WATER AND COOPERATION IN THE MID

Jane Berkowitz Carlton and Dennis William Carlton Professor of Microeconomics Massachusetts Institute of Technology,

Mr. Chairman and Members of the Committee, it is a privilege to testify before you today.

My name is Franklin M. Fisher, and I am the Jane Berkowitz Carlton and Dennis William Carlton Professor of Microeconomics at MIT, where I have taught for 44 years. Most relevant to this proceeding, however, is the fact that, for more than a decade, I have been the Chair of what is now named the “Water Economics Project” (WEP), an international cooperative effort of Israeli, Jordanian, and Palestinian experts, facilitated by the government of The Netherlands with the knowledge – and sometimes the assent – of the three regional governments.

The assertion is often made that disputes over water will be a major cause of war in the present century, perhaps especially in the Middle East where water and disputes over water are among the seemingly everlasting problems. In particular, water issues are seen as forming an important part of the Israeli-Palestinian problem and are, of course, very important for Jordan as well.

This comes about because water is usually considered in terms of quantities only. Demands for water are projected, supplies estimated, and a balance struck. Where that balance shows a shortage, alarms are sounded and engineering or political solutions to secure additional sources are sought. Disputes over water are also generally thought of in this way. Two or more parties with claims to the same water sources are seen as playing a zero-sum game. The water that one party gets is simply not available to the others, so that one party’s gain is seen as the other parties’ loss. Water appears to have no substitute, so that it can only be traded for other water.

But there is another way of thinking about water problems and water disputes, a way that can lead to dispute resolution and optimal water management. That way involves thinking about the economics of water and shows, in fact, that water can be traded off for other things. When this is understood, water disputes and negotiations that appear to be a zero-sum game can be transformed into “win-win” situations, with water becoming a source of cooperation rather than of conflict.

In particular, dealing with – and perhaps settling – the Israeli-Palestinian water issue can be done in a way that involves relatively inexpensive confidence-building measures, benefits both parties, and does not impinge on the real core issues of either side.

The methods that can be used to accomplish these ends already have been developed. I now discuss that development and the methods themselves. (More detailed discussion is elsewhere available.[1])

To understand the principles used by the WEP, it is convenient to consider the following example – a version of which started the WEP:

Water is a scarce resource, and scarcity can breed conflict. But, no matter how much one values water, that value cannot rationally exceed the cost of replacing the water. Hence, the availability of seawater desalination puts an upper bound on the value of water for any country that has a seacoast. Moreover, that upper bound is not very high, as can be seen in the following rough calculation:

a. The cost of desalination on the Mediterranean coast of Israel and Gaza is at most 60¢ per cubic meter and is falling as technology improves.[2] That means that a cubic meter of water can never be worth more than 60¢ in the large cities of the coast.

b. But the water principally in dispute between Israelis and Palestinians is not on the coast; it is underground in the so-called Mountain Aquifer, much of which lies beneath the hills of the West Bank. That water would cost roughly 40¢ per cubic meter to extract and convey to the coast. Hence, ownership of Mountain Aquifer water cannot be worth more than 20¢ per cubic meter per year (60¢ - 40¢).

c. 100 million cubic meters (MCM) per year is a very large amount of water in the Mountain Aquifer dispute. It is almost certainly larger than the true distance between the parties’ negotiating positions. But 100 MCM of Mountain Aquifer water per year can never be worth more than roughly $20 million per year (100 MCM x 20¢), and the WEP’s estimates are that it is worth much less. This is rounding error in the national accounts – particularly for Israel, whose pre-intifada GDP was approximately $100 billion per year.

d. To put it more dramatically, even so large an amount of disputed water is not worth the purchase of a fighter plane.

e. Note, however, that, while desalination plays a central role in this example, it is not the efficient solution to the water problem (although it may contribute). The WEP’s results suggest that (under proper management) desalination will not be efficient on the Mediterranean Coast of Israel and Gaza for at least the next 15 years, except in times of extreme drought. The scarcity value of water on the Mediterranean Coast (the shadow value of water as defined below) is unlikely to be high enough to justify either desalination or Turkish imports.

The major lesson to be learned here is that it is important to think about water in terms of water values rather than only in terms of water quantities. Water, despite the fact that it is essential for human life, is not beyond price.

Indeed, the question of whether there is “enough” water is not well posed. As the example shows, any country with a seacoast can have as much water as it wants, provided it is willing to pay for it. But whether it is so willing will depend on water values. And such values are different for different uses, for some uses have a high priority and a high value, while other uses have a low priority and a low value. Proper analysis of water problems must deal with this.

In fact, there is no shortage of water for human consumption in the region being considered. The problem is rather that there is no cheap water for agriculture. Agriculture that must operate on fresh water is not profitable; hence, agriculture must either be subsidized or must use treated wastewater.

Further, consider the following: A country that owns water and uses the water itself does not obtain the water for free. Rather it incurs an opportunity cost – giving up the money for which it could have sold the water. Naturally, it will choose to do this if it values the water more than the money and will not do it if it values the money more than the water. But this is no different from the behavior of a buyer that purchases water if it values the water more than the money required to make the purchase and refrains from purchasing if it values the money more than the water. Note that this means that the questions of who owns water and of who optimally uses the water, while both potentially important, are unrelated, different questions.

In sum, water can and should be thought of as an economic commodity – although one that has special attributes. By doing so, the water problem can be monetized, de-emotionalized, and put in perspective. One finds that water can be traded off for other things. Water negotiations should not be left solely to water negotiators who, quite naturally, have traditionally thought only in terms of water quantities.

Using such principles, the WEP has produced a computer-driven tool for the rational analysis of water systems and water problems. The tool is called “WAS” (for “Water Allocation System”).[3]

WAS deals explicitly with water values. In so doing, it departs from the standard (but inadequate) mode of thinking about water only in terms of quantities and provides guidance along market-driven lines.

Of course, the standard economic answer as to how to allocate scarce resources is through the use of free markets. However, there are circumstances in which that answer needs to be modified. In particular, the use of actual markets works correctly only if those markets are competitive and then only if all the social benefits and costs of resource use are reflected in private benefits and costs and hence in private profit and loss calculations.

Neither condition is true of water. In particular, many countries (including Israel and Jordan) subsidize water for farmers, implying that water used for agriculture is regarded as more valuable to society than the price that the users (farmers) are willing to pay. To take another example, water use surely has environmental consequences not borne by private parties alone. Beyond all this, water and water quality have implications for the spread of disease – and societies have interest in that beyond the interest of particular patients.

It is possible, however, to produce a simulated market-driven solution that corrects these problems. One way to describe WAS is to observe that it does exactly that.

WAS models the water economy of the area studied (country, territory, region). It takes information on demand, water sources, and infrastructure – actual or projected – and shows how to allocate the available water to maximize the benefits obtained from it. In so doing, it permits the user of the tool to impose constraints – constraints that reflect the social values of water that are not just private values. (For example, the user can specify that water be made available to certain users at set prices or that a given minimum amount of water be allocated to certain uses.)

When this is done, the output of WAS also includes a system of prices (“shadow values”) that can be used to guide decisions just as prices do in an actual free market. But these shadow values reflect the social values of water whether private or public. As further described below, these shadow values are the efficient prices with which to guide international cooperation in water.

For a single country in isolation, the WAS tool can be used to evaluate the costs and benefits of proposed infrastructure projects. Among other examples, the WEP has used it to evaluate the benefits of:

Further, the WAS shadow value of water in a particular location gives the price that a country should be willing to pay for an additional source of water at that location. Such a source can be a desalination plant, the development of a new well area, or even imports from outside.

For example, Turkey is a water-rich country and has proposed at various times to export water to others by sea or pipeline. The use of WAS by prospective importers of such water (Israel, Jordan, or the Palestinians, for example, or even Iraq) can show the price that they should be willing to pay for it.[4]

In all such evaluations, WAS automatically accounts for the effects of the change in water flows caused by a project and, more generally, for the scarcity value of water including the opportunity costs of changing the amount of water available elsewhere in the system. It is a powerful tool, dealing with demand benefits as well as supply costs.

But the uses of WAS are not merely domestic. It can be used to facilitate international negotiations in water and in the design of a mutually beneficial system of regional cooperation in water. I begin with negotiations:

· The use of the WEP’s tools leads to rational analysis of water problems. In particular, it separates the problems of water ownership and water usage. In so doing, it enables the user to value water ownership in money terms (after imposing his or her social values and policies). This enables water negotiations to be conducted with water seen as something that can, in principle, be traded. Further, since the Project shows that water values are not, in fact, very high (partly because of the availability of seawater desalination), the water ownership problem can be made a manageable one.

· Even using the Project’s tools to investigate only the water economy of the user’s own country, the user can evaluate the effects of different water-ownership settlements. (By making assumptions as to the data, policies, and forecasts of other parties, the user can also gain information as to the effects on them.) This should assist in preparing negotiating positions if the ultimate agreement is to be of the standard water-ownership-division type with no further cooperation.

· For example, use of WAS for Israel shows that the loss of the water sources on the Golan or of the entire flow of the Hasbani River (over the Lebanese pumping of which there was heated controversy not long ago) would cost Israel about $5 million a year in non-drought periods and well under $50 million in drought times.

But the standard form of a water treaty (water quantity division) is not optimal. Perhaps most important of all, the Project shows clearly that continued cooperation in water tends to be for the benefit of all parties. Such cooperation in the form of an agreement to trade water[5] at model prices can lead to very large gains to all participants (sellers as well as buyers) and is a superior solution to the standard water-quantity-division agreement. For example, project results show that there are very large benefits to both Israel and the Palestinians from such an arrangement. The gains are far larger than the value of ownership of more or less of the disputed water will ever be. Indeed, under cooperation, the value of a shift of ownership of 10% the Mountain Aquifer would only be about $8 million per year by 2010. By contrast, the value of cooperation itself would exceed $80 million per year, with both parties benefiting. By 2020, such a shift in Aquifer ownership would be worth about $15 million per year, while the value of cooperation would exceed $130 million per year.

Similar results (although not so large ones) hold for a cooperative agreement involving Jordan.

Beyond the economic gains of such an arrangement are the gains from a flexible, cooperative water agreement in which allocations change for everyone’s benefit as populations grow and incomes and technology change. Such an agreement can turn water from a source of stress into a source of cooperation.

Note that no party to such an arrangement is forced to sell (or to buy) water. Trades take place only when both parties gain. And, indeed, as in all willing trades, both parties do gain. The buyer receives water that it values more than the money it pays; the seller receives money in excess of the value it places on the sold water – money above and beyond the amount needed to compensate its water-users for having to make do with less or more expensive water.

I now present some examples of the way in which the WEP’s tools could be used in the Middle East.

1. Every regional run of the WAS model strongly shows that it would be mutually beneficial for both Israelis and Palestinians if there were a water recycling plant in Gaza with some of the output sold to Israel for agricultural use in the Negev where there is no aquifer to be polluted.[7] This means that Israel has a positive economic interest in assisting with the financing of such a plant. That would be a fairly inexpensive confidence-building measure in an area – water – that very many people, experts included, have thought must result in conflict because of “scarcity”. An agreement on this confidence-building step would not impinge on the core issues separating the parties.

2. The construction of such a plant and the agreement to use it as described could be the first step in a general water-trade agreement of the sort described above. Moreover, in the presence of such an agreement, it would be mutually beneficial for Israel to sell water to Gaza, supplying it through the Israeli National Water Carrier that already runs nearby.[8]

3. Without some form of cooperation, with their present water resources, the Palestinians will have to incur the costs of desalination at Gaza. Indeed, if the problem is not resolved, they will have to pump the desalinated water uphill to the southern West Bank. That is obviously costly and inefficient and would be easily avoided by a cooperative agreement of the kind described.

4. The rebuilding of Iraq will necessarily involve the rebuilding of Iraq’s water system. WAS can be used to assist in the planning of that enterprise, providing a country-wide analysis of benefits from different infrastructure plans.

5. Such uses are not restricted to Iraq. I also note that Saudi Arabia is about to spend billions of dollars on water infrastructure. The Saudis also could greatly benefit from the use of the WAS tool to guide that program. Indeed, Syria, and other countries without a fully developed water infrastructure could be helped in this way.

· It should be noted that the offer of the WAS tool for domestic purposes – in a bilateral arrangement between the US and the receiving country – may be a way to promote the mode of thought about water that leads to regional cooperation.

6. Further, as mentioned in an earlier footnote, in addition to WAS, the WEP has produced a tool (AGSM) specifically for analyzing the effects of water policies and water availability on crop choice and agriculture. The rethinking of agriculture and its water use is critical to what happens to the marsh Arabs in Iraq, to the Palestinians in the West Bank, and to the future of Jordan's rural population.

7. Iraq, Syria, and Turkey have an ongoing dispute over the great rivers. As with other water disputes (including the Israeli-Palestinian one), there are different principles of international law, and they do not lead to the same conclusion. The use of a WAS tool could assist in resolving the disputes, using prices to allocate the disputed water, and doing so to the mutual benefit of all the parties.

8. Turkey (despite such disputes) is a water-rich country. It has proposed to sell water to others. This could be the foundation of a general trade agreement for water – and the WAS tool could be used to guide the prices and the regional water flows involved. Indeed, one can imagine a general regional water authority stretching from Turkey through Syria and Iraq to Lebanon, Israel, Jordan, and the coming Palestinian state. This is a bold vision, but now may be the moment to make it come true.

Naturally, there are a number of issues that arise when considering such a cooperative arrangement. Chief among them is that of security. What if one of the partners to such a scheme were to withdraw? Of course, such withdrawal would be contrary to the interest of the withdrawing party, but, as we have sadly seen, people and governments do not always act in their own long-run self-interest.

The main cost of such a withdrawal would occur if the non-withdrawing party had failed to build infrastructure that would be needed without cooperation but not with it.. In the case of Israel and the Palestinians, it might appear that such risk would be chiefly Palestinian, since they, but not Israel, would need desalination plants in the absence of cooperation but not in its presence. (Israel, by contrast, already has a highly developed system of water infrastructure and any decision to build desalination plants does not depend on a decision to cooperate or not cooperate with the Palestinians.)

Interestingly, this conclusion may not hold. WAS results show that it will not be cost-effective (at least in years of normal hydrology) for the Palestinians to build desalination facilities in the Gaza Strip (its only seacoast) simply to supply the growing Gazan population. Rather, with water ownership in the West Bank restricted to present quantities, it would pay (without cooperation) to build such facilities and expensively pump desalinated water uphill to the southern West Bank. But this result also implies that a withdrawal by Israel from a cooperative agreement could be met by Palestinian pumping more than permitted by treaty on the West Bank while building a Gazan desalination plant. This reduces the security issue under discussion.

I add a few remarks on how these ideas are viewed by various governments (to the extent that they are known at all).

· The Israeli-Jordanian-Palestinian project has been facilitated and financed by the government of The Netherlands, which still stands squarely behind it.

· Nabil Sha’ath, Palestinian Foreign Minister, has been a strong supporter for a long time. Moreover, the Palestinians have been negotiating with the Dutch over a bilateral continuation of the WEP and appear eager to have it continue. On the other hand, the Project is highly controversial in the Arab press, being sometimes erroneously described as a Zionist plot to force the Arabs to sell “their” water.

· This reflects the fact that the WEP’s way of thinking about water is not well understood among the general population (not only the Palestinians) and, indeed, seems revolutionary. Considerable progress has been made, however, among water experts and some government officials.

· I do not know how the present Israeli government regards these matters. Some earlier governments were in support. Prime Minister Sharon has never had a serious exposition of the subject.

· The attitude of the Israeli Water Commissioner’s office varies over time – often depending on non-water events. Not surprisingly, there is a “not invented here” syndrome (although the WEP has several Israeli leaders). Israel, with its well-developed infrastructure, has the least to gain domestically from the use of WAS – although it has much to gain internationally.

· The current Jordanian Water Minister, Hazim El-Naser, is a former leader of the Jordanian team of the WEP. He has told the Dutch, however, that the project is now a low-priority one for Jordan – a position that is not necessarily shared by all his colleagues, at least some of whom look forward to a regional use of WAS with Jordan a principal participant.

· Approaches have been made to Syria from time to time. When this was first done some years ago, there was very substantial interest from the Ministries of Economics and Irrigation, but, as one might expect, the attitude of the Syrian Foreign Office has consistently been that they will discuss nothing until the Golan is given back. That is short-sighted, since they could well use a WAS model for their own domestic purposes and since their principal water disputes do not involve Israel at all. It might now be possible for the US government to convince them of this.

· I have recently had positive signs from Lebanon indicating interest both in WAS model for domestic purposes and in regional matters.

The tools are now available with which to solve water conflicts and assist the countries of the region in efficiently dealing with water management and infrastructure.[9] This can be done by thinking in terms of water values rather than quantities and using a simulated market-driven mechanism to guide policies, projects, and cooperation. If that is done, the nature of agriculture in the region could be rationalized based on rethinking water availability and cost on a regional and national basis.

Moreover, American military control of Iraq, the need for a dramatic sign of improved US/Turkish cooperation, the need for Syria to find an area in which it can cooperate, Presidential involvement with the Israel-Palestine Road Map, and, above all, the need to find an area of cooperation permitting a bypass of the deadlock between Israelis and Palestinians are all part of a mosaic in which a strong American-led initiative that is market driven could be very successfully advanced.

[1] The most complete published paper is F.M. Fisher, et al. “Optimal water management and conflict resolution: The Middle East water project”, Water Resources Research 38 (11), 25(1)-25(13),

November 2002, submitted with this testimony. This paper contains examples of the use of the tools for both infrastructure analysis and conflict resolution.

I also submit a less technical forthcoming paper, F.M. Fisher, “Water Value, Water Management, and Water Conflict: A Systematic Approach” ,

It should be noted that the estimates of the value of cooperation in these papers are now known to be greatly understated, due to additional information that has been incorporated since they were written.

[2] Indeed, I am informed that current contracts call for a cost of $.50 per cubic meter. This makes the conclusions in the text even stronger.

[3] There is another tool (“AGSM”) that permits the analysis of the effects of varying water policies and availability on crop choice and agriculture generally. I shall not discuss that in detail here.

[4] As observed above, we find that it is unlikely that Israel will find it economically efficient to import water from Turkey except in drought years. Of course, such imports may be deemed desirable for non-economic reasons.

[5] Or, to avoid sovereignty issues, to trade short-term permits to use each other’s water.

[6] The quantitative results given are for normal years, as opposed to drought. With drought, the values rise, but the result as to the greater value of cooperation still holds.

[7] I am informed that the construction of such a plant was actually considered some time ago.

[8] A small amount of water is already so supplied.

[9] I should perhaps add that those tools are available without charge as would be my own time and efforts to assist in their understanding and use.