Trade and conserve water

How to make tight supplies go further

May 20th 2010 | From The Economist print edition

The price is not right

IF MOST governments are bad at making wise investment decisions about water, that is largely because they are bad at evaluating the costs and benefits, and that in turn is at least partly because they find it hard to price water. Many find it hard even to measure. Yet you cannot manage what you cannot measure.

No country uses water pricing to achieve a balance between supply and demand, but countries with sustainable systems all use water rights of some kind that involve the allocation of supply by volume. In a country such as India, which has over 20m well-users, even the registration of wells would be a long and difficult task, as the World Bank points out, never mind measuring the water drawn from each of them. Moreover, introducing a system in which price reflected some sort of cost would often be politically impossible except over time.

Dr Perry, the irrigation economist, says water is typically priced at 10-50% of the costs of operating and maintaining the system, and that in turn is only 10-50% of what water is worth in terms of agricultural productivity. So to bring supply and demand into equilibrium the price would have to rise by 4-100 times. In most countries that would spell electoral suicide, or revolution. That is why community management of the Andhra Pradesh or Chinese kind, which may involve a mix of instruments including regulation, property rights and pricing, offers the best hope.

In the long run it is hard to see sustainable arrangements that do not involve property rights. These can be traded between willing buyers and willing sellers to reallocate water from low-value to high-value uses, and they have proved their worth in the American West, Chile and South Africa. Their most fashionable exemplar is the Murray-Darling basin in Australia, where they have enabled farmers to withstand a fearsome drought without much impact on agricultural production.

Yet water rights do not provide an easy or quick fix to water shortages. For a start, they usually require tested institutions and the ability to ensure fair trading that may take years to establish. Then the scheme, and particularly the assignment of rights, must be carefully designed. Experience in Australia and Chile shows this can be difficult; indeed, the Organisation for Economic Co-operation and Development says there is now widespread recognition that the Murray-Darling system is over- allocated. Spain, which after 20 years has registered less than a quarter of its groundwater structures, shows that this can take a long time. And Yemen shows that trading in the absence of proper regulation can actually add to groundwater depletion, as has happened around the city of Ta’iz. Lastly, farmers may be resistant to tradable rights. Even Israel, hyper-conservation-conscious in water matters, still allocates water centrally among different sectors, and controls use within sectors by permits and pricing. Rights provide quotas, but Israeli farmers do not want to see them traded—and the water table drops.

Above all, it is difficult to include small groundwater-users in a tradable-rights scheme. Nebraska neglects small users, as does Australia. But to do so in India would exclude 95% of the people pumping water. This reinforces the argument for collaborative self-policing of withdrawals by farmers themselves.

Comparative advantage

Plainly, however, that is not going to happen fast, so other solutions are needed. One would be trade. Just as an efficient local trading system should direct water to high-value uses, so an efficient international one should encourage the manufacture of water-heavy products in wet countries and their export to drier ones.

It is not, of course, instantly obvious that some products are lighter or heavier than others in terms of the water embedded in them, yet the amount of this “virtual” water can be calculated and a water “footprint” sketched for almost any product, person, industry or country.

On the back of the business card handed out by Tony Allan, the father of the concept, are the virtual-water values of various products: 70 litres for an apple, 1,000 for a litre of milk, 11,000 for a kilo of cotton, and so on. The value for a copy of The Economist is not included, but it has been calculated by the Green Press Initiative at about 11½ litres. That is little more than the 10 litres Mr Allan has for a single sheet of A4 paper, which suggests the exercise is inexact.

It can also be misleading. The oft-quoted figures of 2,400 litres for a hamburger and 15,500 for a kilo of beef lead to the conclusion that eating cows must be unconscionable. Yet some cows valued primarily for their milk may still end up on a plate, and others may be well suited to graze on grassland that would be useless for growing cash crops. In Africa a kilo of beef can be produced with as little as 146 litres of water. Moreover, virtual-water content will vary according to climate and agricultural practice. SABMiller uses 45 litres of water to make a litre of beer in the Czech Republic, but 155 litres in South Africa. In other words, the merit of virtual water is not to give precise figures but to alert people that they might be better off growing different crops, or moving their manufacturing to another country.

Or trading. If the virtual water in traded goods were properly valued and priced, exporters would be fully compensated and importers would pay a price that reflected all the costs. But water is everywhere hugely subsidised, and protectionism often stops an efficient allocation of resources. State laws in America, for instance, usually restrict foreign investment in agricultural land. The upshot, at its most absurd, has been Saudi Arabia’s decision to use its finite fossil fuel and fossil water to irrigate the desert for wheat that could be grown with less energy and less evapotranspiration in the American Midwest and then exported to the Middle East.

Unfortunately, Henry Kissinger once raised the thought that America might use its food aid as a weapon. More recently, when food prices shot up in 2008, some countries started to impose export bans or taxes, leading importers to hanker for self-sufficiency. Virtual water seems destined to remain an indicator of distorted allocation for some time to come.