By Florian Léon and Ibrahima Dosso
For developing countries to have lasting development, they must have economic systems that are resilient to shocks such as climate change, natural disasters and conflict.
Recent research has focused on evaluating the long-term effects of these potential economic shocks, and how to mitigate them. For example, several studies highlighted the fact that natural disasters and violent conflict have long-term effects on households.
In a recent study we looked at the resilience of businesses in Côte d’Ivoire after the 2010-2011 electoral crisis. Businesses play a vital role in Côte d’Ivoire’s economy. Small to medium-sized businesses alone employ nearly half the working population and account for around 20% of the country’s GDP. Yet few studies have looked at the mid to long-term effects of adverse shocks on businesses.
Côte d’Ivoire endured a protracted crisis when the incumbent president, Laurent Gbagbo, refused to leave office following his defeat to Alassane Ouattara in the presidential run-off election of 2010. This resulted in widespread violence. The death toll has been put at over 3 000 and the number of displaced people at 700 000. The political standoff ended in April 2011 when military forces loyal to President Ouattara arrested Gbagbo.
We found that businesses did indeed recover, but that there were disparities in how quickly they did based on their size. For example, businesses more able to rebound tended to be those that were smaller (10 employees or less) or those that had access to credit.
After a shock
Although economic activity may contract following a shock, it does not disappear.
Extreme events tend to stimulate the development of informal economic activity. In addition, surviving businesses may benefit from a massive influx of external aid (financial, human and material), or the disappearance of competition. The effects can be differentiated according to the specific characteristics of the businesses and according to their sector.
Despite the brevity of Côte d’Ivoire’s conflict, it had profound consequences. Economic activity was severely disrupted, with an embargo on many exports, the closure of banks, and limited access to certain goods – such as medicines and fuels.
After Gbagbo’s arrest, fighting rapidly died down and the economy was able to recover in the post-crisis years.
Our study involved monitoring the activity of all formal businesses in Côte d’Ivoire (both local and foreign) from two years before the crisis to three years afterward. This enabled us to gain an understanding of how businesses bounced back from the crisis.
Our results show that three years after the crisis, businesses had made up only half of their productivity losses. However, this average masks large individual disparities.
There are several reasons why smaller companies with less than 10 employees were able to bounce back more quickly.
First of all, smaller organisations are more flexible in the face of an uncertain future. Secondly, they are more oriented towards local markets, making them less sensitive to disturbances in infrastructure. Their management system is also far simpler, enabling them to adapt more quickly to changes in the market, and to logistical challenges.
Conversely, businesses with foreign investment, which are more externally oriented and therefore require access to foreign markets (ports and roads), suffered more than local businesses, both during and after the crisis.
These businesses were weakened by restricted access to external markets, in terms of both inputs and sales. Furthermore, they were probably hit particularly hard by the exodus of foreign workers.
Our study provides two other interesting results relating to previous research.
First, businesses using more highly qualified workers or employing more executives were particularly affected. This is because many qualified workers come from neighbouring countries, or more distant ones, such as France, and were the first to flee when the violence began. Many probably never went back.
Access to financing is a major advantage
Our research also highlighted the importance of access to capital to help with business recovery.
The businesses that were the least restricted financially prior to the crisis bounced back with the most ease. Banks suffering from the effects of the crisis probably favoured their older clients over other businesses. Banks in Côte d’Ivoire suffered an increase in delinquent loans in 2011, according to data from the banking commission of the West African Monetary Union (WAMU).
This result confirms a study on Sri Lankan businesses after the December 2004 tsunami, which showed that financial aid enabled a quicker economic recovery.
Our research sheds interesting light on the construction of resilient economic systems. While calling on qualified workers and executives is crucial for business development, it can be a source of vulnerability when a shock occurs. Businesses that are too dependent on a small number of individual employees can be severely affected by their death or flight.
It is therefore important to find tools to mitigate these vulnerabilities by developing training for executives, engineers and technicians to grow the available pool of human resources, and by encouraging the return and re-training of these workers following a sudden shock (conflict or natural disaster).
Quick access to capital is also crucial for economic recovery. Emergency tools, such as IMF emergency loans, can be developed to facilitate the targeting and granting of loans post-crisis.
Furthermore, banking regulations can also be adjusted for extreme situations. For instance, a moratorium on capital ratios could be considered to enable banks to continue to finance current activity.
Lastly, it appears vital to extend this reflection beyond the banking sector (to insurance and capital investment companies, for example) and to use technological advances (such as mobile banking and fintechs) to mobilise and allocate funds in an efficient and cost-effective way.