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 “If you are to suer, you should suer in the interest of the country.”
Indian Prime Minister Nehru, speaking to those displaced by Hirakud Dam, 1948.
   Dams epitomize a central fact about many public investments and policies, ranging from
road construction to trade liberalization – economic gains often come at the cost of making
some groups worse o. According to the World Commission on Dams (2000a) large dam
construction has displaced between 40-80 million people worldwide and submerged, salinated
or waterlogged vast tracts of land. In principle the aggregate gains from building dams could
be used to compensate those who lose land or livelihood. However, it is unclear whether this
occurs if, as is often the case, the winners, but not the losers, are politically and economically
advantaged.
    Economic evaluations of dams and similar public investments largely ignore their distri-
butional eects. This is inappropriate if political support for a public investment can be
realized with little commitment to a subsequent redistribution of the gains. Ignoring dis-
tributional implications is also problematic from an econometric viewpoint. For instance,
if a public investment makes some regions worse o while others benefit, then a regional
evaluation which does not account for the distribution of losers is likely to be biased.
    Dams are a particularly good case for studying the potential disjunction between the
distributional and productivity implications of a public policy. The likely winners and losers
from dam construction are clearly identifiable: those who live downstream from a dam (in
its “command” area) stand to benefit, while those in the vicinity of and upstream from a
dam (in its “catchment area”) stand to lose. From an econometric viewpoint, this implies
that we can estimate the eect of dams separately for these two populations. From a policy
perspective, this makes it relatively easy to identify, and compensate, losers. The absence
or inadequacy of compensation in such a comparatively simple case would suggest that the
distributional consequences of public policies are perhaps less easy to remedy than is typically
assumed.
    Worldwide, over 45,000 large dams have been built and nearly half the world’s rivers
are obstructed by a large dam. Proponents of large dam construction emphasize the role of
large dams in enabling irrigation (both directly and by recharging the groundwater table),
providing water and hydropower for domestic or industrial use, and as insurance against
rainfall shocks. By the year 2000, dam reservoirs stored roughly 3,600 cubic kilometers
of water, generated 19 percent of the world’s electricity supply and provided irrigation for



between 30-40 percent of the 271 million hectares irrigated worldwide (World Commission on
Dams 2000a).
    Opponents argue that most of the gains associated with dam construction occur down-
stream. The only gains enjoyed by the upstream population are from the construction
activity itself and from economic activity around the reservoir. The losses they suer, in
contrast, are large; dam construction causes significant loss of agricultural and forest land,
and increased salinity and waterlogging of the land around the reservoir(McCully (2001) and
Singh (2002)). The upstream populations are also more exposed to diseases caused by the
large-scale impounding of water, such as malaria.
    The oscillating policy stance of the World Bank, the single biggest source of funds for
large dam construction, illustrates the tension between aggregate productivity benefits and
the social costs of large dams. Starting in the mid-1980s, the Bank responded to growing
criticism by NGOs and civil society of the costs imposed on those living in the vicinity
of dams by sharply reducing its funding for dam construction. However, it has recently
changed its policy and restarted lending for dams (with a loan for a large dam in Laos),
arguing that the rationale for the dam rests on proper use of revenues for poverty reduction
and environmental management.
    What is striking in the policy debates, both at the Bank and in civil society, is the absence
of evidence on the impact of the average large dam, and on the success of governments in
compensating any losers. The aim of this paper is to provide such evidence. Our empirical
investigation focusses on India, which, with over 4,000 large dams, is the world’s third most
prolific dam builder (after China and the USA). Large dam construction remains the main
form of public investment in irrigation in India, and dam irrigated areas account for 35% of
the area irrigated throughout the country.1
   Several factors, including geographic suitability, the political clout of local governments,
and the economic implications of dam construction aect dam placement. Hence a simple
comparison of outcomes in regions with and without dams is unlikely to provide a causal
estimate of the impact of dams. Regions where relatively more dams are built are also likely
to dier along other dimensions, such as potential agricultural productivity.
    To address this problem we exploit the fact that a river flowing at a positive gradient
favors dam construction. A higher water level upstream enables water storage and diversion
into irrigation canals, and electricity generation. Too high a river gradient, however, makes it


dicult to build canals and to monitor the water flow into them. In contrast, a steep positive
river gradient is good for hydro-electricity generation. This implies that the relationship
between river gradient in an area and its suitability for dam construction is non-linear for
irrigation dams and linear for hydro-electric dams.
    Detailed GIS data on district geography allows us to exploit variation in dam construction
induced by dierences in river gradient across districts within Indian states to construct
instrumental variable estimates.2 Our regressions control for district fixed eects, state
year interactions, and the interaction of most district geography variables with overall dam
construction in the state. Only the interaction between the fraction of district rivers in
dierent gradient categories and overall dam construction in the state is assumed to be
exogenous. This makes our empirical strategy robust to a range of omitted variable and
(potential) endogeneity concerns. First, we fully control for dierential state-specific time
trends. Second, if districts with greater river presence or relatively more gradient evolved
dierently from other districts in the same state in a way that is correlated with overall dam
incidence in the state, then this is controlled for by the interaction term between the number
of dams in the state and these variables. This estimation strategy is one of the contributions
of this paper, and can be used to provide convincing estimates of the economic eects of
large infrastructure projects, where project location is strongly influenced by geography.
    Our outcome variables are district agricultural and poverty outcomes. Dams do not aect
agricultural production in the district where they are located. In contrast, irrigated area and
agricultural production increase in districts located downstream. A cost-benefit analysis
suggests that the increase in agricultural productivity does not justify the average dam;
even excluding the deadweight loss of taxation, environmental damages, and the increase in
labor usage, the rate of return to the investment is only about 1% on average.
   Further, it does not seem that productivity gains in downstream districts are used to
compensate the losers. Poverty declines in the districts located downstream from a dam,
but increases significantly in districts where dams are built. In downstream districts dams
serve as insurance devices against rainfall shocks. However, they increase vulnerability to
rainfall shocks in the districts where they are built.
    These findings suggest that large dam construction in India is a cost-ineective public
policy that has increased poverty in some areas. The results also underscore the need to



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