# **1 Introduction**

More than a quarter of the world’s population lives in countries affected by instability and violent conflicts, many recurrent events (World Bank 2011). Previous studies have shown the devastating consequences of war and conflict on various human capital outcomes such as health and education; however, less is known about how the private sector is affected and how firms adapt during such situations, primarily due to a lack of data. Nonetheless, understanding these effects is important for at least two reasons: (i) the private sector is identified as an important engine of growth for developing countries; and (ii) reconstruction policies require the allocation of scarce resources. By understanding the impact of conflict on the private sector, resources can be appropriately allocated to improve the prospects for recovery.

This paper fills a gap in the literature by studying the impact of conflict on firms in the context of Cˆote d’Ivoire. Cˆote d’Ivoire presents an interesting case study since it has a relatively large private sector,<sup>1</sup> with systematic collection of information on registered firms since the 1970s. Economic fluctuations and power struggles characterize the early 1990s, but prior to experiencing its first coup d’ ́etat on Christmas Eve 1999, most observers still considered serious political violence to be unlikely in a country that had enjoyed an uninterrupted 30-year period of political stability. The 1999 coup marks the beginning for an episode of social unrest and eventually a Civil War in 2002. At the center of Cˆote d’Ivoire’s crises were issues of ethnicity and nationality, fueled by political tactics exploiting discontent between its southern populations and the large migrant populations from neighboring countries.

Our analysis makes use of detailed financial and employment data from the census of formal firms for the years 1998-2003. We document that starting in 2000, firms enter at a decreasing rate and exit at an increasing rate. Aggregate employment also decreases. Moreover, average output is 20-40% lower than in the pre-conflict period. These patterns coincide with the surge of violence starting in 2000. However, this period of violence in Cˆote d’Ivoire is also coupled with major macroeconomic shocks, including large swings in commodity prices and a collapse of foreign aid.<sup>2</sup> As a result, even though these conflict events are largely unanticipated, it is not possible to identify the common macro component of the conflict impact with the data at hand.

The paper focuses on disentangling the non-macro component of the conflict impact associated with certain firm characteristics. In particular, we test whether firms owned by or employing foreigners were impacted disproportionally. We aim to identify (i) the magnitude and heterogeneity in the costs of conflict associated with firm ownership and employment; (ii) potential transmission mechanisms of these heterogeneous effects; and (iii) how firms respond to conflict intensity. The focus on foreign ownership/employment is motivated by anecdotal evidence which suggests increasing anti-foreigner

> 1In Cˆote d’Ivoire, the formal private sector accounts for 60% of GDP (Berthelemy and Bourguignon 1996).

> 2Cocoa prices - Cˆote d’Ivoire most important export - dropped substantially from 1998-2000 before rebounding in 2002 and 2003 (The Economist 2003). Much of the country’s foreign aid was suspended in 2000 as the World Bank, IMF, and EU withdrew support to Cˆote d’Ivoire in response to the 1999 coup (The Economist 2000).

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