Subsidies to irrigation water use and farmers’ responsiveness to change: lessons for policy reform in Vietnam

Submission note: A thesis submitted in total fulfilment of the requirements for the degree of Doctor of Philosophy to the Department of Economics and Finance, La Trobe Business School, College of Arts, Social Sciences and Commerce, La Trobe University, Bundoora.

Subsidies to irrigation have long been identified as problematic for economic, environmental and social reasons. The orthodox response from most economists is to call for clearer price signals to enhance the efficient allocation and use of scarce resources. In principle, the price should reflect the marginal social cost of water provision. However, in cases where markets for water and related services are absent or incomplete, establishing and charging the “right” price, or any price at all, is no simple matter, especially in emerging economies such as Vietnam. This study investigated the feasibility of water pricing reform to reduce subsidies as well as to promote the sustainability of irrigation services in Vietnam. Data were collected by in-person questionnaires from two regions in northern Vietnam. Three main types of information were sought, 1) farmers’ attitudes and motivation towards farming, land use and irrigation, 2) willingness of farmers to pay for improvements in irrigation services, and 3) key farm attributes, irrigation types, and socio-economic characteristics of the farm households. Various multivariate analysis techniques were applied to the data, including: exploratory factor analysis, structural equation modelling, and multiple regression analyses. A key finding of this study is the nature of the heterogeneity amongst farmers in the study regions. The exploratory factor analysis identified three attitudes/motivations of farmers: market awareness and demand responsive; low input and involvement in farming; and trust in authority. The first two constructs represent farmer segments from the study context. A second major finding from this study is that the attitudes/motivations have an impact on farmers’ willingness to pay for improved irrigation service. In this respect, the results from structural equation modelling indicated that the first segment had a relatively strong positive relationship with farmers’ willingness to pay for improved irrigation service, while the latter segment had a negative relationship with willingness to pay. Trust in authority did not have a significant impact on willingness to pay. A third main finding from this research is that a “one-size-fits-all” approach is not likely to work well in pursuit of water pricing reform. Rather, a strategy with differentiated options to isolate different farmer groups and irrigation systems based on existing farm attributes, irrigation types and household characteristics can be promoted. The results from this study emphasise the importance from a policy perspective of taking into account the demand side of water services, especially heterogeneity of water users. This study also raises some serious questions about how to contemplate policy designs for reform of the irrigation sector. From this study context, a differentiated approach may offer a higher prospect of success and better targeting of reform effort is probably warranted.