How much is water worth? In a country like Pakistan, where water is synonymous with life, food security and national identity, the question seems almost philosophical. But in a world of competing demands and accelerating climate change, it is becoming the most urgent practical question policymakers face.
What is the economic cost of a drought or flood, not just in lost crops, but in lost factory output, lost exports and lost household income? And what is the economy-wide benefit of giving an extra unit of water to a city versus a farm?
For decades, water management has been treated as a hydrological challenge — a question of engineering, flows and volumes. But to solve Pakistan’s 21st-century water crisis, we must consider the economic value of sound water management as well as the costs associated with poor management.
A new tool for a new reality
The Hydro-Economic Decision Support System (DSS) is a tool designed to provide insights into the economic implications of water allocation and management decisions. This model, based on the CGIAR Computable General Equilibrium (CGE-W) framework, is a virtual laboratory for the entire Pakistani economy. It was updated under the CGIAR NEXUS Gains Initiative, followed by the Water-Energy-Food-Environment (WEFE) Nexus Policy area of work of the CGIAR Policy Innovations Program, and led by the International Water Management Institute (IWMI) and International Food Policy Research Institute (IFPRI) with the collaboration of the Pakistan Institute of Development Economics (PIDE).
Unlike a purely hydrological model that asks where water goes, the Hydro-Economic DSS asks what values are generated and where they go. What this means in practice is that the modeling system connects water in the Indus Basin to every part of the economy — land allocation, crop choices, industrial output and household incomes. By linking hydrology with the wider economy, the model allows policymakers to move beyond individual sector analysis to systematically compare alternative strategies. Instead of asking only, “what if we build a dam?”, it helps answer deeper questions such as “how do different water management choices affect agricultural and economic growth, exports, and household welfare across the whole economy?”
Quantifying the slow burn of climate change
The power of the Hydro-Economic DSS can be demonstrated by comparing two different climate threats: the sudden shock of catastrophic floods and the cumulative slow burn of rising heat and drought stresses.
Pakistan is rightly focused on flood resilience. The 2022 floods alone, for example, caused an estimated $30 billion in losses. However, analysis reveals a hidden and equally profound threat. Simulated cumulatively over a 25-year period, heat and drought stress reduce crop yields, lower labor productivity and degrade land, contributing to an estimated $28 billion in aggregate household losses — a metric that captures impact across the entire economy.
Consequently, investment should be delivered, where the political process will allow, more equally towards both a disaster response and an adaptation agenda.
A tool for national and regional planning
The true power of the Hydro-Economic DSS can only be realized if it is owned and used by national agencies and research organizations. This would enable Pakistani researchers and planners to directly link water and agricultural policy to the nation’s core economic challenges — stagnant GDP growth, lagging exports and the national trade deficit. Indeed, the Pakistan Institute of Development Economics (PIDE) is currently developing a national macroeconomic model, with plans to directly integrate the new Hydro-Economic DSS, providing a more complete picture — effectively connecting water flowing in canals with national budgets.
While the model provides evidence for where investments should pay off, weak governance, inconsistent policies and vested interests remain major obstacles to turning these insights into action. This is particularly apparent in the sensitive but critical issue of water pricing. For example, in Punjab, the reliance on pumped tubewell water, which is very costly for farmers, has encouraged them to improve water use efficiency and water productivity. By contrast, in Sindh, highly subsidized canal water provides no such financial incentive for conservation, leading to lower adoption of efficient technology and a continued decline in water productivity.
To combat this, there is a need to move away from inefficient federal subsidy models toward actively de-risking high-value, climate-resilient crops. Because agriculture in Pakistan is largely driven by private farmers, these individuals bear all the financial risk when transitioning away from traditional, water-heavy crops like sugarcane and rice. To encourage the adoption of lucrative alternatives like olives, blueberries and dragon fruit, the government should provide adequate safeguards against crop or market failure.
Like its counterpart, the Water Allocation Planning Model for the Indus Basin, the new Hydro-Economic DSS is far more than just a piece of software. It is a platform for a new, more difficult but more honest conversation. By providing a shared language — the language of economics — it offers a way to break down institutional silos and build consensus around the hard, evidence-based trade-offs that will define Pakistan’s future.
Stephen Davies is a nonresident fellow, Natural Resources and Resilience Unit, International Food Policy Research Institute (IFPRI); Shujaat Farooq is dean of research at the Pakistan Institute of Development Economics (PIDE); Mubarik Ali is a consultant at Pakistan’s Ministry of Planning, Development & Special Initiatives; Muhammad Tahir Ali is a research economist at IWMI; Aslam Javeed is from Punjab’s Planning and Development Board; Iqra Akram is a national researcher-economist at IWMI; Muhammad Faisal Ali is research fellow at PIDE; Mohsin Hafeez is the strategic program director for Water, Food and Ecosystems at IWMI; and Claudia Ringler is director, Natural Resources and Resilience at IFPRI.
