DP16759 Production Networks and War

Author(s):	Vasily Korovkin, Alexey Makarin
Publication Date:	November 2021
Keyword(s):	conflict, firms, production networks, Trade
JEL(s):	D22, D74, F14, F51, H56
Programme Areas:	International Trade and Regional Economics, Development Economics, Political Economy
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=16759

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, 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 start of the war. The magnitude of such second-degree effect of conflict is one-third 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 and profits. 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. At the median, network adjustment compensates for 80% of the network-destruction effect a year after the conflict onset.