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Water and economic development

Economic development is the reproduction on an expanded scale and gradual qualitative and structural positive changes in economy, production forces, education, science, culture, living conditions and quality, and human capital. Economic development includes the development of social relations. This is the process of life quality improvement.

The main drivers of economic growth and development are human capital and generated by this capital innovations.

Important indicators of country development that determine stability and sustainability of economic development and growth are investments in integral parts of human capital education, culture, medicine, science, and life quality.

Developed countries invest 2-5 times more in human capital than developing countries.

An estimated three out of four jobs that make up the global workforce are either heavily or moderately dependent on water. This means that water shortages and problems of access to water and sanitation could limit economic growth and job creation in the coming decades, according to a UN report 2016 Water and Jobs.

Water and jobs are inextricably linked on various levels, whether we look at them from an economic, environmental or social perspective, said Irina Bokova, Director-General of UNESCO.

Assessing the relationship between water, economic growth and jobs is particularly challenging, the Report states. Nevertheless, the report notes a number of studies that find correlations between water related investments and economic growth.

The transition to a greener economy, where water plays a central role, will also lead to more jobs. The International Renewable Energy Agency (IRENA) estimates that 7.7 million people were already employed in renewable energy in 2014.

There is increasing pressure on freshwater resources. Between 2011 and 2050, global population is expected to increase by 33%, from 7 to 9 billion, while food demand will rise by 70% in the same period. Furthermore, the 5th assessment report of the Intergovernmental Panel on Climate Change (IPCC) forecasts that for each degree of global warming, approximately 7% of the global population will face an almost 20 % decrease in renewable water resources.

This projected shortage will call for non-conventional sources of water, such as rainwater harvesting, recycled wastewater and urban runoff. Use of these alternative water sources will create new jobs.

Currently, according to the UN Report, almost 1 % of the total workforce in both developed and developing countries currently work in the water sectors which includes water management, construction and infrastructure maintenance, as well as water supply and sanitation.

The market for jobs in water supply and sanitation is promising and there is significant potential for growth. For example, in Bangladesh, Benin and Cambodia alone, nearly 20 million people living in rural areas should gain access to running water by 2025, which is six times the current number, and represents a potential economic impact worth as much US$90 million.

The need for investment into aging and inefficient infrastructure is also a potential driver for employment in the sector. An estimated 30% of global water withdrawals are lost through leakage. In London the rate of loss is 25 % and in Norway 32%. In some countries, irrigation practices are either non-existent or outdated and result in poor agricultural productivity. In Africa for example, agriculture is mainly rain-fed and less than 10% of its cultivated land is currently under irrigation, holding back job creation.

Achieving the 2030 Agenda on Sustainable Development will require a keen understanding of key role of water in the world of work. Decent jobs are directly linked to water management, in areas such as providing water supply, infrastructure and waste management; and water-dependent sectors, such as agriculture, fishing, energy, industry and health. Moreover, access to improved drinking water and sanitation facilitates job creation and a healthy, educated and productive workforce which is the foundation for growth.

Creating conditions that improve water productivity and favor the transition to a green economy, training more skilled workers in order to respond to increasing demands for labor in the water sectors are some of the points that the Report brings to the attention of the Governments to appropriately respond to the requirements of the United Nations Sustainable Development Goals notably number 6, specifically dedicated to water and sanitation.

Freshwater challenge has become an integral part of international political agenda since the last decade of the XX century.

Before early 2000s, economic experts did not pay enough attention to water issues besides national water facilities, irrigation, hydro energy and urbanization problems.

In this context, one may mark several main aspects.

First, this is water component in world production, agriculture and energy. The second block of problems fighting water shortage and adaptation to new resource limiters. This refers to an abrupt increase in water withdrawals by a number of developing countries (first of all, China) that causes structural changes in national economy. This issue is particularly problematic and affects both adaptation (better water use, re-orientation of economy depending on contribution of water-intensive sectors in GDP) and competition between states for international water resources.

There is also the issue of right to water, right to economic use of water and investments in the water sector.

About 70% of the worlds freshwater is used in irrigated agriculture; moreover, irrigation water withdrawal has increased by more than 60% since 1960.

The second largest user is industry (20%).

Shares of agriculture and industry differ in developed and developing countries, but even in more developed countries the share of agriculture in total water consumption is higher than 30%.

The three leading countries with highest annual water withdrawal are India, China and USA.

The largest share of renewable water withdrawal is in Iran (68%).

The highest per capita water withdrawal is in USA (1,518 m3/capita/year).

Distribution of water by sector is not uniform: Pakistan, Iran, Indonesia and India spend more than 90% of water for agriculture, while Russia (63%) and the United States (46%) are leading in industrial water withdrawal.

Municipal sector puts high load on water in Japan and Russia 20 and 19%, respectively.

The indicator of water productivity is particularly interesting, meaning how many dollars to GDP are contributed from every cubic meter of water.

In this context, Japanese economy uses water more productively: every cubic meter generates $53.5. United States takes second place with their $23.5.

In other countries, this indicator varies from $0.6 (Pakistan) to $8.2 (Mexico). In Russia every cubic meter of water generates $6.

Such big difference is explained by larger share of high-tech manufacturing and developed services sector. Those sectors are incomparably less water-intensive than agriculture and even processing industry.

There is also direct relationship between the agricultural share in GDP and personal incomes.

Agriculture is the main water consumer but its contribution to global GDP is well lower.

In developed countries with high per capita income, the added value of agriculture in GDP is 1.6% as a whole and does not exceed 7.2% (Island). In the countries, where per capita income at the average level, this indicator is higher 10.4%. It is notable that the agricultural share in national water withdrawal in rich countries is 43%, while in average income countries it is 75%, but contribution to GDP differs 6.5 times but not 1.7 times. For low-income countries agriculture plays a different role in their economies: the agricultural share in GDP is higher than 60% in poorest African countries (CAR, Somali) and 29.8% in general in this group of countries. Moreover, agriculture accounts for 85% of the total water withdrawal.

The role of industrial water consumption is different. The highest industrial contribution to GDP is in average income countries 36.2%. This is the consequence of transfer of processing industries to developing countries.

This refers to large assembly plants that do not consume much quantities of water. This explains low industrial water withdrawal in these countries only 4.8%. The relatively high share of industrial water withdrawal in rich countries (37.5%) is explained by well-developed energy system, concentration of industrial manufacturing and highly efficient agriculture in Western Europe.

There are two indicators of productions water intensity: water withdrawal and water consumption. The difference between those indicators can be substantial. This is quantity of water that returns back after production cycle into river or other water source. Agriculture remains the leading water consumer, especially in developing countries. Consequently, water shortage will aggravate with the growth of this indicator.

As to water withdrawal, the global leading sector in terms of this indicator is energy sector. Besides hydropower stations, water is needed in other electricity generating stations (except for wind and solar stations), mainly for cooling. However, after production cycle, the bulk of used water is returned to upper soil layers. Accordingly, with growing water withdrawal, the matter of water treatment will be particularly acute. In industry, situation varies depending on sector: oil-chemistry, metallurgy and timber processing industry are more water intensive. The more water is required in production for cooling, the higher this indicator of water withdrawal will be.

Experts, while considering water as an economic resource, pay attention to the following characteristics of water. Definition of water as an economic good is somewhat justified actually water is a resource, its price, volume and demand for it are subjected to valuation. But water is a specific resource, it cannot be fully replaced, and water market has limits that determine both supply and demand.

With the development of water market and pricing of water as a resource, problems occur of non-economic nature. First, water is unique as a vital resource, which is irreplaceable. Then, water market is very specific, to which contribute the following factors: human right to water, environmental security, national security as a whole, transboundary basin management, etc. In this context, water as a vital resource is also characterized by the fact that its price is not an absolute indicator of water value. It rather reflects how complex is valuation of freshwater exclusively as an economic resource.

The fuller picture of water prices is in urban water consumption: besides national surveys, the World Bank regularly publishes monitoring on 261 cities all over the world. The most expensive water is in North-Western Europe. Out of top ten cities with cheapest water seven cities are located in most water scarce regions.

In enlarged list the trend is the same: highest water tariffs in North-Western Europe; lowest water tariffs in Arabian countries, post-Soviet space and developing countries with limited access to drinking water.

As to water demand elasticity (WDE), it can be estimated more accurately for urban household water supply, while situation with agriculture and industry is more complex.

In the US, the 10% increase in maximum water price will lead to 3-4% decrease in demand of urban dweller, meaning that WDE of average urban dweller in the US varies from -0.3 to -0.4.

Other things being equal, the more elevated are prices, the higher is WDE. A classic example is fruit irrigation in Australia in drought periods: raising tariffs for additional water (as compared to other periods) causes social discontent.

As to WDE in agriculture, based on 24 surveys in the US over the 1963-2004 the average indicator is 0.48 against prices.

Moreover, it is found that the drier is the region, the higher will be WDE in agriculture there. In contrast to urban consumer, who uses certain quantity of additional needed water even at high price, agricultural producers set the so called cut-off price, after which water demand approaches zero, i.e. the farmer will not increase production if water costs higher than a certain admissible price. This relationship is very important for the models of water use reduction in developing countries, where agriculture consumes 70-80% of diverted water.

As to the place and market of water in the world economy as a whole, experts assess it through international law (IL): when it comes to such long-term projects, the actors need (international) rules of the game.

The economic use of freshwater as a subject of IL originated only in early . Regulation of water use by international treaty law was developed gradually and addressed the following spheres in sequence: navigation, fishery, timber floating, border rivers and environment.

If one considers the cost of water as the opportunity cost, then, first of all, losses through inefficient water use can be estimated. This refers to such losses as health costs, compensation of lost workforce, lost profit in tourism and agriculture, and degradation of public utilities sector.

Thus, in South-East Asia, Cambodia, Indonesia, Philippines, and Vietnam loose about $9 billion a year or 2% of their total GDP due to shortage of water.

Losses through diseases caused by poor sanitation account for bulk of losses ($4.8 billion). Poor sanitation causes pollution of water, makes the cost of drinking water more expensive, and negates the effectiveness of fish farms ($2.3 billion). Additionally, there are losses through underuse of fertile land ($220 million) and tourism ($350 million). As estimated, achievement of basic sanitation will produce $6.3 billion a year.

According to UN, achievement of SDG on water and sanitation by 2015 was estimated at $84 billion.

In global economy, water rich countries use this resource as a competitive advantage.

Experts say that the value of water as a resource becomes higher since it is one of two key elements for food production. Though valuing water has increased competition for water between countries, the sphere of conflict of interests virtually remains the same, while opportunities for mutually beneficial strategies has become wider.

Major obstacle to more efficient water use is insufficient investment into the water sector.

The problem of investment raising is that, despite expected high cost-effectiveness, the investor and the beneficiary are not the same entity. Benefits from water investments are gained not only by concrete water consumers but also by the society as a whole (the state saves the costs of emergencies, tourism and industry are developed, and healthcare system becomes more effective). Those benefits virtually are impossible to accumulate in form of dividends for an individual investor. This makes it difficult to attract private investors. Besides, there is an issue of payback of relevant project, taking into account the water right (i.e. supposed restrictions on pricing).

Technology trade is the most attractive sphere for investments at present. The technology market is one of the forms of clean water market collaboration that does not require physical transportation of water.

Such technologies can be conditionally divided into three categories.

1) Technologies helping to produce more commodities given the constant water withdrawal, i.e. technologies for better water efficiency, water saving, including drip irrigation, irrigation canal coating, etc.

2) Technologies helping to get more water from unconventional sources: desalination, water treatment, groundwater development, etc.

Such technologies are particularly popular in the Middle East, South-East Asia and in a number of Mediterranean countries (first of all, Spain).

3) Infrastructural construction technologies that allow remapping water in a country or a region through dams and hydroschemes.

First category technologies are very promising in international economic relations: potential to improve efficiency of national water use is colossal - agricultural water losses account for 60% of total water withdrawal.

In 2003, FAO analyzed 248 irrigation projects in 33 developing countries: total investments amounted to $8 billion; the average project cost was no more than $32.5 million. Most investments were allocated by the World Bank. Undoubtedly, investments and average price of 1 ha widely differ among countries.

Thus, investments averaged $2,280 into irrigated hectare, with $398 in China and $7,218 in Zimbabve.

Desalination is the most widespread technology of the second category.

Desalination projects become self-repaid more quickly (through economies of scale and reduction of costs) and companies prefer implementing these projects independently or together with directly concerned municipalities. World leaders in water desalination are Saudi Arabia and UAE that account for more than 40% of total desalinated water (20.6% and 20.3%, respectively). Other countries with large share of desalination are Spain, Algeria, China, US and all small Gulf countries.

The cost of desalination substantially decreased over the last 30 years. Desalinated water will keep up with ordinary water, even in the regions that do not suffer from serious water stress.

The third category infrastructural construction technology allows radically changing water balance over the vast area, on the one hand, and is the source of international conflicts, on the other hand.

China (by number of dams) and Turkey are leading in such infrastructural construction. The key aspect of such development at the present stage is the possession of technologies. Today, this sphere is the most conflict-prone from the political point of view.

By finalizing forms of water trade, the expert underlines the only form developed fully on the market bottled water trade. However, this market is specific and is of no significant interest for world economy since has no structural effect on it.

The so called virtual water concept was put forward by T. Allan in the early 1990s. He defined it as quantity of water embedded in food or other commodities. According to this concept, water-poor countries may and should buy water-intensive commodities from the countries, where the value of water is lower. This way water use efficiency increases. Given form of water trade is encouraged by international organizations as such approach solves a number of problems occurring during physical water trade, such as water rights, ecology, investment, transboundary regulation.

According to UNESCOs estimates, already today the world manages to save 6% of all used freshwater through virtual water trade.

The virtual water exporters are the Northern America countries, Argentina, Thailand, and India, while the importers are Japan, South Korea, China, Indonesia, and the Netherlands.

For visualization of benefits from virtual water trade, lets consider figures from different countries. For production of 1 ton of soybean 4,124 m3 of water is needed in India, 2,030 m3 in Indonesia, and 1,076 m3 in Brazil. The average global indicator is 1,789 m3. Water component differs much more if we consider meat production: for 1 ton of beef 11,681 m3 of water is used in the Netherlands, 21,028 m3 in Russia, and 37,762 m3 in Mexico. The average global indicator is 15,497 m3.

Finally, lets consider rice and wheat. For production of 1 ton of rice Australia will use 1,022 m3 of water, while Brazil 3,082 m3. The water component in 1 ton of wheat varies from 619 m3 in the Netherlands to 2,375 m3 in Russia.

In general, buying-up and rent by countries of land abroad for food production is also an integral part of the water market. This is mainly done for national food security.

Given current tendencies, one may speak about occurrence of a number of preconditions for global water crisis in the near future, if no due measures are taken. Yet, on a global scale the issues at hand are regional water shortage and the lack of freshwater (social phenomenon) in poor countries but not the crisis. Undoubtedly, water shortage differs quantitavely and qualitatively in various regions.

According to FAO classification, physical water shortage implies that more than 75% of renewable water sources are used. This means that arid areas will not necessarily suffer from physical water shortage.

Economic water shortage indicates that annually 25% of all renewable waters are used for economic and peoples needs. If the share of used renewable water is less than 25%, this is not the water shortage.

The crisis of arid regions has been always observed and is a part of their economic system and lifestyle of local population. In the context of climate change, this crisis has been aggravating.

Thus, in African countries the main problem consists in incapability of economic entities to distribute available resources efficiently rather than in shortage of water. Most experts believe that water in Africa is enough to solve the problem of water shortage. However, currently, Africa uses only 4% of own renewable water (for comparison, developed countries use about 70-90%). Because of extreme poverty in a number of regions, 340 million people lack access to freshwater and 500 million lacks basic sanitation.

Poverty does not allow organizing transportation of water or using desalination, vapor condensation or other technologies to get water.

The so called Asian (agrarian) crisis seems to be the most complex at present day: it comprises the challenges of industrialization, high rates of production growth, urbanization and consumption growth. This crisis is linked to growth of peoples income and changes in consumption patterns. Growing incomes encourage consumption of meat, poultry and milk, for production of which a lot of water is used.

For instance, the Chinas citizen consumed on average 20 kg/year of meat in 1985. This figure grew to 50 kg in 2009 and 53.5 kg in 2011. Moreover, 1000 m3 of water is used for production of 1 ton of fodder grain. Thus, as UN estimates, the change in dietary habits of 1.3 billion Chinese people implies an increase in water demand by 390 km3 a year for meat production only.

According to United States Geological Survey, in 2004 the total water consumption for domestic needs amounted to 300 l/day/capita in developed countries (from $380 in USA to $129 in Germany) and 20-30 l/day/capita in backward countries. For reference, 1000 l/day/capita is spent in New York, the most water intensive city all over the world.

UN experts predict that in near decades the highest increase in water withdrawals will be in Asia due to population boom, economic development, and urbanization: from 2500 to 3300 km3. Moreover, in early , water withdrawals did not exceed 400 km3, while in 1950 they were slightly more than 900 km3.

By summing up, one may say that the demand drivers at a conditional global freshwater market include population growth, agriculture, dietary changes of large groups of population, industrial and energy development, and urbanization. The supply factors include inefficient water use/water wastage, water pollution, and climate change.

It is highly probable that water shortage will have a strong impact on global economy.

Intensification of competition for water at the world market is caused, first of all, by growing demand for water-intensive commodities, two third of which is food. The food market has a significant impact on water shortage conditions and the status of this market shapes water balance in regions and the world as a whole.

In recent decades, food market is characterized by significant deficit and wide price variations. Meanwhile, the main competitive advantage is the relatively low price of commodity since the food market is that of homogenous product.

Hence, effective water use contributes to steep increase in economic competitiveness.

Sources:
Water drives job creation and economic growth, says UN report
In Russian:
Likhacheva A. Fresh Water Problem as a Structural Factor of World Economy / Ekonomicheskiy Journal VShE. 3 / / 2013

Author: Rysbekov Yu. Kh., SIC ICWC