This paper explores the influence that financial sector deficits have had on a country's export performance under trade liberalisation. It argues that under such circumstances, financial constraints are particularly damaging because trade liberalisation increases the demand for finance both in the export sector and for investment.
The paper aims to identify the most relevant factors in determining how financial constraints are likely to hinder the export performance of a particular country. Based on these factors, the paper outlines a research scheme that, once applied to a particular country, provides a detailed understanding of the financial needs that should be addressed during trade liberalisation.
The analysis of the experiences of three African countries - Kenya, Uganda and Ghana - that undertook substantial trade liberalisation in the 1980s and 1990s, reveals the following key findings:
- financial constraints unevenly affected the various sectors and producer subgroups within the economy. Such constraints therefore not only affected the country's overall trade performance, but also influenced the composition of the export portfolio and the participation of producer groups in the export sector
- export is a multilayered process determined by production, transaction and competitiveness. Financial constraints can be present in each of the three layers and can severely hamper a sector's export performance even is there is a sufficient supply of finance in other layers
- investment support schemes or alternative sources of finance, such as FDI or integration into a global value chain, can be partial substitutes for weaknesses of the domestic finance system. However, they are typically only available for certain sectors and producer groups
The research scheme incorporates these insights in seeking to identify potential financial constraints in countries planning to liberalise trade. The aim is to improve the outcome of future trade liberalisation projects by improving the targeting and timing of supplementary programmes meant to overcome financial constraints.
Authors: Uexkull, E.von
Produced by: Deutsches Institut fÂr Entwicklungspolitik (DIE) / German Development Institute (GDI) (2006)
Available online at: http://www.eldis.org/cf/rdr/rdr.cfm?doc=DOC21732
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