Macroeconomic impacts of water allocation under droughts. Accounting for global supply chains in a multiregional context

Abstract

Water allocation policies play a key role in determining the impact of drought events on the macroeconomic system. Economic agents may find it difficult to modify their production structure immediately, and will therefore try to maintain current production and commercial patterns. The study takes this behavior into account and combines a Multi-Regional Input-Output model with a Non-Linear Programming optimization model to assess the macroeconomic impacts of localized droughts on a global scale. It analyses their propagation through interconnected supply chains, and it also evaluates the implications of different water allocation policies in terms of GDP impacts, with a large regional and sectoral detail. Our results show that the policy-regime chosen greatly determines the extent of the economic impacts, both in the directly affected region and in third countries. When the drought affects only agriculture, that negative economic impacts can be mitigated by adjusting production and trade. In contrast, when water availability is reduced uniformly across all economic sectors in the drought-stricken region, economic losses spread across the globe.