Droughts: Misery In Slow Motion

By Richard Damania 16 January, 2018

Following their new report, we sat down with the World Bank's Damania to see why droughts need more attention , Following their new report, we sat down with the World Bank's Damania to see why droughts need more attention

Drought impacts are slower & less visible than floods: for firms, the economic cost of droughts is 4x that of floods
Farms lose produce for 81mn people from drought yearly
Current water management methods are not up for the challenge; we need policies that consider the economic incentives in managing water from source to tap & back
Richard Damania
Author: Richard Damania
Richard Damania is the Global Lead Economist in the World Bank’s Water Practice. He leads the Practice’s work on analytical, advisory, and the operational engagements related to the role of water and the economy. Prior to this he was the Lead Economist of the Africa Sustainable Development Department with responsibility for infrastructure, environment and social issues. In this capacity, he led the analytical program and was responsible for quality control. He has also served as Lead Economist in the South Asia and Latin America and Caribbean Regions of the World Bank. Before joining the World Bank, he was Professor of Economics at the University of Adelaide in Australia. He has published extensively with over 100 papers that span matters ranging from Natural Resources, Infrastructure Economics, Climate Change and the Economics of Regulation. He has held numerous advisory positions in government and international organizations and serves on the Editorial Board of several prestigious academic journals.
Read more from Richard Damania →

report cover

The 21st century will witness the collision of two powerful forces – burgeoning population growth, together with a changing climate. With population growth, water scarcity will proliferate to new areas across the globe. And with climate change, rainfall will become more fickle, with longer and deeper periods of droughts and deluges. What impacts will this convergence of events have?

The World Bank’s new report – “Uncharted Waters: The New Economics of Water Scarcity and Variability presents new evidence on how increasingly erratic rainfall impacts farms, firms and families.  It also shows that although floods and storm surges pose major threats, droughts are “misery in slow motion,” with impacts deeper and longer lasting than previously believed. China Water Risk sat down with Richard Damania, one of the writers of the report, to find out more.


China Water Risk (CWR): Congratulations on the release of the report “Uncharted Waters: The New Economics of Water Scarcity and Variability”. Floods and storm surges are more sensational disasters but your report shows that droughts can be more impactful. Can you share why this is?

Richard Damania (RD): A drought is like an undiagnosed and untreated disease because it is less visible. In contrast, a flood is like a disease that is visible and therefore gets treated. As a result, the aid comes in, the reconstruction starts, and the city recovers reasonably rapidly.

Floods are much more visible & we know what to do… so the final impact is often not as great as with a drought

“Uncharted Waters” is not saying that floods don’t do damage; it is saying that because floods are much more visible and we know what to do, we do the right thing – so the final impact is often not as great as with a drought. The impacts of drought are slow and less visible – for instance, power outages, increases in waterborne diseases etc.

 

CWR: Your report focuses on three affected groups – farms, firms and families. How do droughts/dry shocks impact each group? Is there a group that is most at risk? 

RD: For firms based in cities, the economic cost of droughts is four times greater than that of floods, with even more severe and longer-lasting effects. And when urban water services are disrupted, firms suffer significant reductions in their sales and employment, stalling economic momentum.

“For firms based in cities, the economic cost of droughts is four times greater than that of floods”

It also finds that because of repeated droughts, farms around the world are losing produce that could feed 81 million people each year. To grow more food, farmers are forced to expand their farmland into nearby forests. But cutting down these trees destroys watersheds which causes rivers in the forest to dry up, and also destroys carbon sinks, which worsens climate change.

 

And for families, a rainfall shock may be fleeting but its consequences can shape the destiny of those who experience it in infancy. For example, in rural Africa, women born during severe droughts bear the marks throughout their lives, growing up physically shorter – undernourished and unwell because of crop losses. This can lead to them receiving less education, and ultimately, becoming less wealthy. For far too many people, rainfall is destiny.

So the impacts of rainfall shocks ripple throughout firms, farms and families, sometimes for generations.

CWR: The link between agriculture and drought is quite obvious but the link to business is less so. Clearly they are at risk but do you think they realise it? Are they aware of their reliance on water?

RD: When droughts descend, there is less water so we observe more power outages which in turn slows economic activity in the city. We observe as a result that firms’ sales decline. For formal firms, this is by an average of nine percent. And for informal firms as much as 35% on average.

And since informal economic activity is predominantly prevalent in developing countries there are large impacts on the labor market, resulting in lower-levels of employment and lower wages.

In addition, when there is less water, the quality deteriorates so there are more waterborne diseases such as diarrhea.

CWR: Droughts have much deeper and long-lasting impacts than previously thought. How can we avoid going down a “parched path”? What is the role of infrastructure?

RD: The report shows it is increasingly important that we treat water like the valuable, exhaustible, and degradable resource that it is. This sea-change will require a portfolio of policies that acknowledge the economic incentives involved in managing water from its source, to the tap, and back to its source.

“…it is increasingly important that we treat water like the valuable, exhaustible, and degradable resource that it is”

This includes designing and implementing policies which control the demand for water. It means the utilities responsible for water distribution in our cities need to be properly regulated to incentivise better performance and investments in network expansion while also ensuring a fair market return. And it means that when rainfall shocks turn into economic shocks, safety nets must be put in place to ensure families can weather the storm.

Constructing new storage and management infrastructure is an important part of the solution – indeed, we looked particularly at infrastructure because infrastructure is so expensive. And we found that infrastructure is effective. It provides a healthy boost to farm profits and buffers farmers against the ups as well as the downs of rainfall. The exception to this is in arid areas where – when done in the wrong way – it can provide perverse signals and result in mal-adaptation.

“All these policies are links in a chain…but a chain is only as strong as its weakest link”

You can think of these solutions like a chain. All these policies are links in a chain and should strengthen and support one another. But a chain is only as strong as its weakest link so all need to be robust if they are to work effectively as a collective.

 

CWR: Your report posits that “supply-side approaches…are seldom sufficient to build adequate resilience to fickle rainfall patterns”, so what other measures can be taken to mitigate drought impacts?

RD: Supply-side approaches need to be accompanied by demand management. In areas where water is scarce, if we provide that water for free, this gives an economic signal that water is abundant when in fact it is scarce. So there is an incentive to overuse and waste the water hence we find that in arid areas, when irrigation water is provided for free, farmers grow water-thirsty crops such as rice and sugarcane. When the drought hits, farm output collapses and farmers are worse off than they would have been without the infrastructure.

CWR: Looking ahead, climate change will likely complicate the upcoming challenges. Are you optimistic that current water policy frameworks can evolve to address them adequately? 

RD: If we don’t take deepening water deficits and the bigger and more frequent storms that climate change will bring seriously, we will find water scarcity spreading to new regions of the world, potentially exacerbating issues of violence, suffering, and migration.

Current methods for managing water are not up to the challenge

Current methods for managing water are not up to the challenge. This sea-change will require a portfolio of policies that acknowledge the economic incentives involved in managing water from its source, to the tap, and back to its source.


Further Reading

  • 5 Facts On Crop Failures Due To Water Risks – In 2016 China suffered 44 million tonnes of crop failure due to droughts and floods. Check out China Water Risk’s Max Leung’s five facts to get the latest info and see which regions are most at risk
  • China’s Green Planning For The World Starts With Infrastructure – China can exert greater external influence through infrastructure development but Professor Asit K Biswas and Kris Hartley from the Lee Kuan Yew School for Public Policy caution against it citing financial and environmental risks. See more
  • Companies Are Taking Water Security Seriously – Here’s How – CDP’s Cate Lamb shares key findings from their 2017 Global Water Report, which includes a 41% increase in companies disclosing and a record number of corporates achieving an ‘A’ score. Is putting an internal price on water the next step?
  • Hotels & SDGs: Moving Together On Water Risk – Forward thinking companies are re-aligning their strategies with the SDGs and so is the hotel sector. International Tourism Partnership’s Fran Hughes on their recently announced 2030 vision and goals
  • Key Takeaways From The 5th China SIF Conference – The 5th China Social Investment Forum Annual Conference was just held in Beijing. See Dr Guo Peiyuan of SynTao Green Finance, a co-host of the event, three key takeaways, including the first ESG Chinese equity index
  • Sponge Cities: An Answer To Floods – Floods have cost China close to RMB2 trn between 2000-2014. Today, with 641 cities prone to flood risk, the Chinese govt has turned to sponge city pilots. Do they work? How much do they cost? CWR reviews
  • Counting the Costs of Floods in China – With China in the midst of one of its worst flood episodes in history, Asit K Biswas & Cecilia Tortajada look at the significant social and economic costs of floods, and what can be done about them
  • Groundwater Shortage Calls For Urgent Action – China’s groundwater is overextracted and this needs immediate tackling. Prof Asit K Biswas & Kris Hartley from the Lee Kuan Yew School for Public Policy explore solutions, from desalination to sponge cities
  • Creating Water Abundance From Scarcity – Water stewardship strategies are no longer enough to address water scarcity & quality issues so what can corporates do? Water Foundry’s CEO William Sarni shares his thoughts from innovative approaches to new business models to competitions
  • At A Glance: Water Risk Dashboard – Need to gauge water risks across your operations, suppliers or investees at a glance? China Water Risk’s Hubert Thieriot expands on a new dashboard for exactly that – check it out!
  • Water Risk Valuation – What Investors Say – See what 70+ investors have to say on different valuation approaches we applied to 10 energy stocks listed across 4 exchanges. Is there consensus? What are they most worried about?