S US T A I N AB L E D E V E LO P ME N T
Handling the Serious and Growing
T hreats to our Most Renew able
Resourc e—Wat er
Ken Frederick
A U G US T 2 0 0 2 · I S S U E B R I EF 1 1
Resources for the Future
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Issue Briefs are shor t repor ts designed to provide topical, timely
information and analysis to a broad nontechnical audie n ce .
Introduction
Water, which covers nearly 70% of the Earth’s surface, is our most abundant resource. It is also
one of our most renewable resources. The total quantity of water is essentia lly constant and unaffected by human activities. Driven by energy from the sun, water constan tly circulates from the
seas, lakes, and streams (through evaporation) or the plants (through tra nspiration) to the atmosphere and back to earth (t hrough precipitation). Impurities accumulated either naturally or through
human use are removed in the evaporative process, making it possible to use and reuse water indefinitely.
Despite the apparent abundance and renewability of the resource, water adequacy is one of
the pr imary resource issues in much of the world. The World Commission on Water for the 21st
Century concluded that we are on a path toward a water crisis and that business as usual is unsustainable. A s imilar conclusion was reached at the Inte rn ational Conf erence on Water and the
Environment held in Dublin, Ireland, eight years earlier:
“Scarcity and misuse of freshwater pose a serious and growing threat to sustainable development and protection of the environment. Human health and welfare, food security, industrial development and the ecosystems on which they depend, are all at risk, unless water and land resources are managed more effectively in the present decade and beyond than they have been in
the past.” (Report of the Inte rn atio nal Conf erence on Water and the Environment: Development
Issues for the 21st Century, 2 6-31 January 1992, Dublin, Ireland.)
The Problems
A number of problems underlie these concerns. While global water resources are abundant and
completely renewable, only 2.6% of the global resource is freshwater, and 70% p ercent of that is
locked in gl aciers, permanent snow, ground ice, and permafrost. Most of the remaining freshwater is in the ground, only a small fraction of which is accessible at current cost levels. Less than
0.3% of the freshwater is in the lakes and rivers.
Regional freshwater supplies are highly variable. Average annual precipitation ranges fr om
vir tually nothing in the driest deser ts to as much as 10 meters in some areas. Large annual and
seasonal variations in precipitation and runoff undermine the long-term aver ages; streams may
dry up or flood depending on the season.
Dams, rese rv o i rs, canals, wells, and pumps help contain surplus f lows and distribute water
during low flow periods, conver ting a region’s fugitive and uncer tain natural water endowment
into more reliable freshwater supplies. But increasing water supplies by building more dams and
rese rv o i rs brings sharply rising costs.
There are limits to and diminishing returns from the safe yield produced by successive increases in a river’s reser voir cap acity. A stream’s maximum possible yield is limited by its average an nual flow and reser voir eva poration losses of fset the gains from surface storage well before t his maximum is reached. Because the best reservoir sites are developed first, subsequent
increases in storage require larger invest me nts. This is illustrated by the experience in the United
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Resources for the Future ·Issue Brief
States, where the average reservoir capacity produced per cubic yard of dam declined 3 5 - f ol d
from the 1920s to 1960s.
Sedimentation reduces a reservoir’s capacity to store water over time. In the United States,
total reservoir storage capacity probably declined in the 1990s as sedimentation losses exceeded
new developments. The oppor tunity costs of storing and diver ting water increase as the human,
environmental, and economic costs associated with flooding valuable lands behind dams mount
and the number of free-flowing streams declines. As a result of these factors, proposals to construct additional large-scale multipurpose dams, once widely viewed as symbols of visionary, humane resource management and the solution to most water problems, now encounter strong and
sometimes violent resistance around the world.
Water quality degradation is a principal cause of the scarcity of water for potable, industrial,
and agricultural use. Water may be unfit for human use even under natural conditions. But contaminants introduced by human activities further limit the supply of suitable water. The general
lack of sanitation and waste treatment facilities in the developing world is the principal reason
water-related diseases are the leading cause of infant and child mortality. Agricultural and industrial chemicals that end up in surface and groundwater supplies threaten water supplies in all
countries.
Achieving major reductions in anthropogenic sources of water pollution has proven difficult
and cos tly. The United Nations designated the 1980s as the International Drinking Water Supply
and Sanitation Decade, with a goal of providing clean drinking water and sanitation to all by 1990.
Tens of billions of dollars w ere spent to extend water ser vice to an additional 1.3 billion peop le
and sanitation ser vice to another 748 million in the developing world. While impressive, these
results fell well shor t of the goals. The increased sanitation ser vices did not even keep up with
population growth in the developing world.
The United States has spent hundreds of billions of dollars since the passage of the 1972 Clean
Water Act to limit and treat industrial and municipal wastes discharged into its waters. Although
these investments have re sulted in major improvements in the qua lity of its waters, they fall well
shor t of the 1972 legislation’s goal of restoring all navigable waters to a “fishable and swimmable” condition. Moreover, investments to control point source contaminants are encountering diminishing returns in their ability to restore streams, lakes, and estuaries. Nonpoint sources of pollutants, such as r unoff from farms, urban areas, and construction sites, and seepage from landfills
and septic systems, are now the principal sources of pollutants. Preventing these pollutants from
reaching water resources requires intr oducing politically unpopular land use regulations.
The ability to provide for future water demands also is ha mpered by the loss of wetlands a nd
the degradation of other valuable aquatic ecosystems. Wetlands are important hydrological a nd
biological components of watersheds. In addition to providing habitat for fish and wildlife, they
help purify water by filtering and settling sediments and pollutants, and they reduce flooding by
dispersing high water f lows. Globally, hundreds of millions of hectares of wetlands have been lost
as a result of draining and filling, flooding behind dams, and depleting streamflows. In the United
States alone, nearly 45 million hectares in the conterminous 48 states, about half of the original
endowment of wetlands, have been lost.
Many estuaries, lakes, and rivers also have been s everely degraded by water di versions for irrigation, municipal, and industrial uses. The reduction in the size of the Aral Sea in central Asia
to less than half of its original size and the resulting eco logical, economic, and health damages is
Handling the Serious and Growing Threats to our Most Renewable Resource—Water
3
an extreme but not isolated example of the costs that may be associated with unconstra ined water di versions. As a result of drought and upstream diversions, the Yellow River in China did not
even run into the sea for more than 220 days in 1997. And the Colorado Ri ver, the main source
of water for the U.S. Southwest, has been so depleted by municipal and agricultural users upstream
that flows now rar ely reach the delta, once a vibrant ecosystem of wetlands and estuaries. Freshwater supplies are also being depleted or degraded by unsustainable rates of groundwater use. Ten
percent of the world’s agricultural food production now depends on nonrenewable groundwater
supplies. Water tables are falling a meter or more annually in parts of Mexico, India, China, the
United States, and a number of other countries. Groundwater use exceeds recharge on about 4 million hectares in the United States, 20 percent of its irrigated area. Declining well yields and increasing pumping depths have reduced irrigation from the Ogallala aquifer in the U.S. High Plains
by about 1 million hectares.
Salinity and water logging from poor drainage have plagued irrigators for millennium. Salinity contributed to the decline of the Sumerian civilization of Mesopotamia in the T igrus and Euphrates basin. More recently, high salt levels have forced the abandonment of irrigation on millions of hectares of land worldwide and reduced the yields on millions more. In the Aral Sea
basin alone, high salt levels forced about 1 million hectares out of production and reduced crop
yields on the remaining irrigated lands an estimated 60%. By the late 1980s nearly 18 million
irrigated hectares in China, India, and Pakistan had been damaged by salt. In addition to the
threats of declining water tables and rising salt levels, irrigators face growing c ompetition for
water from municipal and industrial users and environ me nta lists wanting to protect and restore
instream water uses.
The technology exists to upgrade wastewater and to desalinate sea or brackish water for any
use. Depending on the quality r equirements of the end use and the quantity of salts and other impurities in the source water, the costs of recycling and desalting are likely to be 5 to 10 times those
of most currently available water supplies. These technologies are becoming increasingly common for municipal and industrial uses in the more affluent countries. But their costs are generally prohibitive for developing countries and for agricultural users worldwide.
The prospect of greenhouse warming poses another con ce rn for all water users. Warming
would alter precipitation, evapotra nspiration, and runoff patt erns, as well as the magnitude a nd
frequency of extreme events. The nature, timing, and even the direction of the impacts on the regional and local scales of primary interest to water planners and managers are uncertain. Some
regions are likely to experience more intense precipitation days, as well as increased flooding.
Others may have more frequent and severe droughts. And s ome may experience both more intense
floods and droughts. There are likely to be winners as well as losers. On balance, however, the impacts are likely to be negative in part because water-supply systems are designed and operated
on the assumption that future climate will look like the past climate.
In contrast to the threats and constra ints on supplies, demands for both instream and withdrawal uses of water tend to rise with economic and population growth. Providing for increasing
water demands will require changes in how water has traditionally been managed and allocated
among competing us ers. Understanding why supplies are under stress is essential for introducing
needed cha nges.
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Resources for the Future ·Issue Brief
Why supplies are threatened
Competition for scarce resources is a fundamental f act of economic life. The primary purpose of
an economic system is allocating these resources a mong competing users and distributing the final products efficiently—that is, in a manner that tends to maximize society’s net benefits. Prices
and mar kets are the primary mechanisms for a llocating scarce resources in the developed world.
They pr ovide incentives to conserve and invest in new supplies, and op por tunities to transfer resources a mong competing uses as conditions change. Under cer tain conditions, they can at least
approximate an efficient allocation of a society’s scarce resource s.
Water, however, has rarely been treated as an economic good and subjected to unfettered market forces. Its vital and often revered status has led societies to restrict sales, subs idize favored
users, and price water well below its full cost and scarcity value. The institutions that establish
the op por tunities as well as the incentives to use or a buse water resources are mostly relics of an
era when water was viewed as a free resource. Treating water as free may have been appropriate
a century or two ago, when one person’s use had little or no effect on the availability or quality
of water for others. As the resource becomes scarce and its ab il ity to assimilate wastes is exceeded, all users within a hydrologic unit become increasingly int erdependent and each use can
affect the quantity and quality of water used by others. Failure to treat water as an economic good
and take account of these interdependencies among us ers is now the primary reason supplies are
misused and abused.
Water poses special problems for introducing effective prices and markets. Efficient markets
require well-defined, transferable r ights to the resource. If markets are to produce socially efficient exchanges and appropriate price signals, buyers and sellers must bear the full costs and benefits of a transfer. Markets for water generally fail on both c ounts. The nature of the resource creates problems for both establishing the necessary property rights and for ensuring that the costs
and benefits are fully inte rn al ized to the parties in the transfer.
The h ydrologic cycle makes water renewable and able to assimilate large amounts of a society’s wastes. This c ycle also ma kes water’s pres ence variable in time and space. Streams and
groundwater supplies that flow from one proper ty to another have the characteristics of a common proper ty resource for which it is difficult to establish clear proper ty rights. When ownership is established only by capture, an individual’s incentive is to accelerate use of the resource
before it is captured by others.
Water use is rarely fully consumptive, enabling it to be used many times. But each use can affect the availability, timing, and quality of water available to others. Exte rn al ities, or t hird-party
effects, result when water is transferred from one use to another. Natural hydrologic regions are
often split into multiple political and administrative units that fail to take account of the interdependencies among water us ers and the oppor tunities for more efficient and integrated basin wide
management. These failures are particularly likely on inte rn atio nal ri vers, w hich cover almost
half of the earth’s total land surface.
A further complication in the development of efficient water markets is that water resources
produce public as well as private goods. Public goods, such as the scenic amenities and wildlife
habitat pr ovided by clean, free -flowing streams, are not marketed bec ause those who c hoose not
to pay cannot be effectively excluded from fre ely enjoying them. Unfettered private water trans-
Handling the Serious and Growing Threats to our Most Renewable Resource—Water
5
fers ignore the impacts on such goods. Similarly, pol l u te rs underi nv est in waste reduction and
treatment when the costs of the pollution are borne by society rather than the individual polluter.
Competitive markets and prices also require the presence of many buyers and sellers. But it
is rarely practical to have multiple water suppliers servicing a single household, business, or far m.
Prices are usually set by utility managers or r egulators rather than by market forces. At least in
the or y, a utility can supply water efficiently and set prices at levels that equate an individual’s
cost of using water with the marginal social cost of providing it. In pr actice, however, water pricing practices have been based on financial, po litical, or religious considerations rather than economic efficiency. Urban water suppliers often treat water as a necessity, the demand for which is
unresponsive to price. Prices are generally set to cover the supplier’s average costs. For reasons
described above, the marginal costs of adding supplies to meet the demands of a growing population are likely to be well above the average. An analysis of the costs of raw water from Wo rl d
Bank-financed projects indicates that, in most cases, the unit costs of additional water from the
nex t water-supply project is more than double the cost from existing projects. With average cost
pricing, consumers pay less and have less incentive to con se rve, and producers invest in supp lies
for which the marginal cost exceeds the marginal value in use.
Pricing distortions and inefficiencies are even greater if the supplier’s costs do not include
the opportunity costs of the water. Traditionally, suppliers pay for transpor ting, storing, and treating water but not for the water itself. This effectively treats water left in a stream, reservoir, or
aquifer as having no value, causing it to be overused by whoever does have access to the resource
in the absence of well-organized prop er ty rights. Subsidies, which are particularly common and
generous for irr igators around the world, introduce further inefficiencies in water use.
The loss of hundreds of millions of hectares of wetlands is another exa mple of mar ket failure.
The benefits of reduced flooding, cleaner water, and improved fish and wildlife habitat pr ovided
by wetlands are shared by downstream residents of the floodplain, communities using the naturally filtered water, and s ociety as a whole in the case of habitat for endangered species. On the
other hand, the benefits of dryland created by draining and filling wetlands accrue to individual
landowners who have little incentive to protect the natural wetland.
Why they are important
The quality of life, as well as life itself, depends on an adequate supply of freshwater. Water is
critical for the health of both humans and ecosystems. It also is an important element of economic
and recreational activities. Neither plants nor animals can survive long without it, and water is
used in vir tually everything we do and make. It is the most widely used res ource by industry, and
is used both directly and indirectly to produce energy; it pr ovides transpor tation routes and a vehicle for disposing of waste; and it provides important cultural and am enity va lues. When the resource is scarce, tradeoffs among these s ervices must be made. How these tradeoffs are made has
impor tant economic, environmental, and health implications.
Water management instit utions generally have failed to: (1) extend basic water services to billions of the world’s poorest people; (2) facilitate socially-efficient water transfers; (3) introduce
appropriate incentives to conser ve and to invest in the development of new resources and technologies; (4) protect water quality, public goods, and common property resources; (5) resolve conflicts among competing us ers expeditiously; and (6) encourage int egrated management that takes
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Resources for the Future ·Issue Brief
account of the interdependencies a mong the residents of a shared watershed. These failures impose a number of costs, even in societies where reliable supplies of high quality water are provided. Water is not allocated to its highest value uses and socially unproductive investments are
made while potentia lly productive investments are not. Instream water uses and aquatic ecosystems suffer. Failure to resolve conflicts a mong competing water users in a ti me ly fas hion results
in costly litigation and missed oppor tunities to adopt management strategies that might be mutually beneficial. Conflicts involving countries sharing a river basin or groundwater resource are
potentia lly explosive.
Few factors have a greater impact on human welfare than the availability of safe drinking water and sanitation. In the developed world most people take for granted that potable water will be
available at the turn of a tap and that their wastes will be quickly removed from their homes and
neighborhoods. In the developing world, an estimated 1.3 billion people lacked access to safe water in 1995 and twice that number lacked access to sanitation. Failure to provide these basic services has devastating implications for mortality, morbidity, and economic opportunities. Waterrelated diseases and illnesses are re sponsible for the deaths of most of the 5 million children under
the age of five who die annually in Africa. Poor sanitation and drinking water propagate a number of pa inful and debilitating diseases such as guinea worm and schistosomiasis, and contribute
to periodic cholera epidemics. The poor health of a labor force lacking access to safe drinking water and the countless hours spent transpor ting water for domestic use from distant and often-contaminated sites further diminishes development prospects.
Irrigation, w hich accounts for about 70% of all water withdrawals, has recei ved favored treatment in the a llocation of supplies. Since the start of the green revolution in the 1960s, irrigation
accounted for about 80% of the increase in agricultural production. About 40% of the wor ld’s agricultural food and f iber is now produced on the 17% of the cropland that is irrigated. Synergies between irrigation and the green revolution technologies contributed to the growth in both irrigation and the production of food and fiber. Reliable supplies of water are essential for achieving
the benefits of these technologies, and the higher yields that can be attained with these technologies encourage irrigation. Ho we v e r, the growth of irrigation has slowed over the last two
decades. As noted above, its future is clouded by dependence on nonrenewable water supplies,
salinity, domestic and industrial users capable of paying more for water, and environmentalists
wanting more water left in their natural environments.
The degr adation of aquatic and related t errestrial ecosystems—and depletion of groundwater
supplies—pose long-term problems for meeting both instream and withdrawal water demands and
limiting flood damages. The quality of rivers and lakes is often poor as a result of water diversions, deforestation, elimination of wetlands, development of riparian lands, and the chemicals
and human wastes that get discharged into them. Healthy ecosystems require appropriate amounts
of good-quality water at certain times. Even a partial restoration of a degraded ecosystem is likely
to be expensive, t ime consuming, and necessitate redirecting water from of fstream to instream
uses.
Handling the Serious and Growing Threats to our Most Renewable Resource—Water
7
What might be done
In spite of the problems detailed above that inhibit the use of economic instruments for allocating
and protecting water supplies, there is a growing consensus that water management must rely more
on economic principles to achieve more efficient and sustainable use and to provide adequate water and sanitation services for the poor. The 2000 repor t of the World Commission on Water for
the 2 1st Century is the latest in a long line of repor ts that have concluded that freshwater must be
recognized as a scarce commodity and managed accordingly.
The tr adition of providing subsidized water t hrough government agencies has left hundreds of
millions of people without basic water and sanitation services and failed to pr ovide the funding
needed just to keep up with population growth in Africa. In 1990, delegates from 46 African nations met in the Ivory Coast and endorsed privatizing water and sanitation services to promote
efficiency and recommended that future investments be based on effective demand and recovered
through user fees. Targeted subs idies may be needed initially to help poor communities develop
and manage their own water systems. To avoid introducing new distortions in water use, the subsidies should be delivered direc tly to the people who would then pay the full-cost of the services
recei ved. In urban areas, the wealthier households with connections to a central water supply system have been the primary beneficiaries of the subsidies.
When available, access to safe, reliable supp lies of drinking water is one of the best bargains
a consumer can get. Water costs, direct and indirect, are much higher when supplies are not re adily available. Families receiving water by truck are likely to pay 10 times more than they would
if connected to a city’s distribution system. Boiling or buying bot tled water when the system’s
water is unsafe and building in-house storage facilities, drilling wells, and installing booster pumps
when the service is unreliable a lso are costly options. Many people in the developing world are
in a low-level equilibrium trap in which a low level of service is provided, the wi llingness to pay
for poor service is low, and thus revenues are insufficient to improve or ma intain the system. The
challenge is to move to a high-level equilibrium in which users get a high level of ser vice and are
willing to pay for the ser vice and its maintenance.
The World Commission on Water estimated that the current level of investment would have
to be doubled to about $180 billion a year to reduce the number of people without water and sanitation services to 330 million and increase average caloric intake in developing countries to at
least 2,750 per day by the year 2025. Fundamental reforms in water management and pricing a lso
are needed to ac hieve such sizeable increases in the availability of these services.
Full-cost pricing would help attract the nee ded investments. It also would promote conservation and reduce wastewater treat me nt costs that rise in direct propor tion to the quantity of water
treated. The belief that clean water is a basic human right that should not be left to private companies and market forces poses a potential o bstacle to making the required management and pricing changes. The violent and deadly protests in 2000 that followed a contract to turn the water
system of Cochabamba, Bolivia’s third largest city, over to a foreign-led consortium illustrate the
potential intensity of the resistance to such changes and the need for participation of community
instit utions in developing policies that will have legitimacy and broad support.
Sanitation services are essential to sustainable water use and basic human health. Using rivers
and lakes to dispose of untreated sewage t hreatens the health and productivity of the receiving
ecosystem and the livelihood of those dependent on it. Providing and paying for an efficient level
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Resources for the Future ·Issue Brief
of water treatment is complicated bec ause the primary beneficiaries of the cleaner water are likely
to be r emoved in time and space from the polluters. Sustainable water management in such cases
depends on the broader community r egulating the quantity and quality of discharges and spre ading the costs between the polluters and beneficiaries in a mutually acc eptable manner. Cos t-effective approaches to achieving water-quality goals might include effluent fees that provide incentives to develop and adopt least-cost technologies or tr adable permits to po llute that establish
an allowable quantity of pollution in a watershed and provide inc entives to achieve t his level at
the lowest cost. Local-level community groups need to be involved in det ermining the level and
cost of s ervice provided and the utilities must have incentives to provide that s er vice efficiently.
Integrated water resource management at the level of natural hydrologic units is an essential
step for improving water use efficiency, protecting aquatic ecosystems, and reducing conflicts
among water users. As the competition for water rises, all users within a hydrologic unit or watershed become increasingly interdependent. Upstream users affect those downstream, and
groundwater use affects surface water supplies and vice versa. A holistic int egrated approach also
would take account of the impacts of land use on the availability of freshwater. These interdependencies are c ommonly ignored in management decisions because natural hydrologic units are
split into multiple political and administrative units; water supply facilities are under separate
ownership; ground and surface waters are subject to different laws; and land use often ignores
the impacts on water resources.
The c omplexities and interdependencies a mong water users are particularly evident in dam
and reservoir operations. Allocating water or reservoir capacity for one use affects all other users
within the hydrologic system. For example, dr awing down a reservoir for flood control may reduce available supplies when they are most va lued for irrigation, hydropower, navigation, or recreation. Managing these systems in the social int erest is a daunting challenge for w hich markets and
market-determined prices are of limited help. According to the World Commission on Water, decisions should be participatory, scientifically informed, and made at the lowest possible level. But
integrated water resources management requires that this be done within a geographic fram ework
defined by the natural units by which nature manages water.
Water mar keting in volves the voluntary transfer of water r ights to new uses and users. While
it is not a panacea for achieving efficient and sustainable water use, marketing has great potential to increase water-use efficiency as supply and demand conditions change. But marketing water differs in important ways from the sales of most goods and services, and faces several obstacles. Water transfers result in t hird-party impacts that must be taken into account expeditiously
and fairly to ensure a transfer is in the social interest. More over, it is expensive to move water outside of existing channels, and institutional factors often limit transfers even when the infrastructure is in pl ace to move water at low cost. The laws, regulations, and treaties that establish wat er
rights limit how it can be used.
In spite of the obsta cl es, the potential gains suppor t water marketing. Chile and the western
United States are the two areas where marketing is most advanced. To date, water marketing has
largely involved transfers from relati vely low -value, inefficient irr igation to municipal and industrial uses. When irrigators have an opportunity to sell water, they value the resource in t erms
of its oppor tunity cost—the value they could get by selling water—rather than at the subsidized
price they pay for it. Water sales provide irrigators with both the incentives and the funds required
to invest in more water-efficient practices.
Handling the Serious and Growing Threats to our Most Renewable Resource—Water
9
The prospect of global climate change is likely to contribute to the benefits of water transfers.
Greenhouse warming will affect the hydrologic system as well as the demand for water. The magnitude, timing, and even the direction of the climate-induced changes in a region’s water supplies
are uncer tain. The costs of building dams, rese rv o i rs, and other infrastructure in anticipation of
these uncer tain changes are high. H owever, reexamining op erating r ules, relaxing constra ints on
water use, and developing institutions to encourage voluntary exchanges of water through markets will make the system more efficient and able to adapt to whatever the future might bring.
Further Readings
Frederick, Kenneth. “Water Marketing: Obsta cl es and Oppor tunities,” Forum for Applied Research and Public
Policy, Spring 2001, pp. 54 - 62 .
Gleick, Peter H, Gary Wolff, Elizabeth L. Chalecki, Rachel Reyes. The New Economy of Water: The Risks and
Benefits of Globalization and Privatization of Fresh Water, Pacific Instit ute for Studies in Development, Environ me nt, and Security, Fe b ru ary 200 2.
Postel, Sandra. Pillar of Sand: Can the Irrigation Miracle Last?, WW Norton & Company, 1999.
The World Commission on Water for the 21st Century. “A Repor t on the World Com mission on Water for the
21st Century,” Water International 25(2), June 2000, pp. 284-302.
Ken Frederick is a former senior fellow at RFF.
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Resources for the Future ·Issue Brief