The economic implications of global water scarcity

The economic implications of global water scarcity
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Water is vital to human existence — and a big concern for policymakers, business leaders, and economists is its heightened scarcity.

If water is neglected by societies and governments, then the odds are they will eventually collapse.  Without water, businesses ranging from family farms to major corporations face multiple problems, including higher costs and long-term viability.

These higher costs will eventually be borne by consumers and make water a more expensive commodity than oil and gold combined. By 2025, it is projected that two-thirds of the globe’s population will face water shortages.  Water scarcity is a new addition to our modern lexicon with economic implications that will alter policy-making for rich and undeveloped nations alike.

Causes of water scarcity

Numerous economic reasons exist for the predicament of water scarcity.  As population grows water demand increases.  While the human population has more than doubled in the last 50 years, there has been a corresponding growth in industrialization and economic development which increases water usage, water ecosystems transformation, and a huge loss of biodiversity.  Currently, over 41% of the global population lives in river basins which are experiencing water stress.  A growing population also means an increased need for shelter, food, and clothing putting additional pressure on water supplies in the production of digestible commodities and energy.

The agricultural industry is regarded as the largest contributor to water scarcity.  Agriculture accounts for 70% of freshwater usage, however approximately 60% is lost due to waste involving irrigation system leakages, inefficient application, and planting crops exceedingly thirsty for where they are grown.  For example, UNESCO states that 3 cubic meters of water are needed to grow 1 kilogram of rice.  This is occurring in India, China, and the United States, nations that have or will reach their water usage limits.  Compounding the problem is the growing use and dependence on fertilizers and pesticides contributing to freshwater pollution.

Lack of proper water management systems contributes to the growing global water scarcity.  For example, California’s key industry is agriculture where according to the National Agriculture and Rural Development Policy Center (NARDP), there has been little expansion of major water infrastructure since the early 1970’s.  California has poor groundwater management resulting in over-pumping in normal years thereby and resulting in the limitation of groundwater availability in dry years.  Poor water management in California also includes a lack of underground storage or groundwater “banking”  which has long-term benefits as the snowpack in the state’s mountains recedes.  In the Middle East and North Africa, proper water management is difficult to achieve when it is divided among diverse institutions lacking any cohesive policy, thereby enhancing the dilemma of proper water usage for agriculture and a growing human population.  Without proper management, the economic impact of water scarcity will be felt in numerous ways.

Economic implications of water scarcity

Among the economic implications of water scarcity is the impact on businesses worldwide leading to higher operating costs and staying competitive.  For global firms controlling costs is difficult but it worsens when the price of water increases exponentially to where margins shrink precariously.  This causes firms to regard water access as a competitive advantage and relocate when possible.  For example, a firm will give preference to relocating to areas where water risks are lowest such as moving to a city located by a lake, river, or river basin.

Cities such as Milwaukee and Chicago are preferred by firms over a city far from fresh water.  Many businesses want to have easy access to water resources that are healthy, reliable, and viable or else they cannot expand nor hire or maintain their workforce.  A clear example is the situation in Flint, Michigan, where the water supply has been severely damaged and will take years to remedy.  In the meantime, firms that regarded Flint as a potential relocation area are now less likely to consider it.  The lack of water will have a domino effect on communities: local commerce declines, incomes go down, tax revenues decrease, population declines due to lack of employment opportunities, cities and the surrounding communities shrink dangerously.  The bottom line is that businesses need water: According to UNESCO, in high income nations industry accounts for up to 59% of total water use.

Another key economic implication of water scarcity is the effect on agriculture.  While agriculture contributes to water scarcity, it is also highly dependent on this resource.  In places such as Morocco, dwindling water supplies have meant environmental deterioration and land use loss for agricultural purposes has been estimated at approximately $350 million USD.  Water scarcity impacts India, China, and the Middle East which face serious drought conditions thereby causing farms to reduce their crop production and food prices to spike dangerously.  In China in 2006, drought conditions affected or threatened 182 million hectares of farmland, 8.7 million livestock, and 95 million people.

Increases in food prices and lack of water inflame regional conflicts and cause population migration to where water is readily accessible.  Water scarcity leads to food shortages while raising commodity prices thereby hindering trade with developing economies and in the long run cause civil unrest.  Water scarcity has a direct impact on rain-fed and irrigated agriculture as well as livestock, and an indirect impact on food processing industries.

Rectifying a dire situation

Among the methods to deal with water scarcity are increasing storage infrastructure through water recycling, improving farming practices, upgrading sewage systems, and desalination plants. Governments must invest in infrastructure to help alleviate the water scarcity problem in the long-run.  According to the economist Richard Damania, “When governments respond to water shortages by boosting efficiency and allocation even 25% of water to more highly-valued uses, losses decline dramatically and for some regions may even vanish.  Improved water stewardship pays high economic dividends.”

Categories: Economics, International

About Author

Arthur Guarino

Arthur Guarino is an assistant professor in the Finance and Economics Department at Rutgers University Business School teaching courses in financial institutions and markets, corporate finance, and financial statement analysis. The first half of his career was spent in the financial services industry. He has written articles dealing with finance, economics, and public policy.