On the effects of persistent negative terms-of-trade shocks on growth: new evidence from Sub-Saharan Africa

This article examines the effects of persistent negative terms-of-trade (ToT) shocks on economic performance in Sub-Saharan Africa (SSA) using a local projections difference-in-differences (LP-DiD) approach. This methodology allows for flexible estimation of dynamic treatment effects while controlling for GDP dynamics and contemporaneous shocks. The results show that persistent negative ToT shocks generate delayed but economically meaningful reductions in GDP per capita, with effects accumulating gradually and lasting up to 9 years. The estimated contractions are significantly larger in SSA than in the rest of the world. This heightened vulnerability reflects the region’s structural characteristics – high commodity dependence, low economic diversification, limited financial development, and weaker institutional quality. Heterogeneity analyses further reveal that countries with deeper financial systems and stronger institutions experience smaller and less persistent losses. Overall, the findings underscore the importance of financial development, institutional strengthening, and export diversification in enhancing resilience to persistent adverse ToT shocks in SSA.