Looking to another kind of liquidity

The severe drought which has afflicted large parts of central and southwest China this year could yet have benefits as a wake up call.

It often takes a localized natural disaster to change policies at national level – British air improved after the great London smog of 1952, and maybe hurricane Katrina will result in radical changes to coastal management in the US.

The immediate effects of the drought are mainly on agriculture in the stricken areas. But they are a reminder that water shortages are endemic to much of north, west and central China. New demands on its use for households and industry as well as agriculture ensure that the issue can only get more pressing in the future.

It seems unlikely that any single policy, such as China’s plan to divert river water from surplus areas to deficit ones, is sufficient to cope.

The shortages in the north are already more severe than is generally imagined because few take account of the rapid depletion of groundwater. Supply must either be increased or demand cut back to the point where water table levels are stabilized.

Problem-solving

What are the solutions? First, in areas where water is scarce, it must be appropriately priced. This will hurt farmers but the fact is that land productivity in northern China is very high – too high for the water resources – while labor productivity is generally low. Those forced off their land will move to the cities and China could well do with faster, not slower, urbanization, even if this sees the emergence of urban slums and puts downward pressure on unskilled urban wages.

Furthermore, higher water prices for farmers would not necessarily cause a fall in agricultural output. It should, and with the right encouragement could, result in much more scientific use of water than at present and a shift from thirsty crops to not-so-thirsty ones.

The price, however, would be to admit that the goal of grain self-sufficiency is counter-productive, if not environmentally dangerous, unless there are big changes in where and how grain crops are grown.

Pricing can also have a huge impact on the usage of water by industries and households. Waste of water is currently the norm because water is cheap and there are few incentives to recycle it, or deterrents to dumping contaminated water into river systems, further reducing the amount of clean water available nationwide.

Any new pricing policy would have to take account of the fact that the situation is not the same all over China. The southern half of the nation generally has a more than adequate actual or potential supply of water. Indeed one could argue strongly that policies aimed at diverting water to the north are hugely expensive and economically inefficient. They are politically driven and their benefits probably exaggerated.

Correct water pricing would see a shift of production, rural and industrial, towards the better endowed south.

In agriculture there is already greater potential for improving land productivity than in the north, even excluding the water cost factor. Include it, and the disadvantages of continuing intensive cultivation in endemically dry zones become stark.

Likewise there are many water-using industries which arguably should be close to cheap water sources just as historically heavy industries have tended to grow close to coal and iron ore sources.

Obviously a policy of huge water cost differentials has political problems. Given this, and the potential impact on the geographical distribution of the population, it would have to be phased in gradually.

But China’s reform period has already produced huge population movement, rural to urban and center to coast. Mobility is a sign of dynamism and feeds continuing economic growth. For China, a high and diversified price for water would be an investment in the future and a way of raising productivity through the pricing mechanism rather than spending huge sums on diversionary schemes that address the symptoms, not the cause, of the problem.

Damning the dams

It will also reduce the need for major river damming projects which are under attack for environmental reasons.

On the upper reaches of rivers such as the Salween, Brahmaputra and Mekong, the lifelines of Myanmar, Bangladesh and Vietnam respectively, such dams are also a threat to good relations between China and its neighbors.

Though these are for hydroelectric rather than water usage purposes, they are a reminder of the interconnected nature of rivers and environmental systems.

Investment in water-saving farm techniques and in urban and industrial recycling could well have spin-off in terms of exporting China’s skills and products. Progress in this area can help avoid the kind of water wars which threaten to make the Middle East even more dangerous.

India, too, needs even greater progress in water management to reduce its susceptibility to the vagaries of the monsoon and improve conditions in perennially dry parts of the country.

For now, most environmental and health focus is on air pollution, an all too obvious major problem in most of China’s big cities and many of its smaller ones. But the water crisis effects the whole country, even the well-watered south where contamination rather than shortage is the problem.

The water crisis is also more difficult to resolve than air pollution. It could and should be the single most discussed and acted-upon issue of the coming decade.