Dependence on external credit and credit availability

Credit availability proves to be another important source of comparative advantage, though the estimated impacts are smaller as compared to physical and human capital endowments. Coefficients are correctly signed and yield statistically significant results in all specifications of the model. The standardised coefficients for this variable are just below 0.20, i.e. of the size comparable to those pertaining to tertiary schooling (Figure 6.1). Nevertheless, cross-country variation in credit availability is relatively large and, as Figure 6.2 reveals, there is a relatively large potential for this source of comparative advantage to shape trade patterns in the future, especially as far as emerging economies are concerned (Table 6.1). It can be inferred that a one standard deviation change in the credit availability indicator would result in a 4% to 11% average increase in exports. Such a change is equivalent to increasing the 2005 ratio of domestic credit to private sector to GDP from the level observed in the Czech Republic (average less standard deviation) to the level observed in Italy or France (about average) or, equivalently, from the level observed in Italy or France to the level of Spain or Portugal (average plus one standard deviation).

Interestingly, the highest scores of credit availability in 2005 and in 1995 were recorded for some of the countries most severely affected by the dramatic tightening of credit in the early stages of the 2008-2009 and the 1997-1998 financial crises. For example, the two highest indicators of credit availability in 2005 are recorded for the United States and Iceland while Malaysia and Thailand were amongst the highest ranked countries in 1995 (Annex Figure 6.B5).This does not necessarily undermine our result that credit availability boosts exports more in sectors with higher dependence on external financing but rather points to the fact that credit squeezes similar to the ones observed during the 1997-1998 and 2008-2009 crises may have important implications for patterns of trade. In fact our results suggest an interesting and testable hypothesis that exports of external finance-dependent sectors could have been hit particularly hard in countries experiencing the toughest credit conditions in the aftermath of the recent crisis.

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