Michael Harris is Chief Economist for the Australian Bureau of Agricultural and Resource Economics and Science (ABARES).

The Asian Century White Paper outlines a vision of Australia's present and future where all aspects of Australian life and policy are enmeshed with Asia, so that even the most domestic of issues — such as irrigation water reform — are also an important part of our foreign policy.

Our neighbours face increasing scarcity and variability in water resources, and greater international rivalry for their use. It is no surprise then that the White Paper calls on Australia to share our knowledge and experiences.

Like Australia, many countries in Asia owe much of their agricultural production to great river basins: Australia's Murray-Darling; South East Asia's Mekong; China's Yangtze and Yellow Rivers; Myanmar's Irrawaddy; and South Asia's Ganges. As in the Murray-Darling, in each of these systems there are ever greater demands while the supply of water is threatened by climate change or disputes between different political jurisdictions. Each of these countries, together or alone, must figure out how they can ensure what water they do have is used most effectively.

Australia's experience and knowledge can be (and has been) put to work here. The White Paper states that to contribute to 'sustainable security' in the region, 'we are well placed to collaborate and share our experience of replacing centrally planned water allocations with a market', which captures the central insight into Australian water reform.

Since water is scarce we need some mechanism to ensure that water is used where it is most productive. This mechanism also needs respond to variation in water availability from year to year (Asian countries, like Dorothy Mackellar's Australia, are 'lands of droughts and flooding rains'). A government could try to decide where the water is needed most and distribute it among competing interests all espousing their own needs, but even the most enlightened public servant could not possibly know whether the professed needs of one irrigator is truly greater than another.

Property rights and water trading avoids this conundrum.

An individual water user is best placed to recognise the value of water in their own circumstances, whether for farming or another use, and compare it to the value to the value to other users — represented by the price they are willing to pay in the market. If this price is higher than the value of the water to an individual user, they can sell whatever water they have to a user who has a more valuable use. In this way, year after year, water can be directed where it is most needed and can provide income to those who forego their water use.

While surface water (that is, water in rivers and streams) dominates our discussion of water, similar principles of property rights and trade can also be used to govern groundwater.

The major use of water in both Australia and Asia is for irrigated agriculture, so ensuring the efficient use of water also increases the amount of food that can be produced. In many parts of Asia agriculture is also still the major use of human labour, so water rights reform could increase the incomes of the largest, and poorest, segment of Australia's neighbours. This is why Australian water experience can contribute to 'sustainable security' in the region.

The potential for property rights reform in Asian water is considerable, and the prospect for gains great.

Although the reform process has been drawn out in Australia, what took 100 years of wrangling here could be done in a far shorter period, just as the industrialisation of the 'Asian Tiger' economies and now China have achieved in decades what the West took over two centuries to do.

The long Australian history of water reform begins with federation and competing claims between South Australia and states upstream on the Murray River. However, the problem of allocation was always seen as a problem between different governments (as on the Mekong today), and not between different water uses, which is the ultimate issue at a stake.

For most of the 20th century water rights were fixed to certain pieces of land regardless of whether the water was best used there or elsewhere, and large dams were used to divert more of a scarce resource rather than making better use of the water already diverted.

Yet a river could only be diverted so much. By 1994 the Council of Australian Governments agreed in principle that water rights should be separated from land and traded freely as property. This in turn began a learning process. Property rights to water need to accurately reflect a water user's impact on infrastructure and their use of common storages such as dams. Trading prices need to reflect the evaporation losses that occur as water moves downstream, and the effect of water use on water quality. Most recently the environment has been recognised as a user of water alongside agriculture. Water trade has allowed water to be purchased and directed to improving river health and biodiversity.

The pay off from this experience became very clear during the 'millennium' drought in the past decade.

Temporary water trade — that is, the sale of a year's water rather than the permanent right — allowed many farms to stay afloat despite the most challenging climatic conditions for many decades, and allowed the impact on production to be minimised. Horticulturalists bought water to keep their trees and vines alive for better years. This water was often sold by broadacre farmers who could then temporarily shift to dryland cropping or ride out the drought on water sales.

This history of reform and drought has left us with a large stock of knowledge about the mechanics and institutions of allocating scarce water through trading, and this has been extended around the world and cited by reformers in Chile and the US, and attracted interest from India. ABARES has also conducted research on the possibilities for water trading in the Yangtze which was used by AusAID to brief Chinese policymakers.

There is a certain urgency about this issue, and not just due to changes in climate or increased population. One important lesson from the Australian experience is that poor decisions are very difficult to reverse, and property rights can sometimes exacerbate these problems. For instance, the advent of water trading saw an increase in water use, as 'sleepers' and 'dozers' (entitlements that had never been exploited, or had not been exploited for some time) were sold to farmers who put them to use and created an over-allocation of a resource that was becoming scarcer.

The countries of Asia are undergoing tremendous changes in agriculture, and changes made now may have effects long into the future. These changes should not inhibit good water policy in future, and hopefully they can get it right the first time.

The drafters of the White Paper were right to recognise that Australia's water experience has a vital role to play in the Asian Century.

Photo by Flickr user Tim J Keegan.