Disentangling the social, macro and micro-economic effects of agricultural droughts: An application to Spanish irrigated agriculture

Abstract

Droughts affect irrigated agricultural production, reducing economic output and creating social stress. The economic consequences of droughts begin at the farm level, reaching the macro level along the production chain value. To the extent that crop markets adjust to the supply shocks and because droughts do not affect all sectors at the same time and with the same severity, it is instructive to conduct economic evaluations of drought effects at both micro- and macro-economic levels. The objective of this paper is to estimate the impact of water availability variations on the crops’ market values, the total value added of the agricultural sector and farm employment. We run regression models for these three economic variables and 14 provinces in Spain, comprising more than 50% of the Spanish irrigated area. Results show that the macro economic variables are only sensitive to water availability in the provinces where aridity and water stress are more severe. The value of the harvests obtained in irrigated land is largely explained by water availability. The time trend explains the largest percentage of variance of the three economic variables, including micro and macro