How to solve the water conflict

Some believe that the war in Iraq is about oil. They are wrong, but the next war may very well be one over a far more precious liquid -- water. According to the U.N.'s World Water Development Report, which was presented at the Third World Water Forum that just concluded in Japan, water may be a major source of conflict in the Middle East in the years to come. Elsewhere, including Asia, it threatens to be an increasingly contentious issue.

But don't get out your water bottles just yet, because the same report also notes that "the record of cooperation historically overwhelms the record of acute conflict over international water resources." Indeed, widespread trade in water actually eliminates conflicts. According to Hillel Shuval, a professor of environmental studies at Hebrew University in Jerusalem, tensions relating to water between Israel and Palestine died down after Israel signed a deal to treat water for 50 cents a cubic meter. Water trading, he says, "ensures rationalization of water use [and] if you monetize the conflict, it makes it less emotional. If water is seen as a commodity, not as mother's milk, it shows that there is not enough there to go to war."

However, the Middle East's situation remains tenuous. For example, water usage is subsidized in Israel, and many farmers there grow cotton -- a thirsty crop produced far more efficiently in other countries. Israel uses about 67% of its water for agriculture, which represents only 2% of its gross domestic product, and farmers pay 55% less than domestic users.

Middle-Eastern delegates to the Water Forum worried that their extremely scarce water supplies may be subject to terrorist acts, and that refugees will face huge water shortages. And the chance of supplies being cut is significant, since 60% of Arab water originates from outside the region.

Many interest groups rely on a possibly dire situation to justify government control of water because it is a "fundamental human right." Yet governments everywhere fail to provide clean water to poor people, and instead are providing favors -- in the form of huge water subsidies -- to politically powerful farmers. Activists at the Water Forum who argued that water trading hurts the poor are ignorant of how poor farmers already use trading schemes. In a paper for the New Delhi-based Liberty Institute, Nirmal Mohanty and Shreekant Gupta observed that informal water markets among farmers are widespread in India, and most developed in Gujarat. These are mostly limited to the irrigation sector because they lack legal mechanisms -- property rights and contracts -- for formal transactions.

The paper pointed to Chile as an example where legal rights have encouraged better water usage. In the 1970s, only 63% of Chileans living in urban areas and 27% of those in rural areas had access to clean water. When water was essentially privatized, municipalities were able to buy water from farmers, vastly increasing their ability to provide water to the people. Now, 99% of Chilean urban dwellers and 94% of rural households have 24-hour access to clean water.

In both Chile and South Africa, market pricing for water has led farmers to produce more valuable products, such as fruits and nuts. Water was used by politicians in South Africa, who gave taxpayer-funded favors to politically powerful farmers. In the early 1990s, the government boldly reduced its own powers over allocation of water rights, and allowed agricultural users to trade their water entitlements.

In both countries, many millions of dollars were realized in efficiency gains that left all farmers and their local economies better off. Mexico and China have had similar success stories, proving that secure rights over scarce water, and the power to trade those rights, ensure that water is used where it is valued most. But China and India's successes with water trading may be short-lived. China recently announced its "South to North Water Diversion Project," and in June India will announce a giant project to redirect billions of cubic meters of water every year.

Asian countries might take a hint from Chile and South Africa, where water trading helped to prevent the construction of costly and environmentally damaging dams. This capital was freed up to provide water systems to the poor. Yet never one to learn a lesson from reality, the U.N. continues to advocate dams and other large projects in the water report. It does recognize, however, that the private sector can play an important role in the delivery of water to people. But though this sounds promising, it then suggests that government and water users should still retain control of water, and that profitability be limited. Public-private partnerships have many advantages, but when governments interfere with pricing and profitability, it results in a distortion of the market. This stops the private sector from building sustainable water systems and creating wealth.

While there might be a public-health benefit from clean water and sanitation, general government subsidies benefit the wealthy at the expense of the poor, who end up paying exorbitant prices for water that is trucked into townships and villages. A preferred alternative to subsidies might be to give poor people vouchers for water and sanitation services.

If governments are serious about providing clean water, they should vest more control in water users and suppliers through property rights, eliminate harmful water subsidies and remove power from bureaucrats who hand out favors.

Mr. Tren is a South African economist, and the co-author of "The Cost of Free Water: The Global Problem of Water Misallocation and the Case of South Africa" (Free Market Foundation of Southern Africa, 2002). Ms. Okonski, based in London, runs the Sustainable Development Project for the International Policy Network.

URL: http://online.wsj.com/article_print/0,,SB104871734623070900,00.html