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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 organizations are attempting to mitigate the worst effects.
The World Health Organization defines drought as a prolonged dry period in the natural climate cycle that can occur anywhere in the world. It is a slow onset disaster characterized by the lack of precipitation, resulting in water shortage. Drought can have a serious impact on health, agriculture, economies, energy and the environment.
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, organizations 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:
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.
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 localized 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.
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.
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.
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:
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.
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.
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