Effects of water scarcity on Peru’s long-term growth potential: a general equilibrium model-based quantitative assessment

This study quantifies the impact of water scarcity on Peru’s long-term growth potential using a Computable General Equilibrium model that explicitly represents water as a production factor in selected activities and incorporates mobility constraints on its allocation across sectors. The model is calibrated on a Social Accounting Matrix of the economy that has been specifically extended to capture water-related features. Simulations are conducted based on climate change-induced reductions in water availability projected for 2050 in the Pacific coastal region, the country’s economic core and the area most exposed to water stress. The results highlight the economic and welfare costs associated with increased water scarcity, as well as its differentiated impacts across sectors. They also confirm that the degree of substitutability between water and other production factors, as well as the degree of water mobility across sectors, jointly determine the capacity of the economy to adapt to water scarcity.