Efficiency of Community Based Water Markets in Oman Slim Zekri, Houcine Boughanmi, Hemesiri Kotagama Department of Agricultural Economics & Rural Studies, College of Agricultural and Marine Sciences, Sultan Qaboos University IG/AGR/ECON/05/02 DATA AND METHODOLOGY Box-Jenkins (ARIMA) analysis is a widely used econometric method to test existence of patterns in time series data. The prices and quantity of water auctioned at each auction (once a week) in four aflaj over the years 1994 to 2003 was used in this study. Al-Farfara (Daudi, stable water flow) Mehaidath (Daudi) Al-Balfai (Ghaili, less stable water flow) Al Samdi (Ghaili) The four afalaj considered in this study are situated in the region of Samail in Oman. These are situated in a radius of about 15 Km. The same climate and soil type prevail in the area. RESULTS 1 Stationarity and model identification The price time series of the 4 falaj were specified as an ARIMA model with a homogeneity degree of 2 and a second order moving average and an autoregressive components. This specification was chosen by examining the autocorrelation functions of the times series and its differences as well as the performance of alternative specifications. Thus the ARIMA (2,2,2) equation that was estimated was of the following form. Log Pt=C+β1 logPt-1+ β2 LogPt-2 +εt + θ1εt-1 2. The estimated model is given below 3. Testing for white noise/ random walk Q-statistics is a Chi-square statistics to test for the hypothesis that the residuals are not white noise (i.e. they are correlated with each other) with a degree of freedom equal to the number of lags minus the number of estimated coefficients If the model is correctly specified then the residuals should resemble a white noise process, that is we would expect Q to be small (below the cutoff critical level). In our case the chi-square critical level at the 95% LS is 23.68 so the residuals are white noise (markets efficient) only in the ALFAR and MIHAIDTH falaj. INTRODUCTION AND RESEARCH PROBLEM The advantage of market-based approaches over command and control approaches in improving efficiency of resource management has been theoretically established. There is substantial literature evaluating the successes and failures of the adoption of market based policy instruments in natural resource management. Since early 1990s, market based volumetric pricing has been proposed to manage demand for irrigation water. Water price would be an incentive for efficient use of water, recover cost of water supply, and enable further investments. Although theoretically acceptable and has been strongly advocated, to adopt markets to manage irrigation water, there has been little empirical proof of its efficiency. Most studies have judged the efficiency of water markets by relating the responsiveness of water prices to related market prices (as commodity prices) and other market variables. Studies on water markets have been constrained due to the unavailability of data on volumetric water prices. Falaj irrigation systems are a long-established ingenuous engineering and social heritage of Oman. The community for centuries has managed the aflaj, emulating the market process. Water price is arrived through a farmers’ bidding process on a weekly basis by auctioning the common water rights. Each water right is leased to the farmer offering the highest price. THE OBJECTIVE OF THE STUDY Evaluate the efficiency of aflaj irrigation water markets in Oman. HYPOTHESIS OF THE STUDY The aflaj irrigation water market in Oman is not efficient. THEORY Efficient market Hypothesis: EMH An efficient market will fully reflect all available information, such that price movements do not follow any patterns (thereby unpredictable). Prices follow a “random walk”/ white noise that is unpredictable. Thus if market is efficient past prices can not be used to predict future prices. If the market is efficient, prices will not behave in an identifiable/ estimable pattern. Will have white noise.     CONCLUSION The results of this study indicates that markets are efficient in managing irrigation water in 50% of the irrigations schemes studied. Further empirical research need to be undertaken to examine the efficiency of markets in managing irrigation water.