This paper presents new estimates of the effects of dry episodes (rainfall shocks) and droughts on gross domestic product per capita growth rates using state-of-the-art empirical methods. Rainfall and water availability exhibit considerable spatial variability that is almost two times greater than that of temperature. Hence, the analysis needs to be conducted at a high degree of spatial disaggregation to capture the effects of rainfall variations on economic indicators of interest.

The findings have several implications for development practitioners. They highlight the need for stewardship of forests and other natural capital that affect the hydrological cycle but are seldom associated with the growth impacts of droughts. They also highlight the need for proactive investment to address vulnerabilities through upgrades in information systems, institutions, and infrastructure that build drought resilience.

Droughts and Deficits uses recent econometric methodologies to answer this question. Rainfall and water availability display considerable spatial variability that is almost two times greater than that of temperature.

The authors of the report conducted their analyses at a high degree of spatial disaggregation to capture the effects of rainfall variations on economic indicators of interest.

By examining the effects of water on a single aggregate measure -- economic growth -- the report finds that low-income countries and middle-income countries are considerably more vulnerable to dry shocks than are higher-income countries.

Rainfall deficits have a negative impact on GDP growth, with low- and middle-income countries in arid areas sustaining the highest relative losses. As the severity of a drought increases, so too does the impact on economic growth.

In low- and middle-income countries, moderate drought reduces growth by about 0.39 percentage points, and extreme drought reduces growth by about 0.85 percentage points (average growth rate 2.19%).
By contrast, in high-income countries, extreme droughts reduce growth by a little less than half the impact felt in developing countries.

The adverse effects on economic growth are therefore sharper in agriculture-dominated areas of the developing world. The higher losses reflect these countries’ greater dependence on agriculture, which is the sector most affected by rainfall disruptions.

Cumulative rainfall in the recent past helps determine the growth impacts of a dry shock
Rainfall increases in previous years raise the levels of green water in the root zone of crops - also known as soil moisture - and can neutralize the harmful impacts from a dry shock. Conversely, if recent years were drier than normal, the headwinds on economic growth from dry rainfall shocks are considerably stronger.
Without intervention, the global land area and population facing extreme droughts could more than double from 3% during 1976-2005 period, to 8% by the late 21st century.
Droughts and Deficits - Summary Evidence of the Global Impact on Economic Growth
Drought impacts have been unevenly distributed around the globe and vary significantly across and within countries. Such patterns also highlight the disproportionate losses that developing countries continue to face. This risk information can also be particularly valuable in enabling more effective responses to the increasing threats from climate change, for example by helping policy-makers to prioritize and spatially target interventions of greatest growth impact.

Bringing drought resilience to scale
Due to these prolonged dry shocks, the world is on a path to even greater losses in economic growth and development gains. Without significant improvements to the way policy makers respond to and manage these events, we will be unable to tackle two of the major challenges of the 21st century:

Sustainability: enhancing the environment for growth, rather than degrading it.
Inclusion: sharing the benefits of progress in ways that are just and equitable.