Water scarcity and local economic activity: Spatial spillovers and the role of irrigation

This paper explores the spatial spillover effects of water scarcity on local economic activity and examines the role of irrigation in modulating these effects. Utilizing a newly assembled global geospatial data set that combines information on seasonal water availability and economic activity measured by nighttime luminosity, I conduct a spatial econometric analysis at the granular level of $0.25°$ $\times$ $0.25°$ grid cells worldwide. My results reveal that agricultural water scarcity in rainfed grid cells has negative spatial spillover effects on economic activity, extending up to 300 kilometers away. However, the presence of irrigation infrastructure effectively mitigates both the direct negative impacts and the negative spatial spillover effects of agricultural water scarcity on economic activity. These results suggest that the benefits of certain climate adaptation measures may not be confined locally, but are observable at a larger scale. This paper emphasizes the importance of considering spatial dynamics and irrigation in understanding the effects of water scarcity on economic activity, providing valuable insights for water resource management policies targeted at promoting climate-resilient development.