March 2006

The Water Revolution: Practical Solutions to Water Scarcity

Millions of people around the world lack access to clean, affordable water--a problem that has been greatly exacerbated by poor policy choices. In many countries, government subsidies and excessive regulation have created perverse incentives resulting in a diminishing supply and a poor quality of water. In nations where opposition to the private provision of water is prevalent, public-sector water infrastructure is typically decrepit and failing. What can be done to promote greater access to clean water? In The Water Revolution (International Policy Network, March 2006), edited by Kendra Okonski, contributors address this issue and propose how to best allocate an already scarce water supply. Panelists at a March 22 AEI panel discussion--held on World Water Day--considered practical solutions for making clean, affordable water available to everyone. 

Roger Bate
AEI

Mr. Bate argued that most environment scholars tend to agree that the world’s water supply is running out and that water pollution is an increasing problem. What they do not agree on is which solutions work best to fix the problem.

Mismanagement of water is a problem across the world. While problematic even in the United States, mismanagement is lethal in poor nations. Across the world, 1 billion people lack access to potable water, and 2 billon lack access to proper sanitation. Fighting for water in the face of such scarcity is fierce. Water politics can destabilize entire regions. Mr. Bate agreed with Mark Twain that “whiskey is for drinking and water is for fighting over.”

Mr. Bate outlined the general history of water development.

• Stage 1: Nations engage in hydraulic building of dams and reservoirs to store water.
  
• Stage 2: Hydraulic development becomes hugely expensive and environmentally destructive.
  
• Stage 3: Quotas are placed on use of water, leaving some without access to water.
  
• Stage 4: Infrastructure development occurs at a much lower level, there are more sophisticated pricing systems, and the cost of water to consumers does not approximate the actual cost of delivery.
  
• Stage 5: Water supply is augmented due to political pressure, even though cost is extremely high; restrictions are placed on use; privatization is attempted as a last resort.

Mr. Bate argues that many places in the world today have reached stage five and are engaging in the debate about privatization versus universal access. This debate focuses largely on the market.

Andrew Morriss
Case Western University

Mr. Morriss argued that markets are essential in providing people with water. In fact, he claims that there are no real alternatives to the market. He rejects the suggestion that those who argue for market distribution, government control, and a universal right to water all “just get along,” as it is impossible for those three views to coexist.

Mr. Morriss believes that markets are superior for four reasons:

1. Markets provide more information at a lower cost, which is important in business. Markets allow us to know about the relatively scarcity and demand for a resource. The additional information helps to reduce risk and increase welfare. Furthermore, markets allow more complex transactions.

2. Markets are dynamic in the way they reflect changes of information. Markets teach things that people do not know otherwise. Mr. Morriss used the example of e-Bay, where sellers learn the demand for the items they wish to sell. Without the market, sellers would be unaware of demand for their items. Water is no different: through the market, it is easy to learn how many people want water and how much they want it.

3. Markets better incorporate new knowledge about ways to produce and deliver water. The water market, like other markets, is able to respond to new information in a matter of minutes. With an increase in price, new firms enter the market; with a drop in price in location A and a rise in location B, distributors shift water supply from A to B.

4. Markets provide incentives for new technology. When someone owns the water and profit is at stake, there is incentive to reduce waste. Mr. Morriss cited as an example the production of steel which used 200 million tons of water per ton of steel in 1930, but now uses only around 20 million tons of water per ton of steel. There are now front-loading washing machines and water-saving showerheads, thanks to people’s desire to save cost by saving water.

5. No large-scale agreement about water distribution is necessary in market theory. Contention about how water is used can be eliminated when everyone pays for their own water and can use it at will.

Of course, there are also problems with market distribution of water. There are externalities, and people without resources are not advantaged in markets. In Russia, the Aral Sea is a great example of the potential damage of poor water management. One argument critics make against water markets is the inevitable movement of water from poor rural areas to rich urban areas, leaving the farmers without water for crops. Mr. Morriss responds that while this movement would be the case at first, as the markets progress, there will be an intermediate balance. After all, the poor tend to be disadvantaged by governments as well. People who do not have access to water now--typically the poor--are paying more to buy water in bottles and from trucks. He argues that current water policy in developing countries subsidizes the wealthy and taxes the poor. Governments also struggle with externalities and have fewer tools to fix the problem.

Kendra Okonski
International Policy Network

Ms. Okonski began by outlining the characteristics of government water systems in poor countries around the world. She claimed that the government’s water subsidies did not help the poor access drinking water, but instead, helped the wealthy fill swimming pools. Billing and metering in such countries are erratic and as many as 50 percent of people do not pay their water bills. There is no incentive to properly measure usage, and the water infrastructure is failing.

Ms. Okonski then compared countries with failing government water systems to those with prospering market-run systems. In Mexico, the poor are likely to pay the most for water, for they lack the political connections to benefit from subsidies. It is illegal to disconnect water to those who do not pay their bills, so there is little incentive to help market systems prosper. Since many do not pay, most do not have access to water at all. In Chile, on the other hand, the market-based system has provided citizens full-time access to potable water in urban areas--a rarity in South America. Access to water has spurred Chile’s agriculture; it now is an exporter of produce.

Some African countries, such as Senegal, Cote d’Ivoire, and Guinea, have had success in privatizing water supply. Others, however, implement top-down distribution systems that leave the poor without water. The urban poor living on the outskirts of large cities often do not have access to government water distribution. In such locations, small entrepreneurs have arisen, creating informal markets to supply water for a profit. Ms. Okonski argues that these informal, unregulated systems help the poor by supplying a vital service they could not access otherwise. Ms. Okonski also cited a study of a slum in New Delhi, India, that had created its own pipe network for water distribution when the government refused to supply services to the area. Customers living in the slum paid for water to be delivered twice per day at an appropriate cost. Ms. Okonski heralded these market approaches as an effective way to bring water to those without.

The overarching lessons that Ms. Okonski drew from analyzing water systems across the world was that government systems tended to suffer from waste and lack of innovation, often failing to provide services to the poor. Market systems, in contrast, tended to provide better service and increased efficiency. While noting that market systems were not “one size fits all,” she strongly advocated a market-focus, bottom-up approach to water distribution to bring access to clear water to a larger number of people.

AEI research assistant Lauren Campbell prepared this summary.