# **4.5 Impact of economic and financial development**

We also attempt to understand whether the impact of financial constraints arising during a crisis is more or less pronounced in countries with higher GDP per capita or higher level of financial development. In the first column of Table 8 we show that the triple interaction of the crisis with bank finance dependence and GDP per capita is significant but very small in magnitude. This result implies that poorer countries hit by a financial crisis experience a stronger impact on their exports in industries that require more external finance than their richer counterparts. The second and third column of Table 8, however, show that higher GDP per capita before the crisis does not significantly help industries highly dependent on trade credit or more tangible industries. In Table 9 we look at the same issue differently and, in line with the above results, show that the fact that a country is developed implies a less severe impact of the banking crisis.

We run similar regressions as for GDP per capita using financial development measured as private credit in GDP instead of the GDP per capita variable. As documented in Table 10 we find that countries with less developed financial systems are hit harder. A conclusion one may make from these results is that countries that are richer and more financially developed might also have additional financing options outside of the banking sector. As shown in last column of Table 10 this really seems to be the case. In economies with higher shares of other financial assets in GDP the impact of the crises on industries with high need of external finance is less pronounced.<sup>10</sup> Results from this section are visualized in Figure 3. Panel (a) captures the relationship between the financial development and the difference in the impact on exports growth in a high and low dependent industry induced by a banking crisis. The values on the horizontal axis represent the percentiles of financial development in our sample, ranging from 0.07 in Nepal to 1.81 in Japan. We show that when a crisis hits a country like Nepal, it will induce a differential of almost 7 percentage points, while at higher values of financial development the differential decreases until it completely vanishes. Panel (b), with GDP per capita percentiles on the horizontal axis, offers

> 10It is important to notice that there could be two reasons why our result differ from Kroszner, Laeven, and Klingebiel (2007) who find that the effect of a financial crisis is deeper in countries with a more developed financial system. First, it is possible that exporters in countries with a more developed financial system are perceived more reliable and better able at dealing with foreign banks so in a context of crisis they can replace their domestic loans with foreign loans - a possibility that is much less likely in the case of domestic producers given their more limited relationships with international banks and exchange risk concerns. Second, our sample of countries differ from the one covered by Kroszner, Laeven, and Klingebiel (2007) as their sample includes many more poor and African countries while our sample is more representative of middle-upper income countries. The reason of these discrepancies in the sample used is due to data availability and the fact we rely on the dataset used by Dell’Ariccia, Detragiache, and Rajan (2008) while Kroszner, Laeven, and Klingebiel (2007) rely on Caprio and Klingebiel (2002).

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