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The Economic Value of Water Security
Dale Whittington, Claudia Sadoff, & Maura AllaireAugust 24, 2012
Intuition vs. Analysis
• Our intuition tells us that the benefits of water are extremely large, that water is very valuable …
• What does it tell us about the “costs” of infrastructure?
Intuition vs. Analysis
• We want to raise donor funds for the sector (and convince Ministers of Finance of the importance of water security) based on intuition;
• But we need analysis to invest the money wisely.
Intuition vs. Analysis
When is intuition likely to be the most useful?
Best guide for decisions?
Background (1)
Looking at both …- Regional water resources investments, &- Municipal piped water and sewer
networks
Background (2) - Concepts
• Economic value • User values vs. system values• Water security• Water Development Paths
Table of ContentsIntroduction
The Economic Value of Water Security: Basic Concepts
The State’s Perspective on the Value of Water SecurityOverviewThe Role of the StateWater in a Dynamic, High-Growth Economy
The Perspective of the Household on the Economic Value of Reducing Water-related RisksEconomic Value of Reducing Risks from Floods and DroughtsEconomic Value of Reducing Water-related Health Risks
Concluding Remarks: What is to be Done?
Four puzzles …
Puzzle #1
• Economists tell us water allocation problems are easy to solve.
• Movement of water from “low-value uses” to “high-value uses” is cheap.
• But States behave as if water is extremely valuable.
Puzzle #2 – Ex-post “Macro Evidence” on Investments
• Investments in large-scale water resources management investments → economic growth, high returns (?)
Puzzle #3 – “Micro Evidence” from Households
• Household demand (willingness to pay) is high to reduce water-related risks (floods, droughts, WASH diseases) – right?
Annual flood deaths in China, India, and Bangladesh year by year (1950-2010)
1
10
100
1,000
10,000
100,000
1,000,000
10,000,000
1940 1950 1960 1970 1980 1990 2000 2010 2020
Flood
Dea
ths
Bangladesh
China
India
Deaths in High-Income Countries by Age Cohort Population, 2004
0
4,000
8,000
12,000
16,000
Under 5 5-14 15-29 30-44 45-59 60-69 70-79 Over 80
Deat
h Rat
e (d
eath
s per
100,
000 o
f Age
Coh
ort
Popu
lation
)
Deaths in High-Income Countries by Age Cohort Population, 2004
WASH-related
HIV/AIDS
Resp. infect.
Other CMPN
Other Injuries
Cardio. Diseases
Other Non-comm.
WHO 2008
0
4,000
8,000
12,000
16,000
Under 5 5-14 15-29 30-44 45-59 60-69 70-79 Over 80
Deat
h Rat
e (d
eath
s per
100,
000 o
f Age
Coh
ort
Popu
lation
)Deaths in Low-Income Countries by Age Cohort Population, 2004
WASH-related
HIV/AIDS
Resp. infect.
Other CMPN
Other Injuries
Cardio. Diseases
Other Non-comm.
WHO 2008
Puzzle #4
Water Development Paths …
Water & Sanitation Coverage vs. GDP
Distribution of Capital and O&M Expenses for Municipal Piped Network Services (among Donors,
Government, and Customers) vs. GDP
Puzzle #4
• Almost no examples of a country that has experienced economic development that does not move toward more water security; and • Few examples of a country moving from
water-insecurity to water security before GDP, economic growth increases.
Water & Sanitation Coverage vs. GDP
→ There are not many fundamentally different water development paths from the households’ perspective, but there are from the State’s.
Piped Water Coverage:China, Brazil, India, Nigeria, & Egypt
19
50
19
53
19
56
19
59
19
62
19
65
19
68
19
71
19
74
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
20
07
20
10
20
13
20
16
20
19
20
22
20
25
20
28
20
31
20
34
20
37
20
40
20
43
20
46
20
49
0
10
20
30
40
50
60
70
80
90
100
China
India
Brazil
Nigeria
Egypt
Year
Pip
ed W
ate
r &
Sanit
ati
on C
overa
ge
(% T
ota
l P
opula
tion)
WASH-related mortality 1950-2050, by world region
Five reasons why water-related risks are so important to the State
Reason #1- Foreign threats
- Some water-related threats are man-made. - Households and states can be confronted with water-related risks from the non-cooperative behavior of other states.
Reason #2 - Disasters
- When large water-related disasters strike (e.g., floods, droughts, cholera epidemics), many citizens experience losses at the same time. -The legitimacy of the State is called into question if it fails to mobilize adequately to large-scale, complex disasters such as floods, drought, and epidemics. → Insurer of last resort
Reason #3 - Food
-Food shortages may arise for a variety of reasons, including natural disasters, floods, droughts, crop disease, and disruptions in global trade. -If food is in short supply and food prices spike, the economic value of water increases. -Taking a static perspective on the economic value of water in agriculture before a food shortage occurs risks ignoring the issue that the State is most concerned about: ensuring that its citizens are fed.
Reason #4 – Coordination, Conflict Resolution
- The State must coordinate the actions of different water users and resolve water allocation conflicts among its citizens. - Failures of coordination and conflict resolution are perceived as failures of the State.
Reason #5: Increasing returns to scale
- The State is responsible for establishing the economic policies needed for less developed countries to transition to a high-growth economy. - Improved water services and water resources management have important (but difficult to quantify) roles to play in the transition to a high-growth economy.
Advice for Government (Ministry of Finance?)
Joseph Schumpeter
“ … one essential peculiarity of the working of the capitalist system is that it imposes sequences and rules of timing … it is not sufficient to be right [about investment opportunities] in the abstract; one must be right at given dates.
Business Cycles (1939)
Implications for Government (Ministries of Finance?)
1) Transparency - Choice of water development paths
- Clarification of tradeoffs - Accountability
- Participation2) Teams of serious people – strategic planning3) Capacity building – creating strategic thinkers
The different perspectives of the State & the household on water risks
and the economic value of water
Attributes of Municipal Water Services in selected Asian cities
-100
-50
0
50
100
150
200
250
300
350
- 20 40 60 80 100
Kathmandu
Delhi Colombo
Ho Chi Minh
Jakarta
Hong KongSeoul
Quantity
Quality
Quantity
Quality
Quantity
Quality
Quantity
Quality
Quantity
Quality
Quantity
Quality
Quantity
Quality
Quantity
Quality
Cons
umpti
on/C
apita
(l/c
/d)
Quali
ty(%
)
Reliable, 24-hour access (% connections)
KathmanduColombo
Ho Chi Minh
Jakarta
Hong Kong
Delhi
Seoul
Poor Service(Very Insecure)
High-Level Service(Secure)
Attributes of Municipal Water Services
Notes: Quantity, measured as domestic consumption per capita (liters per capita per day) Source: ADB 2004. Water in Asian Cities.Quality, measure as % of water samples passing bacteriological tests Source: ADB 1997 Second Water Utilities Data Book.Reliability, measured as % of connections having 24-hour access Source: ADB 2004. Water in Asian Cities.
Annual capital and per capita expenditures in the Water Industry in England and Wales, 1921-2015
(constant 2011 prices)
Households’ Perspective
Quantity: 5m3Reliability: 3hr/ dayQuality: Poor
Quantity: 15m3Reliability: 24hr/ dayQuality: Excellent
Quantity: 10m3Reliability: 18hr/ dayQuality: Good
Quantity: 12m3Reliability: 12hr/ dayQuality: Good
Level A
Level B
Level C
Level D
Table 4 – Summary Comparison of Household and State Perspectives
Perspective on … Households State
Economic value of water User value System Value
Investment Planning Steps along a water development path
Responsible for choice between alternative water development paths
Economic Value of Disasters Ex-ante (Economic value determined before disaster
Ex-post (Insurer of last resort)
Non-cooperative behavior Conflicts with neighboring households
Conflicts with other states on shared water bodies
Dynamic, High-Growth Economy Reactive(Little an individual household can do)
Proactive(Responsible for the policy framework, including water)
Knowledge base about water resources
Largely limited to very small geographic scale, site specific
Responsible for systems understanding, but difficult
Table 4 – Summary Comparison of Household and State Perspectives
Concepts
- Economic Value- Water Security- Water Development Paths