Economics of Water Scarcity and Efficiency

Over the coming decades, global freshwater withdrawals are expected to grow, especially in low- and middle-income countries. Unless there are significant improvements in the efficiency of water use by economies, freshwater stress, crises, and scarcity will worsen. This paper explores further the economic relationship between water use efficiency and scarcity. Because growing scarcity of freshwater in many regions and countries is not adequately reflected in markets, there are often insufficient incentives for investment and innovation to improve the efficiency of water use. To explore further changes in water use efficiency across countries, we conduct a panel analysis of water productivity changes for 130 countries from 1995 to 2020. Countries with lower initial levels of water use efficiency tended to have higher water productivity growth, whereas more agriculturally dependent economies displayed lower improvements in water use efficiency. Better institutional quality and capacity for innovation may also increase water use efficiency. We discuss the implications of these results for improving water use productivity in economies, and in particular, the opportunities and challenges for improving water markets and trades to alleviate water scarcity. We conclude by identifying further areas of research.