Chapter 3 Reforming The Reform? Policy Debate Under Chilean Democracy
Updated: Aug 24
Bauer notes how the book is being written around 2004, which is about 20 years after the model water code of 1981 was installed. He also points out that the military was still in charge of the country in the 1980s, and little in the way of a policy debate was even allowed. It wasn't until the 1990s and the return to democracy that many people even became very aware of what had been done to the water code. As a result, Bauer focuses attention mainly on what happened from the early 1990s to 2004: This Review is being written here in 2026, so what has happened in the 20 years since 2004 will be handled in other places.
Bauer notes that the Chilean economy was growing rather rapidly in the 1990s which is another reason more attention was put to the water code. As noted, the Chilean government was also returned to democracy in 1990, with a more center left political orientation. Attempts at trying to modify the water code, however, has faced substantive right of center, to extreme right political opposition.
Bauer notes that the empirical research on water markets and water trading in Chile done within Chile have been given quite different interpretations dependent upon the political persuasion of the person that is pointing to the results. Bauer notes how a number of issues have not been given enough attention including “… social equity, river basin management, conflict resolution, and Environmental Protection (p. 53).” As DIT makes clear, such a narrow view would be expected, as Free Market Environmentalism oriented researchers do not have a placeholder for such things as social equity and river basin management. Only self-interest in the domain of the profane gets any attention. The blinders leave out any consideration of the sacred.
Reforming the Water Code: Mucho Ruido, Pocas Nueces
The Democracy based government that was put in place in 1990 was required to stay within the dictates of what the military government had put in place, namely: The 1980 constitution, the associated legal and political framework that that it put in place, and especially the neoliberal economic model had to be preserved. Market fundamentalism was in effect imposed through the frame of the 1980 Constitution.
As Bauer makes clear, the main concern with the 1981 Water Code was that it had swung the pendulum too far toward the free market and deregulation. In DIT terms, it is about moving totally away from path 0M toward path 0G without regard for what would be truly a better choice on some path 0Z.
Round One (1990 -1993): The Government Goes Too Far
The goal came to be moving away from the unfettered laissez faire nature of the water market treating water as a commodity, and bring back the “general interests of the nation” and the notion that water is a “national good for public use.” In DIT terms, the private water use rights had been defined exclusively for individual good in such a way that there really were no duties or obligations to the public good. The water code had basically encouraged speculation, hoarding, and monopoly of a commodity. In DIT terms, the focus had been put exclusively on path 0G outcomes, approaching the vertical axis of profane-only considerations.
The proposed bill in 1992 had four parts. First, the public characteristic of a private water use right was to be highlighted. Second, a government agency was given authority to protect water quality and water courses, to include ensuring minimum flows for ecological purpose. Third, river basin management agencies were put in place. Fourth, regulations were tightened in the arid North relative to the more humid South.
Also, a requirement was put into play that water use rights had to be put to work, and not simply acquired for speculative purpose, the old use it or lose it provision of earlier Chilean water law. The latter requirement especially came under fire by right wing political groups and the neoliberal economists. It became a focal point as a symbolic claim the government was anti-market, and moving away from the neoliberal free market frame.
The river basin management agencies also came under fire. The proposal came out as rather vague, as in --- using DIT framing --- proposing an Other Forum that did not have Ostrom IAD design principles in view. It was viewed as another symbol the government was anti-market. The opponents to all the proposals argued the need to leave out the government involvement other than to ensure economic incentives would play: In DIT terms, it was about leaving out all consideration of the shared other-interest in the Other Forum(s), and leave it all to the self-interest of the Market Forum.
Alternative Instruments: Water Rights Taxes Versus Fees for Non-Use
The idea of putting a tax on water kept coming back into the discussion after 1993. Bauer points out how it still had not been put in place in 2004, but it was back on the table for discussion.
The other idea floated in the early 1990s was to pay a water use fee for nonuse. It had been applied to mining rights in Chile for years. The government would award mining rights to a company, which became a private property right. As long as the company was mining the mineral, no fee was charged. If mining stopped, the use right had to be returned to the government unless the fee was paid. Intriguingly, the ownership went back to the government, not the public.
A non-use fee was introduced for water, but only for new water rights. The rates differed by region, with much higher rates in the arid North. Eventually the whole idea was abandoned, as the opposition to the reform ruled.
Growing Emphasis on Economic Instruments and Analysis (1994-1995)
Substantive research effort was put into studying the Chilean water markets during the 1990s, especially by researchers from outside Chile. Most such studies touted the Chilean Water Marketing approach, but, not with much empirical support: Ideology ruled. In 1994, the idea of a fee for non-use also resurfaced. Others proposed a water use fee on all water used as a “productive input,” with increasing fees as the volume increased. In DIT terms, the Other Forum discussion on who and how to implement such a use fee was never brought into view, so, it was never done.
An Aside: Chilean Environmental Law
Bauer notes that Chile never had a serious environmental law. It had become a problem in international trade, as other countries wanted some assurance the Chilean export products were complying with at least rudimentary attention to environmental sustainability. A rudimentary law was passed in 1994. Because of pressures from right wing groups, it was designed such that it would not slow national economic growth: DIT makes clear such growth is on path 0G, without regard for the sacred represented in environmental sustainability on path 0M. Intriguingly, water rights and water law was kept separate from environmental law.
Round 2 (1996-2003): The Government Moderates Its Position
The concern was still with the overly oriented to laissez faire framing for the water markets. The government worked toward public education and discussion about the context for the water markets. Some technical policy studies were commissioned.
The concern over non-use of water rights, leading to speculation, was also brought back into view. The concern was with the public interest. Concern over ecological, instream river flows also came back into view. The government was determined to temper the water use rights that were in place, which had been defined in the way libertarians wanted (again, the Chicago Boys) with the focus only on the private interest, and, as a result, were oblivious to the public interest. Yet, the government did acknowledge a key role for water markets.
Nonconsumptive uses --- especially hydroelectric power --- also came under scrutiny, as the military government had privatized the electric utilities. Privately owned hydropower monopolies were supplying most of the Chilean electricity. The tense relationship between consumptive use of water upstream of hydropower dams for electricity generation, as well as environmental use of the water, had also not been addressed. How to coordinate such river basin level issues had not been addressed in privatizing water. Through the DIT lens, the Chicago Boys had no sense of the need to build an underlying institution and to develop an Other Forum (the visible hand) to help make the Market Forum functional. It was left to the magical invisible hand.
And, it was not resolved. The building of river basin management institutions still had not been done in Chile by 2004. It seems the hope is that the invisible hand will do the river basin management someday.
The Opposition Hardens
Bauer notes how the opposition hardened “from the same set of private sector interest groups, neoliberal policy analysts, and right wing politicians (p. 65).” The matter of a fee for nonuse was especially opposed. Through the DIT lens, all kinds of regulation were resisted, framed in the old bogeyman ways from the right, as framed by libertarian economics. The old right-wing trope shored up by libertarian, self-interest only economics (which is an ideology build on a cargo-cult science --- see Lynne 2025 --- not a true empirical science) has always been that even moderate involvement of the government in tempering self-interest with the shared other-interest would lead inexorably to socialism on the way to public ownership and central planning. Hayek (1944) is often cited as supporting that ideology, although Hayek did not actually make such claims (see The Two Roads to Serfdom).
Constitutional Challenges of Fees for Nonuse
Bauer notes that most of the opposition was extreme and not reasoned. One such claim was that any kind of fee for nonuse was unconstitutional. Government did get a small win in the claim that for new water use rights a nonuse fee could be charged. It was argued that the government's case was constitutional, as water still had some attributes as a public property, with the ability to charge a nonuse fee indicating same. Yet, conservative legal scholars argued it down, framing the nonuse fee as unconstitutional as it did not allow the owners of water use rights to just not use same if so desired. It is clear that neoliberal, right-wing conservative ideology ruled in said case.
Déjà Vu All Over Again? The Revival of Water Use Taxes
The opposition against a nonuse fee is in effect an opposition against water being a public property. So, what of water taxes, as in treating water like land, with the government putting a tax on private property in both cases? Naturally the neoliberals, with libertarian economics support, could perhaps support a tax on private property, as the property remains private both before and after the tax. A water tax is complex, however, as irrigated land pays higher taxes. So, introducing a water tax would mean having to reduce the tax on irrigated land, perhaps down to the level paid on unirrigated land.
Pros and Cons of the Economic Instruments
Bauer goes through a list of pros and cons for nonuse fees and water taxes. Through the DIT lens, it is clear the debate over nonuse water fees and water use right taxes is at base a debate over whether any of Chilean water is still a public property, or, has it all been privatized. If the nonuse fee could be established, that would open the door to shift the balance in private&public property in water back toward the public side, which is exactly why the neoliberals and conservatives will do everything to stop it.
The Bottom Line
Bauer speaks to a claim by a Chilean government lawyer that insisting on taxes instead of fees for nonuse is basically an expression of opposition to any reform to the Chilean Water Code which privatized water ownership in Chile. Yes, it is. The return to democracy has not meant a return to a better and certainly not best balance in private&public property. All private property in water is the new reality in Chile.
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