Government Interventions and the Depletion of Natural Resources: Evidence from Foreign Exchange Market and Water Pricing Policies

Articles in Press

Document Type : Research Paper

Authors

Faculty of Economics, University of Tehran, Tehran, Iran

10.22059/ier.2025.391419.1008198

Abstract

This study investigates the long-run impacts of government interventions in foreign exchange markets and water pricing policies on agricultural water withdrawal in 18 resource-based economies from 1990 to 2020. Motivated by the Dutch disease context, where governments adjust macroeconomic levers to bolster competitiveness in the tradable sector, particularly agriculture, we construct policy gap measures as deviations of the nominal effective exchange rate from the real effective exchange rate and of nominal water prices from shadow prices. A panel framework combining I(1) and I(0) variables is estimated using two-stage least squares (2SLS) in levels, with lagged policy variables as instruments, after confirming cointegration among non-stationary series. Results show that currency appreciation through exchange rate interventions reduces water withdrawal on average (elasticity: –0.35%), driven by the export-competitiveness channel, although effects reverse in water-scarce economies where the input-cost channel dominates. Water underpricing significantly increases withdrawals (elasticity: –1.17%), with heterogeneity across water-scarcity groups. An inverted-U Environmental Kuznets Curve is identified, with a turning point near 38 billion US$ GDP (constant 2015), indicating that most countries lie above the threshold where growth reduces water use. Population growth generally increases withdrawals, while cultivated area expansion and climatic variables exert context-dependent effects. Policy recommendations include aligning nominal water prices with shadow values alongside enforcement and efficiency programs, avoiding sustained currency overvaluation in water-scarce contexts unless paired with irrigation governance reforms, and tailoring interventions to water availability, institutional capacity, and development stage. Coordinated macroeconomic and water management strategies can mitigate depletion while sustaining agricultural productivity.

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Iranian Economic Review

Articles in Press, Accepted Manuscript
Available Online from 07 December 2025

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