The Optimist

Trickle-Down Economics

There’s a free-market solution to the world’s water crisis. Make people pay by the drop.

As the U.N. climate change meetings meander on in Durban, South Africa, with little sign of major breakthrough -- and soon after news that the last year saw the largest rise in carbon emissions in history -- it is a good time to think about how to deal with some of the impacts of a global warming that appear increasingly inevitable. One big impact involves water -- both that there's soon going to be too much of the salty stuff subsuming low lying areas as the ice caps melt, and too little elsewhere. A warmer world will be wetter overall, but current models predict that climate change will make some dry parts of the planet -- Northern Africa, for one -- even drier. Many of the places are already the very regions suffering from the greatest shortages. Even without climate change, global patterns of water usage are unsustainable, but global warming is a big reason to start using the stuff with greater care. The simplest way to encourage that? Make people pay for it.

Water is essential stuff, and sometimes we're willing to price it accordingly. How else to explain why U.S. consumers spend $7 billion on bottled water a year when they can't tell the difference with what comes out of the tap in taste tests -- and despite the fact it often costs more than three times as much per gallon than gas. But at other times we demand, like air, that it should be free -- or at least significantly subsidized. Farmers in California alone received about $236 million per year in effective subsidies from access to cheap water in the 1990s, for example. But California is far from the worst example of subsidizing unsustainable water use worldwide. And unless we start charging consumers what it costs to deliver piped water, many parts of the planet are simply going to run out -- even absent the impacts of climate change. Meanwhile, the world's poor consumers, mostly unconnected to piped delivery, will continue to pay considerably more for their water than the connected rich -- adding inequity to unsustainability as a cost of mispricing the stuff.

One-third of the world's population already faces water shortages. A recent McKinsey report estimates that based on current trends, by 2030, a third of the world will live in areas where the gap between water needs and accessible, reliable supply is greater than 50 percent -- so they'll have to be planting and drinking on borrowed time by that point. Agriculture is the big problem -- irrigation of cropland is responsible for 71 percent of freshwater needs worldwide, and accounts for over 93 percent of the freshwater we take out of rivers, lakes, and the ground and cannot then clean and re-use, according to the World Bank. By 2030, without efficiency improvements, global water requirements will climb from 4,500 cubic kilometers (about the volume of Lake Michigan) to 6,900 cubic kilometers each year -- largely thanks to the growing demand for food. That is some 40 percent above current accessible, reliable supply.

The picture is not that grim, however. For a start, we have seen a 1 percent improvement in efficiency in water use in agriculture per year in the period 1990-2004, alongside irrigation network growth that has occurred at a similar pace. If these trends continue, between them, these may address 40 percent of the gap between supply and demand in 2030, according to McKinsey.

Second, there are a number of methods to dramatically, and very cheaply, increase water efficiency at a considerably more aggressive rate than 1 percent a year. No-till farming, irrigation scheduling, reduced over-irrigation, and irrigated drainage all can have a dramatic impact. And a number of water-saving investments are very cheap -- including proper maintenance and repair as well as  the use of drip irrigation. McKinsey estimates the total global cost to close the 2030 water gap to be $50-$60 billion a year -- around 0.06 percent of the world's predicted gross domestic product that year.

Increasing the efficiency of water use and finding the money to extend efficient irrigation are problems linked to water pricing -- in developing and developed economies alike. When Italy charges about 60 percent of costs for irrigation water or Pakistan charges only about a third of the costs of water delivery, connected farmers in both places waste water -- and the system doesn't produce enough revenues to finance either repair of existing services or expansion to unconnected farmers who are usually among the poorest. About eight years ago, an early experiment in democracy in China showed that it is possible to reform dysfunctional irrigation systems. Farmers in the Yangtze Basin elected "water user's association" executive committees to oversee the operation of local irrigation systems -- raising funds for operation and maintenance from water pricing. Since the introduction of the associations (and pricing water by volume), farmers are using less water per hectare, delivery losses have fallen, and despite lower water use, grain yields have actually increased by 6 percent. Each user's association has saved an average of about 1.2 million cubic meters of water a year.

International trade provides another important part of the answer to looming global water shortages. Rather than farms forming circles of green in the middle of the Saudi desert (this in a country which spends billions of dollars on desalinizing sea water), Saudi Arabia should just import more food from places with more H2O. Whatever the recent spikes in agricultural prices, it remains far cheaper to grow crops where there is substantial natural rainfall than in places where there isn't, which is why about three-quarters of the country's cereal needs are already imported. The only reason that number isn't higher is because -- once again -- of considerable subsidies.

The problem of underpriced water affects people living in cities as well, with similarly harmful consequences for the poor. World Bank analysis suggests that utility water prices in developing countries cover about 30 percent of costs on average. Just as with irrigation systems, if water companies don't charge enough to cover their supply costs, they can't sustain the current network, let alone lay pipes to new customers. A small elite of richer consumers is left with a degrading quality of service -- sewage-tainted supplies that run for only a few hours a day, and pipes that lose huge amounts of water.  Think Nairobi, where taps have remained dry recently despite unseasonably wet weather.  Leaking delivery systems in the developing world lose about 16 billion cubic meters of water each year -- enough to meet the water needs of 200 million people. Meanwhile, poor households are usually not connected to the utility network at all. They are forced to buy water from vendors at five to 16 times the metered price, or more. If they had access to a tap delivering water properly charged at the price to deliver, they would pay a fraction of what they currently do for water.

The idea that water should be free or nearly free is a convenient one for large farmers and elites in the city. But subsidies are flushing global water security down the toilet -- it's time for them to end.  Properly pricing water is a multiple win: It will reduce the impact of climate change, ensure future generations have access to water for drinking and food, and improve the quality and reach of piped supplies, saving money and improving health for billions worldwide. All that, and it doesn't even take an international climate agreement -- which is great news, given everything that hasn't been happening in Durban. 


The Optimist

Doing More with Less

Dwindling funding for the global fight against AIDS doesn't mean the battle is lost -- but it does mean we have to think about what we're getting for our money.

Last week, the Global Fund, the world's largest multilateral source of financing for the fight against AIDS, made a grim announcement: its donors had cut their funding by $1.6 billion, a big enough bite out of the organization's budget that the fund would be bankrolling no new AIDS treatment projects until 2014.

The announcement casts a pall on the international community's observance of World AIDS day this week, an occasion on which, the Global Fund's problems notwithstanding, we have a great deal to celebrate.  Never before have we had the abundance of tools to fight the global AIDS epidemic that we have today. Male circumcision has proven a powerful means of reducing infection -- a free circumcision service offered in South Africa's Orange Farm township, for example, reduced HIV prevalence there by 55 percent. An article published in the New England Journal of Medicine suggested that putting HIV-infected patients on antiretroviral drugs immediately after they were diagnosed dramatically reduced the risk of infecting their partners. Looking forward, although hopes for the impact of a microbicide gel to reduce infection amongst women appear dashed -- at least for the moment -- early stage HIV vaccine trials have shown 90 percent success.

Meanwhile, 33 developing countries have seen annual rates of new HIV infections drop by a quarter or more from their peak. From 2006 to 2010, the number of people in developing countries on antiretroviral drugs tripled to over 6 million. Costs for those drugs have come down markedly; antiretrovirals that went for $1,100 a year in 2004 can now be had for $335. The annual death toll from the disease plateaued in the middle of the last decade and has since begun to drop. Between 2002 and 2006, AIDS mortality in Kenya fell by 29 percent.  These breakthroughs give new hope in the struggle against a disease that has devastated some of the world's poorest countries, killing 30 million people and infecting 30 million more worldwide.

But the breakthroughs don't amount to a global reprieve -- and last week's reminder of the perennial uncertainty surrounding the resources available to fight the epidemic, on top of news that donor funding for HIV/AIDS leveled in 2009 and then declined 10 percent in 2010, should be a wake-up call to focus on cost-effective responses.

Doing that requires getting our balance of treatment and prevention right. Because for all the promise of recent advances, we are not expanding treatment rapidly enough to cover the newly infected. For every new recipient of retroviral drugs, two people get infected. And while costs of treatment are dropping, they are not doing so fast enough. Today, as much as four-fifths of the cost of AIDS treatment in developing countries goes not to the drug but to the staff, health system administration costs, and testing necessary to deliver it -- costs that are harder to reduce with a technological breakthroughs.

Meanwhile, health economist Mead Over, my colleague at the Center for Global Development, suggests that even if the money were found to start everyone who tested positive for HIV on an early course of retroviral drugs, under even the rosiest of scenarios the number of people living with AIDS in Africa would continue to rise until 2046 -- as would the costs of treating them, which would hit $60 billion a year. That's nearly equal to total aid flows to Africa in 2010. In fact, according to OECD statistics, AIDS and other reproductive health services already suck up more aid money than all other health spending combined in Sub-Saharan Africa -- and they aren't delivering the biggest health bang for their buck.

For a start, AIDS prevention is not only better than treatment, it is cheaper, too: Mead Over estimates that adult male circumcision costs about $42 per year of life saved from lower HIV infection rates, compared to $780 per life year saved by antiretroviral treatments. Or compare AIDS programs to other underfunded health priorities in the region. The World Bank estimates that additional vaccination coverage against diseases like measles, tuberculosis, or diphtheria in Africa costs from $1 to $5 per life year saved. For bednets and mosquito nets used to fight malaria, the figure is between $2 and $24.

That's not to say AIDS funding should be reduced: there should be more resources for both AIDS and other health emergencies in Africa. And regardless, it is not clear that money dedicated to AIDS would be redirected to other health issues; to some extent treatment money is anchored by the implied commitment on the part of the U.S. government and other donors to continue funding in order to cover the treatment costs of those currently receiving drugs. If not for that anchor, there is little reason to assume funding wouldn't be withdrawn as part of general budget cuts.

Nevertheless, it does suggest the urgent need to focus resources on the combination of interventions that will allow for what Over calls an "AIDS transition," in which the number of new infections falls below the number of AIDS deaths, so the number of people on treatment --and the cost of that treatment -- starts to drop. He reports that Rwanda may be an early success story in that transition: 94 percent of those who are known to need antiretrovirals are being treated, while the rate of new HIV infections has dropped below AIDS deaths in 2007 and 2008. In part that's thanks to active counseling, near-universal testing of partners of people infected with HIV, and ubiquitous testing of pregnant women.

If we can't rapidly achieve a similar transition worldwide, we may have to start contending with painful tradeoffs. Researchers at the University of Cape Town have discussed the idea of choosing between "comprehensive treatment to fewer patients or universal access to a more limited package of benefits" -- limits might include only providing access to the cheapest antiretrovirals, limiting laboratory testing, and deploying nurse-driven rather than doctor driven treatment, for example.

Without a lot of additional money -- and that doesn't look likely any time soon -- each new person put on treatment takes resources that could be used to stop additional people getting infected in the first place, through programs like cash payments to girls who remain in school, for instance, or funding free adult male circumcision. It is an unquestionably grim choice to have to make, but prioritizing prevention is the best way to do the most good for the most people.