Developing Economic Arrangements for Water Resources Management—The Potential of Stakeholder-oriented Water Valuation - Water and Agriculture: Sustainability, Markets and Policies - page 126

The increasing awareness of the scarcity of water resources has led to the adoption of
the principle that 'water is an economic good' as one of the four Dublin principles in
1992, which are widely accepted as the basis for integrated water resources management
(IWRM). Economics deals with the allocation of scarce goods over various competing
demands, and therefore this view of (scarce) water resources as economic goods seems to
make good sense. The focus of various OECD studies on 'making markets work for water
management' and on the use of water pricing is in line with this (OECD, 1999, 2002,
2003), as well as the focus of the FAO/Netherlands Conference on Water for Food and
Ecosystems on the 'new economy' as one of its main themes (FAO/Netherlands, 2005).
Using economic arrangements for water resources management seems promising, but
is by no means easy. Experiences show that economic arrangements need to be embedded
within an appropriate institutional framework and that the objective of economic
efficiency needs to be balanced with broader societal objectives. As the interest in market
instruments has grown, more insight has been gained in the conditions within which they
may or may not be successfully applied for water resources management. However, the
question remains: how to replicate the existing cases where economic arrangements are
successfully used in water resources management in other areas where the conditions
seem promising. Therefore, this paper sets out to review some of existing cases where
economic arrangements have been successfully applied, focusing on the processes that
have characterised their evolution.
Economic arrangements for water resources management
Water as an economic good
Water is a valuable resource, but its value is rarely reflected in monetary terms. Using
economic arrangements in water management can be useful as a means to capture certain
important values in cash flows and to allow economic exchange mechanisms to support
the allocation of water resources and the associated costs and benefits among
stakeholders. Examples of such economic arrangements are, for instance, payment
schemes for environmental services (FAO, 2002, 2004c), water quality trading schemes
(EPA, 2004), green water credits (Dent, 2005) and water markets for the trading of water
rights or entitlements (Kloezen, 1998; World Bank, 1999). The use of such economic
arrangements and market approaches is expected to lead to a more economically efficient
allocation of water resources as compared to more administrative allocation mechanisms.
Especially, market arrangements are believed to provide a more flexible allocation
mechanism that also provides economic incentives to water users to use water resources
in an economically efficient way (Briscoe, 1996; Kloezen, 1998; World Bank, 1999;
Bjornlund and McKay, 2002).
Although the available examples show that economic arrangements can be
successfully applied to deal with scarcity issues in water resources management, various
authors have convincingly argued that water is not an ordinary economic good (Perry et
al.. , 1997; Savenije, 2001). One should recognise that property and user rights may be
complex, that physical characteristics often hinder transfers of large water volumes from
one place to another, and that water is a non-substitutable resource. Although these
complexities may be less present in certain parts of the drinking water industry, they
certainly do apply to agricultural water uses (Savenije, 2001). In economic terms, water
resources are neither purely public nor purely private goods and they are mostly non-