Surviving the Perfect Storm: Exports, Fiscal Austerity, and Firm Heterogeneity

Courtesy of Manuel Adelino, Paulo Fagandini, Miguel Ferreira, and Francisco Queiro

How do economically depressed areas recover following a recession? Our recent paper uses the 2010–2011 European sovereign debt crisis and a Euro area periphery country as a laboratory to answer this question.

The 2010–2011 European sovereign debt crisis led to a severe recession in the southern economies of the Euro area followed by a protracted recovery. The Euro area has grown significantly less than the U.S. for the last decade, with a cumulative growth gap of 11 percent between the two economies from 2008 to 2018, despite large-scale interventions by the European Central Bank (ECB). One notable exception has been the behavior of exports from Euro-area periphery countries (i.e., Portugal, Spain, and Greece). While domestic demand contracted and credit conditions worsened, these periphery countries experienced a significant increase in exports, sometimes referred to as an “export miracle.”

Understanding the Export Miracle

Our paper aims to understand this “export miracle’’ phenomenon. We use a drop in government spending as a shock to domestic demand. Specifically, we use the large intervention by the European Commission, the International Monetary Fund (IMF), and the European Central Bank (jointly, the Troika) in Portugal in 2011, and the fiscal austerity measures imposed as part of the Troika’s loan bailout package.

We find that firms more exposed to the government (i.e., firms with above median share of total sales coming from government procurement contracts pre-intervention in 2010 and 2011) experienced a 5 percentage point lower growth in domestic sales relative to otherwise similar firms less exposed to the government (i.e., firms with below median share of government exposure).

We next show that firms that rely more on government contracts before the fiscal austerity period increased their exports significantly more than other firms. This growth was mostly driven by firms that were already exporting in the pre-intervention period (i.e., exporting firms) rather than by non-exporting firms entering foreign markets. Exporting firms with higher government exposure increased their exports by 12 percentage points more than exporting firms with lower government exposure. At the same time, exporting firms with higher exposure to the government were also more likely to fail. Thus, some firms grew exports substantially and (partially) offset the reduction in domestic sales, while other firms died.

Characteristics of Firms That Enter into Exports

We next examine the heterogeneity of firms’ responsiveness to the fiscal shock along several firm characteristics. The literature on firm responsiveness to local investment opportunities suggests that firm age is an important characteristic, and that young firms may be especially sensitive to changes in investment opportunities. At the same time, a firm selection model into trade suggests that it is the high-skill, high-productivity firms that should be responsible for the aggregate changes we observe for these countries.

While continuing exporters significantly increased their exports, the main source of differences across firm characteristics is along the extensive margin (i.e., entry into exports). In fact, entry into exports was more likely among larger firms and older firms with higher government exposure. In contrast, younger and smaller firms with higher government exposure were less likely to start exporting. We also show that high-quality firms were more sensitive to domestic demand shocks. Specifically, we find that firms more exposed to the government with above-median cost per employee, total factor productivity, and managerial education responded to the fiscal austerity shock by starting to export.


Our paper shows how firms react to changes in local demand and investment opportunities. We provide evidence on which firms can use excess capacity to start exporting or grow their exports, which prior work has shown to be a complex activity that only the most productive firms in the economy can engage in. Our results highlight the importance of the nature of growth opportunities to understand firm responsiveness to a shock to domestic demand. While previous research on the non-tradable sector show that young and smaller firms respond more to a demand shock, we show that older and larger firms are in better position to use excess capacity to enter export markets.



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