Monday, October 30, 2017

Some Watery Economics

The quantity of fresh water on planet Earth doesn't change much over time, but the demands on that water and how it is distributed can cause considerable stress. A group of World Bank authors--Richard Damania, S├ębastien Desbureaux, Marie Hyland, Asif Islam, Scott Moore, Aude-Sophie Rodella, Jason Russ, and Esha Zaveri--provide an overview of the global situation in "Uncharted Waters: The New Economics of Water Scarcity and Variability" (October 2017).  As the report notes:
"The future will be thirsty and uncertain. Already more than 60 percent of humanity live in areas of water stress where available supplies cannot sustainably meet demand. If water is not managed more prudently—from source, to tap, and back to source—the crises observed today will become the catastrophes of tomorrow.
"Projections suggest that by 2050, global demand for water will increase by 30–50 percent, driven by population growth, rising consumption, urbanization, and energy needs. At the same time, water supplies are limited and under stress from negligent management, growing pollution, degraded watersheds, and climate change. As many as 4 billion people already live in regions that experience severe water stress for at least part of the year. With populations rising, these stresses will mount.  ...
Water stress is emerging as a growing and at times underappreciated challenge in many countries of the developed and developing worlds. One in four cities, with a total of US$4.2 trillion in economic activity, is classified as water-stressed. Moreover, 150 million people live in cities with perennial water shortages, defined as having less than 100 liters per person per day of sustainable surface water or groundwater. In coming years, population growth and continuing urbanization will bring a 50–70 percent rise in the demand for water in cities. This will be fueled not only by the growing numbers of urban dwellers but also by lifestyles and consumption patterns that are more water-intensive. By 2050, almost 1 billion urban dwellers will live in water-stressed cities.
Water issues hurt both rural agriculture and urban areas. In rural areas, the losses involve both reduced agricultural production and environmental consequences:
"Throughout much of the world, even moderate deviations from normal rainfall levels can cause large changes in crop yields. ... Such variability is responsible for a considerable net loss of food production every year—enough to feed 81 million people every day, a population the size of Germany’s. ... Rainfall shocks cascade consequences from declining agricultural yields to shrinking forest cover. Faced with declining agricultural productivity due to rainfall shocks, farmers often seek to recoup these losses by expanding cropland, at the expense of natural habitats. Rainfall variability can account for as much as 60 percent of the increase in the average rate of cropland expansion, and, as a result, is responsible for much of the pressure on forested areas."
There's less evidence on water issues and urban economies, but here's a taste:
"While urban infrastructure is generally able to buffer residents against the effects of moderate rainfall shocks, cities are still at the mercy of large rainfall shocks. Further, while the immediate devastation caused by floods attracts much attention, droughts in cities may have the longer-lasting, more severe impact on firms and their employees. In Latin America, losses in income caused by a dry shock are four times greater than that of a wet shock. Droughts have poorly understood consequences within cities, causing higher incidences of diarrheal diseases, health impacts on young children, and an increased frequency of power outages.
"The performance of firms in cities is also affected by the availability of water. While the private sector’s reliance on transport and energy infrastructure is well established, little is known about the significance of water to firms. Findings in this book show that when urban water services are disrupted, whether by climate, inadequate infrastructure, or both, firms suffer significant reductions in their sales and employment. Particularly vulnerable are small and informal firms, a major source of employment in developing countries. The impacts of water supply and sanitation services in cities therefore extend beyond the widely documented effects on human health."
 The report also emphasizes at at number of places that prices need to play a role in addressing water issues, because of what the paper calls "the paradox of supply":  
"IThe availability of irrigation typically provides both a buffer against rainfall variability and a significant boost to crop yields in normal years. However, in many dry regions of the world these systems fail to protect farmers from the impacts of droughts. Free irrigation water creates the illusion of abundance, which buoys the cultivation of water-intensive crops such as rice and sugarcane that are ultimately unsuited to these regions. The ironclad laws of demand and supply then dictate that when water is provided too cheaply, it is also consumed recklessly. As a result, crop productivity suffers disproportionately in times of dry shocks due to extraordinary water needs that cannot be met. This book demonstrates that this paradox of supply is a widespread problem in areas where water is scarce and its demand is uncontrolled."
When water is underpriced, the undesired consequences just keep multiplying. At the most obvious level, pricing water encourages a degree of conservation. Another issue is that water-hungry crops are wrongly encouraged. Moreover, when water isn't priced, then the (public or private) organizations that provide water can't cover their costs. They become unable to attract outside investment capital for additional water storage or delivery systems, because with insufficient revcnues, how can they repay the investment? When water is underpriced, water providers need to focus on  how they will keep getting government subsidies--which are their financial life-blood--instead of how they serve customers. Here's a selection of comments from the report on these themes:  
"The supply of free or underpriced water in arid areas spurs the cultivation of water-intensive crops such as rice, sugarcane, and cotton, which in turn increases vulnerability to drought and magnifies the impacts of dry shocks. One well-known study found that access to the Ogallala aquifer in the United States induced a shift to water-intensive crops that increased drought sensitivity over time. The Aral Sea is a more extreme example of a resource that has gone from abundance to depletion within a generation. To increase cotton production, the then–Soviet government diverted rivers that fed the Aral Sea, and as a result it today holds less than one-tenth of its former volume. This book demonstrates that this paradox of supply is a more widespread phenomenon than was previously known and can be found at a global scale. ...
"In cities, water pricing tends to be the simplest and most effective tool for compensating the service provider. At the same time, high water prices generally work in reducing city demand, and targeted subsidies or bloc tariffs can be strategically employed to ensure that the most vulnerable residents retain access to affordable water. When utilities need to recover costs through pricing, they also have an incentive to prevent wastage and revenue losses by fixing leaks in the system. In fact, a staggering 32 billion cubic meters of treated water is lost from urban systems around the world each year through leaks in the pipes. Half of these losses occur in developing countries, where customers frequently suffer from supply interruptions and poor water quality. Further, when water is priced appropriately, water utilities become beholden to their customers for generating revenue, rather than to political interests for providing subsidies. This increases their incentives to expand service and quality throughout cities, rather than to only politically connected communities.
"Utility cost recovery is also important for ensuring that utilities can secure adequate financing. Private financiers are reluctant to invest in utilities that are not self-standing and rely on government subsidies to stay afloat. As a result, private financing is unavailable to many utilities, or it must be backed by public guarantees, greatly reducing the utilities’ ability to invest in upgrading or expanding their infrastructure. In the developing world, cost recovery rates are abysmally low; in 2004, 89 percent of utilities in low-income countries and 37 percent of utilities in lower-middle-income countries charged tariffs that were too low to cover basic operation and maintenance costs, and little has changed since then. Closing this gap could greatly improve the ability of utilities to make investments that increase access to and the reliability of piped water. ...
"[P]er capita reservoir storage has been declining since about 2000, partly because of poor management and loss of storage capacity to sedimentation. At the same time, the stage is set for a large increase in the world’s number of dams, projected to rise 16 percent by 2030, with storage volume increasing by about 40 percent. Estimates suggest that even an expansion of this scale may not suffice to meet future demand."
Those interested in the economics of water might want to check back on these earlier posts: