The Economic Impacts of Droughts: A Framework for Analysis

•Economic assessments of drought require a specific analytical framework.•We identify two types of economic impact: 'green water' and 'blue water' droughts.•Level and composition of hydraulic capital is a key factor in determining impacts.•Policy-making has a key importance in shaping the economic impacts of droughts.

Droughts are a specific type of natural hazard. Economic assessments of drought impacts require a framework capable of accounting for its unique and particular characteristics. Traditional conceptual frameworks used to assess the impacts of natural hazards do not adequately capture all of the factors that contribute to the economic impacts of droughts, such as: the importance of the level, and composition, of hydraulic capital; the dispersion of economic impacts across different economic activities and agents; the temporality of drought events; and the critical importance of policy-making in shaping the short and long-term economic impacts of droughts. Nor do traditional frameworks take account of the complex interaction between factors within the domain of decision-making and underlying climate conditions. We propose a new conceptual framework based around two sources of economic impact: 'green water' and 'blue water', and argue that because each source of drought impacts the economy in different ways, they must be differentiated in any assessment of economic impact.