1. Introduction

1. Introduction

This chapter argues that the old institutions governing water in MENA are suffering from lack of legitimacy and trust to manage the 21st century problems of allocating water amidst drastic scarcity, induced by climate-change and population-growth. Institutions are unable to win voluntary compliance with restrictions on the quantity of water that can be used, or the tariff that needs to be paid to cover the costs of delivering water services. That is, water regulations and tariffs lack legitimacy. Lack of trust in and among utility staff and managers, that they can improve water service delivery performance, keeps utilities persistently inefficient and underfunded. Global capital is not flowing sufficiently to finance water infrastructure in MENA because investors are not assured of recouping steady returns. Returns to capital are risky because available evidence suggests that the infrastructure that would be financed is not well managed for cost efficiency and revenue raising potential. Attracting private investment, while representing citizens’ interests in the face of monopoly power, requires a legitimate or credible policy environment, trusted and creditworthy state agencies. But political conditions in the region are such that global markets worry about policy legitimacy, lack of transparency and creditworthiness. The chapter provides ideas for institutional reforms, using the crisis and emotive power of water in MENA as an opportunity.

Water has been at the core of the development of national identities and social contracts in the history of Middle East and North Africa (MENA) region. For example, the level of annual flooding of the Nile had a big impact on Egyptian agricultural productivity and the tax revenues that could be raised from agriculture. To assess taxes more ‘fairly’ later Ptolemaic rulers of Egypt (305–30 BC) built temples along the Nile and installed Nilometers in them that measured the level of the river. In turn these levels were used to determine the annual level of taxation. Throughout history, the institutions for investing and managing large-scale irrigation water have been linked to centralized forms of power: pharaohs, sultans, emperors, kings, colonial administrations and post-independence central governments (Wittfogel 1957).

When the modern nation states of the region came into being in the first half of the 20th century, they pursued a development model and a social contract which has been characterized as “interventionist-redistributive” (Yousef, 2004; Richards and Waterbury, 1996). States assumed a commanding role over the economy, investing in large infrastructure like dams as part of an economic plan for development. States also assumed a welfarist position of providing for the basic needs and well-being of their citizens in exchange for acquiescence with a closed political system (Brixi et al, 2015). Legitimacy of the state was shaped by the state managing economic and natural resources to deliver public services and the necessities of life—food, fuel, water—at low prices, subsidized below market or costs of production. Water infrastructure was crucial for both these roles—of intervening in the economy to promote development and of providing services for well-being.

For example, the building of the High Aswan Dam in Egypt, the Sefidrud and Karun dams in Iran, Mosul dam in Iraq and many other dams across the region were iconic symbols of nation building, enabling the expansion of both irrigated agriculture and electricity production. These dams were more than development projects within a rational planning framework, they symbolized modernity and command over nature. Between independence and the 1980s Morocco more than doubled the number of dams, expanded the irrigation area from 70,000 ha to over 800,000 ha, and added over 1000 MW of hydroelectric capacity (Bourblanc and Mayaux, 2016). States gained popular support, or legitimacy, from these mega-projects and the associated expansion of services.

This development model achieved some success in the 1950s and 1960s, delivering sustained economic growth and dramatic improvements in human capital (Elbadawi, 2002; Yousef, 2004). Various political economy analysts have argued that the early success, immediately post-independence, was aided by the geopolitics of oil and the access of states to external financing, allowing them to keep their part of an “authoritarian bargain” (Yousef, 2004; Desai et al, 2009). However, by the 1970s, macroeconomic conditions became adverse—states found they could not afford the fiscal burden of various subsidies. Furthermore, the myriad state-owned enterprises (SOEs) that had initially contributed to industrialization and employment, began to show signs of mismanagement and poor financial health (Yousef, 2004; World Bank, 2009). Economic reforms of market liberalization and privatization of SOEs were pursued as the solutions to rising problems of unemployment, low productivity and slow growth, but with ideological and vested-interests’ resistance (Dasgupta, Keller and Srinivasan, 2002).

The early institutions that were established to enable structural transformation of economies in MENA have been revealed to suffer from two, very different, problems: (1) too much state control, too little space for entrepreneurship and markets; and, on the other hand, (2) too little state control over the problem of environmental externalities, and too little state capacity to raise revenues to finance appropriate public investments. Water in MENA exemplifies the second problem. Water is a very different product than what is typically analyzed in economic markets. Its physical properties are such that no country in the world has relied entirely on market institutions for its allocation. Across the world, including in the most advanced market economies, water resources are owned by states, or public institutions. Significant sources of renewable water, such as rivers and lakes, are national property, or, a local common. Private property rights over water are limited and often linked to land ownership. Water utilities that supply water for drinking, sanitation and other household use, are typically state or municipality-owned, even in an advanced market economy like the United States (Masten, 2011). If and when private firms are invited to build and operate utilities, the process of “privatization” involves negotiation with state agencies or regulators over the terms of production, supply and pricing of water services (Galiani et al, 2005).

Institutions of state, government and local common property governance thus play inescapably significant roles, even when some parts of the production or supply of water services are privatized. Privatization of water services is not expected to automatically deliver the efficient outcomes as other markets in the logic of economic theory, because the conditions for those efficiency results are absent in water.1 States, or government agencies would need to purposefully design those market conditions and the property rights that the logic of economic theory identifies as the conditions for efficient allocation of scarce resources.

The 21st century experience with the impact of climate change and population growth has brought to the fore another reason for the inescapable role of state institutions in allocating water—a massive, unforeseen, “common-pool problem” where the equilibrium outcome of individual consumption by millions and billions of people involves rapid depletion of the resource. The problem of water scarcity in economies, including not only in MENA but in the most advanced market economies with otherwise strong institutions, is driven by lack of institutions to price the “externalities” associated with the consumption of water (Leonard et al, 2020). The world lacks sufficient understanding of how to design these institutions so that water use can be appropriately regulated, and fairly shared across its competing needs. This chapter

1 A powerful result from the logic of economic theory is that market institutions that enable decentralized and voluntary exchange among individuals are likely to allocate resources for greater net gains to society compared to allocation decisions made by a central planner. This logical argument has also found empirical support in variation across countries in economic growth and prosperity, with market-oriented reforms associated with more healthy economies (Rajan and Zingales, 2003, provide a review). However, water is a commodity with physical properties such that the private property rights needed for decentralized and voluntary exchange are not well established. For example, even in the case of delivery of water by private tankers to individual households, which may appear as a decentralized and voluntary exchange, access to the source of water is not, with property rights over the commodity being illdefined, violating a fundamental condition for market efficiency.