This study developed a general framework that can be applied to integrating environmental sustainability aspects into economic development planning in the case of exploiting water resources through inter-basin water transfers (IBWT). Using the Lesotho Highlands Water Project (LHWP) between Lesotho and South Africa (SA), the study used the multi-country ecological social accounting matrix (MC-ESAM) for Lesotho and SA to integrate ecological implications of the LHWP with the economic benefits of the project. The study further used the developed MC-ESAM multipliers to analyse the impact of lost ecological services downstream the LHWP dams in Lesotho on the wellbeing of households directly affected by the project in Lesotho and the general economies of Lesotho and SA. The MC-ESAM multipliers were also used to analyse different policy scenarios aimed at compensating affected households in Lesotho for ecological losses. The results revealed that while the LHWP has significant direct and indirect benefits in terms of social and economic development in Lesotho and SA, the project has serious unitended impacts on ecological resources and services, with resultant deleterious wellbeing implications for populations residing within the reaches of the LHWP rivers and downstream the LHWP dams in Lesotho. The results from the MC-ESAM multiplier analysis indicated that not only the income of populations directly affected by the project in Lesotho is likely to fall, but also that of other households and social groups, as well as the general economies of Lesotho. Also, because of economic dependence of Lesotho on SA in terms of imports, SA will also loose. The policy simulation results showed that compensating the ecological losses would greatly improve the welfare of directly affected populations and the rest of Lesotho economy. The empirical analysis and policy simulations results showed relatively small impacts in general, but were significant for groups of people directly affected by the project in Lesotho. The study demonstrated the importance of integrating ecological consequences into impact assessment of IBWT before such transfers can be implemented to ensure Pareto optimality and of considering economy-wide impacts and multi-sector, multi-country linkages associated with IBWT for a holistic impact assessment of IBWT. / Thesis (PhD (Agricultural Economics))--University of Pretoria, 2007. / Agricultural Economics, Extension and Rural Development / unrestricted