Action against Drought: Risk Management versus Crisis Management

Drought risk management includes the following elements: drought preparedness, mitigation of drought risks, and forecasting and early warning of droughts. Drought risk assessments serve as the basis for drought preparedness and drought risk mitigation (Hayes et al. 2004). These feed into drought management plans and identify specific ex ante and ex post actions (Alexander 2002).

BOX 5.1 DROUGHT IMPACTS AND RESPONSES IN URBAN AREAS

Although agriculture continues to be the major water user globally, the impacts and costs of droughts can be extensive in urban areas. In addition to specific industries (e.g., food and beverages), this also puts the service sector (e.g., tourism) at risk and could spark social tensions. The urban costs of droughts will continue to grow in the future because of climate change and expanding urbanization, and are magnified by relatively higher levels of returns from urban compared with agricultural water use. Therefore, drought preparedness and mitigation efforts in urban areas are important.

Several ways to increase urban drought resilience have been suggested. For example, reducing the overall costs of droughts may involve water transfers from low-value agricultural uses to higher-value urban uses during drought periods. Similarly, drought costs could be substantially reduced in the urban areas of northern California by purchasing water from lower-value agricultural uses.

Drought preparedness and mitigation plans in urban areas include increasing water conservation through appropriate policies and infrastructures (see Chapter 13). Water conservation measures could include nonmarket and market mechanisms. Nonmarket mechanisms usually involve water conservation education and explicit restrictions on specific water uses, while market-based mechanisms involve increasing water prices during droughts. Nonmarket mechanisms may be associated with significant transaction costs to enforce compliance, as well as loss of revenues to water utilities. Increasing the price of water during drought periods, on the other hand, may pose challenges in terms of social equity in water access. Beyond their immediate shortterm impacts, droughts may also have longer-term indirect impacts on urban economies and livelihoods. For example, water conservation measures and higher water pricing may encourage a transition to more water-efficient home appliances (e.g., washing machines, dishwashers, showerheads, and toilets).

Sources: Moncur, J.E., Water Resour. Res., 23(3), 393-398, 1987; Michelsen, A.M, and Young, R.A., Am. J. Agric. Econ., 75(4), 1010-1020, 1993; Dixon, L., et al., Drought Management Policies and Economic Effects in Urban Areas of California, 1987-1992, Rand Corporation, Santa Monica, CA, 1996; Rosegrant, M.W., et al., Annu. Rev. Environ. Resour., 34(1), 205, 2009; Harou, J.J., et al., Water Resour. Res., 46(5), 2010; Sauri, D., Annu. Rev. Environ. Resour., 38, 227-248, 2013; Guneralp, B., et al., Global Environ. Change, 31, 217-225, 2015.

Drought risk management activities concern reducing vulnerability to droughts and are conducted at various scales. The micro-level actions involving households, communities, and individual businesses are often underappreciated but, arguably, are the most important elements of drought risk mitigation. For example:

  • • More secure land tenure and better access to electricity and agricultural extension were found to facilitate the adoption of drought risk mitigation practices among agricultural households in Bangladesh (Alam 2015). Similarly, Kusunose and Lybbert (2014) found that access to secure land tenure, markets, and credit played a major role in helping farmers cope with droughts in Morocco.
  • • Holden and Shiferaw (2004) found that improved access to credit helped farming households in Ethiopia to cope better with drought impacts since they no longer needed to divest their productive assets. Moreover, since many rural households in Ethiopia tend to channel their savings into livestock, which may be wiped out during droughts, developing access to financial services and alternative savings mechanisms could also help to mitigate drought risk.
  • • Land use change and modification of cropping patterns are frequently cited as ways to build resilience against droughts (Lei et al. 2014 in China; Deressa et al. 2009 in Ethiopia; Huntjens et al. 2010 in Europe; Willaume et al. 2014 in France).
  • • Dono and Mazzapicchio (2010) showed that agricultural producers in Italy's Cuga hydrographic basin could minimize the impact of future droughts by tapping into groundwater resources.
  • • Another frequently used drought risk mitigation strategy is to diversify livelihoods by adopting off-farm activities (Sun and Yang 2012 in China; Kochar 1999 in India; Kinsey et al. 1998 in Zimbabwe), and divesting of livestock assets (Kinsey et al. 1998 in Zimbabwe; Reardon and Taylor 1996 in Burkina Faso).
  • • Finally, UNDP (2014) found that a strong asset base and diversified risk management options were among the key characteristics of drought-resilient households in Kenya and Uganda. These aspects were due primarily to the households having better education and greater knowledge of coping actions against various hazards. This allowed them to diversify their income sources.

At the macro level, activities contributing to the mitigation of drought risks mostly involve institutional and policy measures. Booker et al. (2005) found that the establishment of interregional water markets could reduce drought costs by 20-30 percent in the US Rio Grande basin. Other examples include the development of an early warning system (Pulwarty and Sivakumar 2014), drought preparedness plans, increased water supply by investing in water infrastructure (Zilberman et al. 2011), demand reduction (e.g., water conservation programs) (Taylor et al. 2015), and crop insurance.

Although drought insurance is an effective and proactive measure, the development of formal drought insurance mechanisms is hindered in many developing countries by a number of obstacles, including high transaction costs, asymmetric information, and adverse selection (OECD 2016). At the same time, the covariate nature of droughts decreases the effectiveness of traditional community and social network-based informal risk sharing (Kusunose and Lybbert 2014). On the other hand, insurance can actually discourage ex ante drought mitigation behavior. However, this depends on the type of insurance used. In general, two types of insurance are used to ensure against drought damage in agriculture. Indemnity-based insurance protects against predefined losses, while index-based insurance protects against predefined risk events such as droughts (Barnett et al. 2008; GlobalAgRisk 2012).

Specifically, under indemnity-based insurance, crop producers are compensated for their drought-induced losses after a formal assessment of the extent, often compared with their preexisting productivity levels (Meherette 2009). As a result, the transaction costs of indemnity-based insurance schemes are high and they are more suitable for large-scale farming operations.

Index-based insurance schemes use shortfalls in rainfall, temperature, or soil moisture (without formal on-farm assessments of the extent of the damage) to trigger payouts to insured farmers. With significantly lower transaction costs, index-based insurance could be more suitable for smallholder farmers (Barnett et al. 2008; Meherette 2009). Index-based insurance, however, requires a well-functioning and relatively dense infrastructure of weather monitoring stations. Presently, the lack of such infrastructure presents a barrier to the wider rollout of index-based insurance schemes in many developing countries. Under index-based insurance, insurance payouts are not linked to actual damage, but to deviations in weather parameters. Insured farmers, therefore, would continue to have an incentive to take measures to limit the extent of their losses due to droughts. Moreover, index-based approaches allow for insurance against the indirect costs of droughts. For example, agro processors could take out index-based insurance, while they may find traditional indemnity-based insurance is not applicable to them within the context of droughts (GlobalAgRisk 2012).

A limitation of index-based insurance lies in appropriate identification of risk event thresholds that trigger payments, that is, minimizing the so- called basis risk, when the realized weather parameters in the area covered by the same index could be very heterogeneous (Barnett and Mahul 2007). If the threshold is too high, it may not cover some of the losses. If it is too low, the longer-term viability of the insurance scheme may be jeopardized. Identification of optimal payment trigger thresholds also requires the availability of sufficient past data to construct the index. Naturally, depending on the context, a blend of both index- and indemnity-based insurance approaches could be used.

Beyond local and national levels, international coordination of drought risk mitigation and drought responses are equally important in transboundary river basins (Cooley et al. 2009). Inadequate management of transboundary water systems during droughts could magnify both direct and indirect costs of droughts, especially in downstream countries. The existing transboundary agreements on water allocation may need to be reviewed for their flexibility to respond adequately to the increasing frequency of hydrological droughts under climate change (Fischhendler 2004). For example, whether the transboundary water allocation schemes are based on predefined minimum flow deliveries from upstream to downstream countries or on percentage quotas could have substantially different impacts during droughts (Hamner and Wolf 1998). Regional drought risk mitigation efforts would include increasing the flexibility of transboundary water allocation regimes in response to droughts (McCaffrey 2003). This includes the operation of large-scale water reservoirs, which could have considerable impacts on upstream-downstream water flow regimes (Lopez-Moreno et al. 2009). Transboundary water management institutions could play a vital role in coordinating such responses to droughts (Cooley et al. 2009), and efforts are needed to promote the development of national and transboundary drought preparedness plans, assuring they are consistent in cases when they are interdependent.

As it is not possible or economically efficient to eliminate drought vulnerability completely, droughts will continue to affect society to some extent. It is, therefore, important to identify more efficient drought responses. Crisis management measures may include impact assessments, response, and reconstruction, involving such tools as drought relief funds, low-interest loans, transportation subsidies for livestock and livestock feed, provision of food, water transport, and drilling wells for irrigation and public water supplies (Wilhite 2000). Several studies identify ways to improve the efficiency of drought response measures. For example, pooling resources at the regional level in sub-Saharan Africa was found to be an effective strategy to hasten drought relief and reduce its costs (Clarke and Hill 2013), although this may not reduce future drought vulnerability. Experiences from Ethiopia showed that employment generation schemes could be effective in terms of immediate aid and strengthening local resilience against future droughts. These schemes paid drought-affected populations to work in drought mitigation activities (e.g., building terraces and check dams) rather than giving direct food relief (IFRC 2003).

Since it is difficult to evaluate the costs of droughts, it is even more challenging to compare the costs and benefits of proactive risk management versus reactive crisis management. Lack of comprehensive data on drought costs also makes it difficult to assess the effectiveness of mitigation investments (FEMA 1997). Moreover, because of the limited number of historical mitigation investments, any ex ante assessments of the rate of return from future mitigation actions will depend on modeling assumptions, which may not always prove to be consistent with the actual performance of the investments. However, once mitigation investments are made, governments and donors will want to know the returns from their investments. This should lead to additional impact assessments being conducted and will identify more efficient drought risk mitigation options (Changnon 2003). Most of the relevant past studies investigated the impact of adopting very specific drought mitigation options, where data were available and the uncertainty of assumptions could be reduced—for example, the impact of water-saving technologies (Ward 2014) or policies such as water trading (Booker et al. 2005; Ward et al. 2006). There is a need for additional such case studies. While it is plausible that drought risk management approaches are more efficient than crisis management measures, this review found a lack of rigorous empirical evidence to support this argument.

 
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