Water Infrastructure and Socio-Economic Development Issues

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1 Water Infrastructure and Socio-Economic Development Issues SIMONA MARIA FRONE Department of Sustainable Economic Development Institute of National Economy at the Romanian Academy 13, Calea 13 Septembrie street, sector 5, , Bucharest ROMANIA DUMITRU FLORIN FRONE Faculty of Management, Economic Engineering in Agriculture and Rural Development University of Agricultural Sciences and Veterinary Medicine 59, Marasti blvd., sector 1, , Bucharest ROMANIA Abstract: This paper aims to revive debate and to improve the concern and understanding of the importance of water infrastructure development in enabling sustainable socio-economic growth and poverty alleviation although this is just one of many aspects that must be weighed and understood in managing water resources. In this purpose, we present and support the paradigm of the S curve water security scenarios. Then we consider the limits and challenges in assessing the socio-economic development impact of improved access to water infrastructure, from a modeling view. Defying some of these obstacles and acknowledging the special situation of Romania, we develop some simple regression and correlation analysis of these issues, to conceptually assist the supposed large investment effort. Key words: water security, infrastructure, development, S curve, impact, proxy infrastructure variable, socioeconomic 1Introduction Today as in the past of the world economic history, water resources development and management remain at the heart of the struggle for growth, sustainable development and poverty reduction. Although this has been the case in all industrial countries, most of which invested early and heavily in water infrastructure, institutions and management capacity, it remains a challenge in many developing countries today and also in Romania, where investments in water development and management are still an urgent priority. 2 The paradigm of water security and economic growth Our research aims to continue and to confirm one of the main recent contribution in the theoretical and methodological grounding of the correlation between water infrastructure and socio-economic development, as presented in the papers and studies of [1], who claim and argue on the relationship between investment in the water sector and socioeconomic development, including poverty alleviation. By introducing the concept of water security, these authors impose the paradigm that every country must achieve water security before launching sustainable economic growth; for water security, strategic investments in the water sector (either in the phisical water infrastructure or, later, in water management institutions) should be implemented. We may define a complete "water security" as: the sustainable availability of water quantity and quality acceptable for production, livelihoods and health, coupled with an acceptable level of risk to society related to unpredictable water-related impacts. Companies and nations will make the initial investment required for regulating water resources and water storage, then for water supply for human settlements and industrial production, food and energy, and therefore will invest in associated institutions needed to manage water resources and the related infrastructure in order to reach a perceived level of "water security." ISBN:

2 Water security can be achieved with the creation or acquisition of an appropriate level of a mix of infrastructure and water management capacity. Thus, water security is achieved when communities are resistant to the impact of water resources - so that lack of access to water and water related services and vulnerability to the adverse impacts of water (drought, floods, disease, etc.) can not create significant barriers to growth. Implicit in the notion of water security is the idea of a 'minimum platform of water institutions and infrastructure'. Below this minimum platform, society and the economy are not resilient to the impacts of water shocks and/or unreliable water for production or livelihoods, and water is a significant obstacle to growth. But until reaching "basic water security", the magnitude of negative social effects (eg, morbidity, mortality, resource conflicts) and their economic impact (eg, institutional failure, inefficient production, shocks, disasters) can be too large so that the economy, environment and society are affected significantly, and growth can not be managed in a rational and predictable way. The variant of the S curve to describe the correlation between investment in water infrastructure and economic growth is mainly used by hydrologists to illustrate differences in terms of water security scenarios (Figure 1): Fig.1 Water security scenarios of economic development As described in Fig.1 [1] developing countries will generally be along the lower, water-insecure or water-vulnerable horizontal segment of a difficult hydrology S-curve. Intermediate economies are often along the steep, tipping point segment, and developed economies are generally along the upper, water-secure horizontal segment. It may be noticed that the specific form of "S curve" was chosen to indicate that economic returns to early investments in water infrastructure, in certain circumstances and perhaps especially in countries with high hydrological variability, may appear to be quite low. Therefore, a postulate is that it may be necessary to implement a significant level of public investment, before there is basic water security (eg, infrastructure, regulation and water storage, sufficient to adjust the flows) to be followed by productive private investment and to have economic growth unconstrained by access to water. This feature of the S curve paradigm has important implications for how we evaluate the cost effectiveness of early investment in water resources infrastructure, because the standard methods and procedures of projects' economic analysis tools can be problematic to be employed here, since they are generally inadequate to capture the potentially transformational impacts of large-scale, multipurpose investments. These impacts can be economic, social and environmental and both positive and negative. Investments in water security should be and have historically been considered public goods, mainly financed by public investment, from fiscal resources. 3 Conceptual and methodological limitations and challenges of analyzing the correlation between water infrastructure and economic development Already in the 1950s, Hirschman [2] has described both the critical importance of social overhead capital (infrastructure and power), and the challenge of imposing economic discipline in planning such investments. The author noted that Investment in social overhead capital is advocated not because of its direct effect on final output, but because it permits and in fact invites directly productive activities to come in. In modern studies and research, infrastructure is understood as the basic physical structure consisting of: transport infrastructure, water supply and sewage-wastewater treatment infrastructure, telecommunications infrastructure and energy infrastructure. This is considered public infrastructure, creating benefits for many users. Like human capital, public infrastructure can be incorporated in the production function to explain the residual growth factor, all as human capital, public infrastructure is financed by public saving. ISBN:

3 Generally not traded on international markets, in some countries (such as Romania) built public infrastructure may be insufficient, which explains the delay in the economic growth convergence of countries. Public capital, especially infrastructure capital is essential for socio-economic activities undertaken by people in households and businesses. Inputoutput tables show, for example, the inputs of telecommunications, electricity and water are used in the production of almost every sector, while transport is an input for each freight. However, a study [3] concludes that "investments in infrastructure are not sufficient by itself to generate sustained progress in economic growth". In most literature approaches, scientists are seeking to use physical indicators of public infrastructure, rather than monetary indicators, on the ground to avoid the difficulty of assessing the infrastructure, because there is no agreed methodology for assessing the infrastructure variables [4]. Usually, it is considered that the infrastructure consists of several sub-sectors defined by a set of physical variables: transport infrastructure (length of public roads, railways, etc.); water infrastructure and wastewater discharge (resident population connected to these services and collection systems and wastewater treatment); telecommunications infrastructure (number of telephone lines) ; electricity infrastructure (power plants, transmission and distribution lines). Most recent studies and research, taking into account European countries or medium developed countries, refer mainly to transport infrastructure, the electricity and telecommunications, as factors of economic development. Since water and wastewater infrastructure is already well developed and comprehensive in these countries, it is not considered a priority area of investment for socioeconomic development and fighting poverty, like in the developing countries of Africa and Asia. Unfortunately, the sector of water and wastewater infrastructure is still underdeveloped in Romania (with a rate of only cca.55% of the population connected to the public water supply and sanitation service), although the country is considered an upper middle income level country and an emerging economy. As we have pointed out before [5], the current situation of the water/wastewater infrastructure development is critical in Romania and at regional levels: inadequate water treatment, poor sewerage network and low access to centralized water and wastewater systems are the main weaknesses of this environmental sector. Therefore, we consider that Romania is still in the ascending portion of the S curve of correlation between economic growth and water infrastructure, probably close to the tipping point; water infrastructure contribution to economic growth and the economic returns to investment in this infrastructure sector will be still increasing. Moreover, taking into account recent climate changes that in our country are manifested by increased extreme events, summer-autumn droughts, massive deposits of snow falls and then flood risk in winter-spring, we believe the concept of water security for Romania should be better studied, reviewed and developed. Concerns about the importance of development in infrastructure, including water and sanitation, occurred also in other new members of the European Union with emerging economies, seeking to maximize the efficiency and favorable socioeconomic impact of EU Structural and Cohesion Funds assistance, to accelerate the economic convergence. Thus, specific characteristics of each country determine the set of infrastructure components and the aspect of social and economic impact that can be more or less clearly quantified by one or more variables: growth rate, income inequality, GDP/capita, regional competitiveness, productivity and welfare. In an effort to overcome the obstacles and trying to demonstrate the importance of public infrastructure for sustainable economic development, we initiated some calculations for regression and correlation analysis. We relied mainly on the model and methodological approach of the research cited above, developed and tested recently for the Baltic states by (Snieska & Simkunaite, 2009). Also, for compliance, we have used mainly data from international databases suggested by these authors (Eurostat, World Development Indicators), but had the unpleasant surprise to discover even more missing data for Romania, than for the Baltic states. Next, in the mathematical statistical research undertaken we have tried to capture the correlation between economic development (represented by variable GDP / capita at purchasing power parity PPP) and the development of infrastructure of water / wastewater (represented by different proxy ISBN:

4 variables, depending on data availability) for Romania. Table 1- Dynamics of the variables considered for analysis, in Romania, Variable 1.GDPS (%,EU27 =100) 2. UWPS (Millions m3) Variable 1.GDPS (%,EU27 =100) 2. UWPS (Millions m3) Years in the time series Years in the time series Table source: Raw data from Eurostat (variables 1, 2) and from the Romanian Statistical Yearbook, 2010 (variable 3). First we tested the correlation between economic growth (expressed by GDP per capita in Purchasing Power Standard, as EU-27=100, a variable named GDPS) and the use of water from public water supply (a proxy variable for water demand, named UWPS). (In the following approach, the LN function represents a natural logarithms procedure used to normalize the variables. The brackets below the estimated coefficients show the values of their t- Statistics) a) In the first correlation considered, the dependent variable is GDPS, while the exogenous independent variable is UWPS. The regression equation estimation output is: LN(GDPS) = LN(UWPS) (1) R 2 = ( ) (23.156) The coefficient of determination R 2, which takes a value close enough to 1, as well as the attached statistical tests for regression coefficients and Durbin-Watson test with a value close to 2, statistically and mathematically validate the regression equation (a). In terms of economic analysis and significance, as seen from the above equation, in Romania, in the considered time-period, the determined variable GDP/capita was inversely correlated with water consumption from the public water supply. This does not necessarily imply that a public water network is not important for economic development but can also mean that in this period, the restructuring and reforms of the water sector in Romania, have reduced the water waste and water losses from the network, so practically they increased the economic efficiency of water supply networks, nationally. We should have been given the choice of other proxy variables in terms of water infrastructure (eg, share of population connected to the water supply and sanitation); however we did not find long enough data series. b) To highlight the influence of the access to water and sewerage network on regional economic development in Europe, we considered a cross-country regression (of 2009, latest data available) for 25 countries in Europe, of the variable GDP / capita, as determined by the share (%) of total country population served by public water supply system, and by the share of population connected to sewage systems. The data used is entirely from Eurostat tables. The sample of 25 European countries was selected for data availability and include Romania and 20 other EU countries and four non-eu European countries (Norway, Turkey, Former Yugoslavia, Iceland). The variables considered in the modeling were: -As the endogenous variable: relative GDP per capita (PPP), noted PIBLOC09; -As the explanatory variables: o Population connected to public water supply (% of total population of the country), variable denoted CPWS (resident population Connected to Public Water Supply); o Population connected to sewerage systems and wastewater treatment (% of total population of the country), variable denoted CWWT (resident population Connected to WasteWater collection systems and Treatment). We got to the following regression and correlation insights: LN (PIBLOC09) = 0.481LN (CWWT) (2) R 2 = This equation of cross-country regression shows that in Europe, there is a positive correlation between access to public sewerage network and the economic development indicator, although there are certainly other determinants that are not figured in the regression equation above (thus, the coefficient of determination is only 0.43). The estimated elasticity coefficient ( ) for the degree of connection to wastewater ISBN:

5 infrastructure explanatory proxy variable is questionable, but it is certain that this coefficient is different from zero and positive, as indicated by all statistical tests and probability coefficients attached (t-statistic = , Prob. = ), which validates the regression equation and correlation indicated. LN(PIBLOC09) = 0.775LN(CPWS) LN(CWWT) (3) R 2 = By introducing both proxy variables for water infrastructure connection degree (CPWS respectively CWWT) in the regression equation, there is naturally an increase of the coefficient of determination R 2, and a relative decrease in regression coefficients, which we consider that better approximates the influence of these variables on the economic development in the period, although the sense of influence is maintained. In addition, we find that the estimated coefficient of the variable LN (CWWT) is quite stable (compared to the value estimated in the previous regression equation) and t-statistic significant, while the estimated coefficient of variable LN(CPWS) although higher, is not statistically significant, so we cannot conclude about the true value. Again, this is explained by the fact that the sewerage and wastewater treatment systems are less developed than water supply throughout Europe (especially in rural areas), and now efforts are mainly for investment to expand this network in the new member states and less developed regions, benefiting from structural instruments. Conclusions This is a modest first attempt to estimate and validate the empirical correlation between the development of infrastructure for water and wastewater, on the one hand, and economic development (expressed as GDP per capita) at national and European level, on the other hand. Although the estimation results of regression and correlation parameters are not spectacular, since we did not choose the most appropriate explanatory variables, the most sophisticated modeling techniques, while data series used were too short, however, these partial results encourage us to go on with research to argue for the importance of developing water and wastewater infrastructure in Romania, for sustainable socio-economic development. In addition, the most important conceptual and methodological limitations and challenges of analyzing the correlation between environmental infrastructure and economic development at local, regional, national levels, occur in the attempts of modeling and quantifying the objectives of sustainable development. In this respect, it is necessary to highlight the complex influences of the water systems development on the economic development, social development and increasing the quality of the environment, thus requiring long data series and complex interdisciplinary modeling techniques. There is a strong need for this endeavor, hopefully leading to the dissemination of good theories and methods of quantifying the sustainable development paradigm. Acknowledgements This paper is supported by the Sectorial Operational Programme Human Resources Development (SOP HRD), financed from the European Social Fund and by the Romanian Government under the contract number SOP HRD/89/1.5/S/62988 References 1. Grey and Claudia W. Sadoff, Water for Growth and Development. David in Thematic Documents of the IV World Water Forum. Comision Nacional del Agua: Mexico City Hirschman, Albert O.,. The Strategy of Economic Development. New Haven:Yale University Press, World Bank , Responsible Growth for the New Millenium. Washington, DC:The World Bank 4. V.Snieska & Ineta Simkunaite, Socio- Economic Impact of Infrastructure Investments ECONOMICS OF ENGINEERING DECISIONS, Frone Simona, Frone Dumitru Florin, Water Supply and Sanitation as a Requirement for Sustainable Tourism Development in Romania, in RECENT RESEARCHES IN TOURISM AND ECONOMIC DEVELOPMENT, WSEAS Press 2011 ISBN: