UNCHARTED WATERS The New Economics of Water Scarcity and Variability FIGURE 2  The Water Policy Cycle Supply-side approaches, though necessary, are sel- Improved management in the water sector, while dom sufficient to build adequate resilience to fickle necessary for building efficiency and resilience, may rainfall patterns. Without proper economic signals, increasing the supply of water often also increases not protect the poor from erratic rains nor assure that water is used sustainably. Safety net programs and Executive Summary demand. The result is a vicious cycle where water sup- insurance schemes are needed to protect the most vul- plies are expanded only to see that water consumed nerable populations from the torments of droughts and inefficiently; eventually returning the region to wors- floods. In rural areas, these safety nets could take the When the rains withered and the forests turned into in slow motion with impacts that are deeper and lon- Water source W parched savannahs, the earliest humans drifted out of ger lasting than previously believed. Although over- ening levels of water stress. This paradox of supply force- form of crop insurance schemes, while in cities, careful fully illustrates the need for combining investments utility regulation is needed to ensure affordable access Africa in their quest for water. Farms, settlements, flowing riverbanks and storm surges certainly pose Protect the source and eventually cities clustered along riverbanks and major economic threats, this book demonstrates that of water supplies that expand water supplies with policies that manage to clean water. Adequate safeguards, such as quotas and demand and allocate water efficiently. Such policies water quality standards, are required to ensure more gave rise to great civilizations. Now, as then, economic the impacts of water scarcity and drought may be even Farms include water pricing, water trading exchanges, and sustainable water use, to protect water sources, and to activity remains tied to water availability. But this greater, causing long-term harm in ways that are quotas on overall water use to ensure enough is left prevent over-use and abuse of these public goods. This relationship will undergo unprecedented pressures, as poorly understood and inadequately documented. Manage demand to address over for the environment. Water trading schemes are a mix of policy tools is needed to protect those most vul- the 21st century witnesses the collision of two power- Droughts can have health impacts, hamper firm pro- Water infrastructure deepening water stress promising approach that allows for the sale of water to nerable to water shocks, and ensure that rainfall does ful forces—burgeoning population growth, together ductivity, accelerate the destruction of forests, and for delivery transforms water higher-valued uses. The result is a win-win because a not become destiny, perpetuating poverty. with a changing climate. With population growth, compromise agricultural systems. from a public to a private good transfer occurs only if buyer and seller both benefit water scarcity will proliferate to new areas across the This book presents new evidence to advance from the transaction. Efficiency of use rises and conser- The future will be thirsty and uncertain. Already globe. And with climate change, rainfall will become understanding on how rainfall shocks coupled with vation improves. The institutional architecture required more than 60 percent of humanity live in areas of water more fickle, with longer and deeper periods of water scarcity impact farms, firms, and families. On for a well-functioning water trading system is complex. stress where available supplies cannot sustainably meet droughts and deluges. farms, the largest consumers of water in the world, Firms But even if the obstacles seem significant, this is an demand. If water is not managed more p ­ rudently—from Erratic rains weigh heavily on communities and impacts are channeled from declining yields to chang- Regulate water utilities instrument whose time has come for consideration, if source, to tap, and back to source—the crises observed economies. Floods are so powerful a metaphor of the ing landscapes. In cities, water extremes, especially for reliable access to safe not immediate implementation in all contexts. today will become the catastrophes of tomorrow. human experience that nearly every civilization— when combined with unreliable infrastructure, can water and sanitation from classical antiquity, to the Abrahamic religions, to stall firm production, sales, and revenue. At the center ancient Mesopotamia—tells of a deluge epic that of this are families, who feel the effects of this uncer- changed the world. Although it is debated whether tainty on their incomes, jobs, and long-term health these myths have a basis in historical events, extreme and welfare (figure 1). weather events still reshape societies and permanently Families mark the lives of those who experience them. Over the past two decades, extreme rainfall events have affected Parched Farms, Shriveling Yields, and Safety nets to protect the about 300 million people on average every year. With Shrinking Forests vulnerable since water is a climate change, such extreme episodes of rainfall are merit good Throughout much of the world, even moderate expected to increase in frequency. Adapting to chang- deviations from normal rainfall levels can cause ing trends in rainfall, although difficult in its own large changes in crop yields. The driest regions are right, is a gradual and predictable process. Knowing most sensitive to rainfall variability, although extreme how to address unpredictable rainfall shocks, of uncer- rains can also bring crop losses to regions with more tain frequency and unknowable magnitude, presents bountiful precipitation and productivity. Such vari- an additional challenge brought by climate change. ability is responsible for a considerable net loss of Environmental policies to reduce SKU 33162 Whereas floods are spectacular weather events food production every year—enough to feed 81 mil- water pollution and degradation that cause sensational damage, droughts are misery lion people every day, a population the size of 5 6 1 Germany’s. Many of the affected regions overlap with When Rainfall Becomes Destiny FIGURE 1  Some Results at a Glance their employees. In Latin America, losses in income impractical. Water must therefore be supplied to con- areas that are already facing large food deficits and caused by a dry shock are four times greater than that sumers through a single network, which must have a are classified as fragile, heightening the urgency of Although a rainfall shock may be fleeting, its conse- of a wet shock. Droughts have poorly understood single owner—a monopolist—that needs to be regu- finding and implementing solutions. Rainfall shocks cascade consequences from quences can shape the destiny of those who experi- ence it in infancy. Deprivations, such as a lack of food, endured in early life impede the physical and mental UNCHARTED WATERS consequences within cities, causing higher incidences of diarrheal diseases, health impacts on young chil- dren, and an increased frequency of power outages. lated to ensure adequate access to water at a price that people can afford. Finally, the water passes through sewers and reenters the ecosystem where, if untreated, ­ declining agricultural yields to shrinking forest development of a child with significant and often irre- it can pose major health and environmental risks. cover. Faced with declining agricultural productivity versible consequences. With population growth the demand for water is accelerating The performance of firms in cities is also affected and with climate change rainfall has become more erratic These multiple, and at times competing, attributes due to rainfall shocks, farmers often seek to recoup by the availability of water. While the private sector’s In rural Africa, women born during severe often cause policy makers, economists, environmen- these losses by expanding cropland, at the expense of reliance on transport and energy infrastructure is well ­ natural habitats. Rainfall variability can account for droughts bear the marks throughout their lives, Rainfall shocks affect about 25% of humanity each year established, little is known about the significance of talists, and water experts alike to disagree on how best growing up physically shorter, receiving less educa- to regulate, distribute, and use water. But neglecting as much as 60 percent of the increase in the average water to firms. Findings in this book show that when tion, and ultimately, becoming less wealthy. They these linkages can result in policy decisions that are at rate of cropland expansion, and, as a result, is respon- urban water services are disrupted, whether by cli- sible for much of the pressure on forested areas. may also be less empowered to make household finan- Impacts ripple across farms, firms, and families mate, inadequate infrastructure, or both, firms suffer best less effective than they could be, and at worst cial decisions and more accepting of domestic vio- downright harmful. Climate change may accelerate this pattern, leading significant reductions in their sales and employment. to a harmful cycle where rainfall shocks induce lence. Droughts tend to be viewed as short-term events Particularly vulnerable are small and informal firms, a that end as soon as the rains start falling again, but At its source, supply-side measures are needed deforestation, thereby increasing carbon dioxide ­ major source of employment in developing countries. their effects can haunt individuals throughout their to deliver water to users. These may encompass emissions, and, in turn, further exacerbating rainfall The impacts of water supply and sanitation services in lives, causing impacts that go undetected. investments in infrastructure like reservoirs, irrigation extremes. cities therefore extend beyond the widely documented systems, and wastewater reuse technologies. “Natural effects on human health. Irrigation systems usually insulate agriculture Perhaps most troubling, the legacy of rainfall FARMS FIRMS FAMILIES capital” solutions, which draw on such features of from the adverse effects of rainfall variability, but shocks can ripple through generations, harming not nature as the water-retaining abilities of forests, offer these systems may also paradoxically amplify the just the women who experienced them, but also their Dry shocks reduce For firms and cities, A dry shock in infancy Avoiding the Parched Path relatively inexpensive means of addressing some water impacts of shocks. The availability of irrigation typi- children. Rainfall shocks experienced by a mother in yields and cause the cost of dry can become destiny, scarcity issues as well. Investments in technologies cally provides both a buffer against rainfall variability her own infancy can significantly impact the health of annual losses that shocks are four with lasting effects Pursuing business as usual will lead many countries that improve the efficiency of water used and con- her children, who are more likely to suffer from mal- down a “parched path” where droughts shape desti- and a significant boost to crop yields in normal years. could feed 81 million times greater than on health and wealth, sumed may be helpful too and offer the tantalizing However, in many dry regions of the world these sys- nutrition. These findings add to the urgency of nies. Avoiding this misery in slow motion will call for people, the population wet shocks. Without trapping subsequent prospect of creating “new” water, without depriving tems fail to protect farmers from the impacts of addressing the effects of adversity in infancy through fundamental changes to how water is managed. It will of Germany. Dry shocks sufficient water, generations in require using different policy instruments to address any existing users. Adoption of these solutions has droughts. Free irrigation water creates the illusion of steps such as drought insurance or social safety nets. been slow due to misaligned incentives. A large pro- push farmers to expand economies slow poverty and the multiple economic attributes of water, through its abundance, which buoys the cultivation of water- portion of the benefits of efficiency improvements are intensive crops such as rice and sugarcane that are agriculture into forests, down with impacts malnutrition cycle of use (figure 2). public, while technology adoption costs are private. ultimately unsuited to these regions. The ironclad Vulnerability in the City worsening climate on health, labor At its source, in rivers, forests, and aquifers, water This implies that sharper incentives are required for laws of demand and supply then dictate that when In cities, the economic impacts of a dry shock are change and threatening incomes, and firm technology uptake that might include a change in the is a public good subject to all the mismanage- water is provided too cheaply, it is also consumed often greater than those of a wet shock. While urban water supplies sales ment and overexploitation problems of a common-­ subsidy regime, improved access to credit, or public recklessly. As a result, crop productivity suffers dis- infrastructure is generally able to buffer residents property resource. As water moves into pipes to investments in infrastructure. The challenge of man- proportionately in times of dry shocks due to extraor- against the effects of moderate rainfall shocks, cities quench the thirst of cities, or into irrigation canals to aging water in cities is fundamentally different, dinary water needs that cannot be met. This book are still at the mercy of large rainfall shocks. Further, grow food, it becomes simultaneously a private good demanding better performance from water utilities demonstrates that this paradox of supply is a wide- while the immediate devastation caused by floods and a merit good—one to which people have a right through appropriate forms of regulation and incen- spread problem in areas where water is scarce and its attracts much attention, droughts in cities may have as a necessity for life and health. In cities, this dual tives to assure a balance between quality services for demand is uncontrolled. the longer-­ lasting, more severe impact on firms and Dry shocks are misery in slow motion challenge is compounded by the fact that the costs of consumers, and a rate of return that assures cost building multiple water systems is prohibitive and recovery and further investment in the sector. 2 3 4