Global financial crisis 2008 and its vulnerability in SAARC countries

Abstract

The key objective of the study is to analyze the impact of global financial crisis on export in countries of SAARC region. For current empirical analysis, this study used a gravity model to investigate export of final goods from SAARC countries to high income countries during the period 2003 to 2014. The independent and dependent variables were used in the natural logarithm form of dummy variables. The geographical distance between capitals of trading partners and importer’s and exporter’s GDPs are used as standard independent variables. Consequently, this study includes their dummy variables demonstrating common official language, membership in regional trading agreements and financial crisis. Therefore, to examine the impact of last crisis, model comprises dummy variable (y2007, y2008, y2009 and y2010) representing critical years of study. Moreover, this study also used random effect approach which required that at least one assumption should be fulfilled which is zero correlation of independent variables. The current study concluded that financial markets of SAARC countries remained less vulnerable to financial crisis or bad-loan crisis because of having less exposure to subprime assets and high capital to risk assets ratio. However, trade of goods and services of the SAARC countries with the developed economy resulted in negative effects on most of the SAARC countries. Moreover, the study also revealed that financial crisis had serious repercussion for the other countries of the SAARC region due to lack of appropriate response and that a timely response by countries could save the prolonged negative influence of financial crisis.