ABSTRACT
INTERSECTORAL WATER MARKETS: A SOLUTION FOR THE WATER CRISIS IN ARID AREAS? Theory and a case study of Jordan M. SCHIFFLER, German Development Institute, Berlin, Germany
Abstract Water markets are sometimes hailed as the most effective and efficient way to alleviate water scarcity in arid areas. In irrigated agriculture, which accounts for more than 80% of water use in most arid areas, the economic value of water is much lower as compared to the value in increasing municipal and industrial (M & I) uses. Traditional legal instruments - such as non-tradable licenses for water use - lock up water in these inefficient uses. It suffices to allow trade in water rights, so the argument goes, and water will gravitate to the highest value uses (“water flows upstream to money”), while agricultural water users are compensated through the market. As all water users would face prices which reflect the opportunity cost of water, unlike the often ridiculously low subsidized prices charged in many cases at present, they would face a powerful incentive to conserve water instead to waste it, which would free up high amounts of water for other uses. Because of market imperfections, an appropriate regulatory framework is necessary to allow such markets to function. [1 ]
The basic line of this argument shall not be disputed in this paper. The trouble, however, often is with the numerous difficulties which arise if one tries to implement the recommendations resulting from a basically sound economic analysis in practice. Therefore, I will first discuss the theoretical concept of water markets, its preconditions and economic rationale, second empirical studies on water markets will be summarized, third the results of empirical research in Jordan will be presented, and finally some conclusions will be drawn. Keywords: Water markets, regulation, economics, Jordan, Arizona, Chile
1 What are Intersectoral Water Markets? Intersectoral water markets are institutions which establish the rules for the
decentralized transfer of water rights between the agricultural and the urban (municipal and industrial) sector. Such markets are yet rare in the real world. They exist only in few areas in the world, such as the Southwestern United States and Chile (see below).
