The agricultural and economic impacts of massive water diversion

We examine the agricultural and economic impacts of China’s South–North Water Diversion Project, a massive initiative that channels water from the resource-rich south to the drier north. Using a difference-in-differences approach, we find that the project increases total grain output by 8.2% and raises agricultural productivity by 4.7% in water-receiving counties. It also mitigates the adverse effects of drought shocks, leading to modest increases in local incomes. Improved water availability induces adaptive responses, including greater land allocation to water-intensive crops and a higher incidence of multi-cropping. Additionally, we find no evidence of significant losses in water-supplying areas. Our back-of-the-envelope calculation suggests an internal rate of return of 6.4%, underscoring the project’s economic viability.