Democracy is the theory that the common people know what they want and deserve to get it good and hard.
H. L. Mencken US editor (1880 – 1956).
I recently received the following comment from one of my better students in my Econ 211 class on my post last month, “Water Shortages.” He writes about the protests against Bechtel and its water monopoly. I usually reply to comments with the comment section, but, after reading a bit about what happened in Bolivia, I had much more than a comment to write.
Here is the comment from JW:
Whenever I hear of water shortages, I think of Bechtel, a company from here in the U.S. that tried to privatize one of Bolivia’s most precious natural resources – WATER! If Bechtel had won the fight, which they did at first, effectively taking control of Bolivia’s water supply, then it wouldn’t be the Bolivian government setting the water prices for that country, it would be the largest construction and engineering company in the United States with 37.9 billion dollars in revenue. It is also pertinent to note that Bechtel is he 5th largest privately owned company in the United States. And shortly after they took control of Bolivia’s water they raised they rates by 35%, which immediately sparked protests, and led by the Coalition in Defense of Water and Life and a machinist Oscar Olivera, Bechtel was dethroned, and the people one a major victory against multinational corporations trying to profit off of their water supply. Good for them. We have to fight against the parasitic economic principles of large corporations that claim allegiance only to their bottom line.
I can understand why a water shortage would remind you of that tragic situation in Bolivia. Here are a couple of points, however.
First, when there is a shortage, the last folks you want to help you out of the situation are government officials. Here is why: Government officials depend on their popularity to remain in power, and they do want to remain in power. Raising prices that the common people pay is never popular. Popular is not always right, however. With a shortage there just is not as much as people want to buy at that price. Shortages have their roots in scarcity, but are not the same, but since scarcity is a ubiquitous problem, there is nothing that can make it go away. People never want to be told they can’t have all they want. A shortage is what results when prices do not fully ration scarce resources, but require some additional rationing.
How are government officials going to ration anything, in particular, how will they ration water? They might use first-come, first-served, but then people will compete to get there first. In Bolivia, the richer folks were connected to water systems with pipes, but the poor had to get water in jugs and transport it. Guess who would have gotten their water first? The government may have had to turn water on and off to various parts of Cochabamba (the Bechtel water monopoly was only for one city, Cochabamba, the third largest city in Bolivia). What is more likely is that the government would have played favorites, providing water to the parts of the city that supported the government more than the parts of the city where their opponents were more concentrated.
Also, in a shortage situation, it would be helpful if instead of just finding different ways of sharing the existing amount of water that could be provided; the rationing institution (practice) gave an incentive to folks to provide more water, to alleviate the shortage.
Government rationing does not do this. However, raising prices does. Governments have little incentive to raise prices, because it is so unpopular. Private firms have a profit incentive and care little about popularity.
The second thing is that you should take a closer look at just what happened in Bolivia. Here are two excellent sources: 2000 Cochabamba protests from Wikipedia and Timeline: Cochabamba Water Revolt from PBS.
The problems started back in the 1980s when an irresponsible government spending far exceed their taxing (spending: popular, taxing: unpopular), leading to hyperinflation of over 25,000% in 1985. Bolivia only had the World Bank to turn to after that, because they no one else trusted investing in Bolivia, even their own citizens did not want to. But having to turn to the World Bank meant having to comply with World Bank requirements for loans, which meant privatization for things such as water infrastructure.
Local water systems are, by their nature, monopolies, what we have called in class, “natural monopolies.” One distribution company can provide water to an area more cheaply than two, as more distributors would require expensive duplication of infrastructure (water mains and such). Water systems throughout the country were in trouble due to years of inadequate investment in maintenance.
The World Bank required the government(s) of Bolivia to get out of businesses from oil refineries to water distribution. A Bechtel subsidiary somehow became the lone bidder for the SEMAPA water company in Cochabamba (can you say “rent seeking?”).
As part of the requirements for the contract to run the water system for Cochabamba, local politicians required Bechtel’s subsidiary, Aguas del Tunari and the other members of the consortium had to invest in a dam project that Cochabamba Mayor Reyes Villa wanted for them to get the $2.5 billion contract. They also had to pay the debts of the old water agency, pay to expand the system and fix the existing and failing system. The World Bank had warned that the Mayor’s dam project was not needed and that an existing dam could provide the needed water. Opponents of the mayor claimed that the project was for the profit of the mayor’s major donors.
To do all that was required, particularly build the new dam, prices had to be raised by around 38%, or to nearly $20, but this was not affordable to poor Bolivians. There were also rumors that the vague law that enabled this deal gave the company rights over all water, including rain water and water from wells and such.
It looks like the Bolivian officials dangled the potential for a monopoly in front of the noses of Aguas del Tunari and said you can have it if you build our dam, then charge what you want.
Of course, part of the problem is that the Bechtel and their subsidiary, Aguas del Tunari, ran the project just with their engineers, not economists or marketers who would have looked at what they would be able charge based on demand in the market.
Anyway, the rate hikes sparked protests and the protestors eventually won, as JW mentioned. In the end, the control of the water system was restored to the local government. The system continues to deteriorate. The poor are still without safe water and pay far more than do the rich and businesses, as was the case before privatization. Those with connections, pipes, only get water for about 4 hours a day, so the shortages persist.
The problem here was not as much the greedy capitalists, but the greedy politicians and their backers who forced requirements into the agreement that were helpful for them, but not for their customers and citizens. Of course, both sides have a bit of blame to share.
As a side note, this story was the theme for the the Bond movie, Quantum of Solace.
Anyway, JW, thanks for pointing out this piece of recent international history. This story has a lot of lessons for us, from rationing methods and dealing with shortages, to natural monopolies and the waste of rent seeking.