New Horizons in Environmental Economics series
INTRODUCTION Water efficiency improvement in agricultural production has emerged as a formidable challenge to improve productivity in the water-scarce areas of the world (Qadir et al., 2003). In China, one of the important agricultural bases is located in the Northern semi-arid region from which a large portion of wheat and corn demand is supplied. With rapid industrialization and continuous increase of demand for grain, the role of the Northern region in water efficiency improvement in grain production becomes increasingly significant and crucial. The deterioration of water resource endowment in the Yellow River due to decreased precipitation and increased air temperature during the last 50 years has been reported (Yang et al., 2004). Since the water in the Yellow River first dried up before reaching the river mouth in 1972, both drying-up period per annum and furthermost distance of dried-up point from the mouth have increased over time. This phenomenon has continued unabated until its most serious position in 1997. However, the situation has dramatically improved since the enforcement of two new water management policies in 1998. One of the new policies administratively allocates water withdrawn from the Yellow River to each province in order to make a balance in water resource distribution between upper and lower reaches (Yellow River Resources Committee, 1998). The agricultural productivity in the region, where supply of agricultural water depends heavily on the river, is expected to be adversely affected by such rapid policy changes. On the contrary, the Southern part of China is endowed with...
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