Economy-wide impact of drought induced productivity losses

Abstract

PURPOSE : The purpose of this paper is to investigate how a drought which initially affects agricultural productivity can ultimately affect an entire economy. The study aims to assess the magnitude of the impact as well as highlight key issues that can inform the implementation of drought mitigation programmes. DESIGN/METHODOLOGY/APPROACH : The paper presents the literature on the economic impact of drought and uses a computable general equilibrium model where productivity shocks are applied to the agricultural industries following which the resulting impacts on the rest of the sectors of the economy are obtained. FINDINGS : The findings show that the key macroeconomic variables, namely, real GDP, industry output, employment, the trade balance and household consumption are negatively affected by the drought shock. PRACTICAL IMPLICATIONS : The results point to the fact that in the absence of drought mitigation mechanisms, the occurrence of even a short drought as modelled in this paper can impose substantial socioeconomic losses. ORIGINALITY/VALUE : First, a general equilibrium framework which uses climate and economic data when evaluating the social-economic impacts of drought is used. Most studies employ partial equilibrium analysis in analysing drought impacts on specific sectors or crops within a limited geographical area. Others use global or multi-regional models which impose averages on the observed impacts. The current study provides valuable insights on the potential damage which droughts can impose on a single economy. This gives a basis for decision making to support drought mitigation policies and programmes.