Conflict and Input Misallocation in the Manufacturing Sector: Evidence from Ethiopia

This paper examines the impact of civil conflict on the functioning and accessibility of markets for production inputs and their allocation among manufacturing establishments using the 2014-2018 annual census of Ethiopian manufacturing firms. We exploit the time and spatial variation in conflict intensity at the district (Woreda) level and compare whether production input choices of Ethiopian large and medium manufacturing firms in the same sector differ across districts experiencing differential changes in conflict intensity. We find that conflict-induced distortion results in manufacturing firms substituting domestically produced for imported inputs. As a result, firms in high-conflict districts use a relatively lower value of foreign-produced materials and a relatively higher value of domestically produced ones in production. These distortions are likely among the microeconomic mechanisms through which conflict affects aggregate economic outcomes. Furthermore, we find that conflict intensity induces manufacturing firms to substitute non-production workers (skilled workers) with production workers (unskilled workers). Finally, we estimate the impact of conflict induced input distortions on the output value of manufacturing firms and find that this distortion can account for about 40% of the fall in output value of firms in high-conflict districts.