Valuing Water for Sustainability

The value of water as a resource that underpins economic activities is evident in all economies, but it is much less evident in economic statistics. Its value and that of related ecosystem services are poorly understood and rarely explicitly factored into tradeoffs and decisionmaking. Prices virtually never reflect water's full value, so water users do not see its full value or the need for conservation. These flawed "market signals" guide everyday economic decisions. If they do not recognize the value of water, then—broadly speaking— neither will the economy.

The value of water is also obscured in measures of macroeconomic performance such as the gross domestic product (GDP). In the System of National Accounts, from which the GDP is calculated, water for consumption or as an input into production is universally undervalued by using the price actually paid for its use. Unlike other inputs that are sold in competitive markets, this price is generally far less than water's real economic value and often even less than the cost of supplying it. Under these circumstances, neither producers (who receive price signals that do not value water) nor policymakers (who receive economic analyses that do not value water) can know whether they are using water beneficially or simply squan dering it.

Furthermore, the costs of degradation of water resources and related ecosystem services are not accounted for in national income accounts. Whereas investment in manufactured capital, such as a water treatment plant or a dam, is reflected as an increase in a country's wealth, investments in "natural assets" such as wetlands, watersheds, or groundwa-ter aquifers are not included at all, even if they serve equivalent functions as produced capital. (See Box 8-1.) In fact, quite the opposite tends to be true: the inflated income derived by overexploitation or degradation of natural assets is reflected as (apparently) strong growth. At the macroeconomic level, therefore, decisionmakers are receiving perverse signals regarding the impacts—and, in particular, the sustainability—of their development strategies.

Since the 1970s, many people have worked to reintroduce the value of the environment and natural resources into economics and thereby promote more sustainable economic decisionmaking. (See Chapter 2.) These perspectives are grounded in the recognition that natural resources, while once abundant, are now clearly a constraint in some circumstances. Again, water provides an excellent demonstration. The use of deep groundwater was once constrained by the technology and capital needed for pumps and fuel. Groundwater abstractions since the 1950s, with the advent of motorized drilling rigs and pumps, have increased from 100-150 cubic kilometers per year to 950-1,000 cubic kilometers. Today groundwater is significantly overex-ploited in many countries. As a consequence, water tables fall, wells run dry and no longer provide water for human and agricultural needs, and fragile ecosystems such as wetlands are degraded. The constraint is no longer capital or labor, but the resource itself.15

SPECIAL SECTION: PAYING FOR NATURE'S SERVICES Water in a Sustainable Economy

Box 8-I.Water as Capital

Fifty years ago sustainability was simply not a part of the vocabulary, and water was not a particular consideration for economists. Classical economists recognized land (meaning all natural resources), labor, and produced capital as the basic sources of wealth. Neoclassical economists focused only on labor and capital, with "land" treated as just another interchangeable form of capital. The general view was that natural resources were abundant relative to demand and therefore not an important focus for the economist, whose task it was to allocate scarce resources—those whose use constrained alternative economic opportunities. There was little appreciation of the fact that the environment is used not only as a "source" of valuable inputs but also as a "sink" for the waste and pollution of the economy. Neither was there much thought about the possibility that the world might reach a scale of resource exploitation at which the capacity of both the "source" and "sink" functions of the environment could become a binding constraint on well-being and economic growth.

The focus on produced rather than natural capital is particularly stark when it comes to water. Prices are typically related to the capital outlays required to deliver water (that is, the infrastructure and the operations and maintenance charges) without any component of value attributed to the resource itself. Not only does an undervalued water resource tend to be overused, it also induces distorted prices that provide poor information about whether investments make sense. It provides no insight into whether economic activities are actually creating value or whether the resource is running out and needs to be conserved. It must be said, though, that water delivery is highly capital-intensive, and produced capital will therefore remain a crucial focus for financial and economic analyses of water investments. The point to recognize is that the value of water resources also matters, and that water's availability, quality, and timing cannot simply be "assumed."

Total economic value (TEV) has become a recognized means of capturing both the market values (those that can be observed through market trades) and the nonmarket values of natural resources. (See Box 8-2.)16 While efforts are being made to ensure that the value of water is better incorporated into economic decisionmaking, similar efforts are being made to ensure that the economic value of the resource is recognized in water management decisions. In January 1992, in advance of the U.N. Conference on Environment and Development in Rio, the International Conference on Water and the Environment was held in Dublin, Ireland. Some 500 participants—government experts and representatives from nongovernmental groups around the world—endorsed the Dublin Principles, which distilled global good practice in water management and were a milestone in the area of sustainable resource management. (See Box 8-3.)17

Principle 4, on water's economic value, unleashed a spirited debate. Many people held the view that water was a "gift of nature" or a "basic human right" and that it should therefore be provided free of charge. "Water as an economic good" was seen as a denial of water as a social or environmental good and an effort to "capture" and "commodify" the world's water. Yet Principle 4 was not intended as anything quite that radical and was not meant to deny the environmental or social aspects of water—these features were in fact underscored in the very first principle. Nor was it intended to call into question whether access to water for basic human needs would remain a priority relative to other economic uses. There was, and still is, a strong global consensus that this is the case.

Water in a Sustainable Economy SPECIAL SECTION: PAYING FOR NATURE'S SERVICES

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