28 March 2009

Don't Subsidize Water

From the Department of No Duh!, we get this World Bank paper:
The pressure on an already stressed water situation in South Africa is predicted to increase significantly under climate change, plans for large industrial expansion, observed rapid urbanization, and government programs to provide access to water to millions of previously excluded people.

The present study employed a general equilibrium approach to examine the economy-wide impacts of selected macro and water related policy reforms on water use and allocation, rural livelihoods, and the economy at large.

The analyses reveal that implicit crop-level water quotas reduce the amount of irrigated land allocated to higher-value horticultural crops and create higher shadow rents for production of lower-value, water-intensive field crops, such as sugarcane and fodder.

Accordingly, liberalizing local water allocation in irrigation agriculture is found to work in favor of higher-value crops, and expand agricultural production and exports and farm employment.

Allowing for water trade between irrigation and non-agricultural uses fueled by higher competition for water from industrial expansion and urbanization leads to greater water shadow prices for irrigation water with reduced income and employment benefits to rural households and higher gains for non-agricultural households. The analyses show difficult tradeoffs between general economic gains and higher water prices, making irrigation subsidies difficult to justify.
In sum, water markets will move water to higher-valued uses, which may impoverish those benefiting from current restrictions on water trade. What's the solution to this? Addressing poverty with direct income support to the poor -- not second-order policies like water subsidies, which create terrible first-order distortions.

Bottom Line: Never take a roundabout trip when you can go direct!

2 comments:

rw said...

The City of Johannesburg has welcomed the Supreme Court of Appeals ruling on pre-paid water meters, saying it confirms the city's pro-poor policies.

The SCA yesterday, March 25, 2009,ruled that pre-paid water meters that are currently being used by Phiri residents in Soweto are unlawful, but gave the city two years to legalise them. The court also ruled that the city should provide Phiri residents with 42 litres of water per person per day. The city's Nthathisi Modingoane says the ruling will have no impact on their water saving campaign.
Meanwhile, Water Affairs Minister Lindiwe Hendricks is expected to visit Ngangelizwe Township in Mthatha in the Eastern Cape today. Ngangelizwe is one of the townships which is still using the bucket system, and has overflowing sewage; the houses are mud structures and there is a high crime rate. Hendricks and Eastern Cape Local Government MEC Thoko Xasa are expected to come up with a strategy to refurbish dilapidated infrastructure in the area.

David Zetland said...

@rw -- that's good news (I agree to the 42l/capita/day guideline), and I am sure that the meters can be legalized...