Difficulties in Adopting Formal Water Trading Rules within Users' Associations

By Calatrava, Javier; Garrido, Alberto | Journal of Economic Issues, March 2006 | Go to article overview

Difficulties in Adopting Formal Water Trading Rules within Users' Associations


Calatrava, Javier, Garrido, Alberto, Journal of Economic Issues


This paper attempts to explain why collective organizations in charge of managing scarce resources can face difficulties in evolving into more efficient institutions. It is framed within a literature strand that asks why institutions fail or succeed, on the basis of some skepticism about the use of rational models of social design as well as a deliberate openness to learning from cultural and biological evolution. Rational order, in the words of Vernon Smith (2003), can be thought of "as an undesigned ecological system that emerges out of cultural and biological evolutionary process: homegrown principles of action, norms, traditions and 'morality'" (469-470). However, R. Maria Saleth and Ariel Dinar (2004) have argued, for the case of the water sector, that institutions are severely constrained by path dependency, a construct that allows them to illustrate the powerful effects of history, customs, and traditions on the observed state of water institutions around the world. Saleth and Dinar concluded that path dependency poses serious constraints for change and evolution.

Some authors have built on Elinor Ostrom's works to analyze water user associations around the world (Ostrom 1990, 1993, 2001; Livingston 1985; Subramanian et al. 1997). This literature teaches us how collective entities share costs, risks, and benefits. It also shows what modes of collaboration lead to more social cohesion and to more efficient ways of dealing with various sources of collective and individual risks. Uncertain water supply may be one of the most important for irrigation schemes but certainly not the only one.

Constructivist rationality, quoting Smith (2003) again, stands opposed to evolutionary biology in that it "uses reason to deliberately create rules of actions, and create human socioeconomic institutions, that yield outcomes deemed preferable.... Although constructivism is one of the crowning achievements of human intellect, it is important to remain sensitive to the fact that human institutions and most decision making is not guided primarily, if at all, by constructivism" (468). In the context of water resources and collective organizations, rational constructivism leads to the notions of property rights, incentives, and resource tradability. This mindset supports many sectoral reforms that give markets a major role in resource allocation.

Yet a plain fact encountered in many worldwide irrigation organizations is that formal water trading is an exception, whereas one can find numerous ways of informal trading in most countries where irrigation water is a basic resource for food production. Furthermore, while virtually all world countries have formal water codes, very few recognize that water rights can be tradable (Australia, USA, Chile, and, since 1999, Spain; see Easter et al. 1998), and most of them explicitly forbid water users to exchange their water rights. This finding is somewhat disturbing, as one would expect that states would be inclined to regulate the markets and develop means to make them more secure, equitable, and acceptable.

We argue that both Smith's ecological rationality and Saleth and Dinar's path dependency offer alternative, but not exclusive, explanations of the weak support for formal water trading within irrigation communities. In a context of uncertain water supply, risk analyses offer opportunities to understand the inherent difficulties of establishing formal trading rules. In addition, users' heterogeneity, stemming from unequal endowments, preferences, or culture, reduces the chances of forming a commonly agreed-upon understanding of the resource's allocation problems. Yet organizations develop ways to cope effectively with users' heterogeneity, which in our case is illustrated by the evolution from pure proportional allocation systems to customary priority systems that reward risk-taking irrigators.

This paper seeks to explain why it is not easy for water associations to adopt water-trading rules. …

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