Chapter 4 The Results of Chilean Water Markets: Empirical Research Since 1990
Updated: Aug 24
Bower notes the high stakes that neoliberals, especially the libertarian economists, have in painting a rosy picture of how well the water markets are working. Bauer goes on to point out that the discussion in Chile about water markets has been “long on theoretical or ideological argument and short on reliable information (p. 75).” The reality is quite mixed results. Also Bauer points out that because mainly --- a DIT lens claim, like mainstream economists with a libertarian frame that sees only self-interest have been doing the studies --- the focus has been on the buying and selling, the trading of water rights. As Bauer clarifies, and it is to be expected from analysts using Single Interest Theory (SIT) rather than Dual Interest Theor (DIT) to frame the inquiry of how well the Water Forum performs, little attention has been given to concerns for “social equity, coordination of multiple users, river basin management, resolution of water conflicts, and Environmental Protection (p. 76).” All said considerations are in the domain of the shared with the other-interest, the domain of the sacred. And, as DIT makes clear, SIT is oblivious to all that is sacred, focusing only on the profane.
The Overall Trend: From Partisan Boosters to Greater Balance
Bauer points out how early studies of the Chilean water market claimed without substantive empirical evidence that there was “active trading of water rights, greater efficiency of water use and allocation, social and economic benefits for poor farmers, and fewer water conflicts (p. 76).” The World Bank had also been doing studies without much real data. The overall claim was that Chilean water markets were both well-orchestrated and doing well, and should be a model for other regions on the Spaceship Earth.
Through the DIT lens, such claims are inherently ideological exaggerations, as water markets oblivious to the shared other interest cannot achieve economic and social efficiency. Referring to Figure 1, the only kind of efficiency that could be achieved from moving along the profane path 0G of Figure 5 is to cause the supply and demand curves to cross as labeled in Figure 1 at the intersection of demand curve WG and supply curve UG. Said inefficient point is illustrated at point A in Figures 5 and 6, as a point totally oblivious to the domain of the sacred, as recognized in considerations of social equity, coordinated river basin use, and environmental quality to include ecological concerns. Said point fails to achieve the economic and social efficiency point at WZ = UZ, which is at a point B in Figure 5. And, even worse, if farmer irrigators are not paying much attention to the marginal costs of applying water on the farm, the outcome is actually the even more inefficient point of use WET, the point of maximum evapotranspiration water use for the crop, as commonly recommended by agronomists and agricultural engineers.
Bauer points to a World Bank report by an economist by the name of Thobani who claimed the Chilean water law had “increased the value of water, reduce environmental damage, and benefit of poor farmers … (p. 77).” The claims were all ideological in character, associated with claims about what private property supposedly accomplishes relative to public property. Bauer also points to research by Rosegrant and Binswinger who in effect make false claims about how water rights were initially allocated, claiming poor farmers benefited, when in fact large agricultural land-owning firms were awarded virtually all the rights in the initial allocations. Said claims, it turns out, rested on claims by a Chilean economist by the name of Gazmuri, who is also a politician, and high-level civilian official in the military government that assigned the water rights to powerful interests favored by the military junta. All said versions of Chilean water market success started to unravel by the mid-1990s.
The facts were quite different than the ideological claims of both the libertarian, mainstream neoliberal economists and the politicians who use that cargo-cult science regularly to give said claims supposed credibility. One of the most obvious shortcomings was the reality that very few water trades had actually transpired, so it was questionable to claim any kind of efficiency had been stirred by water trading. Trading was quite uncommon and remains so through 2004. Also, the few transactions that did arise, took place within the agricultural sector, perhaps giving some small gains in efficiency in that one place.
Why? Bauer provides a list, to include (p. 79):
1. Constraints imposed by physical geography, as in Chilean rivers are short, steep and interbasin transfers are very expensive if not impossible
2. Legal and administrative complications especially in poor record keeping about who had water rights and what the trades were exactly. Through the DIT lens, an Other Forum must operate to provide these kinds of services, to bring the transaction costs down to a lever where a market can function.
3. Cultural and psychological resistance to trading is especially in play in the farming communities. Irrigators are not used to thinking of water as a commodity. Through the DIT lens, farmers would see water as not only being profane for use in producing crops to be sold at price P, but also being sacred --- especially in long standing irrigation communities --- with value O.
4. Inconsistent and variable price signals about the real scarcity and economic value of water. Water rights holders are rarely willing to sell, thinking more about having an adequate supply in case of a massive drought or some such.
Bauer then goes on to point out how the main argument that had been used to sell water ownership and water trading was the notion that economic efficiency would be improved by it. Water would move from lower valued, less cost-efficient uses to more cost effective higher valued use. Investments would also be stirred into water conserving technology because of the opportunity to sell the conserved water. Bauer points out there's very little evidence that any of that happened in Chile. And, on water conservation, as demonstrated in decades of DIT testing, installing water conservation technologies is driven in the main by being in empathy-with other users, or in the case of water quality improvements, being in empathy with downstream users of water leaving the farm (read all about Empathy Conservation at Empirical Support for Metaeconomics? | Metaeconomics).
Bauer also pointed out that being able to sell water use rights did not stir investment in canals and structures. The owners of the water rights still preferred government investment in such facilities. Through the DIT lens, it was about investing in the common good, which needs to be done with tax dollars.
Another study was done by Heame, an agricultural economist at the University of Minnesota. Four areas who were expected to have active water markets in more arid central and Northern Chile were selected. Little trading was being done. The main reason for so few trades was the problem and expense of moving the water to another location, due to the rigid canal infrastructure. Yet, Heame did find that some water had moved from lower value agricultural uses to higher valued urban uses because of the market trading. Intriguingly, the claim was made that the market had worked to make water allocation efficient, demonstrated by the fact there were no trades. Ideology must be supported. Bauer points to how this became a common argument in Chilean debates, although obviously questionable.
Bauer also points to some research by Rios and Quiroz who claimed without empirical evidence that the system was working reasonably well. The claim was that markets were expediting water rental and leasing, again without empirical evidence. Also, said researchers claimed that few transfers have been made between consumptive and non-consumptive users because of the lack of definition of the property right for the latter.
The turn is then to the counter-offensive analysis by entities like the UN Economic Commission and the Caribbean ECLAC. Both organizations were quite concerned with the push by the World Bank and the Inter-American Development Bank to impose the Chilean approach using private property in water and the Water Forum to replace other ways of dealing with water in other Latin American countries. The researchers in the counter-offensive compiled empirical data pointing to the short falls in Chilean Water Forums. It was of special concern that “… Chile was the only country in the world that did not impose any legal conditions on private water rights, and that this ran counter to hundreds, if not thousands, of years of international experience (Bauer 2004, p. 83).” In DIT terms, the shared other-interest was inadequately addressed, and was a major feature of thinking about water going back over the millennia. The water rights needed to be attenuated to account for the shared other-interest, the public interest. As Bauer points out, “… the danger was too great that public interest in water management would be harmed by monopoly power, unfair competition, speculation, boarding, and environmental damage (p. 83).” Unfortunately, the World Bank continued to claim the Chilean water market was the model for the world, without any substantive empirical evidence to back up said claim.
Recent Chilean Overviews: Toward A Shared Diagnosis
Bauer points to the main researcher in Chile during the late-1990s, a Vergara, who is a water lawyer. Vergara has been claiming the move to privatize water and move away from all manner of central planning was a good thing. Vergara wants to improve the way the Water Forum operates, and apparently wants no Other Forum in play. Vergara claims that all will be well if the private property right is more clearly defined.
Vergara came up with a list:
The Chilean water code does not deal with externalities. Through the DIT lens, that is normal for SIT based Water Forums, as the shared with the other-interest is left out of the design of the Forum. In fact, the DIT solution is developing an Other Forum to give context to the Market Forum.
Water rights do not deal with return flows from irrigation fields. So, who owns the water that leaves the field and runs down the canal or down the river? The DIT lens suggests this is a matter for an Other Forum to address, with an attenuated water use right only applying to the water when first applied to the crop, and, any runoff returns to being a public property.
Recordkeeping and registration of water rights is inadequate. Again, an Other Forum is essential for said kind of record keeping.
Many water rights that do have formal legal titles have a substantive content that is disputed in practice. The example Bauer uses is that some claim that the right is a permanent right, when in fact there may not even be water in the source during certain times of the year. It is a paper right not a corpus of water right.
Finally, substantive problems with the canal infrastructure exist. It is virtually impossible to make some of the transfers that perhaps some people would like to make.
Through the DIT lens, the spirit of true ideological framing is in view, in that Vergara claims that fixing all said problems assures the Water Forum can solve all.
Bauer then points to another researcher, Donoso. Many ideological claims about the superiority of a Water Forum have been made by Donoso. Yet, intriguingly, Donoso has realized that the “…the lack of adequate legal, economic, and hydrological information about water rights…(p. 85) can be a problem. The lack has made the market less effective than it could have been. Through the DIT lens, the Other Forum is essential to provide such information. The Market Forum does not run strictly on well-defined property rights. Much more is needed, especially information about the hydrology at play. Donoso has found some water trading --- specifically, selling by agricultural owners to real estate developers and into urban use.
Bauer then turns to research by Dourojeanni and Jouravlev who have claimed too many Latin American countries are taking the Chilean model as an improvement in water management. Said researchers point to the problems with the initial allocation up water leading to “… speculation, accumulation and hoarding, and excessive monopoly power (p. 86).” The minimal level of activity in the Chilean markets also suggest perhaps efficiency is not being enhanced. Also, not dealing with the common good aspects of water is pointed too. Said “externalities” arise in the arena of return flows, in stream effects, and impacts on areas of origin. The latter is the fact the initial allocations and subsequent trading have paid little to no attention to what it is doing to traditional agricultural communities and indigenous communities. Through the DIT lens, again the shared with the other-interest is being ignored and can only be brought into view with an Other Forum.
The Limari River Basin: Poster Child for Chilean Water Markets
Bauer notes three features of the Limari River Basin that has helped facilitate the Water Forum, as in three reservoirs within which to store water (public investment), local water users associations well organized (i.e., DIT lens here, Other Forum is well organized), and dry, hot climate making for the production of high valued crops for export. All three give underlying conditions essential to successful Water Forum represented in the Other Forums leading to public investment in underlying infrastructure and water user associations to help give context to the Water Forum. SIT has no placeholder and no provision for such things; DIT does.
Bauer then goes into the most detailed, rigorous study of water marketing in Chile accomplished by Hadjigeorgalis. That research points to the key need to assure the water right actually represents a physical amount of water, such as water stored in a reservoir. It must not just be “paper water.” Yet, even then, restrictions on water use rights are also essential in order to ensure the shared other-interest in the water is represented in any trade, which works to reduce “externalities.” Trading is then influenced by both the physical and legal location and quantity of the water. The research points to the Water Forum in the Limari River Basis as likely leading to more efficiency, but it is only from some limited trading among irrigators, and, clearly it is only profane trading on path 0G. The research points to how it also helped supposedly helped some small, poor farmers as water rights could be leased out to larger operations during times of drought and income better ensured.
Issues Missing from the Research
Bauer again points out how the research on water markets through the 1990s never did really address the matters of “social equity, environmental sustainability, river basin management, coordination of multiple water uses, and resolution of water conflicts (p. 89).” Through the DIT lens, it is fully understandable as to why, in that most researchers apparently are using the SIT lens of self-interest only, seeing only the Market Forum and price P as the value. All the items in the Bauer list are about the shared with the other-interest, the common good as jointly arising with the individual good, and having value O. All such things must be addressed in the Other Forum of Figure 6. Bauer concludes the focus has been far too narrow, in that the items in the list must also be considered.
Chile’s National Water Policy in the Late 1990s
Bauer points out the Chilean Government is fully aware other matters must be addressed. The list includes:
The public interest needs to be addressed as water is in effect a national good for public use.
Water use must be environmentally sustainable
Water is an economic good
Water policy should promote participation by water users, other citizens, and social organizations… reflecting the social, economic, environmental, and cultural importance of water.
Physical dynamics of water resources and the hydrologic cycle are extremely complicated… adequate scientific and technical knowledge is essential.
Peering through the DIT lens, both the profane&sacred dimensions of water need to be addressed and the Market Forum cannot do it by itself. Other Forums similar to the Florida Water Management District system are needed, as entities that have hydrologic engineers and other technical and legal staff as employees. Said Districts also facilitate the talk, talk, talk about the common good of water, like not over pumping the Floridan aquifer to ensure adequate flows out of the springs for the manatee.
The Chilean Government report proposes to deal with issues in seven categories:
The legal nature of water rights dealing especially with nonuse.
Institutional structure, integrated water management and planning. Using the DIT lens, this is a call for creating some kind of an Other Forum to deal with problems like in stream flows.
Developing a framework (again, an Other Forum) for dealing with environmental pollution and protection.
Focusing on the technical efficiency of water use as well as the specific operations of water markets.
Looking deeper into a water administration and water users organizations, again, looking at alternative kinds of Other Forums.
Finding ways to bring technical and scientific knowledge into play, including data collection and monitoring
Providing technical training and public education.
Again, Chile needs to put substantial resources and effort into the design and implementation of Other Forums.
Missing Research Issue 1: Social Equity
Bauer points to the social inequity relating to peasants and small farmers. Few were given water use rights. Most depend upon overflow from larger farmers. Technology used tends to be more primitive. Peasants and small farmers tend to avoid the legal system, which tends to be unsympathetic, anyway. Through the DIT lens, clearly the common good is not part of Chilean culture, as large, prosperous farms are not giving it any attention. Bauer points out how the studies done by agricultural economists to date have not paid any attention to the matter, either. It is to be expected as the SIT lens has no placeholder for the shared other-interest, the common good among prosperous and not so prosperous farmers. Said economists in general have claimed the equity effects have been trivially small, without any empirical evidence of it being the fact-based case.
Through a DIT lens, one would pursue research into the extent to which Optimal Inquality (see Too Much Inequality? Time to Move Toward Optimal Inequality? ( could be brought into play. The problem is, he Neoliberal, Libertarian Economics “Chicago Boys” framed takeover of the water resource has ensured Extreme Inequality will play. It is inherent to what was done in the 1981 Water Code. SIT based framing has no reasoned way to address inequality. It is at best a “trickle down” system of merit thinking, with whoever was able --- both industrious and more powerful --- to take and keep the water right is deemed deserving of it: Ethical reflection --- essential to achieving Optimal Inequality --- is not part of SIT.
Bauer points to three specific issues relating to the poor and small farmer matter. First, the military junta did not explain to small farmers how they could get access to water rights. Secondly, small farmers really have no way to participate in the market trading except as sellers. And, very few have water to sell because very few were given water rights. Third, small farmers tend to lack the economic resources as well as the social and political influence to get into the market trading. The laissez faire market has no regulatory context, so, power rules. The nonuse discussion is relevant here: It would seem that giving some of said rights to small and poor farmers could be a beneficial thing to Chilean society.
As Bauer indicates, the economic research carried out so far has been designed to look only at economic efficiency rather than distributional issues. Again, the DIT lens suggests why: SIT has no placeholder for the shared other-interest in reasoned distribution. Yet, the matter of who owns the water resource is not a trivial matter.
Missing Research Issue 2: River Basin Management
Being familiar with the 1972 Florida Water Resources Act: It created the Other Forums represented in five Florida Water Management Districts covering the entire State. Each District represents a hydrologic basin. Said Other Forums were put in place, and have now been operating for over 4-decades with reasonable success in such matters as doing the engineering, economic and legal analysis necessary to sustain the Floridan aquifer. Said Forums also allocate the water using short term water use permits, making it possible to work at balancing the profane&sacred, with a focus on the sacred in that Florida water is held as a public property in public trust. In the case of Florida, perhaps some Water Forums could be now introduced.
Chile went the opposite direction. The Water Forum was created first. Actually, it was just done --- as Bauer makes clear --- carte blanche, in effect neutralizing all the Other Forums that had been operating in Chile as though said Forums had never existed. And, now, essentially no reasoned, well-designed Other Forum is yet in play.
As Bauer points out, Chile does not have integrated water resources management. The institutional aspects --- in DIT terms, the shared other-interest based aspects --- have not been addressed. Matters such as “reforestation to control soil erosion, and communication among government agencies…” need some sort of Other Forum to make it happen, and, have yet to be installed. Conflict resolution processes have also not been put in place. As a result, the only alternative in such cases is the judicial system, as in civil lawsuits. Bauer points to part of the problem is the intellectual limitations of academic disciplines that have been looking into the matter: Through the DIT lens, disciplines using SIT (i.e., mainstream economics, especially libertarian economics) would especially be limited and inadequate to the task.
Institutions for Resolving River Basin Conflicts
As Bauer states it, “resolving water conflicts in Chile depends primarily on voluntary private bargaining among the owners of water rights p. 98).” Bauer notes how economists in Chile often refer to the Coase Theorem, which never existed (Coase never proposed such a theorem). It was claimed to have relevance by the Libertarian economists who proposed it, and who invoke it to claim economic efficiency will naturally arise when property rights are well defined and transaction costs are zero.
Well, the problem is, transaction costs are never zero, as said costs are involved in forming and acting on the shared with the other interest, and, there is always a shared other-interest. It is said costs that are incurred in forming and then operating the Other Forum which gives context to the Market Forum. It is the Other Forum that works to minimize the transaction costs such that a Market Forum is made possible. And, then, with transaction costs being acknowledged, the true economic&social efficiency is made possible on path 0Z. Said efficiency --- not even economic efficiency --- can happen on path 0G in the magical world of transaction costs equal zero. Coase actually said: “there are always transaction costs.” Yes, that is a fact.
Bauer points out that local disputes are often resolved within agricultural water user and/or canal organizations. Through the DIT lens, said Other Forum entities would work to minimize the transaction costs among the disputants in the case of conflict. No such entities exist for nonconsumptive uses like hydroelectric power producers, so the civil court is the only recourse.
Intriguingly, Chile does have “vigilance committees” which manage the distribution of river water among the diversion canals along it. Again, the existence of such Other Forum entities would ensure the transaction costs of said distribution were minimized, such that a Water Forum could function. Yet, overall, the 1981 Water Code in effect frames the matter of water allocation as a laissez faire water market. Through the DIT lens, no real vehicle for bringing the shared other-interest is in play, other than some limited efforts by a few water user associations and the committees, and, then, the judiciary to litigate private property disputes. Massive Market Failure is assured.
Examples Of Conflicts and Malfunctioning Institutions
Bauer proceeds to provide some details on how conflict resolution is not operant, pointing to two river basins in Chile, the Maule River and the Bio Bio River. It is noted how said rivers are among the most important for economic activity in Chile, and have a variety of water uses including “irrigation, hydroelectric power generation, urban drinking supplies, industrial uses, and Environmental Protection (p. 99).” Bauer first points to the Laja River, a tributary of the Bio Bio River, which involved a proposed interbasin transfer of water.
Proposed Interbasin Transfer from the Laja River
The head of the Laja river has a dam, a large hydroelectric dam, which produces nearly half the electricity in Chile. The Laja river is also a clean river, and as a result it served to dilute the more polluted Bio Bio river downstream. So diverting water out of the river for other purposes would contribute to a higher degree of pollution downstream. Competing forest products companies applied for a the right to transfer water out of the lodge of river basin to another river basin. Being there was no Other Forum (other than a very limited one, in design and legal status as represented in the DGA) to deal with who would get the water right, and the laissez faire water market code was in play, the right had to be auctioned. Possible transfer was heavily opposed by downstream users in both the Laja and Bio Bio River Basins. DGA pointed out it had no authority over the downstream pollution, nor could it do things like keep a flow of water over the Laja Waterfall which was threatened by the proposed transfer. Bauer points out that the military government was still in power at the time, with it stepping in. The companies backed off on the proposed transfer, mainly due to public relations problems related to the downstream opposition.
Irrigation Versus Hydroelectricity: Consumptive Versus Nonconsumptive Water Rights
Bauer points out that the 1981 water code did allow for creating rights in non-consumptive uses, especially to encourage hydroelectric power generation, with the claim that it would not affect downstream irrigation. Problems developed in that the law did not anticipate the possible conflict between consumptive and non-consumptive uses. The vigilance committees which were charged mainly with allocating the water in the river to different canals were supposed to also involve the power companies who were the non-consumptive users. Said committees had been dominated historically by irrigators as related to consumptive use. The power companies were not invited to the meetings. Because of the temporal dimensions of the water use with the farmers wanting to store water behind the reservoir to deal with short falls in the drier seasons, while the power companies naturally wanted to release the water as the demand for electricity changes, no matter of the rainfall weather patterns in the irrigated areas. The Other Forum in place is not designed to deal with said kind of conflict.
Maule River Basin
Bauer points out that the power companies had been privatized. So, it was the problem of a private water company dealing with private irrigators downstream. Another dam had been installed on the river. It caused downstream flow for irrigators problems. The case went to the civil court and dragged on for years. Bauer also points out that the only Other Forum really in play was the Maul River Vigilance Committee, with the 1981 Water Code now requiring the power company had to be a member. The power company was altering river flows, and adversely affecting downstream irrigators, which the DGA claimed the company did not have are right to do. Lacking any Other Forum capable of addressing the matter, it had to be litigated in civil court. It went all the way to the Supreme Court. It was never resolved. And, while downstream owners of water use rights were damaged, the new dam installed upstream by the power company kept stopping flows. Said kind of conflict arose again as relating to the Pangue Dam.
Pangue Dam on the Bio Bio River
A new dam proposed on the river would provide for substantive among of power production using a very small reservoir. It meant downstream irrigators and other users would be harmed. It went to the Supreme Court who ruled the irrigators claims were speculative, and, if there was actual damage at some point in the future, the irrigators could bring suit against the power company. In effect, the Supreme Court transferred wealth from the irrigators to the power company without any kind of compensation.
Bauer points out how a University of Chicago economist, a supposed expert in property rights claimed it was not a problem. The problem was to better define the property right and let the market resolve it. Naturally it presumed transaction costs were zero, which in fact is not the case at all, as there were thousands of irrigators downstream of a power company building dams. Transaction costs would likely be quite high. As usual the libertarian economists just have blinders because said economists use SIT which has substantive blinders --- seeing self-interest only of the water owners, and transaction costs at zero to expedite the trading, when that is not reality --- ignoring the shared other interest in the overall best use of the water.
Evaluating the Institutional Framework
Bauer points out that private bargaining in the realm of water trading using the Water Forum which operates only in price P has been ineffective. DIT makes clear it will always be ineffective without an adequate Other Forum giving context to it. Said Other Forum is essential in order to represent the shared other-interest in the non-money valued goods with value O. And, relying only on the Judiciary is not the solution. The Ostrom IAD Principles need to be in play in a variety of intermediary Other Forums. As Bauer suggests, chili needs a whole set of organizations “based on broad participation and coordination of both private and public actors but with little centralized or top down authority (p. 113).” As DIT makes clear, it needs to apply the Ostrom IAD principles and create the Other Forums, like perhaps one Forum in each of the River Basins (the Bauer map shows nine regions, so at least nine Other Forums). A good starting point would be to consider the structure of the Florida Water Management Districts (who also employ dozens of engineers, hydrologists, economists, ecologists, lawyers and other water specialists) formed by the 1972 Florida Water Resources Act, and improve on same using the Ostrom IAD principles.
Emerging Issues in Chilean Water Policy
Bauer provides a list, most of the items falling outside the purview of how the Water
Forums are performing, but all pointing tothe need for Other Forums to be developed:
The continuing uncertainty, confusion, and complexity of legal title to water rights in many parts of the country
The privatization of urban water supply companies in the more populous regions of the country particularly the metropolitan areas of Santiago, Valparaiso and Concepcion.
The development use, and regulation of groundwater
The water rights and needs of Chile's indigenous communities, particularly in the northern desert and mountain areas
The efforts of the government to promote private concessions for building and operating new water-related infrastructure, particularly reservoirs for irrigation
The growing need for Environmental Protection of water resources and river ecosystems
The long standing and highly controversial debates about legal reforms in electricity regulation.
All of such matters are about building Other Forums to give context to the Water Forums which cannot succeed without same.
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