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2010

Measuring Economic Impacts of Drought: A Review and

Discussion
Ya Ding
University of Nebraska, Lincoln, yding2@[Link]

Michael J. Hayes
University of Nebraska at Lincoln, mhayes2@[Link]

Melissa Widhalm
University of Nebraska at Lincoln, mwidhalm3@[Link]

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and Discussion" (2010). Papers in Natural Resources. 196.
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 Measuring Economic Impacts of Drought: A
Review and Discussion

By Ya Ding, Michael J. Hayes, and Melissa Widhalm

Ya Ding is a post-doc researcher with the National Drought Mitigation Center at the
University of Nebraska. Michael J. Hayes is an associate professor/director of the
National Drought Mitigation Center at the University of Nebraska. Melissa Widhalm is a
climatologist with the National Drought Mitigation Center at the University of Nebraska.

Correspondence: Ya Ding, National Drought Mitigation Center, 820 Hardin Hall,

University of Nebraska-Lincoln, Lincoln, NE 68583-0988. Email: yding2@[Link]
 Abstract

A comprehensive assessment of drought economic impacts provides critical information

to rational decisions supporting drought mitigation policies and programs. The objective

of this paper is to increase the understanding of the full scope of drought economic

impacts and the associated quantitative assessment methodologies. To accomplish this,

the paper reviews the literature of drought economic impact studies in both agricultural

and non-agricultural sectors, summarizes the methods and data employed, compares the

various results, and investigates the problems and limitations of previous studies. The

paper concludes with a discussion of the challenges and directions of future improvement

on drought economic impact assessment.

Key words: drought, economic impact, estimation

Introduction
Growing public awareness of the issue of global climate change has raised

enormous concerns regarding its potential impacts and consequences. Although there are

inconclusive findings on the specific impacts of climate change on regional water

resources, many scientists have suggested that climate change is likely to increase the

frequency and intensity of extreme climate events such as drought (IPCC 2007). In

addition to the risk to future water supplies brought on by climate change, population

growth, urban expansion and requirements for environmental protection have been

stressing local water supplies in many places, exacerbating competition for already scarce

water resources.

The integration of these issues poses great challenges for existing drought policies,

which have been largely focused on short-term responsive actions rather than proactive

planning and mitigation strategies. Although effective responsive actions are important

for soothing short-term disturbances and providing emergency supplies to maintain basic

functioning of industries and markets, they are incapable of increasing long-term social-

economic resilience to future drought impacts. It is generally agreed that mitigation and

preparedness are keys to reducing future drought risks; however, government officials are

often reluctant to allocate money and resources to mitigation because of limited

information on the costs and benefits of drought mitigation programs. In fact, a report of

the Council of Governors’ Policy Advisors (Brenner 1997) identified the “lack of

information” as a major obstacle in adopting mitigation strategies.

Cost-benefit analysis (CBA) has been widely employed to evaluate economic

feasibility of public projects and policies (U.S. Water Resources Council 1983, Hanley

1
and Spash 1993, Griffin 2007). Projects are considered economically acceptable if

summed benefits exceed summed costs. The costs of a mitigation project are usually up-

front; while the benefits of the project are more uncertain and harder to predict. We are

interested in the methodologies of computing the costs of disasters because the benefits

of mitigation programs can be approximated by using the estimated costs of the disaster

that would be otherwise avoided by the mitigation programs. Therefore, in order to

understand the monetary benefits of drought mitigation programs, quantification of the

economic impacts of drought need to be available.

In spite of the importance of accessing drought economic impacts, few studies

have been done in a consistent or systematic manner. Inconsistent mixes of production

losses, indemnity payments, and relief costs are often quoted by the media and misused

by decision makers. In addition, many analyses have been focused on agricultural losses

only and do not capture the broad range of impacts resulting from drought.

The objective of this review paper is to provide useful information for members

of the weather community and policy makers to help them understand the full scope of

drought economic impacts and assessment methodologies, and to help determine the

feasibility of future drought mitigation programs. To accomplish this, the paper reviews

the existing literature, summarizes the methods and major findings, investigates the

problems and limitations of previous studies, and discusses the challenges and future

directions of developing consistent and systematic tools for assessing drought economic

impacts.

2
Understanding Drought and Drought Impacts
Drought can occur in any climate of the world. In general, it is known as a

climate-related condition relative to what is perceived as ‘normal’. Because normal

precipitation and water use expectations vary, the specific definition of drought is more a

matter of where the water comes from and how it is being used. Unlike other natural

hazards such as floods, hurricanes, tornadoes, and earthquakes, which occur over finite

periods of time and result in visually obvious damage, drought develops slowly and

quietly, lacking highly visible and structural impacts. Developing drought conditions

often go unnoticed until precipitation shortages become severe and impacts begin to

occur. The slow pace and long duration of drought typically makes it difficult to quantify

the overall economic impacts.

The impacts from natural hazards, including drought, can be both direct and

indirect. Direct and indirect effects are sometimes referred to as primary and secondary

(or higher-order) effects in the literature. Identifying an adequate definition for direct and

indirect impacts is important for economic impact assessments because the bounds set by

such definitions dictate the scope of impacts that may or may not be included. However,

one challenge is that a clear and consistent classification of these two types of effects is

lacking. Van der Veen (2004) reviewed different cost concepts used in the economic

literature of disasters. In the manuals of Flood Hazard Research Center Parker et al.

(1987), direct costs were limited to loss of land, houses and machinery; while indirect

costs are related to business interruption as well as backward and forward multiplier

effects in the economy. Similarly, according to the definition given in a study by the

National Academy of Sciences (1999), direct impacts result “from the physical

3
destruction of buildings, crops, and natural resources”, while indirect impacts are “the

consequences of that destruction, such as temporary unemployment and business

interruption” (National Academy of Sciences 1999, p. 5). Since direct impacts are often

solely used in the estimation of economic losses, using this definition, only crop or

pasture losses are counted as direct drought impacts. Large-scale business interruption

losses would all be excluded. Certainly, it is not practical to use this definition in

estimating the economic impacts of drought.

Cochrane (1997) and Rose (2004) proposed to extend the definition of direct costs

to include not only the physical damages but also the consequences such as business

interruption and unemployment. They redefined indirect costs as arising from interactions

and transactions between economic industries and sectors. Since drought cause less

visible and obvious physical damage, but incurs considerable losses in terms of business

interruption and unemployment; therefore, we recommend using this definition for

drought impact assessment. We will discuss in more details about indirect or secondary

impacts of drought in the next section.

Economic Impacts of Drought

Drought-induced water deficiency affects production, sales, and business

operations in a variety of industries. In this paper, these effects are referred to as the

direct economic impacts of drought; while, indirect economic impacts of drought stem

from the interactions and transactions among industries and sectors. Drought also causes

4
environmental and social impacts, and results in non-market losses. An overview of

drought economic impacts is supplied in Figure 1.

Agricultural Sector

Drought impacts are most eye-catching in the agricultural sector. Dried crops,

abandoned farmland, and withered and yellow pastureland are the common signs of

drought. Prolonged soil moisture deficits due to drought cause damage to crops and

pastures. Crop failures and pasture losses are the primary direct economic impact of

drought within the agricultural sector. Drought-induced production losses cause negative

supply shocks, but the amount of incurred economic impacts and distribution of losses

depends on the market structure and interaction between the supply and demand of

agricultural products.

Drought-induced losses are not completely borne by farmers; instead, a portion of

the losses are passed on to consumers through increased prices. The higher the price

increases, the more losses will be passed on to consumers. It is even possible that farmers

are better off from the drought impacts, given that the price increases by a higher

percentage than the supply decreases. Additionally, farmers purchasing crop insurance

will get part of their losses compensated by insurance companies, and some eligible

farmers may receive direct disaster aid from the government. The ultimate losses borne

by farmers could be very different from the actual impacts caused by drought. It is a

common mistake to equate farmers’ income losses with the economic impacts of drought.

Therefore, it is important to quantify overall drought impacts as well as identify the

losses borne by different stakeholders.

5
 The economic impacts of drought are complicated because drought also creates

winners. Drought-induced higher prices would attract goods from other regions to flow

into the local market, which helps smooth the supply shortage and limits the price

increase. In this case, producers outside the drought-stricken area benefit from favorable

prices. Therefore, it is important to establish the geographic coverage or the accounting

stance when assessing the drought impacts. Local drought impacts might be cancelled out

when evaluated at regional or national level. Zero-sum transfers of losses or gains should

be excluded from impact assessment (Griffin 1998). Another important issue is that

drought causes long-term impacts on perennial crops and livestock productions. The

negative impacts in these cases might linger for multiple years. Considering these lagged

effects of drought, it is important to set a time frame when assessing the economic

impacts of drought.

Non-agricultural Sectors

Drought also causes significant economic impacts in non-agricultural sectors

through its effects on water supplies including streamflows, reservoirs, wetlands, and

groundwater. These non-agricultural sectors include, but are not limited to, tourism and

recreation, public utilities, horticulture and landscaping services, navigation and other

industries/businesses that have significant water consumption.

Public water supply systems are designed to deliver clean water to the public on a

continuous basis. If their water sources are from reservoirs or groundwater aquifers, they

would not be subject to effects of short-term precipitation variations. However, the

occurrence of severe and sustained droughts that deplete water storage can still cause

water scarcity, deteriorated water quality, and even interruptions of supply. To manage

6
water shortages, water authorities can adopt adjustments that reduce water demand or

adjustments that increase water supply. Demand-side measures include but are not

limited to voluntary and mandatory use restrictions, price changes, conservation

education programs, and investment in water-saving equipment and appliances. Supply-

side measures can include finding alternative water sources, providing emergency

supplies (drilling new wells, hauling in water), and recycling water. The losses caused by

drought include: households’ welfare losses due to restricted water use and deteriorated

water quality; lost production or sales for industries and businesses due to forced

slowdown or shutdown; costs of emergency supplies; revenue losses and increased

monitoring and treatment costs for water suppliers.

In the tourism and recreation sector, since many activities are water-related,

droughts can bring critical losses to businesses in drought-stricken areas. Drought

impacts exist for both winter and summer recreational activities. In winter, a lack of

precipitation in the form of snow affects the business of ski resorts. Although many

resorts could lessen the drought impact temporarily with snowmaking, it incurs additional

costs and competition over water rights. Additionally, winter drought affects the level of

snow pack stored at higher elevations, which in turn affects snowmelt and streamflows

during the following spring. Reduced streamflows might result in fewer visits and a

shorter rafting season. Other summer recreational activities, like fishing and boating, can

be affected by drought as well, especially a multi-year drought that depletes water in

lakes and reservoirs.

7
 Nursery and landscaping service businesses also face big losses from drought.

Droughts cause damage to nursery crops and add additional costs of watering newly

installed plants and replacing dead ones. Plant sales may decline because of increased

plant mortality and water use restrictions triggered by drought. During the historic

drought in the southeast United States in 2007, many businesses were forced to close

locations, lay off employees, or even file for bankruptcy. The Georgia-based nursery

chain Pike Nursery filed for bankruptcy protection because of drought-induced financial

difficulties (Bond 2007).

Other sectors subject to drought impacts include navigation and construction.

Because the factors influencing business operations are numerous, drought impacts in

non-agricultural sectors are uncertain and vary across time and location. It is important to

consider the macroeconomic influences and local characteristics when estimating these

impacts.

Secondary Effects

The secondary impacts of drought, as well as other natural disasters, are attributed

to the interactions and transactions among industries and sectors. Outputs from one

industry/sector become inputs into other industries/sectors. Therefore, the direct

economic impacts on an individual industry would spread through the upstream or

downstream linkages to other industries, causing secondary impacts. For example,

farmers with crop losses will reduce their supplies to the downstream industries, such as

food processors and ethanol plants. These consumers would have to bid a higher price for

the inputs or otherwise reduce their production for the lack of inputs. In turn, their

8
downstream customers may be forced to do the same. Such types of effects are called

downstream or forward effects. On the contrary, farmers may reduce their input

requirements like fertilizer from the upstream suppliers, which can cause upstream, or

backward, effects. The upstream and downstream effects together are referred to as

indirect effects. In addition, any income reduction caused by a disaster would force

consumers to diminish expenditures, and thus generate another round of impacts. Such

impacts are usually referred to as induced effects in the literature, and they are also part

of the secondary effects.

The most popular approach used to estimate the secondary effects from an

exogenous change such as drought is the Input-Output (I-O) model. The I-O model is

based on the interdependencies between industries and sectors within an economic region.

The fundamental idea is that the output of a product produced by one sector is equivalent

to the amount of that product purchased by all the users. IMPLAN is a commonly

accepted software package for applying I-O analysis, and it was first developed by the

U.S. Forest Service and is now managed by the Minnesota IMPLAN Group (available at

[Link] I-O model has shortcomings, with the major ones being the

assumption of no input substitution, no price effects, and no constraints on resources.

These assumptions might result in overestimates of the secondary impacts1.

Another approach used to estimate the secondary effects is the Computable

General Equilibrium (CGE) Model, which is a more advanced extension to the I-O model.

This model is more sophisticated and flexible. It capitalizes on the advantages of the I-O

model and overcomes many of its limitations (Shoven and Whalley 1992, Rose 1995).
1
See Leontief (1986) for a comprehensive introduction to Input-Output models.

9
For example, it allows for input substitution, incorporation of price effects, and inclusion

of resource constraints. However, its implementation is more difficult because it requires

a wider range of data and a higher level of aggregation of sectors.

Non-market drought impacts

Drought impacts were usually grouped into three principal areas: economic,

environmental, and social (Wilhite and Glantz 1985, Wilhite 1993). In the past sections,

we have discussed drought impacts in a range of sectors and industries, as well as

secondary effects of drought through interactions among economic sectors. From

economic perspective, environmental and social impacts can also lead to economic

consequences. In other words, any welfare changes experienced by human beings should

be counted into the measures of drought economic impacts. For example, if drought

causes damages to the habitat of endangered species, then the welfare of people who care

about these species would be harmed and therefore should be counted as a part of drought

incurred losses. Similarly, if drought causes health problems, like stress and anxiety to

people, their lost welfare should also be counted as a part of drought incurred losses.

Economists and other social scientists have developed various methodologies and

techniques to evaluate non-market values. The three most commonly used ones are:

travel cost, hedonic pricing, and contingent evaluation (Freeman 1993, Wilson and

Carpenter 1999, Champ et al., 2003).

Although non-market losses could be considerable, quantification of such losses

are rarely included into drought impact assessment or other disaster loss calculation.

“Disaster losses are almost exclusively limited to impacts measured by market values,”

10
and “Non-market losses are never estimated.” (Cochrane 2004, p.290). Possible reasons

that impede the estimation of non-market impacts are: non-market evaluation methods

are difficult, expensive and time-consuming; researchers are required to have a high level

of economic knowledge and specialized expertise in data collection and modeling; some

non-market impacts are incommensurable or intangible.

Empirical Studies of Drought Impacts

Although drought impacts exist in a variety of sectors, most impact studies are

focused on the agricultural sector or sub-sectors, for three main reasons. First, agriculture

activities are highly sensitive to weather variability. Drought impacts on crops and

pastures are direct and immediately observed. Second, data in the agricultural sector are

easier to obtain than in other sectors. Many studies that we reviewed employed the “with

and without” approach to estimate drought losses. This approach compares the values of

economic variables under drought with those under normal weather conditions. Most

commonly, the historical average values were assumed to be the normal values, and the

data requirement of historical records is largely satisfied by USDA’s National

Agricultural Statistics Service (NASS). NASS maintains comprehensive databases of

land use, farm income, crop production, livestock inventory, and commodity prices, in a

timely and consistent manner. For other sectors (e.g., tourism), although some historic

records or statistics are available at regional or sub-regional levels, the definitions of

variables, collection procedures, accounting stances, and data update processes are not

consistent nationwide. Such data limitations make comparisons across time and location

difficult for these sectors. Third, monetary estimates of drought losses are often collected

11
in the drought-stricken areas seeking federal disaster aid. Historically, most relief

programs have been available for agriculture only. The loss estimates are critical for the

decision-making process of federal relief funds. However, such estimates are usually put

together in a limited time frame, and sometimes before the drought terminates and the

impacts are fully realized; therefore, the estimated figures might not be accurate and

caution should be exercised when using them.

In the United States, most of the empirical drought impact assessments that have

been conducted were at the state level. One representative study was conducted by

Diersen et al. (2002). They examined economic impacts in South Dakota from the 2002

drought. They estimated the direct drought impacts on crop and livestock production, as

well as the secondary effects on the state’s economy, using an I-O model. Their original

estimate of total impacts amounted to $1.8 billion. Later that year, Diersen and Taylor

(2003) reexamined the drought impacts by considering the improved market conditions

and direct federal aid of $100 million that was provided to the state. As a result, the

estimated overall impact was revised from $1.8 billion to $1.4 billion. This is a key issue

and demonstrates why estimates should be used with caution. It also illustrates that

market conditions may improve because of the drought-induced supply shortage. A

similar study was conducted by the Food and Agricultural Policy Research Institute at the

University of Missouri. They estimated that the drought of 2002 in Missouri caused a

total direct loss of $251 million in the agricultural sector (the combined crop and

livestock losses reduced by USDA livestock compensation and cost share payments), and

negative multiplier effects of $209 million on the state economy. Other statewide impact

analyses include the 1998-2000 Georgia drought report (Georgia Department of Natural

12
Resources 2001), the 2005 Illinois drought report (Changnon and Knapp 2006), and the

2001-2002 Oklahoma drought report (Arndt 2002). These reports discussed drought

impacts on the agricultural sector as well as other sectors (e.g., energy, commercials, and

residences), but no systematic quantitative estimation methods were given.

Research on the economic losses outside the agricultural sector is limited, and

most studies have been in the municipal water supply sector. Russell et al. (1970)

estimated the impact of the 1962-1966 drought in Massachusetts. They obtained the

majority of data through interviews with government officials, water utilities managers,

and industrial/commercial leaders. The estimated drought-incurred losses included

business losses and investment costs for industrial/commercial firms; revenue loss and

emergency supply costs for water utilities; and well investment and sprinkler losses for

domestic residents. The estimated losses were between $5 and $13 per capita, in 1970 US

dollars. More recently, Garcia-Valiñas (2006) analyzed the impact of water use

restrictions and water quality reductions on consumer welfare during the drought period

of the early 1990s in Seville (Spain). The water demand functions were estimated for

residential and industrial/commercial customers, respectively, using quarterly water bill

data as well as other economic information. The welfare variations were then calculated

based on the water demand functions. The average welfare losses, in 2001 Euros, were

€138.3 ($124.5 in 2001 US Dollar) per user and quarter for households and €62.6 ($56.3

in 2001 US Dollar) for industrial/commercial firms. Another group of studies estimated

the amount of money people are willing to pay (WTP) to increase water supply security

or to avoid water use restrictions, using contingent evaluation methods (Howe and Smith

1994; Griffin and Mjelde 2000; Koss and Khawaja 2001) or choice modeling (Hensher et

13
al. 2006). However, these studies gave various results of the WTP, partly because of the

different specifications on the frequency and severity of water restrictions caused by

drought.

The impact assessment of municipal drought addressed part of the losses of the

horticulture and landscaping industry, but not in any thorough fashion. Hodges and

Haydu (2003) investigated the drought impacts on the Florida horticulture industry

during 2000. They considered the impacts of drought on both sales and purchases of

horticultural products and services. Their estimates were not restricted to the nursery

sector, but also encompassed retailers, landscapers, and consumers. The drought impacts

were not negative for all affected sectors. Some businesses (e.g., retailers) benefited from

the drought as a result of demand for replacement plants.

Drought impact studies on recreation and tourism are mostly qualitative or

restricted to businesses within a local area. Schneckenburter and Aukerman (2003)

analyzed the economic effects of the 2002 drought on Colorado’s recreation and tourism

industry, which suffered statewide, but “often takes a back seat to the interests of

agriculture in terms of policy and public support”. The authors provided a snapshot of the

drought impacts through a series of one-on-one interviews with stakeholders. Enormous

and severe drought impacts were described for state and county parks, the boating

industry, the rafting industry, and the fishing industry. In another study, Leones et al.

(1997) examined the impacts of streamflow depletion on rafting businesses in northern

New Mexico counties. They found that the lower water levels generally had negative

effects on daily visitor numbers and rafting-related expenditures, but the magnitude of the

impacts depended on the characteristics of the river courses. They also analyzed the

14
indirect impacts of the rafting industry on the regional economy through the use of an

Input-Output model. The results indicated that maintaining higher-than-actual levels of

summer streamflows would have generated $0.94 million more from rafting and 44

additional jobs.

Very few studies estimated drought impacts at the national level. Riebsame et al.

(1991) studied the national economic impacts of the 1988 drought in United States. They

looked into the impacts for several sectors, including agriculture, transportation, power

generation, recreation, commerce, and industry. They estimated the total cost of the 1988

drought at $39.2 billion (in 1988 US dollars). Their estimates are often cited by

government officials, although they are indeed problematic. First, federal disaster aid and

crop insurance payments were included as costs of drought, which is incorrect. How

federal payments should be considered depends on the scope of analysis. If the scope is

Nebraska only, then federal payments would be a benefit of the drought. However, if the

scope is national, the federal payments are a transfer payment to be ignored. Second, a

drought-induced supply shortage drove food prices up, which increased the spending of

consumers, but also raised producers’ income as well. The authors considered only the

consumer’s losses due to higher food prices, but not producers’ gains, which would result

in the overestimate of drought losses. On the other hand, losses suffered by other sectors,

such as public water supply, tourism, and recreation, were not included. Therefore, given

these overestimates and underestimates, the question is really whether or not the

Riebsame et al. estimate is reasonable and “in the ballpark,” so to speak.

15
 More recent nationwide measurements of drought impacts have been conducted in

Canada and Australia. Kulshreshtha et al. (2003) estimated the economic costs of the

droughts of 2001 and 2002 to the regional and national economy of Canada. The study

focused on agricultural impacts of the droughts (impacts on crops, livestock, orchards,

and vineyards), and secondary impacts were projected using an Input-Output model.

Impacts on other sectors were reviewed and described in a qualitative manner. The direct

and secondary impacts of drought on agriculture were estimated for each individual

region (Canada was divided into four regions) and then summarized for the entire nation.

As a whole, the lost gross domestic product (GDP) was estimated at C$3.65 billion (or

$2.34 billion in 2001-2002 US dollar), and a loss of 23,777 jobs also resulted. Horridge et

al. (2005) measured the impacts of the 2002-2003 droughts on Australia. To estimate the

direct impacts, the authors computed productivity losses due to rainfall deficits in each

individual region, and then summarized to the national level. The direct losses from

drought were introduced as output shocks to The Enormous Regional Model (TERM),

i.e., a Computable General Equilibrium model for Australia; and the indirect impacts at

regional and national levels were projected. The results indicated that the 2002-2003

droughts caused an overall reduction of Australian GDP by 1.6%, of which 1% was

directly related to agricultural sector, and the remaining 0.6% was due to multiplier

effects.

Conclusion
Given the infrequent occurrence of natural hazards and the numerous factors

influencing economic activities, it is a great challenge to separate the impacts of a natural

16
disaster from other factors and quantify them. Compared to other natural disasters,

drought typically has an unclear onset or ending, a large spatial coverage, and an

extended duration; which all make the drought impact assessment an even more

challenging task. Although difficult, understanding the economic impacts of drought is

important for developing effective relief and mitigation strategies. Accurate estimates of

drought impacts are needed to justify the initial investments in many mitigation activities.

Better loss estimates are also helpful in facilitating allocation of drought relief to those

most in need.

In this paper, previous studies on assessing economic impacts of drought were

reviewed and discussed. We illustrated the underlying economic theories of drought

impacts, summarized the methods and data employed in the literature, and pointed out the

limitations and issues within the existing studies. The experience and lessons learned

provide valuable information for future improvement of drought economic impact

assessment.

Lessons Learned and Recommendations:

• Similar to federal disaster payments, most drought impact studies were ad hoc,

following a specific drought disaster. Considering that drought is the most

common natural disaster in the United States (14% of the country experiences

severe or extreme drought at any one time), it is recommended that a national

database of drought impacts, and the economic losses associated with these

impacts, be developed. The Drought Impact Reporter tool hosted on the National

Drought Mitigation Center’s website has been designed as this database (available

at [Link] The Drought Impact Reporter tracks drought

17
 impact reports/stories from media, public, and a variety of federal and state

networks. Currently, this tool is still under development and testing; and we

expect it will provide comprehensive and timely information for researchers,

planners, policy makers, and the general public.

• Many drought impact estimates were focused on short-term losses of production

and income, while the lagged or dynamic impacts of drought on perennial crops

and livestock cycles were less investigated.

• Different assumptions were made about normal conditions. The impact

measurements were not comparable across regions. We suggest that guidelines be

developed for data collection and model utilization that can be customized to

accommodate local features.

• Non-market losses of drought should be considered. Even though the

quantification of non-market impacts is difficult and sometimes impossible to

obtain, a qualitative description need to be available.

• The economic impacts of drought are not only restricted to monetary losses or job

losses. Previous studies have found that drought significantly increases the

adoption of water-conserving irrigation systems and tillage practices (Carey and

Zilberman 2002; Ding et al. 2009). Such voluntary mitigation activities would

increase drought resilience of agricultural production in the long run.

• Last but not the least, interdisciplinary research is needed on the quantitative

measurement of drought economic impacts. Economists, meteorologists,

hydrologists and water managers need to work together to obtain a comprehensive

assessment of economic impacts of drought.

18
Acknowledgements
The work presented in this article was supported under USDA RMA Partnership
Agreement #02-IE-0831-0228 and NOAA grant #NA06OAR4310087. The authors
acknowledge Deb Wood for her editorial comments.

19
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 Drought
Agricultural sector Non-agricultural sector

Soil moisture deficit Water supplies in forms of streamflow, reservoir,

wetland, groundwater, etc.

Crop and pasture

losses Irrigation Tourism & Public Horticulture & Other
recreation utilities landscaping industries/b
services usinesses

Direct economic impacts Secondary economic impacts

Non-market imapcts
Market impacts
(environmental/social)

Overall economic impacts of drought

Figure 1: An overview of drought economic impacts

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