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ARTICLE IN PRESS

Global Environmental Change 18 (2008) 617625

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Global Environmental Change


journal homepage: www.elsevier.com/locate/gloenvcha

Pricing Chinas irrigation water


Michael Webber , Jon Barnett, Brian Finlayson, Mark Wang
School of Anthropology, Geography and Environmental Studies, The University of Melbourne, Victoria 3010, Australia

a r t i c l e in fo

abstract

Article history:
Received 11 December 2007
Received in revised form
25 July 2008
Accepted 29 July 2008

Many development agencies and other actors are advocating that China adopt a system of water
markets or of high water prices in order to resolve the inefciencies of irrigation agriculture and to
supply sufcient water for growing urban and industrial uses. We argue that this proposal rests on a
series of propositions: that the price of water is too low to encourage farmers to be efcient; that
farmers are not charged volumetric prices and so are not encouraged to conserve water; that water is
scarce largely because farmers are proigate in their use of water; and that proper pricing of water will
not affect equity. None of these contentions is true. Farmers have to pay not only the ofcial charges for
water but also the much higher costs of pumping it onto their elds. Once pumping is included, farmers
are paying prices that are volumetric. Furthermore, the inefciency of farmers arises in large part from
the manner in which water is delivered to them: the system offers no rewards for care in the use of
water and instead rewards greed. And, nally, although it might be true that higher prices do not affect
equity within a village, in fact they would have substantial effects on inter-sectoral equity, with farmers
becoming worse off in comparison to urban dwellers. The paper concludes by sketching a more
appropriate scheme for raising the efciency of use of irrigation water.
& 2008 Elsevier Ltd. All rights reserved.

Keywords:
China
Water
Irrigation
Pricing
Market
Institution

1. Introduction
There is a general understanding that China is short of water.
The average amount of water per person in China is only
23002400 m3/year, about one quarter of the world average
(Falkenmark et al., 1989; Shi and Xu, 2001). This problem is
recognised locally (Wang and Lall, 2002), internationally (Lohmar
et al., 2003) and institutionally (Wang et al., 2004). Water scarcity
is most intense in northern China, particularly the North China
Plain, where agriculture, industry and municipalities demand
more water than is available (World Bank, 2000a, b, 2001, 2005;
see also Yang and Zehnder, 2001). The problem is most acute in
three north-central river basins: the Hai, the Huai and the Huang
(Yellow) River Basins (Lohmar et al., 2003), where, according to
the World Bank (2001, p. 51), renewable water availability is only
358750 m3/person/year; the problem is compounded by pollution, falling groundwater levels, land subsidence and sea water
intrusion (Mei and Dregne, 2001).1 The problems have arisen in
part because of agricultural intensication in northern China, but
mostly because of rapidly growing urban and industrial demand,

 Corresponding author. Tel.: +61 3 8344 3171; fax: +61 3 9349 4218.

E-mail address: mjwebber@unimelb.edu.au (M. Webber).


But similar problems afict other northern and inland basins; for example,
on the Tarim basin, see Wang and Wang (2005).
1

0959-3780/$ - see front matter & 2008 Elsevier Ltd. All rights reserved.
doi:10.1016/j.gloenvcha.2008.07.014

with scarcity being accentuated by high levels of contaminants


(Webber et al., 2008). Water shortages in Chinas important grainproducing regions may signicantly affect agricultural production
(Lohmar et al., 2003), potentially provoking food crises (Brown,
2004). There is, therefore, a growing clamour for measures to
restrict the growth of demand, particularly to reallocate water
from supposedly inefcient agricultural uses to the rapidly
increasing industrial and urban users (Xinhua, 2004).
There is a general understanding, especially in agencies of
development and aid that the best solution to this problem is to
price water through a market. The Asian Development Bank
advocates this solution:
[ADB] will support the evolution of water allocation through
markets of transferable water rights once the necessary policy,
legal, and institutional frameworks for [Integrated Water
Resources Management] in a river basin context have been
put in place (ADB, 2003, pp. 1819).
Governments and civil society need to see water as an
economic good. Financial incentives for optimising water use
will be strengthened through a mix of water charges, marketbased instruments, and penalties. y Managing water demand
is a function of efcient pricing, effective regulation, and
appropriate education and awareness. ADB will promote tariff
reforms through its water-related projects and programs to
modify structures and rates so that they reward conservation
and penalize waste (ADB, 2003, pp. 2425).

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M. Webber et al. / Global Environmental Change 18 (2008) 617625

The World Bank, in strategic statements (World Bank, 2002)2


and the design of individual projects for China (World Bank,
2000a, b),3 makes the same comments: low water charges and
the lack of accurate water measurement and volumetric water
charging have resulted in inefcient use of water resources. It
argues that there is, therefore, a need for institutional reform
in China that incorporates: the user pays principle, decentralisation of service delivery, market oriented development, treatment
of water as a valuable economic resource, water measurement
and volumetric water charging, and participation of water users.
In this view, the development banks are supported by environmentalists (Brown, 2001),4 international resource management institutions (Hussain, 2005), national aid agencies (for example, Norways:
Hansen and Bhatia, 2004) and many economists (including He and
Chen, 2004; Ehrensperger, 2004; Rosegrant et al., 2005).
They are also joined by Chinese agencies of water management. Since 1999, the Yellow River Conservancy Commission
(YRCC) has sought to manage water scarcity in the Yellow River
basin by: engineering measures; raising water prices; moving to a
system of water rights transfers (Li, 2005)5 and actively supporting research on the manner in which such systems operate in
Australia and the USA (Tong and Zhang, 2005). The Xinjiang Tarim
Basin River Management Bureau of the YRCC has since 2003
stipulated a surface water allocation for prefectures and the
Xinjiang Production Corps as a prelude to trading in water rights
(Wang and Wang, 2005). Academics in law and management call for
property rights in water to be established (Liu and Dong, 2005), in
hydrology propose models of net welfare to set prices (Shao et al.,
2005), and in public administration suggest that the price of water
to farmers be raised to cover costs (Mao, 2005).
It is the aim of this paper to explain the weaknesses in
proposals to use markets to resolve water shortages in northern
China; the critique leads us to identify practices that could raise
the efciency with which irrigation water is used. We do not
discuss the bureaucratic processes and interest coalitions that
give rise to water policy in China (though some of these are
relevant, and we are trying to inuence policy). Nor do we analyse
the discourses surrounding water policy in China, though some of
these are important to policy proposals. The paper is not a critique
of markets for water per se (on which, see Barlow and Clarke,
2003; Shiva, 2002). Nor do we intend that our arguments apply
elsewhere, even though many of the proponents of water markets
are international institutions. Instead, we make an argument from
the particular circumstances of the North China Plain and of
irrigation agriculture that uses surface water.6 We do intend to
explain at a variety of levels how pricing models do not t the
circumstances of contemporary northern China: instruments need
to be appropriate to circumstances, even if we grant the need to
supply increasing amounts of water to the burgeoning cities and
industries of the north.
We begin by identifying the models that might be followed
when pricing water and their purported benets. These sections
are general rather than specic to China, since the benets of
markets are themselves theoretical. However, the principal point
of the paper is to make three claims about the foundations of

2
The Bank does note that the current lack of dened rights prohibits market
pricing or water trading.
3
One of the main outcome indicators for project CNPE56516 is to be the
implementation of volumetric water charges.
4
Who comments that trying to raise the price of water in China is like trying
to raise the price of gasoline in the United States.
5
Li GuoYing is a commissioner of the Yellow River Conservancy Commission,
Ministry of Water Resources, China.
6
The arguments about water pricing for urban consumers are quite different;
the water crisis in southern China is about ooding and quality, not about
shortage; and we just do not know enough about other societies.

arguments about the value of markets to resolve water shortages.


The rst (Section 3) is that the concept of water rights, upon
which pricing and trading depend, is alien to the administrative
circumstances of Chinese farmers; next, we argue that the
discursive framework of the debate casts the farmers as the
culprits of inefcient water use whereas the principal problem is
one of inefcient water administration bureaucracies (Section 4);
and nally, we contend that higher water prices in effect represent
a tax on farmers, who are as a group already the poorest members
of Chinese society (Section 5). The paper concludes by isolating
the preconditions for more efcient use of water for irrigation in
northern China and the classes of measures that might meet those
preconditions.
The paper draws on a variety of sources. First is a literature that
argues the benets of markets and/or pricing for water demand
management; this literature is commonly theoretical, and is
often generalised to a variety of developing countries, not just
China. Secondly, we draw on econometric and other secondary
evidence about water demand and supply conditions within
China. And thirdly, we draw on our own experience. We
have spent more than a decade talking to farmers across northern
China about a variety of issues, including water management;
the locations include the rural fringes of Beijing and Shanghai;
Shandong (Jinan municipality and Dongying); Henan (Zhengzhou
municipality); Inner Mongolia (both on the steppes and south
of Hohhot); and Shaanxi (the rural areas of Yulin and Yanan
cities). In these places, we have collected information (by survey
and observation) on cropping practices, the system of water
administration in villages, the prices paid for water, methods and
timing of irrigation, irrigation volumes, pumping costs and attitudes
to market pricing. For this paper we have also discussed similar
issues with water managers (principally the provincial Bureaus of
the YRCC in Zhengzhou and Jinan), municipality administrations in
Hohhot, Zengzhou and Jinan, and local academics.

2. For prices
In 2000 at The Hague, the World Water Council adopted as a
Vision the proposition that water should be charged at full cost
to all users. There is, however, a variety of ways of pricing water.
Water in a river is a resource, delivered to farmers via an
irrigation infrastructure. The price that Chinese farmers are
charged for the water they use on their farms typically combines
a resource fee and an infrastructure charge. A resource fee seeks to
capture the opportunity cost of water in a river in its best
alternative use (which may include environmental ows). An
infrastructure charge is the fee charged for delivering water from
the river to farmers elds, including the capital cost of
constructing, operating and maintaining an irrigation system.
In China as in most places, such prices are set by the state,
though in principle private organisations could be given this
right. The charge to farmers for irrigated water can be set in
several ways:
1. Area: either a xed price per hectare of irrigated land (perhaps
with a quota) or different xed prices per hectare of
subsistence land and above-subsistence land;
2. Crop: a variable price, depending on either the crop grown
or the season (or both), possibly with a lower price for
subsistence crops;
3. Volumetric: a xed or variable price per unit of water delivered
to a farm;
4. Multipart: volumetric pricing at the level of, say, a village,
combined with area or crop pricing within the village (Hussain,
2005, pp. 6365).

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M. Webber et al. / Global Environmental Change 18 (2008) 617625

All these prices tend to restrict the aggregate amount of water


that farmers use. In principle, though, the most effective way of
restricting the use of water by irrigation farmers is to charge
volumetric prices for the water they use. Since irrigation
infrastructure has high xed costs, volumetric charges may need
to be supplemented by xed fees (see Johansson, 2000).
A special form of volumetric price is a price equal to the
marginal cost of supplying water, including the social (scarcity)
value of water in a river, infrastructure and maintenance, and
administration. If farmers are rational and have perfect information, then in theory they produce the highest return for the
amount of water supplied (Johansson, 2000). If this price is the
same across all sectors, inter-sectoral allocations are efcient in
this sense, too.
Markets can determine prices, under particular conditions
(Dinar and Mody, 2004; Easter et al., 1997). First, users of water
from a river have rights to a certain volume of water per perioda
year, a quarter or a seasonseparate from the right to use land.
Second, the right to some or all of the water can legally and in
practice be sold to others (by in practice we mean that the water
can actually be moved from the seller to the buyer). Third, a
management system exists that resolves conicts over external
effects (such as return ows and pollution), uctuations in river
ow and the rights of in-stream users. Finally, rights and contracts
are legally enforceable and trading is not too costly. If there are no
externalities from the use of water, all parties are fully informed,
there is complete certainty, competition is perfect and there are
non-increasing returns to scale, then water markets efciently
allocate water: the price paid by users equals the marginal cost of
supply and equals the marginal productivity of water for users
(Dinar and Mody, 2004; Johansson, 2000). If such a water market
exists, water prices are determined by it.
Even if some of these conditions are not met, a rights-based
system of water transfers could, it is argued, equitably improve
the efciency of water use (Easter et al., 1999)that is, values of
output per cubic metre could be raised. Users have an incentive to
conserve water, for the saved water can be sold, increasing the
supply of water to locations and sectors where demand and ability
to pay are greatest. The system is equitable because those whose
consumption decreases (and so whose production falls) are
compensated by the sale of water. If the sum of all use rights
(including environmental ows) is equal to or less than supply,
and if rights are adjusted to natural variations in supply, then a
tradeable water rights system is also sustainable (Easter et al.,
1998, 1999; Rosegrant and Binswanger, 2004). In practice, the
costs of designing and administering a transfer market increase as
the number of rights-holders increases, so the scale of allocations
is important: use rights and transfer rights could be assigned to
provinces, counties, townships, villages, or individuals, which
could then sub-allocate rights to users within their domain
multiple markets at different scales under various jurisdictions
are possible.
Thus, the rst claim is that if water prices are quasi-volumetric
and near to marginal costs, then water use is efcient. A central
body can set these prices, but a system of tradeable water rights
also achieves such benets. Secondly, if prices are approximately
equal to costs, they facilitate appropriate levels of investment and
maintenance. Related to this claim is a third: enhanced investment and maintenance improve water services to farmersthus
the broad package of price changes does not harm the poor. As the
Asian Development Bank puts it: the evidence from scores of
water projects is that the poor are increasingly willing to pay for
services that are predictable and effective (ADB, 2003, p. 25; see
also Hansen and Bhatia, 2004). Thus, it is argued, reforms do not
harm poor consumers and often improve their access to water
(Clarke and Wallsten, 2002). Higher charges for irrigation water

619

help recover the cost of providing water delivery service; give an


incentive for efcient use of scarce water resources; and act as a
benet tax on those receiving water services, providing resources
for further investment to the benet of others (Perry, 2001;
see also Cai and Rosegrant, 2004), all without affecting equity
(Tsur and Dinar, 1995).
In China, actual prices charged for irrigation water are thought
to be well below levels that are efcient (i.e., that markets would
set). Prices do not even cover the full costs of operating and
maintaining irrigation systems (Hussain, 2005; Wang et al., 2004;
Yang et al., 2003). The price of irrigation water varies across the
country, being generally lower in the south (RMB0.020.03/m3 in
provinces like Guangdong and Chongqing) than in the north
(RMB0.100.14/m3 in provinces like Gansu and Shanxi) but is
generally one half-one third of the cost of supply (Zhou and Wei,
2002).7 Other estimates differ, but also claim that existing prices
are less than costs (Shi and Xu, 2001; World Bank, 2000b), despite
steep increases in the price of water in the Huang He basin in the
last ve years (YRCC, 2001). A computable general equilibrium
model estimates that the market price for water in China should
have been nearly RMB4.00/m3 in 2000, about thirty times the
highest prices now paid for surface water by irrigation farmers
(He and Chen, 2004). Partly as a consequence of these differences
between the price and the cost (or the value) of water, various
actors in Chinas complex water resource management structure,
including the Ministry of Water Resources, are considering the
merits of a system of transferable water rights (Lohmar et al.,
2003). Indeed, in principle the establishment of water markets is
now possible after the revised national Water Law came into force
in late 2002 (Yuan and Chen, 2005). In 2003 the YRCC established
ve pilot water right transfer projects in Ningxia and Inner
Mongolia (Yuan and Chen, 2005), permitting factories to invest
in water-saving irrigation technology and buy from irrigation
districts the water thus saved.
Yet these arguments, that tradeable water rights or marginal
cost pricing are the key to successful management of water,
are applied in country after country in Asia and elsewhere;
they are simply replicated in China by the ADB, the World Bank,
foreign experts, western-trained Chinese economists and engineers, and the central agencies of water management in China
(such as the Ministry of Water Resources). The identication
of problems is the same for China as for the UK or the USA; the
solutions proposed are the same too, despite their different
physical, economic, social, legal and institutional conditions.
The water problems in China may indeed be similar to those in
western Europe; however, solutions that work efciently
in western Europe may be inefcient or ineffective in China
(Biswas, 2001). We now turn to consider these different
conditions.

3. The theoretical issue


The YRCCs pilot water right transfer projects in Ningxia and
Inner Mongolia reveal several problems that impede effective
rights-based transfers (Yuan and Chen, 2005). These problems
include the fact that the original water rights are unclear; the
questionable legality of transferable water rights; imprecise rules
about transfers; lack of agreement on the roles of the various
bureaus involved; and lack of agreement about who should
supervise transfers and enforce rules (Yuan and Chen, 2005).
7
According to Wang and Huang (2000), industrial prices are two-three times
agricultural prices in the south and up to ten times in the north.

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These issues reect deeper incompatibilities between water


resource management in liberal democracies and in China.
Evidence of the potential benets of a system of transferable
water rights in China comes from liberal-democratic countries
such as the USA and Australia. There, systems of transferable
water rights have improved the efciency of water use, but are
new and remain imperfect (Dinar and Mody, 2004; Matthews,
2004; Pigram, 1999; Smith, 1998) and have to be very carefully
tailored to local institutional and environmental conditions
(Haddad, 2000b). Yet, even if this policy instrument works in
some countries, it will not necessarily work in China: externally
driven solutions to water problems in developing countries tend
to correct the least relevant problems in the least practical way
(Biswas, 2001; Pigram, 1999). The potential for such a system of
transferable water rights in China needs to be assessed against
Chinas different political structure, national goals, legal system,
degree of rural development, property rights institutions, resource
management capacity, and water demand and supply. So, many
proponents of tradeable water rights, including advocates of their
use in China, stress that important preconditions must be
metespecially institutional preconditions (Haddad, 2000a;
Matthews, 2004; Perry et al., 1997). Lacking these preconditions,
a system of transferable water rights may do more harm than
good to water users and the environment (Perry et al., 1997).
Foremost among these preconditions is a secure and transparent property right in water that is independent of rights to land.
Informal market systems may sufce for effective exchange of
groundwater and temporary trades of water (Easter et al., 1998,
1999). However, formal water rights are mandatory if there are to
be trades of permanent rights of water whose use entails return
ows to the environment (including irrigation by surface water).
The rights must be assigned to the bodies that are trading
waterfarmers, if the system is individual; or villages or
irrigation districts, if trading is collective.8 This entails laws that
assign rights, legal systems that enforce those rights and punish
those who transgress on the rights of others, and a transparent
system that all users understand and have access to information
about (Easter et al., 1999; Matthews, 2004). Participants, including
farmers and their collectives, must be comfortable with the idea
of rights, and have faith in the systems that make and enforce
the rules.
None of these conditions is evident in China. Civil and political
rights are generally effectively upheld only in liberal-democratic
societies (if then) and their meaning is not always commensurate
with, and their application not always effective in, other political
systems. This is particularly true of China, where the idea of
natural rights is problematic, and the legal authority that can
determine rights almost always favours the rights of the State over
the rights of the individual (Yu, 2005) and of higher level
institutions over local authorities. Thus the formal system of
property rights in China is mixed and indeterminate: individuals
right to land is only a use right which is legally far from secure
(Ho, 2001; Liu, 2005). In the living memory of almost all farmers
in China the overwhelming fact is that resources may be excised
by the State at any time: the inalienable character of basic rights,
that is the ideal of western countries, is far from Chinese practice.
For example, the 2002 water law states clearly that all rights to
surface and groundwater belong to the State and that water is
managed by various authorities on behalf of the State. Even the
most basic right to water is the product of de facto rather than
de jure arrangements (Lohmar et al., 2003; Schlager and Ostrom,

8
On transmitting collective incentives downward to individual farmers, see
Wang et al. (2003); on the position of villages and irrigation districts in the water
management system, see Section 4.

1992). Indeed, a measure of the distance between the reality in


China and the ideal of a functional system of water rights is the
recent argument that people should have a right to participate
in water resources management, a right they do not now have
(Liu, 2005).
In other words, there are no transparent and secure rights to
water in China. Proponents of water markets (Lohmar et al., 2003;
see also Tong and Zhang, 2005) argue that a necessary rst step is
to establish such rights, apparently not recognising that the lack of
secure rights to water is in itself a cause of many of Chinas water
management problems: we observe some users getting more than
they need, others not enough; the timing of releases not matching
demand; and almost all users taking more than they need when
water is available. The paradox is that if water rights were clear
and secure then water would be used far more efciently than
now and a market to transfer rights might be unnecessary. A
system of water use rights that is independent of the State, secure,
enforceable, and legitimate (trusted by all parties) would enhance
the efciency with which farmers use water, whether or not use
rights are transferable. However, such a system is far from
actuality (according to Xia and Sun, 2005, the allocation of water
rights is a key bottleneck) and may not be realisable under the
Chinese party-State.
There is a variety of other preconditions for a system of
transferable rights. These include: separation of water rights from
land rights; laws that set out how rights can be traded and a
system to enforce those laws; laws to establish a clear hierarchy
among different rights; infrastructure to transfer water among
users in different locations; institutions to monitor and regulate,
preventing adverse effects on third parties; and a legal system to
create an avenue for disaffected parties to seek recourse, possibly
including an ombudsman to protect the public interest (Dinar and
Mody, 2004; Easter et al., 1998; Lohmar et al., 2003; Matthews,
2004: Perry et al., 1997). These preconditions must be met
whether the rights are assigned to individual farmers or to
collectives, such as irrigation districts.
A system of transferable rights also demands detailed knowledge of the physical ow of water through a system (from sources
to users), including the use of groundwater and return ows; of
where there is too little water and where there is too much9; of
where the largest losses of water occur in the systemand in
China all this information needs to be at a spatial resolution that is
far ner than is required in regions of low population density, like
rural USA or Australia.10 Our observations on the north China plain
indicate that at least a half of water withdrawn from the river is
lost to evaporation and seepage from unlined irrigation canalsa
problem that a system of transferable water rights will not in itself
solve (Xu, 2001). The manner in which water moves in a system
has signicant implications for the best system of management:
one system of management cannot t all places equally well
(Perry et al., 1997; Haddad, 2000a).
Furthermore, systems of transferable water rights are premised
on the idea that water is an economic good. In China the bulk of
water consumption does serve private economic uses. Agriculture
accounts for 7080 per cent of water use (Liu and Chen, 2001),

9
Though the Huang He basin is associated with water shortage, we have
found consistent evidence of water logging and the associated salinisation of soils
in areas within Jinan municipality that are irrigated from the Huang He.
10
Local hydrogeologic knowledge is vital. For example, some of the most
sophisticated analyses of the preconditions for a water market discuss the
implications for market and pricing systems of return owsexcess water from
farms and seepage from irrigation canals that serves to recharge groundwater
systems or returns to the river (Briscoe, 1996; Perry et al., 1997). However, the
Huang He below Zhengzhou is perched above the ood plain and excess water
ows into other basins, such as the Huai He; furthermore, in much of Shandong
the problem is a groundwater table that is too high rather than too low.

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M. Webber et al. / Global Environmental Change 18 (2008) 617625

and industrial users account for most of the rest. Agricultures


share is consumed by hundreds of millions of small farmers who
irrigate their crops. Despite the fact that these farmers increasingly sell their produce commercially, however, the system and
the activities of farmers have signicant public benets. For
example, rural landlessness in China is low (McKinley, 1996), rates
of poverty are low and falling rapidly (Stern, 2002; Wang et al.,
2004), food production has grown faster than population
(although grain production has been kept stable) so that
domestically produced food is cheap,11 and the rate of rural to
urban migration is arguably lower than it would be if farmers
were not able partly to secure their livelihoods from the land. The
capacity of Chinas farmers to apply water to land and produce
subsistence and commercial food acts as a oor on urban wages, a
rural social security system.12
In other words, while water is ostensibly an economic good in
agriculture, it has signicant indirect public good functions. Water
also has important non-economic values, such as for public
health, ecosystem health, recreation, landscapes, gardens and
other domestic micro-enterprises, and religious and cultural
ceremoniesall of which may be ignored or not well served by
a rights-based transfer system (Meinzen-Dick and Bakker, 1999).
The underlying assumption of rights-based transfer systems (that
water is an economic good) thus needs to be carefully considered
(Barlow, 2001; Briscoe, 1996; Chambers, 1988; Kasrils, 2001;
Shiva, 2002). If we imagine Chinese society to be a collection of
autonomous and rational individual actors,13 a rights-based
transfer system may increase the efciency with which water is
used, at least from the perspective of those who can most make
money from it. However, if we imagine Chinese society as
something more than the sum of its individuals, then China is
not so obviously well served by such a system. As one peasant,
educated to the end of high school, in Wujialiang village near
Yulin (Shaanxi) put it to us, if water is commodied then its use
will be dominated by the rich, even though its a right for all, and
ecosystem effects will be ignored.
The imagination of society is important in other ways. At the
heart of market-based models of resource allocation is an
imaginary of the universal society, according to which actual
societies areor should be-comprised of rational individuals
acting to maximise their welfare. This methodological individualism holds that all social phenomena are explicable in terms of
the ways that individuals act. It ignores or at best downplays the
signicance of the State, institutions, power relations, culture,
history, and non-economic values (Brohman, 1995). Methodological individualism underpins much of modern social science, and
is central to almost all economic and political approaches to policy
formulation and implementation; yet it is highly problematic
even as a model of relatively atomistic, afuent, rights-based,
liberal-democratic countries, let alone for China where the State is
paramount, history matters, and collectivities still play signicant
social roles. Time after time we observe that the activities of
individuals, private enterprises and the state are complexly
intertwined, so that individual commercial decision-taking is
not separable from institutional supervision: in the Yangzi delta,
southeast of Shanghai, Langxia township has absorbed much of
the communal land, established a development corporation to

11
And it reduces demand for grain on the world market, avoiding the kinds of
price rises that were feared by Brown (1995).
12
As one casual worker from Zhuanyaogou village (near Ansai, Shannxi) who
worked as a construction labourer in Yulin (Shaanxi) put it to us: if I become
unemployed, I can come home, live with my parents, help them out, and wait for a
phone call from my boss.
13
Whether individual farmers or their collectives (such as villages or
irrigation districts).

621

lease that land to agricultural research enterprises and universities, and encouraged farmers to intensify their production of
rice, fruit and milk, while at the same time prettifying their
villages to attract tourists to stay in the homes of those same
farmers; in Beidaolaban and countless similar villages across
Huhehaote prefecture (Inner Mongolia), the Autonomous Regional
government and large (private) urban milk-processors are encouraging peasants to switch from traditional crops to intensive
milk production. These developments all involve various arms of
the state, private corporations and individual peasants in development projects, so tightly bound together that individual
decision-taking is irrelevant. In China as in many other places, it
is likely that water markets will be restricted to informal and local
trades (see Briscoe, 1996; Dinar et al., 1997) and are likely to be
instituted at a collective level rather than by individual farmers.
Market-based mechanisms are only one of many possible
instruments for implementing resource management policy
(Dovers, 1995). Of these, given the States strong regulatory
capacity, and peoples familiarity with regulation as a policy
instrument in other aspects of Chinese life, a regulatory approach
seems to be more practical than the use of market mechanisms
(even so, the allocation and enforcement of clear water use rights
might benecial). Likewise, given that the bulk of water is lost
through evaporation and seepage from irrigation canals, water
savings are more likely to be achieved by widely applying lowcost technologies to minimise this loss rather than using a blunt
tool such as transferable water rights.

4. Framing the culprits


Marginal cost pricing and water trading work to increase
technical and allocative efciencies only if the practices of farmers
are the principal reason for water being used inefciently
in China. The language is one of inefcient farmersthey use
ood irrigation rather than drips and sprinklers; they grow low
value crops with water; they apply too much water; they do not
time water applications properly. The story is repeated in the
Chinese press (Yu, 2004), among irrigation engineers and plant
breeders (Kijne et al., 2003; Tuong and Bouman, 2003) and among
economists (Cai and Rosegrant, 2004). Some commentators
are more sympathetic, arguing that water-saving irrigation
practices and technology are not widely used because there are
no incentives in place for farmers to benet directly from saving
water (Lohmar et al., 2003). The result of this discourse is
development projects that seek to change irrigation practices
on farmssuch as the World Banks water conservation project on
the north China plain (Beijing, Hebei, Liaoning, Shandong)
(for details see World Bank, 2000a, b). The implication is clear:
many, if not most of the problems lie at the farm level and are the
fault of farmers.
However, the management of surface water for irrigation
reveals a different story. We observe a system that is in chaos. The
problem, perhaps is not so much resource scarcity as scarcity of
appropriate management (Lu et al., nd; Yang and Zehnder,
2001).14 At an institutional level there exist the confusions and
uncertainties associated with the tiao-tiao-kuai-kuai structure of
governance in China. The detailed management of irrigation
districts also provides little scope for farmers to modify their
irrigation practices.
14
Since the principal Chinese proponents of market-like trading in water
rights are the Ministry of Water Resources and its river basin management
authorities like the YRCC, this is not a popular argument within Chinese water
management circles.

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M. Webber et al. / Global Environmental Change 18 (2008) 617625

The institutions that manage surface water in China are many


and complexly linked (Hou, 2000; Lohmar et al., 2003; Lu et al.,
nd; Zhou and Wei, 2002). Consider the Shandong Bureau of the
YRCC, with which we have worked. It belongs to the YRCC, one of
a set of national river basin commissions, whose primary task is to
approve and enforce provincial water withdrawal plans. In turn,
the YRCC is an agency of the Ministry of Water Resources, which is
itself responsible for planning, constructing, and managing all
water-related projects including ood control, power generation,
water transport, domestic water treatment, and industrial water
use in addition to irrigation; the bureaus under the Ministry are
responsible for managing plans of higher level agencies and for
administering water resource systems. In other words, a vertical
(or tiao tiao) structure channels commands from State Council
through central government ministries (such as the Ministry of
Water Resources), to water resource bureaus at provincial,
prefectural, county and township levels. Individual irrigation
districts report to their appropriate water resources bureau.
At each level of government, the management of water also
requires cooperation between the different agencies that are
responsible for different functions: this is horizontal cooperation
(or kuai kuai). The line of power owing from the Ministry of
Water Resources is supplemented by lines from the State
Environmental Protection Administration (wastewater, pollution),
the Ministry of Geology and Mining (groundwater), the State Price
Bureau (prices), the Ministry of Construction (urban water
delivery) and the Ministry of Agriculture (onfarm technologies).
These agencies and their subordinate bureaus must cooperate
within the central government and within each province,
prefecture and county. At each level, goals for social and economic
development are set by the government at that level, into which
must t the activities of the functional agencies.
The Shandong Bureau is thus located in a matrix. Power ows
from high ranking agencies (YRCC) and a demand for cooperation
ows from equivalent ranking agencies in the same government
(Shandong Province). This system generates conicts (Lu et al., nd)
between different users (urban and rural consumers are served by
different agencies); between different sources of supply (ground
and surface water are administered separately); between supply
and conservation; between national, basin, provincial and local
levels of government; and between ood protection (prevention),
water supply and pollution control. Some conicts are delicately
described by Liao and Xiao (2005). In many respects, this system
operates to force irrigation farmers to use as much water
as possible.
Consider the level of provinces. The Shandong Bureau, for
example, tells us that there is a stated allocation of water to
provinces; but the allocations are periodically revised and subject
to exceptional circumstances (such as drought). Since the Bureau
does not receive as large an allocation as it seeks, it competes with
other Bureaus for water and, fearing that it will lose some of its
allocation in the future, uses all of (or more) of its allocation to
ensure that the same amount is allocated next year. Other Bureaus
are in the same competitive game. Down within Shandong, we see
a similar competitive ethic forcing irrigation districts to use all
their allocations too.
Consider also the level of an irrigation district. In some
irrigation districts, managers are given explicit incentives to
conserve water (Wang et al., 2003). In many, though, the
procedure is like that we observe within Jinan municipality,
Shandong, Local governments can tell the Shandong Bureau how
much water they want and when; yet the amount and timing of
releases from the Huang He into the irrigation canals are entirely
at the discretion of the YRCC. Water ows into an irrigation canal
for a xed period that is determined by the YRCC and ows
through the distribution canals to the last farmers in the district.

Farmers have to use water when it is made available, even if they


do not need it. The rst farmers along the distribution canals use
what they want or need; some is then lost to seepage; the rest is
available to the next farmers along the canal.
As we see these farmers irrigate, they do not have the option of
being more efcient users of water. There is no water storage in
the system, so water applications cannot be timed; farmers
cannot reduce applications now to use more later. Since farmers
are charged for water on an areal basis, any reductions in their use
of water translate into yield reductions but no monetary savings.
In other words the language of blame needs to be reframed: the
inefciency lies in the system of water management. The YRCC
gives no managers or farmers incentivesindeed, gives them
little opportunityto save water.

5. Taxing farmers
Within the paradigm of methodological individualism, the
ability of prices to regulate water use depends on the price
elasticity of demand. Estimates of the price elasticity of demand
for irrigation water in China range from 0.35 to 0.41 (Wang
et al., 2005) to 0.11 (Cai and Rosegrant, 2004). Whatever the
precise number, elasticities are low, implying that a doubling of
the price of water would lead to a 1040 per cent reduction in use.
There are several reasons why the price elasticity of demand for
irrigation water is so low.
First, at very high levels of application of water, more water
reduces yields (Fraiture et al., 2002). Beyond a certain point water
is subject to negative marginal returns, not diminishing marginal
returns. Even at very low prices, farmers may not use all the water
they can get. Thus, if prices are low, an increase in price may have
little effect on the use of water, since it is not prices that constrain
use but the shape of the production function.
Secondly, farmers may be subject to legal or de facto water
rationing, which restricts their applications of water to suboptimal levels (Fraiture et al., 2002). Such rationing includes canal
dimension and pump capacity, and means that the use of water in
Chinese agriculture is in aggregate well below the demand curve
(Ehrensperger, 2004). Again, this means that water is rationed by
command rather than by price, and moderate changes in price
may not inuence farmers decisions.
Thirdly, though, the price charged for water is only one
component of the cost paid by farmers for water. Standard
components include the water resource fee and the fees paid for
delivery (infrastructure capital costs, operations and maintenance). In addition, when water is drawn from a river on the north
China plain, the water in irrigation channels is below ground level
and is gravity fed, so farmers have to pay to pump the water up
onto their land. For example, we observed farmers in Beidong
village (Jinan, Shandong) paying an average of about RMB5.00
per mu per year for water; but they paid another RMB95.00 per
mu per year for diesel to pump that water from the canal and
another RMB60.00 per mu for the pumps (amortised over ve
years). In other words, estimated price elasticities are not for
resource and infrastructure fees but for the very much larger
resource plus infrastructure fees and pumping costs.15
Such data prompt three conclusions about the costs of
irrigation water in northern China. First, all farmers who have to
pay to pump waterwhether from the ground or from a
canalare in effect paying a volumetric charge for water. Since
15
This is an observation that we have not found repeated in policy circles or in
empirical research on agricultural economics in China. In fact, the actual elasticity
of demand for water, e e0 (p+p1)/p, where e0 is the estimated elasticity, p1 is the
pumping and other costs the farmers have to pay, and p is the direct price of water.

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M. Webber et al. / Global Environmental Change 18 (2008) 617625

pumping costs are many times greater than the resource and
infrastructure fees, this means that their water charges are
already largely volumetric. Therefore, to the extent that the
management system permits farmers to consciously plan their
use of water, they are already making decisions about the use of
water that reect a comparison of prices and returns. Either such
farmers are already using water efciently or the price mechanism is not working to direct their choice of technique. Secondly,
farmers are paying a very high price indeed for their irrigation
water. Some farmers in Beidong were paying 10 per cent of their
gross annual household incomes for water. Although the published prices of water in northern China are RMB0.100.15/m3, the
effective price paid by these farmers is over RMB3.00/m3, slightly
higher than the price paid by residents of Melbourne for
household water (Essential Services Commission, 2005). These
implications of pumping costs seem to have escaped the
proponents of market prices for water. Thirdly, since elasticities
are so low, any price increase is effectively a tax on farmers for
little return in water saved. If the price elasticity of demand for
water is 0.1, a 100 per cent increase in the price of water
translates into a 10 per cent saving in water, a 90 per cent increase
in costs and some reduction in output. One forecast, based on data
for Shanxi province, estimated that a tenfold increase in the price
of surface water would reduce social welfare by 39 per cent even
though farmers would increasingly turn to groundwater (Fang and
Nuppenau, 2004). Since farmers are the poorest group in China,
especially in north China, it seems especially unreasonable to tax
them in this manner (compare Ahmad, 2000; Molle, 2001; Perry,
2001). Proponents of market prices for irrigation water thus have
to propose income subsidies (that are independent of water) to
compensate farmers for such losses.

6. Conclusions
Our evidence and argument prompt two different kinds of
conclusions. The rst concerns the nature of the claims that are
made about the efciency of irrigated agriculture in northern
China; the second reects more positively on the nature of the
solutions to water scarcity that might work and be equitable.
The claims that are made about the use of water by irrigation
farmers in northern China include the contentions that the price
of water is too low to encourage farmers to be efcient; farmers
are not charged volumetric prices and so they are not encouraged
to conserve water; water is scarce in large part because farmers
are proigate in their use of water; and proper pricing of water
will not affect equity. None of these contentions is true. Farmers
have to pay not only the ofcial charges for water but also the
costs of pumping it onto their elds; these latter charges might be
30 times the ofcial price of water and raise the effective price of
water to levels comparable to those in water-scarce developed
countries. Once pumping is included, farmers are paying prices
that are volumetric: the more water they pump, the more they
pay. Furthermore, the inefciency of farmers arises in large part
from the manner in which water is delivered to them: the system
offers no rewards for care in the use of water and instead rewards
greed. And, nally, although it might be true that higher prices do
not affect equity within a village, in fact they would have
substantial effects on inter-sectoral equity, with farmers becoming worse off in comparison to urban dwellers.
This summary implies that an appropriate means of raising the
efciency with which irrigation water is used must be different
from the widely advocated model of universal pricing of
individual farmers. Like Haddad (2000a), we do not reject the
idea of rights and markets per se but seek to tailor them to t the
physical, institutional, development, and social realities of north-

623

ern China. First, the fact that farmers who pump are already facing
(high) volumetric prices implies that they already are given
incentives to irrigate as efciently as they are able under current
institutional arrangements. Thus appropriate systems of management rst need to be put into place and only then should
additional incentives be given to farmers to become more efcient
users of water. The critical criterion for an appropriate system of
management is that it provides farmers with the ability to use
water efciently if they choose. And, we have argued, that
criterion is met if farmers (or groups of farmers) are allocated
water rights, which themselves depend on storage systems that
enable farmers to use their water when they need it. If farmers or
groups have dened rights to water at times they need it, they
have the capacity to use water efcientlya capacity that they do
not now have.
Once such a system of dened rights is established, then the
question of price and efciency can be addressed. The weakness of
present proposals for pricing irrigation water is that they intend to
charge farmers for use of water without providing them a
compensatory income. This is the source of the inequity. The
appropriate solution would seem to be to provide farmers with
the right to sell their water to urban and other users at market
prices. However, allocating these rights is unlikely to work at an
individual level, since metering is impracticable and water
markets are institutionally incompatible with social practice in
China. But it could be done collectivelyat the level of an
irrigation district, for example: the district sells some of its water
entitlement to the large cities of northern China. That income can
then be used to pay for the infrastructure that is needed to save
the estimated 50 per cent of Chinas surface irrigation water that
is lost to seepage and evaporation in irrigation channels. Cities
buy the water that they need; farmers are provided with the
capital with which to become more efcient users of water; the
inequities of high prices are avoided. The markets thus established
are local (between cities and nearby irrigation districts) and are at
an appropriate scale (the irrigation district). Once such a system is
in place, then and only then can the questions of water management at the scale of individual farmers be appropriately
addressed.
Whatever the design of the system of water transfers from
agriculture to urban-industrial users, it is critical that the money
transfers occur at the same scale as is the principal source in
inefciency. In agriculture on the north China plain the principal
source of inefciency is the loss of water in irrigation canals.
The provincial bureaus of the YRCC and the irrigation districts
within them are the managers of these canals. Money must be
transferred to those bureaus and irrigation districts and all of it
spent to reduce their seepage losses and raise their ability to
provide water when farmers need it. Otherwise, farmers will lose
water. If, by contrast, compensation for water transfers is paid
directly to farmers, there is no additional money with which the
managers of canals can pay to reduce the technical efciency
losses, and agricultural output falls. (This is the fundamental
weakness of the market-prices-plus-compensation model.) If
compensation is paid to other agencies of government, there is
no reason to suppose that it will be applied to reducing efciency
losses in irrigation. Even if a market-like transfer of money for
water represents the best deal that farmers can get for what might
be regarded as an inevitable loss of their present de facto rights to
water,16 it is still critical that the transfers be designed in the
manner we have indicated.

16

As one referee astutely observed.

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