A prerequisite for an irrigation development program is a national economic policy framework that is conducive to agricultural growth. Chapter 4 reviews the policy instruments that can play a role in such a framework. Whatever the choice of instruments, it is essential that policies be configured in a way that provides adequate price incentives at the farm level for agricultural growth. Moris and Thom warn against undertaking irrigation projects 'where there are poor agricultural pricing policies, ineffective marketing facilities, high transport costs, or the unavailability of required agricultural materials'.41
The powerful influence of macroeconomic policies on water use is illustrated by the case study for Yemen, presented in the annex to this work. The most important aquifers of that water-scarce country are being over-exploited, with the consequence that water tables are dropping rapidly. It is urgent to encourage water conservation, and even at the margin to favor rainfed agriculture over cultivation based on tubewells. Nevertheless, of the 20 policy instruments examined in the study, all of them turned out to be biased in the direction of providing incentives for overuse of water.
Although the exchange rate was not a significant factor in the case of Yemen, at least at the time of that study, in some circumstances it can be the most important factor in determining whether irrigation investments will be worthwhile. The profitability of cropping is one of the most basic considerations in deciding whether to expand an irrigation network, and the analysis of Chapter 4 has shown that it depends crucially on exchange rate policy. This factor is so important that, as a general rule, it can be said that irrigation investments should not be undertaken if the exchange rate is significantly overvalued. Trade policies skewed in favor of the industrial sector also can undermine the profitability of irrigation investments.
The consequences for irrigation of unfavorable agricultural pricing policies include not only lower incomes for farmers, and therefore lower project returns, but also the inability of farmers to contribute to system maintenance costs, inadequate maintenance and therefore increasing physical deficiencies, and even partial or total abandonment of schemes as soils deteriorate and farmers find more remunerative alternatives elsewhere. The ability to arrest negative environmental effects is weakened. Net returns to water decline below levels that are obtainable from irrigation under more favorable conditions, which already are low by the standards of other water-using sectors. Thus, from a national perspective, expanding irrigation under policies that are biased against agriculture leads to wastage of water and the capital invested in the systems, environmental damage and failure to improve sufficiently the economic conditions of farmers.
Other basic elements of national policies for agricultural development include appropriate land tenure policies, effective transfer of agricultural technology and effective rural financial institutions. As Moris and Thom have summarized it, irrigation does not pay without attractive crop prices, security of land tenure, availability of inputs and credit and reliable water supplies.42
39. Inter-American Development Bank, 1997, p. 4.
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