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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.
0959-3780/$ - see front matter & 2008 Elsevier Ltd. All rights reserved.
doi:10.1016/j.gloenvcha.2008.07.014
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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.
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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619
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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.
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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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.
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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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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
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