Water Management Reform And The Choice Of Contractual Form In Rural China

Inefficient performance of irrigation systems not only leads to a waste of water resources, but may also affect agriculture production, especially in regions facing a water stress problem. In rural China, only 40% of the water allocated to irrigation is effectively used, a figure much lower than many developed countries (Wang, 2000). Although traditional irrigation technology such as flood irrigation accounts for part of the inefficient use of water, the lack of effort in managing surface irrigation systems are also thought to affect the performance of China's water systems (Wang et al., 2003). In confronting problems with China's irrigation systems, leaders have begun experimenting with changing the institutions that manage water in rural communities. Since as early as the 1980s, but even more so since the late 1990s, China policy makers have promoted water management reform. In pursuing this policy, however, villages have responded differently. Some have chosen to stay with the traditional for of village leader-run irrigation management. In these villages, the village leader has been totally responsible for delivering water to farmers, collecting fees, and maintaining the system. They either manage the system themselves as part of their own duties or hire a manager for a fixed fee to perform water management tasks. In other villages, the leader has transferred all control and income rights of canals to private individuals, and the individual has effectively become the manager of a private water management company. Finally, in other villages, the village leader and the hired manager share responsibilities and share the profits from the irrigation tasks. While the importance of such reforms has been shown by others (Wang et al., 2003), no one has yet tried to explain why certain management forms have appeared in some villages and others in other villages. Observations in the field have provided hints, although there has yet been an attempt to formally model these. One thought is that while policy makers have encouraged reforms in general, they have left the details of designing the management forms to villagers and that villagers will choose a form of management that best fits the characteristics of their villages. It is possible that irrigation management in some villages requires a great deal of collective action while others require a great deal of careful management that could only be provided by individuals that spent considerable time and effort in orchestrating water deliveries and collecting fees from farmers. If village leaders are better at collective management, including tasks such as coordinating investment projects and mobilizing the village's labor to maintain canals, villages may decide to manage their canal system with a leader-run management system. Although leaders may not have much time or incentive to management water deliveries very carefully, if the main need of the system is the input of collective investment and collective labor (e.g., if the canal network silts up annually), leaders may still want to stay in complete control of the system. In contrast, if land is highly fragmented, households are spread out and cropping patterns are diverse and require careful timing, it may be that the best management strategy is to move to an individual contracting system, especially if the canal system requires little maintenance. Finally, if both maintenance and careful water allocation is needed, village leaders may share responsibilities with individual contractors in a share contracting system. Curiously, despite the importance of understanding contractual choice (both as a topic in itself and as part of the effort to measure the impact of water management reform), no work has been done on it. To address this topic, the overall goal of this paper is to provide a general framework for explaining the choice of canal managerial forms and to predict how the form of this contract will vary depending on characteristics of irrigation infrastructure, water resources and economic environment of different villages. To meet this overall goal, we have three specific objectives. Our first objective is to describe in detail the various managerial forms found in rural China: leader-run management system (or canals managed only by leaders who at most hire canal managers on a fixed-salary basis), share contracting system (or a form of managerial organization in which leaders and managers form a partnership), and individual contracting system, (or lease arrangements in which the manager manages canals alone after making a lump-sum, lease-type payment to the leader). Our second objective is to outline a theoretical framework explaining the leader's choice of the form of managerial organization (The word "outline" is used since the author's borrow heavily from Eswaren and Kotwal's (1985) model of contractual choice in tenancy contracting. The authors take credit, not for producing a new analytical framework, but rather for applying an existing theory in a convincing way to a very different question.). Finally, the predictive power of the model is tested by investigating how well data on the form of the contractual agreements struck between village leaders and canals managers can be explained by the factors suggested by the model. Our paper utilizes a unique set of data collected in Ningxia province in north China that we collected ourselves in 2001. Detailed interviews and formal surveys with village leaders, canal managers and workers helped the authors develop measures of the control and income rights enjoyed by those who manage the canals. We also collected additional data on other aspects of the form of the management contract, and on various measures of the nature of the village's irrigation infrastructure, characteristics of village leaders and canal managers, and variables that characterized the village economy. With these data, we first lay out the empirical facts. We show the correlations that exist between contractual choices and the characteristics of canal systems, the human capital characteristics of leaders and canal mangers and other economic factors. We build on these observations to build a theoretical model of contractual choice. Following the sharecropping literature (e.g., Eswaren and Kotwal, 1985), our model envisages village leader and canal manager as both contributing unmarketed resources in a managerial arrangement in which both agents have incentives to self-monitor. The optimal managerial form is ultimately determined by village leader, the guardian of the locality's assets, who calculates which form will return to him/her the highest level of profits. Our theoretical model helps us formulate several hypotheses that describe how villages might choose to organize village canal systems in different settings. In the final section of the paper, we test our theory econometrically. Taking advantage of the nature of the data to identify the determinants of contractual choices of village leaders in Ningxia province, we use multinomial regressions with fixed effects at county level to control for all variables that are unobservable at the county level and above. Our analysis shows that in villages with canals that require a lot of maintenance, village leader manage canals themselves. However, in villages in which the land is fragmented, leaders contract out irrigation services to individuals. Finally, when the leader is busy managing other activities in the village (e.g., a village-owned enterprise), leaders delegate responsibility for canal management to individuals. In general, our econometric results support the hypotheses generated by our model.