OECD Environment Working Papers

This series is designed to make available to a wider readership selected studies on environmental issues prepared for use within the OECD. Authorship is usually collective, but principal authors are named. The papers are generally available only in their original language English or French with a summary in the other if available.


Implications of water scarcity for economic growth

Global freshwater demand is projected to increase substantially in the coming decades, making water one of the most fiercely contested resources on the planet. Water is linked to many economic activities, and there are complex channels through which water affects economic growth. The purpose of this report is to provide background information useful for a quantitative global assessment of the impact of water scarcity on growth using a multi-region, recursive-dynamic, Computable General Equilibrium (CGE) model. The paper provides a detailed review of the literature on water, water scarcity, sectoral activity and economic growth, and identifies the possibilities and bottlenecks in incorporating water use into a CGE framework. It covers agricultural water consumption, with special attention to irrigation, water use in energy production, and demands for water by households, industry and services. Finally, it discusses water supply and allocation. Based on the evidence assembled, there appear to have been relatively few instances in which water scarcity has significantly slowed the long term rate of national economic growth. Furthermore, in reviewing the literature on water demand, the ample opportunities for conserving water across the board are striking, including in the electric power sector, the production of industrial steam, residential consumption, and irrigated agriculture. In our opinion, the main reason why such substitution has not been more widespread to date is due to the absence of economic incentives for conservation. The presence of large inter-sectoral distortion heightens the need for general equilibrium analysis. But implementation of a global CGE model with detailed representation of water demand and supply will be a significant undertaking. It is essential to break out water from the other inputs in the CGE model, treat water as both an input and an output, and add sectoral detail, with special attention to crop irrigation. Furthermore, there are challenges in assigning appropriate values to water and specifying allocation rules for dealing with water scarcity.


Keywords: CGE model, water use, water scarcity, economic growth
JEL: Q25: Agricultural and Natural Resource Economics; Environmental and Ecological Economics / Renewable Resources and Conservation / Renewable Resources and Conservation: Water; O44: Economic Development, Innovation, Technological Change, and Growth / Economic Growth and Aggregate Productivity / Environment and Growth; Q15: Agricultural and Natural Resource Economics; Environmental and Ecological Economics / Agriculture / Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment; C68: Mathematical and Quantitative Methods / Mathematical Methods; Programming Models; Mathematical and Simulation Modeling / Computable General Equilibrium Models
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