Bringing Water Markets Down to Earth: The Political Economy of Water Rights in Chile, 1976-95

For 15 years Chile has been the leading international example of pro-market policies for water resources, and its 1981 Water Code has recently been touted as a model for other countries to follow. Water markets are controversial in both theory and practice: their potential benefits include greater efficiency and flexibility of water use and less state intervention and expenditure; while their drawbacks include social and environmental externalities, vulnerability to high transactions costs, and other common examples of “market failure.” No country has taken the experiment as far as Chile, since its Water Code privatized water rights, reduced state administration, and attempted to stimulate a free market in water rights. The results have been mixed and uneven. The lesson of the Chilean case is that setting up water markets is harder and more complicated than it may seem, even in the fairly simple arena of irrigation transfers.