CHAPTER 3.

ECONOMIC IMPACTS OF DROUGHT

Drought historically has caused direct and indirect economic, social, and environmental problems throughout the world.5 Some of these problems are difficult to avoid, even with early preparation. However, other ills are avoidable, especially those stemming from poor economic planning and delayed drought response. This section establishes a baseline of typical economic consequences of drought. The specific impacts of the 1991/92 drought in Southern Africa can be measured against this baseline to assess reducible if not avoidable costs.

Drought-induced economic losses include those resulting from impaired dairy and beef, crop, timber, and fishery production; lack of power for industrial use; decline in agriculture-dependent industries; increased unemployment in agriculture and other drought-affected industries; strain on financial institutions (capital shortfalls, credit risks); loss of revenue to state and local governments (from reduced tax base); reduced navigability of waterways; and increased costs for transport of water and development of new sources (Wilhite and Glantz, 1985). Such effects are felt by municipalities, business and industry, agricultural enterprises, households and individuals, and governments.

3.1. Economic Development and the Effects of Drought

One way to measure the impact of a disaster is to look at changes in Gross National Product (GNP) or Gross Domestic Product (GDP). Over the last three decades, specific droughts have reduced GNP by at least one percent in countries in East Africa, Europe, North America, South America, Southeastern Asia/Australia, Southern Asia, and West Africa (World Conference on Disaster Reduction, 1994). Measures of GDP over time show that economic downturns often materialize after a drought. For example, in the year after the 1984 droughts in Sub-Saharan Africa, the GDP for Mali, Niger, and Ethiopia fell by 9 percent, 18 percent, and 7 percent, respectively. Zimbabwe's GDP declined 3 percent after the 1983 drought (Benson and Clay, 1994).

Because most Sub-Saharan African economies are driven primarily by agriculture, the effects of meteorological droughts are direct and can be large. In such countries, a majority of the population is employed in agriculture or pastoralism, and the sector's cash crops contribute to foreign-exchange earnings. Thus, the ramifications of drought are extended throughout the economy. Zimbabwe faced enormous economic losses as a result of the 1982/83 drought, including US$ 360 million in direct agricultural losses and US$ 120 million in drought relief costs (Ogallo, 1987). The agricultural losses were experienced by both rural and commercial farmers, as a lack of rains hampered the maize crop and shortage of irrigation water caused a sharp decline in commercial wheat production (one of Zimbabwe's more important export crops).

Stage of Development

o In the past, governments have maintained or increased cash crop production, even when food crops were badly affected by drought.

o Other exogenous factors (besides drought) can affect developing economies. These include major economic reforms, changes in commodity and oil prices, booms and slumps in the world economy and civil or international conflict.

Economic impacts of drought are influenced by a country's stage of economic development. Least developed or semi-subsistence economies have large agricultural sectors which are shaken immediately by meteorological or agricultural drought. The result is a decline in GDP, agricultural exports, employment opportunities, and domestic purchasing power. The remainder of the economy tends to be less impacted because of a lack of linkages. A similar situation arises in dualistic countries, which have large capital-intensive extractive sectors not closely linked to other sectors such as agriculture. In Niger (a dualistic economy), GDP fell by 17 percent in 1984, although the agricultural sector declined 35 percent. In the same year, industry and manufacturing output increased. Economic recovery may occur relatively quickly in these countries because of simplified sectoral needs (SADC, 1993). It is important to note that in the past, governments maintained or increased cash crop production, even though the food crop activities were badly affected by drought.

A semi-subsistence economy typically moves to the next stage with greater manufacturing of simple products from domestic raw materials (e.g. textiles and food). Natural resource extraction, especially mining, also contributes to diversification. During this economic transition, the number of urban households increases, a population segment that is more dependent on purchased food, and hence more vulnerable to drought conditions. But because of increased output levels, the economy may start to see a relative decline in the overall impact of drought on GDP (SADC, 1993).

Developing or intermediate economies are the most vulnerable to drought. Economic diversity occurs through development of labor-intensive, low-tech manufacturing and industrial sectors. There often is a dependency on domestic natural resources and imported capital. Zambia, Nigeria, and Zimbabwe are examples of this middle economic type. In Zimbabwe, 1992 GDP fell by eight percent in real terms with the agricultural sector directly accounting for only a three percent decline in GDP. This illustrates agriculture's importance within the overall economy. Complex economies (e.g., RSA) have smaller agricultural sectors relative to the economy as a whole, and drought shocks are more easily absorbed.

In addition to a country's stage of economic development (which can be measured via GDP), vulnerability to drought is also influenced by the proportion of rainfed agriculture and livestock production in the GDP, level of exports, the amount of arid land, and the levels of household self-provisioning (Benson and Clay, 1994). With the interaction of so many factors, measuring the impacts of drought can be problematic:

Other positive and negative exogenous factors [i.e. other than drought] may also be impacting on the economy, for example, major economic reforms, changes in commodity export prices and oil prices, booms and slumps in the world economy and civil or international conflict (SADC, 1993:67).

Figure 3.1 presents a view of how drought can influence a nation's economy.

3.2. Economic Reform and Drought Join Forces

o The 1991/92 drought caught the countries of Southern Africa by surprise. It also caught the economic reform efforts in several countries by surprise, particularly in Zimbabwe and Zambia.

The 1991/92 drought that caught SADC countries and RSA by "surprise" caught several countries' economic reform efforts by "surprise" as well, especially those in Zimbabwe and Zambia. The World Bank and IMF traditionally have not factored in the impacts of disasters such as drought or civil conflict in their stabilization or adjustment measures. For a brief discussion of the history, purpose, and components of economic structural adjustment programs, refer to Appendix A.

Zimbabwe's ESAP

o Leading into the 1991/92 drought, economic policy was already seeking improvement in the budget deficit and foreign exchange position. Production of cash crops like tobacco and cotton was encouraged, partially through a decline in real maize producer prices.

o Some experts believe economic reform pressures drove Zimbabwe to sell its surplus maize stock in order to reduce storage costs and reduce the budget deficit. This may have made Zimbabwe more vulnerable to the impacts of the drought.

From the late 1980s through 1990, Zimbabwe's government (GOZ) established a "home-grown," or self-sufficient, economic recovery program. It had decided to reform without outside help, after it failed to implement a World Bank program in the early 1980s and lost donor support. Although it was not receiving external financial support during this time, the World Bank in collaboration with the Confederation for Zimbabwe Industrialists and the Zimbabwe National Chamber of Commerce, still influenced its direction (Skalnes, 1993).

Forces behind the decision to reform included a stagnant economy that could not absorb the growing number of graduates, received little investment to spur the industrial sector, and could not run at full capacity because of a lack of foreign exchange to import spares and inputs. In addition, during the 1980s, the GOZ was spending twice the "prudent" level to sustain economic growth. Spending was used to assist Mozambique in its war against RSA-backed RENAMO forces, to support its human resources with health and education services, and also to provide/manage food supplies for its domestic population as well as the SADC region (Thompson, 1993).

Leading into the 1991/92 drought, economic policy was already seeking improvement in the budget deficit and foreign exchange position. Production of cash crops like tobacco and cotton was encouraged, partially through a decline in real maize producer prices. In addition, 1990/91 was considered a drought year -- with below normal rainfall and a relatively poor maize harvest of 1,586,000 tonnes.

At a time when strategic maize reserves were critically low, the World Bank approved the official IMF-World Bank directed ESAP in April 1991. The ESAP expanded the government's initial efforts, carrying with it IMF-World Bank-arranged funds that were tied to highly specific reform measures and targets. In July 1991, the Finance Minister, Bernard Chidzero, referred in his budget to the lifting of price controls, improvement in foreign exchange available to industry, and relaxation of import controls ("Zimbabwe: IMF Backs Market Reform," 1991).

Official ESAP steps taken in 1991 included the gradual liberalization of imports, a currency devaluation, and attempts to reduce government expenditures by retrenching civil servants and cutting parastatals' costs. The intent of import liberalization, known as Open General Import License (OGIL), was to reduce import tariffs, thus opening the economy up to more competition and specifically to imports of machinery, technology, and capital improvements. Such a measure requires proper sequencing with exchange rate reform.

Currency devaluation is a very common policy used in economic reform packages. It helps bring exchange rates into closer line with the international market, and enhances exports. Stoneman (1992) comments that an IMF-mandated currency devaluation of 25 percent came in September 1991. Jayne and Chisvo (1990) note a 1990 depreciation, which precluded any upgrading of farm machinery or equipment, since imports became more expensive. Skalnes (1992) writes about a "latter 1991" 40 percent devaluation. United Nations and World Bank statistics indicate a 30 percent devaluation 1990 to 1991, falling somewhere in the middle of these other estimates. It is safe to assume that at least one, if not several, ESAP-inspired devaluations occurred in 1991.

Within the agricultural sector, marketing boards were to be restructured to make them more market-oriented. Depot locations, sizes, and numbers were altered. And, for many crops (excluding maize), producers were allowed to sell to the highest bidder, while consumers could buy from marketing boards or other sellers (Masanzu, 1992).

The goals of the ESAP seemed to be tied to the philosophy that "parastatal efficiency supersedes food security," as summarized by Stoneman (1992). Some experts strongly feel that economic reform pressures drove the sale of Zimbabwe's surplus maize stock in order to reduce storage costs and reach an annual "balancing of the books" (ORAP, April 1992). Other experts see the choice as a political one, not tied to specific directives from the World Bank and IMF.

Some economists have pointed out that the ESAP's import liberalization and devaluation combined "non-virtuously," because even though the government reduced borrowing and spending, inflation still spiraled upward, contrary to the reform program's plans. The poor sequencing of reforms may have made Zimbabwe more vulnerable to drought.

By the end of 1991, the ESAP planned to place 30 percent of imports on open license. Major goals for 1994/95 included cutting the budget deficit of Z$1.5 billion in half by 1994/95, to five percent of GDP, and terminating the employment of 26,000 civil servants (twenty-five percent of the total). The ESAP sought to bring inflation down to ten percent per year by 1995 (Shreeve, 1991). An optimistic growth rate of five percent per annum was sought between 1990 and 1995 (Sachikonye, 1992). As mentioned in an April 1991 issue of the African Recorder, "Mr. Mugabe is having to tread a fine line between satisfying popular aspirations and laying the foundations of a strong economy" (8361).

Zambia's Reform Efforts

o Economic reform measures included cutting government expenditures. One effect of this was a 25 percent decrease in maize production in 1991 due to a lack of inputs such as fertilizer. The loss of income from the 1990/91 crop led to less area being planted for the 1991/92 crop season. In addition, farmers faced low producer prices in 1991, also a result of economic reform efforts.

After several failed structural adjustment efforts during the 1970s, Zambia launched another effort in 1985. It sought to tighten domestic financial policies, establish market exchange rates, free consumer goods prices, and reform tax, tariff, and public enterprise policies. Declining copper prices stalled the program, currency values dropped 150 percent in 18 months, economic growth was less than one percent per year, inflation rose above 50 percent, budget and external current deficits increased, and foreign exchange holdings declined. Finally, after food riots broke out in 1987 in response to higher maize meal prices, the government halted this reform program.

Zambia re-established IMF-backed reform in 1990, when it accepted financial terms for removing price controls and devaluing its currency. Some of the reforms were similar to those of Zimbabwe, especially the liberalization component and the focus on cutting government expenditures. One effect of the latter was the 25 percent decrease in maize production in 1991. This arose from the inability of the provincial and district unions to market crop inputs such as fertilizer, because of financial constraints (Zambia Food Security Bulletin, 1992a, b, c). The reduced production caused less income from the 1990/91 crop and so less area was planted for the 1991/92 crop season. Maize farmers also faced low producer prices in 1991, a reflection of the ESAP's market liberalization, and another cause of poor production (SADCC/REWS, 1992).

Because Zambian President Kaunda was facing elections in 1991, any ESAP measures that threatened his success were hampered, and the country's economic state worsened. The ESAP's loans were suspended when Zambia failed to adequately follow through with liberalization. By 1992, after President Chiluba was elected, subsidies placed on maize had been sharply reduced, spurred by the drought and by political pressures (Shawa, 1993). Up to this point, Zambia's processed maize meal prices were the lowest in the region, creating a large smuggling trade and another reason to dismantle subsidies.

3.3. Summary

o In the long-term, economic reform efforts probably increase government resilience to drought in that they strengthen overall economic performance. In the short-term, however, drought can impede reform and reform can magnify the adverse effects of drought.

Drought can have dramatic deleterious effects on nations' economies, which tend to reveal themselves immediately and are short-term in duration. Simple and intermediate economies are especially susceptible, because they are driven by a large agricultural sector. Food availability and prices, employment, access to imports, government expenditures, availability of social services, and credit sources are all influenced by drought. Countries unable to hurdle drought events and achieve longer-term economic development, suffer longer-range effects of drought.

As Benson and Clay (1994:44) note, "In the longer term, successful (economic) adjustment probably increases economic resilience to drought, particularly to the extent that it strengthens overall economic performance." However, in the short-run, the interactions between reform and drought are not always complementary. Drought can impede reform, and reform can magnify the adverse effects of drought -- factors to consider when assessing drought response efforts, and the potential benefits of ENSO forecasting.



Foot Notes

5. For an example of drought impacts in China, see Wang and Mearns (1987); in India see Sinha (1987); in Northeast Brazil, see Magalhaes and Glantz (1992); in Ethiopia, see Webb and von Bruan (1994).

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