Flight from Quality

AuthorNatalie Chen and Luciana Juvenal

Flight from Quality Finance & Development, December 2016, Vol. 53, No. 4

Natalie Chen and Luciana Juvenal

Argentine wine exports tell a tale of consumers’ shift to lower-quality goods after the global financial crisis

World trade collapsed following the global financial crisis, declining 30 percent in nominal terms between the third quarter of 2008 and the second quarter of 2009. Even after adjustment for inflation, the decline was a massive 18 percent.

By another measure, the ratio of world trade to GDP, there was a similar dramatic falloff. That is because the crisis disproportionately affected trade in consumer durables and investment goods, which represent a large share of global trade, but a small fraction of world GDP.

But it appears that it was not only consumers buying less that helped drive down the value of global imports and exports. Focusing on Argentine wine exports, we provide evidence that the nominal (before inflation) value of global trade fell also because consumers bought cheaper, lower-quality goods rather than more expensive, higher-quality products.

The pinch of recessionWhen income goes down, as typically happens during a crisis or a recession, households consume less. Because some of what they consume is imported, the demand for foreign products—that is, for imports—also falls. Importantly, however, consumer belt-tightening may affect not only how much households consume, but also the types of goods they buy. In particular, because consumption of higher-quality goods is generally more sensitive to changes in income than that of lower-quality items, a sudden reduction in income (an adverse income shock in economist parlance) may lead to a “flight from quality,” whereby households in crisis-hit countries reduce not only the quantity but also the quality of the goods they consume. This, in turn, should lead to a bigger contraction in higher- than in lower-quality imports. We investigate whether the global financial crisis induced such a flight from quality in traded goods. In the case of wine made in Argentina, that turned out to be the case.

Measuring quality is a challenge because there is no single and comparable indicator across different types of goods. But we found a way around that obstacle by focusing on the wine industry only, where well-known experts regularly assess the quality of the products. We rely on those ratings as a directly observable measure of quality and combine them with a unique data set of...

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