Water availability and economic development: Signs of the invisible hand? An empirical look at the Falkenmark index and macroeconomic development

It is widely believed that critically low levels of water availability will hinder economic growth and development. To the contrary, we find that countries with available water resources below 500 m³ actually outperform countries with levels between 500 and 1600 m³ in terms of growth, per capita Gross Domestic Product, and investment. We show descriptive evidence indicating that much of the reason for this seemingly unintuitive result lies in the natural pressures faced by critically water-scarce countries to move from water intensive agriculture to less water intensive services and industry, with an emphasis on the services sector. We believe governmental policy should focus less on water resource attainment in support of agriculture and more on transitioning to services.