When the rains fail: How drought undermines manufacturing productivity in Ethiopia
Drought reduces manufacturing firm productivity by 2-3.5%, with impacts intensifying over two years and compounding when firms experience repeated shocks. The main drivers are lower labour productivity, disrupted raw material supply chains, and weaker rural demand, while limited access to credit prevents firms from investing in resilience. The findings highlight the need for drought-linked finance, early warning systems, improved road infrastructure, and the integration of climate risk into industrial policy.
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Chakraborty-Gebre-Rossi-Policy-Brief-May-2026.pdf
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- Drought reduces manufacturing firm productivity by 2-3.5%, and the damage deepens over two years before stabilising. Standard disaster assessments that focus only on the year of the shock substantially undercount the cost.
- The primary channels are labour-productivity loss, raw-material supply-chain breakdown, and collapsing rural demand. Capital investment is entirely absent throughout—not because returns are low, but because firms cannot access credit.
- Firms hit by two droughts lose more than the sum of both shocks combined. As climate change increases drought frequency, these compounding losses will grow.
- Agriculture-dependent firms feel the worst productivity effects in the second year after drought, not the first. Reactive policy triggered by production data will always arrive too late for this group.
- 67% of firms cite a lack of access to credit as the primary barrier to resilience investment, identifying a market failure rather than a lack of willingness to adapt.
- Four targeted interventions can reduce the damage: drought-linked credit facilities, early-warning systems for manufacturers, road infrastructure investment, and integration of climate risk into industrial development plans.