Institutions and policies for improving water allocation and management in the Yellow River Basin, China

LWR/2000/120: Institutions and policies for improving water allocation and management in the Yellow River Basin, China

China

Australian Bureau for Agricultural and Resource Economics, Australia

Dr Steve Beare
Phone: (02) 6272 2040
Fax: (02) 6272 2318
Email: sbeare@abare.gov.au

• International Water Management Institute, Sri Lanka
• Center for Chinese Agricultural Policy, China

$763,191

01/01/2003 - 31/12/2005

01/01/2006 - 31/08/2006

Dr Christian Roth

China is poorly resourced with water, presenting a major threat to long-term food security. Predictions indicate that by 2020 grain requirements will exceed current consumption by more than 40 per cent, with livestock demand expected to double. Arable land, however, is almost fully allocated. Increasing urbanisation, industrial demand and upward income mobility are increasing water consumption. Many of these factors are also resulting in rising levels of water pollution which, coupled with deteriorating irrigation systems and water misallocation, threatens supplies. Imbalances in water resources between regions (the north is arid while further south is comparatively water-rich) further complicate water supply and equity.

Water shortages have been considered from both technical and engineering perspectives, with the Government using innovative delivery technologies to try to increase efficiency. Despite this approach little has changed. Conflicts, and shortcomings of scarce incentive schemes, demonstrate the continuing pressure on water resources.

Institutional limitations, including a lack of integrated, multi-regional approaches or national coordination, are the main factors behind continued water resource pressure. This becomes particularly so given the sectoral approach, with activities in one area often causing shortages downstream. The conflicting needs of industrial, agricultural and urban users further fragment approaches to water allocation.

The project aimed to establish equitable institutional arrangements in the Yellow River Basin (YRB) that promote more efficient water allocations and management, in order to increase the productivity and sustainability of the water resource.

The research team undertook the following activities:
Profiling the hydrological, physical, agronomic, socio-economic conditions in the basin;
Estimating the opportunity cost (economic productivity) of water uses by sector for different regions of the basin;
Coordinating the collection of required primary data identified from 1 and 2, and profiling the legal, institutional, management systems, China's accession to the WTO and their impacts on water use;
Using the data and results from the above to develop a simulation model to evaluate the economic impact of alternative water trading and other allocation policies in the basin;
Drawing up recommendations for more effective institutional arrangements and policy instruments that will assist sustainable management of water resources under trade liberalisation in the Basin.

The team used an integrated modelling framework - the Basin Level Model - that drew on ABARE's water modelling systems, and also CAPSim from the Center for Chinese Agricultural Policy (based largely on physical and economic designs and focused on agriculture).

Theoretical gains from water trading were demonstrated for the YRB. Traditional technical and engineering analysis of irrigation is not enough in the 'mature phase' of water use in China. With total abstractions of water for irrigation, domestic and industrial use running ahead of sustainable yield and acute economic and environmental problems in some areas, the research emphasis should now be on socioeconomic and institutional analysis.

The project team identified a range of institutional impediments to dealing with water scarcity in Northern China. Irrigation infrastructure for surface water was often in poor shape. Land and labour constraints needed to be considered in the agenda of reform for surface and groundwater irrigation.

Current impediments to replacing administrative allocation of water in the YRB with water trading include the lack of defined property rights to water, and concomitantly, the absence of any mechanisms to transfer revenue from water sales to potentially exporting regions and/or, at the local level, make transfers to those irrigators most affected by water trade. It was recommended that property rights for water in China be considered at the provincial, county and village levels. Property rights to land also need to be accounted for. Any changes in property rights to water could not occur quickly, suggesting an experimental approach with trials of water trading at the village level. As revealed in the groundwater studies, active water trading is already taking place in villages dependent on groundwater in Northern China.

Resistance to change was hardly surprising given the drastic effects of water transfers on rural incomes (if uncompensated), and the fear and uncertainty that attaches to major policy changes. Even after 15 years' experience of water trading in Australia, commitment to water trade is not as strong at the local level as official rhetoric would have it. In similar vein, the project reviewers anticipated many complex issues in the establishment of China's water rights market.

Perhaps the project's most important conclusion arising from the studies of groundwater in Northern China were that local solutions to water scarcity need to be developed, based on economic and technical assessments of the local situation.

Substantial differences were identified between groundwater areas in the extent of overdraft (water scarcity), implying that any government controls and regulations should be based on metering and monitoring of water levels. Project reviewers noted that remote sensing was a feasible option for enriching the information base available to policy makers on groundwater at potentially lower cost.

An instinctive reaction to emerging water scarcity in Northern China has been to emphasise water saving technology for both surface and groundwater. This approach has been unsuccessful for predictable reasons. Much the same conclusion has applied in Australia where the concept of water use efficiency (WUE) has also been abused.

It was recommended that a more constructive approach to water scarcity would be to consider water use by crop. Straightforward economics of transport and location suggest that high-valued perishable products should be grown close to urban centres. Less water would be required if production of summer crops like maize and cotton were concentrated in wetter parts of China or imported, taking pressure of scarce water supplies.

China has a long history of aiming for self-sufficiency in grain production. While arguments about self-sufficiency and food security are well rehearsed, there are important new ingredients in the risks facing the Chinese economy. China now has a lot of its economy tied to the outside world through imports of industrial raw materials (energy and minerals) and exports of manufactures. Greater reliance on imports of grain, especially feed grain, would now not make as much difference to the political and economic risks facing China as long thought.