Temporary Trade Shocks, Spatial Reallocation, and Persistence in Developing Countries: Evidence from a Natural Experiment in West Africa

Brian Blankespoor,M Shahe Emran,Harold Coulombe,Forhad Shilpi

doi:10.2139/ssrn.3406902

Brian Blankespoor, M Shahe Emran + Show 2 more

Open Access

https://doi.org/10.2139/ssrn.3406902

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Abstract

In response to rising inequality following decades of trade liberalization, many countries are adopting trade restrictions. Can temporary trade restrictions have long-lasting effects on the spatial distribution of employment and resource allocation? To analyze this, this paper exploits the civil war in Cote d'Ivoire (2002-07), which disrupted access to the world market for two neighboring landlocked countries: Mali and Burkina Faso. The Ivorian war forced rerouting of trade from the Abidjan route to non-Abidjan routes. This paper builds a general equilibrium model where a subsistence-based autarkic hinterland coexists with an integrated segment, and there are two alternative routes to international markets. A trade shock to one route affects resource allocation in both routes by shifting the spatial margins of market integration and sectoral specialization. The effects are heterogeneous, depending on the pre-war market access of a location. The empirical analysis takes advantage of panel data and estimates the effects on structural change in employment on the non-Abidjan route using a triple difference design with location fixed effects. The areas that remain in autarkic equilibrium before and after the trade shock provide plausible estimates of the changes arising from long-term factors unrelated to the trade shock. The estimates show that the temporary trade shock created divergence between the Abidjan and non-Abidjan routes, with accelerated structural change in favor of manufacturing and services employment in the non-Abidjan route. This paper finds evidence of persistence in the effects through higher sunk investment in built-up density, agglomeration through concentration of skilled labor and greater public investment in complementary inputs such as electricity infrastructure (measured by nightlights density).

Highlights

There is a broad consensus among economists that trade liberalization increases productivity and national income, but there has been a deeper appreciation of the adverse distributional effects in recent years
The crisis lasted for 5 years till a political settlement was reached in 2007.3 We examine whether this temporary negative shock to the Abidjan route led to reallocation of economic activities to the other routes not directly affected by the Cote d’Ivoire (CIV) crisis, and created the preconditions for longer term effects and path-dependent evolution of the regional economy through irreversible investments in built-up density and agglomeration of skilled labor
We exploit the disruption of trade through the Abidjan seaport due to the civil war in Cote d’Ivoire (2002-2007) as a natural experiment to understand the effects of a temporary trade shock on structural change in employment in the neighboring land-locked countries: Mali and Burkina Faso

Summary

(1) Introduction

There is a broad consensus among economists that trade liberalization increases productivity and national income, but there has been a deeper appreciation of the adverse distributional effects in recent years. Intuitions and Discussion An increase in the transport cost for areas using port of Abidjan has the immediate impact of increasing the relative price of the importable good in a location that was integrated before the war This reduces the maximized utility of the consumer in that location. To investigate how the trade disruption caused by the civil war in Cote d’Ivoire may have affected the resource allocation across the Abidjan and non-Abidjan areas in Mali and Burkina Faso, we adopt an empirical model that takes advantage of the panel data by combining sub-district level fixed effect with a triple-difference set-up. A substantial and mature literature shows that economic density in a location is correlated with the access to market, and the theoretical analysis above suggests that trade/transport shocks can have differential impacts depending on the extent of market access of a commune/department during the pre-war period.

Findings

(7) Empirical Results

(8) Conclusions