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Howard A. Cohen is a senior lecturer in public management at the Fels Institute of Government of the University of Pennsylvania, and past president of Operation Independence, an international organization promoting economic growth in Israel. Steven Plaut is a senior lecturer in business and economics at the University of Haifa, Israel, and a visiting associate professor at the University of California at Berkeley.

As an economic resource, the value of water in the Middle East ranks perhaps second only to oil. Water has long played an important role in the region's politics, both domestic and international, and its importance is expected to increase in the future as the Middle East experiences growth in its population and its tourism, agricultural, and industrial capacities. Water has already emerged as a major issue and potential focus of conflict between Israel and the Palestinian regions, as well as between Syria and Turkey, and has the potential to become a problem along the Nile and Euphrates river valleys as well.

Middle East water has also been a major concern of American policy since the Eisenhower administration, when the Johnston mission's arbitration of Arab-Israeli water disputes set down markers that remain influential to this day.

Water problems in the Middle East have two main aspects: domestic--the efficient allocation of water resources within a country; and international--the division of water resources among countries. Although most discussions analyze these two levels separately they are, in fact, closely interconnected. Moreover, most domestic and international problems of distribution can be solved with the same mechanism: the openly competitive auctioning and sale of water rights.

AQUIFERS, RIVERS, AND SEWAGE

Syria depends primarily on the Euphrates and Orontes Rivers for its water supply. Jordan looks primarily to the Yarmouk River and, to a much lesser extent, the Jordan River (which is quite salty and brackish for most of its length). The Gaza Strip relies on an underground aquifer into which far too many wells have been sunk. In Israel, most water comes from the Sea of Galilee (which is really a lake, known as Kinneret in Hebrew) and two large underground aquifers, the Mountain (also known as the Yarkon-Taneenim) and the Coastal. The Mountain Aquifer also provides most of the water used on the West Bank. Israel and the Palestinians also rely on smaller sources, such as wells, some of which tap into the runoff from Mount Carmel, some of which is trapped in ponds, and sewage water that may be recycled and used for commercial purposes.

While Israel and its Arab neighbors stand at very different levels in terms of development, technology, and standards of living, all of them suffer from similar misallocation of water resources, and for similar reasons. The following discussion concentrates on Israel because much of what holds true for Israel, the most studied country, applies to the others as well.

To appreciate the water issue, it is important to understand the geology of aquifers. Underground reserves of water and other underground natural resources (such as oil) produce a flow at a relatively permanent steady-state level, with some seasonal fluctuations in water flow. Overpumping a water aquifer damages this natural flow, leading to its decrease and sometimes allowing salt and other pollutants to seep into the porous underground caverns that serve as reservoirs. In some aquifers, such damage is irreversible in the short term. Once the water is polluted, recovery to potable standards can take decades because of slow flows, and the need to dilute the pollutants to levels that are normal or acceptable.

All the aquifers under Israeli control have been overdrawn in recent years.1 The complete absence of any restrictions on pumping in the Gaza Strip means that Gazans are drawing down their aquifer at about twice its natural rate, leading to seepage of salt water into the aquifer and its eventual reduction or elimination as a source of potable water. Excess pumping also has seriously damaged the Coastal Aquifer in Israel, contaminating it with salt water. Sewage water and other pollutants have seeped into the Mountain Aquifer, and Jordan's aquifers also have been dangerously drawn down.2

Israel's existing water policy was the target of an extremely critical report published by Israel's State Comptroller in December 1990. The report concluded that "irresponsible management of the water supply for 25 years has caused the destruction of the water reserves of Israel and serious damage to water quality. Excess pumping from water reserves over many years has caused a hydrological deficit of the most severe proportions." It also determined that Israel's water policy threatens severe ecological damage.3 The natural replenishment capability of rivers makes them much less of a long-term environmental or economic problem.

I. ISRAEL'S WATER PROBLEM

The water problem in Israel results from a host of mistakes: narrow special interests controlling water-use decisions, faulty pricing assumptions, rigid usage patterns, subsidies, penalizing users of low-cost sources, and hidden income distribution.

Political control. Subject only to oversight by the Knesset (Israel's parliament), and in particular by its Finance Committee, the minister of agriculture is the supreme governmental authority charged with formulation of water policy. The minister appoints an advisory Water Commission, as well as the directors of other public-sector agencies that play a role in water development, pricing, and supply, such as TAHAL (an agency for developing new water resources). Mekorot, Ltd., a government-owned corporation, pumps and transports about 60 percent of Israel's water, including that drawn from the Sea of Galilee, leaving small private suppliers in control of the remaining 40 percent through a system of licenses and quotas.

Subordination of water policy to the minister of agriculture leads to problems, for the minister is a natural advocate for the farm interests, which consume some 70 percent of the water needs. Similarly, the farm lobby has dominated the Knesset Finance Committee, whose members have traditionally included many representing farm interests and related sectors. The internal politics of Israel's parties and the coalition system of government has resulted in such skewed representation. Hence, there is a conflict of powerful interests at the heart of water policy. Giving farm interests control over water consumption is like giving the cat control over cream consumption at the dairy.

Water rights are allocated administratively by politicians and political appointees, who allegedly base their decision on "fair" and "objective" criteria in public statements and reports that do not set forth measurable specifics. If that's the case, why are these criteria secret? The public cannot learn why Kibbutz A receives three times per capita more than Moshav B. Nor can it find out the criteria for allocating water among competing farm sectors, such as cotton and citrus.

In fact, the makers of Israel's water policy do not have any objective criteria for allocating water used in agriculture. Precedent appears to be the only explanation for who gets what. A producer who received a certain amount in the past will generally continue to receive at least as much in the present, with no regard to alternative uses, commercial considerations, or even drought conditions. In a sense, allocations have become entitlements. Past clout has turned into permanent patronage. Less powerful interests lose out in a system in which non-agricultural interests are peripheral.

To remedy this situation, a new reform-minded water commissioner in November 1991 proposed taking 20 percent of farm water and allocating it through an open competitive auction. This and other reform proposals led to deafening jeremiads from the organized farm interests with political muscle, who (for good reason) like the existing system. As a result, the idea of a limited auction was quickly dropped. When the Labor government came to power after the July 1992 election, one of its first actions was to fire that water commissioner and replace him with one friendlier to the entrenched farm interests with historic links to the Labor Party.

In short, water allocation in Israel is based upon political influence, not commercial considerations.

Cost pricing. The water commissioner, who works cooperatively with the minister of agriculture, pegs the price of water on the basis of pumping and transportation costs. But this is completely the wrong premise. Pricing water on costs makes no more sense than pricing oil on the basis of how much it costs to pump and transport it to market. The price of water should be based upon social opportunity costs, that is, the value that potential users would assign to it were it sold at a competitive auction. There is evidence that this is at least three times current agricultural water prices.4

Charging too little for water creates incentives for waste and overuse. It also discourages development of new, more expensive sources of water, even when that water costs far less than its true value to the economy.

No flexibility. Once allotted, water rights cannot be transferred without permission. The Water Commission strictly prohibits the reselling of water rights by farmers to other farmers or to urban users; indeed, such acts are subject to criminal prosecution. The Ministry of Agriculture recently announced that it was investigating 180 cases of illegal reselling of water and land rights, and assigned this task to the "Green Commandos,"5 a quasi-police force used by the ministry to suppress other "illegal" agricultural activities, such as the production of food by those lacking a production quota.

Farmers may not even redirect their own allotment from one field to another or from one crop to another without prior approval by the water authorities. This perpetuates misuse by not allowing farmers to transfer water from less productive to more productive uses. So as not to disturb their favorable situation, farmers are content to stay with their past practices and do not respond to market forces and changing consumer choices.

A farmer who sells his land cannot sell his water allotment together with the land, and must include a clause in the contract in which the buyer attests to having been forewarned of this. Hence water and land productivity is further distorted by the suppression of transferability of land and water allocations without government approvals.

Lastly, farmers who temporarily consume less than their full water allotment find their allotments cut in subsequent years. This creates an incentive for farmers to waste water. Just as a cabinet minister or program manager spends all his budget for fear that next year's budget will be cut, so farmers use all their allotted water to preserve their share, even if that means dumping it down the drain. Of course, this leads to waste and distortions.

Contrarily, farmers can consume water far above and beyond their allotments with little fear of punishment because the penalty surcharges continue to keep the water prices at about one-third of its social opportunity cost.

Subsidies. Not only is water underpriced but farmers often do not even pay the nominal prices they are supposed to be charged. In an example of exceptional financial arrangements by the Knesset to powerful special interest groups, the Ministry of Agriculture budget contains a item for water subsidies to pay the value added tax on water consumed by farmers. Water subsidies amount to about $120 million annually and have become the most expensive subsidy in Israel after that for public transportation. It reduces the price of agricultural water an additional 17 percent.

There is a subsidy involving seasonal water use. Although water should cost more in the summer because of seasonal reductions of supplies and increased demand, the ministry applies no surcharge for water used at that time of year.

Another form of indirect subsidy concerns the underpricing of the pumping and distribution services of Mekorot, Ltd., which charges too little even to cover its own capital depreciation. To compensate, Mekorot has repeatedly sought and been awarded budget supports and bailouts from the government.

Equalization fund. A water "equalization fund," which operates somewhat as did the U.S. "equalization fund" for petroleum in the 1970s, distorts the analysis even further. The fund penalizes those with access to cheap water sources, such as farmers with their own wells, and distributes the proceeds to those who use more expensive water sources. Again, "fairness" supposedly motivates this policy, but the result is a further distortion of water allocation. It subsidizes the use of the most expensive sources of water. And it eliminates the incentive to seek out and exploit cheaper water sources; why do so when the savings will be expropriated?

Hidden income redistribution. The low price of water to farms amounts to a hidden income redistribution of wealth to farming interests from the rest of the population. Urban users pay much higher rates for water than farmers. City dwellers obtain water through the municipalities, which pay about three times the farmers' price, then resell the water to urban consumers, including households and industry, with markups of 100-200 percent. Urban consumers end up paying three to nine times more for water than farmers pay. Expensive as it is in Israel, urban water also goes for far less than its social cost. Thus, neither farmers nor urbanites paid the social cost of water; auctions would produce higher charges for all Israelis.

Exporters of Israeli agricultural products also benefit from this hidden subsidy given the farmers, and such benefits are passed on to the foreign consumer in the form of lower prices (a middle man absorbs them instead). When the farm economy is distorted, Israeli farmers export Israel's water for too little money. In a sense, a large portion of Israel's water resources are exported as farm products. The country's limited water supplies could be used much better to generate different export products. The famous Jaffa citrus in its day was an excellent export for an immature, non-technologically oriented economy, but in the geopolitical environment of today, subsidizing is impossible to defend. Increased water prices might reduce agricultural production in Israel, which might not be a bad idea, or export shares would go to the most efficient, productive farmers.

THE MIRACLE OF THE MARKET

As long as political considerations determine the distribution of water, there is no way to ensure proper distribution and water will be wasted. The solution must be to divorce water distribution from politics.

Auction. An open competitive auction offers the best method to allocate water rights.

Water users should submit bids for water use in the same way that bids are submitted for scarce and valuable issues of government bonds. The allocation would go to the highest bidders. The auction should be based on two forms of bids, again much like bond issuings. The municipalities, industries, and small farmers would be permitted (but not required) to submit noncompetitive tenders, where they stipulate the amount of water they wish to buy, agreeing in advance to pay the average price that the auction will produce from the competitive bids. All other users would submit a competitive tender, stipulating a price. At the auction, the quantities of water requested by the noncompetitive tenders would first be set aside. The remaining amount would be sold to those who submitted competitive tenders, starting with the highest bid and working down the list of tenders until the full amount of water has been allotted.

Auctioning has the virtue of identifying the most productive potential users of water among the farmers, manufacturers, municipalities, etc. Those who can extract the greatest economic value from the water will pay the most for it. Because the water produces the most market value for them, they are the ones capable of bidding the highest prices for it in an auction. Thus, the purchasers are the most productive producers--not the farmers with the most political influence.

Those farmers for whom the water generates less than the true economic and social value would be excluded because of their inability to bid competitively. That way, the less efficient or productive farmers would drop out, leaving only the more productive to consume water. The auction pricing also would eliminate or curtail excess demand for water.

Economic efficiency requires the complete elimination of subsidies. But, if for political reasons a government wishes to continue subsidies for water use after its adoption of an auction mechanism, it could do so. States could support and compensate low-income farmers and other water consumers in ways besides water subsidization. For example, the poor in cities could receive direct grants for water. The taxation system also reflects what the political institutions, such as the Knesset, deem to be socially and politically desirable ends. This way, the choice to subsidize will be above the table, not in deals hidden by the bureaucracy.

Resale of water rights. Secondary market trading in water rights should be permitted. A water rights exchange (like a stock exchange) could operate, or water rights brokers could make matches using traditional market responses. Anyone would be permitted to buy or sell water rights in this secondary market. Individual users would be charged an amount based on location to cover costs of transporting the water on a pay-as-you-go basis. There should be no artificial impediments created by regulators to the formation of futures contracts for water rights and other water-based financial instruments, which would be useful for risk-hedging purposes.

The resale of water rights, it is important to note, can take place even in the absence of a competitive auction. Though not ideal, this would be much preferable to the prohibition currently in place in Israel. Such is the case in California, where the water market is also distorted, but where resale of water is explicitly permitted. This process neutralizes much of the damage from water policy.6 In recent years, California has even begun permitting farmers to resell their water allotments for urban and suburban use.7

Under this arrangement, farmers who receive the rights through political muscle can then resell these rights to the highest bidders--who will tend to be the most productive users. Such reselling exposes the unfairness of the politicized allotment, but that unfairness would not be worse than that which exists under the current system. The advantage of reselling lies in that the water ultimately ends up with those who can best use it.

The government's role will be limited to conducting the auctions and policing the consumption. This supervision is necessary as a response to the "soda fountain effect": Two consumers of the same underground resource tend to behave like two teenagers at the soda fountain drinking with different straws in the same glass: each tries to get as much out as fast as possible. Such effects have been notorious in Texas oil fields and elsewhere.

These solutions apply to Israel's neighbors as well, for they also suffer from misallocation of water due to political decisions and politically based allocations. State controls in Syria are ubiquitous. In Jordan, the government underprices and rations water. The Palestinians have not yet developed a water policy, but the prevalence of statism and central control in Palestinian economic thinking is clear, and likely will be reflected in water policy. Indeed, throughout the Muslim world, state control of water resources is common, a view supported by Islamic law, which decrees that resources beneath the land belong not to the owner of the land but to the state.

II. THE INTERNATIONAL PROBLEM

Water is frustratingly oblivious to the boundaries of national political sovereignty in the Middle East,8 for the imperial powers established national borders after World War I that paid almost no attention to hydrological concerns.

Most of Syria's water comes from rivers whose sources are in Turkey (the Euphrates and the Orontes). The growing belligerency between Syria and Turkey over those sources is a potentially explosive political conflict, one too-little noticed by the Western media. Water control dams built in Turkey have the ability severely to restrict water flows into Syria. Even less noticed is the conflict developing between Syria and Iraq over Syrian plans to begin pumping water from the Tigris River.9

The Jordan River is a major source of potential conflict. Its headwaters flow from the Golan Heights and from Lebanon. It is the international border separating Israel from Jordan, and now will be a border of the Palestinian autonomous zone as well. All these parties must share Jordan River water. Other waters are also ripe for dispute. The Yarmouk River borders Israel, Jordan, and Syria. While the Sea of Galilee lies wholly within Israel, its waters may be used to supply Jordan, Syria, and the Palestinians in future accords. Israel depends heavily on the Mountain Aquifer, which lies largely below the West Bank and is likely to serve as the main source of water for the Palestinians.10

Division of water resources is likely to become a more acute problem as a result of the Israel-PLO accords and as the Palestinian Authority begins to exercise some control over the area's resources. It is extremely unlikely that the Palestinians will seek to consume less than they do now, further exacerbating the danger of overconsumption. The existence of two or more authorities (Jordan may play a role as well) creates serious difficulties for water policy and harmful incentives for overconsumption and overpumping. The issues are economic, political, and legal.11 This problem is somewhat like the phenomenon of gross overpumping of oil in the Texas fields early in this century, which also had a soda fountain effect.

Every one of these sources of shared water has served as the focus of political or military conflict, and each carries the danger of future conflict. Part of the problem, of course, is that politics does not offer satisfactory ways to allot water use rights among the contending countries without the assertion of force or the fear of such force.

APPLYING MARKET SOLUTIONS

Our recommendation, therefore, is to develop a system that puts politics aside as much as possible. The water itself should be sold commercially and competitively. This would leave the states arguing not about the distribution of water but about the distribution of revenues from the sale of water rights.

We envision a large auction at which individual users or potential resellers from all interested countries participate. Farmers, municipalities, and industries from Israel, Jordan, the Palestinian areas, Syria, and Lebanon could submit bids for water from the different regional sources, including the rivers and aquifers. The water would be assigned to the highest bidders, regardless of nationality. Market auctioning ensures water will be used productively, creates incentives for expanded supplies, and uses pricing mechanisms to cut down waste and overconsumption. And it maximizes revenues.

This proposal still leaves two issues unresolved: the global amount of water to be used and the distribution of revenues. Both are essentially political (not economic) issues, and need to be resolved by the participants through a political process.

A coordinated agency of the governments involved must set limits to total consumption from shared water resources, such as the international rivers and the Mountain Aquifer. This by nature of the undertaking must involve a degree of coordination and collaboration not often seen between Arabs and Israelis. Total water quantities to be used should be determined according to hydrological and environmental considerations by an independent panel of engineers, geologists, and economists without ties to any interests, especially not to agricultural interests.

Establising a system to distribute revenues is a political, not an economic issue. Water revenues could be distributed, for example, proportionate to population or gross domestic product. With an auction in place, no state should be concerned if the water is sold to users in other countries, for it will get substantial revenues. With an auction, the debate would no longer be about water but about money.

These steps will guarantee efficient water use in the entire region. But at the moment, the varying political, economic, and ideological orientations of all players seem to rule out any such resolution. Neither Israelis nor Arabs have yet reached the degree of faith in market allocation that was long ago reached through consensus in most of the world. Other political difficulties may arise due to emotional residuals from the long conflicts that have existed in the region. Will Arab authorities really acquiesce to Israeli users' out-bidding them for water, even when they retain much of the revenues from its sale?

THE AMERICAN ROLE

The involvement of the United States is a prerequisite to resolving the conflicts in the region, as evidenced by the signing of recent agreements in Washington. As the accepted intermediator in diplomacy and as an advocate for freer markets, the United States can help educate all parties about the market and cajole reluctant diplomats to consider these options. It can help set up the international commission to help determine the amounts to be used and revenue distribution. Through direct and indirect channels, the United States could nudge all the parties toward market allotments and adoption of pricing mechanisms. As part of the emerging focus on regional economic development and cooperation, Washington could and should urge the elimination of existing distortions. Such results should be considered as prerequisites to U.S., European Union, and other funding of large-scale water projects in the region.

What about developing alternate sources of water for Israel and its neighbors? At present, none of them appear commercially viable, for the current gross underpricing of water ensures the nonviability of imaginative projects to augment water supplies. These include: large-scale water desalinization, the better use of waste water, the importing of water from Turkey through a "peace pipeline" or the so-called Medusa bags (huge sacks full of sweet water towed through the Mediterranean), and the building of a canal from the Mediterranean to the Dead or Red Sea (a plan originally envisaged by Theodore Herzl). And if these projects do have validity, the realistic pricing of water would make it possible to make this clear in economic feasibility studies.

Rather than turn to such imaginative and expensive schemes, the Levant should turn to a much more feasible solution: a sensible allocation system based on the market. Water is far too scarce and important for the states of the region to rely on the political calculus of officials in power at any given moment. The marketplace does this better than any political mechanisms.


1 On the environmental and geographic issues involved in excessive consumption, see Arnon Soffer, Naharot Shel Esh (Tel Aviv: Am Oved, 1992). For a discussion of Israeli water policy, see Zvi Greenwald, Alternativot Mediniyut Hamayim B'Yisrael (Haifa: Neaman Institute, Technion, 1980).
2 Miriam R. Lowi, Water and Power (Cambridge: Cambridge University Press, 1993), pp. 158-59.
3 See The New York Times, Apr. 21, 1991. See also Doah Al Neehul Meshek Hamayim B'Yisrael (Jerusalem: State Comptroller, 1990), pp. 7-10.
4 Steven Plaut, "The Social Value of Water in Israel" (forthcoming).
5 Yediot Aharonot, Aug. 26, 1991.
6 Ronald H. Schmidt and Steven Plaut, "Water Policy in California and Israel," Economic Review, Federal Reserve Bank of San Francisco, no. 3, 1993.
7 Business Week, Mar. 2, 1992.
8 Jad Isaac and Hillel Shuval, eds., Water and Peace In the Middle East, proceedings of the First Israeli-Palestinian International Academic Conference on Water, Dec. 10-13, 1992, Zurich, Switzerland (Amsterdam: Elsevier Science, 1994).
9 See Soffer, Naharot Shel Esh.
10 Eran Feitelson and Marwan Haddad, eds., Joint Management of Shared Aquifers: The First Workshop, June 27-29, 1994 (Jerusalem: The Truman Institute of Hebrew University, 1994).
11 On the international legal issues, see Deborah Houser-Couriel, Some Examples of Cooperation in the Management and Use of International Water Resources (Jerusalem: Truman Institute of Hebrew University, 1994), esp. chapters I, III, and IV.