In 2018, South Africa was reeling from a three-year-long drought, the worst in a century. As water levels in dams dropped dangerously to 30 percent, the government declared this drought a national disaster and imposed water restrictions in major cities, mainly Cape Town, leaving the Western Cape with 10 percent of dam reservoir water unsuitable for drinking. The drought caused economic shocks across the country.

While agriculture provides only 750,000 jobs and makes up slightly less than 5 percent of South Africa’s GDP, it has indirect links to most other industries. The drought damaged most commercial and staple crops and forced breeders to slaughter cattle, causing a 6.4 percent increase in food prices.

Over half of the farmers in the formal labor force lost their jobs. Agricultural growers’ losses in 2018 were estimated at R10 billion (€0.7 billion). The combined effects of the decline in agricultural exports and the increase in wheat imports are estimated to reduce the trade balance by R20 billion (€1.4 billion). Since the Western Cape accounts for 13.3 percent of overall GDP, growth in 2018 could potentially drop to 0.8 percent from its initial estimate of 1.1 percent.

Questions

Why was the South African economy harshly affected by the supply shock caused by the drought even though agriculture comprises a relatively small portion of GDP?

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