we estimate the following main equation: g fcit = α + α + δsize + λsize Crisis + γsize ECredit + ηsize ECredit Crisis + ε ct it fcit fcit t fcit it fcit it t fcit where our dependent variable g fcit is the mid-point growth rate of firm s export value to country destination c in a 3-digit ISIC industry i in month t. The variable is our measure of export credit dependence, between 2008M9 and 2009M12, and ECredit it Crisis t is a dummy variable for the period Size fcit is a variable for initial size defined as the export share of exports of firm f in each 3-digit industry. This an industry specific measure of relative size of the exporter. As previously mentioned, one of the main contributions of this paper is the introduction of a sector-specific measure of export credit dependence. As the Chilean trade statistics register the type of payment for each exports transaction, we compute for each 3-digit industry the proportion of its exports financed through trade credit. For some reasons related to product characteristics, we argue that there are some 5 It would be also interesting to look at how the extensive margin varied across different market destinations and whether credit constraints may explain these changes. We leave this question for future research.
9 industries in which credit in foreign sales is more important than others. For example, uncertainty in the quality of products can make purchases at credit the preferred option for importers. Additional reasons may be supply driven. For example, large domestic exporters in some industries can have better access to local credit markets than small exporters in other industries. Then, industries where larger exporters are prevalent may be more able to sell at credit. In any of these cases, we should expect to find significant differences in the prevalence of credit across industries. This is effectively the case for Chilean industries. In some sectors, such as tobacco (314 according to ISIC) and beverages (313), almost 100% of exports have been sold at credit during the period 2000 through In contrast, the importance of credit in exports of transport equipment (384) and miscellaneous manufactures (390) is about 80% and 65%, respectively (Figure 6) 6. The interaction between crisis and size allow us to analyze whether the financial crisis had lower or larger effects on smaller or larger exporters. The introduction of size allows us to control for differences in export growth attributable to differences in the exporter size. It can be argued that smaller exporters have more space to expand exports, if so, initial size would be negatively correlated with export growth. We are particularly interested in analyzing if smaller firms in those industries more dependent on export credit are specially affected during the crisis. This is captured by the interaction between exporter size, crisis and export credit dependence. 6 To get rid of temporal fluctuations that can be originated by changes in domestic or international financial conditions, we use time-unvarying differences of this measure by taking the weighted average of credit dependence for the period before the crisis (2000 through 2006).
10 If larger exporters were negatively affected during the crisis in industries more dependent on trade credit, the parameter of these interactions (η s) would be negative. One concern with this specification is that our measure of trade credit may be highly correlated with other measures of finance dependence. The most commonly used in this literature is the measure developed by Rajan and Zingales (1998), which captures industry-specific differences in external finance 7, but it is not intended for measuring dependence on international trade credit. Figure 7 shows that that both measures are negatively correlated, but the correlation is far to be perfect 8. For testing which credit constraints were more relevant during the crisis, we therefore include in our regressions the same interaction variables using the measure of overall financing dependence. 4. Econometric Results Our main results are presented in Table 3. In all of our regressions, as we noted in equation (1), we include industry-time specific effects that control for common time varying shocks across industries, and country-time specific effects that control for time varying shocks that are destination country specific. This would allow controlling, in part, for demand-driven explanations for international trade contraction. In fact, if credit dependent industries are more affected during the financial crisis, this would be captured by the industry-time specific effects. In the case that the severity of the crisis differs across countries and then impacted differently the demand for Chilean exports, this is captured by country-time specific effects. 7 Alternative measures of liquidity needs were developed by Raddatz (2006). 8 The correlation coefficient between both variables is and statistically significant at 5%.
11 In general, the evidence shows a negative relationship between exporter size and export growth, suggesting that smaller exporters tend to grow more than larger exporters. The negative parameter for the interaction between size and crisis (columns 1 and 2) reveals that larger exporters were more negatively affected than smaller exporters. This is consistent with the stylized facts presented in the previous section showing that the percentage of exporters with negative growth increased more rapidly for exporters in the superior quartile of the exports size distribution. Our results for Chile, even when we use a continuous variable for size, are similar to those found by Bricogne et al. (2009) for France 9. In both economies, it is found that large exporters were disproportionately more affected by the crisis. In columns (3) and (4) we add the triple interaction for size, crisis and export credit and the interaction terms of these variables with financing dependence from Rajan and Zingales (1998). There are significant differences for the effect of financial crisis across these specifications. The triple interaction for export credit changes from positive and significant to negative and non significant when the interactions with financing dependence are included. To better appreciate these differences, we show in Table 4 the marginal effect of crisis for different values of size and credit dependence. For each case, the rest of the variables are evaluated at the corresponding mean. First, we find that financial crisis reduced the export growth rate in 10%. This effect, however, is almost zero for smaller firms (size evaluated at the bottom 10% of the distribution). By contrast, the reduction is about 29% for larger exporters (size evaluated at the top 10% of the distribution). 9 They use dummy variables using four quartiles of the relative size distribution. We do not follow this approach here because it results in an over-parameterized specification, with too many interaction terms.
12 Second, we calculate the crisis marginal effect for different exporter size at industries that are high and low dependent in overall financing and export credit. For the average exporter and in terms of size, we find a non significant effect of the financial crisis in industries with low dependence on financing (the parameter is , but it is not statically significant), but a reduction of 23% for those exporters producing in more financing dependent industries. Interestingly, the differences tend to be minor between industries with high and low dependence on export credit. The effect is a reduction of 7.8% and 11.8%, but the marginal effect for the average exporter is not statically significant in low export credit industries. Finally, we compute the marginal effects for large and small exporters (again using the bottom and top 10% of the size distribution) in industries with low and high dependence on export credit and financing dependence. The results show that these marginal effects are always lower for smaller exporters independently of the credit dependence of the industries. Comparing firms across industries characteristics, we find that the negative effect of the crisis is always larger for exporters in industries with high financing dependence and that there are smaller differences between sectors with high and low dependence on export credit. We find that large exporters in low financing dependent industries reduced export growth in 6.2%, but large exporters reduced export growth in 60% in high financing dependent industries. By contrast, large exporters experienced a more similar export contraction of 22.6% and 34.1% in low and high export credit dependent industries. Moreover, the effect on low export credit industries is not statically significant. In sum, our results so far show that the financial crisis had more negative effects on large firms exporting in those industries where overall financing needs tend
13 to be more important. We introduce two robustness checks for looking at whether these results hold. First, we acknowledge that countries facing the negative consequences of the financial crisis implemented expansionary monetary (and fiscal) policies to reduce the negative effects of the crisis. Then, the effect of our dummy crisis would be capturing the average impact on exports of countries with more or less aggressive monetary policies. This is important for the problem at hand. In fact, a reduction in interest rates is commonly used to relax liquidity constraints and to expand credit. Then, during the crisis, the effect of the crisis can be lower for exports directed to countries where interest rates were reduced by more. To shed light on this issue, we introduce changes in money market rates to capture the potential effect of the variations in the cost of credit across importer countries 10. Second, it can be argued that the importance of export credit may be different across market destinations. This could be the case when exports in a same industry may be subject to a different likelihood of no payment depending on regulatory or institutional characteristics of the importer country. To deal with that problem, we compute our variable of export credit dependence for two groups of countries: industrial and developing countries. There are two reasons for this choice. First, there are not enough observations for computing industry-specific measures for each importer country. Second, the correlation between institutional quality and income is relatively high. Thus, splitting our measure in two groups according to income seems to be enough to check whether these differences exist and have consequences in our previous results. As we show in Figure 8, the correlation of export credit for these two 10 Given that countries faced the crisis with different initial levels of interest rates, we use the relative change in the money market rate. This is, ( i t it 1 ) / it 1 where i is the nominal interest rate and t is the corresponding month.
14 groups is high, as it would expected whether technological (or other exogenous reasons) explain why some industries rely more in export credit that others 11. The results of these regressions are shown in Table 5. In column (1) we introduce interaction terms between changes in money market rates in the importer countries and export credit dependence and crisis with export credit dependence. In column (2) we repeat these estimations but replacing our measure of industry specific export credit dependence for this variable for industrial and developing countries. In both specifications, we find that the parameter for the interaction between export credit dependence and changes in money market rates (MMR) is negative and significant, and that the triple interaction of export credit dependence, crisis and changes in MMR is positive and significant. Both results are unexpected considering that an increase in MMR would reduce the availability of credit in the importer country and, through this credit mechanism, would reduce exports in industries selling at credit by more. Note that the derivative of export growth with respect to changes in MMR is ECredit ECredit Crisis. Then, a higher value of exports to credit implies a larger positive effect of increases in the cost of credit in the importer country, and this positive effect is larger during the crisis. Nevertheless these unexpected results, the main findings related to the crisis effect on larger and more overall financing dependent industries are mostly unchanged. These marginal effects for results in columns (1) and (2) are presented in Table 6 and 7, respectively. We confirm in both set of results that the negative effect of the crisis was higher for larger exporters (about 30%), and also for large exporters in industries more dependent on overall credit (about 60%). 11 The correlation coefficient is 0.53 and statistically significant at 5%.
15 5. Conclusions The purpose of this paper was to analyze the main factors behind the great trade collapse in the aftermath of the global financial crisis. This is an important contribution to the empirical literature of the causes of trade contraction as there is not yet a definitive answer as to whether this was due to a fall in global demand or a product of financing constraints. Using monthly data covering all Chilean exporting firms during the period , we find that export contraction was generalized across firms, industries and destination markets, but penalized larger firms more. Our results show that both overall financing and export credit were significant determinants of export contraction in the Chilean case. However, the effect is highly heterogeneous. The evidence shows that larger exporters belonging to industries more dependent on overall credit have suffered disproportionately more. This has important policy implications as public policy aiming at stimulating trade credit may not be effective if overarching credit conditions remain subdued.
16 References Amiti, M. and Weinstein, D. (2009): Exports and Financial Shocks, NBER working Paper Baldwin, R. (2009): The great trade collapse: What caused it and What does it mean? in The Great Trade Collapse: Causes, Consequences and Prospects online book available at Beck, Th. and R. Levine (2002): Industry Growth and Capital Allocation: Does Having a Market-or Bank-Based System Matter?, Journal of Financial Economics 64(2): Baldwin, R. and Evenett, S. (2009): Introduction and Recommendations for the G20 in Richard Baldwin and Simon Evenett, eds., The Collapse of Global Trade, Murky Protectionism, and the Crisis: Recommendations for the G20, London: CEPR, 2009, chapter 1, pp Bernard, A. B., J. B. Jensen, S. J. Redding and P. K. Schott. (2009): The Margins of US Trade (Long Version), NBER Working Paper Nr , National Bureau of Economic Research. Bricogne, J., L. Fontagne, G. Gaulier, D. Taglioni and V. Vicard. (2009): Firms and the global crisis: French exports in the turmoil, Banque de France, Document de Travail 265. Greenaway, D., Guaruglia, A. and R. Kneller (2007): Financial Factors and Exporting Decisions, Journal of International Economics, 73(2):
17 Levchenko, A., L. Lewis and L. Tesar (2010): The Collapse of International Trade During the Crisis: In search of the Smoking Gun, NBER Working Paper Manova, K. (2008): Credit Constraints, Equity Market Liberalizations and International Trade. Journal of International Economics 76(1): Raddatz, C Liquidity Needs and Vulnerability to Financial Underdevelopment, Journal of Financial Economics, 80, Rajan, R, and L. Zingales Financial Dependence and Growth, American Economic Review. 88(3): World Bank, Prospects for the Global Economy: Global Economic Prospects 2010: Crisis, Finance and Growth.
18 Table 1. Trade Variation International Comparison (Annual change, %) 2008m1 2008m9 2008m m12 World Advanced economies Developing countries Argentina Australia Bolivia Brazil Canada Chile Colombia Mexico New Zealand Paraguay Peru Uruguay Source: Direction of Trade (IMF) and author s calculations.
19 Table 2. Decomposition of Chilean Trade Variation (Annual change, %) 2008m1 2008m9 2008m m12 Total Trade Firms Products Value of exports Note: Non-copper exports
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Factoring Exchange Rate Policy into your Investment Strategy: Risks Facing Andean Countries September 2011 Dr. Eliot Kalter President, E M Strategies Senior Fellow, The Fletcher School Ekalter@EMStrategies.com
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518 Chapter 11 INFLATION AND MONETARY POLICY Thus, the monetary policy that is consistent with a permanent drop in inflation is a sudden upward jump in the money supply, followed by low growth. And, in
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Is the Forward Exchange Rate a Useful Indicator of the Future Exchange Rate? Emily Polito, Trinity College In the past two decades, there have been many empirical studies both in support of and opposing
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