2 Economics of Water Productivity inManaging Water for Agriculture

Randolph Barker,1 David Dawe2 and Arlene Inocencio11International Water Management Institute, Colombo, Sri Lanka; 2International Rice

Research Institute, Manila, Philippines

© CAB International 2003. Water Productivity in Agriculture: Limits and Opportunities for Improvement (eds J.W. Kijne, R. Barker and D. Molden) 19

Abstract

Water is an extremely complex resource. It is both a public and a private good; it has multiple uses; thehydrology requires that we examine potential productivity gains at both the farm and the basin levels;both quantity and quality are important; institutions and policies are typically flawed. For a given situa-tion, economists often disagree on how to value water and on the best strategy for increasing water pro-ductivity. This fact notwithstanding, growing scarcity increases the need, if not the demand, for soundeconomic analyses.

The purpose of this chapter is to lay down some of the concepts and complexities in economic analysesrelated to increasing water productivity, to provide some examples and to see what this implies regard-ing the potential for increasing water productivity. We hope that this will help set the stage for produc-tive discussions and the identification of research needs.

The chapter is divided into three main sections. The first section discusses the relationship betweenefficiency, productivity and sustainability, and emphasizes the confusion in definitions. The second sec-tion provides examples at plant, farm, system and basin levels, relating water productivity to both eco-nomic efficiency and sustainability. Closely related to this, in the third section we discuss the potentialsfor increases in water productivity and economic efficiency through incentives created by policy andinstitutional reforms.

Failure to include the potential for recycling or reuse of water diverted for irrigation in the measure-ment of irrigation efficiency has led to the widely accepted view that public irrigation systems are poorlymanaged and that there is considerable scope for increasing water productivity. Water savings do notnecessarily lead to higher water productivity and, similarly, higher water productivity does not lead togreater economic efficiency.

A distinction can be made between those measures that increase water productivity by increasing cropyield for a given evapotranspiration (ET) or diversion as opposed to reducing the water-diversionrequirements. Measures to increase crop yield for a given ET translate into water-productivity gains atthe system and basin levels. However, the management of water to reduce water-diversion requirementsis riddled with off-site effects and externalities. Thus, whether water-management practices or technolo-gies designed to increase water productivity and economic efficiency at the farm level translate intowater-productivity and economic-efficiency gains at the system or basin level needs to be determined.The basin is a hydrological unit as opposed to an administrative unit. It is only at this level that we cancapture and include in our analysis the off-site effects (or, in economic jargon, internalize the externali-ties).

The growing scarcity and rising value of water in a basin induce farmers to seek ways to increasewater productivity and economic efficiency. Recycling or reuse of water is prominent among the prac-

Water Ch 2 2/7/03 9:01 am Page 19

Introduction

Water is an extremely complex resource. It isboth a public and a private good; it has mul-tiple uses; the hydrology and externalitiesrequire that we examine potential productiv-ity gains at the farm, system and basin lev-els; both quantity and quality are importantin measuring availability and scarcity; andthe institutions and policies that govern theuse of water are typically flawed.

Given these complexities, it is small won-der that there is little agreement among sci-entists, practitioners and policy makers as tothe most appropriate course of action to betaken to improve the management of waterresources for the benefit of society. This factnotwithstanding, the growing scarcity ofwater increases the need and demand forsound economic analyses.

The purpose of this chapter is to lay downsome of the concepts and complexities ineconomic analyses related to increasingwater productivity, to provide some exam-ples and to see what this implies regardingthe potential for increasing water productiv-ity. We hope that this will help set the stagefor productive discussions and the identifica-tion of research needs.

This chapter is divided into three mainsections. The first section discusses the rela-tionship between efficiency, productivity andsustainability, emphasizing the confusion indefinitions and distinguishing between engi-neering, biological and economic concepts.The second section provides examples – atthe plant, farm, system and basin levels –relating water productivity (WP) to

economic efficiency (EE) and to sustainability.Closely related to this, in the third section wediscuss the potentials for increases in WP andEE through policy and institutional reforms.

Definitions and Concepts of Efficiency,Productivity and Sustainability

In this section we begin with a discussion ofdefinitions of water-use efficiency (WUE),irrigation-efficiency (IE) and WP. We thendefine EE and relate EE to IE and WP. Weconclude with a brief discussion of WP, EEand sustainability.

Water use and irrigation efficiency

In general terms, we define IE as the ratio ofwater consumed to water supplied. WP isthe ratio of crop output to water eitherdiverted or consumed, the ratio beingexpressed in either physical or monetaryterms or some combination of the two. Thereare four areas of confusion related to the con-cept of efficiency.

First, WUE as used in the literature,including the economics literature (e.g.Dinar, 1993) and plant-science literature (e.g.Richards et al., 1993), most commonly refersto what we have defined above as WP: thatis to say, it is defined as the ratio of crop out-put to water input. We believe that in theseinstances WP is the more appropriate term.

Secondly, the conventional wisdom thatirrigation systems in the developing worldtypically operate at a low level of efficiency

20 R. Barker et al.

tices adopted to increase water productivity, and greater attention needs to be focused on managing sur-face water and groundwater for conjunctive use. We need a better understanding of biophysical andsocio-economic changes in basins over time and improved measures of basin-level efficiencies before wecan determine in a given situation the potential for increasing water productivity through policy andinstitutional reforms.

Finally, as basins become closed, overexploitation of groundwater resources is accompanied by a seri-ous decline in water quality and other problems of environmental degradation. Decisions on basin-levelallocations among sectors cannot be based strictly on economic efficiency but they must involve valuejudgements as to how best to benefit society as a whole. This will include setting priorities in the man-agement of water resources to meet objectives such as ensuring sustainability, meeting food-securityneeds and providing the poorer segments of society with access to water.

Water Ch 2 2/7/03 9:01 am Page 20

(30–40%) is based on what Seckler et al.(Chapter 3, this volume) refer to as classicalirrigation efficiency (IEc) or the water con-sumed divided by the water supplied. IEc isdefined in terms of differences between thepoint of water diversion and the ultimatedestination of the water in the root zone ofthe plant.

IEc � (crop ET � effective rainfall)/(vol. ofwater delivered � change in root-zone waterstorage)

IEc at the project level is typically subdividedbetween conveyance efficiency (water distrib-ution in the main and secondary canals) andfield-application efficiency (water distribu-tion to the fields being irrigated). The waterdiverted but not used for evapotranspiration(ET) includes seepage and percolation,spillover and land preparation, all of whichare treated as losses. Classical efficiencydecreases as one moves from the fieldtowards the reservoir and conveyance lossesare combined with field losses. A high levelof IEc may not reflect good management butsimply water scarcity. Some scholars prefer touse the term relative water supply (RWS), theinverse of IEc, to avoid the connotation asso-ciated with the word ‘efficiency’.

Much of the so-called ‘losses’ in IEc (seep-age, percolation and spillovers) can be cap-tured and recycled (for example, by use oftube wells) for use elsewhere in the system.Conversely, many of the so-called ‘water sav-ings’ practices, such as those that reduce seep-age and percolation (e.g. lining canals), arenot saving water at all but simply redistribut-ing the water – robbing Peter to pay Paul. Theonly real losses to the hydrological system arefrom bare soil and water evaporation (muchof which can occur during land preparation)or from flows to the sea or to sinks.

The concepts of neoclassical irrigationefficiency (IEn) or effective irrigation effi-ciency (Keller and Keller, 1995, 1996; Seckleret al., Chapter 3, this volume) take intoaccount return flows:

IEn � (crop ET � effective rainfall)/(vol. ofwaters delivered � change in root-zone waterstorage � vol. of water returned or recycled)

Taking into account return flows results in a

higher estimate of IE, which leads to the con-clusion that the scope for improving IE ismuch less than is normally assumed.

Thirdly, we must distinguish between IEand WP at the farm and basin level. To under-stand this distinction, we need to turn towater-accounting procedures and includenon-agricultural water uses (Molden andSakthivadivel, 1999). This represents anothersignificant step away from the concept of IEc.The operational terms used here (and there aremany more) are beneficial depletion and non-beneficial depletion. At the basin level, apotentially wide range of factors can depletewater. Beneficial depletion would include con-sumption (ET) by the crop being irrigated aswell as, for example, beneficial consumptionby trees. Non-beneficial depletion includesevaporation and flows to sinks such as the sea.A higher level of efficiency can be achieved bylowering non-beneficial depletion.

Finally, a high efficiency, defined here as alarge percentage of beneficial depletion, doesnot imply a high level of productivity or ofeconomic return. The same degree of benefi-cial utilization may have substantially differ-ent values for the productivity of the water(Seckler et al., Chapter 3, this volume). Forexample, the same amount of water depletedin the irrigation of cereal crops may have amuch higher value in vegetables and fruitsor in non-agricultural uses. Furthermore, aswater flows through the basin, economistswould want to know the benefits and costsassociated with various alternatives forreducing diversions and for recycling water.

Economic efficiency and irrigation efficiency

Economic efficiency (EE) takes into accountvalues of output, opportunity costs of inputsand externalities and is achieved when scarceresources are allocated and used such that thenet value or net returns (returns minus costs)are maximized. Unlike IE, which is a ratio bydefinition, EE is a criterion that describes theconditions that must be satisfied to guaranteethat resources are being used to generate thelargest possible net benefit (Wichelns, 1999).

EE is often consistent with IE. For exam-ple, as water becomes scarce and the value of

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water is high in semi-arid regions, a high IE(although not necessarily the result ofimproved irrigation management) is consis-tent with EE. Alternatively, when off-farmimpacts can be ignored and water is abun-dant with low opportunity cost, EE can beachieved even at low IE.

EE in a production setting involves tech-nical and allocative components. A produceris technically efficient when producing themaximum amount of output with a given setof inputs. The producer is allocatively effi-cient if he/she produces at the point dictatedby the prices of outputs and inputs that willmaximize returns. A producer is said to beeconomically efficient if he/she is both tech-nically and allocatively efficient.

Of concern to many economists is the factthat the farm-level price or charge for irriga-tion water and power for pumping water donot typically reflect the true value of waterand would appear to encourage waste.However, farmers and irrigation-systemmanagers will make adjustments in responseto water scarcity without price incentives.Furthermore, at the basin level, while analy-ses based on economic optimization may beuseful to policy makers, allocations musttake into account the fact that water is a pub-lic as well as a private good. Allocationsamong competing uses involve value judge-ments as to how to achieve the highest bene-fit for society as a whole.

Productivity and partial water productivity

The term water productivity (WP) is alsodefined and used in a variety of ways. Thereis no single definition that suits all situations.As mentioned previously, in general terms,productivity is a ratio referring to the unit ofoutput(s) per unit of input(s).

The most encompassing measure of pro-ductivity used by economists is total factorproductivity (TFP), which is defined as thevalue of all output divided by the value ofall inputs. But the concept of partial factorproductivity (PFP) is more widely used byeconomists and non-economists alike. Partialproductivity is relatively easy to measureand is commonly used to measure the return

to scarce or limited resources, such as land orlabour. For example, in the early stages ofeconomic development, agricultural labouris often in surplus and land is the scarceresource. (There are notable exceptions,including many parts of Africa.) Where landis the limiting resource, the greatest eco-nomic benefits are achieved by increasingoutput per unit of land. Therefore, emphasisis placed on technologies that increase yieldper hectare (e.g. high-yielding varieties andfertilizer). The change in PFP measured inyield per hectare is a useful indicator of theeconomic performance of the agriculturalsector.

But, as an economy develops, the labourforce in agriculture declines and more andmore labour is pulled to the non-farm sector.When agricultural labour is in short supplythe emphasis shifts to labour-saving tech-nologies (e.g. tractors and mechanical thresh-ers). PFP measured in output per worker isnow a better indicator of the economic per-formance of the agricultural sector.

Until recently, water was not considered ascarce resource. Now, with mounting watershortages and water-quality concerns, thereis growing interest in measures to increaseWP, which is a specific example in the gen-eral class of PFPs. WP is most commonlymeasured as crop output per cubic metre ofwater.

Partial water productivity can be expressedin physical or economic terms as follows(Seckler et al., Chapter 3, this volume):

1. Pure physical productivity is defined asthe quantity of the product divided by thequantity of the input. Examples include cropyield per hectare or per cubic metre of watereither diverted or consumed by the plant.For example, the International WaterManagement Institute (IWMI) sees as one ofits primary objectives ‘increasing the cropper drop’.2. Productivity, combining both physical andeconomic properties, can be defined in termsof either the gross or the net present value ofthe product divided by the amount of thewater diverted or consumed by the plant. 3. Economic productivity is the gross or netpresent value of the product divided by the

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value of the water either diverted or con-sumed by the plant, which can be defined interms of the value or opportunity cost in thehighest alternative use.

Economic measures of WP (2 and 3above) are difficult to estimate. While the netvalue is more satisfactory than the grossvalue of the product, the valuation of inputsmust be treated in a uniform manner acrosssites. This can be difficult for land, labourand water (which are also usually the mostimportant inputs). Valuing water is at best adifficult and unsatisfactory process, consid-ering that the marginal value of water variesthroughout the season, between seasons, bylocation, by type of use and by source ofwater.

There is also the matter of scale or the areaover which productivity is measured. Domeasures to increase WP at the farm leveltranslate into increases in WP at the system orbasin level? Water-accounting procedures thattake into account externalities resulting froma farm-level change in water-managementpractices can be used to measure WP at thesystem or basin level. Through this processwe can determine whether an interventionleads to real water savings (taking intoaccount all return flows, as in IEn). However,at this level, beneficial depletion includes ben-efits from water use other than for the cropbeing irrigated, such as water for the environ-ment and other non-agricultural needs.

A distinction can be made between thosemeasures that increase WP by increasingcrop yield for a given ET or diversion andthose that reduce the water-diversionrequirements. In the former case, savings atthe plant and field level are realized at thesystem and basin level. In the latter case,whether increased WP at plant and fieldlevel translates into increased productivity atsystem and basin level needs to be deter-mined. For example, although the watersaved in one farming area may be reallo-cated to higher-value, non-agricultural uses,a reduction in seepage and percolation lossesfrom this area may be at the expense of farm-ers elsewhere in the system.

However, as the term ‘partial’ in PFPimplies, it tells only part of the story. In gen-

eral, functions relating output to input (e.g.water, fertilizer) are nearly always concavebecause the use of higher levels of input iseventually subject to diminishing returns.Under these circumstances, a high WP (or ahigh IE) in a system or basin may simplyreflect a shortage of water rather than goodmanagement or EE. In fact, when such afunction is purely concave, PFP is maxi-mized by using as little of the input as possi-ble, even when it results in large declines inoutput (because, as input use declinestowards zero, productivity increases towardsinfinity). Thus, the appropriate goal shouldbe to optimize WP, not maximize it.

Despite the above arguments, many peo-ple view higher WP (or higher fertilizer pro-ductivity or higher yields) as an inherentlygood idea. But it is easy to see why measuresthat show an increase in PFP of water or anyother input may provide a misleading resultfrom the perspective of the farmer, as well asfrom that of the economy as a whole. A tech-nology or management practice thatincreases water productivity may require theuse of more labour and other inputs. Forexample, a reduction in water application inrice could increase the amount of weedingrequired. Also, a shift to drip irrigation saveswater but also requires capital investment,which might not be cost-effective. Unfor-tunately, the concept of PFP gives very fewguidelines regarding optimization. In fact,without considering the economic and socialvalues of all inputs and outputs, it will bedifficult to make progress on this issue. Thus,we now turn to a discussion of the conceptof net returns.

Net returns and water productivity

In this section we build on the concept of EE,distinguishing between net private returnsand net social returns and relating netreturns to WP. Net private returns aredefined as the market value of all outputsminus the cost of all inputs, taking intoaccount the opportunity cost of familylabour, land and any other inputs that arenot purchased on the market. If the netreturns to a practice are positive, then it will

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be beneficial for farmers to adopt the prac-tice. If net returns are negative, it will be dis-advantageous for the farmer to adopt thepractice and, no matter how large theincrease in WP due to the practice, it isunlikely that the farmer will adopt it.

Alternatives for improving net privatereturns can be categorized as follows(Wallace and Batchelor, 1997):

• agronomic improvements (for example,improved crop husbandry, croppingstrategies and crop varieties);

• technical improvements (for example,improved and lower-cost technologies forextracting groundwater);

• managerial improvements (for example,improvements in farm-level resourcemanagement or system operation andmaintenance (O&M);

• institutional improvements (for example,introduction of water pricing andimprovement in water rights).

The first two categories relate to innovationsor new technologies that lower costs orincrease output per unit of water. The thirdcategory, improved management, refers to anincrease in technical efficiency or increasedoutput per unit of input with existing levelsof technology. The fourth category relatesprincipally to allocative efficiencies encour-aged by the creation of market incentives.

Economic theory shows that if a new prac-tice does not have any effects on third partiesoff the farm (known as technological exter-nalities in the jargon of economics), then theadoption of this practice is advantageous forsociety as a whole, not just for the farmer.Unfortunately, water management is riddledwith externalities, so this theory provides lit-tle guidance as to whether or not it is advan-tageous for society to encourage the adoptionof a specific new water-management technol-ogy based only on the magnitude of netreturns to farmers.

In order to assess whether or not a newtechnology available to farmers is beneficialto society, one needs to calculate net socialreturns instead of net private returns. Thetwo concepts are identical, except that netsocial returns value all inputs and outputs atsocial prices, not market prices. Social prices

are identical to market prices when well-functioning markets exist. When well-func-tioning markets do not exist, as is almostalways the case with water, then one mustattach a social value to water, which isdefined as the value of the water in the bestalternative use (at the margin).

While this opportunity cost is relativelyeasy to define, it is much harder to measure.For example, one could assign to water asocietal value equal to its current value inindustrial use. However, if one hypotheti-cally begins to shift water from agriculture toindustry, the marginal value of additionalwater in industry will eventually decline.Thus, in contemplating large transfers ofwater out of agriculture (as opposed tosmall, marginal transfers), it is not valid toassume that the per-unit value of the watertransferred is equal to the current per-unitvalue of water in industrial uses.

Furthermore, the concept of net socialreturns is silent on issues of equity, and mostpeople would agree that equity is importantin making decisions on the desirability ofimplementing policies or technologies thataffect WP.

Although it is difficult to measure the netsocial returns due to the implementation of apolicy or technology, it is useful to keep thisconcept firmly in mind when making judge-ments about practices that improve WP. At aminimum, this concept reminds us of ourignorance and what specific missing informa-tion is desirable for an assessment of newtechnologies, institutions or policies. Althoughwe shall use the term WP in subsequent dis-cussions, it is always important to bear inmind how much it will cost to increase WPand that not all increases in WP are desirable.

Water productivity, environmentaldegradation and sustainability

Irrigated agriculture not only competes forwater but often contributes to the majordegradation of water resources. Consider, forexample, those regions of rapidly fallingwater tables due to groundwater mining oralternatively regions of rising water tablesleading to waterlogging and salinity. In the

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latter case, the social cost may be in the formof environmental degradation or, if correc-tive measures are taken, the cost to some seg-ments of society may be for appropriatedisposal of drainage water. The net socialbenefit is the difference between returns tothe farmer and the cost to society associatedwith drainage-water pollution (Dinar, 1993).

Ultimately, we must address the issue ofsustainability. Unfortunately, there are manydefinitions of sustainability and sustainabledevelopment, ranging from the very broadto the very narrow, which create a potentialfor misunderstanding (Dixon and Fallon,1989). We define sustainability as the abilityto continue extracting net positive socialreturns from a resource for an indefiniteperiod of time. Notice that it is not inconsis-tent with some degree of environmentaldegradation, i.e. it is not always true for allecosystems that the optimal rate of degrada-tion is zero, just as it is not always true thatthe optimal rate of oil extraction from a par-ticular deposit is zero.

One viewpoint in the sustainabilitydebate holds that high-industrial-input agri-cultural systems are inherently unsustain-able (Lynam and Herdt, 1999). Proponents ofthis view have shifted the debate away fromproduction and income distribution to envi-ronmental degradation and input use. Thefocus on ecosystems by environmentalistsand on watersheds by hydrologists has car-ried the debate substantially above the com-modity-based farm and farming-systemslevel to land, water and other highly valuednatural and environmental resources.

Lynam and Herdt (1999) argue that:

sustainability of common resource systemsnecessarily incorporates value judgements onmultiple criteria over how the communitywishes to utilize resources; moreover sustain-ability of the system will depend more onsocial institutions controlling access and usethan on production technologies.

Relating Water Productivity andEconomic Efficiency: Some Examples

Molden et al. (2001, Appendix A) provide acomprehensive list of alternatives for

increasing WP and Molden et al. (Chapter 1,this volume) illustrate how various alterna-tives can be applied at the crop, farm, systemand basin levels. At each of the first threelevels, we provide an example illustratingthe relationship between WP and EE. At thebasin level, we emphasize the relationshipbetween WP and sustainability.

Plant level: increasing water productivitythrough varietal improvement

The concept of WP used by plant physiolo-gists, molecular biologists and plant breedersrefers to the crop output (either grain or bio-mass) per unit of transpiration by the plant.(This is typically referred to as WUE.) Therehas been steady improvement in grain yieldper hectare through plant breeding in rain-fed and, most particularly, in irrigated areas.The development of short-season varieties,reducing the growing time from 5 months to3.5 to 4, has also been a major source ofwater savings (more crop per drop per day).The development of water-storage facilitiesand expansion of the irrigated area in the dryseason have allowed these savings to betranslated into increases in WP. Thus, there isno question that, over the past three decades,varietal improvement through plant breed-ing (aided by investments in irrigation andadvances in fertilizer technology) has beenthe major source of increase in WP (Richardset al., 1993).

However, the increase in grain productiv-ity is in some ways deceptive (Richards et al.,1993). In almost all crops, the greater grainyield is not due to an increase in biomass butalmost entirely to an improved ratio of grainto biomass (harvest index). As the potentialceiling value for the harvest index is rapidlyapproaching in many crops, the only way tomaintain increases in yield will be to increasebiomass (Richards et al., 1993). There appearsto be considerable potential for increasingbiomass by selecting cultivars for increasedWP, defined in this case as the rate at whichwater lost in transpiration results in the pho-tosynthetic assimilation of carbon in theplant. In many Middle Eastern countries, avery high level of WP has already been

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achieved. There is thus great hope thatresearch in plant breeding and molecularbiology will increase WP in other parts of theworld. In other areas, gains in productivitymay be achieved through varieties tolerantto saline soil and water conditions.

One of the important features of varietalimprovement is that it is relatively less site-specific in terms of potential benefits thanmost management interventions. Much of theresearch is funded by international andnational agencies. Numerous studies haveemphasized the high returns to investment invarietal-improvement research in the past(Evenson et al., 1991; Alston et al., 1995) –although in many instances the benefitsascribed to research may include contribu-tions from irrigation and advances in fertilizertechnology. In setting research priorities, akey issue is the size of the geographical areaas well as the size of the population uponwhich the varietal improvement is likely tohave an impact. This will determine the bene-fits of the research relative to its costs. Aswater scarcity becomes more acute, the poten-tial benefits of this research will increase.

Farm level – adoption of yield-increasing andwater-saving technologies: the case of SRI

In promoting the adoption of new technolo-gies, researchers and extension agents oftenfocus on the higher yield potential, ignoringthe opportunity cost of family labour and theincreased management requirements. Thispoint is illustrated in a draft report on astudy of the adoption of the System of RiceIntensification (SRI) in Madagascar (Moserand Barrett, 2003). The paragraphs below arebased on this report.

SRI was developed in the early 1990s inMadagascar as a seemingly ideal low-external-input sustainable agriculture (LEISA)technology. The method requires almost noexternal cash inputs, such as chemical fertiliz-ers, pesticides and seeds. The SRI methodinvolves seeding on dry beds, transplantingyounger than 20-day-old seedlings with oneseedling per hill, spacing of at least 20 cm� 20 cm, frequent weedings and controllingof the water level to allow aeration of roots

during the growth period of the plant.However, the technology requires approxi-mately 50% more labour. Using this method,farmers have repeatedly obtained yields twoto three times higher than the 2–3 t ha�1

obtained using traditional practices. Owingnot only to higher yields but also to the water-saving irrigation practices, the gains in waterproductivity at the field level could be veryhigh, although water accounting would berequired to determine the basin-level impactsof farm-level water savings.

The study undertaken by Moser andBarrett (2003) surveyed 317 households infive villages. Approximately one-third of thefarmers adopted SRI but most practised it ononly a portion of their land. The adopterstended to have higher education, belong tofarmer associations and have higher wealthand income. In contrast, the non-adopterswere unskilled agricultural labourers, who,lacking the financial resources to carry themthrough the ‘hungry season’, depended onthe agricultural wages they received daily.Thus, they cannot afford to spend the extratime required for adopting SRI on their ownfarms because they are busy working onother people’s farms. More importantly,many of those who adopted SRI have sinceabandoned the technology, often after tryingSRI for only one season (Table 2.1).Apparently, the significantly higher yieldswere not enough to offset the substantiallyhigher labour costs and managementrequirements.

System level: benefit–cost analysis

We have observed that water savings per semay or may not lead to increases in WP.Likewise, an increase in WP may or may notresult in higher economic or social benefits.Following the general concepts in our dis-cussion of net returns at the system level,economists assess the merits of an invest-ment by measuring the benefits and costs(B:C) ratio or the internal rate of return (IRR).These are measures of the performance ofinvestments or the productivity of capital.These two terms are defined mathematicallyas follows:

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B:C ratio:

The IRR is the discount rate i such that:

For the B:C ratio, a social discount interestrate is chosen, typically 10%. If the B:C ratioexceeds 1, then the project has a positivesocial benefit. If the IRR is greater than thesocial discount rate (often assumed to beabout 10%), then the project has a positivesocial benefit. While an assessment of envi-ronmental costs is now frequently includedin the analyses, as with farm-level analyses,this is largely a commodity-orientedapproach. Benefits of a given project are typi-cally measured in terms of higher yield andnet returns to the farmer for irrigating a spe-cific set of crops.

One of the most well-studied irrigationprojects in Sri Lanka is the Gal Oya WaterManagement Project (Uphoff, 1992; Murray-Rust et al., 1999). A deteriorated irrigationsystem, the Gal Oya Left Bank IrrigationSystem, was rehabilitated in the period1982–1985, using a combination of physicaland institutional interventions.

A time-series, impact-assessment modelwas used to describe the trends and impacts

in the system as a whole, as well as in differ-ent parts of the system (Amarasinghe et al.,1998; Murray-Rust et al., 1999). The datafrom 1974 to 1992 covered the period bothbefore and after the rehabilitation.Significant gains have been made in WP forthe system as a whole. The tail-end farmers,even though they were less intensively orga-nized, showed the best overall performancein terms of water use, crop production andWP.

Did benefits exceed costs? The projectcompletion report conducted in 1985 esti-mated an IRR of between 15 and 30%(Project Completion Report, 1985). A subse-quent study by Aluwihare and Kikuchi(1991) reported an IRR of 26%. While invest-ment in the construction of new systems inSri Lanka is no longer profitable, among themajor rehabilitation projects conducted inrecent years, Gal Oya has had the highestIRR (Table 2.2).

But there are two caveats. First, some ofthe gains made were at the expense of otherwater users (D.H. Murray-Rust, personalcommunication). Prior to rehabilitation, waterin the drains was being used by farmers out-side of the Left Bank Irrigation System. Withthis water no longer available, many farmerssimply went out of business. We do not knowto what degree these ‘hidden’ costs wouldlower the IRR. However, this example of off-site effects or externalities emphasizes theneed to adopt a basin perspective.

Secondly, although the area irrigated bygroundwater is still small, the recent IRRestimates for largely private agro-well and

B C

it t

tt

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=

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10

1

C

it

tt

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11 +( )=

=

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B

it

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=

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Economics of Water Productivity in Agriculture 27

Table 2.1. SRI adoption and non-adoption patterns in Madagascar, 1993–1999 (from Moser and Barrett,2003).

Ambatovaky Iambara Torotosy Anjazafotsy Manandona Averagea

Households trying 48 16 27 28 21 25the method, 1993–1999 (%)Households using 26 7 0 13 17 15the method in 1999 (%)Adopters who 46 53 100 49 19 40disadopted (%)

a Average is weighted to account for different numbers of households at each site.

Water Ch 2 2/7/03 9:01 am Page 27

pump investments in Sri Lanka are muchhigher than for public investments in reha-bilitation (Kikuchi et al., 2002). But changesin the management of surface water canhave a major impact on the groundwateraquifer and overexploitation of groundwatercan have negative consequences for both thesupply and quality of groundwater. Thisraises the issue of how best to coordinate thedevelopment and management of surfacewater and groundwater.

Basin level: response to water scarcity andsustainability

As the competition for water increases andriver basins become closed for all or part ofthe year, WP and EE are typically increasedby shifting to higher-valued crops, where fea-sible, and by reallocation of water to industryand domestic uses. Also, water scarcity andthe rising value of water can bring forth aresponse in terms of the development andadoption of new technologies and institu-tions that can raise water productivity. In eco-nomics, these latter changes are explained bythe theory of induced innovation (Hayamiand Ruttan, 1985). For example, with refer-

ence to the Green Revolution, the theoryimplies that the development of high-yield-ing, fertilizer-responsive cereal-grain vari-eties was a response to both rising food-grainand falling fertilizer prices, which made thistechnology highly profitable. Applying thistheory, we see that situations of water short-age and the rising value of water are induc-ing new techniques, improved managementpractices and institutional reforms that willraise the productivity of water. The profitabil-ity, the feasibility and hence the order ofthese changes will vary from site to site,depending on local circumstances.

Recent studies of the Gediz basin inTurkey (IWMI and General Directorate ofRural Services, Turkey, 2000), the ChaoPhraya basin in Thailand (Molle, Chapter 17,this volume) and the Rio Lerma basin inMexico (Scott et al., 2001) illustrate theendogenous adjustments that have occurredat both the farm and system levels inresponse to water shortages.

In the case of the Gediz basin, the adjust-ments were in response to a prolongeddrought from 1989 to 1994. A change wasmade in the way water was allocated, shift-ing from a demand- or crop-based system toa supply-based system, with water rationed

28 R. Barker et al.

Table 2.2. Rates of return on irrigation investments in Sri Lanka in recent decades: new irrigationconstruction and rehabilitation based on 1995 constant prices (Kikuchi et al., 2002).

International rate of C:B ratio return (%)

New construction projectsa

1980 0.8 121985 1.1 91990 1.5 71995 2.0 5

Major rehabilitation projectsb

TIMP 1984 1.04 10Gal Oya 1987 0.37 26VIRP 1990 1.09 9ISMP 1992 0.60 17MIRP 1994 1.02 10NIRP 1999 0.88 11

TIMP, Tank Irrigation Modernization Project; VIRP, Village Rehabilitation Project; ISMP, Irrigation SystemManagement Project; MIRP, Major Irrigation Rehabilitation Project; NIRP, National IrrigationRehabilitation Project.a For the technology level ‘New improved varieties, N � 140 kg’.b Years after the names of projects stand for the years when the projects were completed.

Water Ch 2 2/7/03 9:01 am Page 28

from the reservoir downward. The resultwas a significant increase in basin-level irri-gation efficiency. To adapt to the dramati-cally reduced length of the irrigation season,farmers, with the assistance of the govern-ment, developed groundwater resources.The shift in cropping pattern over the pastdecade away from cotton to grapes andorchards is partially explained by thedrought, but the entry into the EuropeanCustoms Union was the overriding factor.

In the Chao Phraya basin, irrigation effi-ciency has been gradually raised by the useof grating drains, conjunctive use of ground-water, pumped water from ponds and low-lying areas and improved management ofdams. Farmers have responded to watershortage and unreliable deliveries in the dryseason by sinking tube wells and diversifyingcrop production and through a spectaculardevelopment of inland shrimp farming. Thishas occurred despite the fact that there areconsiderable technical constraints and risksin diversification. The centralized water-allocation system has handled the issue ofallocation of water to non-agricultural usesrelatively well. Basin-level efficiency is highand there appears to be relatively little scopefor achieving further productivity gains.

In the Rio Lerma–Chapala basin, water-shortage problems gained prominence withprecipitous declines in Lake Chapala (themain source of water for Guadalajara) in the1980s. IWMI studies have shown the distrib-ution and extent of aquifer depletion (2 myear�1) and growth in agricultural waterdemand. The Lerma–Chapala Consejo deCuenca, established in 1993, is the oldestriver-basin council in Mexico. It has respon-sibility for water allocation among users,improving water quality and WUE and con-serving the basin ecosystem. However, agri-cultural, industrial and domestic demandhas been rising rapidly, and there is simplynot enough water to meet all demand with-out further overdraft of the aquifer. Water forLake Chapala and Guadalahara has priorityand 240 million m3 of water formerly usedfor irrigated agriculture have been reallo-cated to Lake Chapala. Farmers are begin-ning to demand that Guadalahara pay forthe 240 million m3.

In summary, in all three basins there hasbeen a response by farmers and irrigationorganizations to water shortage that hasraised WP and basin-level efficiency andthere appears to be relatively little scope forfurther gains. The non-agricultural demandfor water will continue to rise and decliningwater quality already presents a seriousproblem. But each of the three basins is at adifferent stage with respect to basin closureand chronic water shortage. The situation inMexico is clearly unsustainable. The reduc-tion in irrigated area and, where possible,the shift to high-valued crops on the remain-ing land can help alleviate the problem.

Allan (1998) has coined the term ‘trade invirtual water’ to show how internationaltrade can help alleviate water scarcity andincrease WP. Mexico provides an interestingexample of trade in virtual water (Barker etal., 2000). Over the past 30 years, both fruitand vegetable exports and cereal-grainimports have been increasing rapidly. Figure2.1 shows that, over the 5 years from 1991 to1996, the value of fruit and vegetable exportsexceeded the value of grain imports byUS$1.0–1.5 billion. At the same time, thewater saved by the import of cereal grainswas about six times the water used for fruitand vegetable production.

Policies and Institutions

There are those who argue that water inlarge, publicly managed, irrigation systems isbeing poorly managed and that policy andinstitutional reforms are needed to create theenvironment and incentives for saving waterand increasing WP. Charges for water or forpower for lifting water (if they exist at all) arerarely adequate to cover O&M expenses. As aresult, irrigation infrastructure is deteriorat-ing at a rapid rate and overexploitation ofgroundwater resources is leading to a declinein the water table and in the quality of water.

Others argue that there is much less scopefor increasing WP than is commonlybelieved. Traditional measures of irrigationefficiency are incorrect. Water scarcity, partic-ularly the closing of a basin, creates its ownincentive for reforms, leading to changes in

Economics of Water Productivity in Agriculture 29

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water-management practices at the farm, sys-tem and basin level designed to sustain pro-duction. One such example is the spread ofpumps and tube wells, largely through pri-vate investment, for exploiting groundwaterand recycling water from drainage ditches.

There is a strong element of truth on bothsides of the argument. As suggested in theprevious section, we need much more accu-

rate information on the dynamics of changein water basins over time, noting in particu-lar the changes that occur as water scarcityincreases and a basin becomes closed for allor a portion of the year. As competition forwater increases, decisions on basin-level allo-cations among sectors must involve valuejudgements as to how best to benefit societyas a whole. This will include setting priori-

30 R. Barker et al.

(a)

(b)

3000

2500

2000

1500

1000

500

0

Mill

ion

US

dol

lars

Cub

ic k

ilom

etre

s

10

9

8

7

6

5

4

3

2

1

0

Cereal imports Fruit exports

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

Year

Cereal imports Fruit exports

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

Year

Fig. 2.1. Cereal imports and fruit and vegetable exports in Mexico ((a) US dollars and (b) virtual water,assuming water productivity of 1.2 kg m�3 crop evapotranspiration for cereals and 4 kg m�3 for fruit andvegetables). Source: Barker et al., 2000.

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ties in the management of water resources tomeet objectives such as ensuring sustainabil-ity, meeting food-security needs and provid-ing the poorer segments of society withaccess to water. These objectives can beincorporated as assumptions or constraintsin economic-cum-hydrological optimizationmodels (McKinney et al., 1999).

Faced with growing water shortages,many national policy makers, backed byinternational experts, have called forimproved management of canal irrigationsystems. The steps required include: (i)reforms in pricing and charging users forwater or water services; (ii) greater participa-tion in the O&M of systems by local usergroups; and (iii) the establishment of waterrights. In this section, we discuss the first ofthe two most widely promoted reforms,water-pricing policy and irrigation-manage-ment transfer (IMT), and one less publicizedarea, management for conjunctive use, whichappears to offer potential for gains in eco-nomic efficiency, equity and WP. We shouldemphasize that the appropriate policy andinstitutional reforms will vary depending onthe biophysical and socio-economic environ-ment at a given site.

Water-pricing policy

In developed as well as developing coun-tries, there is disagreement regarding theappropriate means by which to price waterand the appropriate level of water charges.The pricing of water may involve differentobjectives, such as cost recovery (who hasbenefited from the investment in irrigationand who should pay), financing the irriga-tion agency or reducing wastage of water.Politics also enters heavily into water-pricingdecisions. Moreover, many countries lack thetradition, experience and appropriate institu-tions for pricing irrigation water.

The World Bank has recently undertakena comprehensive study, ‘Guidelines forPricing Irrigation Water Based on Efficiency,Implementation, and Equity Concerns.’ As apart of that study, Johansson (2000) has con-ducted an exhaustive literature survey onpricing irrigation water. More concise treat-

ment of the issues can be found in Tsur andDinar (1997) and in Perry (2001). The authorsemphasize the fact that water (particularlywater used in irrigation) is a complicatednatural resource, a complicated economicresource and a complicated politicalresource. Moreover, while water supplied isa proper measure of service in domestic andindustrial uses, water consumed is theappropriate measure in irrigation, and this isparticularly difficult to measure.

Tsur and Dinar (1997) discuss several dif-ferent pricing methods for irrigation waterand their implementation costs. Theseinclude pricing based on area irrigated, volu-metric pricing according to the water used orconsumed, output or input pricing, fixed-and variable-rate pricing and water markets.The necessary and sufficient conditions formarkets to operate, especially defined andenforceable water rights, are, in most cases,not yet in place. Variable-rate pricing is oftensuggested in charging for electricity forpumps.

Bos and Wolters (1990) investigated irri-gation agencies representing 12.2 million haof irrigated farms worldwide. They foundthat water authorities charged on a per-unitarea basis in more than 60% of the cases, on avolumetric basis in about 25% of the casesand a combination of area and volumetricmethods in 15% of the cases.

Water-pricing methods are most pro-nounced through their effect on croppingpattern – more so than their effect on waterdemand for a given crop (Tsur and Dinar,1997). The various methods differ in terms ofamount and type of information and theadministrative costs needed in their imple-mentation. The most economically efficientmethod will depend on physical conditions,such as conveyance structures, water facili-ties and institutions. If the objective is alloca-tion and not cost recovery, rationing (i.e.assigning water to specific uses) representsan alternative mechanism for coping withwater shortages where demand exceeds sup-ply (Perry, 2001).

An example of volumetric-cum-area pric-ing is found in the Zhanghe irrigation system(ZIS) in Hubei, China (Dong et al., 2001). Theprovince determines the price for water for

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different uses and water is rationed amongsectors when supplies are short. The water-user groups or villages pay the water fee toZIS on a volumetric basis. The fee for the totalvolume paid by the group is then divided bythe area, and individual farmers are chargedaccording to their irrigated area. Even thoughfarmers pay an area fee, they are well awarethat, if they use less water as a group, theirfees will be reduced. The savings in water useat the farm level through improved water-management practices, as well as throughhigher crop yields, have led to an increaseover time in the productivity of water for irri-gation (Hong et al., 2001). There is also anincentive to save water at the system level.Over the past three decades, water has beendiverted to higher-valued, non-agriculturaluses, greatly increasing the productivity ofZIS water resources. However, the decrease inwater seepage and runoff resulting fromwater-saving practices (including the lining ofcanals) may have reduced the water availablein downstream tanks within the ZhangheIrrigation District but outside ZIS, and thenegative impact of this is not known.

Participatory irrigation management andirrigation management transfer

In the area of institutional reform, the devo-lution of management and financial respon-sibility from irrigation-system managers tolocal user groups has gained prominence.The popular terms for this are participatoryirrigation management (PIM) and IMT.These terms are defined as follows(Groenfeldt and Svendsen, 2000):

• PIM usually refers to the level, mode andintensity of user-group participation thatwould increase farmer responsibility inthe management process.

• IMT is a more specialized term that refersto the process of shifting basic irrigation-management functions from a publicagency or state government to a local orprivate-sector entity.

The interest in transfer of responsibility touser groups rests, in large part, on the desireof many governments to reduce expendi-

tures on irrigation. Among proponents, it isalso argued that handing responsibility tolocal user groups will result in better O&Mand increased productivity. PIM/IMT hasbecome one of the cornerstones of the WorldBank water-management policy (Groenfeldtand Svendsen, 2000). Recent experience inPIM and IMT seems to suggest that there hasbeen considerably more success in transfer-ring management responsibilities in moreadvanced countries, such as Turkey andMexico, than in the developing countries ofAsia (Samad, 2001). Where implementationhas been successful, government expendi-tures and the number of agency staff havedeclined and maintenance has, in somecases, improved, but there is little evidenceyet that PIM/IMT has led to an increase inthe productivity of irrigation water.

While, under IMT, government responsi-bility for water management in the lowestlevel of the irrigation system is beingreduced, at the same time water scarcityrequires increased government involvementat the highest level of management (Perry,1999). For example, China has recently cen-tralized control over water diversions fromthe Yellow River because upstream userswere taking so much water that the riveroften ran dry before reaching the sea. Thiscentralization seems to have increasedstream flows in the river. Important areas ofcentralized management at the basin andsector levels include water allocation amongsectors, flood control, drought planning,water-quality regulation and enforcementand groundwater depletion.

Conjunctive use of surface water andgroundwater

Historically, the development of the technol-ogy of surface-water irrigation preceded thatof tube wells, based on compact diesel andelectrical power. In fact, the introduction oftube wells in the Indus basin and perhaps inthe North China Plain was motivated byconcern over the waterlogging and saliniza-tion that occurred when canal irrigationcaused the water table to rise (O’Mara, 1988).Public drainage wells were installed to lower

32 R. Barker et al.

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water tables and reduce waterlogging. Aboom followed in tube-well investments forirrigation by individual farmers in southAsia and by communes (and, more recently,by private farms) in north China. Because ofthe greater convenience and reliability ofgroundwater, many farmers within surface-irrigation command areas have dug wells ortube wells.

The rate of increase in new areas irrigatedby surface water has levelled off. But the irri-gated area served by the ever-cheaper tube-well technology has continued to expand tothe point where, in India, over half of thearea irrigated is from groundwater. The mas-sive investment in tube wells has completelytransformed the use of water resources inthese regions and has raised problems ofresource management that are beyond thegrasp of existing irrigation bureaucracies.The overexploitation of groundwater, partic-ularly in the semi-arid areas, is leading todeclines in both quantity and quality ofwater, affecting not only agriculture but alsodomestic supplies and human health. Often,in many large-scale irrigation systems, tail-end farmers have to supplement surface-water supplies with lower-quality drainwater or shallow groundwater (Murray-Rustand Vander Velde, 1994).

One of the greatest potentials for increas-ing WP lies in the management of surface-water and groundwater resources forconjunctive use, provided this leads to betterdistribution of water. For example, loss ofyield due to salinity could be greatlyreduced with improved conjunctive manage-ment of surface-water and groundwaterresources, especially by better distribution ofcanal water to maintain optimum levels ofwater table and salt balances, even in the tailreaches of canal commands (Hussain et al.,Chapter 16, this volume). This requires closemonitoring of any adverse effects on soil andwater quality, as has occurred in irrigationmanagement in the People’s VictoryIrrigation Canal in the Yellow River basin ofChina. It has been suggested (M. Wopereis,personal communication, 1998) that farmersin the Senegal River valley, an area withsevere soil salinization (e.g. Raes et al., 1996),be equipped to monitor salinity levels them-

selves. Cheap field conductivity meters canbe used for this purpose and such equipmentshould be within the financial reach offarmers’ cooperatives.

Summary and Conclusions

Initially, we addressed the confusion in thedefinitions of IE, WUE and WP. IE is mea-sured by the ratio of water consumed towater supplied, whereas WP is a ratio ofcrop output to water either diverted or con-sumed, measured in either physical or eco-nomic terms or some combination of thetwo. Then we discussed the relationshipbetween WP and EE. Just as water savingdoes not necessarily result in higher WP, soalso higher WP does not necessarily result inhigher EE (e.g. the case of SRI).

Measures to increase crop yield for agiven ET translate into WP gains at systemand basin levels (e.g. through varietalimprovements). However, the managementof water to reduce water-diversion require-ments is riddled with off-site effects or exter-nalities (e.g. the case of Gal Oya). Thus,whether water-management practices ortechnologies designed to increase WP andEE at farm level result in higher WP and EEat system or basin level needs to be deter-mined. The basin is a hydrological, asopposed to an administrative, unit. It is onlyat this level that we can capture and includein our analysis the off-site effects (or, in eco-nomic jargon, internalize the externalities).

The growing scarcity and rising value ofwater in a basin induces both farmers andirrigation organizations to seek various waysto increase WP, EE and net returns (e.g. thebasin cases in Turkey, Thailand and Mexico).Recycling or reuse of water, particularlythrough the exploitation of groundwater, isprominent among the practices adopted toincrease WP. Greater attention needs to befocused on managing water for conjunctiveuse.

We need a better understanding of bio-physical and socio-economic changes inbasins over time and improved measures ofbasin-level efficiencies before we can deter-mine, in a given situation, the potential for

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