On the relationship between water use and economic growth in China: New evidence from simultaneous equation model analysis

Given the importance of water resources in China's economic development, in this paper, the relationship between water use and economic growth is investigated using panel data from 29 provinces in China from 1999 to 2014. Building upon the theoretical framework of the environmental Kuznets curve (EKC), this study estimates the possible linkages by a) adopting both a conventional single-polynomial model and simultaneous equation model (SEM) for the analysis; the latter addresses the potential bilateral causality between water use and economic development, b) evaluating the comprehensive effects of socio-economic factors, including industrial structure, population scale, trade openness and the amount of local water resources, and c) testing water use in aggregate and by sector. The results indicate that the relationship between per capita water consumption and per capita GDP in China is “N” shaped. In contrast, there is evidence for the positive contribution of industrial water use to economic development, while the impacts of both total and non-industrial water consumption on per capita GDP are nonlinear. Moreover, trade openness and per capita water resource are both positively correlated with water consumption, and an increase in the population density would cause the demand for industrial water use to increase. The findings also suggest that simultaneity between water use and economic growth should be considered in future studies.