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How market-based water allocation can improve water use efficiency in the Aral Sea basin?

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Author Info

  • Bekchanov, Maksud
  • Bhaduri, Anik
  • Ringler, Claudia

Abstract

Increasing water demand due to population growth, irrigation expansion, industrial development, and the need for ecosystem improvements under mounting investment costs for developing new water sources calls for the efficient, equitable and sustainable management of water resources. This is particularly essential in the Aral Sea Basin (ASB) where ineffective institutions are the primary reason of intersectoral and inter-state water sharing conflicts and lack of sufficient investments for improving water use efficiency. This study examined market-based water allocation as an alternative option to the traditional administrative allocation to deal with water scarcity issues in the ASB. Potential economic gains of tradable water use rights were analyzed based on a newly constructed integrated hydro-economic river basin management model. The analysis differentiates between inter-catchment and intra-catchment water trading. The former does not consider any restrictions on water trading whereas the latter is based on the assumption that water trading is more likely to happen between neighboring water users located within the same catchment area. The analyses show that compared to fixed water allocation, inter-catchment water trading can improve basin-wide benefits by US$ 373 and US$ 476 million depending on water availability. Similarly, additional gains of US$ 259 to US$ 339 million are estimated under intra-catchment water trading depending on relative water availability. Trading gains are higher under drier conditions. However, water trading carries a series of transaction costs. We find that transaction costs exceeding US$0.05 per m3 of water traded wipe out the economic potential for water trading. Enforcement of the rule of law, infrastructural improvements, participation of representatives of all water stakeholders in decision making processes, and friendly relationships among the riparian countries are suggested as means for reducing transaction costs of water trading contracts.

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Bibliographic Info

Paper provided by University of Bonn, Center for Development Research (ZEF) in its series Discussion Papers with number 155504.

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Date of creation: May 2013
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Handle: RePEc:ags:ubzefd:155504

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Related research

Keywords: inter-catchment and intra-catchment water trading; transaction costs; hydro-economic model; Agribusiness; International Development; International Relations/Trade; Land Economics/Use; Resource /Energy Economics and Policy;

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  1. Heidecke, Claudia & Kuhn, Arnim & Klose, Stephan, 2008. "Water pricing options for the Middle Drâa River Basin in Morocco," African Journal of Agricultural and Resource Economics, African Association of Agricultural Economists, vol. 2(2), September.
  2. North, Douglass C., 1989. "Institutions and economic growth: An historical introduction," World Development, Elsevier, vol. 17(9), pages 1319-1332, September.
  3. McCann, Laura & Colby, Bonnie & Easter, K. William & Kasterine, Alexander & Kuperan, K.V., 2005. "Transaction cost measurement for evaluating environmental policies," Ecological Economics, Elsevier, vol. 52(4), pages 527-542, March.
  4. M. Ejaz Qureshi & Jeff Connor & Mac Kirby & Mohammed Mainuddin, 2007. "Economic assessment of acquiring water for environmental flows in the Murray Basin ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 51(3), pages 283-303, 09.
  5. Hearne, R.R. & Easter, K.W., 1995. "Water Allocation and Water Markets. An Analysis of Gains-from-Trade in Chile," Papers 315, World Bank - Technical Papers.
  6. Booker J. F. & Young R. A., 1994. "Modeling Intrastate and Interstate Markets for Colorado River Water Resources," Journal of Environmental Economics and Management, Elsevier, vol. 26(1), pages 66-87, January.
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