Increasing water scarcity coupled with an absence of economic incentives has led to an investment shortfall of 400 to 500 billion Euros per year in the global water economy. The water sector remains underfinanced, as prices continue to be subsidized and are kept artificially low despite scarcity. The price for water does not reflect the real costs of this increasingly scarce resource, in particular in the agricultural sector. However, a price hike would entail severe social repercussions.
In terms of mere numbers, sufficient amounts of water are available on earth to ensure adequate supplies of freshwater. However, rainfall is seasonal and distributed unequally across regions, so that scarcity or drought do occur. Furthermore, water is essential to all life on this planet and cannot be replaced by any other commodity - which sets water apart from all other economic goods on earth. About 70% of water is presently being used in irrigation agriculture. Industry and the energy sector account for another 20%. Private households consume a mere 10%, mostly for such daily tasks as taking showers, flushing the toilet, and doing the laundry. Water is not being recycled, even though demand has steeply increased within the past 50 years due to rapid population growth. Firms increasingly view water as a decisive factor in their product development and profit margins. Many economic sectors are particularly dependent upon a constant supply of water: agriculture, food industry, energy, mining, chemicals and pharmaceuticals, producers of paper and cellulose, clothing industry, semi-conductor industry, and tourism. In the near future, water availability and access to recycling technologies will be major points of consideration for firms. As water scarcity increases, so will political conflicts. In many countries, the state regulates the water sector. However, the politically inspired water price could soon become a problem, since it neither reflects supply and demand, nor covers costs in poor countries in particular. The low price is problematic even in the developed world, as it leads to water being wasted.
The challenge for economists is the following: Water prices will have to be higher and irrigation methods more efficient in agriculture. Water-deprived regions should focus on the production of goods that require little water, while policymakers should refrain from maligning genetic engineering and biotechnology. Trade needs to adapt as well: Countries which need a lot of water for their agricultural products, would do better to import these. Cities need to improve the maintenance of their water systems and to modernize their infrastructures. In many countries, there will be no way around raising water prices. These adaption costs could be financed through international climate funds. Finally, state and private firms should work more closely together in public and private partnerships to address the water challenge.
Read the Report in German: http://www.dbresearch.de/PROD/DBR_INTERNET_DE-PROD/PROD0000000000253960.pdf">Weltwassermaerkte
