Climate Shocks Beyond the Farm Gate: El Niño, Agro-processing Firms, and Industrial Resilience in Ethiopia

This paper examines the impact of the 2015–16 El Niño-induced drought on food and beverage manufacturing firms in Ethiopia. Using a triple difference-in-differences framework that exploits spatial, sectoral, and temporal variation in drought exposure, we find food and beverage firms in drought-affected districts experienced a 39 percent reduction in sales, a 25 percent decline in total factor productivity, and a 26 percent fall in labour productivity relative to comparable firms in unaffected districts. Event study estimates show that these effects were largely absent in 2015, emerged in 2016, and deepened through 2017 and 2018, well after the El Niño itself had subsided. In terms of labour market outcomes, the drought did not produce statistically significant job losses among surviving firms but instead compressed wages, with unskilled production workers experiencing wage reductions of approximately 27 percent while skilled workers were essentially insulated. We identify reduced raw material availability as the primary transmission channel, operating through the intensive margin as firms scaled back input quantities within existing supplier relationships rather than switching sourcing markets. Survey evidence from surviving firms corroborates these findings. The results suggest that climate resilience is not only an agricultural policy concern but also an industrial policy imperative in economies where agro-processing depends heavily on domestically sourced agricultural inputs.