Economic potential and political considerations of regional water trade: The Western Middle East example

EISEVIER

Resource and Energy Economics

16 ( 1994) 335-356

Ariel Dinar a,*, Aaron aAgricultue and Natural Resources Department, The World Bank, 1818 H Street NW, Washington, DC 20433, USA ’ Department of Geography, Unirlersity of Alabama, Tuscaloosa, AL 35487, USA

Abstract Development of many regions in the world is conditioned on out-of-region supply of water. Sometime out-of-region may mean another country. When the contributing country has riparian rights to these water, conditions for cooperation must exist in order to transfer the water. If the allocation is assumed among countries with some level of hostility, political considerations which are usually not incorporated in economic analysis can hinder or even block the most efficient arrangement. The problem has several physical, economic and political aspects. This paper draws on a water trade framework (including transfer of water and irrigation technology), to evaluate a regional trade in water. This framework quantifies both the economic payoffs using n-person game theory, and the political likelihood of any of the coalitions actually forming, usiilg the PRINCE Political Accounting System. The economic-political approach is applied to a case of a potential Nile water trade in the western Middle East. The results demonstrate how incorporating political considerations in the analysis may provide a more acceptable regional solution compared to the economic-related allocations.

* Corresponding author. Earlier versions of this paper have been presented at the European Science Foundation workshops in Haifa, Padova, and Rethimnon during 1991-1992, and at the Fondazione ENI Enrico Mattei Workshop in Milan, 1993. The authors benefited from comments at these meetings. The research leading to this paper was conducted while Dinar was at the Dept. of Agricultural Economics, University of California, Davis. The views expressed arc those of the authors and should not be attributed to The World Bank. 092%7655/94/$07.00 0 1994 Elsevicr Science B.V. All rights reserved SSDI 0928-7655(94)00014-B

A. Dinar, .I Wolf/ Resource and Energy Economics 16 (1994) 335-356

336

Kcyvords: Regional

water trade; Western Middle East

JEL classification: Q25

ntro As water resources become increasingly scarce relative to potential demand, the value of water has been more frequently used by economists to preach for water transfers between efficient and less efficient uses. Water transfers within and between sectors is more common lately in countries where water has been a resource associated with a stringent system of priority rights. A combination of events such as long-term drought and the collapse of governmental financial systems that provide funds for investment in new water projects has helped recent development and operations of water transfer, banking and markets in the western U.S., east Asia, and many other countries (e.g., Griffin and Boadu, 1992; Howitt and Vaux, 1994; Shah and Raju, 1989). As water can more efficiently be allocated between users within countries or basins, it can as well, be reallocated between countries sharing the same basin (river or aquifer). Several studies have addressed water transfer at the interbasin level; that is, transfer of water from one region to another within a country, or between countries in the same river basin system (e.g., Krutilla, 1907; Rogers, 1993). Very few, if any, studies have dealt with transfer of water between countries that do not share the same water body or basin. One possible problem associated with this kind of international water transfer is at the engineering level, that is, hardware complications in moving huge quantities of water between regions (Howe and Easter, 1971). Another problem that may add to the difficulty in dealing with international water transfer is associated with the special nature of water as a commodity. International water transfer is influenced by ideologicalpolitical considerations that may affect potential arrangements in the region. Such considerations are hard to account for in a quantitative modeling framework (LeMarquand, 1977). The western Middle East region includes the Jordan watershed, the Nile watershed, and the Eupharates watershed. Of these, the Jordan watershed experiences the most severe water scarcity, particularly Israel (IL), the West Bank (WB), and the Gaza Strip (GS). As was described in Dinar and Wolf (1994), natural population growth, expected immigration, and depleted water resources (Wolf, 1993) create a severe water deficit in Israel, Gaza Strip, and the West Bank under several scenarios involving the above variables. Several innovative solutions to this water shortage, each of which focuses on increasing supply, have been art from Turkey, using oil tankers and plastic

economic

to the northern part of Israel ( elf, 1993); desalinization of sea water (Wolf, 1993); pumping of abundant a unts of fossil water in southern Israel (Wolf, 1993); and diverting water from the m Israel and Gaza Strip (Ben Shachar et al., 1989). These plans have been sup rted by very detailed engineering feasibility analyses. However, the d political arrangements have usually been ignored. Dinar and Wolf (1994), have used a parti lar cooperative arrangement of water conservation and transfer in Southern alifornia to develop a general regional water trade model. The agreement, in Southern California between the Metropolitan Water District (MWD) and the Imperial Irrigation District (IID) uses one form of water marketing to make agricultural water available to the urban sector. Under the agreement, MWD pays IID to finance water conservation projects over a period of time. In exchange, MWD receives the water saved by the conservation projects. The water transferred for urban uses is water that was previously lost through conveyance leakage, and it does not alter the amount of water available to farmers for irrigation. The economic framework of the water trade model in Dinar and Wolf (1994) was applied to a simplified case study that includes the scenario of trading Nile water for irrigation technology between Egypt and Israel, and exchanging relative cheap Nile water against expensive locally harvested water between Israel and the West Bank and Gaza. This scenario has been suggested in Ben Shachar et al. (19891, including all engineering components and conveyance costs. Dinar and Wolf (1994) identified two regional arrangements that include only (1) a full cooperation (the grand coalition): EG, IL, GS, and WB, and (2) a partial cooperation (the partial coalition): EG and GS. The model provided equilibrium prices for sale of water between the parties involved. The annual economic outcome to the region (in terms of incremental welfare) was $126.50 million and $8.00 million for the full regional cooperation and for the partial cooperation, respectively. The economic results suggest that a regional water trade arrangement should include the four parties. Mowever, two problems may hinder any possible application of such idea. First, the asymmetry_ of the outcome, especially between EG and IL is a major obstacle that needs to be addressed. Second, the results of the political analysis shoved that the partial coalition is preferred to the economic results. These two obstacles demonstrate that the political difficulties inherent to any water transfer arrangement provide profound challenges to the parties involved. This paper draws on the economic approach in Dinar and Wolf (1994). Additional regional arrangements are identified, and additional ;Lical consideraorated. The next tions that may affect any economically feasible solution are inc section describes the economic framework and the ca Wolf (1994), that serve in the current analysis as well. regional cooperation in water trade are potentially realized for t escri ternative allocatior! schemes are t

A. Vicar, A. Wolf/ Resource and Energy Economics 16 (1994) 335-356

33s

allocations to the parties still do not satisfy basic political and “fairness” requirements. Political aspects of water transfer are introduced and incorporated into the analysis. A modified Political Accounting System (PAS) is used to realloc:;tc the regional gains, now including political considerations. The paper concludes with assessing pros and cons of such an approach and the necessity to amend it with solid inspection institutions and the need for future quantifiable measures of political standpoints.

The model is developed for the simple case where two water users evaluate trading water for water saving technology. Each user has a well behaved “waterwelfare” production function measured in dollar values, on the same scale for both users. One user is characterized by a relatively less binding water constraint and relatively low water cost but a relatively inefficient water-use technology. The second user is characterized by a relatively more binding water constraint and a relatively efficient water-use technology. With no trade of water, each user utilizes its water resources to maximize its own welfare. The result is a given level of welfare for each user. This solution is characterized by a relatively lower, or non opportunity cost for water in the case of user 1 compared to the solution for user 2. The economic rationale would suggest transferring water from user 1 to user 2. In the case of an available efficient water saving technology, a possible trade between these countries may result in mutual benefits. User 2 can sell efficient wale; saving technologies to user 1, which may save water without reducing its welfare level. The water saved can be sold to user 2, generating additional welfare. A necessary condition for this kind of trade to happen is that none of the user,, end up with a welfare level lower than before the trade. This framework has been applied, based partially on ideas about water transfer and planning introduced in Guariso et al. (1981) and in Ben Shachar et al. (1989), to a case study including IX, IL, GS, and . The scenario suggested by Ben Shachar et al. (1989) ’ is that water from the Nile be diverted through the eastern Sinai Desert to southern Israel (the Negev). A water-saving technology ’ will be sold by IL to EG in exchange for part of the water that is saved. Part of this water will replace the amount originally conveyed from northern Israel through the Israeli National Carrier to ahe Negev. Part of the water not sent from Israel to the

’ For

simplification

participate in a more c

2

WC’ cxcludc scvcral countries (Jordan and Lebanon) that potentially prchcnsivc regional arrangcmcnt ( cn Shachar ct a]., ]$#$I).

can a packageof hardware, training and rnaintcnancc.

can

A. Dinar, A. Wolf/ Resource and Enurgv Ecommics

16 (1994

3.35-356

339

Table 1 Characteristic function values and incremental payoff of the parties for all regional cooperative arrangements Coalition

EG) IL1 GS) :WB) :EG; IL} :EG; Gs) :IL; GS} IL; WB} :EG; IL; GS} :EG; IL; WB} [IL; GS; WB’) (EG; IL; GS; WB)

Incremental payoff per party (million $1 Value for coalition s EG IL GS WB 0.00

0.00 0.00 0.00 0.00

0.00 0.00 0.00 5.00

85.70

4.00

6.60 5.00 6.60

0.00 0.00 85.7 112.55 0.00 112.55

4.00 0.00 0.00 4.00 0.00 4.00

3.35 0.00 3.35

90.70 8.00 0.00 0.00 96.30 120.90 0.00 126.50

Incremental payoff for coalition s 0.00 0.00

0.00 0.00

0.00

0.00 0.00

0.00 0.00

90.70 8.00 0.00 0.00 96.30 120.90 0.00 126.50

0.00 0.00 0.00 0.00 0.00 0.00 0.00

Negev that was replaced by the Nile water,will be sent to the WB. Another part will augment the demand for water in GS. The economic model in Dinar and Wolf (1994) was applied to scenarios where several levels of cooperation between the four parties involved are considered. The solutions suggest annual incremental increases in regional welfare that vary from $8.00 million to $126.50 million, and individual allocation of these gains based on economic efficiency alone. The solution values are presented in Table 1. Water prices for transactions between parties are presented in Table 2. IL is probably the major beneficiary in most regional arrangement cases. Additiona! annual welfare to IL increases by $112.55 million in th#?grand coalition and the partial coalition with EG and WB compared to the non-cooperation and some partial coalition cases. In other partial coalition arrangements IL gains less but is still ahead of all parties. Egypt’s welfare improves in the case of the grand coalition compared to the case of a partial coalition and the non-cooperation case

Table 2 Water prices derived from the regional water trade model for each relevant coalition Coalition

PEG

-+ IL a

(EG; IL} (EG; GS} {EG; IL; us) {EG; IL; WB) {EG; IL; Gs; WB)

0.25 1

PEG --, GS

PIL

+WB

0.260 0.260 0.260 0.260

a P’ : ’ means c.:.:z of unit of water sold by i to j.

0.260

0.203 0.203

--

A. Dinar, A. Wolf/ Resource and Energy Economics 16 (I 994) 335-356

($6.6 million compared to $4 million). ncremental welfare to GS does not change in the case of the grand coalition corn red to some partial coalitions ($4 million) and $0 in the non-cooperation case. he WI3 incremental welfare in the grand coalition case is $3.35 million compared to $0 in the case of a partial regional arrangement and some non-cooperation arrangements. Notice that coalitions between IL, GS, WB have zero values. In an open economy model presented above there is no reason not to have water sales between the three parties. II using the values in Table 2, no water transfer betw!:en IL, GS, and WB was found feasible. As the major party, which holds the water in the regional game, EG is not likely to be in fa-.sor of such distribution of the regional gains. If redistribution of these gains is not considered, the regional solution may not be stable enough, or may even not exist. In order to “correct” for the instability embodied in the regional optimization solution, and +o make cooperation more attractive to some parties, the incremental regional payoff is considered for redistribution using alternative allocation schemes.

e regional game an

ative allocation schemes

The regional water trade model can bz interprettd as a cooperative game with side payments (if necessary) and described in terms of a characteristic function (Shubik, 1982). Th e value of a characteristic function for any coalition expresses the coalitional gains, assuming efficient behavior of the coalition members. Using game theory terminology and procedures, a “fair” allocation of common costs or payoffs is considered against the contribution of each party to the regional incremental gains. At this stage no ideological and political considerations affect creation of any coalitional arrangement. The core (Shubik, 1982) is a set of the game allocation gains which is not dominated by any other allocation set. The core fulfills individual and group rationality requirements, that is, each party should be better of in the grand coalition compared to non cooperation, and to participation in any partial coalition. The core equations for the regional game are

Table 3 Extreme points of the core in the regional game Maximum incremental payoff allocation to party j (millions of dollars) EG (1)

IL (2)

GS (3)

WB (4)

0.0

90.7 88.3 118.5 0.0 0.0 0.0 0.0 126.5 88.3

5.6 8.0 8.0 5.6 0.0 5.6 0.0 0.0 0.0

30.2 30.2 0.0 30.2 30.2 0.0 0.0 0.0 30.2

0.0 0.0 90.7 96.3 120.9 126.5 0.0 8.0

Coalition formation sequences leading to this allocation

1234 1324 1342 2134 2314 2413 1423 3412 3124

1243

2143 3214 4123 2341 4312

4213 2431 4132

3241 1432

3421

4321

4231

The system of the above equations has more than one allocation. A method of calculating the extreme points of the core (Shapley, 1971) was applied (Table 3). The method calculates incremental contributions of each party in joining any existing coalition, and assigns these contributions to that party. The four left columns of Table 3 are the maximum possible allocations to the parties, and the right hand side of the Table is the coalition formation sequence leading to these allocations. The results suggest that the negotiation set in this game is quite large. EG and IL can each claim up to $126.5 million; the maximal value for GS is $8.0 million, and for WB it is $30.2 million. Another allocation scheme is the Shapley Value (Shapley, 1953). This scheme allocates the regional gains between the parties based on the weighted average of eat” ?arty’s contributions to all possible coalitions and sequences. In the calculatior process an equal probability is assigned for the formation of any coalition of the same size, assuming also all the possible sequences of formation. The Shapley allocation of the regional gains is 57.7, 56.4, 2.4, 10.0, to EG, IL, GS, and WB, respectively. The Shapley allocation is contained in the core of the game, and is also consistent with the maximum claim values computed in Table 3. That is, EG and IL receive similar allocations, and GS receives an allocation which is 24% of that for WB, which is consistent with the core maximum value allocation (8.0 compared to 30.2 for GS and WB, respectively). The Shapley value has been criticized for assuming equal probabilities to any coalitional formation. The generalized Shapley Value (Loehman and Whinston, 1976) refers to a subset of practical coalitions only, and the probabiiity of a coalition occurring depends on the logical sequence of its formation (Fig. 1). Similar to the Shapley value, the Generalized Shapley value assigns to each party the weighted average of its contributions to all coalitions realistically of the regional gains is 63.7, 45.8, 2.8,

1.0

I

A. L3inar.A.

itica

343

ects 0

The analysis SOfar has addressed only economic and engineering aspects of the problem. In this regard, it should be viewed as a base-line analysis. As suggested by Krutilla (1967), differences in national ideologies regarding all or some of the issues under consideration, may further complicate, or even decay the solution. Major considerations to the suggested water trade may be political economic or technical in nature. Establishing water trade, and the pos transfers, necessitates not only cooperation between occasionally antagonistic neighbors, but also the acquiescence of several co-riparians, any of whom might view it as their right to object. The vast literature associated with political aspects of water transfer is mainly restricted to ad hoc case studies. LeMarquand (1977) provides a general conceptual framework to handle international rivers cooperation. The conceptual framework developed there is applied to four case studies which involve international rivers and 2 to 4 political entities. The model identifies three sets of factors, that establish general patterns of incentives and disincentives for cooperation, each containing several variables. The three factors are the Hydrologic-Economic relations among the potential cooperations, Foreign Policy of each potential cooperator (regarding relevant issues), and Domestic Policy and Consensus. The Hydrologic-Economic factor can be viewed as a necessary condition for cooperation. Then, Foreign Policy, affected by Domestic Policy and Consensus may decay or enhance this cooperation. This framework does not include an important factor, the power of a potential cooperator to prevent the establishment of other coalitions. Another drawback of this approach, at least for economists, is the lack of quantitative measurements of the different factors and variables used. The literature applying political science approaches to cooperation in water resource development, has also included a Political Accounting System (PAS) to quantitatively and qualitatively predict interactions among entities (Coplin and O’Leary, 1974, 1976). The first elements of this system are issue positions that expresses how strongly the participant is for or against each of the issues. Values used are in the range [ - a,; + a,]. Another element in the PAS is the power of a party over an issue, that is the ability of each party to accomplish or prevent the occurrence of each outcome at issue. Values used are in the range it, a2 I,+ 2 1. The third element in the PAS is the salience-the importance each par 2 1. a particular issue. Values used are in the range [II, a&, integers. Multiplic,,,g+;on carried out horizontally provides a reading of an entity’s overall position. Finally, summation over each party’s total allows a comparisop of different scenarios, with higher numbers suggesting greater relative viability. Two problems have been left with unsatisfactory treatmen First, the measurement of the values ordinal, and may not be consistent. coalitio

344

A. 13inar, A. Wolf/Resource

and Energy Economics 16 (1994) 3.?5-356

own objectives (issues). and the outcome may satisfy all OP part of the pa~~cipants. otential The approach does not account for an outco e that will sa parties. atson (1984) and Frey and Naff (1985) ap y a similar P r issues conflicts. This approach consists of th e components: ( 1) Motivation to participate (potential benefits), (2) Riparian Position (over the water), and (3) Power (to prevent any coali nal setting). Subjective weights ranging from 1 (weak) to 5 (strong) are ass ed to each component for each entity. A summation over the weights by entity provides the total ranking for the parties involved. Interpretation of the results suggest that the more unifcrm the ranking, the higher the conflict potential. Endtner (1987) used measures of differences in cultural ideologies related to water of native Indians and Mormons to explain the political economy of water development in Utah. Using a vector of cultural symbols and meanings of water for both parties, she developed the Robinson-Brainerd Coefficients of Similarity on nine ~cipjrcsconcerning water ideology. The topics include (1) nartire and meaning of water, (2) the importance of water, (3) water’s spiritual/religious significance, (4) basis for the right to use the water, (5) water use rules, (6) water application techniques, (7) opinions about buying and selling water, (8) consequences of water markets, and (9) ways access to water could be lost. The results suggest that the ormons and the Indians agree to some extent on most practical uses of water, but hav,le dramatic differences over cultural and legal topics. The study concludes that cultural ideologies of American Indians and Mormons have biased their response to reforms in water laws (projects, water markets) in directions not economically desired by them. An approach employing differences in bebefs and attitudes regarding water, between a water user and a regulatory agency is developed and applied to a case of water permit allocation in Florids (Lynne et al., 1991). The model consists of 27 belief and attitude statements that provide measures on a Spoint Likert scale (from strongly agree = 1 through strongly disagree = 5). The difference between the responses of the water-permit applicants and the agency personnel to the belief and attitude statements is used as a measure for potential conflict. The brief review of the literature suggests that water is a special commodity with more than “regular” economic values assigned to it. Therefore, the inclusion of political and ideological considerations is essential to any trade arrangement. Political corrsiderations in the potential Western

Qst arrangement arties which have both

countries’ respective p

is almost total1 he power of in threats of force, to guarantee its allocation of 55,500 t

1984; Krishna, 1988).

Egypt and Israel’s traditional hostility ended officially in the Accord in 1978. Since that time, occasional cooperative projects have been implemented between Egypt and Israel. According to Krishna f 1988), the idea of the Nile diversion to Israel was again raised in 1981 when President Anwar Sadat reportedly offered Prime Minister Menachem Begin 365 MCM/ yr, “in exchange for the solution to the Palestinian problem and the liberation of Jerusalem.” Reaction to the proposal was swift and harsh, with criticism coming from Egyptian and Israeli nationalists, as well as from up-stream states, as will be explained later. Egypt might view allocations to other entities, such as Gaza or the West Bank somewhat more favorably. Gaza fell under Egyptian military administration from 1943-1967, and Egypt has historic affinity for the Palestinian cause. As Kaliy (1989) pointed out, water for tha West Bank would actually come from Israeli diversions of the Jordan, which in turn would be replaced in the Negev by Nile Water. For this reason, the idea of Nile water being supplied to Israel might cause those with ideologic constraints to such a project to object more strenuously than

would direct diversion to Gaza. 4.1.1.2. Sudan. Sudan is the only Nile riparian having a legal water arrangement with Egypt. A 1929 Nile Waters Agreement was renegotiated in the 1959 Nile Water Treaty, allocations from which are upheld today (Lowi, 1990). In addition to zillocating 55,500 MC / yr to Egypt and 18,500 MCM/ yr to Sudan, the Treaty allows for joint re w of water-reducing claims by any rip sharing of increases in the yield of the Nile (Whittington and Shahin, 1986). It is presumably on the strength of half of the increased flow anticipated 2 water development projects (for d 1968). An eight-year-old civil war h would have added 4,000

34h

A Dirrar, A. Wolf / Rcsowcc and Encrgv Ecmonlics

16 (1994) X35-.356

Islamic state since 1989 with a strong Mahdist tradition, might not view diversions sracl favorably. Nile water for Gaza might be seen as a better alternative, while ~~‘atcrtargeted for the West Bank could have the same politically-complicating aving to go through the Israeli water budget, as discussed previously. 4. I.]._?. Ethiopia. Ethiopian territory contributes between 75 and 85 percent of Nile flow, rising to 95 percent during flood period ( rishna, 1988). As a consequence of this contribution, and of its strong riparian position, Ethiopia has been described as “holding both Egypt and Sudan by the jugular” (Waterbury as cited in Lowi, 1990). Ethiopia is not without its own civil strife, with only a recent conclusion to a long-standing civil war. Furthermore, Ethiopia has never joined Egypt and Sudan in any water-sharing agreement, although a 1925 Italian-British agreement gave Britain the right to build a storage dam at Lake Tana (Krishna, 1988). Ethiopia has not accepted the legitimacy of the treaty, and since the 1930’s, has pursued several water development studies of its own, for both in- and out-of-basin transfers for irrigation and for storage at Lake Tana. Jovanovic (1985) estimated that Ethiopia may claim up to 40,000 MCM/ yr for irrigation, reducing flow to Sudan and Egypt by 23 percent to irrigate within the Nile basin and 39 percent if irrigation is extended out-of-basin. In the absence of a basin-wide water-sharing agreement fol the Nile, potential diversion is a controversial and heated issue throughout the region. Ethiopia may find difficulty in objecting to out-of-basin transfers while developing its own plans for such diversions, although it mjght be argued that diversion to non-riparian entities would be a different case. Ethiopia strenuously objected to Egyptian transfers t: the Sinai, assuming that the water was meant for Israel (Krishna, 19c8). Egypt rejected Ethiopian objections and President Sadat warned that “if Ethiopia takes any action to block our right to the Nile w atzs, there -will be no alternative for us but to use force” (as cited in Krishna, 1988). This reaction may have been a continuation to earlier tensions over the dam of Lake Tana, over which President Sadat also warned, ” Egypt would go to war if Ethiopia planned to build a dam on Lake Tana” (quoted in Shahin, 1986). It is probably too early to speculate what specific positions rhe new Ehiopian go;-ernment may take vfs-a-vis any particular target for diversion, or even what its relations with states potentially involved in a water transfer may be, blit l;iven its own water plans and preeminent riparian position, it will likely take Iinterest in developments. 4.12. Targetentities

sing water shortage, it is not surprising t asin water transfers. srael currently

ater Carrier to

t 20 percent

of it

atershed to the

centers along the Coast (Inbar and aos, 1984). Proposals have also been made to transfer water from the Litani basin in Lebanon to Israel ( atson, 1984), and more

n-Shachar et a]., 1989). recently to import water by the barge load fro Israeli reaction to a water trade is both crucial and difficult to gau to the Sadat proposal, where I el would have been the beneficiary, were at best, with then-Agricultural nister Ariel Sharo voicing the common concern that “I would hate to be in a situation in which the Egyptians could close our taps whenever they wished.” Israel’s reaction to water directed to Gaza or the West Bank is even harder to predict. Presumably Israel would prefer that either a-ea receive water from new surface sources rather than the alternative of continued groundwater exploitation. Israel shares aquifers with both entities, and overdraft in Gaza and the West Bank can impact Israeli wells.

4.1.2.2. West Bank and Gaza. The areas of the West Bank and Gaza have been under Israeli military administration since 1967. Israel has increasingly incorporated West Bank and Gaza hydrology into the Israel grid, including limiting some groundwater development (Cooley, 1984; Lowi, 1990). This is particularly true in the West Bank where over-pumping could affect Israeli coastal wells, which provide nearly 40 percent of its water supply. As a consequence, water resource development in the West Bank has taken place through conservation efforts aimed at increased water use efficiency, and surface water augmentation from the Israel National Carrier or, in the case of Gaza, through a 70 MCM/ yr groundwaLzr overdraft (Kahan, 1987). Palestinians have objected to Israeli control of local resources and the water issue has become an increasingly common subject of nationalist debate (See Dillman 1989 for Palestinian perspectives). Both entities currently reach or exceed their annual water budgets and would probably welcome Nile water. Gaza has a greater imminent need as measured by its annual overdraft. The population of the West Bank might also voice objections at Israeli water replacing Nile sources, as discussed earlier. 4. I .3. Analysis of the political positions The view of each political entity regarding a possible water transfer and consequent water diversions is likely to be dependent on the individual relationships among the entities as well as on attitudes towards “target entities.” To summarize the political positions of each of the parties, we Accounting System as described by Coplin and O’Leary (1974, 1976) and incorporating modifications for hydro-p party’s political attitude (Issue, Power, a feasible coalitions. Issue Position is scored fro stro tively, stro

34x

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When applied to hydropolitics, this measure is equivalent to a quantitative summation of LeMarquand’s (1977) factors. In the case of hydrologic disputes, power can include riparian position and legal strength as reflected in a water sharing treaty, as well as the more traditional military and political aspects, and is ranked from 0 to 3 to reflect increasing levels of power. Issue Salience is, simply. how important a proposal is to a political entity, and is also rated from 0 to 3 to show increasing salience. This measure includes also a summation of internal forces, many of which are described by Endtner (1987). While we recognize both the general lack of enthusiasm for political analysis in general, and the elementary and subjective nature of the PAS in particular, ’ we feel its inclusion in our model is a useful first step in an attempt to quantify political considerations. Once each component is evaluated for each party for participating in each coalition, multiplication across will give a measure of a party’s overall level of support or opposition to a proposed coalition. Adding these values for each actor invo!ved wil! provide a ranking va!ue for the proposal as a whole, which can be compared to the values for other coalition:;. a higher number reflecting greater likelihood of support. Relative rankings for each entity are suggested by the previous discussion of their likely concerns over a water trade and transfer. The results of this analysis @ITab,‘e 4) reveal the relatively low values assigned to partial coalitions including IL. @ne might also notice that, as mentioned, power can be reflected both by legal strength, as in the case of Sudan which has a longstanding treaty with Egypt, and throclgh riparian position, such as in the case of Ethiopia. Also, salience can change drastrcally with coalition formation. 4.2. hclusion

of pol!‘tical considerations and reallocatioc of the regional gains

The analysis of the political positions so far was conducted under the assumption that the parties in the game are economically rational. This means that a decision by each party to join a given coalition is based on the incremental payoff to that party fro joining that coalition. ased on the literature reviewed earlier, ideological and political considerations need to be included in our modeling framework. The probabilities used in the ShapPey value and the generalized ey value allocations ignore these aspects. This section attempts to develop priate coefficients that will incorporate political consideration into the analy-

x-counting system

the interaction

between econcmics and some of the in the evaluation of water scarcity Y critique of the

NCE method

‘CXp3-t

4.Dincap;A.

Wolf/ Resource and Entv-gv Economics 16 (I 994 .W%-.~~~

Table 4 Modified political accounting systems for the regional game Riparian and target entities Coalitions Coalition Nile Basin Egypt Sudan Ethiopia Targets Israel Gaza Wesl Bank

Positions

Power

Salience

{EG). (IL), (GS), {WB) {EG; IL) 3 1; -2 +2 -1 -1

0.23

3 3 ;

3 2 2

-18 -12 -8

2 1

3

+12

1 1

-1

1

Coalition Nile Basin

2 1 2

+1 +3 +2

Coalition Nile Basin

J%YPt Sudan Ethiopia Targets Israel Gaza West Bank

0.89 3 2 2

+12 -t-4 -4

3 3 1 Total

+6 +9 +2 +29

(EG; IL; GS) +1 -2 -2

2 2 2

3 2 2

+2 +3 +2

2 1 1

3 3 1 Total

Coalition Nile Basin Egypt Sudan Ethiopia Targets Israel Gaza West Bank

-1 -28

{EG; GS) +2 +2 -1

0.64 +6 -8 -8 +12 +9 +2 + 13 0.64

(EG; IL; WB) +1 -2 -. 3

2 2 2

3 a 2

+6 -8 -8

+2 +2 +a

2 1

3 1

+ 12 +2 +9 +13

1

Probability 1.00

Total

Egypt Sudan Ethiopia Targets Israel Gaza West Bank

Total

3

Total

340

A. Dinar, A. Wolf/ Resource and Energy Economics 16 (1994) 335-356

350 Talk

4 (continued)

Riparian an&j target entitks Coaiitions

Posit ions

Power

Coalition Coalition Coalition

Total

Probability

1.00

{EG), {IL), {GS), {WB)

0.73

{EG; IL; WB; GS}

Coalition Nile Bassin Egypt Sudan Ethiopia Targets Israel Gaza West Bank

Salicncc

+1 -e 3 -L 3

2 1 2

3 2 3

+2 +1 +1

2 1 1

3 2 2 Total {IL; GS} {IL; WB} (IL; WB; GS}

+6

-4 -8 t6 +2 +2 + 14 0.0 0.0 0.0

issues. Non-economic tools emphasize the importance of political, or even the aesthetic and emotional elements of hydrology. It is recognized, however, that economics and po!itics play parallel roles, sometimes complementary, sometimes contradictory, in the long-term evaluation of water basin development; but neither paradigm is autonomous. Just as political considerations can effectively veto a project with an otherwise favorabie economic outcome, a project with potential regional welfare improvements might influence the political dectsion-making process to allow for necessary cooperation. Although the process of inleraction between economics and politics is dynamic in nature, we examine at this stage only the political likelihood that any of the previously described coalitions may or may not occur at the initial stages of a water transfer project. The approach suggested by Coplin and O’Leary (1983) is used to estimate the probability for a given coalition to be established. Using the same approach, Coplin and O’Leary (1976) suggest a Modified PAS that provides an absolute measure to estimate the Eikelihood of a coalition to be established. This is achieved by calculating t(s) -=A/( A + B + C), where ((s) is the political probability for coalition s to exist, ci is the total scores of adl the parties in support; B is the absolute value of the totah scores of those in opposition; and C is the value of those with a neutral position. Table 4 presents the values of the Modified PAS and the probabilities associeach coalition. The PAS values for each coalition-party combination can practically be estimated using different focus group approa es within each party’s interested groups. For oscs of this analysis we use t information summaetermining these values. The of 0.23, 0 W; 0.64; 0.78; 0.0; 0.0; and 0.0 represent

respectively the probabilities for formation of the coalitions (EG; IL), (EC, GS), (EG; IL; GS). (EG; IL; WB), (EG; IL; GS; WB), (IL; WB), (IL: GS), and (IL; WB; GS). The latter three coalitions have been assigned probabilities of 0.0 since there is no physical possibility for cooperation between them, in terms of water transfer. Therefore, the 0.0 probabilities should be viewed as technical probabilities. All status quo coalitions (EG}, (IL), (GS), and (WB) are assigned probabilities of 1.00. This is based on recognizing that between parties with high level of hostility, defined here as parties with conflicting goals, the most likely scenario is for parties not to overcome their hostility. 4.2.2. Reallocation of the regional gains using physical-political probabilities The generalized Shapley value is modified to account for the likelihood of political formation of the possible coalitions. This is done by multiplying for each coalition the physical-economic probabilities P( s, s - (j)) by political probabilities e(s). The resulting allocation 8. is given by the generalized Shapley value with modified probabilities (GSVMP$

The modified probabilities are shown in Fig. 2. The probability values in the figure should be interpreted in the following way: Values along the branches initiated from the same root indicate the probability for the following coalitions’ creation, and the complementary value to I indicates the probability for remaining in the previous coalitional stage. For example, the probability of formation the coalition (IL; EG; WBI initiated from (IL; EG} is 0.32 and the probability of formation the coalition AL; EG; GS} initiated from (IL; EG) is 0.32. Therefore, the probability not forming these coalition and remaining in the formation (IL, EG) is 0.36 [ = 1 - (0.32 + 0.32)]. Using the above equation and the data in Table 3 and the values in Fig. 2, the reallocation of the regional gains is 77.3, 35.6, 4.1, 9.5 for EG, IL, GS, and WB, respectively. In comparing the different allocation schemes, one would observe that ali are included in the core of the regional game, and therefore they are considered to be efficient allocations. Following the changes in the allocation, to EG, IL, GS, WB, of the regional gains from cooperation, starting with the regional economic solution (6.6, 112.55, 4.00, 3.35) through the Shapley value (57.7, 56.4, 2.4, lO.o), the generalized Shapley value (63.7, 45.8, 2.8, 14.2), and finally the generalized Shapley value with modified probabilities (77.3, 35.6, 4.1, 9.5) cuggests that the GSVMP allocation is the most stable one. Based on the GSVMP allocation, EG gets closest to t allocations it considers fair accordi g to ik core allocations. significantly compared to the regional economic solution, but no one could believe

Fig. 2. Coalition -ormation sequence in the regional cooperative d<:note the condit:onal political-physical-economic probabilitic: ar,othcr.

game. Numhcrs along the branches of moving from one coalition to

A. Dinar, A. Wolf/ Resource and Enero

Economics 16 (1994

335-356

353

that IL’s share in the regional gains would be so high, and higher than those allocated to EG. Given the role of WE; in the regional game, it is surprising that its allocations are always higher than those for GS. The main reason is the fact that WB’s participation allows IL to save a substantial electricity cost, otherwise needed to send water from northern Israel to the Negev. GS’s allocation according to the GSVMP is better than the one according to the regional economic solution.

5. Discussion Water is a resource that is becoming increasingly scarce in many locations around the world. In some areas, water’s relative scarcity may enhance the potential for conflicts. Markets for water, if appropriatively established, may help resolve these conflicts. In this chapter we used economic concepts to demonstrate that under certain conditions, water trade among potential water users may increase regional welfare and be preferred over cases where individual entities maximize welfare subject to in-country water resources. Based on previous literature, economic efficiency is not a sufficient condition for cooperation, especially when it is related to water. We developed then a procedure which incorporates political and ideological considerations into the decision-making process of the potential participants. The resulting coefficients allowed us to modify the probabilities of coalition creation in the regional game, and reallocate the regional gains. We have simplified the regional model by (1) assuming that only water prices are determined in the market and the quantity of water to be delivered is an exogenous decision; and (2) selecting only one future-demand scenario. Although a real-world analysis should include consideration of engineering aspects of water conveyance and storage over space and time, w: feel that the use of an already-existing engineering framework and future projections serves the purpose for our economic analysis. Unlike previous studies on water markets, we also include a political analysis aimed at addressing relevant issues other than solely economic concerns. The inclusion of such analysis is even more important in the case of an international water trade because of the political nature of water transfer. For the application of the approach we used a special case where -water-efficient technology was sold by one party to another and the amount of water saved was reltiased for sale to the regional participants. A more general case could as well include technology transaction between any regional party and the “rest of the world. ’ ’ This may change the regional outcome and may make the game more attractive to some parties and less attractive to others. The reallocation process of the regional gains, using different allocation schemes and including political aspects, demonstrates the need for massive income

transfer from one party to another in order to keep the arrangement stable. In this case Israel needs to “bribe” Egypt and to reduce its initial allocation, of 112.55 in the solution of the economic model, to 35.6 in the case of the Generalized Shapley odified Probabilities. This means that the inclusion of a technology component as a feature of the model is not necessary, and the alternative might be the use of the income transferred to improve water use efficiency in Egypt. One drawback of our approach is the use of “almost subjective” considerations for proposal evaluation. This problem results from the need to combine quantitative (economic) and qualitative (political) measures in the analysis. Future research should focus on quantifying political and ideological considerations to be compatible with economic ones. Future investigation of international water transfer should also include mechanisms and institutions, such as joint committees, for achieving the proposed economic solution. At this point in time we are not sure that this will provide a feasible solution. In the case of the western Middle East, this is probably a prerequisite for any regional arrangement.

The characteristic function of a normalized game where the players have to Lallocate the additional payoff from cooperation v(s)

=f'-

CfJ jE

VsES

s

where v(s) is the value of the characteristic function for coalition s E S in terms of incremental payoff, and 5’ is the set of all possible coalitions. It is assumed that v(( j)) = 0 for j E N where N is the set of all players. The core allocation wi fulfills individual and group rationality requirements, and joint efficiency

&JJ2 v(s) jE

QSES

s

#I

=

v(N)

jEN

e Shapley value allocation is:

where IZ is the number of players in the game, and Is 1 is the number of members in coalition s. The generalized Shapley allocation is CP(S,s-

~j=

s

(i))[ 4s) - v(s-- IjHl &EN

SE jEs

where PCs, s - (j)) = P( s 1s - (9)) P( s - ( j)) is the probability joining coalition s.

of player

j

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