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The economics of water scarcity

Author

Listed:
  • Jon Frost
  • Carlos Madeira
  • Serafin Martinez-Jaramillo

Abstract

In many countries around the world, water scarcity could become a macroeconomically relevant concern. As a key input into production processes (agriculture, power generation and industrial use) and a common good, water resources risk being overexploited. Regressions with panel data for 169 countries between 1990 and 2020 show that, while water use is positively correlated with output, higher water scarcity is associated with lower gross domestic product growth and investment, and higher inflation. In contrast, water use efficiency is associated with higher gross domestic product growth and lower inflation. Climate scenarios show risks of much more severe water shortages in the future, threatening its sustainable use. This could impose higher costs on individual sectors and on the economy, reducing output and pushing up prices. Water availability and use could thus become an area for economists and central banks to monitor in the context of climate change, economic forecasting and monetary policy.

Suggested Citation

  • Jon Frost & Carlos Madeira & Serafin Martinez-Jaramillo, 2025. "The economics of water scarcity," BIS Working Papers 1314, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1314
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    JEL classification:

    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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