Distributional Effects of Irrigation Water Price Changes, a Case - PDF document

Distributional Effects of Irrigation Water Price Changes, a Case Study in Lake Urmia Basin Farah Asna Ashari Ruhr University Bochum – Germany Iran is located in the mid-latitude belt of arid and semi-arid regions of the earth with limited availability of water resources which has confronted the state with water management challenges. Water scarcity across the country has growing influence on development plans in several sectors which rely on water resources. The country has 0.36 percent of the world’s freshwater resources while about 1 percent of the world’s population live there (IWRMC, 2005). Annual rainfall in Iran varies from 50 mm in central Kavir Desert to 2275 mm in Caspian Sea basin with an overall annual average rainfall of 228 mm which almost 66 percent of the rainfall evaporates. Agricultural activities are a significant contributor to the economy of Iran. In the interest of attaining food security and self-sufficiency, and being prepared to mitigate the impact of international sanctions against Iran, agricultural development plans have always been paid special attention by government. However, the environmental and socio-economic rationales for these plans are questioned. Nearly one-third of the total area of Iran is appropriate for agricultural activities (FAOSTAT, 2012) and the estimation of 16.3% of labor force is engaged with agricultural sector (The World Factbook, 2013). Agriculture accounts for an average of 11% of the GDP (Iran Economy Stats, 2012) Almost all arable (99 percent) in Iran is run and managed by private sector. More than 90 percent of rural agricultural households possess lands with small and medium farm size. Farming activities is determined by adequate water accessibility which is mostly scattered in different regions of the county (Keshavarz, Ashraft, Hydari, Pouran, & Farzaneh, 2005, p. 156) and living condition of rural population is strongly affected by water resources. Agricultural sector consumes 92 percent of the 93.3 Billion Cubic Meters (BCM) water use. Groundwater is main source of water in agriculture; Legal as well as illegal groundwater abstraction covers about 70 percent of water use in agriculture levels (Hashemi M., 2012, pp. 88-89). The 1982 Fair Water Distribution (FWD) Act states that water as a common pool 1

property belongs to the state. Private well owners own much of the groundwater which is controlled by issuing water allocation permits, although there are illegal and informal abstractions which cannot be controlled. Surface water is mostly abstracted through traditional water rights. Iran is the 5th country in the world in terms of irrigated land area (Hashemi M., 2012, p. 91). Figure 1- Lake Urmia Basin Location in Iran Source: https://aquapedia.waterdiplomacy.org/wiki/index.php?title=File:Urmia2.jpg 1 The dominant economic activities in the basin is mainly agricultural followed by industrial and tourism. Agriculture is cited as the principal user of raw water in the basin with 75 percent of water use in the lake basin which is supplied through surface and groundwater sources. Urban supply is accounted for of 21 percent of the water consumption in the area followed by industry with 4 percent (mostly textile industry). Figure 2 illustrates the water consumption per sector. 1 Ecological zone is the entire Lake plus surrounding wetlands and other habitats which have a strong ecological connectivity with the Lake . 2

Figure 2. Water Consumption by Sector in Lake Urmia Basin Industry 4% Urban 21% Agricultural 75% Source: (Yekom, 2002) The lake has been subject to extensive draining resulting to a critical condition of declining water level and increasing salinity for the last decades. The extensive demand for water due to increasing population and agricultural activities resulted depriving the lake of replenishment water and lessening the quality and quantity of the water in the lake. Most of the wetland derived goods and services have been lost in recent years threatening the globally important biodiversity provided by the lake and the basin ecosystem. The lake water level dropped to 1270.42 meters in 2013 which is 3.5 meters under the ecological sustainable level and the lake area has reduced by 46% to 2700 Km 2 (Jabbari, 2011). A growing attention to the deteriorating environmental condition of the lake has started since 1990s. The surface area of the lake is being declining. Since 1995 the lake area has shrunk to less than half of its size with falling water levels (Hashemi M., 2012, p. 124 and 150). . Since the lake Urmia basin has about 7 percent of Iran water resources, Iranian policymakers, particularly the Ministry of Energy (MoE) had a growing attention to the Lake in the last decades and it has been registered on the political agenda since 2000. As already mentioned irrigation is capturing the major share of water resources in Lake Urmia basin. Demand for water has increased in response to agricultural development plans. Surface water inflows to the Lake have been diverted to irrigation schemes and underground water resources have been overexploited to meet agricultural demand that has imposed some significant pressures on the lake’s ecosystem. The opportunity costs associated with diverting the water away from the lake has not been realized and incorporated into the development plan for the region. An important challenge in the area is maintaining the natural ecosystem of the lake basin to provide essential support to life for human and all species in the region. Irrigation water pricing 3

is a sensitive policy intervention as farmers rely on their farm income for their basic needs. As an objective in this research we estimate the distributional effect of irrigation water price changes on farm households. However, the data limitation does not allow for more detailed analysis, this analysis still give us a good indication of welfare loss distribution. The data used here is a cross sectional data collected from a sample selected in a multi-stage sampling of farm households in Lake Urmia basin in 2013. Some 273 farm households randomly were sampled from two districts (Shabestar, Ajabshir) including 9 villages in the area. Quantile Regression First we implement a quantile regression to find the coefficient of independent variables for poorest to richest group. Then percentage of farm revenue, and percentage of welfare loss are determined for five groups under a hypothetical water pricing scenario in order to explore the effect of price changes on each group. This section will be closed with Lorenz curve for farm income before and after the water price changes. The dependent variable of the study is divided in three groups; low, medium and high income (0.25, 0.50, 0.75 quantiles). The last regression is the regression for the 0.1 quantile or the whole data for the dependent variable. Table 1 presents the results for quantile regression. These results indicate the effect of independent variables along the distribution of dependent variable. In all three quantile regressions labor and intermediate inputs coefficients, and land in quantile 0.75 are not significantly different from zero. The other variable coefficients for all quantiles are significantly different from zero at 95% or 90% level. The figure 3 shows a method to visualize the change in quantile coefficients along with confidence intervals. In each plot, the regression coefficient at a given quantile indicates the effect on farm income of one percent change in that variable, assuming that the other variables are fixed. Green lines are the slope coefficient for the quantile of the x axis and the gray shadows around it are the confidence intervals for that specific variables. The dashed lines are the least squares estimate and the dotted lines are its confidence interval at 95% level. The quantile slope estimates are not statistically different from the least squares estimate. The OLS 4