Economic Growth and Water Consumption

Projections of future water scarcity are numerous; however, measurements of actual water use and predictions of future water availability and consumption rates have proven difficult to estimate accurately (Gleick 2003). One of the difficulties in correctly calibrating such predictions lies in specifying the role that factors such as economic growth play in determining water use. 
Numerous studies show a positive correlation between wealth and domestic water consumption, both in Israel (Portnov and Meir 2008) and abroad (Dalhuisen et al 2003). There is less agreement, however, on how water consumption at the national level is affected by growth in the overall economy.  Some researchers have found little correlation between national economic growth and water consumption (e.g. Gleick 2003), while others have found an inverted U type relationship, often called an Environmental Kuznets Curve (EKC), in which water consumption initially grows as a function of economic growth, but later begins to decline (e.g., Rock 1998; Bhattarai 2004).
 
This study evaluates the relationship between economic growth and water withdrawals using multiple cross-sectional and panel datasets, and a variety of statistical techniques, including generalized least squares (GLS), fixed-effects, and non-parametric density regression (NPDR) analysis. Datasets included UN FAO figures for per capita water withdrawals for 2005 for 190 countries, and total and per capita water withdrawals for OECD member states from 1960-2000 and for U.S. states from 1960-2005. GLS and fixed effects regressions of found an EKC type relationship when annual water withdrawals per capita (AWW/N) was regressed on per capita income measures (e.g., GDP/N) for all datasets. Fixed effects regressions also found an EKC for total water consumption for the OECD, but not the U.S. dataset. Analyzing by sector, international cross-sectional data indicated that agricultural water use followed an EKC, but both domestic and industrial water withdrawals were strictly positively correlated with income. OECD and U.S. panel data, however, indicated that industry (including industrial cooling uses in the U.S.) were responsible for the eventual downturn in overall water withdrawals as a function of income.
 
While the overall trend of an ECK for per capita water appeared robust across datasets, analysis using NPDR techniques, which do not require assumptions of functional form, found that consumption rises as a function of income and levels off, but does not decrease (see Figure 1 below for a comparison of GLS and NDPR fitted curves). This indicates that the decline found in GLS and fixed effects regressions may be an artifact of assumptions about functional form, rather than a true reflection of trends in the data.
 
In sum, the research finds some support for the existence of an EKC, but results are not robust. Rather, they are highly dependent on choice of datasets and statistical technique.  Results are also sector specific.  Furthermore, trends found in aggregate data proved to be poor indicators of individual country behavior. Thus, the predictive value of the EKC relationship is limited

References:
 
Bhattarai, M. (2004). Irrigation Kuznets Curve Governance and Dynamics of Irrigation Development: A Global Cross-Country Analysis from 1972 to 1991. Colombo, Sri Lanka, International Water Management Institute.
Dalhuisen J.M., R.J.G.M. Florax, H.L.F. de Groot, and P. Nijkamp (2003). "Price and income elasticities of residential water demand: A meta-analysis." Land Economics 79(2):292-308.
Gleick, P. (2003). "Water Use." AnnualReview of Environment and Resources 28:275-314.
Portnov, B.A., and Isaac M. (2008). "Urban water consumption in Israel: convergence or divergence?" Environmental Science & Policy 11(4): 347-358.
Rock, M.T. (1998). “Freshwater use, freshwater scarcity, and socioeconomic development.” Journal of Environment and Development 7(3): 278-301.
United Nations (UN). (2009). Water In A Changing World. The United Nations World Water Development Report 3. New York: UNESCO.


 Dr. David Katz
Recanati School of Management & Porter School of Environmental Studies
Tel Aviv University