NOTES AGRICULTURAL & RURAL DEVELOPMENT Can Water Undermine Growth? Evidence from Ethiopia ISSUE 18 SEPTEMBER BY: CLAUDIA SADOFF 2006 Ethiopia has highly variable rainfall, both across the water shocks. The study found that considering the country and over time, and the country experiences reg- effects of water variability reduced projected rates of ular droughts that devastate parts of the country and economic growth by 38% per year and increased pro- ripple through the economy. Such unmitigated hydro- jected poverty rates by 25% over a twelve year period. logical variability1 currently costs the Ethiopian economy Furthermore, the variability of rainfall increased value- over one-third of its growth potential. The very structure added of water investments, such as irrigation, that of the Ethiopian economy, with its heavy reliance on reduce vulnerability to rainfall. The study also found that rainfed subsistence agriculture, makes it particularly vul- transport infrastructure played a major role in the inabil- nerable to hydrological variability. Currently, the ity of local economies to adjust to localized crop failures, extremely low levels of hydraulic infrastructure and lim- as it allows areas with food surpluses to sell to areas in ited water resources management capacity in the coun- food deficit. This analysis, undertaken in cooperation try undermine attempts to manage variability. These cir- with the Ethiopian government, helped to make the cumstances leave Ethiopia's economic performance vir- issue of water resource management a central focus of tually hostage to its hydrology. the government's national poverty reduction strategy. Up until now, most policy and macro-economic deci- WATER RESOURCES sions have been based on growth models that assume IN ETHIOPIA rainfall is consistently at historical average levels. These Water has always played a central role in Ethiopian models do not take into account shocks to the economy society; it is an input, to a greater or lesser extent, to caused by extreme water events, such as floods and almost all production. Water is also a force for droughts. A World Bank study (World Bank 2006) esti- destruction--causing flash flooding, disbursing pollu- mated the magnitude of the impacts of high water vari- tants, and facilitating the transmission of diseases. In ability on growth and poverty so that the government Ethiopia, as in all societies, there has always been a can better manage water and manage other parts of the economy (trade, transport) to reduce the impacts of struggle to reduce the destructive impacts of water and increase its productive impacts. This struggle has intensified over the past century as the population has rapidly grown--from 12.5 million in 1905 to 71.2 mil- lion in 2005. In fact, the population of Ethiopia is projected to increase by another 64% to 110.5 million by 2030 (HNP Statistics Database). Today, the devel- opment of Ethiopia is seriously constrained by a com- plex water resources legacy and a lack of access to, and management of, these water resources. Ethiopia's water resources can be characterized by two principal features, a natural legacy and a histori- cal legacy. The natural legacy is one of very high, and apparently intensifying, hydrological variability, cou- pled with marked rainfall seasonality. At first sight, Ethiopia's water resources endowment appears gener- ous, with a mean total surface water flow of about 122 billion cubic meters per year. The country has sev- eral major rivers and lakes, significant groundwater Arne Hoel/World Bank THE WORLD BANK resources and annual rainfall. However, Figure 1: Rainfall Variation Around the Mean and GDP Growth rainfall across much of the country is both highly seasonal--with most of the rain falling in a single, short season from 80 25 mid-June to mid-September--and 20 Mean 60 exceptionally variable and unpredictable, 15 the both in time and space. With poorly pro- 40 10 owth tected watersheds and almost no invest- ound Gr 5 ment in water storage, a consequence of Ar 20 GDP this hydrological variability is endemic 0 in 0 and unpredictable drought and flood. -5 Variation 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 -20 -10 Change The historical legacy of Ethiopia's water Rainfall Variation Around the Mean -15 resources is one of several international ainfallR -40 cent GDP Growth erP rivers, of which the Nile is the most -20 cent -60 important. Ethiopia provides 85 percent erP -25 of the natural Nile River flow into Egypt. Year -80 -30 In the Nile River Basin tensions have long been high; without the bold affir- Source: World Bank 2006. mative action for cooperation that Ethiopia is currently adopting, these tensions would likely ture create a web of effects that result--at least in part--from grow as demand for water grows. Especially in the Nile the country's extreme hydrological variability. This variability River Basin, international cooperation on shared waters will has economy-wide impacts in good and bad years. Rainfall be crucial to achieving sustainable water security without variability has direct impacts on the landscape, agricultural international tensions. output, transport passability, and water-intensive industry and power production. These impacts are generally unmitigated HYDROLOGY AND ECONOMY-WIDE because there is little hydraulic infrastructure to regulate or PERFORMANCE store water. They are often amplified by the fragmented nature of the Ethiopian economy, which does not facilitate Ethiopia's extreme hydrological variability is echoed in its eco- trade between affected and non-affected regions of the nomic performance. The vast majority (80 percent) of country; and transmitted through input, price, and income Ethiopia's population subsists on rainfed agriculture, thus effects onto the broader economy. Many of these dynamics their welfare and economic productivity are linked to the conspire against structural change in the economy. Endemic volatile rains. The correlation between rainfall and overall drought, fragmented and inadequate infrastructure, and GDP is strong, as can be seen in Figure 1. The impact of rain- expectations that food aid shipments will disrupt transporta- fall variability, unchecked by either physical infrastructure or tion and tamp down food price spikes during shortages, all strong management practices, can be felt not only on agri- promote a risk-averse subsistence economy and undercut cultural output, but on the environment, electricity (which is incentives for farmers to produce surplus, marketable crops. 90 percent hydropower), manufactured goods, incomes and consumption, and prices. Current policies focus on food aid and other tools for miti- gating the impact of drought on the population and the Poor market access and costly transportation services have economy, but much of the problem lies in the very structure created a highly fragmented economy in which average grain of the economy, which leaves its people vulnerable to hydro- prices differ 30­70 percent across regions. This fragmenta- logical variability. The majority of the population depends tion reflects missed opportunities to make both buyers and directly upon rainfall for subsistence agriculture, and the sellers better off. It also amplifies drought and flood shocks broader economy is built on domestic demand that is as by hampering trade between surplus and deficit regions unpredictable as the rains. This is compounded by inade- in the country. quate infrastructure, fragmented national markets, and the current policy environment, which all prove to be disincen- DYNAMIC EFFECTS AND INCEN- tives for investments in more weather-resilient activities such TIVES FOR GROWTH as irrigated agriculture, manufacturing, and services. Unless the structure of the economy changes, stable economic The fragility of the Ethiopian landscape and the dependence progress will continue to be both intensely disrupted by of the Ethiopian population and economy on rainfed agricul- drought and flood, and quietly undermined by risk aversion. 2 MODELING THE ECONOMIC 3. Historical variability: This variation is a stochastic extension IMPACTS OF THE WATER (varying within a range of probability) of the model that more RESOURCES OF ETHIOPIA fully reflects Ethiopia's historical levels of rainfall variability, and, in addition, captures the negative impacts of excessive A model was developed by a team of expert economists for rains on the agricultural and non-agricultural sectors. the World Bank's Ethiopia Country Water Resources Assistance Strategy (2006) that sought to quantify the econo- GROWTH AND POVERTY COSTS my-wide impacts of hydrological variability and water OF DROUGHT AND VARIABILITY resources management in Ethiopia.2 This model was devel- oped in contrast to standard economic models, which assume The model showed that historical levels of hydrological vari- average rainfalls over a long period, and thus are inappropri- ability diminish growth projections for the Ethiopian economy ate for Ethiopia as they fail to capture the significant eco- by over one-third and raise poverty rates by some 25 percent-- nomic impact of the country's hydrological variability. The clearly demonstrating the extraordinary impact of drought, newly developed model accounts for this variability and proj- and particularly variability, on the Ethiopian economy. ects a much bleaker--but more realistic--picture of the coun- A single drought event in a 12-year period--a very conserva- try's economic future. The model is dynamic, running for a tive estimate for Ethiopia--will decrease average GDP growth period long enough to explore the implications of variability rates by 5­10 percent. If historical levels of variability and the over time, and captures the following key characteristics: partial impacts of floods are incorporated, GDP growth rates · Highly variable rainfall and endemic droughts and floods fall 20­40 percent. Figure 2 shows the difference in GDP growth rate projections when rainfall is modeled as a · Fragile and degrading landscapes smoothed average, when a single drought event is incorpo- · Low levels of infrastructure investment to mitigate hydro- rated, and when historical levels of variability are assumed. logic variability · Fragmentation of the economy, particularly regional seg- In terms of poverty, the impact of a single drought will mentation in agricultural markets increase poverty rates 12­14 percent, causing an additional · High transportation and marketing costs 5 million Ethiopians to be living in poverty by the year 2015 (relative to the non-drought case)--17 million more than The model was run with three assumptions regarding rain- today. With hydrological variability, projected poverty rates fall variability. Specifically: rise 25­35 percent and project 51 million people living in poverty--22 million more than today. Figure 3 shows the 1. Smoothed rainfall: This variation assumes 1995­2002 difference in the number of people projected to live in average rainfall in all years. Smoothed rainfall is the under- poverty when rainfall is modeled as a smoothed average, lying assumption in virtually all economy-wide modeling. when a single drought event is incorporated, and when his- torical levels of variability are assumed. 2. Stylized drought: This variation assumes 1995­2002 average rainfall except for a stylized, two-year drought of average It is important to note that drought shocks, which tend to severity; it captures the isolated "shock" of a single drought. be a primary focus for weather risk analysis in Ethiopia, Figure 2: Effects of Hydrology on GDP Growth Rates Figure 3: Effects of Hydrology on Poverty Rates 3.50 Smoothed Drought Variability 3.00 51.07 2.50 60 50 45.67 Rates 2.00 eopleP 40 1.50 of 30 40.79 Variability Annual 29.12 1.00 20 Drought Millions 10 0.50 Poverty 0 Smoothed Projections 0.00 2003 with and without GDP Growth rate Ag GDP Non-Ag GDP 2015 Hydrology Source: World Bank 2006. Source: World Bank 2006. 3 represent just part of the story. The historical variability model, While it is common practice to spread different types of while still quite conservative, better reflects the real hydrolog- investment across regions, such isolated investments will not ical impacts endured in Ethiopia. It captures year-on-year sto- have the same growth impact as coordinated, co-located chastic variations, and some of the impacts of floods as well investments. as droughts. These models clearly suggest that variability, rather than a narrow focus on drought, must be the central Finally, in addition to managing the variability of water water resources challenge for development in Ethiopia. resources, the vulnerability of the Ethiopian economy to DE-LINKING THE hydrology must also be managed. Economy-wide, policies ECONOMY OF ETHIOPIA and investment decisions need to shift the pattern of devel- opment and the structure of the economy away from the In order to de-link economic performance from rainfall and country's heavy reliance on rainfed agriculture to make it less enable sustained growth and development, three strategic vulnerable to its hydrologic legacy. shifts appear necessary. WATER, POVERTY, AND WEALTH First, Ethiopia must make major investments in water resources infrastructure, institutions, and management In Ethiopia the centrality of water is clear. With little water capacity. The country's growth will continue to be under- resources infrastructure, relatively weak management institu- mined until it achieves water security by acquiring a mini- tions and capacity, extreme hydrological variability and sea- mum platform of infrastructure, institutions, and capacity to sonality, and a highly vulnerable economy, Ethiopia faces an manage its water resources. Investment on this scale may ini- enormous challenge in building the minimum platform of tially show low returns--much like a road investment, which water infrastructure and management capacity needed to shows little return until it joins two cities--but growth will achieve water security. But until water security is achieved, continue to be hindered until water security is achieved. growth will continue to be severely constrained. Second, Ethiopia's investments in water infrastructure should REFERENCES be multipurpose in nature, and should be made in combina- tion with the market infrastructure investments and related Health, Nutrition, and Population (HNP) Statistics Database. World Bank. reforms needed to fully leverage their growth potential. http://devdata.worldbank.org/hnpstats/HNPDemographic/total.pdf Particularly given the vast scale of investments needed in (Demographic Projections, accessed September 1, 2006). water and transport infrastructure, it may be necessary to World Bank. 2006. "Managing Water Resources to Maximize adopt a "growth pole" strategy (World Bank 2005) ensuring Sustainable Growth: A World Bank Water Resources Assistance the resilience of the primary engines of economic growth. Strategy for Ethiopia" A Country Water Resources Assistance The combination of water, irrigation, hydropower, roads, and Strategy, World Bank, Washington, DC. other market infrastructure investments should produce dra- matic synergies and provide the incentives and opportunity World Bank. 2005. "A Strategy to Stimulate and Balance Growth in for farmers to shift out of subsistence agriculture into sur- Ethiopia." A Country Economic Memorandum Report 29383-ET, plus/commercial agriculture and nonagricultural activities. World Bank, Washington, DC. 1 Hydrologic variability is variation in the distribution of water resources due to fluctuations in rainfall, groundwater levels, river flows, and so on. 2 The model includes 56 climatic zones, 34 agricultural commodities, 2 non-agricultural commodities, and distinguishes between irrigated and non-irrigated areas. This note was prepared by Sandra Ruckstuhl, Consultant, and Claudia Sadoff, Lead Economist, both of the Water Resources Management team in the Agriculture and Rural Development Department of the World Bank. This note summarizes findings from the Ethiopia Country Water Resources Assistance Strategy (CWRAS) of the World Bank. It is based on findings from Managing Water Resources to Maximize Sustainable Growth: A World Bank Water Resources Assistance Strategy for Ethiopia. The core team for the report was led by Claudia Sadoff and included Catherine Revels, Yitbarek Tessema, Mekuria Tafesse, Mulat Demeke, Peter McCornick, Mark Rosegrant, Sherman Robinson, Xinshen Diao, Ken Strzepek, Paul Block, Charles Rogers, Martha Solomon, and Tadesse Kuma. David Grey provided advice and guidance to the core team throughout this work. The full report can be downloaded at www.worldbank.org/cwras. The text of this note can be downloaded at www.worldbank.org/rural or email ard@worldbank.org. THE WORLD BANK 1818 H Street. NW Washington, DC 20433 www.worldbank.org/rural