Water solution - observer new design

Water solution

By Katherine Cinq-Mars, McGill University, Canada

In your article “Virtual solution” (No. 254, March 2006), you write that “any effective policy to encourage efficient use of scarce water resources must be based on pricing.” As you explain, increasing the price of water to better reflect its scarcity would cause low-value, water-intensive crops to become uncompetitive in water-scarce countries, and their imports more attractive. There is no disputing this logic, but any water policy prescription must be based on more than pricing and consider factors other than simply water scarcity if it is to be effective and adopted by governments.

Three key considerations come to mind: the employment value of crops; the feasibility of developing a water-efficient economy that will generate the foreign exchange to buy imported goods and to employ those farmers who can no longer afford to grow their water-intensive crops; and the ability of groups benefiting from water-intensive activities to influence policy.

Many water-stressed countries are also capital-scarce and labour-abundant. Certain water-intensive crops are also labour-intensive and it might be wiser to start by cutting into the production of goods that have a lower labour-to-water requirement ratio than to price water indiscriminately of its end use. In the meantime, water-efficient economic activities need to be promoted. Failure to do so might result in higher unemployment and jeopardise political stability, which is why some governments are reluctant to raise water prices.

The virtual water trade prescription makes sense at the macro-level, but shifting production towards less water-intensive goods entails adjustment costs and risks for individuals and firms at the micro-level. Those benefiting from water-intensive activities are likely to oppose a virtual water trade strategy.

The ability of a government to steer production away from water-intensive goods will be affected by the level of political influence of those competing for scarce water, and by the resources available to the state to offer as incentives for making the transition. Where actors benefiting from water-intensive activities (principally farmers and agribusinesses) are able to influence the water policymaking process, the state will be able to adopt a virtual water trade strategy only if it is able to minimise their expected losses, for example, by providing employment and business opportunities in other sectors.

All OECD Observer articles on water