Why is Drought such a Problem for the Economy?

Drought doesn’t just impact those directly affected in the immediate area, it has wide reaching consequences for the economy. Drought poses a problem for individuals, businesses and the government, and impacts a number of different sectors such as agriculture, energy production, tourism and leisure.

Global warming means that incidences of drought across the world are increasing year on year. Governments and communities are being forced to try and adapt to this new reality. 

👉 In this article we’ll explore the economic impacts of drought across the different sectors and look at the ways that governments and organisations are attempting to mitigate the worst effects.

Over 55 million people are affected by droughts every year and water scarcity affects 40% of the world's population. Drought is one of the most serious threats to livestock and crops, and threatens the livelihoods of millions of people. Not only this, drought also increases the risk of disease and can result in mass migration. 

Alarmingly climate change is increasing the incidences of drought globally, which means that governments, organisations and individuals around the world must work to halt the effects of climate change and mitigate climate related disasters such as drought.

Unfortunately, drought is becoming increasingly common thanks to climate change, and the impact is not limited to the directly affected area and community, the effects of drought can be far reaching. It has the potential to impact the wider economy and can even affect the cost of products and energy for consumers around the world. In fact, a recent World Bank report found that drought and water scarcity has the potential to stall economic growth, increase migration and may even result in conflict. However, it also determined that countries can take steps to mitigate the worst effects of drought by managing their water resources effectively. 

Before we look at the impact of drought on the individual sectors of the economy and the steps that countries can take to alleviate the impacts of water scarcity, let's first look at just how severe the issue actually is. The World Bank’s report ‘High and Dry’ found that: 

• Water is vital for production; water scarcity and drought may cost some countries as much as 6% of their GDP
• Growing populations and expanding cities will see water demand increase significantly, which will make the impacts of drought more severe
• Spikes in food prices due to droughts may increase the chances of conflict and drive migration
• The worst effects of water scarcity and drought can be avoided through better water management and policy decisions
• Economic repercussions of drought and water scarcity can be minimised where governments respond to water shortages with efficiency solutions and by allocating a quarter of their water sources to high-value uses such as agriculture

The World Bank determined that water management is crucial for achieving the UN’s Sustainable Development Goals and for reducing poverty and sharing prosperity. Some of the worst effects of water scarcity and drought can be prevented with effective water management policies.

We know that drought is bad news when it comes to the economy, but some sectors are worse affected than others - namely, the agriculture sector, energy sector and the tourism and leisure industry. Let’s take a closer look at the impact.

Drought and agriculture

In the agricultural industry it’s no surprise that drought can have dire consequences for crops and farmers’ incomes. Studies find that agriculture accounts for roughly half of all economic losses from drought. Overly dry conditions and lack of water can damage or even kill crops and even short term drought can cause significant harm where this occurs during the key stages of a crops development, for example where drought occurs just after planting or during flowering. 

Certain crops are also more vulnerable than others, for example fruit, vegetables, tree nuts and medicinal herbs are more susceptible to damage from drought, which means that they pose a higher risk for economic loss too. 

Where crops are damaged or lost, farmers of course suffer the immediate economic impact through loss of income and earnings. However, the knock on effects are far reaching. Drops in supplies of certain crops can result in raised prices for consumers. The effects aren’t localised either, take the severe drought that began in California in 2012 for example. This has impacted the price of goods in Canada, and Canadians have experienced a 40% increase in the price of lettuce on account of the fact that 70% of their supply was sourced from California. 

It’s not just crops that suffer either, drought affects livestock farms too. The lack of drinking water for animals and poor conditions for them to graze, alongside increased prices of feed mean that livestock farms often take the decision to sell or slaughter higher numbers of animals. The immediate effect may be to lower the price of meat due to the surplus supply, however, if drought conditions maintain this eventually leads to a price hike on meat products.

Drought and the energy sector

When it comes to energy, drought has the biggest impact on hydropower (where there might not be enough water to produce power) and thermal energy production (where there might not be enough energy to cool the process). 

Where drought means that there is insufficient water leading to less power generation of hydropower sites for example, this can result in an insufficient amount of energy to power a country’s energy network which means that the shortage needs to be supplemented by other energy sources - often these are fossil fuels, which results in high carbon emissions. 

In terms of economic effect, energy shortages often result in increased energy prices. For example, one particularly severe flood in California in 2001 resulted in decreased hydropower generation, which in turn created a hike in electricity prices. It’s estimated that the effect of the drought on the economy was between $2.5 and $6 billion.

Drought and tourism/leisure

Another example of an industry that can be severely impacted by drought is the tourism and leisure industry. Businesses that rely on income from water-based activities (for example boating, rafting, canoeing, fishing) may be financially impacted during a drought on account of decreased visitor numbers and cancellations of bookings or stays. Small waterfront businesses such as hotels, restaurants, shops etc. may also suffer where they rely on tourists for their income.  

Drought and infrastructure

It’s not just the agricultural, energy and tourism sector that are affected by drought, it’s our infrastructure too. When water supplies are depleted through drought, the ground shrinks from lack of moisture (this is known as subsidence) which can damage structures such as roads, water pipes and even buildings. Damage to infrastructure comes with an economic cost through repair and replacement. 

Drought can also have an economic effect on the water based transportation of goods and supplies. Where rivers and canals dry up, it may be difficult for ships to pass, meaning that alternative and often more expensive and carbon intensive transportation methods may be required.

Thankfully, a wide range of different adaptation measures exist when it comes to mitigating the worst effects of drought. This includes measures that improve the resilience of drought sensitive sectors such as the development of drought resistant crops, improved power station cooling techniques, livelihood and diversification models, early warning and alert systems.

 Let’s take a look at some of these adaptation measures in a bit more detail:

New Infrastructure

• Aquifer storage and recovery - increasing the capacity for groundwater storage builds climate resilience by allowing excess water flows to be stored in an aquifer for later recovery and use during extended periods of drought. 
• Diversification of water supply - a diverse water supply lowers the risk that supply falls below demand in times of drought. 
• Increase water storage capacity - increasing water storage capacity can involve measures such as raising a damn, practising aquifer storage (as already outlined above), and removing accumulated sediment in reservoirs 
• Install low-head dams - rising sea levels combined with lowered freshwater runoff due to drought can cause the saltwater-freshwater boundary to move further upstream in tidal estuaries. Upstream movements can reduce the quality of water. However, low-head dams can prevent this upstream movement from happening in the first place.

Increase system efficiency

• Recycling of water - by recycling domestic wastewater it is possible to expand the existing water supply. 
• Conjunctive use - this means that water supplies from different sources are coordinated to maximise the water supply. It involves storage excess water in times of surplus supply, and using these stores in periods of drought.

Model climate change risks

• Climate change models - by developing models to better understand climate change and the potential risks to water supply and quality it is possible to develop appropriate management strategies to deal with these scenarios if they come to fruition.

Change land use

• Implement water management strategies - a range of policies and measures can be adopted to better prepare and prevent water scarcity in times of drought. These measures will usually focus on preserving or restoring vegetation to protect watershed areas (ie. land that channels rainfall and snow melt into water sources such as rivers and streams) - this helps to prevent the worst effects of drought by maintaining the quality of the soil and land and reducing excess water runoff.

Adapt water demand

• Reduce water usage at electricity plants - the energy sector is responsible for the largest portion of water withdrawal. Therefore, it’s important that energy producing facilities take effort to improve water efficiency. Examples of steps that can be taken include the use of closed loop water circulation systems (ie. a circulation loop where water is continuously circulated), dry cooling system for turbines, and the use of reclaimed water for electricity generation. 
• Reduce agricultural water demand - after the energy sector, the agricultural sector is the second largest user of water. In order to reduce the use of water in this sector it is necessary to first forecast demand, particularly in areas susceptible to drought. This can then allow for appropriate plans to be put in place to reduce water demand. Examples of technology that can be employed to help achieve this include drip irrigation.
• Water conservation  - water conservation programs are an effective way to cut down on waste and inefficiencies. This is most effective when combined with public communication explaining how they can cut down on household or business water usage.

Monitor operational capabilities

• Monitor water conditions - in order to effectively plan for drought and the impacts of climate change on our water supplies, it’s crucial that we monitor data to develop accurate models and to be able to project future supply levels and potential areas of risk. 
• Update drought contingency plans - droughts can have big impacts on water supplies. Contingency plans (informed by data modelling) should plan for the use of alternative water supplies and the implementation of water restrictions for houses and businesses.

In addition to the actions outlined above that can be adopted by governments and local authorities, there are also a number of actions that can be taken on an individual level to help cut down on water waste and usage. These actions can truly make a difference in times of drought and are generally beneficial for the environment even in times where there are no water supply issues. 

• Install low-flow fixtures - low-flow toilets, shower heads and taps can save water and money. Where they are installed in a household of four for example, this can result in an annual saving over 100,000 litres of water. 
• Turn off the tap while brushing your teeth, shaving or washing your face
• Don’t use your toilet as a bin - each flush uses between 6 and 26 litres of water, so you should do whatever you can to reduce the number of times you flush it 
• Fix leaks - one little drip every second results in 19 litres of water a day! Check your home for drips and leaks. 
• Limit the amount of dishes you use - every time you wash something you’re wasting water, so make sure that you’re not washing plates and utensils unnecessarily. 
• Avoid baths and take shorter showers - showers are much more energy efficient than baths, but you should still try to limit how long you’re in there. 
• Only run washing machines and dishwashers when full.

As the effects of global warming are more keenly felt around the world, droughts and water shortages will become increasingly commonplace. The effects of this are not only limited to the areas directly affected by the drought but will also be felt elsewhere around the globe. This is especially true when it comes to the economic impacts of drought. There is a significant knock on effect and we can even see spikes in the prices of energy and food products. 

Thankfully there are steps that governments and individuals can take to help mitigate some of the worst effects of drought.

At Greenly we can help you to assess your company’s carbon footprint, and then give you the tools you need to cut down on emissions. Why not request a free demo with one of our experts - no obligation or commitment required. 

If reading this article has inspired you to consider your company’s own carbon footprint, Greenly can help. Learn more about Greenly’s carbon management platform here.