Personal view: Water markets may prove the way to stave off water wars

By Roger Bate. Personal View in The Daily Telegraph

The residents of Boscastle will be glad to hear that World Water Week has just finished. They probably think they've had all the world's water dumped on them in a week, but the concern of experts gathered in Stockholm has been the worry of too little of it, rather than too much.

There are the usual apocalyptic forecasts: "Continuing on our present path will mean more conflict," says a report by the International Water Management Institute (IWMI) said. Others go even further: "I don't know what will shake our complacency other than the fact there will be droughts, pestilence and wars that break out over water rights," is the warning from William Mitsch, professor of natural resources at Ohio State University.

Unlike much hysteria over the environment, there really is a water problem, especially shortages in the more arid regions of the world, such as the Middle East, parts of China, India and North Africa. There are also shortages where gross pollution occurs, notably the former Soviet states. Since water is so precious it is heavily politicised and change takes an age, so while wars are unlikely, conflict is increasing.

The main reason why there is a global water shortage is incompetent management, which causes total inflexibility in allocation - there is plenty of water, it's just used stupidly.

But there is some good news: in countries that have adopted water markets, efficiency has increased and, somewhat unexpectedly, both equity and the environment have improved. Water markets occur where those with water quotas, notably farmers, trade them.

Simply allowing water rights to be traded between those holding quotas has a remarkable effect on flexibility and hence productivity. Chile changed its water law in 1981 to allow rights ownership and trading. The result was a massive improvement in farming (over 6pc growth a year for 15 years) as the more efficient farmers bought the extra water they required, while poorer farmers found they had windfall assets in their water rights.

Municipalities were keen buyers, and clean water is now supplied to 94pc of rural users and 99pc of urban users 24 hours a day. Before water was traded, the figures were 65pc and 27pc, and then only intermittently. As remarkably, efficiency improvements reduced demands for dam construction. Since dams are often destructive to ecosystems, not only were tens of millions of pounds saved in construction costs but an ecosystem was protected.

Chile is the most startling story, but Australia has probably overtaken it in terms of market sophistication, allowing complex trading along almost the entirety of the Murray-Darling Basin. Markets also exist in South Africa, Peru, Mexico and the western US states. Black markets flourish in India, Pakistan and China.

These informal markets must be legalised to allow farmers secure title over water, because ironically, only this will allow the flexibility to provide for the massive and growing populations of China and India.

India desperately needs water reform. More than one million children die from water-borne diseases every year, and only one in three Indians have access to decent sanitation and quality drinking water. The rest are exposed to dysentery and other water-borne disease, as well as back-breaking toil for those (usually women and children) who have to collect water every day.

The indirect costs are even more staggering, with increasing salinity in irrigation water causing crops to fail, farmers to commit suicide (over 500 year this so far) and thousands of the poorest to starve. China's problem is similar but even more worrying. Its response has been to start the world's largest dam development programme, in the hope of bringing badly needed water to Beijing and the country's parched northern regions.

The government hopes it will meet domestic and industrial demand for water which is growing at over 8pc a year, but Beijing's main aquifer is depleting rapidly; by 2040 it will be used up, according to some estimates. Unless policy is changed China's economic growth will slow as it runs out of available water. Shortages increase the risk of ecological disaster, leaving the country with a massive food deficit.

The example of Chile shows the way ahead, and since Indian politicians get voted out for failing to deliver water, change must be possible. China lacks India's democratic culture, but the problem is so pressing and the solution should appeal to China's market-savvy leaders. The history of Chile and South Africa shows change can happen when political will is backed up by overwhelming necessity.

Water markets are not a sufficient condition for water to be used well; sparse rainfall can only be stretched so far, and water infrastructure is expensive. But markets are necessary for the efficient use in farming (where 70pc of the world's water is used).

Until that happens, the gloomy predictions of the Stockholm Cassandras will continue, and like Cassandra herself they will prove to be correct. They don't have to be. All else has failed, so it's time to try