Free to choose? Safe water, cheap water, and the liberalization of trade in water services

Does liberalization of services trade in the water sector enhance public health and welfare? Under what conditions does trade openness improve water access? We use economic analysis to study the implications of the liberalization and privatization of water services on population welfare. The liberalization of trade in services is premised on the notion that it garners efficiency gains stemming from a reallocation of scarce resources. However, the liberalization of many publicly provided services is problematic, often due to the incompatibility of domestic policies and liberalization commitments. The desire to enhance public access to clean water, for example, is undercut by the privatization of water supply, which typically leads to price increases. This makes people vulnerable to water-borne infections and diseases since higher prices force them to collect their water from untreated sources. According to some estimates, more than two million annual deaths, most of which are children, can be attributed to diarrheal diseases due to a lack of access to clean water. It is therefore critical to assess the current push for water-sector liberalization under agreements such as the GATS. The analysis highlights the tension between the goals of openness and greater access. We identify conditions under which socially inefficient outcomes may arise and point out policies and avenues for advocacy that have the greatest likelihood of moving us toward the most desirable results. Among the influences on efficiency access considered are domestic investments in water provision and the structure of capital markets. The conclusions are illustrated using country experiences.