Fresh water is a scarce resource although it is renewable, it is taken faster than it is made in the water cycle, with fresh water making up less than 3% of the world's water and 70% of that being frozen in glaciers (Howard Perlman, 2013). With an increasing global population putting stress on limited supply of fresh water, these shortages and scarcity can have huge effects on the state of the global population and economic growth. In this essay I will be discussing if world economic growth is in danger due to scarce fresh water and the effects of high rents on selling water will have on this growth.
Economic growth is defined as 'the positive trend in the nation's total real GDP over the long term' (Lipsey & Chrystal, 2015, p701) and water scarcity can affect economic growth in a variety of ways. Water is an incredibly important resource required to sustain life and used is heavily in industry and agriculture. Water scarcity and high rents on selling water, may lead to higher water prices and since water is a necessity (inelastic demand) so consumers may have less money to spend on other products if prices are increased. Similarly, water intensive products may become more expensive to produce and for consumers to buy which can lead to less products being sold. both of these can reduce GDP, which is the total output produced in the whole economy over a period of time (Lipsey & Chrystal p703). Agriculture uses a large amount of water making up about 70% of fresh water usage (The Data Blog, 2017) and is required to produces food so if water becomes more expensive so will food; this may have serious consequences such as food shortages, drought, increases risk of conflict and migration, leading to economic inactivity in areas under water stress and decrease in economics growth.
Water privatization is when water provision is handled by the private sector. Water privatization differs among countries some such as in England where water is privatized and dominated by regional monopolies and in other placed such a Northern Island, and the majority of world, water is supplied by government owned enterprises. There are mixed opinions on whether water should become a private commodity instead of a public good, as water is essential for life and that the private sectors main objective is to make profits however others may argue it increases efficiency and improve the quality of services.
This essay I will focus on how high rents on selling water affects economics growth and will use David Ricardo's theory of land rent to interpret this statement.
(Foley,2006, p242)
In this diagram depicting Ricardo's theory of land rents from Foley's book 'Adam's Fallacy' we see the corn output for land of different fertilities and as we go further along we see the corn output of less and less fertile land. We see what is called natural wage which is the equilibrium wage of corn which the level at which the population will stable, (Foley, 2006, p71) this is level at which workers able to afford corn as Ricardo's assumes that workers spend their wages on commodities so that they will be able to reproduce themselves. If the wage is too low the population will not be able to afford food to survive thus decreasing the population due to starvation. If the wage is too high, this we lead to lower profits and the population may increase at higher rate than the production of food, also causing a higher demand for corn than can be supplied, consequently also leading to starvation and the population starting to die out in the future – this relates with Malthus's theory of population in which the population grows geometrically and agricultural output grows arithmetically, Ricardo uses Malthus's analysis to come up with the natural wage.
Cultivated land is the land used which used to grow corn, on the diagram the uncultivated land is the less fertile land which produce lower levels of profit under the market rate of profit, and the stationary state is when the corn output is just enough to cover the wage of land workers, this occurs when the population gets so large that land which its revenue only covers the natural wage is used. As the population increases the demand for corn also increases, and therefore the less fertile land is being cultivated. The same can be said about water as the demand increases more and more water reserves are being used for extraction of water, at first you would extract water from reserves that are easier to access i.e. mountain spring but as the demand increased you would extract water from places which are harder to extract and less profitable for example a very deep ground water reserves, which has higher labor costs. This demonstrates the law of diminishing returns; the marginal water reserves provide a lower output.
In Ricardo's theory there are the landlords who owe the land, there are capitalists that sell the corn and pay rent to the landlord in order to use their land, and there are also land workers who work on the corn farm and are paid wages by the capitalist. In the case of water reserves it is difficult to distinguish who is the landlord and the capitalist as often the water companies that own the land in which the water is extracted from also extract and sell the water.
As we can see in the diagram the profit rates are the same on the cultivated land but the rents differ depending on the fertility of the land. Differences in rent on land of different fertilities is due to the bargaining between the landlords and capitalist. As the demand increases more of the less fertile land is being cultivated so the landlords can demand higher rents on profitable land due to competition; if one capitalist refuses to use pay that amount of rent, another capitalist would be willing to pay however if the landowners requests rent that is so high and that profits fall below market profit rate – no capitalist will rent the land. The price of the corn is the cost to produce it in the marginal land, Riccardo believed that the rent was the surplus and in the marginal land there is no rent and the output is only enough to cover the profit and wages, this however is uncommon to find in the real world and modern economists believe rent does determine the price. It is cheaper to produce corn on more fertile land, however due to competition the market price is the same, so capitalists on more fertile land would make more profit however the landlords will demand more rent, thus equalizing the profit rate.
As the demand population increases the demand for water increases, water is extracted from less and less productive reserves which is costlier (requires more labor/workers) and therefore the price of water increases, as the price is the marginal cost of water produced from the least productive reserve. This will cause the rent on the more productive reserves to increase. However, as the price increases the natural wage must also increase so the workers must be able to afford the water to survive, so real wage stays the same so that can have same purchasing power, due to Ricardo's assumptions that workers use most of their wage on commodities so that they can reproduce themselves. This might suggest that privatization of scarce fresh water reserves won't cause the world economic growth to choke on high rents on selling water, however this is only until it reaches a certain point; you can't just keep inflating the price of water and wage at the proportion, water is scarce and it will come to a point in which there will not be enough water to sustain the population.
Referring back to the diagram, when pass the marginal land we see lesser fertile uncultivated land that produces fewer profits than the average market rate and due to Riccardo's assumption that profits rates equalizes among different industries, this implies that if the population grows to a point in which land that produces very little profit is cultivated then every industry would be receiving less profits. According to this model higher rents on selling water means very unproductive water reserves are being used, which produce less revenue and increases market price therefore the landowners can demand higher rents on more productive water reserves, which would be enjoying higher revenue. As water becomes increasing scarce more of the less profitable water reserves are being used and bringing the market profit rate down in all industries, consequently causing world economic growth to choke.
Water scarcity is definitely a serious issue which can have dire economic and social consequences however due to increases in technology currently and in the future, could help improve this problem. Desalination of salt water, which is what most of the Earths water supply is comprised of, if technology is created which makes it cheap enough to access large amount for less, this can reduce water scarcity as no longer relying on limited fresh water reserves. Others claim that there is enough water and that water scarcity exists due reasons such as mismanagement and inequality of water distribution, lack of infrastructure and corruption, (UN, 2007, p45). In the case of Agriculture which accounts for 70% of fresh water but its estimated that 60% is lost due to leakages in irrigation and inefficiencies in application of irrigation (FAO,1990, p14), implying a solution to water scarcity maybe using technology to allocate scarce resources better and fix these inefficiencies which leads to water being wasted. Combating global warming may be another solution as it affects the water cycle causing droughts in some areas and The World Bank Report 'High and Dry: Climate Change, Water, and the Economy' stated that climate change could cause some areas a decrease in GDP up to 6% by 2050 (World Bank,2016, p1).
Technological advancements will reduce the costs of extracting water from reserves. In the case of the corn, referring back to the diagram, the uncultivated land less fertile than the marginal land will then be able produce a higher outcome and make larger profits now reaching average profit rate making them no suitable for cultivation. The other plots would also produce higher outcome and profits, however some taken as rents. So according to Ricardo's assumption that profits rates equalize in different industries, technology will allow the profit rate to still remain the same and not endangering economic growth, higher profits means more capital accumulation and more investment in industries providing more efficient services and products, allowing the GDP to grow, relating to Ricardo's theory of capital accumulation. However, it is unclear how long these advancements and future advancements will keep this going and when the diminishing returns effects will cause profit rate to decrease.
Fresh water scarcity is a global current issue with many layers, with an increasing population and increasing water consumption sustainability is what needs focus. At the current rate of population growth and rate water usage, will we be able to supply enough water to reach our demand? Using David Ricardo's model of land rent as an analogy to explain this issue, I was able to explain how selling rents can cause economic growth to choke and the effects technology will have on this theory. Due to limited water resources as the demand increases more water reserves are used to extract water which are require more labor so are costlier to extract leading to increases in the price of water, which would lead to an increase in wage for workers to keep real wage the same. As the demand increases even more the marginal land requires high costs and produces very little profit, and profits in different industries equalizes, so all industries would be having fewer profits till that stationary state in which no profits are made. Technological advancements would just decrease the costs of water extraction and make marginal land more profitable.