Abstract Integrated watershed management (IWM) is emerging as an alternative to the centrally planned and sectoral approaches that currently characterize the planning process for dam construction in Ethiopia. This report clarifies the concept of IWM, and reviews the major social, environmental and economic problems caused by dams in Ethiopia and elsewhere. Dams are planned from a top-down perspective in Ethiopia, some people are relocated against their will, haphazard land-use changes can occur, and soil erosion and reservoir sedimentation can increase. Many communities affected by dam constructions have not been sufficiently recognized or compensated, and environmental protection measures such as land-use planning and soil and water conservation have not been adopted in watersheds in which construction of dams is occurring. Furthermore, revenues generated from hydropower and water supplies often benefit urban dwellers, or the national economy, at the expense of rural inhabitants in watersheds. Creation of a multistakeholder platform, integration of soft system methodology with hard system tools, and completion of environmental protection measures should be among the major components of an improved planning methodology for construction of new dams in Ethiopia. This translates into an environment wherein science and knowledge can help watershed inhabitants create a diversity of locally appropriate resource management solutions. Effective implementation of environmental policies and strategies could improve the quality of watershed-based developments. The conclusion is that the IWM approach is a good alternative to effectively address the social, environmental and economic problems associated with planning and constructing new dams in Ethiopia.