Under pressure The economic costs of water stress and mismanagement
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Under pressure
The economic costs of water
stress and mismanagement
SUPPORTED BY
Under pressure
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The economic costs of water stress and mismanagement
Table of contents
About this report 3
Executive summary 4
1. Introduction 6
2. Water stress today 8
2.1 Water scarcity 10
2.2 Water excess 13
2.3 Water quality 15
3. The economic costs of water stress by sector 17
3.1 Agriculture 18
3.2 Energy 22
3.3 Industry and services 26
3.4 Households 29
3.5 Ecosystems 32
4. Areas for actions 35
Water as a political priority 35
Basin-level approach 36
Evidence-based policymaking 37
Businesses have a role to play 37
Investors have a role to play 38
Considering the economic cost of water 38
Prioritising environment-friendly solutions 39
Summary 40
References 41
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The economic costs of water stress and mismanagement
About this report
This report summarises the key findings of a research programme
developed by the Economist Intelligence Unit (EIU) with support from the
Swiss Agency for Development and Cooperation (SDC) and FONPLATA-
Development Bank. The findings are informed by the research conducted
for the Blue Peace Index programme, an extensive literature review, a
comprehensive data audit, and expert interviews conducted by the EIU
between October 2020 and March 2021. The findings and views expressed
do not necessarily reflect the views of the partners and experts.
The report was produced by a team of EIU researchers, writers and editors,
including: Matus Samel, Dina Alborno, Mike Jakeman, and Rakshitha Siva.
Stéphanie Piers de Raveschoot of the Swiss Agency for Development
and Cooperation (SDC) and Gabriel Baldivieso, José Lupo, and Henrique
Pissaia of FONPLATA-Development Bank provided expert guidance to
the research and development of the report.
The project has benefited from counsel provided at various stages by a panel
of experts consisting of prominent authorities on different aspects of water
stress and transboundary water cooperation. These include the following:
• Daniel Blanco, Executive Director of Fundacion
Humedales / Wetlands International Argentina
• Tatiana Fedotova, Water Stewardship Consultant, Swiss
Agency for Development and Cooperation (SDC)
• Alfonso Malky, Latin America Technical Director,
Conservation Strategy Fund (CSF)
• Dr Naho Mirumachi, Senior Lecturer, Department
of Geography, King’s College London
• Luis Pabon, Consultant, Inter-American Development Bank (IADB)
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The economic costs of water stress and mismanagement
Executive summary
Fresh water is essential for human health, Water shortage and excess are already drivers
the global economy and broader societal of the most damaging natural disasters.
wellbeing. Not only do we use it for drinking One estimate indicates that nearly 75%
and hygiene, but we also consume it indirectly of all natural disasters between 2001 and
via the food we eat, the clothes we wear, 2018 were water-related, and that during
and the products we buy. Yet the world has the past 20 years floods and droughts
failed to manage its freshwater resources affected over 3bn people and caused total
sustainably. Over the past century, available economic damage of almost US$700bn.4
freshwater resources have been increasingly
In addition to water shortages and water excess,
strained as withdrawal rates have risen almost
deterioration in water quality also generates
sixfold, outpacing global population growth.1
additional costs for governments, businesses and
Global demand for water is expected to grow communities, through detrimental impacts on
further, by around 1% per year until 2050, the quality of soil, fisheries, and human health.
driven by continued population growth, rising This has a transboundary element too, as a World
living standards, and the effects of climate Bank study estimated that pollution of rivers in
change.2 Demand of this magnitude will result upstream regions can reduce GDP growth in
in a sharp increase in the proportion of the downstream regions by between 1.4% and 2%.5
world’s population – and the share of the global
Policymakers and businesses are aware of the
economy – that is subject to water scarcity.
seriousness of water-related risks, but tend
Moreover, the water crisis extends to water to focus on responding to consequences and
excess, as well as shortage. Just as the proportion immediate threats, such as natural disasters
of the global population and economy affected by and displacement, rather than the underlying
scarcity is set to rise, so too is the share of those drivers. Yet the costs of water stress for
affected by regular flooding and rising sea levels.3 communities and businesses are very real.
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The economic costs of water stress and mismanagement
• Agriculture is by far the biggest consumer resulting healthcare costs, and the loss
of water, accounting for up to 90% of of life, dignity and prosperity have on the
total consumption in certain countries, realisation of fundamental human rights.10
and is thus inherently exposed to water
• Finally, the importance of water systems
stress or a permanent decline in water
goes beyond the essential direct use for
availability.6 Agricultural production is
domestic purposes and economic activities.
essential for providing food to people
Water ecosystems, including watersheds
around the world, but is also a major
and wetlands, provide a range of services
source of income and employment,
that are essential for human life and
particularly in emerging economies.
wellbeing, including crop pollination, water
• The industrial sector, which accounts for purification and regulation, flood protection,
a major share of water consumption in erosion control, and carbon sequestration.11
many developed markets, uses water as
Despite the complex nature of water systems,
a direct input into products and for a host
which sometimes present inherent trade-
of processes. Most industries, particularly
offs between the vital interests of individual
energy, food and drink, chemicals, and
stakeholders, there are clear steps that
textiles and apparel use water as a major
governments, companies and households alike
product input, or for industrial processes
can take to reduce the economic cost of water
such as heating and cooling, transport,
stress and mismanagement in the decades to
cleaning, product use and servicing, and
come. Governments and policymakers need
energy supply.7 For all businesses, securing
to move sustainable water management,
access to safe water, sanitation and
including at basin and transboundary level,
hygiene at the workplace is essential for
to the top of their agenda. Businesses and
employees’ wellbeing and productivity.8
investors should improve their accounting
• Similarly, lack of access to safe water at and assessment of the impact and risk that
home can have devastating consequences their water footprint has on their bottom line.
for people’s health, productivity and Finally, communities need to consider the
labour participation.9 This is even before value of water more holistically, and appreciate
accounting for the impact that the their direct and indirect water footprint.
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The economic costs of water stress and mismanagement
1. Introduction
Water is paradoxical. While some are surrounded countries, rather than those with abundant
by it – often inundated with too much of it – water. These inefficiencies inflate production
hundreds of millions of people have so little of costs and speed up environmental degradation.
it that their livelihoods are threatened. Around Meanwhile, consumers all around the world
70% of the surface of the earth is covered by consider the constant availability of water a
water, but the fresh water that people can drink free public good, which makes it harder to limit
is just a tiny fraction of the total – as little as its use and to charge an appropriate price for
2.5%. And of this proportion, more than half is it. While economic considerations are at the
trapped in polar ice, glaciers and permafrost, heart of these decisions, as the backbone of
which means that humankind survives on less life, there is a need to restore water’s value at
than 1% of the planet’s total reserves. Not all the centre of our economies and societies.
of this 1% is easily accessible, as much of it is in
deep underground aquifers, meaning that only Our best hope in reducing the environmental
a very small proportion is directly accessible impact of our need for water is to improve our
on the surface through lakes and rivers.12 knowledge of our own water consumption –
not just in terms of what comes out of our
Fresh water is being constantly reused taps, but also of the volumes used throughout
through the water cycle. However, the growing the entire supply and value chains of the
global population (and its thirst for water) is production of the goods and services that we
fundamentally interfering with this natural buy – and to reduce the mismanagement of
cycle. By building dams and diverting rivers, water further upstream. Total freshwater use
releasing pollutants into the air and water, and increased approximately sixfold during the 20th
chopping down vast tracts of rainforest, we century, outpacing global population growth.13
are changing the way that water is distributed.
However, encouragingly, over the past 20 years
We now live against a permanent background
the increase in overall water use has slowed
of water-related disasters, from disappearing
down, reflecting both a decline in the rate of
lakes in Central Asia to submerging islands
global population growth and the impact of
in the Pacific. In an increasing number of
agricultural and industry policies to reduce the
locations around the world, rainfall is either
rampant growth in water consumption. Indeed,
too little or too great, or insufficiently reliable.
on a per-head basis, water consumption has
In the coming years, a city will in all likelihood
actually fallen over the past 50 years, from a
run out of water. Another will suffer a flood
peak of just over 700 litres per person at the
so catastrophic that it is abandoned.
end of the 1970s to around 550 litres per person
Our day-to-day use of water is inefficient. by 2010.14 Nevertheless, because new fresh
Thirsty crops are grown in arid regions. The water cannot be created in any meaningful
manufacturing of clothing, a hugely water- quantity, the amount available per head
intensive activity, is performed in low-wage keeps falling as the global population rises.
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The economic costs of water stress and mismanagement
Dwindling fast
Renewable internal freshwater resources per capita (m3)
World Latin America & Caribbean Sub-Saharan Africa East Asia & Pacific
North America Europe Middle East & North Africa
60,000
40,000
20,000
0
1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017
Source: FAO
We use water in all aspects of our lives, but we In this report we will outline the economic
can divide that usage into three major sectors. costs of water stress and mismanagement of
Globally, agriculture is responsible for around our freshwater supplies.* We will consider the
70% of our total consumption, with industry role that we expect climate change to play
next at 20%, and domestic use at 10%. There are in disrupting existing trends, and use several
major regional variations in these proportions, case studies to look in greater detail at how
which largely reflect the level of economic governments and jurisdictions have sought to
development. In Asia and Africa, for example, manage freshwater supplies in stressed rivers
80% of water use is accounted for by the and basins. Finally, we highlight certain areas
agricultural sector. In Europe and North America, where action is urgently needed to improve our
the largest share is consumed by industry. water usage and management in order to reduce
the risk of further environmental degradation
and resulting socioeconomic damage.
* In this report, we approach “water stress” as a broad concept covering water
availability (including excess and variability), accessibility, and quality.
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The economic costs of water stress and mismanagement
2. Water stress today
Global demand for water is expected to grow By 2050, under a business-as-usual scenario,
by around 1% per year until 2050, driven by where countries make moderate improvements
continued population growth, rising living in reducing water waste and enhancing
standards, and the various expected effects of productivity, and where the energy mix
climate change.15 Demand of this magnitude moves slightly towards renewables, these
will result in a sharp increase in the proportion proportions would rise to 52% of the world
of the world’s population – and the share of the population and 45% of global GDP.17
global economy – that is subject to water stress.
Policymakers are aware of the problem.
A study by the International Food Policy The water crisis, defined as “a significant
Research Institute (IFPRI) estimated that decline in the available quality and quantity
36% of the world’s population was subject of fresh water, resulting in harmful effects
to water scarcity a decade ago, and that on human health and/or economic activity”,
this group was responsible for generating has been cited by respondents for years as
22% of global economic output.16 one of the biggest risks facing the world.18
Stressing out
Water stress by country (Ratio of water withdrawals to water supply, 2040 forecast)
Extremely high (>80%) High (40-80%) Medium to high (20-40%) Low to medium (10-20%) Low (
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The economic costs of water stress and mismanagement
Nevertheless, it scores higher on potential
impact than likelihood in the World Economic
Forum’s Global Risk Perception surveys.19
Policymakers are aware of the seriousness of
water scarcity, but are often focused on more
immediate threats, such as extreme weather,
natural disasters, and involuntary migration.
The water crisis, often the underlying driver
of these events, is evolving more slowly,
which increases the risk that inaction will
cause greater harm in the longer term.
Moreover, the water crisis extends to water
excess, as well as shortage. Just as modelling by
the IFPRI has suggested that the proportion of more commonplace and catastrophic, claiming
the global population and economy affected by more human lives and causing more damages.
scarcity is set to rise, so too is the share of those As Benjamin Strauss, Chief Executive of
affected by rising sea levels and regular flooding. Climate Central asked the New York Times,
One study found that the proportion of people “How deep a bowl do we want to live in?”23
who will be subject to much higher fluvial flood
Climate change is undoubtedly a key factor
risk is likely to double in many populous countries
exacerbating global water stress today, and is
in the period to the mid-2040s, including China,
expected to remain so for many years to come.
India, Pakistan, Indonesia, the US, and many
It is important to note, though, that while climate
sub-Saharan African countries.20 One estimate
change itself is a global phenomenon, its impacts
indicates that nearly 75% of all natural disasters
on water availability are unevenly distributed
between 2001 and 2018 were water-related, and
across basins and regions due to their varying
during the past 20 years floods and droughts
geographical, social and economic conditions.
affected over 3bn people, and caused total
Even within transboundary basins, the impacts
economic damage of almost US$700bn.21
vary between upstream and downstream
Meanwhile, other research suggests that the countries. In Central Asia, for example, higher
proportion of current land area inundated by surface temperatures are expected to lead
rising sea levels by 2050 could be three times to higher precipitation levels in the north of
greater than previously thought, resulting in the the region and lower levels in the south, along
number of people living below the tide line rising with more frequent episodes of extreme heat
from 110m at present to 150m by the middle and greater aridity. At the same time, hotter
of the century.22 Living below the tide line is temperatures will lead to the accelerated melting
possible and can be secured through the erection of glaciers, resulting in faster streamflows, in
of sea walls, barriers and other forms of defence. turn raising the risk of flooding in downstream
However, such systems will need to be reinforced countries in the short term. However, in the
as sea levels continue to rise, at greater cost. longer term, all countries in the region are
Failure of levees and walls would also become expected to face a future with less water.24
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The economic costs of water stress and mismanagement
2.1 Water scarcity
The primary climate-related cause of episodes drawn. However, a comprehensive study by the
of water stress is drought.25 Droughts occur European Commission published in 2019 showed
naturally and have been recorded regularly, that the world experienced longer, more severe
if at unpredictable intervals, throughout and more intense meteorological droughts
human history due to fluctuations in weather during 1981–2016 than over the period 1951–1980,
patterns. Scientists suspect that climate change and linked this trend to higher temperatures.26
is triggering more frequent and more severe Among specific drought hotspots in the
droughts, but the multitude of contributory Mediterranean basin, the Sahel, and the Congo
factors to a drought – such as temperature, the River basin, the increase in drought episodes was
proportion of precipitation that falls as rain, the associated with both lower precipitation and
storage of water in the form of glaciers, and the higher temperatures, but in north-east China,
types of vegetation providing ground cover – precipitation was not significantly different,
have so far prevented a direct link from being suggesting that a hotter climate was responsible.
Drying up
Distribution and impact of drought by region (2001-2018)
Damage (US$ billions) People affected (millions) Number of occurrences
Africa
Asia
North
America
South
America
Europe
Oceania
0 100 200 300 400 500 600 700 800 900 1000
Source: United Nations University Institute for Water, Environment and Health
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The economic costs of water stress and mismanagement
If the link between climate change and incidence Water levels subsequently rose in the city as a
and severity of drought is still being established, consequence of more rain and tighter water
it is clear that inadequate water management management. In this instance, a humanitarian
practices can make naturally occurring droughts disaster was avoided, but the economic costs were
more damaging, or even cause local droughts not. Such an example illustrates an all too common,
directly. For example, much of the western yet incredibly dangerous, approach to water
US is covered by “use it or lose it” legislation management – that of waiting to being on the
that governs water allocations. If landowners brink of a catastrophe before finally taking action.
can be shown to not require the full volume of
fresh water allocated to them, they are at risk Droughts are highly expensive. Research by
of having that allocation reduced. Furthermore, the US National Centers for Environmental
those allocations are not regularly reviewed, Information identified 26 droughts in the US
so although the streamflow of the Colorado between 1980 and 2019, with an estimated
River, which supports the livelihoods of an average cost of US$9.6bn per drought. Of the
estimated 45m people, is 25% lower than it seven types of natural disaster tracked in the
used to be, farmers, ranchers and businesses research, only tropical cyclones were more
are being incentivised to use every drop (and expensive (at U$21.5bn per event).30 The costs of
more) of their share.27 Nor is this exclusively droughts are wide-ranging. There are the first-
a US problem: the World Wide Fund for order effects, such as crop and livestock failure,
Nature (WWF) believes that EU member which reduce the income of farmers, and the
states also regularly over-allocate water by additional costs of crop-switching to less thirsty
failing to account properly for the impacts produce. There are also losses further up the
of future droughts on water availability.28 supply chain, as retailers are forced to find new,
more expensive suppliers, and to customers to
Although the imagery of parched arable land
whom some price increases will be passed on.
and emaciated animals is powerful, droughts
Interestingly, though, through the globalisation
are not just a rural phenomenon. Several world
cities have come dangerously close to running of supply chains, water-scarce countries have
out of water in recent years, most notably become increasingly reliant on importing goods
Cape Town in South Africa in 2018, and São produced in water-rich countries to meet the
Paulo in Brazil in 2015. Cape Town’s water crisis needs of their populations, meaning that many
was driven in large part by strong population global water flows are “virtual” and end-users
growth and economic development (which can in fact be very remote from the direct effects
fuelled water-intensive industries, such as golf, of drought. On the other hand, the businesses
wine production, and swimming pools) and a that use water directly for energy or industrial
change in precipitation. Local authorities had production, or that provide goods as services
taken steps to conserve water over the previous to farmers, fisheries, or river navigation, might
two decades (and per-head water use fell), all suffer. Finally the effects on the health of
but three years of lower rainfall saw the city’s the environment and human population can
six reservoirs shrink to around one-quarter have long-term impacts on productivity and
of their capacity, prompting rationing.29 prosperity of the affected communities.31
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The economic costs of water stress and mismanagement
Case study: Drought and migration in the Senegal river basin
The tributaries of the Senegal River begin in “equitable sharing of water resources, through
the highlands of Guinea and in neighbouring development and management, between co-
Mali. They join up in central Mali and then basin states of a transboundary river”.34 The
form the border between Mauritania to organisation has also played a role in reducing
the north and Senegal to the south. After the incidence of crippling diseases, such as
more than 800km of westward travel, the malaria and schistosomiasis.35 The World Bank
Senegal River drains into the Atlantic Ocean. has reported evidence of migrant flows back
to the region following a major investment
The river’s basin encompasses land in all four
project to improve local irrigation practices.36
of these countries and provides a home to
12m people. It is not a straightforward place to That said, there is plenty of work to be done.
live. The seven-month dry season sees almost As outlined in the Blue Peace Index, the
no rain at all. When rain is due, it is often basin’s very low levels of drinking water access
unreliable, which prevents the replenishment and elevated rate of undernourishment
of the soil with nutrients required for farming. mean further improvements in national
Likewise, raising livestock is more difficult if and transboundary water management are
the land is parched. Overfishing and damming necessary in order to ensure the populations’
further upstream have also made earning access to the water and food they require.37
a living more difficult. The World Bank One area for action is the development of
notes that the latter has brought power and better tools for evidence collection,
telecommunications capabilities, but has such as hydro-meteorological stations.
also reduced water availability.32 Population The individual riparian states also need to
growth has exacerbated these pressures
improve national mechanisms for water
and resulted in mass migration away from
availability management, pollution control,
the basin and towards the region’s biggest
and implementation of environmental
cities. Migration to find work is extremely
policies. As a region that is at high risk of
common: one study by the UN’s High
suffering severe effects of climate change,
Commissioner on Human Rights suggested
this absence of safeguards is a concern.
that 90% of men in one region of Senegal had
This is particularly pertinent given that
migrated at least once in their life because
climate change is likely to exacerbate
of water-related economic distress.33
the unreliability of rainfall, while rising
The basin does, however, have relative temperatures will make agricultural work
effective governance. The Organisation pour more taxing, once again increasing the appeal
la mise en valeur du fleuve Sénégal (OMVS), of life in a city. Nonetheless, the long-term
which was established in 1972, has been sustainability of resources, and efforts to
praised by the UN Food and Agriculture avoid overstraining them, must be front and
Organisation (FAO) for its work in ensuring centre when pursuing development goals.
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The economic costs of water stress and mismanagement
2.2 Water excess (IPCC) is expecting this increase to continue so
that average temperatures are between 1.6°C
Too much water also carries economic costs. and 4.3°C higher by the end of the century,
Floods can be triggered by large amounts relative to the pre-industrial period.39,40 A study
of precipitation falling either very quickly or published in Nature in 2018 suggested that
consistently over a longer period, such that it these higher temperatures in the oceans can
eventually causes rivers and streams to burst their result in tropical storms carrying more water
banks; by a storm causing the sea to surge inland vapour, which means they both move more
and submerge coastal areas; or by the bursting slowly and deposit more precipitation, which
of glacial lakes and flash flooding in mountainous in turn raises the risk of floods.41 The severity
regions. As with droughts, flooding is a naturally of storm surge flooding is also compounded
occurring phenomenon. It emerged as a problem by higher sea temperatures, with surges
only when humans began to occupy floodplains, travelling further once they reach land.
such as the Mississippi Delta in the US and the
Tigris-Euphrates in the Middle East, having
discovered that the land was extremely fertile. Widespread impact
Numbers of people affected by weather-related
When our flood prevention efforts fail, as was disasters (1995 - 2015)
evident in the city of New Orleans in the US when Flood Drought Storm
it was submerged during Hurricane Katrina in Extreme temperature Landslide & wildfire
2005, and in Vargas state in Venezuela in 1999,
the impact can be devastating. Floods can destroy
houses, businesses, infrastructure and farmland.
Even when waters recede, they can leave behind
layers of mud and silt, requiring intensive efforts
to remove before the land can be restored, and
they can even leave land completely infertile.
At this point, conditions are ripe for diseases and 56 %
infections to spread. The OECD describes flooding 2.3 billion
as “one of the most common, wide-reaching and
destructive” natural disasters, estimating that
every year it affects one out of every 32 people
on the planet and incurs losses of US$40bn.38 26 %
1.1 billion
There is a strong body of evidence to suggest
that climate change is resulting in more extreme 16 %
weather events and that the events themselves 660 million
are becoming more intense. The US National
2 %
94 million
Oceanic and Atmospheric Administration
(NOAA) has recorded an average increase in
8 million
the global sea surface temperature of 0.13°C
each decade over the past century, while the
Source: Centre for Research on Epidemiology of Disasters;
Intergovernmental Panel on Climate Change United Nations Office for Disaster Risk Reduction
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The economic costs of water stress and mismanagement
Case study: Flooding in the Sava river basin
After weeks of unusually wet weather, in May basin lacked an efficient flood-forecasting and
2014 a cyclone spun across Eastern Europe, warning system in 2014, and the countries
triggering a further three months’ worth of implemented limited measures regarding
rainfall in just three days.42 The Sava River, natural disaster management – notably lacking
which flows from Slovenia, Croatia, Bosnia Climate Change Adaptation Plans.46 According to
and Herzegovina, and into the Danube in an investigation by the International Commission
Serbia, was overwhelmed and several of for the Protection of the Danube River (ICPDR),
its tributaries burst their banks, flooding an international organisation dedicated to
towns and cities nearby and triggering the management of the river’s waters and the
waves of landslides. Estimates suggest prevention of river-related accidents, the damage
that more than 60 people were killed and to housing and infrastructure was exacerbated
over 2.6m were affected either through by the “inappropriate” construction of properties
loss of power, damage to their homes, on land prone to flooding and sliding. It also
or the destruction of their livelihoods.43 recommended that the 40-year-old criteria
There was also extensive damage to for management of the river be updated to
infrastructure and industry, including thermal strengthen the dikes along the Sava. Finally,
power stations, coal mines and farms. it argued that while “all possible means to
exchange information” were used to spread
Although flood defence activities were news of the flooding, a more efficient flood-
deployed along 200km of the river, they were forecasting system was required to help
designed with a once-in-a-hundred-year flood the authorities take decisions quickly.47
in mind. Experts believe that the 2014 flooding
was a once-in-a-thousand-year disaster.44 In the years since the disaster, the area
Measures that had been expected to contain has attracted funding from the World
any conceivable flooding, including the use of Bank, UNESCO and other international
permanent and temporary dikes, sandbags, organisations, and since 2018 a flood-
the deployment of search and rescue forecasting and early warning system has
teams and the recruitment of thousands of been operational as a result of cooperation
volunteers, proved inadequate. Across the between the International Sava River
three worst-affected countries – Bosnia, Basin Commission (ISRBC) and the World
Serbia, and Croatia – the total damage and Meteorological Organisation (WMO).48
losses from the flood were estimated at just As highlighted in the Blue Peace Index,
despite significant progress on monitoring
under €4bn. The Serbian economy shrank
and data sharing, the riparian states and the
in 2014 as a direct result of the flooding.45
ISRBC should do more, particularly in terms
As outlined in the Blue Peace Index, despite of joint infrastructure development and
frequent and heavy flooding, the Sava River coordinated stakeholder engagement.49
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The economic costs of water stress and mismanagement
2.3 Water quality
In addition to water shortages and water excess, wastewater in rivers and streams, if this is not
deterioration in water quality also generates outlawed by legislation or if no alternative is
additional costs for governments, businesses and available. There are numerous examples of how
consumers. These costs are often more difficult international cooperation can reduce pollution
to imagine. The impacts of drought and flooding levels in major waterways – notably in the Rhine
are clear, but additional processes to clean water in Western Europe – but even with shared goals
to make it fit for purpose, or lower agricultural and robust standards in place, rivers and streams
yields because of pollutants in irrigation remain vulnerable to industrial accidents.53
systems, can also be expensive. A World Bank
study has found that when rivers become Climate change will also affect the quality of
polluted in upstream regions, such as through available water. For example, as climate change
damage to sanitation facilities or the release makes heavy downpours of precipitation more
of chemicals, GDP growth in downstream common, the volume of surface runoff – the
regions is reduced by between 1.4% and 2%.50 water that flows over the ground after a storm
– will increase, and this moving water is at risk of
Using water to irrigate crops is essential to make picking up pollutants and dirt from the ground,
farming more efficient. Studies have shown transferring them into water bodies. Thus, water
that the 20% of global farmland that is irrigated supplies could become contaminated, raising
produces 40% of world agricultural output.51 the costs of providing potable water in countries
However, the quality of the water used in irrigation with access to safe water, and raising the risk
is crucial in the success of the crops. Research by of waterborne diseases in those that do not.
South African and Nigerian agronomists found
that using waste or groundwater could cut the The IPCC has “very high confidence” that the
growth of some vegetable plants by one-half higher water temperatures created by climate
relative to irrigating with rainwater. Likewise, change will result in increased spread of
the concentrated presence of metals such as waterborne diseases that can cause diarrhoea,
cadmium and chromium in water has been fever, and flu-like symptoms.54 Studies have
correlated with poor outcomes.52 Unless properly found a great deal of evidence from around the
controlled, dirty water used in agriculture risks world linking episodes of flooding and heavy
contaminating potable water sources, introducing rainfall with higher incidences of diarrhoea.55
a range of risk factors to human health. The use Climate change and the more frequent and severe
of water by industry is another threat to the extremities of the water cycle will thus exacerbate
quality of the water in the surrounding ecosystem. the devastating socioeconomic impacts of
The clearest example of this is the disposal of the water crises through multiple channels.
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The economic costs of water stress and mismanagement
Case study: Agriculture and flooding in the La Plata river basin
The La Plata River is the second-largest of cattle and other livestock and wildlife.
drainage basin of the South American The IPCC’s 2018 update claimed that it
continent and one of the largest in the world, had high confidence that much of the area
encompassing all of Paraguay, most of covered by the La Plata basin had experienced
Uruguay, one-third of Argentina, the south- unusually high rainfall and that this had
east of Bolivia, and the south-west of Brazil. increased flood frequency and intensity.60
Three of the continent’s major rivers, the It is widely believed that deforestation, the
Paraguay, Uruguay and Parana, meet at the growth of urban centres along the rivers, and
Rio de la Plata in the south-east corner of the the intensity of farming have all contributed,
basin and empty into the Atlantic Ocean. along with the effects of climate change,
to an increasing rate of major flooding.61
The basin, home to an estimated 160m
people, is crucial to the economies of the five In 1967 the riparian states created an
countries: as much as 70% of their combined intergovernmental committee known
GDP is produced in the basin area.56 In fact, as the CIC (Comité Intergubernamental
“it is one of the most economically important Coordinador de la Cuenca del Plata)
basins globally,” says Luis Pabon, a consultant to coordinate the management of the
at the Inter-American Development Bank.57 basin. Two years later, The La Plata Basin
It is the main source of electricity for the Treaty came into force and has been
region, thanks to a series of huge hydroelectric supplemented with additional plans and
power plants, while the major economic agreements, including the establishment
activity in the basin is agriculture. According of a fund in 1974, FONPLATA, currently a
to the FAO, the basin provides most of the fully fledged development bank that works
food to the countries and the bulk of their to promote the sustainable development
total exports. For example, the one-third of and integration of its member countries.
Argentina’s land area in the basin produces Nevertheless, insufficient enforcement
over 90% of the country’s cereals and oil mechanisms mean that basin countries
crops, and 85% of its beef. Other major crops remain exposed to extreme weather
include rice, wheat, soybeans and sugarcane.58 events, both flooding and drought, which
have resulted in forgone economic growth.62
Although parts of the basin are among the “We need to strengthen governance,”
few regions in the world where precipitation says Luis Pabon. “The CIC Plata is a rather
has increased over the past century, this weak institution in practice. We need to
actually provides a greater source of risk.59 harmonise economic and environmental
Valleys and flatlands in the basin have policies and regulations, encourage joint
experienced more frequent flooding in the planning and decision-making, and crucially,
past 50 years, which is often fatal to herds increase stakeholder participation.”63
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The economic costs of water stress and mismanagement
3. The economic costs of water
stress and mismanagement
Fresh water is a resource that is essential not is taken soon, water will become scarce in
only for individual human health, but also regions where it is currently abundant – such
for functioning communities, businesses and as Central Africa and East Asia – and scarcity
economies, and for the environment on which will greatly worsen in regions where water is
they are built. Water scarcity, exacerbated by already in short supply – such as the Middle
climate change, could hinder economic growth, East and the Sahel in Africa. These regions
spur migration, and spark conflict, impacting could see their growth rates decline by as much
societies through a number of channels. A as 6% of GDP by 2050 due to water-related
World Bank report finds that unless action impacts on agriculture, health, and incomes.64
Room for improvement
Estimated effects of water scarcity on GDP in 2050 under a business as usual scenario
-6% -1%
Source: World Bank
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The economic costs of water stress and mismanagement
Room for improvement
Estimated effects of water scarcity on GDP in 2050 under an efficient water policies scenario
+6% +2% +1% / -1% -2% -6%
Source: World Bank
3.1 Agriculture
Of all the industry sectors, the links between highest reliance on water quality – as well as
agriculture and water are the strongest. Agriculture quantity – among the region’s industries.66
is by far the biggest consumer of water, accounting
Although the share of agriculture in global
for up to 90% of total consumption in certain GDP is on a downward trend, falling to 3.3% in
countries, and would therefore be the most 2018 according to the World Bank, from 5.5%
exposed sector in the event of water stress two decades before, it remains a huge sector
or a permanent decline in water availability.65 for many developing countries in particular.
Without enough water, it is not possible to Even in large emerging markets, such as India,
irrigate crops, cultivate fish or rear livestock. Thailand or Turkey, it accounts for 16%, 8% and
Agriculture needs not just water, but good-quality 6.4% of GDP, respectively.67 Without a reliable
water. A 2018 study by ECORYS found that in and plentiful supply of water, agriculture will be
Europe the agriculture sector had the second- unable to continue to support these economies.
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The economic costs of water stress and mismanagement
Watering the world
Water withdrawal shares by sector (% of total withdrawals, 2015)
Agriculture Industry Domestic
100
80
60
40
20
0
World Europe Northern Oceania Southern Asia Africa
America America
Source: FAO, AQUASTAT
Agriculture is also labour-intensive: 43% of other industries may not be able to absorb.
Indian, 31% of Thai and 18% of Turkish workers Second-round effects then include lower
are engaged in agriculture.68 Even if the sector is private consumption (if agricultural workers lose
less productive than manufacturing or services, their income) and potentially higher inflation,
any deterioration in water availability which unless lower domestic agricultural output is
makes agricultural work uneconomic risks compensated by cheaper foreign imports.
leading to a sharp rise in unemployment that
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The economic costs of water stress and mismanagement
Case study: Excess salinity in the Mekong river basin
The Mekong River has its origins in the Tibetan projects. When the sand is removed (especially
plateau and runs through China, Myanmar, when combined with the lack of sediment
Laos, Thailand, Cambodia and Vietnam, flowing from further upstream), the riverbeds
before flowing into the South China Sea. deepen, permitting more seawater into
Its basin is essential for all of the Southeast the river, which in turn requires more fresh
Asian nations. It provides fresh water for water to flush it out.73 Given that the supply
irrigating crops, sustains fisheries, and provides of fresh water is being compromised, the
water for thirsty industries such as power outcome is longer periods of high salinity.
generation and garment manufacturing.
A coordinated response is required to prevent
However, the basin is also struggling with this phenomenon from worsening, but China
excess salinity. Swathes of the delta are and Myanmar are only observer members
inundated by the sea every year for a period of the Mekong River Commission (MRC), the
of several weeks, until the seawater is pushed main decision-making body.74 As outlined in the
back out by fresh water from further upstream. Blue Peace Index, the lack of a single platform
Yet those employed in agriculture and fishing on which to discuss the health of the river
have observed that, in recent years, the period and its implications for riparian states holds
of excess salinity is lasting for longer, which back cooperation not just on salinity but also
is killing fish and preventing crop growth. In flood response and climate change mitigation,
some areas of southern Vietnam, studies have both of which will have a major impact on
recorded a loss of rice production of more agricultural productivity and the standard of
than 50% because of prolonged periods of living of the millions living beside the river.
basin salinity.69 Globally, the economic losses
Moreover, although the riparian states and
owing to salt-induced land degradation
the MRC have made significant progress in
are estimated at US$27.3bn per year.70
the technical areas of water management,
There are several factors behind this such as monitoring and data sharing, greater
phenomenon. First, the construction of focus on following the integrated water
upstream dams has affected how fresh water resource management (IWRM) principles,
flows into the basin. There are 11 dams along pollution control, and inclusive stakeholder
the Chinese stretch of the Mekong alone and engagement are essential for the long-term
a further two in Laos.71 The dams prevent sustainability of the development of the
freshwater lakes which usually feed the lower basin. As Naho Mirumachi of King’s College
Mekong, such as Tonlé Sap in Cambodia, London explains, “infrastructure development
from filling and discharging the water that – whether traditional or nature-based – is
pushes the seawater in the delta back out.72 important, but on its own cannot solve
Dams also prevent the flow of sediment from the issues, unless local stakeholders and
upstream. Second, the lower Mekong is a rich communities are empowered and effectively
source of sand that is useful in construction involved in planning and decision-making.”75
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The economic costs of water stress and mismanagement
The challenge for agriculture, then, is how to exist locally in a more effective way, through the
become more efficient in order to feed a growing more widespread adoption of efficient irrigation
global population while simultaneously using practices. Deploying even a basic flood irrigation
less water. The FAO estimates that agricultural system, where water from rivers or streams
production will need to rise by 70% from is allowed to inundate a field where crops are
current levels by 2050 in order to account for being grown, tends to double the yield compared
population growth and the changing diets of with crops grown exclusively with rainwater.78
those in low-income countries who are becoming Yet flood irrigation can also be improved upon
wealthier.76 This latter factor should not be – approximately 50% of the water used in this
underestimated. According to McKinsey, growing process is wasted. Drip irrigation systems, which
a kilogram of wheat uses 1,300 litres of water, feed water slowly into the soil surrounding the
but a kilogram of beef needs 16,000 litres.77 roots of plants, are much more efficient, but also
much more expensive to install and operate.79
The World Bank believes that achieving this goal
will need a greater correlation between global Likewise, farmers’ decisions on what crops to
supply chains and local hydrological and climate grow and when has an enormous effect on their
conditions – in short, growing crops in places water consumption. Other variables crucial to
where local weather can support them. these decisions include market prices for the crops
Water effectiveness is currently poor in agriculture under consideration, the suitability of the local soil,
as highly water-intensive crops are often produced the cost of water, and international trade barriers.
in arid regions and exported. Tackling the The global agricultural sector using water most
challenge also requires using the water that does efficiently would require both farmers aligning
crop growth with local agricultural conditions
more effectively, and the international trade of
goods being as frictionless as possible. Reducing
food waste could also lower the economic
cost of water scarcity for agriculture. The FAO
estimates that as much as one-third of total food
production is wasted before it is consumed.80
Produce is lost or has to be discarded along every
step of all supply chains. This could be because
of overly restrictive regulation, a lack of cold
storage, or sluggish harvesting. In high-income
countries, households routinely buy more food
than they need to eat. In low- and middle-income
grower markets, investment in infrastructure,
transport and packaging industries would
reduce waste, while in high-income consuming
nations, the FAO recommends better education
of consumers of the environmental cost of
buying cheap food that is allowed to rot.81
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The economic costs of water stress and mismanagement
3.2 Energy ecosystem services.85 However, hydropower also
provides one of the most highly visible examples
The energy sector uses a fraction of the
of the impact that water stress – from drought or
water consumed by agriculture, but still
fluctuations in water availability – can have on an
represents 3% of the global total.82 The most
essential aspect of socioeconomic development.
direct use of water in the energy sector is for
Inadequate access to electricity in developing
hydropower generation, which remains the
countries has dire social and economic impacts.86
largest renewable electricity technology by
However, in Africa, where hydropower accounts
capacity and generation, providing the bulk
for 22% of electricity generation, climate has
of electricity generation in a considerable
already affected the capacity of Zambia’s
number of countries, ranging from Norway,
largest hydropower plant, leading to blackouts.
to Ethiopia, Paraguay and Kyrgyzstan.83
Hydropower plays an important role in many
Hydropower relies on water passing through countries’ decarbonisation pathways, but is
turbines to generate electricity. Most of the water particularly vulnerable to climate impacts.
withdrawn is returned to the river, but the regime
of river flow varies depending on a large number Yet, the water–energy nexus is much more
of factors such as technology type (run-of-river complex. Beyond hydropower, the use of
or reservoir), reservoir size, climate, engineering, water in the sector can be split between that
and amount of demand from end-users.84 which is used in power generation (which,
Development of large-scale hydropower dams according to the International Energy Agency
can have significant impacts on water availability (IEA), is around one-third of the total), and
and quality, as well as changes in habitat that used for extracting and refining primary
conditions, fragmentation of fish migration energy products, such as coal, oil and biofuels
pathways, loss of biodiversity, and erosion of (which accounts for the other two-thirds).87
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The economic costs of water stress and mismanagement
Thermal power plants use differing amounts The growing conditions and the type of irrigation
of water depending on the fuel, the weather, used determine the level of water intensity.
their function in the electricity grid, and Water may have to be removed from mines
the type of cooling deployed. However, the before coal can be extracted, while the coal
technology behind thermal power generation itself may need to be washed before it can be
relies on abundant water and the process processed. Crude oil extraction tends to require
creates plenty of “thermal pollution”, which less water than biofuels but more than coal. The
pursuit of tight oil through fracking has created
the IEA defines as water discharged at a
negative headlines in areas that already see
different temperature compared with that
intense competition for water resources and
at which it was withdrawn, which means
due to the risk of contaminating groundwater.
it cannot be directly returned to source.88
Limited water availability would increase the It is not necessarily the case that using more
price of thermal power generation, or, in some renewable sources of energy will reduce the
circumstances, render it uneconomical. amount of water that the sector consumes.
Although solar and wind power need minimal
There are also huge variations in the amount of water, biofuels are very thirsty, as is nuclear
water used to grow, extract, cool and transport power. This is an important point with regard
primary energy products. Biofuels, such as to how we view the energy industry. A full-
bioethanol, represent the largest amount of throated adoption of renewables over fossil
water consumption in this sub-category, because fuels would represent an enormous step
of the need to grow base crops, such as corn towards limiting greenhouse gas emissions, but
or sugarcane, which are then fermented. it would do little to temper the water crisis.
Thirsty energies
Global water consumption in the energy sector by fuel type in the
Sustainable Development Scenario, (2016-2030, billion cubic meters)
Fossil fuels Biofuels Coal Gas Nuclear Biomass Other renewables
2016
2030
0 10 20 30 40 50 60 70 80
Note: Other renewables include wind, solar photovoltaic, concentrated solar power, and geothermal
Source: IEA
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The economic costs of water stress and mismanagement
Case study: Water-energy-food cooperation
challenges in Central Asia
The Central Asian republics of the former arrangement across the basins, whereby
Soviet Union are not short of fresh water dams and reservoirs were constructed in the
on average, but their supplies are unevenly upstream nations, releasing their contents
distributed. Their failure to cooperate to irrigate the downstream countries in
efficiently on water is leading to major summer. In return, the downstream nations,
opportunity costs, from lower agricultural which are richer in fossil fuels, supplied
yields to weaker health outcomes and energy to their upstream counterparts in
smaller intra-regional trade. In the region, winter. When the Soviet Union broke up,
the main sources of fresh water are located individual countries started focusing on
in upstream Tajikistan and Kyrgyzstan, their national development projects and as
which leave Uzbekistan, Kazakhstan and regional energy prices, which had been kept
Turkmenistan reliant on flows from their artificially low, began to rise towards world
neighbours. The Amu Darya flows from the market prices, the stored water in Tajikistan
mountains of Tajikistan and Afghanistan to and Kyrgyzstan became much more
the steppe and desert areas in Uzbekistan valuable to use for hydropower generation
and Turkmenistan. Historically the river than in supplying their neighbours.
has been a key tributary for the Aral Sea,
The newly independent nations recognised
but it has been exploited extensively since
the need to collectively manage the
the mid-20th century, particularly for
water resources generated from the
irrigation, ultimately resulting in the river
transboundary Amu and Syr Darya Rivers,
drying up before reaching the Aral Sea.89
and gradually merged existing institutions
Similarly, the Syr Darya flows from the
and established new ones to form a
mountains of Kyrgyzstan and Tajikistan,
complex set of institutional arrangements
delivering the main source of fresh water
under the International Fund for Saving the
through Uzbekistan’s fertile Ferghana
Aral Sea (IFAS) framework. The existing
Valley and south-western Kazakhstan.
water allocation agreement is monitored
Over-exploitation of water from Syr
by the Interstate Commission for Water
Darya has similarly led to severe depletion
Coordination of Central Asia (ICWC), which
of water flows and, combined with the
holds regular meetings, has a secretariat,
vanishing of the Amu Darya, caused the
the ICWC Scientific Information Centre
quasi-disappearance of the Aral Sea.90
(SIC), and regional branches. The highest
The Soviet Union developed heavy body of the IFAS, the Executive Committee,
infrastructure and a resource-sharing has a rotating presidency and rotating staff
(Continued...)
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The economic costs of water stress and mismanagement
(on a three-year basis), which presents meeting as a guest in 2018, at which the
a challenge for policy continuity, and other member states acknowledged the
ultimately for its power and influence. country’s grievances, but no progress or
changes have been achieved as a result.93
Moreover, as outlined in the Blue Peace
Index, the mandates of these organisations Both upstream and downstream countries
have proven to be too narrow and lack the suffer from this failure to work together.
capacity for broad transboundary water Downstream nations are receiving less water
management. In the absence of shared than they need to sustain their agricultural
goals, a culture of competition rather than sectors and they lack strategic visions of
cooperation has taken root,91 and the development that meet the needs of their
political fragility of the region means that climates. Undermining rural livelihoods
cross-border integration is incredibly limited. also risks pushing disaffected economic
migrants towards the cities, which may
Although the efficiency and effectiveness lack the infrastructure to cope, resulting
of this governance structure have been in even deeper political grievances.94 The
questioned, attempts to reform various upstream countries still have enough water,
parts of the IFAS framework between 2008 but a lack of regional development hampers
and 2012, led by Kazakhstan, but supported their connectedness to global markets, and
by Tajikistan and Kyrgyzstan in particular, access to international borrowing and best-
were unsuccessful.92 In 2016, Kyrgyzstan practice on water management techniques.
announced that it would “freeze” its The opportunity cost of frosty regional
membership of the IFAS, citing dissatisfaction relations on water could be costing Central
over the lack of accommodation of Asian countries an estimated US$4.5bn a
its interests, and it has not attended year as a consequence of lower agricultural
ICWC water allocation meetings since. productivity, higher energy prices and
Kyrgyzstan’s president attended an IFAS limited access to capital markets.95
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