Editor's Note: This article is the second installment in a RANE series on the geopolitical impacts of water stress. The first provides a broad overview of how unequal distribution of freshwater shapes geopolitical patterns.

Water distress risks destabilizing economies across the globe, increasing the threat of cross-border migration flows while contributing to intra-regional economic divergence. A range of factors is stressing water supplies around the world, including climate change and changing weather patterns, as well as population growth, rapid urbanization, industrialization, and the use of agricultural techniques that drain groundwater. In 2020, the U.N. Food and Agriculture Organization (FAO) considered global water stress, defined as freshwater withdrawal as a proportion of freshwater resources, to be at a "safe" level of less than 19%. However, stress levels differ dramatically around the world, ranging from high in Southern Asia and Central Asia to critical in Northern Africa. In a report published in October 2023, the World Wide Fund for Nature (WWF) also estimated that "by 2050, around 46% of global GDP could come from areas facing high-water risk" compared with the current 10%. 

The changing availability of water will have myriad global economic implications, with the greatest impacts being felt in the agriculture, logistics, energy and tourism sectors. Global water supplies are expected to become increasingly volatile in the coming years, as climate change leads to more severe droughts and more catastrophic flooding in areas around the world — causing widespread damage to crops and infrastructure. Such dry spells and deluges can severely disrupt agricultural production, which, in extreme cases, can lead to food scarcity and malnutrition. Low rainfall can also disrupt energy supplies by curtailing production at nuclear and hydropower plants that depend on water from nearby rivers to generate electricity, in turn causing broader, even systemic economic disruptions. In addition, too little or too much rainfall can cause supply chain disruptions by impeding transit via rivers, which is essential to many countries' economies. Extreme changes in rainfall can also negatively impact countries' tourism sectors if water scarcity leads to water rationing, or if severe floods make the news, leading to revenue losses and reduced economic output; this is a risk in both advanced economies (like Greece or Portugal) where tourism represents a relatively large share of GDP, as well as small, low-per-capita-income countries with large tourism sectors, where workers in the industry often have no alternative employment opportunities (like the Maldives or Seychelles). 

• In 2022, a drought saw water levels in Germany's Rhine River drop to dangerous levels for navigation, which severely affected German automakers by forcing them to find alternative routes to ship their cars. 
• In 2021, drought conditions prompted the U.S. Hawaiian island of Maui to impose water restrictions that affected residents. 
• The Thai island of Koh Phi Phi has been on the verge of experiencing a water shortage that has increased the risk of rationing measures and negatively impacted the local economy and tourism sector. In 2023, a combination of low rainfall and a surge in tourism also caused a water crisis in the Thai holiday destination of Koh Samui, which suggests that increasing tourism will not prove sustainable in some places in the future, particularly if drought conditions become more frequent.

Growing water stress will have a disproportionate impact on poorer countries, particularly those that are highly reliant on agriculture, due to their limited ability to pursue mitigation policies and their greater vulnerability to economic shocks. Water scarcity and flooding are more disruptive, economically and socially, in countries where a larger share of the population is engaged in agriculture and where a higher share of income is spent on essential goods and services (such as food or clean water), which is often the case in low-income countries. Poorer countries are also at greater risk in terms of access to clean water and sanitation because their infrastructure is typically of lower quality and more vulnerable to physical and weather-related disruptions. In poorer countries, damage to rivers caused by flooding or droughts can even lead to problems with the supply of essential goods (such as food) and reduce access to potable water by damaging essential infrastructure. Poorer countries also often do not have backup energy supply and transportation systems, which makes them more susceptible to water-related disruptions, magnifying the impact on their economies. In addition, poorer countries are at much greater risk of socio-political instability given their greater vulnerability to economic shocks, including food price security.

• The issue of water scarcity and flooding is difficult to disentangle from the broader consequences of climate change. Economic models can gauge the impact of diminished or excessive rainfall on food production and domestic food prices in isolation. However, water scarcity and overabundance rarely occur in complete isolation. To predict rather than project the impact of water scarcity, assumptions need to be made about how other variables will behave, including how a country would be able to respond in terms of risk-mitigating policies. If water insecurity disrupts agricultural output and increases domestic food prices, the economic impact will partially depend on that country's ability to import food, as well as fluctuations in global food prices. Moreover, water shortages will affect different crops in different ways, making it all the more difficult to estimate the precise impact of water scarcity on a country's agricultural sector and food prices.

Among the world's developing economies, those in Africa and the Middle East are poised to be hit hardest. The regions close to the Equator — namely, South America, the Middle East, sub-Saharan Africa, South Asia and Southeast Asia — are at far greater risk of economic water insecurity, as these are the regions experiencing an adverse combination of rapid population growth and insufficient investment in water risk mitigation, exacerbated by overall lower levels of economic development. But of these regions, the impacts will be felt most acutely in the Middle East and Africa. In the Middle East, there is simply not enough physical water available to meet the region's growing needs due largely to changing rainfall patterns and rising global temperatures. And this has been exacerbated by population growth and urbanization, which has further strained water supplies in desert countries of the Middle East. Growing water scarcity concerns in the Middle East have already given rise to geopolitical tensions over the shared use and distribution of water rights where rivers pass through several countries. Africa, meanwhile, also faces physical water insecurity due to a confluence of environmental changes, rapid population growth and urbanization. But compared with the Middle East, Africa faces greater economic water insecurity, meaning that whether or not water supplies are scarce, countries struggle to effectively use and distribute water due to mismanagement and lagging infrastructure investment. The negative economic impact of water scarcity in countries with rapid population growth, namely those in Africa and the Middle East, will contribute to further outward migration as well, as often stagnating or even falling living standards prompt more people to flee their home countries — leading to increased migration flows, especially to Europe. 

• According to the World Bank, many countries in Africa, the Middle East and Asia, including China and India, will suffer GDP losses in excess of 6% by 2050 if they fail to adopt more efficient water management policies.

 Some regions with relatively higher income levels (such as Europe and North America, as well as South America) will be much less affected by physical and economic water insecurity in absolute terms, but changing water availability will impact certain areas within these regions differently, which will contribute to a diverging economic outlook. In wealthier countries, higher per capita incomes limit the impact of water scarcity-driven food price inflation. Richer countries can also outbid poorer countries in terms of securing international food supplies, particularly if drought- or flooding-induced harvest failures have already driven up the prices of such supplies. In addition, advanced countries have greater financial resources to both take risk mitigation measures (including the development of backup transportation and energy supply networks), as well as rebuild following large-scale damage caused by severe flooding. But even in regions where water scarcity will be far more manageable, the impact will still be felt. For instance, the European Union has done some modeling around the broader impact of climate change on economic growth, and it found that countries around the Mediterranean will suffer output losses while Northern European countries will fare much better. Anecdotal evidence, like the record-high temperatures that Italy and Greece experienced last year, suggests that tourism in Southern European countries will also suffer over time, even if initially tourism may simply shift from hotter parts of these countries to cooler areas. In North America, Mexico and the Southwest region of the United States will be most adversely affected by (approaching) physical water insecurity. Lower rainfall and hotter temperatures have already begun to impact agriculture in both areas, and may also eventually impact tourism flows to Mexico and U.S. desert states (like Arizona and Nevada). However, the overall economic toll is unlikely to cause broader national-economic dislocation, given the United States and, less so, Mexico's relatively high per capita income and the much more limited role played by the agricultural sector in both countries. 

• Compared with their southern counterparts, Northern European economies will overall suffer less from climate-induced changes in rainfall and water availability. In fact, agricultural sectors in some parts of Northern Europe are expected to benefit from changing weather patterns. Northern European countries could also see more visitors, as tourism in Europe shifts to more temperate and less water-scarce countries adjacent to the North Sea at the expense of Southern Mediterranean countries. In addition, Europeans living in hotter and drier countries (like Greece and Italy) might increasingly relocate northward, leading to increased intra-European migration — particularly between EU countries in the passport-free Schengen area, where borders do not represent an obstacle to free movement. However, some Northern European countries like Germany also rely on riverine logistics networks, which are more vulnerable to disruptions caused by extreme changes in rainfall compared with maritime trade routes and logistics networks.
• The agricultural sector in Mexico accounts for less than 4% of the country's GDP. In the United States, the share is almost 6% of GDP; but water scarcity will initially have the greatest impact on the U.S. Southwest region, which accounts for only a limited share of total U.S. agricultural production.