The cost of drought: A causal study for Brazilian Municipalities

This study provides one of the first causal assessments of drought-induced economic losses at the municipal level in Brazil. Using a balanced panel of 5,538 municipalities from 2004 to 2021, we apply a staggered adoption difference-in-differences framework with municipality-clustered standard errors to estimate the medium- and long-term impacts on total GDP, formal employment, population density, and sectoral value added in agriculture, services, and industry. The results show that droughts generate persistent and economically significant contractions in municipal output and formal employment. For population density, the estimates indicate sustained post-treatment declines; however, event-study diagnostics reveal significant pre-treatment trends, suggesting that droughts amplify ongoing demographic dynamics rather. Losses are particularly pronounced in services and industry, indicating strong demand- and supply-driven spillovers beyond agriculture. Although the Northeast remains chronically exposed, the most severe contractions concentrate in municipalities in the South–Southeast, suggesting that regions with higher economic formalization and more complex production structures may be more vulnerable to recent drought shocks. These findings have direct implications for climate-adaptation strategies, highlighting the need for territorially targeted investments in water security, risk management, and economic resilience. More broadly, the results point to unequal and spatially concentrated burdens, underscoring the need for future research to examine the distributive impacts of droughts across municipalities with different socioeconomic profiles and adaptive capacities.