# 6. The macroeconomic impact of climate shocks in Uruguay

## 6.1 Droughts

**Droughts can have a significant and long-lasting impact on the livestock and crops sectors, particularly in regions where agriculture is a primary source of income and food supply** . The recovery time for each sector can vary depending on a range of factors, including the severity and duration of the drought, the availability of resources, and the resilience of the local ecosystem. In some cases, recovery can take several years or even decades, particularly in regions where the land has been severely degraded or where farmers have lost significant amounts of livestock. In other cases, recovery can be relatively quick, particularly if farmers have access to resources and technologies that can help them manage the effects of drought. However, it is important to note that even after the immediate effects of drought have been mitigated, the long-term effects can linger, affecting the productivity and profitability of the sector for years to come.

### **Direct and indirect second-round effects on other sectors along the value chain and through general**

**equilibrium effects are also sizeable** . The crops sector is a large contributor to intermediate inputs into production in other sectors of the economy (goods from one industry that are used in the production process of another industry). Of total crops outputs, 10 percent are intermediate inputs into the livestock sector (for e.g., feed crops) and around 25 percent are intermediate inputs into the industry sector which includes food manufacturing (Table 1). Similarly, of total livestock production, 77 percent of output is an intermediate input into the industry sector, mostly into food manufacturing, but also hides and leather products. L&A raw outputs are not large inputs into the services sectors – partly because hospitality (which includes restaurants and cafes) is a small portion of total services, but also because the hospitality sector is more likely to use _transformed_ livestock and agriculture products from the manufacturing sector rather than the raw outputs. Through their intermediate inputs into manufacturing and raw commodity exports, agriculture and livestock represent a sizeable part of the Uruguayan economy. Given this, and the secondround importance of food manufacturing and its downstream industries and exports, the macroeconomic impact of droughts exceeds the direct impact of L&A over GDP.

**Table 1: Selected IO** **<u>shares for Crops and Livestock industries</u>**

||**Crops**<br>**Share of out**|**Livestock**<br>**puts to other sec**|**Industry**<br>**tors (as interme**|**Services**<br>**diate inputs)**|**Household**<br>**consumption**<br>**Share of outputs t**|**Exports**<br>**o final demand**|
|---|---|---|---|---|---|---|
|**Crops**|22%|10%|25%|1%|13%|21%|
|**Livestock**|0%|5%|77%|0%|4%|9%|
|**Industry**|2%|2%|16%|19%|22%|35%|

Source: BCU 2016

**We first perform two quantitative exercises to assess the macroeconomic impact of droughts** . First, we analyze the effects of a single drought event to illustrate the staggered direct impacts on L&A and the magnitude of the overall impact on relevant macroeconomic variables and their recovery dynamics. We also assess the distributional implications of such a shock. Second, we run 1,000 stochastic simulations out to year 2100, drawing from a distribution of droughts consistent with the loss curves presented on Figure 7. This illustrates probabilistic paths for an economy subject to climate shocks alone against a baseline of no climate shocks, and how that could change under different climate scenarios.

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