Water and growth: An econometric analysis of climate and policy impacts

Water‐related hazards such as floods, droughts, and disease cause damage to an economy through the destruction of physical capital including property and infrastructure, the loss of human capital, and the interruption of economic activities, like trade and education. The question for policy makers is whether the impacts of water‐related risk accrue to manifest as a drag on economic growth at a scale suggesting policy intervention. In this study, the average drag on economic growth from water‐related hazards faced by society at a global level is estimated. We use panel regressions with various specifications to investigate the relationship between economic growth and hydroclimatic variables at the country‐river basin level. In doing so, we make use of surface water runoff variables never used before. The analysis of the climate variables shows that water availability and water hazards have significant effects on economic growth, providing further evidence beyond earlier studies finding that precipitation extremes were at least as important or likely more important than temperature effects. We then incorporate a broad set of variables representing the areas of infrastructure, institutions, and information to identify the characteristics of a region that determine its vulnerability to water‐related risks. The results identify water scarcity, governance, and agricultural intensity as the most relevant measures affecting vulnerabilities to climate variability effects. Key Points Study conducted at subnational spatial scale (country‐river basin unit) and includes surface runoff variables never used before Results emphasize the need to incorporate water‐related impacts in estimates of economic consequences of climate change Water stress, water governance, and agricultural intensity emerge as the most significant endogenous factors in determining economic growth