Risk management instruments supporting drought planning and policy

Abstract

This chapter looks at the role of risk-sharing mechanisms to help alleviate and reduce the economic and social consequences of droughts and water scarcity periods. We group various instruments according to different criterions, and review their potential and practical difficulties. By categorising the reviewed instruments under the stages of drought on which are best applied or referring to whether they are targeted to agricultural and operational droughts, we provide a framework for discussing their merits and drawbacks. This same framework is also used to evaluate the potential of each instrument and the evidence available to support it. We conclude by highlighting the limitation of economic instruments to manage drought risks. In part, this is because avoiding drought effects has public good properties. The chapter concludes, based on the available evidence, that there is still potential to manage part of the drought risks using financial instruments and insurance.