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Nat. Hazards Earth Syst. Sci., 13, 26792694, 2013www.nat-hazards-earth-syst-sci.net/13/2679/2013/doi:10.5194/nhess-13-2679-2013 Author(s) 2013. CC Attribution 3.0 License.
Natural Hazards and Earth System
Direct and indirect economic impacts of drought in the agri-foodsector in the Ebro River basin (Spain)
M. Gil, A. Garrido, and N. Hernndez-Mora
CEIGRAM, Technical University of Madrid, c/ Senda del Rey 13, 28040 Madrid, Spain
Correspondence to: M. Gil (firstname.lastname@example.org)
Received: 14 December 2012 Published in Nat. Hazards Earth Syst. Sci. Discuss.: Revised: 30 June 2013 Accepted: 9 July 2013 Published: 28 October 2013
Abstract. The economic evaluation of drought impacts is es-sential in order to define efficient and sustainable manage-ment and mitigation strategies. The aim of this study is toevaluate the economic impacts of a drought event on the agri-cultural sector and measure how they are transmitted fromprimary production to industrial output and related employ-ment. We fit econometric models to determine the magnitudeof the economic loss attributable to water storage. The directimpacts of drought on agricultural productivity are measuredthrough a direct attribution model. Indirect impacts on agri-cultural employment and the agri-food industry are evaluatedthrough a nested indirect attribution model. The transmis-sion of water scarcity effects from agricultural production tomacroeconomic variables is measured through chained elas-ticities. The models allow for differentiating the impacts de-riving from water scarcity from other sources of economiclosses. Results show that the importance of drought impactsare less relevant at the macroeconomic level, but are moresignificant for those activities directly dependent on waterabstractions and precipitation. From a management perspec-tive, implications of these findings are important to developeffective mitigation strategies to reduce drought risk expo-sure.
Droughts originate from a deficiency in precipitation that, ifsustained over time, may result in water shortages for hu-man consumption, economic activities or environmental re-quirements (Wilhite and Glantz, 1985). The special charac-teristics of droughts, such as their slow temporal onset anduncertain spatial propagation, set droughts apart from other
natural hazards and make impacts difficult to assess (Wilhite,1993). These characteristics require innovative methodolo-gies to evaluate the economic impact and scope of a drought(Wipfler et al., 2009).
Water-dependent activities such as agricultural production,agri-food industry and agricultural employment are severelyimpacted by a reduction in water availability. Irrigated agri-culture is the main consumptive water user in Spain, usingup to 90 % of available water resources in the Ebro Riverbasin (CHE-SDMP, 2007). Irrigated agriculture is thereforeparticularly vulnerable to drought hazards. Rainfed agricul-ture is also vulnerable to droughts, but has a lower expo-sure because of lower land productivity and lower agricul-tural production value. Both irrigated and rainfed agricultureprovide the primary inputs for the agri-food industry, anddrought impacts are therefore transmitted from one to an-other. Wilhite et al. (2007) and Iglesias et al. (2007) highlightthe complexity of assessing drought impacts that spread overtime into many sectors of the economy. It is therefore im-portant to develop methodologies that allow for the measure-ment of the losses directly and indirectly attributable to watershortages; to discriminate these impacts from other influenc-ing variables; and to describe how these losses are relatedto one another. Garrido et al. (2010) and Gil et al. (2011)contributed to this work by developing econometric modelsthat assess the impacts of drought on agricultural production.Their approach is adapted and further developed in this pa-per to measure the magnitude of the impacts and their spreadthroughout the economy.
An accurate assessment of the socioeconomic and envi-ronmental impacts of drought is necessary to enable im-proved management of water as a scarce natural resource,inform water allocation decisions in times of drought and
Published by Copernicus Publications on behalf of the European Geosciences Union.
2680 M. Gil et al.: Direct and indirect economic impacts of drought
design adequate drought mitigation and prevention measuresthat help minimize impacts. Recent focus on the need to im-prove the assessment of the costs of natural hazards in gen-eral, and droughts in particular, responds to concerns aboutthe increased risks that derive from expected climate changeprocesses. As a result, for example, recent EU-funded ini-tiatives, such as the Xerochore (2010) and ConHaz projects(Logar and van den Bergh, 2013), have emphasized the needto improve the quality and reliability of drought impact as-sessments. Basin-wide studies that integrate economic andhydrologic optimization models have been used to assess dif-ferent policy alternatives in order to minimize impacts. Ac-cording to Ding et al. (2011) most drought impact studiesare developed for a specific drought event, contributing toassessment improvement for policy makers. Nonetheless, agreater emphasis is needed to assess the real scope and spreadof drought damages from primary to industrial sectors andisolate these effects from other sources of economic perfor-mance variations (such as price variations).
2 Evaluation methods of economic drought impacts
The economic performance of a specific sector in timesof drought is influenced by many factors, not only wateravailability. In order to discriminate the impacts of droughtfrom other influencing variables we can develop economet-ric models that include relevant explanatory variables of theevent and measure the causal relation and the attributioneffect between variables (Martnez-Cach, 2004). The useof econometric models as a tool to evaluate the impacts ofdrought at different levels would have the advantage of dis-criminating drought effects from others. Furthermore, it al-lows us to obtain production elasticities with respect to wateravailability, and the related effects across sectors (from pri-mary sector to agri-food industry and agricultural employ-ment).
Water is an important input for agricultural production,and therefore variations in the amount of water affect agri-cultural production levels, although the variation is not nec-essarily proportional. The elasticity between these two vari-ables determines the magnitude of the impact that will occur.In turn, the elasticity between agricultural production and re-lated macroeconomic variables completes the chain of causa-tion, offering an inferential device to analyse impacts in theeconomy caused by water supply shocks.
Most of the analyses concerning the elasticity of wateras a production input evaluate the price elasticity of waterdemand, with the price or shadow price being the variablefactor. Schoengold et al. (2006) measure the direct effectsof water pricing on water demand, and the indirect effectson changes in crop choices or irrigation technology, usingthe concept of elasticity. However, regardless of variations inwater prices, water use variations also generate different in-direct impacts that can be evaluated. In this paper, the direct
and indirect economic effects of water supply on agricultureare evaluated. Decaluwe et al. (1999) argue that introducingwater price elasticity in analytical models permits evaluat-ing policy alternatives considering welfare criteria and waterconservation objectives. While this may be true, droughts re-sult in reductions in production as a result of the decreasein water availability that outweigh potential crop price in-creases. The result is an overall decrease in the value of agri-cultural production. The elasticity of water can also be usedto calculate how these decreases are transmitted from vari-ables directly affected by water to indirectly affected eco-nomic variables.
The economic impacts of drought and its spreading andrepercussions throughout the economy of a region occurthrough economic links between the markets of primaryproducts, whose production relies on water availability, andthe economic activities that process them. The simpler di-rect estimations of drought losses measure the physical dam-age to crops (Ritcher and Semenov, 2005; Hartman, 2003;Xiao-jun et al., 2012), and the microeconomic estimationsof these damages, relating market prices to production func-tions (Klein and Kulshreshtha, 1989), are the natural exten-sion of the evaluation of primary production impacts. A num-ber of studies analysing the economic impact of droughts usemathematical programming models to simulate economicimpact using linear (Dono and Mazzapicchio, 2010; Peckand Adams, 2010) and non-linear models (Jenkins et al.,2003; Booker et al., 2005). Hydro-economic models alsocombine mathematical programming with socio-economicand environmental aspects to measure drought risks (Wardand Pulido-Velzquez, 2012). Econometric models fitted atthe macroeconomic level (Alcal Agull and Sancho Portero,2002; Martnez-Cach, 2004) or at the level of the irriga-tion district (Lorite et al., 2007), the irrigated farm (RubioCalvo et al., 2006) or single crops (Quiroga and Iglesias,2009) were also developed for this purpose. Other authorshave used computable general equilibrium models (CGE) orinput-output (IO) models to study the regional effects of wa-ter scarcity (Goodman, 2000; Gmez et al., 2004; Berrittellaet al., 2007; Prez y Prez and Barreiro-Hurl, 2009). Wel-fare losses of drought are also assessed by some authors,using choice experiments (Martin-Ortega and Berbel, 2010)or other innovative methods, such as happiness evaluations(Carroll et al., 2009; Frey et al., 2009).