The Policy Implications of Using Water More Than Once - The Case of Irrigation in Egypt

When water is scarce and agricultural production is dependent on irrigation, the question naturally arises how to allocate water most efficiently from societys point of view. Standard volumetric water pricing targets the amount of water the farmer applies to his field. However, what matters from a social efficiency point of view is often not how much water is applied to the field but rather how much water is consumed by the crops and evaporation, as a substantial amount of the water losses due to drainage and percolation tends to be recycled in a basin. One example of this phenomenon is the Egyptian agricultural sector. Egyptian crop production is virtually 100 per cent dependent on irrigation, which makes agriculture the major water consumer in Egypt. So far Egyptian farmers have not had to pay for their irrigation water, but water scarcity is expected to be a growing problem in Egypt due to population growth and reclamation of desert land for agricultural production. Consequently, efficient allocation of irrigation water is becoming an important issue from an economic efficiency point of view. Egyptian agriculture is traditionally centred around the Nile, and in the Nile Valley virtually all water losses are recovered by the basin water system. As outlined above, this in turn has implications for the socially optimal choice of policy instrument to regulate the farmers’ use of irrigation water. Based on results from a theoretical model I have recently developed on the optimality of policy instruments for regulating farmers’ use of irrigation water, the present paper will explore the empirical implications of different direct and indirect water allocation policy instruments ranging from water pricing to land taxation. The theoretical analysis will be incorporated into a modified version of the ORANI-G CGE model and the IFPRI 1997 SAM for Egypt, where the use of water in agriculture has been introduced. The analysis will compare the production and efficiency implications of the theoretical first best instrument of combined volumetric water charges and return flow credits with the theoretically second best instruments of standard volumetric water pricing or crop-specific land taxes. It is expected that crop-specific land taxes will perform relatively well from an efficiency point of view, although they will not induce adaptation of water-saving production techniques in the production of a particular crop. The efficiency of crop-specific land taxes is particularly interesting because it suggests a way to secure gains from a more efficient allocation of water in Egyptian agriculture despite the fact that metering of individual farmers’ water use is typically not possible in Egypt. While the empirical analysis is obviously country-specific, the general results are not only relevant for Egypt, but also for other water scarce countries where return flows are recycled in the basins. The analysis highlights the fact that field irrigation efficiency may actually not be that important from a water conservation point of view and that a relatively efficient allocation need not require the ability to meter the water use of individual farmers, which is often not possible, at least in developing countries.