Growing threats of climate change pose serious challenges to economic growth in low-income countries. Extreme weather events, such as droughts and flooding, have had devastating economic consequences. While some firms are directly hit by weather shocks, recent studies have shown that indirect exposure to such shocks through domestic production and supply networks also has significant negative consequences (Rentschler et al., 2021; Balboni et al., 2023). In this project, the researchers aim to understand how firms and their supply chain partners in Uganda and Rwanda are indirectly affected by extreme weather events. In particular, they are interested in exploring how firms are impacted when they face temporarily reduced demand, as their customers are hit by weather shocks. This channel of shock propagation can significantly amplify the consequences of extreme weather events. Beyond documenting negative shocks to firms, they will further explore whether exporting activities can serve as a risk-mitigating factor for domestic businesses. In fact, exporting firms have a diversified network of potential customers, and they may continue to operate even when there is a drop in local demand.
In this project, the researchers plan to use administrative data to study the effect of extreme weather events. Both Uganda and Rwanda have rich datasets of Value-Added-Tax (VAT) with which they can track firm-level transactions from information on sales and purchases. Along with customs declarations data, it is possible to study inter-firm trade patterns and see how shocks propagate upstream and downstream in the domestic supply chain. They aim to empirically test (i) whether firms face demand shocks from consumers or business customers in the event of extreme weather events, and (ii) whether firms that are linked to exporting activities, either directly or indirectly, are insulated from such shocks.
This study will shed light on how firms can be affected by extreme weather events and what channels exist to protect them against local demand shocks. It will help policymakers design measures that make firms more resilient to a diverse range of shocks. While climate adaptation policies typically focus on the agriculture sector due to its vulnerability to weather shocks, climate change also affects non-agricultural sectors. Furthermore, a firm’s economic performance is dependent on the market it operates in, which implies that weather shocks can indirectly affect firms through its transactions. This project can contribute to the debate by uncovering the comprehensive picture of climate change and therefore to design inclusive policies that mitigate the negative impacts across all sectors and regions. Furthermore, this study will help identify the channels through which the governments’ trade policies contribute to mitigating such shocks.
