Water Shortages, Water Allocation and Economic Growth: The Case of China

Current projections indicate that by 2025, water scarcity will affect over one quarter of the world’spopulation. This suggests that the need to manage water more efficiently will become more pressingduring the next few years as the demand for water increases along with the expansion ofeconomies and their populations. This paper investigates the economic impacts of efficient intraregionaland/or inter-regional water reallocation, and examines their corresponding economic gains.A Ramsey-type growth model of a small, open, competitive economy is fitted to year 2000 Chinesedata andthe empirical model is used to perform policy experiments. Within region water reallocationincreases per-capita Chinese GDP by about 1.5% per year over the period 2000-2060. Theaggregate potential welfare gain due to this reallocation is 1002.51 billion RMB. Transferring waterfrom southern to northern China via the South-North Water Transfer Project, on average, has asmaller impact on per-capita GDP over the period 2000-2060, with an aggregate welfare gain of557.23 billion RMB. Combining intra-regional and inter-regional water reallocations, on average,increases per-capita GDP by 0.38% per year over the period and the aggregate welfare gain fromthis combination is 1148.06 billion RMB.