NOTES AGRICULTURAL & RURAL DEVELOPMENT WATER MANAGEMENT AND AGRICULTURAL TRADE BY: THE WATER FOR FOOD TEAM ISSUE 5 FEBRUARY Within two decades, one-third of the world population intense products (such as cereals), consequently ensur- 2006 will live in countries afflicted by water scarcity. In some ing them food security, and to pay for these imports areas, part of the increased demand may be met with exports of less water-intense, higher value added through investments in irrigation and water supply sys- cultivations (such as horticultural products). Likewise, tems and in nontraditional sources of supply. In other water-rich regions could grow water-intense products areas, such as the arid Middle East and North Africa (such as rice and cereals) and sell them to water-scarce region, the economic and environmental costs of devel- countries. This would lead to an increased economic oping water resources constrain expansion of supply. efficiency in the agricultural sector worldwide. This is There, development of water supplies will not meet often referred to as "trade in virtual water." growing demands. There will be a push for investments in water policy and water management reforms that More open trade in agriculture smoothes out the bumps increase the water use efficiency of existing systems. in the market, rather than aggravating them, as many However, even with substantial increases in the efficien- believe. More open trade allows food to move from cy and productivity of water use, many countries will not places where it is in surplus to deficit areas and enhances have enough water to satisfy minimum water require- the capacity of deficit regions to feed themselves.i ments for domestic uses and at the same time meet industrial, environmental, and agricultural demands for water. Since agriculture consumes by far the largest per- POTENTIAL AREAS FOR centage of water, most countries will take water from INVESTMENT agriculture, allocate it to other sectors, and rely on The linkages between agricultural trade, water, and increased food imports to meet their domestic needs. food security have important implications for agricul- tural development and water resources management Hence, agricultural trade is linked to food security and to strategies. The issues are broad and complex and do water management. Declining water availability in some not readily translate into investments. As water regions may be offset by openness of agricultural mar- becomes increasingly scarce, more investment kets. Indeed, global trade liberalization by developed resources are allocated to augmenting supply. These and developing countries would encourage water- investments (for instance in groundwater mining, scarce countries to expand imports of agricultural water- desalinization, irrigation scheme expansion, and trans- port of water through long pipelines) are less produc- tive than others, both at the national and at the household level. They also have negative environmen- tal implications. Trade will reduce this rising tide of allocative ineffi- ciency by switching incentives to less water-intensive crops in water-short countries and by directing increasingly costly investments to more cost-effective uses within the same sector. This reduction presup- poses an environment that enables rising public and private investment to switch from older water-inten- sive technologies to new knowledge-intensive ones. Such a switch will be helped by building new research and development (R&D) in skill-intensive responses in research and extension capacities, farming skills, infra- structure to develop alternative crops, water manage- ment techniques, marketing and supply enhancement, and POTENTIAL BENEFITS OF REFORM agro-processing. It entails shifting to a market-based agricul- Improved water management practices and trade in "virtual ture that is more water and resource efficient and that can water" can help alleviate water scarcity, release water for more therefore grow and absorb labor. efficient uses, increase productivity, and ultimately reduce food prices for consumers. Investments in these areas can therefore AGRICULTURAL PRODUCTIVITY. Meeting national and glob- drive growth and poverty reduction, both directly and indirect- al food security needs will require significant increases in water ly--because they may reduce food costs and supply uncertain- productivity. Key areas of investment will include the following: ties, improve the diets of the rural and urban poor, raise and diversify incomes, provide employment and entrepreneurial · Agricultural R&D (crop breeding for drought and salinity opportunities both inside and outside cities, and induce small- resistance) holder farmers' productivity gains, which would increase their · Rainfed agriculture opportunities for wealth creation and better integrate them · Crop diversification and creation of an enabling environ- into local, national, and international markets. ment for high-value agriculture · Agricultural risk management WATER RESOURCES MANAGEMENT. Enhancing water con- POLICY AND servation in agriculture is already imperative in many countries IMPLEMENTATION ISSUES to meet demands from increasing urbanization and other sec- AGRICULTURAL PRODUCTIVITY. Some of the core areas to tors. Water resources development will continue to be impor- be addressed for increased water productivity are integrated tant in some regions (such as Africa) but in other regions, farm resources management and agricultural research and increasing water use efficiency at the field and basin levels will extension. be critical to moving water to high-value uses. Key recommen- dations include: Agricultural research shows that significant and sustainable improvements in water productivity are attainable only through · Modernizing irrigation systems integrated farm resources management. Water use-efficient on- · Inducing investment through public-private sharing farm techniques coupled with improved irrigation management · Institutional and policy reforms options--such as supplemental irrigation, deficit irrigation, · Promoting Integrated Water Resources Management and water harvesting; better crop selection and appropriate (IWRM) cultural practices; improved genetic make-up; and timely socioeconomic interventions--can help achieve this objective. TRADE FACILITATION. Trade facilitation will be important for countries that need to increase their competitiveness, as well as Scientific research has allowed global food supplies to out- for water scarce regions that need to ensure food security. This pace increases in demand. Evidence from China and India "behind-the-border agenda" includes anything from institu- shows that public expenditures on agricultural research and tional and regulatory reform to improving customs and port extension have the largest impact of all possible rural invest- efficiency. It is intricate and costly to implement. The World ments on growth in agricultural productivity and generate Bank attaches great importance to trade facilitation--as reflect- large benefits for the rural poor. However, investment in ed by its portfolio of 80 active projects totaling US$4.6 billion. research usually pays dividends only years, if not decades, Box 1 offers a sample of Bank-financed projects for trade devel- after the decision. Some important research areas include opment in agriculture. crop breeding to improve adaptation to moisture and tem- perature stress, and promotion of effective risk management. Box 1: Trade-Related Lending The two largest categories of World Bank trade-related lending in 2002 were loans for (1) export development (such as the Foreign Investment and Export Facilitation Project in Armenia) and competitiveness, and (2) trade financing. In Mauritania, the Bank will provide support through livestock and agricultural competitiveness projects (that address standards issues) as well as port modernization and airfreight projects to expedite trade. In addition, the Bank participated in the Standards and Trade Development Facility, an interagency partnership with the World Trade Organization, Food and Agriculture Organization, and World Health Organization, which will deliver technical assistance for food safety and related standards. Source: Tang 2003. 2 A necessary complement to scientific research for increased (2001). Perceptions of national interest in food self-sufficiency food production is the development of a market for the addi- too often lead governments to hoard food stocks, artificially tional products and/or quantities, to ensure that increased encourage production, and limit imports. Even where the inter- productivity is translated into increased income for farmers. national market offers an alternative source of food, the idea of Hence, agricultural trade is fundamental in ensuring the divi- dependence on external sources is anathema to many policy dends of research. Moreover, enhanced investment in educa- makers and their constituents in the North and South. Food self- tion, training, and rural infrastructure to improve the adaptive reliance and independence from foreign interference, even at ability of farmers and the rural economy generally is of para- demonstrably higher costs to the nations involved, are popular mount importance in complementing agricultural research forms of nationalism (Runge, et al. 2003). However, these atti- and extension. tudes are gradually giving way to the more enlightened view that food insecurity is a problem caused mainly by poverty WATER RESOURCES MANAGEMENT. In most regions, only and the consequent inability of the poor to buy food, not by new conservation efforts, and new policies promoting it, can insufficient national production. It follows that insecurity is send the signal that water is scarce. The appropriate combina- increased by tariff and nontariff barriers to food imports and tion of investments in hardware and in policy reforms varies. therefore cannot be resolved without an effective poverty reduc- Water policy reforms should balance improved management at tion strategy. the river-basin level with decentralization to the private sector or community-based user groups at the subbasin level. The The distributional consequences of global agricultural trade policies needed to improve water management include making liberalization are complex and country specific. Managing resource allocation in agriculture more flexible by removing the transition politically, economically, and socially is the main subsidies and taxes that distort incentives and encourage mis- challenge. use of resources, as well as by establishing secure property rights in land and water. Box 2: Linking Farmers to Markets: TRADE FACILITATION. The greatest benefits from agricul- Exporting Malian Mangoes to Europe tural trade will come from a tandem of reduced policy dis- tortions in domestic markets coupled with increased access In Mali, a pilot project to export fresh mangoes to to the developed countries' market. This will also necessitate Europe put in place an efficient supply chain man- reforms in marketing and market organization. Box 2 pres- aged by a not-for-profit marketing agency and ents an example of how Mali has successfully exported man- private business investors through the goes to Europe, displacing traditional exporters such as India, Agricultural Trading and Processing Promotion Israel, and Brazil. Pilot project (PAVCOPA-Projet d'Appui à la Valorisation et Commercialisation des Produits Trade facilitation may, on the other hand, pose new challenges. Agricoles--Cr. 2737 [US$6 million]). Upstream, the Meeting these challenges will involve, among other things, cre- pilot helped producers improve their production ating a framework that encourages the private sector to offer and their knowledge of the marketing channels. risk management tools such as microfinance and insurance. Downstream, it established a partnership with an Modernization of agriculture may well require joint and collab- export company and improved export logistics. orative efforts with the International Finance Corporation (IFC), One innovation was setting up a multimodal ship- specifically with regard to industry and sector competitiveness ping system directly linking the Malian production assessments; design and support of schemes that allow the center to the North European customer market; integration of smallholder farmers into commercial supply and coordinating efficiently the entire supply chains; and the development of market-based-financing and chain. The returns to the producers make this suc- risk management instruments in selected countries. cessful pilot a good example of how to connect farmers to ready markets, promote private invest- Trade liberalization is likely to have impacts on the environment ment in rural areas, and further promote multiple and poverty intermediated through its effects on water and cross-border partnerships, while supporting demand.ii diversification and improving export logistics. LESSONS LEARNED Moreover, the pilot demonstrates that invest- ments can be profitable, and that constraints to marketing and export of agricultural products can The social and political implications of food security and trade be overcome with creative, adaptive, and profes- cannot be overstressed. Visible and effective opposition to glob- sional approaches. al trade and investment liberalization from civil society has mushroomed from Seattle (1999) to Prague (2000) and Genoa Source: Danielou, Labaste, and Voisard 2003. 3 POSSIBLE WORLD BANK INVOLVEMENT AND INVESTMENT dle agricultural development and technical support, includ- OPPORTUNITIES ing agricultural credit programs. This phasing will avoid the tendency of borrowers to emphasize the construction of infrastructure and to divert funding from later phases, such The World Bank has a variety of instruments, each of which is as technical assistance and agricultural development, to best suited to achieve goals related to agriculture and water. Agricultural productivity meet overruns for that infrastructure. · APLs, Development Policy Loans, and SWAPs are useful instruments for helping to promote a policy environment for · The range of investments for agricultural productivity include adopting water conservation through pricing, modern tech- policy, technical, and management reforms. It is important nologies, and the improvement of water quality. for investments to support agricultural competitiveness, · The need to compress rehabilitation costs and develop asset diversification and technology, planning, and feasibility stud- management strategies will increasingly drive investments in ies, as well as create agricultural strategies and agricultural irrigation systems. The emphasis will continue to focus on water strategies and improve market organization. selective rehabilitation to enhance the life of existing hydraulic · Development Policy Lending (DPL) and Sector-Wide infrastructure, and the SILs work well for this goal. Innovative Approaches (SWAPs) can be useful for supporting agricultur- approaches, like water trading and water rights (as in Chile al reform in the areas of policy and planning. and Indonesia) can be supported through LILs. · The more narrowly defined Specific-Investment Loans (SILs) work well for investing in methods to increase rainfed pro- Finally, on trade facilitation, investments using, among others, duction, such as crop-breeding research; inexpensive, gender- tools, technical assistance, and other types of loans are recom- sensitive, and pro-poor technologies; and enhanced manage- mended. ment strategies. SILs are also useful for supporting invest- ments in areas like infrastructure (roads, energy, water, com- munications) and other investments that aid in the vertical REFERENCES integration of agriculture into processing and local industry. Danielou, Morgane, Patrick Labaste, and Jean-Michel Voisard. 2003. · Finally, innovative investments such as weather-based insur- "Linking Farmers to Markets: Exporting Malian Mangoes to Europe." ance contracts, can be best supported through Learning and Africa Region Working Paper Series No. 60. October, World Bank, Innovation Loans (LILs). Washington, DC. · Moving forward, it will be important to improve collabora- Runge, C. Ford, Benjamin Senauer, PhilipPardey, and Mark tion between the Bank and the IFC, the private sector arm of Rosegrant. 2003. Ending Hunger in Our Lifetime: Food Security and the World Bank Group, on issues such as competitiveness Globalization. Baltimore: Johns Hopkins/International Food Policy assessments; integrating smallholder farmers into commer- Research Institute. cial supply chains; and supporting market-based financing Tang, H. 2003. "World Bank Activities on Trade." Trade Note No. 1, and risk management instruments in selected countries. May 29. World Bank, International Trade Department, Washington, DC. World Bank. 2004. Global Economic Prospects 2004: Realizing Water resources management the Development Promise of the Doha Agenda. Washington, DC: World Bank. · In water resources management, the Bank's Adaptable World Wildlife Fund. 2004. Macroeconomics Program Office and the World Bank. Program on Trade Liberalization, Rural Program Loans (APLs) are suitable tools for supporting irri- Poverty, and the Environment. Online at http://lnweb18.world- gated agriculture where a first phase can focus on feasibility bank.org/ESSD/ardext.nsf/12ByDocName/ProjectSummary/$FILE/ analysis; a second phase can deal with construction, supervi- WWFWBresearchsummary.pdf and http://www.panda.org/ about_wwf/ sion of construction, and start-up; and a third phase can han- what_we_do/policy/macro_economics/trade.cfm. i In an analysis of the impacts of a "pro-poor agreement" (When rich countries cut tariff peaks to 10 percent in agriculture and 5 percent in manufacturing, recip- rocated by developing countries' cuts to 15 and 10 percent.) in trade implemented progressively through 2010, the World Bank's Global Economic Prospects 2004 report indicates that by 2015 likely gains will be on the order of US$350 billion for developing countries and US$170 billion for rich countries (World Bank 2004). iiA World Wildlife Fund--World Bank program (World Wildlife Fund 2004) would contribute to the international development community's understanding of the economic, social, and environmental impacts of trade liberalization. This Note was prepared by Shobha Shetty, a Senior Economist at the World Bank, and updated by Salah Darghouth and Ariel Dinar from the Water For Food Team of the World Bank. It is based on Investment Note 1.3 in the larger volume Shaping the Future of Water for Agriculture: A Sourcebook for Investment in Agricultural Water Management. The book documents a range of solutions and good practices from World Bank and worldwide experience, concentrating on investments in policy and institutional reforms in technology and management to improve water productivity and farming profitability. You can download a copy of the full report at www.worldbank.org/rural or email ard@worldbank.org. THE WORLD BANK 1818 H Street. NW Washington, DC 20433 www.worldbank.org/rural