Incentives in water management reform: assessing the effect on water use, production, and poverty in the Yellow River Basin

The overall goal of our paper is to better understand water management reform in China’s rural communities, especially focusing on the effect that improving incentives to water managers will have on the nation’s water resources and the welfare of the rural population. To pursue this goal, the paper has three objectives. First, we track the evolution of water management reform and seek to identify the incentive mechanisms that encourage water managers to more efficiently use water. Second, we identify the impact on crop water use of the incentives provided to water managers during reform. Since we are also interested in the possible negative consequences of an incentive-led water management reform strategy, the paper also explores how changes in incentives also affect agricultural production, farmer income, and poverty. Based on a random sample of 51 villages, 189 farmers, and 378 plots in four large irrigation districts in Ningxia and Henan provinces, both provinces in China’s Yellow River Basin, our *Corresponding author: Jinxia Wang, Center for Chinese Agricultural Policy, Chinese Academy of Sciences, Jia, No. 11, Datun Rd., Anwai, Beijing 100101, China. Tel: 86-10-64886841. Fax: 86-10-64856535. E-mail: jxwang.ccap@igsnrr.ac.cn Jinxia Wang is associate professor, Zhigang Xu is Postdoctoral Research Fellow, and Jikun Huang is professor and director in the Center for Chinese Agricultural Policy (CCAP), Institute of Geographical Sciences and Natural Resource Research, Chinese Academy of Sciences, Beijing, China. Scott Rozelle is professor, Department of Agricultural and Resource Economics, University of California, Davis. The authors would like to thank David Dawe, Richard E. Howitt, Qiuqiong Huang, Bryan Lohmar, Siwa Msangi and Jame Wellen for their insights and helpful suggestions. A special thanks is given to Intizar Hussain and Eric Biltonen, our colleagues from the International Water Management Institute (IWMI) that led the project under which our research was conducted. We also thank two anonymous referees for helpful comments. We acknowledge the financial support from the National Natural Sciences Foundation (70003011 and 70021001) in China, IWMI, the Asian Development Bank and EU-INCO, IC4-CT-2001-10085. We also acknowledge the USDA’s NRI research grants program and the Ford Foundation, Beijing and the International Rice Research Institute for supplemental support of this project. Scott Rozelle is a member of Giannini Foundation. 770 Jinxia Wang et al. results show that in our sample areas the two main forms of water management reform, Water User Associations and contracting, have begun to systematically replace traditional forms of collective management. Our analysis demonstrates, however, that it is not the nominal implementation of the reform that matters, but rather it is the creation of new management institutions that offer water managers monetary incentives that lead to water savings. Importantly, given China’s concerns about national food production and poverty alleviation, the reductions in water, at least in our sample sites, do not lead to reductions in either production or income, and do not increase the incidence of poverty. China’s government has identified the nation’s rising water scarcity as one of the key problems that must be solved if the nation is to meet its national development plan in the coming years (Zhang, 2001). Shortages of water are attenuating efforts to alleviate poverty and are becoming a major source of environmental problems (World Bank, 1998; Zhang, 2000). In many regions of the country, rapidly growing industry and an expanding, increasingly wealthy urban population regularly outcompete the nation’s farmers for limited water resources, threatening to curtail growth in food production. In facing increasing water shortages, leaders typically debate about which of several approaches they should use to address water scarcity problems, although no option has been proved very successful (Lohmar et al., 2003). Developing more water resources to increase water supply historically has been given the highest priority in resolving water shortages. Since the 1950s, China’s government has invested more than 100 billion US dollars into constructing infrastructure for developing new water resources (Wang, 2000). Recently, the State Council announced plans to allocate more than 50 billion US dollars for the construction of a project to move water from the Yangtse River Valley to north China. Despite such ambitious goals, the high cost of developing new sources of water will mean that the volume of water that can be added to north China’s water equation will still be marginal. Leaders also have promoted water-saving technologies and considered whether or not they should use a water pricing policy (Chen, 2002; Rosegrant and Cai, 2002). Unfortunately, most of their efforts to encourage the use of sophisticated water-saving technologies, such as drip and sprinkler irrigation, have failed, and in the past several years the Ministry of Water Resources has distanced itself from a water policy based on water-saving technology (Zai, 2002). Moreover, political considerations will most likely keep leaders from moving too aggressively on raising prices, at least in the agricultural sector (Rosegrant and Cai, 2002). With the failure and infeasibility of several of their policy options, leaders in recent years have begun to consider water management reform as a key part of their strategy to combat China’s water problems, since they believe water in agriculture is being used inefficiently. Despite water shortages, users in all sectors of the economy – but especially those in agriculture, by far the nation’s largest consumer of water – do not efficiently use the water they are allocated. One study, for example, estimated that, due to the poor management of the nation’s canal network, only 50 per cent of water from primary canals is actually delivered to the field (Xu, 2001). Also water that reaches village fields is not used efficiently by local irrigation managers and farmers, between 20 and 30 per cent of the water being wasted. Hence, overall, only about 40 per cent of water in China’s surface water system, Environment and Development Economics 771 allocated to agricultural production, is actually used by farmers on their crops. Others have estimated even greater inefficiencies (Fang, 2000). In response, it has been proposed that local leaders reform the institutions that manage water in China’s communities (Nian, 2001; Reidinger, 2002). Despite the resolve of the current leadership in China to push through water management reform, there is considerable debate about its appropriateness. International evidence shows that water management and its institutional arrangements are important measures for dealing with water shortages (World Bank, 1993; IWMI and FAO, 1995). Since the 1980s, many developing countries have begun to transfer irrigation management responsibilities from the government to farmer organizations or other private entities in order to mitigate the financial burden of water projects and to improve the efficiency of water use (Vermillion, 1997). Theoretically, local water management reform is supposed to rely on increased participation by farmers and better incentives for managers to improve access to water and increase the efficiency of the system. Unfortunately, the records of a number of attempts to implement local water management reforms have not lived up to expectations; there are many cases internationally of efforts that have failed or have generated negative influences (Easter and Hearne, 1993; Vermillion, 1997; Groenfeldt and Svendsen, 2000). Collective action, information problems, and failure to get the incentives right may be among the most important reasons why water management reforms have failed. In fact, since the late 1990s China’s policy makers have promoted water management reform, and, similar to attempts outside China, the record seems to be mixed, although most evaluations are only based on anecdotes or case studies (Nian, 2001; Huang, 2001; China Irrigation Association, 2002). Even in those areas where management reform has been welldesigned, effective implementation of the reform has been difficult (Ma, 2001; Management Authority of Shaoshan Irrigation District, 2002). Visits to the field can easily uncover cases where local water management changes were implemented and failed. Although there are many similarities between international experiences and those of China, even in this early phase of reform the nation’s water management reform strategy has taken on some unique characteristics. Above all, water officials have emphasized the role of incentives in water management reform. In many of the new reform efforts, water managers are provided with monetary rewards if they can meet certain targets, such as achieving water savings. Much less effort has been placed in encouraging participation by farmers in the management of the local irrigation system. While the prominence given to incentives may be unique internationally (especially in the case of water management reform in developing countries), it is not new in the context of China’s overall economic reform effort. Reformers have relied frequently on incentives to induce agents to exert more effort, allocate resources more efficiently and enter into new economic activities (Naughton, 1995). The household responsibility system primarily gave incentives to farmers in crop production (Lin, 1992). The fiscal reforms gave local leaders incentives to start up township and village 772 Jinxia Wang et al. enterprises (Walder, 1995). The grain reforms gave grain bureau personnel the incentive to commercialize commodity trading (Rozelle et al., 2000). Clearly, high-level water officials are hoping a similar set of reforms can improve the performance of China’s water management. While such a strategy also may encourage