NCPA - National Center for Policy Analysis


August 24, 2006

As much of Asia struggles with water shortages, Australia's agricultural sector is thriving, despite its worst drought in decades.  The secret of the success down under: a free-market system of water trading rights, says Roger Bate, a resident fellow at American Enterprise Institute.

Australia's situation stands in stark contrast to many parts of Asia, where Soviet-style systems of water allocation still prevail:

  • In India, Cambodia, Burma -- and to a lesser extent, Nepal -- governments use quotas to decide which farmers receive water, and then dictate how and when they can use it.
  • Since farming accounts for more than 90 percent of water use in those countries, the water supply is effectively dictated by central planning.

Under such a system, there's no incentive to conserve water; quite the reverse, says Bate:

  • If the favored farmers don't use their quota, they lose it.
  • And once allocations are made, they're rarely altered, even when massive changes in agriculture, industry, mining, domestic and rural demand occur.
  • As a result, farmers across the region can afford to waste huge amounts of water, because they often pay one hundred times less for the commodity than domestic users.

Contrast that with the situation in countries such as Australia, which have introduced water-trading rights.  The benefits are immediate:

  • Since farmers have rights to a fixed supply of water in advance, they can sell off any excess water they don't need, instead of simply wasting it.
  • That increases their profits, while allowing others--be they farmers, municipalities, mines or even green groups "retiring" rights--to use this excess allocation more efficiently.

Free markets allow individuals to adapt to changing conditions, be they man-made or natural.  And, as Australia's current experience has shown, such flexibility is dearly needed, says Bate.

Source: Roger Bate, "Australia's Water Works," Wall Street Journal Asia, August 23, 2006.

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