Production Networks and War: Evidence from Ukraine

Alexey Makarin and Vasily Korovkin

No 16759, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: How do severe shocks such as war alter the economy? We study how a country's production network is affected by a devastating but localized conflict. Using unique transaction-level data on Ukrainian railway shipments around the start of the 2014 Russia-Ukraine crisis, we uncover several novel indirect effects of conflict on firms. First, we document substantial propagation effects on interfirm trade --- trade declines even between partners outside the conflict areas if one of them had traded with those areas before the conflict events. The magnitude of such second-degree effect of conflict is one-fifth of the first-degree effect. Ignoring this propagation would lead to an underestimate of the total impact of conflict on trade by about 67%. Second, war induces sudden changes in the production-network structure that influence firm performance. Specifically, we find that firms that exogenously became more central --- after the conflict practically cut off certain regions from the rest of Ukraine --- received a relative boost to their revenues. Finally, in a production-network model, we separately estimate the effects of the exogenous firm removal and the subsequent endogenous network adjustment on firm revenue distribution. For a median firm, network adjustment compensates for 80% of the network destruction a year after the conflict onset.

Keywords: Conflict; Trade; Firms; Production networks (search for similar items in EconPapers)
JEL-codes: D22 D74 F14 F51 H56 (search for similar items in EconPapers)
Date: 2021-11
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