Drought effects on the Iranian economy: a computable general equilibrium approach

In the last two decades, recurring drought becomes a challenge for Iran’s economy, which is located in a drought-prone area, and it has been expected that drought will become more severe and frequent in the future. In this paper, a computable general equilibrium model was applied to give a full scope of drought economic impacts on Iran's economy. In order to model the effects of droughts as a shock to the economy, water entered into the production function as one of the primary factors. Since drought can lead to health problems, the health sector was separated from the service sector to study the effects of drought events on the health sector. The numerical simulations reveal that drought can lead to lower GDP levels up to 7%. Thus, it can have negative impacts on economic growth. Moreover, other factors such as household savings and income can decrease up to 43% and 12% in drought periods, respectively. These adverse effects will lead to a decline in welfare as a socio-economic consequence of drought. Furthermore, demand for health products will rise around 47%; this can refer to some kinds of diseases followed by droughts. Policies and applicable legislation should be introduced to improve water supply usage and develop efficient methods to save water resources, especially in the agriculture sector, which consumes the most significant part of water.