The border closure between Rwanda and Uganda in March 2019 was important, sudden and asymmetric. The monthly number of Rwandan firms exporting to Uganda fell from more than 1,000 to 0 in the month of March 2019. On the other hand, exports by Rwandan firms to Uganda were not forbidden and goods continued to flow from Rwanda to Uganda. The decision to stop imports from Uganda to Rwanda was taken rapidly and unilaterally by the Rwandan government; it was motivated by geopolitical grievances. The shock offers an interesting source of variation to study the impact of border closures on the Rwandan and Ugandan economies. This project therefore addresses a question that has been at the forefront of the policy debate since the large supply chain disruptions caused by the COVID-19 pandemic and its aftermath. What are the impacts of cross-border shocks on domestic production and, perhaps more importantly, what can be done to mitigate these impacts?
This project uses a unique dataset, perhaps the first linking two production networks together, created by merging two comprehensive datasets on the production network universes of Rwanda and Uganda, along with detailed firm-level information on sales, profits, employment, payroll, imports and exports. The empirical analysis of the border closure’s impact on firm outcomes relies on a difference-in-differences specification that exploits the timing of the treatment in combination with suitably defined treatment and control groups of firms (both in Uganda and Rwanda). This allows estimation the causal impact of the border closure dynamically.
This line of research can help policymakers understanding how to create adaptable and resilient supply chains. The production of goods and services is organised along complex domestic and international supply chains, where the performance of one firm crucially depends on the success of firms directly and indirectly connected to it via a production network. Understanding the exposure of domestic production to shocks along the supply chain is essential to build precautionary inventories, invest in alternative trading relationships and make sure firms have the resources to retain employees in case a crucial input is not available for an extended period.
Preliminary results suggest that, despite the scale of the border closure, the Rwandan production network has been remarkably resilient and adaptable. Treated Rwandan firms have not experienced large declines in sales, survival, and employment. They have however adapted their supply strategies quite rapidly, by sourcing more of their inputs from the Rwandan domestic production network, and by importing more from countries other than Uganda. Overall, the results suggest that production networks, through the endogenous rewiring decisions of firms can be key in allowing economies to absorb large shocks. This result stands in sharp contrast to the existing literature on production networks, which has so far mostly cast production networks as a powerful vector for the transmission of shocks. On the other side of the border, Ugandan firms have not experienced much of an impact, mostly because the Rwandan export market is relatively unimportant for Ugandan firms.
