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Chapter 1
The role of water in agricultural development

Agriculture has, arguably, been very successful at capturing the major share of the world’s exploitable water resources. However, the environmental and socio-economic rationale for this capture by the sector is now being questioned. This review presents a framework and a suite of techniques for analysing these issues and making the rationale explicit and transparent. It is not a field manual but rather an 'advocacy' brief. It sets out to bring together economic and ecological evidence and argumentation in support of the need to challenge and change the fundamentals of the prevailing technocentric view of water resources exploitation. A new and more suitable approach to water resources allocation is necessary if the world’s population is to be adequately fed, without further degradation and destruction of the planet’s critical ecosystem services. Water productivity needs to be enhanced considerably, and economic cost-benefit analysis and pricing regimes can play a significant role in such a process. However, these economic measures will not be sufficient on their own. They will need to be buttressed by technological innovation and institutional changes in order to encourage a more equitable distribution of resources and to mitigate potential international conflicts across 'shared' water basins.

Water has unique characteristics that determine both its allocation and use as a resource by agriculture. Agricultural use of water for irrigation is itself contingent on land resources. An overview of economic characteristics of water and their implications is presented below. The case for improved allocation of water to the agriculture sector and improved allocation within the agriculture sector is then presented. In a situation of growing water scarcity and rising demands for non-agricultural (household and industrial) use of water, reassessment of sectoral allocations of water are inevitable. In developing countries, irrigated agriculture plays a vital role in contributing towards domestic food security and poverty alleviation. Therefore, achievement of these objectives is dependent on adequate allocations of water to agriculture. Justification of such allocations requires that irrigated agriculture be a cost-effective means of achieving stated political or social objectives, such as food security or poverty alleviation, and that all externalities be taken into account in the pricing mechanism. Improved allocation of irrigation water is required within the agriculture sectors of developing countries in order to achieve greater efficiency in the use of irrigation water and existing irrigation infrastructure. Reallocation is also required in order to reduce waterlogging and salinization of irrigated land, to decrease the negative environmental impacts and other externalities of irrigation (caused by overextraction of groundwater and depletion and pollution of surface water). The following chapters set out the methods and techniques for achieving improved allocation to and within the agriculture sector. Fundamental to the proposed approach is the adoption of a functional ecosystem perspective for water resources, which underpins water resource management on at least a catchment scale. This is presented at the end of this chapter.

Economic characteristics of water

Water provides goods (e.g. drinking-water, irrigation water) and services (e.g. hydroelectricity generation, recreation and amenity) that are utilized by agriculture, industry and households. Provision of many of these goods and services is interrelated, determined by the quantity and quality of available water. Management and allocation of water entails consideration of its unique characteristics as a resource. These are discussed in brief below.

Water used for irrigation can be pumped from reserves of groundwater, or abstracted from rivers or bodies of stored surface water. It is applied to crops by flooding, via channels, as a spray or drips from nozzles. Crops also obtain water from precipitation. Water infiltrates into the soil, evaporates, or runs off as surface water. Of the water that infiltrates the soil, some is taken up by plants (and later lost through transpiration) and some percolates more deeply, recharging groundwater. This water can be polluted with agrochemicals (fertilizers, herbicides and pesticides), with salts leached from the soil and with effluent from animal waste. However, pollution can be attenuated as the water moves through the ground by processes that include sorption, ion exchange, filtration, precipitation and biodegradation. Aquifers can also be sources of pollution. Pollutants can be released into groundwater from pockets of contaminants or natural materials (e.g. sources of fluoride) within the aquifer. When river levels are low and groundwater levels are high, groundwater can recharge the levels of surface water, which creates a two-way linkage between resources of surface and groundwater.

It is not easy to control or prevent water use. Many uses of water involve the withdrawal of water from the hydrological system (known as 'extractive' or 'off-stream' use). Typically, only a small proportion of the water withdrawn is consumed. Water consumption is exclusive in its use. Consumed water is retained in plants, animals, or industrial products, so it is not available for other uses. However, most of the water withdrawn is not consumed and it returns to the water system for reuse at a later time and a different location. Water in return flows can reenter the surface water system further downstream, can percolate into aquifers, or evaporate, returning to the hydrological system in gaseous form. Therefore, water withdrawals are not exclusive within a broad perspective on water use, but only within a narrow location- and time-specific context. Water can also be used in-stream without removal from the hydrological system (e.g. in hydroelectric power generation or boating). Such uses generally entail little or no consumption of water but do affect the location and time at which water is available for consumption by other uses (Young, 1996).

Water is a 'bulky' resource. This means that its economic value per unit weight or volume tends to be relatively low. Therefore, its conveyance entails a high cost per unit of volume and is often not economically viable over long distances unless a high marginal value can be obtained. The costs of abstraction, storage and any conveyance tend to be high relative to the low economic value that is placed on the use of an additional unit of water. This can create values for water that are location specific (Young, 1996). A further characteristic of water is that the quantity of supply cannot be readily specified; it is determined by various processes: the flow of water; evaporation from the surface; and percolation into the ground. In the case of surface water, supply is determined largely by the climate. Consequently, the quantity supplied is variable and can be unreliable. This can preclude certain uses of water (e.g. the development of water-dependent industries) and affect the value of water in some uses (e.g. irrigation). The quality of water (i.e. the nature and concentrations of pollutants) can exclude certain uses (e.g. drinking-water for household use), but have no impact on others (e.g. hydroelectric power generation).

Characteristics of demand for water for irrigation relate to quantity, location, timing and quality. Irrigation generally requires large volumes of water, which can be low in quality. This is in contrast to household use of water, for example, which requires low quantities of water of high quality. The large volumes of water required for irrigation usually have to be transported over some distance to the field. For surface water, canals and pipes can enable conveyance; in the case of groundwater, extraction is provided via tubewells. In terms of timing, demand for irrigation water can extend through the growing season and, where adequate supplies are available, extend into the dry season for multiple cropping. Peak demand for irrigation water does not usually coincide with peak flows of surface water. This creates the need for storage capacity, which naturally occurring waterbodies (lakes, wetlands and aquifers) or specially constructed dams may provide. Although the quality of water required for irrigation is low, high levels of salinity preclude its use for irrigation, and contaminated supplies can reduce the quality of produce (e.g. contamination of horticultural produce with pathogens in polluted water supplies). Agriculture is implicated in issues that concern water quality. Leaching of effluent from animal wastes, especially from intensive livestock production, can pose a serious water pollution risk. Both return flows of irrigation water and precipitation runoff from arable land can pollute surface water with nutrients, herbicides, pesticides, salts leached from the soil, and sediment.

The dominance of agricultural water use

Irrigation is a vital component of agricultural production in many developing countries. In 1997-99, irrigated land provided two-fifths of crop production in developing countries, and accounted for about one-fifth of the cultivated area. The divergence in these statistics reflects the high crop yields and multiple cropping that are achieved through irrigation (FAO, 2002a). Developing countries are particularly dependent on irrigation: in 1997-99, 59 percent of cereal production in developing countries was irrigated (Bruinsma, 2003). Food production in developing countries is increasing in response to the demands of an expanding population and rising prosperity. Some of this demand will be met by increased productivity of rainfed agriculture, some by increased imports, but irrigated agriculture will be a major contributor.

Water withdrawals and consumption

However, the agriculture sector is often criticized for high wastage and inefficient use of water at the point of consumption (i.e. at farm level) encouraged by subsidized low charges for water use or low energy tariffs for pumping.

It is often claimed that the charges made for irrigation water, fail to signal the scarcity of the resource to farmers. This situation may persist because of entrenched interests, political problems associated with price reform, practical difficulties in measuring and monitoring water use, and social norms, e.g. perception of water as a free good and access to water as a basic right (Rosegrant, Cai and Cline, 2002). These low charges can have an adverse impact on the effectiveness of irrigation systems and water use. They result in poor maintenance and consequent inefficient operation of existing irrigation systems, limited capacity for improvements or investment in new infrastructure, and waste of water at the farm level. Furthermore it is claimed that the subsidies provided for irrigation water tend to favour the wealthy and thereby exacerbate inequalities in resource access and wealth distribution in rural areas (De Moor and Calamai, 1997).

Water used for irrigation comes from surface water or groundwater. The use of groundwater for irrigation enables the extension of irrigated area beyond that which surface water alone can support. In addition, it assists with drainage of the soil (by lowering the groundwater table and providing drainage of soil water into tubewells). Groundwater can supplement surface water during periods of low flow, making surface water available for alternative uses. It is also used as a sole source of irrigation water. For example, in India, more than half of irrigated land is supplied with groundwater, providing one-third of the country’s food production (Roy and Shah, 2003). Groundwater has various advantages over surface water: it can be stored in aquifers for years with little or no evaporative loss; the percolation of aquifer recharge water through the ground attenuates pollution levels (making groundwater particularly suitable as a source of drinking-water, especially in areas with no water treatment facilities); groundwater can be withdrawn near the point of use; and it is available immediately on demand, which enables more timely applications of irrigation water. However, groundwater contains dissolved salts that can be toxic to plants and result in soil salinization. Groundwater can be combined with surface water to dilute salt concentrations to levels suitable for use in irrigation.

Surface water for irrigation is stored either in natural storage capacity (lakes and wetlands) or artificial capacity created through the construction of dams. Dams are usually constructed for the purposes of water storage for irrigation, hydroelectric power generation, flood control, or any combination of these. However, in the case of dual-purpose dams designed to store water for irrigation and hydroelectric power generation, conflicts can arise because increases in demand for irrigation water in the dry season exceed demand for power. This creates difficulties in the specification of the required storage capacity and the timing of water releases. The situation is yet more complex for dams also designed to provide flood protection. Effective provision of flood control requires storage capacity that is empty, but effective storage of water for hydroelectric power generation and irrigation requires storage capacity that is kept as full as possible (though seasonal flooding and flood prediction can limit these conflicts). Despite potential for conflict, provision of storage capacity for irrigation combined with other uses can have advantages. The combined value of storage capacity for multiple purposes may be required in order to make large dam developments economically viable. Moreover, the provision of storage capacity for non-agricultural uses can provide contingency against failure of irrigation schemes to meet predicted uptake and economic returns, e.g. through potential to develop further power generating capacity.

The design and implementation of irrigation projects has traditionally been the domain of engineers and agronomists. In response to a commitment to a more developed approach to water management, a broader multidisciplinary perspective on irrigation is evolving (FAO, 2003b). This approach incorporates social, cultural, environmental and wider economic impacts of irrigation projects. Nevertheless, implementation of this perspective on the ground in the development and management of irrigation projects and programmes remains a persistent challenge. However, this challenge can begin to be addressed by the appropriate deployment of the functional approach to water management advocated here.

Pressures on the supply of water for irrigation

Supply of bulk water for irrigation is under pressure from the demands of other water-using sectors, constraints on further water resource development and is compounded by poor maintenance of existing irrigation infrastructure.

Demand for water for non-agricultural uses is increasing in response to economic growth, rising populations and increased urbanization. Rising urban demands for water (for household and industrial use) pose a particular threat to agriculture because urban demands take priority over rural demands in situations of potential conflict. This is because existing urban supplies are usually polluted, they can be associated with high health risks (such as the risks of epidemic diseases), new urban supplies have to come from increasingly distant sources (owing to scarcity in supplies), and the economic benefits of urban water supplies exceed those of rural supplies. Worldwide, withdrawals of water for household and industrial use quadrupled between 1950 and 1995, while withdrawals for irrigation only doubled in the same period (FAO, 2003c). In terms of future demand in developing countries, non-agricultural demand for water is forecast to increase by 100 percent between 1995 and 2025 and agricultural demand to rise by only 12 percent (given prevailing trends). Rosegrant, Cai and Cline (2002) observe that this is the "first time in world history" that absolute growth in non-agricultural demand for water will exceed growth in agricultural demand. It will result in a fall in agriculture’s share of total water consumption in developing countries from 86 percent in 1995 to 76 percent in 2025.

Increases in non-agricultural demands for water are coinciding with constraints on further development of new water sources. In combination, these two factors are creating increased water scarcity and they will result inevitably in the transfer of water from agricultural use to higher value household and industrial uses. Urban areas can and do appropriate water supplies from rural areas, resulting in depletion and pollution of surface water resources used by farmers and rural households. In areas of India and the Philippines, water supplies have been diverted from large irrigated areas, seasonally or permanently, to meet urban demand, without any payment of compensation to farmers for resultant losses in crop production (IWMI, 2000). Increases in household and industrial demand for water are expected to result in increases in the scarcity of water for irrigation

Irrigation and agricultural development objectives

Governments and donors have traditionally justified allocation of water to agriculture on grounds of food security and rural development. These are examined below, followed by a brief overview of relevant aspects of the international consensus that has emerged in water management policy.

Food security

Irrigation enables greater agricultural production than is achieved with rainfed agriculture. The additional food production obtained with irrigation is essential for food security on a global level, and on a national level for some countries. National food security is attained either through the pursuit of self-sufficiency in food (i.e. meeting demand through domestic production) or through a combination of domestic production and imports. Food self-sufficiency was once a widespread objective and some nations still aspire to it. It creates savings in foreign exchange, protects domestic producers and consumers from the fluctuations of world markets, ensures rural food supplies and contributes to a political sense of national security. However, it has disadvantages. In arid countries, a self-sufficiency policy can increase allocations of water to agriculture at the expense of industrial and household water use, and can contribute to the overextraction of groundwater resources. Moreover, food supplies are vulnerable to extreme weather events, and shortfalls in supply then have to be met through imports, which eat into limited resources of foreign exchange. In response to various factors, which include increased water scarcity, reduced availability of agricultural land, and industrial growth, many countries have moved towards an objective of food security partly enabled by imports (FAO, 2002a). However, successful pursuit of such an objective is reliant on adequate regulation of world trade in foodstuffs, to provide assured imports under fair terms of trade.

Global demand for food is increasing as the population continues to grow and increase in prosperity. Demand pressure is concentrated in developing countries, where demand for agricultural products is forecast to increase at an average rate of 2 percent per year from 1999 to 2030 (FAO, 2002b). Food demand is also affected by a shift in diets, which is occurring in developing countries as a result of increased prosperity, urbanization and changing preferences. Populations in developing countries are tending to consume more livestock products, more fruit and vegetables, and fewer cereals than in the past. Meat consumption in developing countries is projected to increase by 44 percent per capita from 1997/99 to 2030 (Bruinsma, 2003). Combined with a general shift in animal production from extensive (i.e. grazing) to intensive (i.e. cereal-fed) systems and the low efficiency of meat production, this is creating increased demand for cereals (such as maize) for animal feed. Cereals for animal feed account for half of the projected 70-percent increase in demand for cereals forecast to occur in developing countries between 1997/99 and 2030. Irrigation is used particularly important to produce cereals. For example, almost 60 percent of the cereal production in developing countries in 1997/99 comes from irrigated land (FAO, 2003c). However, it also contributes to meeting increased demand for other foods.

Increased demand for food in developing countries will be offset at a national level, to various extents, by increased agricultural production. A 61-percent increase in annual cereal production is expected to occur in the period 1997/99-2030 (Bruinsma, 2003). With the exceptions of sub-Saharan Africa and Latin America (where rainfed agriculture has greater significance), irrigated agriculture will provide much of this increase. In developing countries collectively, irrigated agriculture will provide 57 percent of the additional 256 million tonnes of cereals that will be produced in 2025 relative to 1995. Irrigation increases agricultural production through both the expansion of cultivable area beyond that possible under rainfed agriculture and higher crop yields. FAO (2002b) predicts that 70 percent of the increase in agricultural production that is forecast to occur in developing countries from 2000 to 2030 will come through increased yields, 20 percent through expansion of crop area and 10 percent through increased cropping intensity (multiple cropping and reduced fallow). Irrigation increases yields not only through reduction or prevention of crop water stress, but also through complementary benefits of combined use of irrigation with high yielding varieties, fertilizers and pesticides ('green revolution' technology). Yields for cereals produced with irrigation exceeded rainfed yields by 115 percent in developing countries collectively and by 150 percent in sub-Saharan Africa and West Asia/North Africa in 1995. Although yields for irrigated cereal production in developing countries are increasing by 1.2 percent per year, it is at a reduced rate relative to 1982-1995 (1.9 percent per year).

Increases in yields for irrigated cereals in developing countries are expected to be of a similar proportion to increases in yields for rainfed cereals in the period 1997/99-2030 (annual increases of 0.9 and 0.8 percent, respectively). However, higher initial yields for irrigated cereals will result in greater absolute increases over this period. For developing countries collectively, average weighted yields for irrigated cereal production are expected to increase by 1.4 tonnes/ ha, compared with an increase of 0.5 tonnes/ha for rainfed cereals between 1997/99 and 2030 (Bruinsma, 2003). Irrigated agriculture is thereby forecast to contribute significantly to increased future food production through both high and increasing crop yields.

In addition to increasing productivity, irrigation also enables expansion of the area under cultivation. In 1997/99, irrigation was used on 21 percent of arable land in developing countries collectively, though this was subject to considerable regional variation. In South and East Asia, irrigation was used on 39 and 31 percent of arable land, in the Near East and North Africa, 30 percent of arable land was irrigated, and in sub-Saharan Africa and Latin America (including the Caribbean), irrigation was used on only 2 and 9 percent of the arable area, respectively (Bruinsma, 2003). Expansion of the area under irrigation is expected to be concentrated in developing countries. Absolute increases in irrigated arable area for the period 1997/99-2030 are forecast to be greatest in Asia (an increase of 14 million ha in each of South and East Asia). In sub-Saharan Africa and Latin America, expansion of the irrigated arable area is expected to be low in absolute terms (an additional 2 and 4 million ha, respectively), though these represent large proportionate increases (of 40 and 22 percent) (FAO, 2003c). In the period 1962-1998, the area under irrigation in developing countries increased at an average rate of 2 percent per year, adding a total of 100 million ha to the area under cultivation (FAO, 2002a). However, the net increase in irrigated area in developing countries from 2000 to 2030 is expected to be 60 percent less than the net increase achieved for the period 1960-2000 (FAO, 2003c). The forecast growth rate in irrigated area (0.6 percent per year) is one-third of that achieved in the period 1960-2000. In developing countries collectively, the slowdown in the development of irrigated arable land will be countered to some extent by expansion in the arable area under rainfed crop production. Consequently, the share of total cereal area under irrigation in 2030 will remain relatively unchanged from 1997/99. In developing countries collectively, 22 percent of the arable area will be irrigated (FAO, 2003c).

Climate change is expected to affect agricultural production in developing countries, particularly through increases in temperature in arid regions (which will reduce the potential for crop production) and greater variability in the climate (which will cause increases in the frequency and duration of crop water stress). It will tend to increase local fluctuations in crop production and food supplies, particularly affecting food supplies and the incomes of poor people, and to increase national vulnerability to food insecurity (FAO, 2003c). In certain regions, the effects could be significant even in the next few decades. For example, climate change could cause a 2-3-percent decline in cereal production in Africa by 2020 or 2030. Assuming that other factors remain constant, this would increase the number of people at risk of hunger by 10 million (FAO, 2003c).

Demand for food is not met solely by domestic production in many developing countries; imports of food are required to varying extents. In 1997/99, cereal production represented 91 percent of demand for cereals (a total of 1 026 million tonnes) in developing countries (FAO, 2003c). However, this aggregation hides regional extremes. In the Near East and North Africa, domestic cereal production represented 63 percent of demand. In sub-Saharan Africa and Latin America (including the Caribbean), it represented 82 and 88 percent of demand, respectively, and in East and South Asia, production met 95 and 102 percent of demand. Reliance on imports is forecast to increase. In 1997/99, cereal imports accounted for 9 percent of demand in developing countries collectively and they are predicted to grow to 14 percent of demand by 2030 (Bruinsma, 2003).

Poverty alleviation

In an appropriate environment and with suitable planning (e.g. provision of training and credit), investment in irrigation schemes can alleviate poverty both directly and indirectly through stimulation of the rural economy. Indeed, the purpose of many large scale schemes associated with the Green Revolution in Asia was more to do with addressing food security and poverty targets rather than direct commercial returns. (Plusquellec, 2002). This notion and practice persists. The IFAD "Report on Rural Poverty 2001" is clear in stating that irrigation schemes have direct benefits for poor people, given the required policy and institutional environment (IFAD, 2001). Even if irrigation is not specifically targeted at poor beneficiaries, irrigation stimulates the agriculture sector of the rural economy indirectly through increased demand for agricultural inputs (including agricultural labour, services of local artisans who manufacture tools and equipment, seed and fertilizer) and the marketing of additional produce. Increased incomes in farming communities can create demand for non-agricultural goods and services (e.g. meat, processed foods, clothes, and repair of bicycles), many of which are marketed only locally and can be supplied by resource-poor individuals. The resultant stimulation of non-farm incomes can help to reduce absolute poverty in rural areas in the long term (Bruinsma, 2003), and it can reduce relative poverty as long as the prevailing asset distribution is not too skewed.

Increased food production from irrigated agriculture can confer nutritional benefits for farmers, their families and the local population (through increased food supplies). Irrigation can enable multiple cropping, which can smooth seasonal shortfalls in food supply and encourage the production of crops that contribute towards a more varied and nutritious diet. Improved nutrition can enhance quality of life, reduce illness, increase labour productivity, and improve the performance of children at school (FAO, 2003c). Irrigated agriculture can also benefit the urban poor by keeping food prices low despite growing demand from increasing populations (IWMI, 2000). Indeed, continuation of the current decline in irrigation investment could eventually cause an increase in world cereal prices food prices, which would affect the poor in particular as a large proportion of their income goes on food.

However, irrigation can have a negative impact on the health of rural households through exposure to parasitic infections and to diseases transmitted by water-related vectors such as malaria (associated particularly with canal distribution systems and flood irrigation). Moreover, in an inappropriate environment, e.g. where land is not evenly distributed, economic benefits of irrigation may be received predominantly by wealthy farmers and reinforce inequalities in the distribution of resources and wealth. The policy and institutional environments play critical roles in determining whether irrigation has positive impacts for poor people (FAO, 2003).

International consensus in water policy: water as an economic good

An international consensus in water management has emerged, based on growing concerns about efficiency in the use of government and donor resources, disappointing outcomes from past efforts, and greater awareness of environmental issues (European Commission, 1998). These concerns are manifest in for example, the water policy of the European Community (or the so-called Water Framework Directive), which promotes the use of water pricing and charging as a means of enhancing the sustainability of water resources, and on integrating economics into planning and decision-making. The policy consensus has also been shaped by a reorientation of the development cooperation agenda that has resulted, among other issues, in greater focus on institutional reform, participation, and involvement of civil society and the private sector.

Three agreements lie at the core of the consensus concerning water policy: (i) a set of key recommendations (known as the "Dublin Principles") agreed at the International Conference on Water and the Environment (1992); (ii) Chapter 18 (on freshwater resources) of Agenda 21, the action plan agreed upon at the United Nations Conference on Environment and Development (UN, 1992) held in Rio de Janeiro in 1992 and incorporating adoption of the Dublin Principles for water resources management in rural contexts; and (iii) the World Summit on Sustainable Development (UN, 2002) held in Johannesburg in 2002, which reaffirmed the 1992 "Dublin Principles" and highlighted water availability as a key concern and objective.

The consensus adopts an integrated approach to water resources and a multisectoral view of water use on at least a catchment scale. Water management is considered in relation to issues of economic efficiency, environmental protection, sustainability, and the needs of marginalized and poor people. Decision-making should involve the participation of users, particularly women, and should be driven by the needs of the community. Investments in the water sector are required to be economically efficient, socially acceptable and financially sustainable.

Despite the consensus on water policy, there is considerable debate on the practical implementation of any reforms. For example, while reforms in economic pricing of irrigation water have been proposed, the political economy of pricing policy reforms suggests a rather complex process in evidence (see Chapter 3). It is recognized that the main management challenge is not a vision of integrated water resources management but a "pragmatic but principled" approach that respects principles of efficiency, equity and sustainability, but recognizes that water resources management is intensely political, and that reform requires the articulation of prioritized, sequenced, practical and patient interventions (World Bank, 2003).

As indicated above, sustainability is a key aspect of water management decisions. However, the term sustainability is open to different interpretations, and these affect how it may be operationalized. The differences arise through use of a flexible or stringent interpretation of sustainability, described as weak and strong sustainability, respectively (Turner, 1993).

Sustainability requires that the stock of capital that is available for future generations be equivalent to that available at present. Here, the term capital refers to the overall stock of materials and information that generates goods and services that enhance social welfare. Capital can be subdivided according to whether it is depleted by the production of goods and services, as follows:

Weak sustainability requires that the total stock of capital, human-induced and natural, be maintained, and it assumes substitutability between the two types of capital. As a natural resource becomes depleted, the price increases; this encourages more efficient resource use, substitution with other goods, and technological advancement. However, complete substitution is not necessarily practicable or possible, for example, because of the absence of substitutes for some forms of capital (e.g. critical natural capital), and inadequacy of substitutes (e.g. for complex ecosystems).

Strong sustainability requires that the total stock of natural capital not be depleted. Natural and human-induced capital are regarded as complements not substitutes (Daly, 1995) and stocks of both must be maintained. Consequently, activities are required to conserve the natural environment, or to ensure that any losses incurred are replaced or compensated for fully in physical terms through 'shadow projects' (Barbier, Markandya and Pearce, 1990). The use of a criterion of strong sustainability is likely to result in the wholesale rejection of development projects as most of these impinge to some degree on the environment. However, this rejection can be overcome by employing suites of projects that are designed to have elements that generate net environmental benefits (Pearce, Markandya and Barbier, 1989). Adoption of such an approach enables market-oriented decision-making to persist even under stringent sustainability requirements. The wetland mitigation policy of the United States of America provides an example of a strong sustainability requirement (Marsh, Porter and Salvesen, 1996). The policy requires that any loss of wetland be compensated for by an alternative wetland of equal physical quality. However, a number of problems have been encountered in implementing the policy. These include the definition of a suitable measure of the physical quality of wetlands (McCrain, 1992), and issues that relate to the locality and interactions with the landscape (Ledoux et al., 2000).

The emerging approach to water governance is seeking to adopt a stronger sustainability approach, one guided by principles of stewardship, equity and accountability. The result will be to constrain the mindset and market mechanisms that treat water as a commodity in its various functions and seek to establish an efficient allocation of water among competing end uses. Efficiency is a necessary but not sufficient condition for sustainability, but exactly how constraining sustainability standards ought to be remains an open scientific and policy question. The methods and techniques reviewed in this report can provide a decision-support toolbox to assist in the answering of the composite sustainability questions and challenges.

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