WATER POLICY FOR EFFICIENT AGRICULTURAL DIVERSIFICATION - MARKET-BASED APPROACHES

The rapid liberalization of developing economies encourages agricultural diversification and commercialization. Prevailing water allocation methods have tended to limit the flexibility of farmers in reallocating resources in response to changing incentives. Reform of water allocation mechanisms has lagged behind other input sectors, largely because the physical, technological and economic characteristics of water resources pose special problems to establishment of water rights and market-based allocation of water. This paper shows that there is considerable evidence of sufficient physical flexibility in most irrigation systems to permit crop diversification; that water allocation and crop planting choices respond to the scarcity value of water; and that markets in tradable water rights can be effectively implemented with appropriate design of water law, institutions, and regulations.