The Impact of Water Availability and Pollution on Economic Growth at the Sub-National Level: Evidence from Mexico

There is no doubt about the significance of water for economic activities at the microeconomic level. By contrast, the evidence is inconclusive at the macroeconomic level, particularly concerning economic growth. Arguably, the expected positive nexus between water and growth is obscured by factor mobility and aggregation of economic activities in a large space (the whole country). Nonetheless, the water-growth nexus should be observable at sub-national levels. Accordingly, we test the significance of water for the economic growth of the 32 Mexican states over the years 2005–2020. We build a unique data set with measures of water availability (the ratio of water withdrawals to renewable water resources) and pollution (biological oxygen demand). Using dynamic panel techniques that control for endogeneity concerns, it is found that water explains per capita GDP levels, but there is no evidence favoring a relationship with GDP growth rates. Nonetheless, policymakers should recognize the positive association between water resources and economic growth. Subsequently, they should formulate policies to promote innovation and efficiency in water use, together with measures dedicated to preserving and improving water quality. These findings are significant for Mexican states facing water underutilization, particularly in the south, and those near overexploitation, particularly in the north and central regions. In economically disadvantaged southern Mexico, increasing water usage can spur economic growth. However, to facilitate overall economic development, it could be necessary for this region to engage in water trade with the more prosperous northern and central regions of the country.