# **1 Introduction**

For the first time since 1982 trade volumes are predicted to fall in 2009 by 11 percent (IMF 2009) as a consequence of the simultaneous drop in demand and financial troubles. The recent collapse in exports following the unfolding of the financial crisis has generated new pressing questions about the relationship between banking crises and exports growth.<sup>1</sup> In particular, it is not entirely clear to what extent supply shocks, i.e. the restricted access to finance, due to a collapse in the banking system are responsible for the drop in exports versus the more classical demand side factors. With this question in mind, this paper analyzes the evidence based on 23 banking crises episodes between 1980-2000. In particular, we attempt to disentangle different financial channels through which banking crises can affect exports growth and to separate the impact of these supply shocks from the external demand shocks due to recessionary episodes of trading partners.

The importance of the link between finance and growth cannot be overemphasized and has been extensively studied in the literature.<sup>2</sup> Our study is particularly close to the difference in difference approach originally proposed by Rajan and Zingales (1998) and followed by a number of more recent studies (Beck 2003, Braun 2003, Fisman and Love 2003, Manova 2008a, Raddatz 2006) which substantially reduces concerns about endogeneity present in the finance and growth literature. Building on a similar identification strategy, various recent studies have focused on the impact of financial crises on the industrial activity and growth confirming the hypothesis of a credit crunch channel occurring at times of financial distress (Berman 2009, Dell’Ariccia, Detragiache, and Rajan 2008, Kroszner, Laeven, and Klingebiel 2007, Borensztein and Panizza 2006). However, none of them specifically analyzes the impact of banking crises on export growth and they are silent about the impact of sector-specific external demand shocks.

The impact of banking crises on exports is a particularly relevant empirical question and there are at least two reasons why it differs from merely looking at the impact on production growth. First, based on the findings of the recent firm-level studies pointing toward the importance of fixed costs necessary to penetrate foreign markets, financial constraints may impinge on exporters more than on domestic firms and, therefore, the effect of banking crises on exports could potentially be more adverse than on domestic production (Greenaway, Guariglia, and Kneller 2007, Iacovone and Javorcik 2008, Manova 2008a, Muuls 2008, Roberts and Tybout 1997).<sup>3</sup> Second, it is also possible that given the exporters are on average more productive

> 1”Twenty-eight out of 38 economies reporting November export data (as of January 13, 2009) show doubledigit declines relative to the same month in the previous year. On average, exports of the reporting countries declined by 15 percent in November” (World Bank, January 2009).

> 2For a very detailed survey of the literature see Levine (2004).

> 3For example Iacovone and Javorcik (2008) show how Mexican firms, in order to exploit new export opportunities under NAFTA, had to prepare by scaling up their investments and firms unable to keep up with

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