CURRENT PARADIGM IN THE ECONOMICS OF WATER RESOURCES MANAGEMENT Mr. Sergio Ardila, Economist Environment and Natural Resources Management Division Regional 3, Inter American Development Bank Washington DC
Introduction The design, analysis and implementation of projects in water resources management (WRM) has been an important area of work for Governments and the private sector for a long time. Looking at the amount of financial resources lent by the IDB to countries in Latin America and the Caribbean during the last years we can get an idea of how important this field continues to be. Loans provided by the IDB during 1996 for environmental purposes totaled US$815.3 million, and 83% of that amount (US$677.9 million) was devoted to water resources related projects. In 1995, environmental loans amounted to US$795.6 million, and water resources related projects (US$753.6 million) represented well over 90%. The total amount lent by the IDB for environmental projects during 1992, 1993, and 1994 was well above US$1.1 billion, and again WRM related projects represented a significant fraction. Figures on investments carried out by the private sector are not readily available, but it could be expected that the numbers most likely surpass those above. We should not wonder why people keep asking all sorts of questions about the economic rationale behind these investments. These concerns have found answers in the dedicated work of academics, public officials, and staff at International Organizations who have worked on this subject for a long time. To present the current thinking on the economics of WRM 1 will briefly describe what it was approximately 25 years ago, then I will provide a summary of what we have learned from experiences during this time, and finally I will present what I think are the fundamental changes in the way we do economic analysis of policies and investments in general and water resources management in particular. This review shows that traditional ways to do economic analysis based on the dictates of welfare economics and its concern about efficiency principles are now complemented by more careful descriptions of the way economic agents interact taking into consideration the role of institutions and information on shaping incentives and economic behavior.
Economics of Water Resources Management During the 1970's The economics of WRM was developed initially from the basic principles of welfare economics and natural resource economics. Welfare theory provided the definition of economic efficiency as a criteria to judge resource allocations and production decisions, and the two fundamental theorems of welfare economics showed that efficient allocations can be achieved through a competitive equilibrium. On the other hand, natural resource economics showed us how the interaction of physical links, time dependencies and demand for renewable and non-renewable resources generate opportunity costs, and the dangers of ignoring them in the solution of allocation problems. These two bodies of literature were used by academics and practitioners to develop several practical applications like the well known fields of economic appraisal of projects, as a general subject, and its applications to the analysis of WRM investments. Environmental economics has been growing as an identifiable field in economics during the last 20 to 30 years, generating a wealth of policy recommendations and practical ways to look at pollution problems and natural resource management problems in general. It is customary now to think that natural resource economics deals more with stock related problems, while environmental economics has concentrated more on the policy issues 60