Introduction

The paper analyses the macroeconomic implications of water scarcity. Water is a key input for agriculture, energy, industry and households, yet risks overexploitation due to its common-pool nature. Using panel data for 169 countries (1990–2020), the authors examine associations between water use, water scarcity, GDP growth, investment and inflation, and assess climate-related risks.

Freshwater resource use in the Americas

The Americas hold around 39.8% of global renewable freshwater with one-eighth of the world’s population, yet scarcity varies widely. Some countries, including Mexico and several Caribbean states, withdraw over 40% of available freshwater resources. Agriculture accounts for more than 60% of withdrawals in most countries.

Since 2000, freshwater withdrawal has risen significantly in Mexico and the Dominican Republic. OECD data (2008) show large differences in pricing, with Mexico charging less than USD 0.5 per cubic metre. Water productivity is lowest in agriculture (below USD 2.5 per cubic metre globally), while services generate substantially higher value per cubic metre.

Projections to 2050, based on UN population forecasts and 2% annual GDP per capita growth, suggest global water withdrawal could reach 230% of 2020 levels, with wide cross-country variation.

Economic implications of water scarcity

The authors extend a Cobb-Douglas production framework to include water as an input and model scarcity as raising marginal costs or lowering productivity. Fixed-effects panel regressions show that higher freshwater withdrawal as a share of resources is associated with weaker macroeconomic outcomes.

Each percentage point increase in water scarcity corresponds to 0.08–0.10 percentage points lower GDP growth and 0.27–0.29 percentage points lower investment growth. A one standard deviation increase reduces GDP growth by 0.12–0.16 percentage points and investment growth by 0.39–0.42 percentage points.

Water scarcity is also associated with higher inflation. Each percentage point increase in withdrawal relative to renewable or available resources is linked to 2.1–2.2% higher CPI inflation. A one standard deviation increase raises inflation by 2.9–3.5%. Quantile regressions indicate stronger effects during weaker growth periods.

Effects of water withdrawal across economic sectors

Higher freshwater withdrawal as a share of internal resources is associated with a larger agricultural share of GDP, reflecting low implicit pricing. Services’ GDP share declines with higher total water use per capita.

Using UNIDO data across 22 manufacturing industries, the interaction of industry water intensity and total water use shows negative associations with real manufacturing growth. The automotive sector, accounting for about 7% of global industrial water use and requiring around 148,000 litres per vehicle, shows particularly strong sensitivity. Hydroelectricity production declines with higher total water withdrawal, highlighting energy transmission channels.

The role of water pricing and infrastructure for conservation

Public funding dominates water infrastructure. Achieving SDG targets for safe water and sanitation requires significant additional investment, especially in low-income regions. Leakage can exceed 30%, and median technical efficiency is around 63%.

The paper highlights pricing as a mechanism to improve efficiency. Countries with higher water prices tend to exhibit lower withdrawal ratios, although statistical evidence is limited. Tiered pricing, smart metering, improved monitoring and water markets are identified as tools to strengthen conservation and resilience.

Simulated water stress scenarios for the 21st century

Climate projections indicate rising water stress by 2080 in parts of the United States, Mexico, South America, Europe, Africa, India and China. Scenario analysis suggests groundwater over-extraction may exceed replenishment under high-emissions pathways.

Conclusion

Water scarcity is economically associated with lower growth, reduced investment and higher inflation. With climate change likely to intensify stress, water availability may become macroeconomically material. The authors suggest improved management, infrastructure investment and consideration of a social cost of water use to support sustainable outcomes.