Water and Economic Growth

Several hydrological studies forecast a global problem of water scarcity. This raises the question as to whether increasing water scarcity may impose constraints on the growth of countries. The influence of water utilisation on economic growth is depicted through a growth model that includes this congestible nonexcludable good as a productive input for private producers. Growth is negatively affected by the government's appropriation of output to supply water but positively influenced by the contribution of increased water use to capital productivity, leading to an inverted‐U relationship between economic growth and the rate of water utilisation. Cross‐country estimations confirm this relationship and suggest that for most economies current rates of fresh water utilisation are not yet constraining growth. However, for a handful of countries, moderate or extreme water scarcity may adversely affect economic growth. Nevertheless, even for water‐scarce countries, there appears to be little evidence that there are severe diminishing returns to allocating more output to provide water, thus resulting in falling income per capita. These results suggest caution over the claims of some hydrological‐based studies of a widespread global ‘water crisis’.