Is it better to combat drought or proactively counteract it? The Food and Agriculture Organization of the United Nations (FAO) has prepared a comprehensive, two-level analysis of the economic aspects of drought management. Its goal is to support government and local government bodies in preparing risk plans based on realistic costs and benefits and identifying the most cost-effective investment solutions.
The basic dilemma – prevent or combat?
Rational management of drought is a necessity – it is one of the costliest natural disasters, and climate forecasts predict a significant increase in its frequency, intensity and extent. The situation is not made any easier by the fact that the beginning and end of a drought are difficult to identify, and the duration can be counted in both months and years. The short- and long-term consequences are cascading and affect the social, economic and environmental spheres.
Proactive drought management involves taking measures to strengthen an area’s resilience to a prolonged lack of rainfall. Examples of activities include. Construction of irrigation systems, improvement of land quality or development of crop species that tolerate low moisture levels. This group of steps also includes early warning systems for farmers or micro-lending and insurance programs.
Reactive drought management focuses on recovery and mitigation of the socioeconomic effects of the disaster that has already occurred. The talk includes. about food support and drinking water supplies for the most drought-affected communities, livestock subsidies to regenerate herds or tax breaks. So far, this model has been dominant, but there are growing arguments for the need to change to a proactive approach.
Drought management – costs
Efficient allocation of available public funds is a dilemma for every government and local government. Analyzing the costs associated with inaction in the face of drought risk and the subsequent leveling of its effects is key to justifying planned investments, according to the FAO. Responsible drought management must take into account all the costs associated with it – direct and indirect, but also intangible and transactional. The latter include, among others. Administrative, legal and negotiation costs, partner search, and expenses related to technology transformation.
The direct costs of inaction primarily include losses related to the impact of drought on agricultural production. If preventive measures are taken early enough, expenditures for research, development, construction and maintenance of new infrastructure or systems should be included in the direct cost analysis. Indirect costs, on the other hand, are mainly side effects related to the producer and consumer markets. They are much more difficult to estimate and understand, which is why they are often overlooked in economic feasibility analyses of projects.
An example of the indirect costs of drought is the cascade of problems associated with lower agricultural yields. The supply of raw materials for the food sector is decreasing, leading to higher prices and/or reduced production. Farmers who had lower profits next season will invest less in fertilizers and crop protection products, which could prolong the crop failure problem. All this should be counted as part of the cost of not taking countermeasures.
Benefits of drought management
One of the main reasons for insufficient investment in proactive ways to prevent drought is the difficulty of assessing their tangible benefits. According to FAO experts, avoided losses, such as in agriculture, should not be seen as the only tangible gain. Even if the predicted drought does not occur, after all, investment can bring a range of other benefits, including stimulation of economic potential, savings, and improved social or environmental well-being.
For example, early humanitarian aid in drought-stricken Kenya will (according to the authors of the analysis) save $381 million. in a 15-year timeframe compared to when help is offered too late. Similar findings also apply to other countries in the Horn of Africa – Ethiopia and Somalia.
own elaboration based on Economic assessment of drought risk management, FAO, 2024
Economic analysis of the cost of drought
The approach presented in the FAO study includes two levels of evaluation. The first is to analyze all the aforementioned costs incurred if proactive measures are taken and if they are not. The difference of the two is the net benefit. Drought management should first look for options in which these benefits are positive.
The second level of evaluation takes into account the fact that sources of cost information are very often limited, making reliable economic analysis difficult. Thus, it is proposed to estimate the maximum potential benefit and the lowest probability of loss for each of the viable alternatives (the so-called. maxmin analysis). Losses can include both income losses and lost opportunities to increase income, as well as the negative consequences of not choosing the best of the favorable solutions identified in the first level of analysis.
Case study: Philippines
In 2015-2016, the Philippines was hit by a drought that caused 85 percent damage. national territory and involved the declaration of a state of calamity in nine provinces. The impact has affected 400,000. households and more than 556,000. ha of agricultural land. Using this disaster as an example, FAO experts demonstrated the operation of a two-tiered drought management assessment.
The calculations were prepared for three scenarios – in addition to the real course of the drought, estimates for the moderate (50%) and low severity (20%) variants were also included. The direct costs of inaction were defined as losses in agricultural production. Reduced levels of rice consumption in the community were taken as a measure of indirect costs, while cascading costs were defined as losses in employment for agricultural workers and reductions in their earnings. Expenses for taking proactive measures, however, included the installation and maintenance of drip irrigation.
What did it turn out to be? If the assessment were to end solely on the situation in which the drought actually occurred, the conclusions would not be complete or authoritative. However, if you consider a scenario with and without drought, the benefits of being proactive are clear. Drip irrigation not only prevents crop failure, but also increases crop productivity and reduces overall water use in agriculture. Both of these factors can easily be translated into financial benefits.
Proactive measures are still underestimated!
It is clear from the report prepared by the FAO that drought management requires a multi-factor cost-benefit analysis that includes various options for how the situation will unfold and various aspects, not just monetary. On the one hand, we have the classic costs of not taking early remedial action and having to repair drought damage; on the other, the costs of proactive measures, taken in advance but usually underestimated.
The economic analysis clearly shows that reducing vulnerabilities and strengthening the resilience of systems results in reduced drought damage costs and recovery expenses. Proactive investments have more potential, but the key is to choose the most rational scenarios. This is what the two-tiered drought management assessment is designed to do. Strategists, decision-makers and planners should learn to identify solutions that are most economically practical and take into account the specifics of the country, abandoning measures whose economic feasibility is low.