Water Stress as a Regressive Economic Shock: Evidence from a Global Panel of 120 Countries

Groundwater depletion constitutes a persistent, anthropogenically driven shock to natural capital that unlike transient precipitation variability, erodes the productive capacity of economies in ways that are partially irreversible. Yet its distributional consequence across income levels and institutional contexts remain unquantified, poorly understood within the natural resource and environmental economics literature. This paper estimates the causal effect of groundwater depletion on Gross Domestic Product (GDP) volatility using an unbalanced panel of 120 countries over 2000–2022 (n = 2,429 country-year observations), exploiting cross-national variation in aquifer geology as an instrument for depletion intensity. A one-unit increase in the groundwater depletion rate raises GDP volatility by 0.35 percentage points (p < 0.001), a result that is stable across two-way fixed effects, lagged specifications, and geographic subsampling. Critically, the effect is highly heterogeneous in ways that are structurally interpretable through an environmental economics lens: upper-middle-income economies: where groundwater is a major intermediate input to irrigate agriculture and industrial production: face a sensitivity coefficient nearly three times the global mean. Fragile states face an approximately doubled effect relative to non-fragile comparators, consistent with reduced institutional capacity to substitute or buffer against natural capital depletion. Low-agriculture economies display the highest statistically significant sensitivity, consistent with groundwater's role in disrupting complex, market-integrated supply chains. These findings reframe groundwater governance as a macroeconomic stability intervention and call for differentiated international adaptation finance targeting structurally vulnerable economies.