Esha D. Zaveri, Richard Damania, Nathan Engle ( authors)
Drought, T.S. Eliot famously wrote, “is the death of the earth”, reflecting on a natural force that has long shaped our planet. Over the last twelve centuries of human civilization, megadroughts have played a significant role in the collapse of some of the most complex societies of the pre-industrial era, such as the Khmer and Mayan Empires, the Puebloan cliff-dwellers of the southwestern US, and the Yuan Dynasty of China (Ault, 2020; Cook et al., 2016).

Rainfall variability remains a challenge even today. Over the past three decades, 1.8 billion people, or approximately 25 percent of humanity, have endured abnormal rainfall episodes each year, whether it was a particularly wet year or an unusually dry one (Damania et al. 2017).

This variability has disproportionately impacted developing nations, with upward of 85 percent of affected people living in low- or middle-income countries (Damania et al. 2017). Adapting to rainfall variability is often much more challenging than accommodating long-term trends because of the unpredictable duration of a deviation, its uncertain magnitude, and its unknown frequency (Adams et al. 2013).
Climate change compounds these challenges by making rainfall even more variable. Though future rainfall projections are highly uncertain, there is unanimity across climate change models that rainfall will become more erratic and extreme with rising temperatures. There are already signs that the spatial distribution of rainfall has changed.

This paper is related to the recent empirical literature on the effects of dry shocks and droughts on economic performance. Much of this work exploits granular data on local water availability, to estimate the direct and indirect impacts of rainfall variability or water availability on economic productivity.

The results show that increases in soil moisture in previous years can neutralize the harmful impacts from a dry shock, with suggestive evidence that local and upstream forest cover are key channels through which these impacts manifest. These findings have important implications for measuring the economic impact of droughts and can inform adaptation investments.

As climate change intensifies, dry rainfall shocks and droughts are a growing concern. At the same time, scientific evidence suggests that the world has surpassed the safe planetary boundary for green water, which is water stored in biomass and soil that is crucial for maintaining climate resilience. Yet, evidence at the global scale of these combined forces on economic growth is poorly understood. This paper attempts to fill this gap by using data on annual subnational gross domestic product for 82 countries from 1990–2014.

Using rainfall shocks as plausibly exogenous variations in a spatially specific panel at the grid level, the analysis finds that the global effects of droughts on economic activity are substantial. Moderate to extreme droughts reduce gross domestic product per capita growth between 0.39 and 0.85 percentage point, on average, depending on the level of development and baseline climatic conditions, with low- and middle-income countries in arid areas sustaining the highest relative losses. In high-income countries, moderate droughts have no impact, and only extreme droughts have adverse effects, reducing growth by about 0.3 percentage point, a little less than half the impact felt in the low- and middle-income country sample for the same intensity of drought.

Crucially, the impact of a dry shock of a given magnitude also depends on antecedent green water availability. The results show that increases in soil moisture in previous years can neutralize the harmful impacts from a dry shock, with suggestive evidence that local and upstream forest cover are key channels through which these impacts manifest. These findings have important implications for measuring the economic impact of droughts and can inform adaptation investments.