Water and markets – an essential cocktail

The supply of fresh water is vital: as the world’s population and economy expand, demand for water inevitably increases. The UN World Water Development Report ‘Water for People, Water for Life’ is, therefore, a timely and valuable document. Sadly though, it remains entrenched in the command-and-control paradigm, and so its policy recommendations will likely produce expensive failures, as have so many in the past. This is a pity, because there are several success stories from around the world where significant efficiency in water use has been gained at very low cost.

The Report’s goals are, of course, noble and heroic. The most notable is halving those in poverty and without access to enough food and water by 2015. It also has issued some new challenges such as ‘promoting cleaner industry with respect to water quality and the needs of other users’. Other goals are rather confused: ‘assessing water’s key role in energy production to meet rising energy demands. Ensuring water knowledge becomes more universal…and recognising the distinctive challenges of an increasingly urbanised world’.

Analysis in various UN and World Bank reports of such expansive programmes undertaken at great expense in the past has shown them to have failed almost entirely. When UN Reports during the 1970s found that developing countries were importing 40 million tons of cereals annually, programmes intended to achieve self-sufficiency in food led many poor countries to develop irrigation systems. But poor infrastructure meant that while water use increased many-fold, production barely changed because irrigation was so poorly done, and crop choice inappropriate. Today, poor countries import over 100 million tons of cereals, which is forecast by UN to exceed 190 million by 2015.

There is a strong moral hazard in undertaking internationally/government-funded irrigation schemes. The public clamour for water is hard to resist: in places like India, 69 per cent of people in non-irrigated areas are poor (income under $1 per day), whereas in irrigated areas the proportion is almost reversed, at 26 per cent. This trend is a cause for worry since it’s easier for poor governments to throw more water at the problem than to improve entire agricultural production and distribution systems.

Predictably, ‘Water for People; Water for Life’ plays the numbers game. It claims that by 2050, between 2 billion people in 48 countries and 7 billion people in 60 countries will be adversely affected by water scarcity. The latter estimate includes, amongst other factors, a 20% ‘forecast increase in scarcity due to climatic changes’. And while these numbers are almost laughable – ranging from those currently affected to nearly everyone on the planet – this Report is likely to affect national and international hydro-politics. It encourages societies to push forward with broadly greater government control, limiting use of water in agriculture and business and providing a lifeline free supply for the poorest.

The Report’s cost–benefit analysis shows that the amount of disease and lost working time due to unclean water is vastly greater than the cost of improving water systems. The UN Commission on Sustainable Development, which published the report, claims that every dollar spent on improving water delivery and sanitation would bring $34 of benefit. This is a very valuable assessment – and is probably enough in itself to spur investment. This being the UN, however, the information is used as the basis for fundraising.

The Commission on Sustainable Development claims that investment of between $20bn and $60bn in water delivery and sanitation is required in the next few years. But while it acknowledges that it is ‘essential to involve the private sector in water resource management’, it goes on to say that private financing ‘should be seen as a financial catalyst – not so much a precondition – for project development’. This is because ‘valuing water includes social and environmental priorities as well as cost recovery’, which the Report assumes the market is incapable of doing. Unsurprisingly, the UN continues to look to bureaucracies and pressure groups, all of whom oppose the commodification and privatisation of water.

China and India, and many other Asian countries are rapidly developing dams to expand hydraulic infrastructure and water delivery. Even in Africa irrigation expansion is increasing apace. Dam building can be hugely environmentally destructive and expensive. Past schemes have been gravy-trains for government cronies, resulting in inefficient or even obsolete infrastructure – fulfilling the outcomes forecast by the UN.

Dam construction is not bad in itself. It can be of high value in preventing floods and in improving farm development – but unless schemes are adopted which promote efficiency, increased supply will simply lead to waste on a great scale.

Political reorientation in South Africa was the added spur that prompted a reallocation of water rights among users in the Crocodile River Catchment. In 1994, farmers traded water rights amongst themselves (and in a couple of instances municipalities and industry). Such were the efficiency gains that plans to build the Mountain View dam on the Elands River were shelved, and so far there has been no need to dust them off. This may seem surprising, but under the old political regime, white farmers were allowed almost unlimited, nearly costless water. I personally saw these farmers using spray irrigation systems at midday in temperatures around 85ºF, while black families in the Townships shared a standpipe and had no sanitation. Such staggering inefficiency and inequity is not uncommon in politicised water regimes.

Other countries, notably Chile and Australia, have also allowed farmers to sell rights, making farming more efficient by transferring water to the highest valued use. This approach has reversed waste in agriculture and stopped the demand for new dams. Australia’s agriculture is probably the most efficient in the world and Chile’s farming sector streamlined and grew at over 6% a year for over a decade.

UN bodies also claim that man-made climate change is already leading to more natural disasters. In the 1990s more than 665,000 people died in 2,557 natural disasters, of which 90 per cent were water-related. The UN claims that the number affected was double that of the previous decade. Indeed, the cost of such disasters has gone up 14-fold from the 1980s, according to reinsurers like Munich Re. But this reflects people’s preferences for living in risky locations (by the ocean, in earthquake and flood zones) and the massive increase in property values in these locations, rather than an increase in disasters themselves. It is therefore speculation to say that there will be more disasters in the future due to climate change. But there is little doubt that if water continues to be wasted, salinity problems and water shortages will lead to a massive increase in water-borne diseases, as well as more landslides and land degradation problems and probably flooding, undermining food production and security in sensitive locations, especially the water-poor Middle East.

The notion that water must remain a publicly-provided and controlled commodity will prevent the very investment and efficiency gains that are so badly required. So, while it is unlikely that future wars will be fought over water, it is much more likely if the UN advice is followed. Government control has continually failed – it is time to try the market.

Author: Roger Bate is a visiting fellow of the American Enterprise Institute and a director of health advocacy group Africa Fighting Malaria. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article\22 June 2004