The economic impact of water diversion: evidence from China

Many areas in the world are facing the problem of sustainable development due to water scarcity (Katz 2015). Water resources are the foundation of human survival and an indispensable resource base in the process of economic and social development. Therefore, the connection between economic growth and water resources is an important part of the study of resource and environmental issues. However, the existing discussion on the interaction is mainly to study this relationship by including water use as an input factor in the construction of production functions or the measurement of total factor productivity, and then discussing the impact of water resources on economic status (Filatov et al. 2016; Kilimani et al. 2018; Nourani et al. 2022). For instance, Gleick (2003) indicates that there is no relationship between water withdrawal and economic development; Economidou et al. (2021) indicate that water scarcity has a substantial influence on agricultural output and is typically the primary determinant of whether agricultural activity will continue.

The unsustainability of economic development due to water scarcity is a global issue. One of the reasons for this issue is that the world's water resources are unevenly distributed across regions. Like many water-scarce countries in the world, China also faces the problem of water scarcity. Owing to the unequal distribution of water resources in time and space, there are inherently insufficient water resource endowments in northern China, increasing contradictions between water resource availability and demand, overexploitation of water resources, and relatively extensive water use. Therefore, how to improve sustainable development with water shortage is still an issue in northern China that needs to be solved urgently in economic development. For the unevenly distributed water resources across regions, the potential idea is to divert water from one area to another. As is well known, China's South-to-North Water Diversion Project (SNWDP), the world's largest program for water diversion across basins, was implemented in 2013 (Zhao et al. 2017).

The SNWDP is a strategic project of the People's Republic of China, which mainly transfers water resources from the Yangtze River to the northern region. This project connects water-scarce northern cities through pipeline transportation. Cities through which the transportation pipeline passes can obtain certain water resources through purchase. These water resources will be used for various production activities, thereby ensuring the improvement of economic levels. These water resources are mainly distributed from north to south using pipeline transportation, and these water resources come from the Danjiangkou Reservoir in Shiyan City, Hubei Province, located in the middle reaches of the Yangtze River, and the Jiangdu Water Conservancy Project in Yangzhou, Jiangsu Province, located in the lower reaches of the Yangtze River. The SNWDP currently transfers more than 62 billion cubic meters of water to the north. Calculated based on the time of 10 years since the reform, the SNWDP allocated an average of about 6.2 billion cubic meters of water resources every year. These water resources are relatively small relative to the amount of agricultural water resources used. But these water resources are relatively abundant for urban development and industrial water use, so they may have a certain role in promoting urban economic development.

Since its implementation, the SNWDP has provided strong support for the optimal allocation of China's water resources and alleviating water shortages in the northern region. The SNWDP, as a backbone project for cross-basin and cross-regional water resources allocation, will increase the water supply in the area that can receive water and alleviate the contradiction between water availability and demand in the receiving area. At the same time, it will inevitably affect the economic development of the receiving area. So, does the SNWDP encourage better economic growth in the water-receiving area? What are its specific impact mechanisms and paths? The in-depth study of the above issues is of great significance to clarify the effect of the water diversion on the economic status of the water-receiving area.

Research on the SNWDP has mostly focused on pollution issues. Sheng et al. (2020) discuss the impact of cross-basin water diversion projects on the water resource system of receiving water areas from the aspects of water resource carrying capacity, water resource allocation, terrestrial water cycle, and water pollution. Zhu et al. (2020) study the downward trend of groundwater level and land subsidence in Beijing before and after the opening of the middle route of the SNWDP by integrating and analyzing relevant data sets such as hydrogeological information and land subsidence measurement records in Beijing from 2010 to 2017. Zhu et al. (2021) claim that the SNWDP may support ecological protection and prevent the level of the groundwater from dropping. Miao et al. (2018) analyze the key factors affecting urban water use performance in water-receiving areas, and proposed the best ways and measures to improve water use performance in water-receiving areas.

Some research has focused on economic benefit from water diversion. Su & Chen (2021) show that regional mobilization is a feasible strategy for reducing regional inequalities in water resources. Hence, the SNWDP can help with the issue of water scarcity in the area that can receive water (Zhu et al. 2021), due to the water diversion's ability to supply water to northern China (Yang et al. 2020; Du et al. 2019). An improved use of water resources is made possible by the water diversion (Liu et al. 2020). Li et al. (2021) suggest that the water resources made available by the water diversion support long-term economic growth. Du et al. (2021) find that, since the SNWDP may fulfill the logical distribution of water resources, it can raise the living standards of prefectures that receive water (Sheng et al. 2022). Especially, the water diversion may result in advantages for household, commercial, and agricultural water supplies (Yang et al. 2021). Yang & Xu (2023) find that there is a significant impact of water diversion on agricultural production. But these studies only discussed the potential impact of the SNWDP on overall economic level without empirical analysis.

Many studies have begun to focus on the effect of the water diversion on economic status. However, whether prefectures with water supply can achieve economic impact, and whether this economic impact is a causal relationship, still need empirical evidence. Therefore, this study analyzes the impact of the water diversion on economic status from the perspective of causal identification with an example of the SNWDP in China. Using an empirical strategy of Differences-in-Differences (DID), we investigated the impact of water diversion on economic development using data from prefectures in four provinces in northern China from 2000 to 2020. We use the night-time lighting to index the level of economic development because night-time lighting can serve as an objective indicator of how much energy is consumed by human society's industrial, commercial, and other activities (Henderson et al. 2011). The empirical results show that after the reform, the economic development level in the water-receiving areas increased compared to the other regions. Estimating with alternative outcome measure or subsample, and employing other estimation methods (synthetic control method (SCM) and dynamic panel model (DPM)), the results are robust. The mechanism analysis shows that the main reason, why the water diversion can encourage economic development, is that the water diversion promotes the development of the service industry in the water-receiving areas by supplying domestic water. This research provides empirical evidence for the economic effects of regional allocation of water resources. It contributes to more related research on water resources management and sustainable development.

The opening of the SNWDP has only provided water resources to some northern cities, which means that the impact of the SNWDP on northern cities is heterogeneous. Therefore, the opening of the SNWDP can be regarded as a quasi-natural experiment. Moreover, the DID is a commonly used policy evaluation method for estimating quasi-natural experiments. Therefore, the DID is the main method used to clarify the effect of SNWDP on economic development. In order to further ensure the robustness of the estimation results, in addition to the DID, the SCM and the DPM will be used for further estimation as alternative methods.

The control variables in this study include precipitation, geographic variables and province trend. The data on precipitation come from the NMSDC (data.cma.cn). According to Jia (2014), we used the altitude and longitude to index the geographic variables, and the altitude and longitude are the centroid of the prefectures, which are calculated within R software. In this way, the model will take into account the interactions between the geography variables and the year dummy variables. And we also include the time trend of province in control variables. To further analyze the potential mechanisms of the effect of the water diversion on night-time light, we also include the data of the gross domestic product of primary, secondary, tertiary and total industries, which were determined in 2000. Besides, the water allocation of industries is also included. The data on GDP come from China Statistical Yearbook and the data for water use were obtained from the China Water Resources Bulletin. For further discussion, additional variables include grassland area, wetland area, and water area in all prefectures from 2001 to 2019, which come from MODIS (https://modis.gsfc.nasa.gov). The summary statistics can be seen in Table 1.

We estimated the baseline model and report the estimation results in Table 2. The dependent variable is the average night-time light of all pixels in each prefecture. Column 1 indicates that the SNWDP has promoted the level of economic development at a significance level of 1%, which indicates that after the water diversion reform, the economic development level of the affected areas is higher than that of other areas. Column 2 further adds the interaction term of geographic variables and year dummy variables. Although the estimated effect has decreased, the water diversion can still promote economic development significantly. Column 3 further includes precipitation, and the estimated result is consistent with column 2. Column 4 adds the province time trend, and the estimated coefficient is further reduced. However, the water diversion could still promote economic development significantly. The estimated impact of the water diversion reduces to 0.11, which accounts for 18% of the overall sample average (0.62), and its influence is still sizeable. To sum up, after the reform of the water diversion, the economic status in areas with water supply is relatively higher than that of other prefectures, and the increase magnitude is about 18% of the total average in the sample.

To further verify whether the benchmark model satisfies the parallel pre-trend assumption, flexible estimation is employed to further estimate the impact in different periods in Table 3. There is no control variable included in column 1, column 2 only controls geographic variables, column 3 further adds precipitation as a control variable, and column 4 further adds province time trend variables. It should be noted that the first year, 2000, is left as the reference year. In column 1, the SNWDP can affect the light before the reform, this indicates that the specification without any control variables cannot satisfy the parallel pre-trend assumption. In columns 2–4, the SNWDP cannot affect the light before the reform, the impact starts to be significant only after the reform, this indicates that the specification with control variables can satisfy the parallel pre-trend assumption. According to column 4, the impact of the SNWDP on light starts to be significant in the fourth year after the reform. Therefore, the increase in light is indeed due to the SNWDP.

To ensure that the SNWDP has a strong impact on economic status, we further estimated the effect by regressing with alternative outcome measure and estimating with subsample.

We first estimated the effect of the SNWDP on the GDP, which is another measure of economic level. The estimated results can be seen in Table 4. It should be noted that all columns include the year and prefecture fixed effects. Column 1 shows that the water diversion can promote the GDP at a significance level of 1%, suggesting that, after the SNWDP reform, the GDP of the water-receiving prefectures is higher than that of other prefectures. Columns 2–4 gradually add geographic variables, precipitation, and province time trend. After controlling for the geographical characteristics in column 2, the water diversion still promotes the GDP significantly. Column 3 further adds precipitation as a control variable. The water diversion can still increase the GDP significantly after controlling the meteorological variable as a control variable. Column 4 further adds the province time trend as a control variable. The results in column 4, which is the preferred specification, shows that the water diversion still can improve the GDP significantly, although the estimated coefficient has decreased compared to columns 1–3. In summary, the estimated results are consistent with the baseline results.

The full sample in this study includes the provinces of Hebei, Henan, Shandong, and Shanxi. However, the main areas affected by the SNWDP only include Hebei, Henan, and Shandong. Shanxi is included in the sample only as an important control group. Although Shanxi is adjacent to other provinces and has many similar characteristics, Shanxi is not a province passed through by the line of the SNWDP, then we re-estimated the effect of the SNWDP on night-time light by excluding Shanxi in the sample. The subsample regression is shown in Table 5. It should be noted that all columns include year and prefecture fixed effects. Column 1 shows that the water diversion can promote the night-time light at a significance level of 1%, suggesting that, after the SNWDP reform, the economic development level of the water-receiving prefectures is higher than that of other prefectures in the subsample. Columns 2–4 gradually include geographical characters, precipitation, and province time trend. After controlling for the variables in the subsample, the water diversion can still promote the increase of the night-time light significantly, suggesting that the water-receiving prefectures of the water diversion, comparing to other prefectures, can obtain more economic development after the reform of SNWDP. The estimated coefficient (0.10), in the preferred specification (column 4), is just slighter than that of baseline estimation (0.11). In summary, after regressing with subsample, the estimated results are also consistent with the baseline estimation.

To ensure the robustness, other estimation methods are used to estimate further below. Specifically, the SCM and DPM are mainly used for further analysis.

Economic development may be a dynamic adjustment process and may be affected by a lag period which may also affect the opening of the SNWDP, so a DPM is further used for assessment. The benchmark model does not consider the impact of lagged terms on economic development. Therefore, the following further includes the lagged terms of economic development as the main control variables, which is shown in Table 6. To ensure the robustness of the estimation results, columns 1–4 use a generalized method of moment (GMM) estimation. Columns 1–4 all include year and prefecture fixed effects. Columns 1–4 progressively add the 1–4 lags of the night-time light. The estimated results show that the lag terms for night-time lights in columns 1–3 are all significantly positive, the fourth lag term for night light in column 4 is not significant, and only the AR2 correlation test for column 3 cannot reject the assumption of no serial correlation. Therefore, column 3 is the preferred specification for the GMM estimation. In columns 1–4, the estimated coefficients of the water diversion reform are positive significantly, which indicates that the economic impact of the SNWDP is relatively greater after the reform. Therefore, the estimated results using the DPM show that the baseline results are robust.

Water allocation is a potential solution to regional water scarcity, but water scarcity is not addressed in this way in most countries. However, the promotion effect of this regional allocation of water resources on urban development also provides a reference for other countries to solve the development problems of large cities through water diversion, especially for large cities in arid areas, such as Dubai, which is arid but rich. The mechanism of this impact mainly comes from the provision of water resources, so its mechanism will be further discussed below. In addition, water resources are also the basis for ecological restoration, so the impact of ecological vegetation coverage of the SNWDP will be further discussed below. It is worth noting that this analysis is a further discussion of the possible mechanisms of action mentioned above and the ecological impact of the SNWDP. It is mainly a correlation analysis and may not necessarily belong to a causal relationship.

The effect of water diversion on economic status may originate from changes in economic structure. To further analyze the mechanism from the economic structure, we used data for the real added values of the primary, secondary, and tertiary sectors. The estimated results can be seen in Table 7. Column 1 presents the result of estimating the effect of SNWDP on economic status in the primary sector. The SNWDP has decreased the added value in the primary sector at a significance level of 1%. The possible reason is that the added value in the primary sector is relatively low, and the water supply of the water diversion requires costs, and other sectors may even occupy some water which is used originally for agriculture. Therefore, the water diversion has reduced the growth in primary sector. The results related to agricultural sector are different from Yang & Xu (2023), which indicates that the SNWDP may increase the agricultural production. The potential reason is that Yang & Xu (2023) estimate the impact of SNWDP on agricultural production without logarithmic form while the logarithmic form is used here, therefore the SNWDP may reduce the growth rate of agricultural production. Column 2 is the result of estimating the economic impact based on the secondary sector. The estimated results show that, although there is a positive impact, it is not significant. Column 3 is the result of estimating the economic impact based on the tertiary sector. The SNWDP has increased the development of the tertiary sector significantly. Specifically, the SNWDP can increase the added value of the tertiary industry by 6% on average. Therefore, the effect of the water diversion on economic status mainly comes from the development of the service industry.

The previous empirical results show that the water diversion has inhibited the development of the primary sector, but promoted the development of the tertiary sector. The following will further empirically analyze the impact of the water diversion on agricultural and domestic water use, in order to find out what is behind the allocation of water resources. The water use in agriculture is mainly due to the development of the primary sector, and the domestic water use may increase because of the development of the tertiary sector. The estimated results can be seen in Table 8. Columns 1–4 all incorporate year and prefecture fixed effects, as well as precipitation, geographic variables, and province time trend variables. Columns 1 and 2 are the results of estimating the effect of the SNWDP on water use in agriculture. The results show that the water diversion has reduced water use in agriculture significantly. Columns 3–4 are the results of estimating the impact of the SNWDP on domestic water use. The water diversion has increased domestic water use significantly. Therefore, the water diversion mainly promotes the development of services by supplying domestic water use.

The water diversion may not only to promote economic development, but also can ensure the sustainability of the ecological environment. Based on this, we further empirically analyze the effect of the water diversion on ecological restoration. Specifically, grassland area, wetland area, and water area are included as dependent variables. In addition, China's ecological policy related to water resources is mainly through artificial ecological water replenishment to ensure ecological restoration, therefore ecological water use is also included as a dependent variable. Table 9 presents the results of estimating the impact of the water diversion on ecological restoration. Column 1 is the result of estimating the impact of the SNWDP on the grassland area, and the SNWDP has promoted the expansion of the grassland area significantly. Column 2 is the result of estimating the impact of the SNWDP on the wetland area, and the SNWDP has promoted the expansion of the wetland area significantly. Column 3 is the result of estimating the effect of the SNWDP on the water area, and the SNWDP has promoted the expansion of the water area significantly. According to the magnitude of the estimated coefficients in columns 1–3, it can be found that the grassland area increases mostly after the water diversion. Column 4 is the result of estimating the impact of the SNWDP on artificial ecological water use. The SNWDP has promoted the increase of artificial ecological water replenishment significantly. Therefore, in addition to promoting economic development, the water diversion also promotes ecological restoration through increasing artificial ecological water replenishment.

Many areas are facing water shortages over the world. Part of the reason for this water scarcity is that the world's water resources are unevenly distributed across regions. Therefore, the potential idea is to transfer water resources from one area to another. For example, China's government transfers water from southern area, in which the water resources are abundant, to northern area, in which the water resources are scarce, and this is called SNWDP, which is the largest project of water diversion in the world with the longest distance between two river basins. Using data from 55 prefectures from 2000 to 2020, this study uses DID to estimate the effect of the water diversion on economic development which is indexed with night-time light.

After the reform of the SNWDP, the economic status in the areas which receive water supply increased about 18% of sample average level compared to other regions. The SNWDP has a significant positive effect on the level of economic development since the fourth year after the reform. In order to verify the robustness of the estimation results, we further estimate with alternative outcome measure and subsample, and also employ alternative methods, including SCM and DPM, for estimation, and the results show that the baseline results are robust. Further analysis shows that the main reason, why the water diversion can promote economic development, is that the water diversion promotes the development of the service industry in the water-receiving areas by supplying domestic water. However, the water diversion has reduced the added value of agriculture. The potential cause is that the SNWDP mainly changes the economic structure and promotes the transfer of economic structure to the high value-added service industry. Further discussion found that the water diversion has promoted the expansion of grassland, wetland and water areas, which indicates that the water diversion has ecological effects in addition to economic effects. This study offers empirical proof of the economic effects of regional water resource allocation, and contributes to more related research on water resources management and sustainable development in mega city with water scarcity.

Data cannot be made publicly available; readers should contact the corresponding author for details.

The authors declare there is no conflict.