# **Economy-Wide Implications of Direct and Indirect Policy Interventions in the Water Sector:**

# **Lessons from Recent Work and Future Research Needs**

Ariel Dinar<sup>**1**</sup> Water Science and Policy Center, Department of Environmental Sciences, University of California, Riverside

## **Introduction**

Water is a scarce resource in many arid and semi-arid regions, where economies are highly dependent on water. In many countries, due to climate and landscape, the spatial distribution of supplies and demands is such that while water resources originate in one part of the country, most of the population and economic activity are in regions where water is not available. Therefore, competition over and allocation of water involves serious policy considerations. The state faces difficult decisions regarding management and allocation of its water, land, environmental amenities and development priorities.

Because of its central role in many economies, both developing and developed, water resources have been the focus of many intervention policies. These policies have been aimed at achieving multiple objectives, including income transfer, food production, environmental sustainability, and resource conservation. For example, it is quite common that agriculture consumes the lion share of annual renewable fresh water on earth. This is a sufficient reason for policy makers to focus their efforts on improved performance of water use in irrigated agriculture, especially when water scarcity becomes a limiting factor. While focusing on policies that target irrigated agriculture may lead to an immediate improvement in irrigation water use, still, other implications may negatively affect other water-using sectors, and indirectly also the agricultural sector. This system of cause and effect holds also for the urban water sector, as well as for the industrial and environmental sectors. The fact of the matter is that water, to a large extent, plays a central role as an inter-sectoral mechanism that has to be considered at the economy-wide level when being allocated among competing uses.

Until recently, the economic literature evaluated policy interventions by governments, using a plethora of policy interventions such as pricing, quotas, water right assignments and development of water trading, but with focus only on a subset of waterusing sectors (e.g., Johnson et al., 2002; Dinar and Saleth, 2005, Tsur et al., 2004; Tiwari and Dinar, 2002). Policy interventions could be water-directed (e.g., water regulations) or not water-directed (e.g., trade policies, labor policies). Another typology of policy intervention could be the level at which they are applied, namely as macro policies imposed on the state as a whole, or micro policies imposed on a region, a sector, or individuals. But because

> 1 Based on and extracted from discussions and joint work with Erol Chacmak, Xinshen Diao, Rachid Doukkali, Rashid Hassan, Terry Roe, Yacov Tsur, and Antonio Yunez-Naude during the two phases of the World Bank research project “Macro-Micro Linkages of Irrigation Water Management” during 2000-2007. The author acknowledges the help in conducting the search for and compilation of references of recent published studies on economy-wide and water studies by Juanita A. Frisbie.

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