A socio-hydrological model is used to forecast future conditions in a river basin arising from changes in climate and the economy in order to learn about macroeconomic conditions that would yield pathways for sustainable development and how they may be affected by changes in climate and the economy. The study uses a system dynamics model with endogenous social values and preferences and exogenous climate and economic drivers. Basin scale sustainability is defined as a function of economic growth, provision of environmental services and equality within the basin. The analysis reveals that a diversified basin economy is important to achieve sustainable development. Under current climate conditions, a higher level of diversification in the basin's economy increases sustainability. Higher current capital growth rates, e.g., >2% of the current rate, would also lead to more sustainable development of a kind that is less affected by the availability of water and robust to vagaries of climate change. The results suggest that policy-makers and resource managers should focus on measures to diversify the economy when it is thriving, but also consider the capacity of society to adapt to unpredictable shocks to the system.

Increasingly the competition for water between food production and the environment threatens the viability of agricultural communities. This paper focused on this water-food-environment nexus in the Murrumbidgee River Basin, Australia, and how it contributed to the evolution of the regional economy and changing demographic patterns. Paradoxically, against expectations, changes in water management favouring the environment coincided with falling unemployment and increase in average regional income, despite a decline in agriculture. To understand this, and to explore how the competition for water played out in the Murrumbidgee Basin, we develop and use a socio-hydrologic model that explicitly considers bi-directional feedbacks between human and water systems. The modelling shows that in response to widespread ecosystem degradation, community sentiment forced new water management policies that favoured ecosystems which inevitably led to reductions in agriculture production. In response, the basin economy reorganized through sectoral transformation to the manufacturing and service sectors, improved agricultural practices, and out-migration of basin residents. The sectoral transformation was facilitated by capital available for investment in manufacturing and service sectors with knock-on impacts on population dynamics and unemployment. Collectively these contributed to a sustainable transformation of the basin economy. The study shows how transformation of the basin economy and demographics mitigated potentially adverse economic outcomes and enabled society to cope with water management decisions that favoured the environment. The dynamics outlined here highlight the adaptive capacity of people and movement of capital in a free economy, supported by appropriate strategies and funding, to cope with water stress.