The main specification allows for arbitrary serial correlation of errors across observations from the same Level 1 administrative level or the same country. This approach assumes no correlation in the error structure for grid cells in different areas, even though they may be proximate in space. In Appendix Table 2, we relax this assumption and account for spatial autocorrelation by using spatially corrected Conley standard errors (Conley, 1999). Due to computation limits, we focus attention on the grid cells in the South Asia region (~1,700 cells) among the ~60,000 available for cell-level regression. We implement the procedure using the acreg package developed by Colella et al. (2019). The results continue to remain significant at the 5 percent level.

# 5. Policy Implications and Way Forward

While the evidence points to water scarcity as a growing problem, it is floods that have captured the attention of policy makers and researchers. This may be a consequence of the greater visibility of floods, which are rapid, high-impact events that destroy infrastructure, damage homes, and disrupt livelihoods. They are difficult to ignore. Consequently, a flood typically triggers a rapid policy response through the array of relief systems available within countries, with the backstop support of international relief agencies (Botzen et al., 2019). Perhaps as a result, recent research suggests that even when the short-term impacts of a flood are severe and alarming, economic recovery can come rapidly too (Kocornik-Mina et al., 2020; Felbermayr et al., 2022). Droughts, on the other hand, are spatially diffuse, slow onset natural disasters that are harder to identify. Their impacts can emerge gradually and less visibly and perhaps as a consequence the trigger for a policy response is less evident (Damania et al., 2017). At the same time, these long, silent crises can have much greater economic impact globally than other disasters.

The findings of this paper have several implications for development practitioners. First, they are a starting point for understanding and appreciating the vulnerability to drought within and between countries. The spatial differences in economic impacts need unpacking to gain a more nuanced understanding toward the drivers of these vulnerabilities and how droughts manifest in a particular economy.

Second, they send a clear message that the developing world has been ill-prepared for managing the risks and impacts of droughts over the past few decades. Climate change is expected to lead to greater drought severity in many regions. Without significant improvements to how policy makers manage droughts, the world is on a path to even greater losses in economic growth and development gains due to these prolonged dry shocks.

And third, the results highlight the significance of green water (soil moisture and forests) in mitigating drought impacts, which has been overlooked in economic deliberations. It highlights the need for stewardship of forests and other natural capital that affect the hydrological cycle but are seldom associated with the growth impacts of droughts. As the climate heats up, many regions will face less predictable local rain. There is already evidence that there is a drying trend across much of the developing world. This makes the dependable waters of soils, groundwater and rivers, and the well-managed forests that nurture them frontline climate warriors.

Countries need to proactively invest to address the vulnerabilities through upgrades in information systems, institutions, and infrastructure that build drought resilience. There are several specific ways in which the World Bank and other development partners can support countries in addressing these challenges and needs.