Issues in reforming informal water economies of low-income countries: examples from India and elsewhere.

Abstract

AbstractThe past decade has witnessed a growing sense of urgency in reforming water sectors in developing countries like India faced with acute water scarcity. India, like many other developing countries, is still focused on building water infrastructure and services, and making these sustainable in all senses of the term. The new wave of ideas is asking it to move from this supply-side orientation to proactive demand management by reforming water policy, water law and water administration, the so-called 'three pillars' of water institutions and policies. But making this transition is proving difficult in India and elsewhere in the developing world. Here, making water laws is easy - enforcing them is not. Renaming regional water departments as basin organizations is easy - but managing water resources at basin level is not. Declaring water an economic good is simple - but using the price mechanism to direct water to high-value uses is proving complex. This chapter explores why. It distinguishes between Institutional Environment (IE) of a country's water economy, which comprises the 'three pillars', and the Institutional Arrangements (IAs), which refer to the humanly devised rules-in-use, which drive the working of numerous informal institutions that keep a vibrant economy well lubricated. The relative influence of IE and IAs varies in high- and low-income countries because the water economies of the former are highly formalized, while those in the latter are highly informal. In high-income countries' formalized water economies, IE has an all-powerful presence in the water economy; in contrast, in highly informal water economies of low-income countries, IAs have a large role with the IE struggling to influence the working of countless tiny players in informal water institutions. The emerging discussion exhorting governments to adopt demand-side management overestimates the developing-country IE's capacity to shape the working of their informal IAs through direct regulatory means, and underestimates the potential for demand management through indirect instruments. Demand-management reforms through laws, pricing and rights reforms in informal water economies are ill advised, not because they are not badly needed but because they are unlikely to work. The real challenge of improving the working of poor-country water economies lies in four areas: (i) improving water infrastructure and services through better investment and management; (ii) promoting institutional innovations that reduce transaction costs and rationalize incentive structures; (iii) using indirect instruments to work towards public-policy goals in the informal sectors of the water economy; and (iv) undertaking vigorous demand management in formal segments of the water economy such as cities and industrial water users. Facilitating these requires that water resources managers adopt a broader view of policy and institutional interventions they can catalyse to achieve policy goals.