Droughts, dams, and economic activity

This paper examines the global effects of droughts on economic activity and the influence of local and upstream large dams on this relationship. We use spatially-specific data on drought severity and nighttime lights data as a measure of economic activity. The analysis shows that severe and extreme droughts reduce local economic activity. In preliminary analyses, local dams appear to improve the ability of an area to withstand droughts in least squares equations; however, with instrumental variables to address endogeneity in dam placement, dams appear to worsen the impacts of droughts. Upstream dams also appear to increase the sensitivity of a region’s economic activity to local drought.