NCPA - National Center for Policy Analysis

Water Trading

October 7, 2002

Water shortages are common in arid countries like South Africa. The usual solution is for the government to institute some sort of rationing and engage in production of fresh water. Some experts believe, however, this is impractical.

They contend that government is the primary cause of water misallocation, arguing that governments worsen the water situation by engaging in Soviet style centralized water control. The best solution is for governments to create the initial allocation of water and create a legal framework that allows individuals to trade their quotas.

Chile offers a telling lesson for water-deprived states. In 1966, Chile nationalized its water supplies. But 15 years later allocated rights to individual farmers, businesses and municipalities, and allowed each group to trade its quotas. The results were impressive:

  • In 1970 only 27 percent of rural and 63 percent of urban dwellers received drinkable water.
  • By the mid-1990s, the respective percentages were 94 percent and 99 percent.
  • These figures are better than any other mid-income developing country in the world.

Experts believe that other arid nations like South Africa should implement similar reforms. This would divert water away from entrenched agricultural interests, direct water toward more efficient ventures and allow more efficient uses of the land.

Source: Roger Bate, "How Markets Help Provide Water For The Poor," Journal of the Institute of Economic Affairs, Volume 22, No. 2, June 2002.


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