Blog Post

Exporting the Cost of Dams

Aug 8, 2014 | Sheila M. Olmstead, Hilary Sigman

Last year, former Egyptian President Mohamed Morsi proclaimed: "We will defend each drop of Nile water with our blood if necessary." He was referring to the Grand Ethiopian Renaissance Dam that Ethiopia is constructing, which may affect the flow of the Nile River into Egypt. A year later, talks between the two nations still have not progressed.

For years, economists have been concerned that the local benefits of dams have been overstated and the local costs have been understated. Even if countries make efficient decisions about dam construction on domestic rivers, countries sharing a river may overdevelop the river if they are able to pass on some of the costs imposed by dams to other countries. As evidenced in the Egypt-Ethiopia dilemma, these issues may create the potential for conflict across borders when countries share a river.

In our new RFF discussion paper, Damming the Commons: An Empirical Analysis of International Cooperation and Conflict in Dam Location, we consider what happens when some of the costs of dams may be incurred  downstream and outside of national borders. We analyze 382 river basins and 4,696 dams and conclude that dams are more likely to be placed in river basins that are shared across international borders, controlling for the physical suitability of a location for a dam, and many other factors. Being able to pass some of the inherent cost of the dam downstream—and into neighboring countries—seems to be an incentive for constructing dams on international rivers. Treaties are sometimes discussed as a possible solution to these issues. In our analysis, we find weak evidence that such treaties have any effect.

Water in rivers should present a relatively straightforward problem, with a small number of countries sharing a well-defined resource and a natural default allocation of property rights to the upstream country. Our results do not support optimism about the likelihood of cooperation over more complex or global resources. These issues may become even more important under a changing climate, which will affect the availability of water resources, causing many countries to consider large dams as potential solutions.