Barriers to water markets in the Heihe River basin in northwest China

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Abstract

Tradable water rights systems are becoming an important way to achieve distributive efficiency for water resources. However, it is not easy for countries or regions to establish water markets due to the existence of various barriers. In early 2002, the Ministry of Water Resources (MWR) of China initiated an experimental project—Building Water-saving Society in Zhangye City. This project was the first of its kind in China. The aim of the project was to establish a new water use rights (WUR) system with tradable water quotas and to reallocate water resources reasonably and efficiently through market-based instruments. This paper presents the research done on the system and water markets. It has been found that that the system is hard to implement well and that WUR trading is not popular. The barriers to implementing a WUR system are social and administrative in nature. WUR trading faces management, legal, administrative, and fiscal barriers. We discuss why these barriers exist and we provide policy recommendations to overcome them.

Introduction

Water resources are in short supply in China, especially in the northwest, which has a land area of 3.15 million km2, accounting for about 33% of the total area of China. In 1999, there were 198 billion m3 of water resources in the northwest, accounting for 7% of the total water resources in China (MWR, 2004). With a rapidly growing population and expanding agriculture, water resources are becoming scarcer in the northwest. The use of water has reached or surpassed sustainable limits in some regions with severe water shortages. In recent years, almost all of the water in some inland rivers in the northwest, such as Tarim River and Heihe River, has been used out in the upper and middle reaches. Downstream regions are suffering from desertification and ecosystem degradation (MWR, 2004).

According to the Chinese Water Laws of 1988 and 2002, all water resources are state-owned—private ownership is banned. The Government, which represents the state as owner, allocates water to users through governmental orders and water quotas. Water use rights are poorly defined and the cost of using water is quite low. As a result water resources are largely open access, leading to severe overuse of water and external diseconomies, such as rivers drying up, environmental deterioration and ecosystem degradation. In early 2002, the Ministry of Water Resources initiated an experimental project – Building Water-saving Society in Zhangye City – the first project of its kind in the country. The aims of the project were to establish a new water use rights (WUR) system with tradable water quotas and to reallocate and use water resources reasonably and efficiently through market-based instruments. However, the system was hard to implement effectively and WUR trading was not popular (MWR, 2004). We explore the barriers to water markets in the Heihe River basin in northwest China and we examine ways to overcome these barriers. This research is limited to agricultural water use and its transfer to other sectors.

Governments control the water supply in many countries. These countries typically do not allocate water on the basis of economic efficiency but on other criteria. Fairness or equity may be a guiding principle. The price charged to agricultural users typically does not reflect the marginal cost of supplying water to them. Agricultural water is subsidized by governmental programs to support agriculture. Water use in agriculture is often inefficient and generates adverse environmental effects. Governments who have recognized these problems are slowly adjusting water prices and allowing some limited markets to operate (Hartwick and Olewiler, 1998, p. 85). The tradable water rights system has become a main path to market operations (Rosegrant and Binswanger, 1994). Chile and the western United States are two places where water marketing is currently most advanced. The Chilean Water Law of 1981 established the basic characteristic of property rights over water as proportional share. Changes in the allocation of water within and between sectors are realized through markets in tradable water rights (Schleyer and Rosegrant, 1996, Hearne and Easter, 1995). To date, water marketing has largely involved transfers from relatively low-value, inefficient irrigation canals to municipal and industrial users.

It is not easy for countries or regions to establish water rights trading markets due to many kinds of barriers: political, legal, administrative, cultural, psychological, technical, and geographical (Bauer, 1997, Thobani, 1997, Frederick, 2002). In the 1970s and early 1980s, several researchers noted barriers to market-determined water transfers (Tregarthen, 1983). Randall (1981) identified the threat of monopoly or foreign ownership, a perceived loss of subsidies, and the eventual closure of water channels (as a result of regional market transfers) as sources likely to impede market acceptance.

Gaffney (1997) identified four impediments to functioning water markets in the United States: (1) a lack of seller motivation and market distortions exacerbated by hoarding behavior; (2) licensees withholding entitlements for fear of creating a public perception of surplus entitlements; (3) institutional inconsistencies in the treatment of groundwater, and differential levels and transparency of subsidies; and (4) the divesting of public property to the private sector to enhance market activity and encourage rent-seeking behavior.

Bauer (1997) identified four obstacles in the development of water markets in Chile: (1) geographic and infrastructure constraints; (2) legal and administrative restrictions resulting from the failure to identify and quantify unused or non-activated entitlements and ill-defined rights; (3) cultural and psychological attitudes regarding the importance of irrigation as a symbol of national endeavor, willpower, and overcoming hardship; and (4) an ingrained skepticism of market processes, prices, and value obstacles because price signals remain uncertain, ambiguous, or contradictory.

Tisdell and Ward (2003) explored farmer responses to the introduction of water markets in the Goulburn-Broken Catchment of Victoria, Australia, and suggested that optimal market-based redistribution of water may not occur unless the social and cultural attitudes to trade are duly considered.

Although the Chilean Water Law of 1981 has recently been touted as a model for other countries to follow, water rights sales separate from land are limited in Chile. The lesson which we can draw from the Chilean case is that while some barriers might be overcome by changes in law and policy, or by increasing water scarcity over time, others are unavoidable. The fact that empirical results are mixed (for example, price signals are confusing or contradictory) suggests that the Chilean model is something for other countries and regions to learn from rather than imitate (Bauer, 1997).

Section snippets

Zhangye City

The Heihe River, the second longest inland river in China, originates from the Qilianshan Mountain which lies mainly in the Qinhai province and ends in Juyanhai Lake in Inner Mongolia. The study area is Zhangye City of Gansu province, which is located somewhere midstream of the Heihe River. According to the Statistics Bureau of Zhangye City (SBZC, 2003), the city is 42,000 km2 in size and governs six counties, Ganzhou, Shandan, Minle, Gaotai, Linze, and Sunan Yugur. The city currently has a

Methodology

This study considers two different and independent processes, separately: the WUR system implementation and WUR trading. Implementing the WUR system requires design, promotion, establishment, and operation. The system involves relationships among levels of governors and the relationship between government and water users. Trading WUR involves relationships between water users. We assume there are different barriers to these two processes.

Barriers to WUR system implementation

The initial approval and distribution of WUR was given and carried out by government authorities in Zhangye City. According to the WUR system, every water user obtains an explicit and exclusive annual water quota. In the WUR system, surface water and groundwater are integrated for allocation to water users. Of the farmer respondents to the survey, 97.5% knew the system and their own water quotas. However, in the practical implementation of the WUR system, groundwater quotas are almost totally

Policy recommendations

We recommend the following to overcome the barriers to WUR system implementation and WUR trading:

  • (1)

    Strengthen the groundwater quota system. Currently farmers in some areas substitute groundwater for shortfalls in surface supplies. Local officials from lower levels of government have no incentive to force farmers to adhere to groundwater quotas. The WUR system likely will fail and might lead to ecological degradation if aquifer decline continues. The revenue of local governments and water agencies

Acknowledgements

I appreciate the comments and advice of Dr. David Glover, Dr. Herminia Francisco, and Dr. Theodore M. Horbulyk, and for considerable polishing and refining in language by Ms. Clare Westwood. This article is a part of the output from a study on barriers and transaction costs of water markets in northwest China supported by the Economy and Environment Programme for S.E. Asia (EEPSEA). An earlier version of this paper was presented at the Ronald Coase Institute Workshop and International Society

References (21)

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