Water, risk and economic growth

Dadson, S.

Matching water availability and demand is amongst the most pressing environmental challenges in the twenty-first century (Rockstrom et al., 2009, Vörösmarty et al., 2010). Water scarcity can limit productivity and economic growth and, at the same time, water-related natural hazards (e.g., floods, droughts, inter-annual and intra-annual variability, water-related diseases) pose risks to systems of agricultural and industrial production (Brown and Lall, 2006, Grey and Sadoff, 2007). The availability of an abundant, reliable supply of water is only one amongst many environmental factors of production, but it is a crucial component of growth in many sectors of the economy including agriculture and energy (Whittington et al., 2013). In the United States, water-related infrastructure represents approximately 10–15 percent of total infrastructure capital (Munnell, 1992). Earlier empirical studies which sought to quantify the marginal productivity of public infrastructure capital, encountered difficulties including the problem of determining the direction of causality when using reduced-form growth models based on statistical regression (Munnell, 1992, Gramlich, 1994). However, more recent work using structural growth models to account for the feedbacks between investment and growth in the wider economy has exposed more clearly the substantial contribution of infrastructure to growth (Esfahani and Ramı́rez, 2003).

Whilst the need for investment to mitigate these risks is regularly cited as a key policy target in the quest for growth, prior work to conceptualise the role of water-related growth and risk in the economy has focused on these two forms of water-related risk independently. Here the two influences are combined using a simple, coupled model of water-related investment, risk, and growth at the national level. The model suggests the existence of a context-specific threshold above which growth proceeds along an ‘S’-curve. In many cases there is a requirement for initial investment in water-related assets in order to stimulate growth. Below the threshold it is possible for a poverty trap to arise.

The presence and location of the poverty trap is context-specific and depends on the relative exposure of productive water-related assets to risk, compared with risks faced by assets in the wider economy. Exogenous changes in the level of water-related risk (e.g., climate and land cover change) can displace otherwise secure nations from a growth pathway, potentially towards the poverty trap. These results illustrate the value of accounting for environmental risk in models of economic growth and may offer guidance in the design of robust policies for investment in water-related productive assets to manage risk.

Water, risk and economic growth (pdf, 3.8 MB). The future of national infrastructure systems & economic prosperity conference, Cambridge, UK, March 27–28, 2014.