Water resource as a factor of production - water use and economic growth

Water is one of the most important natural resources that is necessary for the rise and development of any biological and human activity. Being water resource a necessary good for multiple uses, it generates a series of competitive demands whose degree of competitiveness becomes greater in the presence of relevant and increasing pressure factors. The paper sets out a logical scheme for the analysis of productive uses of water, with the purpose of understanding both the functioning of an economy in the presence of a technical constraint to the exploitation of water resources, and the possible policy instruments available to the public authority. Our starting point is the definition of productive uses of water in terms of the amount of resource that is activated to make the stock of physical capital productive. Water resource is not a pure public good, it is available at private and social costs, given the existence of an optimal ratio between physical capital and water resources needed by the economic system in order to be productive. A complementarity hypothesis between the two forms of capital considered (physical and water capital) arises, with the first coming from private investment and the second being defined as the amount of public investment in services and infrastructures for water resource exploitation. As public investment in water capital crowds out private saving eventually available for private physical capital accumulation, an allocation criterion is needed to maximize total production of the system, never falling behind the optimal physical capital-water capital ratio. The first section of the paper reviews the literature dealing with the relationship between natural resources use and economic growth; the second section is focused on the presentation of a Solow-type model that introduces water in a general production function. In developing the model, equilibrium conditions in a “water economy” are described and a parametrical device is set in order to identify optimal taxation policies to finance public water infrastructures investment. The last section shows the results of an empirical analysis that is carried out in order to test the existence of a significant relationship between the aggregate use of water and per capita income produced by an economy. A country-based panel data analysis is performed with the aim of estimating a “water” production function.