Drying Development – The Causal Effect Droughts on (Long-Term) Economic Growth

Do droughts have a causal effect on economic development? Based on meteorological observations, I construct a global data set of drought events occurring in 183 countries over the period 1960-2018. Identifying the drought exposure for each of earth’s 0.5° x 0.5° grid cell, I maintain the local information of drought shocks which economic agents experience. To identify the causal impact of droughts on long-run economic growth, I model economic growth as an impulse-response function in contemporaneous and historical area-averaged drought exposure. Exploiting the random natural variation in weather realizations as the source for exogenous within-country variation in drought exposure, I find that higher drought exposure causes slower economic development in poor, but not in rich, countries. National incomes in poor countries decline and keep declining 16 years following a drought. Specifically, a one standard deviation increase in drought exposure lowers GDP p.c. by 1.1 percentage points 16 years later. To understood why populations successfully adapt to climatic hazards in some dimensions and fail in others and which factors contribute to (successful) adaptation, I examine through which channels droughts affect economic development and estimate the extent of adaptation to drought.