This project builds on a PEDL pilot grant awarded as part of the 2020 PEDL Young Scholars Matchmaking Workshop.
Conflict as a source of friction in input markets affects establishments through several channels such as discouraging the supply of inputs, increasing the cost of inputs, and creating uncertainty. Ethiopia provides a unique opportunity to quantify the extent of conflict-induced propagations and its effect in the manufacturing establishments. In their pilot survey, the researchers found that 78% of manufacturing firms buy inputs from other firms, and 64% of firms reported that their firm-to-firm linkage was interrupted due to conflict. Yet, the micro-evidence that is key to understanding the underlying mechanism of the effect of conflict on a firms’ operations within the supply chain remains limited. This has largely been a result of the paucity of plausible firm data in conflict and fragile areas. Therefore, in this project, the researchers aim to answer two research questions: First, what is the role of input-output linkage in the propagation and amplification of shocks arising from conflicts? Second, how conflict is affecting firms’ business operations and their firm-to-firm relationship?
The researchers’ identification strategy relies on identifying firm-level supply chains and the subset of firms that were exposed to civil conflict. To construct a firm-level production network of supplier-customer linkages, they will rely on VAT data assembled by Ethiopia Revenue and Customs Authorities (ERCA). Second, they will use the Ethiopia Large and Medium Manufacturing Firms Census, collected annually by the Central Statistical Agency of Ethiopia, which covers all manufacturing firms that use power-driven machines and employ tens or more workers. Finally, they link VAT data with the ACLED (Armed Conflict Location & Event Data Project) dataset that has the geographic distribution of conflict to determine the set of firms exposed to conflict.
This study will deepen the understanding of the role of production networks and conflict in the underdevelopment of the private sector in developing country context. This will help policymakers to devise interventions to reduce the impact of shocks arising from conflict and regulate the firm’s access to inputs and outputs located in conflict intensive regions. This project will also contribute to the few existing studies on the role of production networks in propagation of shocks, especially through the focus on how firms’ input-output linkages serves as a channel for the propagation of shocks arising from civil conflict in a developing country context.
