A precious commodity.

Photographer: Justin Sullivan/Getty Images

Thirsty Swiss Cows are Harbingers of (Water) War

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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A quarrel has broken out between Switzerland and France after the Swiss army was caught stealing water from a French lake. While Switzerland's aqua grab seems to have been an honest mistake during a military operation to quench the thirst of the nation's drought-stricken cows, the European spat presages scenes that threaten to become more frequent and more violent all around the world, as climate change increases competition for the wet stuff.

QuickTake Global Droughts

Earlier this month, thermometers in Geneva reached a record 39.7 degrees Celsius (103 Fahrenheit). In France, meantime, 66 of the country's 96 regions have imposed restrictions on water usage, with half imposing crisis curbs that include a ban on water for agriculture. So when Swiss helicopters scooped up 53,000 liters (14,000 gallons), the locals near Lac des Rousses in the French Alps were none too pleased.

Water crises were deemed the world's biggest risk in terms of global impact, in the World Economic Forum's 2015 "Global Risks Landscape" report, beating pandemics, weapons of mass destruction and interstate conflicts. The International Monetary Fund says water resources worldwide "are coming under intense pressure," and this is a potential drag on global economic growth:

Water is a special economic good, with many unique features that differentiate it from other commodities: it is both a private and public good; it is bulky and difficult to transport; it can be used sequentially and can be recycled. Because water is a key input in agriculture, energy, and industry, water shortages and variability can lead to food insecurity, raise production costs, and constrain productivity growth.

It's in emerging market countries that the risks of serious conflict over water resources loom largest. Nations such as China, India and Pakistan have underdeveloped infrastructure, making it tough to increase supply through desalination or to transport water from where it is to where it's most needed.

In November, China's Xinhua news agency reported that 60 percent of the country's groundwater is classified as "bad" or "very bad," and that 17 of the nation's 31 major freshwater lakes are slightly to moderately polluted. Three hundred of China's 657 major cities are at risk of water shortages, including the North China region that includes Beijing and Tianjin.

China's efforts to move water to its arid north from the south of the country aren't alleviating water shortages, a University of East Anglia study has found:

Source: PNS

But if China instead were to build more dams on rivers that flow into India and Pakistan, it could lead to conflict. A better solution, according to the IMF, is to use the price of water to subdue demand, and to stop allowing public subsidies to distort the market:

Water should not be a free good -- the laws of demand and supply tell us that underpricing leads to overuse and undersupply. Water use is found to negatively correlate with water cost, suggesting a role for price signals to rationalize water consumption. Public utilities in many countries set water prices below the cost recovery level, creating incentives for overuse and underinvestment.

Peter Brabeck-Letmathe, the chairman of Nestle SA who's been raising alarms about the impending global water crisis, supports that approach. Since 2005, Nestle, the biggest food company in the world, has been trying to cut its water consumption, targeting a 40 percent reduction by this year. Brabeck-Letmathe says that if nations don't curb their use of fresh water, global grain production may drop to 30 percent less than the world needs. Charging the biggest users more for water is the way to prevent that, he said in October:

The more you use, the higher the price. For rare resources, the economy of scale is the biggest mistake you can have. The less you use, the less you should be paying. This would be a very simple thing.

That strategy seems to be working in drought-stricken California. As water there has become more expensive, usage has declined. California Water Service Group, which runs water utilities in California, New Mexico and Washington, said on Thursday that its second-quarter profit had dropped as consumption in its main market declined.

Gregory Elders, an analyst at Bloomberg Intelligence, reckons it's "just a matter of time" before companies operating in California will have to pay for groundwater, as they already do in Australia.

For the past five years, the world has enjoyed a 30 percent drop in food prices, according to an index compiled by the United Nations. Unless the looming water conflicts can be averted by a combination of smarter technology to boost production, a shift in the pricing structure to suppress demand, and more strenuous government efforts to tackle climate change, the world will become both more expensive and more at risk of conflict. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author on this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net