tm water market

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The Distributive Impact of the Water Market in Chile: A Case Study in Limarí Province, 1981 - 1997 Donato Romano Department of Agricultural and Resource Economics University of Florence, Italy and Michel Leporati Instituto Nacional de Desarollo Agropecuario Santiago, Chile Published in the Quarterly Journal of International Agriculture vol. 41 (1/2): 41-58

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analysis of water market distributive impacts determinants of peasants’ participation in the water market peasant agriculture agricultural sector non-agricultural sectors Limarì Province research area of previous studies on the efficiency of water market highly representative of the Chilean agriculture transformations Objectives: Perspectives: Where?:

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water can be privately exploited through transferable use rights water property rights are separable from land property rights - ‘real’ rights - divisible - mortgageable - no use priorities only demand and supply will determine the resource allocation the State only guarantees the rules of the game. The water market in Chile (Código de Aguas, 1981)

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The state of the art (I): efficiency (Theoretical) pros of private water market vs. public provision (Hearne and Easter, 1997): concentrate resources in higher-value uses  better allocation more rational resource use  conservation higher share of private investments  public budget savings

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The state of the art (I): efficiency Real effects of the water market: positive assessment: - Gazmuri (1994): more efficient water allocation - Holden and Thobani (1995): infrastructures and institutional competencies - Ríos e Quiroz (1995): water scarcity and infrastructure flexibility - Bauer (1997): incentive to investment and flexibility negative assessment: - Peña and Retamal (1992): market power and asymmetric information - Barrientos (1995): few transactions - Bauer (1997): “ “

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By and large: pros > cons Hearne and Easter (1995): The state of the art (I): efficiency The water market in Limarì province : «the market transfer of water-use rights does produce substantial economic gain-from-trade. [These economic gains] are about three times the value of each water share from the Cogotí dam.» But, in the Limarí valley: low transaction costs (on average, 0.02% for buyers and 0.05% for sellers) presence of the reservoir storage (Cogotí dam), modern infrastructures (gated canals, flow meters, etc.) and well organized user associations.

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The state of the art (II): distributive effects Theoretically: neutrality, provided that there is access to information no market power extension and technical assistance Practically: positive effects - Gazmuri (1994) and Thobani (1995): poverty reduction, thanks to trickle down effects negative effects - Ríos and Quiroz (1995) and Bauer (1997): peasants disadvanta- ged because of lack of knowledge about new procedures, lack of financial resources, and weak bargaining power

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The state of the art (II): distributive effects The water market in Limarì province (Hearne and Easter, 1995): «the market transfer of water-use rights does produce substantial economic gain-from-trade. These economic gains occur in inter-sectoral trades and in trade between farmers, and they produce rents for both buyers and sellers. Yet buyers, especially large table-grape producers (…), receive higher rents than sellers.» Consistent with the broader Chilean context of «exclusionary growth» (Carter and Barham, 1996).

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Analysis of all registrations (both original registrations and transfers) of rights among agents which took place between 1981 and 1997 in Limarí Province. The case study (I): market functioning Water market is a very active institution in Limarí Province: total registrations: 1,367 yearly average: 80.4 corrected yearly average: 39.3 market transactions: 84% of total registrations

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Total registrations of water-use rights, 1981-97

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Intra- and inter-sectoral registrations of water-use rights, 1981-97 (percentage on total registrations)

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Characteristic Non-agricultural sectors Agriculture total Capitalist agriculture Peasant agriculture Type of registration Original regs. = 13.95 Original regs.= 56.28 Original regs.= 21.46 Original regs.= 81.63 (% on sector total) Mkt. transactions = 86.05 Mkt. transactions = 43.72 Mkt. transactions = 78.54 Mkt. transactions = 18.37 Avg. registrations size 16.24 12.24 15.55 7.48 (shares/registration) Concentration index 1.59 1.44 1.60 1.15 (registrations/individual) Purchasing/selling ratio:    - Registrations 1.94 0.90 1.80 0.48    - Prices 0.91 1.07 1.51 1.04 Re-sales 60.84 32.35 60.17 13.16 (% on sales) Agents’ behaviour among sectors Different behaviour: Peasant agriculture Capitalist agriculture  Non-agricultural sectors 

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Conclusions: quite far from a perfectly competitive market - market power - access to information? peasant agriculture dependent The case study (I): market functioning

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Evolution of water-use rights among different population quintiles on the period 1981-97: The case study (II): distributive effects Gini coefficient Lorenz curves Whole population Peasant agriculture 

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Evolution of water-use rights distribution, all sectors, 1981-1997  p.c. shares = – 16.7%  users = + 27.0%

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Evolution of water-use rights distribution, peasant agriculture, 1981-1997  p.c. shares = – 83.4%  users = – 53.7%  poor = + 146.7%

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Economic, social and institutional determinants of peasants’ participation and behaviour in the water market: survey on 114 peasant households (2.38% of total HHs) The case study (III): determinants of peasants’ participation logistic regression transact/do not transact buy/sell 

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Logit model estimates for peasants’ involvement in the water market transactions Dependent variable y=1 do not transact y=0 transact Degrees of freedom 5 -2logl restricted 144.406 -2logl non restricted 107.865 2 36.541 Percentage of correct forecasts 82.8% Variables Coefficients Pr>2 Intercept 1.2146 0.0482 JFED: Age of household head 0.1989 0.0153 MEDNI: Household education attainment -0.3258 0.0013 OTRO: Being member of organisations -3.3168 0.0005 other than water-users PAS: Farm grazing area 0.9293 0.0154 INF: Level of information about local -3.3251 0.0290 water market

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Logit model estimates for peasants’ behaviour in the water market Dependent variable y=1 sell y=0 buy Degrees of freedom 6 -2logl restricted 73.325 -2logl not restricted 58.682 2 28.683 Percentage of correct forecasts 87.6% Variables Coefficients Pr>2 Intercept 0.1895 0.0918 JFED: Age of household head 0.0759 0.0321 MEDNI: Household education attainment -0.0857 0.0119 CRE: Access to credit -1.9503 0.0225 DIR: Being manager of water-users -1.3870 0.0293 associations ACC: Total number of water shares -0.1358 0.0291 INF: Level of information about local -7.5430 0.0009 water market

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Private water market has become a very active institution in the Limarí valley But, there are evidences that the market is highly imperfect: - asymmetric information - barriers to entry due to social, cultural, economic, and institutional conditions existing among different agents Conclusions The distribution of water resources is heavily unbalanced and it tended to worsen : - general decrease in the amount of per capita rights - accumulation of resources by the most powerful social-economic groups - peasants are the group that suffered the greatest loss: water is a strategic determinant of agricultural development

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Determinants affecting peasants’ participation and behaviour in the water market: crucial role of the variables relative to information, education and participation in agricultural organisations and in water users associations  potential role of government interventions in: - training of human resources - promotion of adequate and accessible information for the whole population Conclusions

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Conclusions Distribution dynamics influenced by the Government’s abdication from its role as ‘referee’ of the game (consequence of the radically liberalistic environment where the reform was designed and implemented) The Concertaciòn Governments’ ‘growth with equity’ objective has not been achieved