The economics of water scarcity

Jon Frost, Carlos Madeira and Serafin Martinez-Jaramillo

No 1314, BIS Working Papers from Bank for International Settlements

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.

Keywords: water scarcity; efficiency; tragedy of the commons; climate change; natural resources (search for similar items in EconPapers)
JEL-codes: L95 Q25 Q50 (search for similar items in EconPapers)
Date: 2025-12
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Related works:
Working Paper: The Economics of Water Scarcity (2025)
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