Monday, January 25, 2016

Private property, markets, and natural resources: Lessons from Chile's water code

As part of this semester’s introduction to Environmental Law, I asked my students what “Environmental Law” means to them. The first answer was “government interference with private property rights.”

Because any resource protection or allocation regime must work in place, I spend a lot of time in all of my classes discussing the hows and whys—and benefits—of natural resource regulation in Idaho. One aspect of this discussion is always about the role of free market principles in managing the natural environment. But this aspect of the conversation seems to trend toward the abstract, without context that is meaningful for students who might have grown up in the farming, ranching, timber, and mining towns that are still home to many Idaho residents.

The first two weeks of January (both this year and last), I co-taught a course on international aspects of water resource conflicts in the Bio Bío river basin in Chile. Two things tend to surprise our students. First, new dams (including this approved project on the Rio Cuervo in northern Patagonia) are a significant part of Chile’s water resource planning, for a variety of both simple and complex reasons. And second, Chile has chosen to privatize water rights and rely on a market approach to allocating water use.

Despite being thousands of miles from home in a country most of them know very little about, this second element of Chile’s water resource regime provides context useful for my Idaho law students, many of whom innately distrust government and prefer market-based natural resource regulation.

After the Pinochet military coup in 1973, the new military dictatorship relied on a group of largely U.S.-trained economists knows as the “Chicago Boys” to implement a water code that relied almost entirely on privatization and freely-tradable water rights. Carl Bauer’s book Siren Song (and his related articles) contains an excellent overview of Chile’s water code, with Silvia Borzutzky and Elisabeth Madden (Markets Awash: The privatization of Chilean water markets, 25 J. Int. Dev. 251 (2013)) providing an update on changes since Siren Song was published in 2004.

Why is the Chile story useful for my Idaho students? Because, as you might imagine, the system hasn’t worked out as hoped. In practice, Chile’s water markets work relatively well in watersheds without competing types of uses (i.e., little or no hydropower v. irrigation conflict). And not surprisingly, the markets work relatively well when sufficient water is available for all users.

But when there is conflict, both with respect to the type of use or amount of water available, the system struggles. Part of the difficulty is due to a system that encouraged speculation, that doesn’t seem to honor priority in time, that failed to precisely define rights to water, or that made an unrealistic distinction between consumptive and non-consumptive uses. On that last point, the Chilean Supreme Court determined that a dam operator, with a “non-consumptive” right, could freely alter water flows even if the altered flows harm preexisting downstream consumptive rights holders.

This is only a simplified, incomplete introduction. But for anyone interested in property, water, or natural resources management, Chile’s story is fascinating. I recommend considering it. It relies on private property rights without adequately protecting them. It characterizes water as a public good, while allowing (until recently) private speculation and hoarding. It adopted an ‘American’ understanding of the role of the market to a greater extent than we’ve ever considered. And it provides a great case study to help think about water resource conflicts in the western United States, and the appropriate balance of market mechanisms and government regulation.

Law & Economics, Natural Resources, Teaching | Permalink


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