Water runoff and economic activity: The impact of water supply shocks on growth

This paper attempts to fill a gap in a growing literature examining the global economic implications of weather shocks. Past research has found significant, robust impacts of hotter temperatures on reducing economic growth. While rainfall is important for agriculture, impacts on aggregate economic activity remain elusive. In this paper, I argue that rainfall is a poor indicator of water availability, particularly in urban contexts. Instead, I find that changes in water runoff significantly impact economic growth. Results show that years in which runoff is significantly lower than average, local economic activity growth is depressed. This impact is strongest in middle-income regions, where runoff 1 or 2 standard deviation below normal levels reduces GDP growth by 0.4–0.6% and 1.3–2.5%. I examine two mechanisms, agricultural production and hydropower dependence. Globally, agricultural production is depressed by below average runoff shocks, although the resulting impact on GDP is likely low. Regions which are more urban and rely more on hydropower production in their energy mix are significantly more sensitive to these runoff shocks. With climate change expected to increase the variability of water runoff, these shocks are expected to become more frequent in the future and in some regions may significantly hamper growth.