AGAINST THE CURRENT:

PRIVATIZATION, WATERMARKETS,
AND THE STATE IN CHILE

by

CARL J. BAUER
University of California, Berkeley

....

"

Springer Science+Business Media, LLC

Library of Congress Cataloging-in-Publication Data

Bauer, Cari J., 1960Against the current : privatization, water markets, and the state
in Chile I by Cari J. Bauer.
p. cm. -- (Natural resource management and policy)
Includes bibliographical references and index.
ISBN 978-1-4613-7942-3
ISBN 978-1-4615-6403-4 (eBook)
DOI 10.1007/978-1-4615-6403-4

1. Water-supply--Economic aspects--Chile. 2. Water rights--Chile.

3. Water-supply--Government policy--Chile. 4. Privatization--Chile.
1. Title. II. Series.
HD1696.C5B38 1998
98-28298
333.91 '00983--dc21
CIP

Copyright 1998 Springer Science+Business Media New York

Originally published by Kluwer Academic Publishers, New York in 1998
Softcover reprint of the hardcover 1st edition 1998

AH rights reserved. No part of this publication may be reproduced, stored in a

retrieval system or transmitted in any form or by any means, mechanical, photocopying, recording, or otherwise, without the prior written permission of the
publisher, Springer Science+Business Media, LLC
Printed an acid-free paper.

TABLE OF CONTENTS
LIST OF MAPS

Vll

LIST OF TABLES

IX

ACKNOWLEDGMENTS

XI

INTRODUCTION
Water, Markets, and Privatization

Recent Political and Economic History in Chile

Analytical Framework: Geography, Political Economy, and Law

Research Methods

Outline of Book

Notes to Chapter One

BLUEPRINT FOR THE NEOLIBERAL MODEL: LAW,

ECONOMICS, AND POLITICS IN THE 1980 CONSTITUTION

11

Origins and Politics of the 1980 Constitution

12

The Economic Constitution

17

The New and Contradictory Role of the Judiciary

19

Diagnosis and Reform of the Judicial System

22

Conclusions

24

Notes to Chapter Two

26

WATER RIGHTS AND THE LAW OF THE PENDULUM: LEGAL

AND POLITICAL HISTORY OF THE 1981 WATER CODE

33

Goals and Principles: Private Property and Free Markets

34

Historical Background: Chilean Water Law up to the 1970s

36

Steps Toward a Neoliberal Water Code, 1976-1981

40

Conclusions

44

Notes to Chapter Three

46

BRINGING WATER MARKETS DOWN TO EARTH:

WATER RIGHTS TRADING IN PRACTICE, 1980-1995

51

Irrigated Agriculture in Chile: Two Study Areas

52

The Water Market in Practice, 1980-1995

56

Why Water Rights Trading is Limited

60

Peasant Farmers and the Water Market

67

Reforming the Water Code

68

Conclusions

71

Notes to Chapter Four

73

PRIVATE PROPERTY AND RIVER BASINS: WATER USE

CONFLICTS, THE MARKET MODEL, AND THE COURTS

79

Judicial Behavior in Water Rights Cases

80

Non-Consumptive Rights and River Basin Management

84

Hydroelectricity and River Basin Conflicts in South-Central Chile

86

Reforming River Basin Institutions

106

Conclusions

108

Epilogue

110

Notes to Chapter Five

110

CONCLUSIONS

119

BffiLIOGRAPHY

125

INDEX

159

VI

LIST OF MAPS

MAP!

Water market study areas: Central Chile

53

MAP 2

Bfo Bfo River basin

88

MAP 3

Maule River basin

96

LIST OF TABLES

Area irrigated by canals built wholly or partly by the state,

Bfo Bfo Province

55

TABLE 2

Water rights sales, Comuna of Los Angeles, 1980-1991

58

TABLE 3

Water rights sales, Province of Los Andes, 1980-1992

59

TABLE 1

ACKNOWLEDGMENTS
This book was made possible by the support of many people and institutions.
My field research in Chile (1991-1993) was financially supported by dissertation
fellowships from the Fulbright-Hays Program, the Inter-American Foundation, and the
Joint Committee on Latin American and Caribbean Studies of the Social Science
Research Council and the American Council of Learned Societies (with funds provided
by the Andrew W. Mellon Foundation and the Ford Foundation). At the University of
California in Berkeley, initial support for writing (1994) was provided by the
Jurisprudence and Social Policy Program and by the John M. Olin Foundation. A
Ciriacy-Wantrup Post-doctoral Fellowship at U.e.-Berkeley allowed me two years of
additional research and writing (1995-1997), including several months in Chile in
1995. Finally, thanks to the College of Natural Resources at U.e.-Berkeley for support
in the final preparation of this manuscript.
I am grateful to many people in Chile for facilitating my research and being
generous with their time, fortunately far too many for me to name here. I am especially
grateful to everyone who agreed to be interviewed. While in Chile I was affiliated with
three institutions. The United Nations Economic Commission for Latin America and
the Caribbean, Agriculture Division, gave me an office in Santiago and made me
welcome; my thanks to Emiliano Ortega, former head of the Agriculture Division, and
to all of the Division's staff, who continue to make me welcome years later, as well as
to ECLAC's water experts, Axel Dourojeanni, Terence Lee, and Miguel Solanes. In
Santiago I was also affiliated with the Institute of Mining and Water Law of the
University of Atacama, where I have twice taught a course on comparative water law;
my thanks to Alejandro Vergara, former director of the Institute and professor at the
Catholic University Law School, with whom I ct'fntinue to meet and collaborate in a
growing number of countries. In Concepcion, I was affiliated with the Center EULA at
the University of Concepcion, where I shared an office for a year; my thanks to Oscar
Parra, the Center's director.
At the University of California-Berkeley, I appreciate the help I've gotten
over the years from John Dwyer, Louise Fortmann, Keith Gilless, Empe Grant,
Michael Johns, Phillip LeVeen, Richard Norgaard, Harry Scheiber, Martin Shapiro,
and Richard Walker. Thanks also to Lovell Jarvis ofU.e.-Davis, who despite being an
outsider was more involved than anyone. For reading and commenting on different
chapters, I am grateful to Ashok Bardhan, Javier Couso, Elisabeth Friedman, Michael
Hanemann, Lisa Hilbink, Lovell Jarvis, Michael Johns, Seemin Qayum, and Raka Ray.
Special thanks to Seemin Qayum for editing the entire manuscript, saving me from
some of my faults and improving the lives of all of my readers.
Thanks to Ariel Dinar and David Zilberman for their interest and
encouragement in bringing this book to publication. Thanks to Robert Rose for making

the maps, and to Susan Weiss for getting the manuscript ready for printing. Lastly, to
Carol Cahill and Teresa Esser at Kluwer Academic Publishers, my gratitude for their
help and patience.
Parts of this book have been published elsewhere in article form, and I
appreciate those publishers' permission to republish here. Parts of Chapters Three and
Four appeared as "Bringing water markets down to earth: The political economy of
water rights in Chile, 1976-1995," World Development, Vol.25, May 1997, pp.639656. For this permission I thank Elsevier Science. Parts of Chapters Two, Three, and
Five will appear as "Slippery property rights: Multiple water uses and the neoliberal
model in Chile, 1981-1995," Natural Resources Journal (in press). An earlier version
of Chapter Two appeared as ''The contradictory role of the judiciary in Chile's
neoliberal economic model," paper presented at the First Conference of the Latin
American Law and Economics Association, February 1995, in Mexico City.
Special thanks to Grenelle and Bruce Scott and to Harry Scheiber for a boost
at a critical time. And to Brooke Bedrick for sharing the transition from this project to
the next.

xii

l, Que

papel no hace el agua en todas las funciones de la vida

y de la industria humana? l,A d6nde volveremos los ojos
que no encontremos a aquel elemento ejerciendo el influjo
primordial que Ie ha sido concedido sobre toda la creaci6n?

Is there any role that water does not play in all of the
functions of life and human industry? Where shall we turn
our eyes and not find that element wielding the primordial
influence which it has been granted over all of creation?

- Antonio Garda Reyes

"Legislaci6n de Aguas"
Gaceta de los Tribunales 250
Chile, 1847

AGAINST THE CURRENT:

PRIVATIZATION, WATER MARKETS,
AND THE STATE IN CHILE

NATURAL RESOURCE MANAGEMENT AND POLICY

Editors:
Ariel Dinar
Agricultural and Natural Resources Dept.
The World Bank
1818 H Street, NW
Washington, DC 20433

David Zilberman
Dept. of Agricultural and
Resource Economics
Univ. of California, Berkeley
Berkeley, CA 94720

EDITORIAL STATEMENT
There is a growing awareness to the role that natural resources such as water, land,
forests and environmental amenities play in our lives. There are many competing
uses for natural resources, and society is challenged to manage them for improving
social well being. Furthermore, there may be dire consequences to natural
resources mismanagement. Renewable resources such as water, land and the
environment are linked, and decisions made with regard to one may affect the
others. Policy and management of natural resources now require interdisciplinary
approach including natural and social sciences to correctly address our society
preferences.
This series provides a collection of works containing most recent findings on
economics, management and policy of renewable biological resources such as
water, land, crop protection, sustainable agriculture, technology, and environmental
health. It incorporates modem thinking and techniques of economics and
management. Books in this series will incorporate knowledge and models of
natural phenomena with economics and managerial decision frameworks to assess
alternative options for managing natural resources and environment.
A market institution is frequently mentioned as a solution to water allocation
problems, with the Chile case being the most quoted case. This book, using legal
and institutional argumentation, examines the impact of the 1981 Chile Water Code
on the overall performance of the water market in Chile. The book highlights the
impact on the performance of the market from complications in the legal and
priority right system in that code.

The Series Editors

Recently Published Books in the Series
Parker, Douglas D. and Tsur, Yacov:
Decentralization and Coordination o/Water Resource Management
Just, Richard and Netanjahu, Sinaia:
Conflict and Cooperation on Trans-Boundary Water Resources
Antle, John, Capalbo, Susan and Crissman, Charles:
Economic, Environmental, and Health Tradeoffs in Agriculture:
Pesticides and the Sustainability 0/ Andean Potato Production
Spulber, Nicolas and Sabbaghi, Asghar:
Economics o/Water Resources: From Regulation to Privatization
Second Edition

CHAPTER ONE
INTRODUCTION
WATER, MARKETS, AND PRIVATIZA TION
This book is about how free markets have affected the use of water in
Chile. Since the mid-1970s Chile has become famous as the textbook case of free
market economic policies. Chile's military government (1973-1990) adopted these
policies years before other countries did, applying them to a radical degree and
making special efforts to institutionalize the changes for the long term. Water use is
a prime example. In 1981 the military government dictated a new Water Code that
transformed the country's system of water rights: it fortified private property,
introduced market mechanisms and incentives, and pared back the state's power to
regulate.
Free market economics and "market-friendly" policies have become
prominent in debates about the management of natural resources, in many parts of
the world. In Latin America, free market doctrine is often called "neoliberal"
because it revives the laissez-faire economic ideology of the late nineteenth and
early twentieth centuries. Neoliberalism is a reaction against the dramatic expansion
of the role of the state that has marked the twentieth century. As an economic theory
it is founded on orthodox neo-classical economics, taken to a more free market
extreme; neoliberals are more concerned about state failure than market failure. The
University of Chicago has been the leading academic center for neoliberal thought,
while the World Bank has been a strong proponent in the realm of international
development policy. (Thus "neoliberal" does not refer to the liberal position in U.S.
politics, which generally favors state action and regulation; in the United States
neoliberal views would be called conservative.)
Neoliberal economics has also had a strong influence on the analysis of
law, institutions, and politics. The "Chicago" perspective is especially dominant in
the "property rights school" of economics and in the inter-disciplinary field known
as "law-and-economics" (or more accurately as the economic analysis of law).) The
overall argument is that legal rules and institutions should favor the operation of
market mechanisms, such as private bargaining and exchange, and should minimize
government regulations. According to this view, free markets increase economic
efficiency by allocating resources to their most valuable uses. Markets do this
through the price system. Prices allow measurement and comparison of different
things and coordinate dispersed information about supply and demand, and these are
among the market's great advantages over central planning. State regulations and
subsidies are said to distort price signals and alter patterns of resource use in

Against the Current

inefficient ways. Market incentives, in contrast, help to "get prices right" and
stimulate people to use resources more efficiently.
These pro-market economic arguments emphasize the need for private
property rights. Because the essence of the market is private exchange, property
rights must be legally defined as private, exclusive, and transferable. Freedom to
trad~ allows flexibility to reallocate resources as conditions change. Secure property
rights stimulate economic growth by providing incentives to invest capital and
labor, since owners are entitled to the fruits of their investments. The main political
argument for private property is that it guarantees a zone of freedom from state
interference. From this standpoint, state regulation should be limited to defining and
protecting property rights, enforcing private contracts, and lowering "transactions
costs." (Transactions costs are the range of costs faced by individuals in carrying
out a private transaction.) Private bargaining among property owners is said to be
the most efficient way to sort out conflicts over resource uses, including
environmental problems and other third-party effects, provided that transactions
costs are low. If transactions costs are high, then the state's role should be to lower
them. This argument, variously formulated, is commonly known as the "Coase
Theorem," after University of Chicago professor Ronald Coase?
Free market arguments have also been applied to water resources, based on
the notion that water is a commodity like any other. Water markets have been much
debated in recent years, first in the Western United States and later in international
development circles? The debates have been driven by changing social, economic,
and environmental factors. In many parts of the world, particularly in arid regions,
the demands and competition for water have grown beyond the sustainable limits of
available supplies. The increasing relative scarcity of water has raised its economic
value and made it the center of growing political and environmental conflicts.
Where it is not feasible or desirable to develop new supplies, the pressure has risen
to increase the efficiency of water use and to reallocate water from existing uses to
new uses. Markets are one way to do this. In the Western United States, a variety of
market mechanisms and policies have raised water's cost and helped to shift water
out of the agricultural sector and towards urban areas. Nevertheless, water markets
have been highly controversial and therefore restricted in number and closely
regulated. Neoliberal arguments have had limited influence.
Many people, both economists and non-economists, have argued that water
is a peculiar resource with unique physical characteristics that are ill-suited for free
markets. Water is vital to all human and biological existence. Water is "fugitive": it
moves around and changes forms, from vapor to liquid to solid, from rain and snow
to rivers, lakes, and seas. As an economic resource its supply and demand vary in
place and time, making information uncertain or hard to obtain. Because water
resources are physically inter-connected, private rights and transactions often affect
other water users or the environment. Dealing with these third-party effects requires
placing limits on free exchange. In addition, some aspects of water use involve
inherently public and collective interests, in areas such as navigation, environmental
protection, and pollution control. The infrastructure needed to use and distribute
water is typically susceptible to monopoly powers, as with other utilities and

Introduction

services such as electricity and telephones. All of these factors make transactions
costs high and property rights hard to define clearly: water rights must be
conditional and overlapping rather than simply private, exclusive, and transferable.
Sorting out all these problems requires legal and political institutions that are
outside of the marketplace. 4
Chile's current Water Code is unique in its reliance on strong free market
ideology. In studying the Code's results, in this book I emphasize empirical aspects
and I am skeptical about ideological claims. Markets in water, like markets in
general, have advantages and disadvantages; they can perform some functions well
and others poorly. Furthermore, water rights raise complicated issues beyond the
scope of single disciplines or theoretical perspectives. In the following section I set
the stage for the Water Code by briefly summarizing recent Chilean political and
economic history, emphasizing the importance of natural resources. After that I
describe the book's analytical framework and research methods. The approach is
broadly inter-disciplinary, combining insights from geology, geography, history,
political economy, and law. The chapter ends with an overview of the rest of the
book and its overall conclusions.

RECENT POLITICAL AND ECONOMIC HISTORY IN CHILE5

The Chilean state has historically played a major role in the nation's
economic development, particularly since the 1920s. Rich natural resources have
long been the foundation of the Chilean economy, reflecting the country's unusual
and diverse geography: good agricultural land (if irrigated), minerals in abundance
and variety, dense forests, and coastal fisheries. In the late nineteenth century
Chile's part in the world economy was to export nitrates mined in the northern
desert for fertilizer. State revenues came mainly from export taxes. The nitrate
market collapsed in the twentieth century with the invention of cheaper industrial
substitutes, and the country's export dependence shifted to copper. The global
depression that began in the 1920s shut Chile off from most international markets
and triggered a half-century of expansion of the state and inward-oriented economic
development. The National Development Corporation (CORFO) was established in
1939, and for several decades invested heavily in basic infrastructure and industry.
Policies of import-substitution fostered Chilean industries and protected them from
international competition. The agricultural sector, however, remained highly
traditional in its social relations and technology, and had trouble producing enough
food to keep up with population growth.
From the mid-nineteenth century Chile's political system was generally
stable, constitutional, and fairly democratic. Suffrage was restricted, though it
broadened over time, and political parties represented an expanding range of social
interests. The Executive branch of government was generally stronger than the
Congress. The exception was a 35-year period after a brief civil war in 1891, but the
arrangement led to political stalemate and proved incapable of decisive
governmental action in the face of mounting social and economic problems.

Against the Current

Demands for reform led to a new Constitution in 1925, which strengthened

Presidential power and laid the foundation for the growth of the state over the
following decades. After several years of authoritarian government in 1927-1931,
political parties and parliamentary bargaining also consolidated their importance, as
successive governments were based on changing alliances of a basically centrist
nature. The Chilean political spectrum became divided into the now-famous "three
thirds" of left, center, and right.
By the 1960s the Chilean economy had failed to overcome problems of
slow growth, chronic inflation, and large-scale poverty. The Cuban Revolution sent
shock waves throughout Latin America and prompted many countries, supported by
the United States, to attempt broad social and economic reforms in order to avoid a
similar fate. In Chile the reformist party was called Christian Democracy: it drew
heavily on Catholic social doctrine and hoped to chart a course between the two
extremes of communism and capitalism. Although it was a fairly new party, it grew
rapidly to become the country's largest and its leader, Eduardo Frei Montalva, was
elected President in 1964. The Christian Democrats favored increased state
economic intervention. The Frei government's most symbolic and controversial
program was the 1967 Agrarian Reform, which aimed to improve social equity and
modernize agricultural production by redistributing large landholdings to peasants
and farm laborers (campesinos). However, the Christian Democrats' sense of
mission had led them to try to govern without coalition partners, and when their
government was unable to carry out its full agenda, they found few allies and little
support for re-election.
In 1970 frustration with the results of the Frei government's reforms led to
the election of Salvador Allende as President. Allende was a socialist who led a
diverse coalition of leftwing parties called Popular Unity. Although he got the most
votes (almost 40 per cent), he barely edged out the conservative candidate and he
was named President only with the support of the Christian Democrats, after he
affirmed his commitment to abide by the rules of the existing political institutions.
The Allende government further expanded the state's role in the economy,
following the socialist orthodoxy of the time. Despite its minority in Congress, the
government accelerated land expropriation and the Agrarian Reform and
nationalized many private businesses and industries, usually without compensation.
The big American-owned copper companies were the most famous example, which
unlike other nationalizations enjoyed very wide political support. Unfortunately,
during the Allende period (1970-1973) Chilean society and politics became ever
more polarized and neared the brink of civil war. While more radical members of
the Popular Unity pushed for armed struggle and revolution, the Christian
Democrats and rightwing parties dug in their heels in more active resistance, aided
by the U.S. government. Economic conditions deteriorated as well. Finally, in
September 1973 the armed forces overthrew the government in a violent military
coup. The head of the military Junta was General Augusto Pinochet.
As later chapters describe in more detail, General Pinochet and the military
government remained in power until 1990, during which time they sought to
transform Chilean society and political economy. The military government was an

Introduction

authoritarian regime that closed the Congress, outlawed political parties, and
harshly repressed dissent. The government adopted radical free market economic
policies and sharply reduced the state's role in planning, regulation, ownership of
productive enterprises, and provision of social services. The program was designed
by a group of neoliberal economists known as the "los Chicago Boys," because of
their training in free market and monetarist economic theories at the University of
Chicago. The new model was export-oriented and open to the world economy.
Many companies folded as the government abandoned policies of importsubstitution and protection of national industries. The country's economic activities
were restructured to emphasize its comparative advantage in international markets:
rich and diverse natural resources. The initial decade was traumatic, characterized
by monetary shock treatment, structural adjustment, temporary boom, and financial
crisis. Since the mid-1980s, however, the economy has grown rapidly and has
become the envy of other developing countries. This growth has been based on
exports of natural resources, though more diversified than the historical dependence
on copper. Chile now exports a combination of copper and other minerals, forest
products (paper, pulp, wood), specialty agricultural crops (fruit, vegetables, wine),
and fresh and processed fish. The social and environmental costs of this
transformation have been high, and the benefits of the boom have been distributed
quite unequally. The problems remain serious and unresolved today.
In 1990, in an orderly and negotiated transition, the military regime
transferred power to a democratically elected government made up of its political
opponents, a coalition of center-left parties known as the Concertacion. The
Concertacion was elected in late 1989, with its leader, Christian Democrat Patricio
Aylwin, elected President. The Concertacion includes the Christian Democrats,
smaller centrist parties, and two parties of "renovated socialists" (the Chilean term
for leftwing radicals who have adopted moderate, social democratic views). The
coalition had come together gradually during the 1980s and negotiated the
military's return to the barracks. The Concertacion adopted the slogan "growth with
equity." The government has carefully maintained the economic model that it
inherited, while increasing public spending on social programs, thanks to a 1990 tax
reform negotiated with the two rightwing political parties. The larger rightwing
party is Renovacion Nacional, a diverse group of conservatives who have often
been willing to compromise with the Concertacion. The smaller party is the Union
Democrata Independiente (UDI) , which was established by the gremialistas
described in Chapter Two, and which is more ideological, more neoliberal, and
more closely identified with the military. To some extent the Concertacion accepted
the economic model because it had no choice: without such a commitment the
military refused to leave power. But on the whole the Concertacion has kept the
model voluntarily, because despite its social and environmental costs, it has worked
better than the visible alternatives elsewhere in Latin America. By adopting the
model as its own, the Concertacion has legitimized it, wiping off much of the stain
of its having been created by a dictatorship. The coalition was re-elected in 1993
and continues to govern the country today.6

Against the Current

ANALYTICAL FRAMEWORK: GEOGRAPHY, POLITICAL ECONOMY,

AND LAW
My approach to natural resources starts with geology and geography. The
earth sciences feed an awareness of how environmental systems work at local,
regional, and global scales. Geography also adds the human element by studying the
relationship between societies and their physical environments. The perspective of
the earth sciences helps to ground the legal, economic, and political aspects of
natural resources. It emphasizes how those aspects are connected to physical and
ecological systems. Water illustrates the connections well because of its peculiar
qualities. Water links together different land and resource uses in different places. If
you recall the hydrologic cycle-water evaporates from the ocean to fall as rain on
the land surface, then flows in streams and rivers and eventually through our
plumbing back down to the sea-you become more aware of the continuous action
of environmental systems in our daily lives. River basins and watersheds are
compelling geographic images, offering a bird's-eye view of the unity and structure
of environmental systems at different scales of analysis. Learning a region's water
resources is the key to understanding its landscapes and patterns of land use.
By "political economy" I mean the integration of political and economic
analysis, with qualitative and historical methods. Political economy is concerned
with the production and distribution of wealth and with the use and allocation of
resources. Nature provides the raw materials and physical conditions for human
labor, as societies transform their environments and are themselves transformed. 7
Understanding these processes requires looking at the division of labor, social
structure, relations of power, and the role of government. This view of political
economy also draws on the "old" school of institutional economics, with its broad
conception of the social institutions that underlie economic systems. In contrast,
neo-classical economics is built around markets and exchange. It aims to separate
the political and economic spheres and takes a highly quantitative approach. Private
bargaining and transactions are the analytical focus at the micro level. Efficiency is
the dominant concept and objective. This is the approach to legal and political
institutions taken in law-and-economics. While the approach has important
advantages, some of its limitations are suggested by one economist: "An economic
transaction is a solved political problem. Economics has gained the title of queen of
the social sciences by choosing solved political problems as its domain.,,8
Law is about rules and procedures for human behavior. The law's deepest
purpose is to maintain social order and control, in both practical and ideological
ways. At one level this means imposing rules on people as external commands, with
law serving as an instrument of government or of social groups with political power.
At another level law involves people's acceptance of certain norms through cultural
and psychological influences. As a method of analysis law is formal and highly
structured, based on schemes of classification. Legal rules are organized by
category and hierarchy, from the mundane and administrative to more abstract
moral principles like justice or equity. Legal analysis involves sorting through this
range of purposes and interests to decide which rules control which situations. This

Introduction

means that the initial definitions, assumptions, and choices of categories are
critically important; law shapes people's consciousness by determining the range of
options they consider. But law is more than an autonomous system of rules and
logic: it is also the institutions that make and enforce these rules in the real world.
The "law in action" is different from the "law on the books," in the words of the
legal realists. Because legal institutions exist in social and historical context, they
are intimately tied to political and economic factors. 9
Nature, law, and political economy come together in property rights.
Property is about the ownership, use, and control of resources. How property rights
are defined and distributed is the backbone of an economic system: "the legal
constitution of economic power," as historian Willard Hurst put iL IO In this book
property rights are broadly conceived to include legal titles and definitions, the
political and institutional arrangements that surround them, and the actual practices
of resource use. Property also depends on the nature of what is owned. When it
comes to water and the environment, different resources are physically interconnected and therefore one person's rights and uses affect another's. Sophisticated
property systems do not define private rights simply as commodities, exclusive and
alienable; they also recognize overlapping claims to shared resources. This is why
water rights in most countries have been defined as rights to use a public resource
rather than rights to ownership. 11

RESEARCH METHODS

This book is an empirical and inter-disciplinary study of the Chilean water

rights system over ten years after privatization and free market reform. What have
been the results of the 1981 Water Code? When I began fieldwork in Chile in 1991,
there were very few studies and little information available. Thus I sought to
provide a comprehensive overview of new terrain, in the hope that subsequent
studies would examine particular aspects in more detail. The initial tasks were to
describe the general legal and institutional framework for water use, to identify the
important government agencies and private interest groups, and to understand how
these have evolved in recent Chilean political and economic history. The next step
was to carry out regional case studies.
During two and a half years in Chile in 1991-1995, I interviewed a wide
variety of people, gathered documentary material of all kinds, and compiled
archival data. From the beginning I expected the water market to operate differently
in two principal contexts: within the agricultural sector and at the level of river
basins. This is because in agriculture there is only one kind of water use (irrigation),
while river basins involve multiple water uses and hence more complicated
interactions. Therefore, I did two case studies of each of these contexts, located in
different parts of the country. The cases were chosen to compare the functioning of
the Water Code under differing geographic and economic conditions.
The primary study area was the Bfo Bfo River basin in south-central Chile,
some 500 kilometers south of the capital city of Santiago. The Bfo Bfo basin is one

Against the Current

of the country's largest and most economically important: its streams and rivers
supply water for irrigation, hydroelectric power, a variety of industries, and urban
consumption in Concepcion, the country's second-largest city. To analyze the
agricultural water market I chose contrasting irrigated areas at opposite ends of the
central valley system, Chile's agricultural heartland. The Bfo Bfo River basin was
the southern area, with a fairly cool and wet climate, where annual crops and
livestock are raised for the domestic market. The northern area was the upper
Aconcagua River basin, just north of Santiago, which is hot and dry and where
higher value fruit crops are grown for export. To examine multiple water uses I
chose two river basins in south-central Chile. One was the Bfo Bfo and the other
was the Maule River basin, located about halfway between Santiago and the Bfo
Bfo. The Maule basin has been the site of the nation's longest and most severe clash
between irrigation and hydroelectricity over competing claims for water use. 12
This book relies heavily on interviews with many people, mostly Chileans,
in different walks of life and in different parts of the country. Interviews were
crucial both to get factual information and to understand the richness and
complexity of particular situations. The people I interviewed included farmers;
engineers and administrators of private canal users' associations; engineers and
managers of hydroelectric companies; other members of the private sector;
government officials and technicians in local and national offices, especially in the
Ministries of Agriculture and Public Works; politicians; water lawyers; university
professors; staff of non-governmental organizations working in agricultural
development and environmental protection; and experts in United Nations agencies.
My work would not have been possible without their openness and generosity, for
which this book is one expression of thanks. \3

OUTLINE OF BOOK

Chapter Two is about the legal foundations of the Chilean economic

model. I describe the current institutional order based on the 1980 Constitution, a
document that is still in effect and that is the heart of the military government's
legacy. The chapter highlights two aspects of the institutional framework whose
importance and relationship are little known outside the country: the "economic
Constitution" and the new and contradictory role of the judiciary. Chapter Three
describes the key features of the 1981 Water Code, comparing it to earlier water
laws and analyzing the political and ideological conflicts over water rights within
the military regime. The "law of the pendulum" expresses the swing from statecentered regulation to free market forces, although in some ways the new Code was
a compromise between the neoliberals and their more conservative opponents.
Chapter Four looks at the empirical results of the water market and water rights
trading, primarily in the agricultural sector. The results have been mixed: the market
has been less active than was expected (or than is sometimes claimed), due to a
variety of constraints and complicating factors. The chapter looks briefly at the
Water Code's impact on peasant farmers, and ends by discussing recent political

Introduction

debates over proposed reforms of the Code. Since 1990 both governments of the
ruling Concertaci6n have tried but failed to tighten the Code's more laissez-faire
aspects.
Chapter Five broadens the scope to multiple water uses, river basin conflicts,
and the role of the courts. In Chile the coordination of different water users depends
on the overall market logic of the institutional framework: that is, private bargaining
among property owners and limited state intervention, with conflicts going to the
civil courts for resolution. I describe how this framework has worked, focusing
especially on the conflict between consumptive and non-consumptive water rights,
i.e. between irrigation and hydroelectric development. The bulk of the chapter
examines case studies of two of the country's most important river basins, the Bfo
Bfo and the Maule. I conclude that the institutional framework for managing river
basins has some key flaws, illustrating the more general critique of the legal and
institutional model in Chapter Two. Finally, the concluding chapter summarizes the
lessons of Chile's experience. It is a cautionary tale about privatization and free
markets, and an argument for moderation over faith in theory.

NOTES TO CHAPTER ONE

1. The "Chicago perspective" is neither monolithic nor confined to the University of Chicago, but even so it is
an accurate shorthand for neoliberal law-and-economics. See, for example, Alchian and Demsetz (1973);
Coase (1988); Cooter and Ulen (1988); Demsetz (1967); Friedman (1962); Hayek (1960); Posner (1986).
2. Ronald Coase himself has criticized many of the simplistic applications to which his "Theorem" has been
put, because in the real world transactions costs are usually high (Coase 1988). Transactions costs are
generally defined broadly, for example to "include the costs of bargaining, information, measurement,
supervision, enforcement, and political action" (Libecap 1986, p.228). Transactions costs are the analytical
focus of much of the recent work in the "new institutional economics," e.g. Williamson (1985). On the "new
institutional economic history" see North (1981) and (1984); North and Thomas (1973); cf. Field (1981). For
arguments in favor of free market environmental policies, see Anderson and Leal (1991); World Bank (1992).
3. For arguments favoring water markets, see Anderson (1983); Bay Area Economic Forum (1991); Rosegrant
and Binswanger (1994); Rosegrant and Gazmuri (1994); Smith (1988). For more balanced discussions of the
pros and cons, see Brajer et al (1989); Colby (1990); Frederick (1986); Livingston (1993); Saliba and Bush
(1987); Sax et al (1991); Willey (1992); World Bank (1993); Young (1986).
4. See the previous note.
5. See Loveman (1988) for a good overview of Chilean history.
6. There is a great deal of literature from differing perspectives about Chile's political, economic, and social
transformation since the military coup in 1973. Good general accounts are Angell (1993B); Constable and
Valenzuela (1991); J.A. Fontaine (1993); Loveman (1988). Important edited collections are Drake and Jaksic
(1991); Valenzuela and Valenzuela (1976) and (1986); and on economic issues Bosworth et al (1994);
Wisecarver (1992). See also Biichi (1993); De Vylder (1989); Foxley (1983) and (1988); Moran (1989);
Ramos (1986); Valenzuela (1989).

10

Against the Current

7. See the work of environmental historians Cronon (1991) and Worster (1985). My approach also draws on
recent work in ecological economics, such as Daly and Townsend (1993); Costanza (1991); Krishnan et al
(1995); Norgaard (1989). For a Chilean example, see Schatan (1991).
8. Abba Lerner, quoted in Bowles and Gintis (1990), p.166. On the "old" institutional economics, see Bardhan
(1989); Bromley (1982), (1985), and (1991); Commons (1924); Hodgson (1988); Hovencamp (1990); Polanyi
(1944). On the relations between state and market, see Amsden et al (1994); Nelson et al (1994); Wade
(1991).
9. On the relationship between legal, economic, and social history in Great Britain and the United States, see
Corrigan and Sayer (1985); Gordon (1984); Hurst (1956) and (1964); Scheiber (1981); Thompson (1975).
10. Hurst (1964), p.9.
11. This inter-disciplinary view of property draws on Barzel (1989); Bauer (1993B); Berkes (1989); Bromley
(1982) and (1991); Ciriacy-Wantrup and Bishop (1975); Macpherson (1978); McCay and Anderson (1987);
Rose (1994); Ryan (1984); Sax (1971); Sax et al (1991); Thompson (1975). See also the citations in Notes 7,
8, and 9 above.
12. For one year I was a visiting researcher in Concepcion, affiliated with the Centro EULA, a center for
environmental studies at the University of Concepcion. During that year I spent several months in the smaller
city of Los Angeles in the region's agricultural interior. The remaining year-and-a-half I lived in Santiago, a
visiting researcher at the United Nations Economic Commission for Latin America and the Caribbean and at
the Mining and Water Law Institute of the University of Atacama. While based in Santiago I did the case
studies of the Aconcagua and Maule River basins, spending a month in each area.
13. See also Bauer (1995B), (1997), and (forthcoming).

CHAPTER TWO
BLUEPRINT FOR
THE NEOLIBERAL MODEL:
LAW, ECONOMICS, AND POLITICS
IN THE 1980 CONSTITUTION
In recent years Chile has become internationally famous for the success of its
neoliberal economic model and for its smooth political transition from a military
regime to a democratic government. As summarized in the previous chapter, the
military government was in power for nearly 17 years, from 1973 to 1990. During that
time the government sought to radically transform Chilean political, economic, and
social systems, in order to prevent a repeat of the crises of the 1960s and 1970s. The
military aimed to cement the changes with a "new institutional order" (nueva
institucionalidad) established in a new Constitution, which was approved in 1980 and
is still in effect today. What is surprising, in view of the fame of the economic model, is
that outside of Chile there has been little attention given to the model's legal and
institutional underpinnings. Analysts of the 1980 Constitution have concentrated on its
political aspects, especially its authoritarian and anti-democratic features. They have
largely ignored its economic significance, beyond noting the importance of political
stability and secure private property rights. Nor do they mention the increased power of
the courts in economic and regulatory affairs. 1
The institutional order, like the economic model, has been carried over intact
through the transition to democracy. The 1980 Constitution was eventually accepted by
most of the military's opponents as an essential condition for the transfer of power, and
it cannot be altered without the agreement of the military and their rightwing allies. In
fact, the Constitution fixed the transition's timetable and procedures, including a
plebiscite in 1988 on the question of whether General Pinochet should be granted
another eight years in power, and national elections in 1989 after he lost that plebiscite.
Many Chileans have criticized the Constitution as illegitimate because of its
authoritarian nature and origins. 2 Nonetheless, in the mid-1980s the parties that later
became the Concertaci6n agreed for pragmatic reasons to set aside the issue of the
Constitution's legitimacy and recognize it as "a fact." They hoped to reform it later
under democratic conditions? Some of the document's most authoritarian features
were removed or modified in 1989, in a package of refC'rms negotiated between the
military, the Concertaci6n, and the largest rightwing political party (Renovaci6n
Nacional); the basic framework, however, remained intact.4 Since 1990 both
governments of the Concertaci6n have proposed additional constitutional reforms, but

12

Against the Current

the rightwing has repeatedly blocked them in the Senate. What is remarkable in this
heated debate is that the Constitution's economic features have been unchallenged and
left untouched.
In this chapter I argue that Chile is a textbook case not merely of neoliberal
economic reform, but also of the "Chicago" approach to law and institutions, as
discussed in the previous chapter. The Chilean Constitution exemplifies a legal and
institutional framework designed to encourage a free market economy. The
Constitution expands private economic rights and liberties, tightly restricts state
economic activity and regulatory authority, and strengthens the courts' powers to
enforce these principles.5 In the following section I summarize the Constitution's
overall structure and political influences. I then focus on two aspects of the
Constitution whose importance and relationship are widely ignored: the brief but
fundamental economic provisions, including the principle of the "subsidiary state," and
the broader and more powerful role of the judiciary. The Chilean courts now have
unprecedented powers of judicial review over property and economic rights,
government regulation, and public policy. This is a major historical change which
moves the Chilean legal system towards the U.S. model of an active and independent
judiciary. So far, however, the courts have been incapable of adequately performing
their new role, as is made clear in recent debates over judicial reforms. The Chilean
judicial system, like the rest of Latin America, is part of the civil law tradition and is
not well-suited to a common law role. In short, the Chicago Boys imported a U.S.dominated economic theory without importing the legal system which that theory
assumed. The chapter concludes that Chile's institutional model faces growing
problems of public policy making and state regulatory capacity, particularly in matters
of environment and natural resources.

ORIGINS AND POLITICS OF THE 1980 CONSTITUTION

The 1980 Constitution is one of the most important legacies of military rule in
Chile. It is a foundational document that combines an overall ideological vision of
society and state with a detailed legal blueprint to make the vision concrete. The vision
looks backward as much as forward, defining the new order in reaction against the
previous one. 6 The Constitution is a synthesis of the different political and ideological
positions which supported the military government. Members of the military and their
civilian advisors and allies shared certain basic objectives but conflicted sharply over
others. For years the most conflictive issues were whether (and when) to liberalize the
political regime, and whether (and how far) to adopt free market economic and social
policies. There were three main ideological currents, though they often mixed:
authoritarian nationalists (also called duros or hardliners), Catholic corporatists (usually
lawyers) known as gremialistas, and neoliberal economists. It is important to
remember that the legal and political processes discussed in this chapter and the next
took place in an authoritarian military regime. The processes were closed to all but the
regime's closest allies. 7

Constitution

13

The neoliberals and the gremialistas eventually joined forces to shape the
regime's long-term project Sometimes called b/andos (softliners), they convinced the
governing Junta to institutionalize the changes in Chilean society so that military
government would no longer be necessary, over the objections of the duros who
favored authoritarian rule for the indefinite future. The new Constitution was written,
discussed, and approved during the years that neoliberal ideology rose to its greatest
dominance in Chile, before the economic crisis of the early 1980s humbled the Chicago
Boys and forced the government to more pragmatic positions. s Within weeks of the
military coup in 1973, the Junta appointed a Constitutional Commission of
conservative and centrist jurists and law professors. The Commission was to advise the
Junta on constitutional matters and to prepare a draft of a new constitution, following
the Junta's guidelines. The Commission met over 400 times from 1973 to 1978, and
produced a document which in most respects was adopted by the Junta. The new
Constitution was approved in 1980 in a plebiscite of dubious legitimacy.9
The chief architect of the new Constitution was Jaime Guzman Ernizuriz, a
close advisor to General Pinochet, conservative Catholic law professor, and leader of
the gremialistas. lO The previous Constitution of 1925 had established a presidentialist
democracy. It had both a strong executive branch and a relatively strong legislature, in
a pluralist political system with political parties playing a central role. The military and
many of their supporters, including Guzman, blamed the 1925 Constitution for having
been too weak to prevent the growth of radical movements and social conflict in the
1960s and early 1970s. According to this view, the previous system had allowed too
much influence to party organizations and congressional deal-making, which led to
demagoguery, polarization, and finally deadlock. The expansion of popular democracy
after the 1920s increased pressures on the state to keep expanding its role in the
economy and social services. State intervention and popular organization reached new
heights in the 1960s, with the Agrarian Reform launched by the Christian Democratic
government of Eduardo Frei, and then peaked with the socialist government of
Salvador Allende in 1970-73. Because of its very pluralism, conservatives argued, the
previous institutional order could not defend itself from the rise of revolutionary
political movements which aimed to overthrow it.
In contrast, the 1980 Constitution establishes a "new institutional order" to
underpin what was called a ''protected democracy.,,11 It separates civil society from
political parties, in order to reduce the parties' influence, and it banned marxist
organizations until reformed in 1989. The Constitution redefines the separation of
powers within the government in order to increase technocratic authority and restrict
popular sovereignty and participation. Thus it strengthens the President and weakens
the Congress in both law-making and budgetary matters. To counter-balance the
greater Presidential authority, the Constitution creates or strengthens several
autonomous state institutions which reinforce each other: the Armed Forces,
Constitutional Tribunal, Judicial Power, National Security Council, and Central Bank.
These institutions are claimed to be objective and "non-political" because they are
composed of experts who are appointed rather than popularly elected, and who are
therefore not obligated to political parties. (In Chile the term "politics" is commonly
used as a synonym for "party politics," with connotations of partisan manuevering

14

Against the Current

rather than high-level statesmanship.) Similarly, nearly one fourth of the members of
the Senate-the more powerful of the two Houses of Congress-are "designated" by
other organs of government rather than elected. The Armed Forces are given the
constitutional duty to "guarantee the institutional order" (Art. 90) as well as to defend
national security, and to that end they can intervene in civilian government through the
National Security Council. 12
These features of the Constitution reflect the authoritarian nationalist tradition
in Chilean conservative thought: a strong central state is responsible for maintaining
social order and enforcing national unity,o Although the gremialistas shared this
tradition, they gave the document much of its moral and social vi~ion by putting the
state in its place. ("Gremio" generally refers to a private sector interest group, for
example a business or professional association.) As a political movement the
gremialistas had originally organized as conservative law students in the late 1960s, to
protest the increasing influence of leftwing party politics on university affairs. Led by
Jaime Guzman, the gremialistas came to articulate a broader program drawing on
earlier twentieth century Catholic social doctrine. They asserted that the individual
person and the family have certain natural rights that are prior and superior to the law
of the state. They argued further that society should be structured as a mosaic of
depoliticized "intermediate groups" (grupos intermedios)--"intermediate" between
individual and state-which are free from party influences. Intermediate groups include
trade unions, business and professional associations, universities, community
associations, churches, and so forth. This is the realm that many would refer to as "civil
society." The Chilean gremialistas aimed to protect the autonomy of intermediate
groups from state interference, provided that they avoided politics.
The gremialistas adopted the principle of the "subsidiary state" (Estado
subsidiario) from Catholic social doctrine. "Subsidiarity" means that the state should
defer to the most decentralized organizations possible to meet different social needs,
preferably at the level of family or community. The gremialistas argued that most of
people's interests were best represented and most of their needs best satisfied within
such intermediate groups, without interference from government agencies or political
parties. They criticized parties in particular for fomenting social conflict rather than
harmony. Originally the principle of subsidiarity included the corollary that the state
was obliged to meet any needs that intermediate or decentralized groups could not.
This corollary had made it a progressive concept for earlier Catholic reformists in
Chile, including Christian Democrats. Gremialistas and neoliberals managed to
redefine subsidiarity to downplay the state's social obligations and emphasize the limits
on state spending and regulation. 14
The gremialista vision is evident in Article 1 of the Constitution, written by
Jaime Guzman and worth quoting in full. This Article begins Chapter I, entitled "Bases
of the Institutional Order," which sets up the overall framework and principles
governing the entire document. ls Notice the hierarchy descending from individual to
state, although backed up by state power in the end.

"Men are born free and equal in dignity and rights.

''The family is the fundamental nucleus of society.

Constitution

15

"The State recognizes and protects the intermediate groups by ~hich

society is organized and structured, and guarantees them the
adequate autonomy to accomplish their own specific ends.
"The State is at the service of the human person and its goal is to
promote the common good, for which it must contribute to creating
the social conditions which permit each and every member of the
national community the greatest possible spiritual and material
realization, with full respect to the rights and guarantees established
in this Constitution.
"It is the duty of the State to protect national security, give protection
to the population and to the family, favor the family's strengthening,
promote the harmonious integration of all sectors of the Nation, and
assure people's right to participate in national life with equality of
opportunities." (Emphasis added.)
The "common good" (bien comun) is another concept from Catholic social thought,
referring to the overall harmony and organic unity of different social interests. The
concept rejects both the marxist view that society was dominated by class conflict, as
well as the liberal democratic view that the common good was determined by the
principle of majority rule. 16 Later articles aim to separate the realms of civil society and
party politics, in order to reduce the latter's influence. 17
Despite the agreement within the regime on the need for strong centralized
political authority, the state's economic role in the new order was more bitterly
contested. Most of these struggles took place in arenas other than the Constitutional
Comrnission: s After the coup in 1973, one of the Junta's first priorities was to reverse
the "socializing" and socialist economic policies of its predecessors, the governments
of Frei and Allende. This meant above all reaffirming the security of private property
rights, including the return of land and industries that had been expropriated illegally or
without compensation. But beyond that there was less consensus. The Allende
government had pushed state ownership and economic intervention to extremes, yet in
a larger sense it simply continued the trend of the preceding half-century, which
culminated in the ambitious reforms of the Frei government in 1964-70. As noted in
the preceding chapter, historically the state has had a strong role in Chilean economic
development, subsidizing and protecting national enterprises from international
competition. Many conservatives, duros, and capitalists wanted to maintain that state
role: 9
The neoliberals fiercely opposed this "statist" (estatista) position. As noted
above, they were commonly known as "los Chicago Boys," after a group of Chilean
economists who did graduate work at the University of Chicago Economics
Department beginning in the 1950s, and who returned to Chile imbued with its free
market worldview. Excluded from policy-making by the Frei and Allende
governments, the neoliberals argued that Chile should abandon its state-centered
development model, impose severe monetary policies to control chronic inflation, and
open the economy to free international trade and investment. In the early 1970s they
assembled their diagnoses and proposed reforms in a document known as "the brick"

16

Against the Current

(el ladrillo), which was made available to the Junta immediately after the coup and
became the basis for the new government's economic policy. Many neoliberals joined
the new government's economic team, where their technical brilliance and analytical
confidence won them increasing influence?O
By 1975 the neoliberals dominated the government's economic policies, and
in the years that followed they expanded their doctrine into a more comprehensive
ideology of the "free society" and the "social market economy" (econom(a social de
mercado). Drawing on Friedrich Hayek's libertarian political philosophy as well as
laissez-faire economists like Milton Friedman, they declared that individual freedom
was the highest principle of society and economy. They recognized that the state had to
establish and enforce the basic rules for economic behavior, but on the whole they
considered state intervention to be unjust or inefficient. In their view, the free market
was the only economic system that guaranteed political freedom. Markets operated by
"general rules" which the neoliberals claimed were objective and neutral since they
applied to everyone. In contrast state intervention was seen to be inherently biased,
because political and administrative discretion led to "specific rules" which favored
particular interests. The 1980 Constitution is sometimes called the "Constitution of
Liberty" in honor of Hayek's book?)
The neoliberals' alliance and partial fusion with the gremialistas was crucial
in this shift from mere "economic neoliberalism" to "global neoliberalism.,,22 Jaime
Guzman, leader of the gremialistas and chief architect of the new Constitution, was the
most important bridge between the two groups as he adopted many of the Hayekian
views of the neoliberals. Other links were the economists and government ministers
Jose Pifiera and Miguel Kast. They extended the logic of free markets to areas of social
and public policy that had always been considered exempt from market forces; they
aimed to consolidate the new model by "depoliticizing" Chilean social relations,
making them more atomized and less collective. In 1979 the government announced
"Seven Modernizations" which would transform key areas of Chilean society: labor
relations, social security, health, education, agriculture, judicial system, and public
administration. Water rights were also part of this trend, as discussed in the following
chapter.
This neoliberallgremialista ideology became dominant because it
incorporated features of traditional Chilean conservative thought while at the same time
offering a blueprint for radically transforming ("modernizing") Chilean society.23 The
alliance between neoliberals and gremialistas was not always smooth: the former
preferred a more extreme individualism and a revolutionary transformation of society,
while the latter continued to emphasize community ties and a more gradualist
approach. But their fusion was crucial to defining the regime's ideological project,
since the neoliberals had an economic but not a social vision, and the gremialistas had
the reverse. By the late 1970s this fusion was in fact heavily neoliberal, as illustrated by
the change in the concept of the "subsidiary state.,,24
In summary, several distinct but compatible political and ideological strands
came together in shaping the new Constitution. The contradiction between economic
liberty and political repression is at the heart of the Chilean model. 25 The new
institutional order would not have been possible under more democratic conditions.

Constitution

17

Some neoliberals accepted the need for a permanent authoritarian state to ensure
conditions favorable to the market. Others argued that political liberties should increase
as the underlying socio-economic changes took root. To consolidate those changes the
Constitution's "Transitory Dispositions" declared that there would be a slow, gradual
"transition" before Pinochet and the military stepped down; military rule would last for
two eight-year periods with a pause between them for a plebiscite in 1988. 26 Against
his expectations Pinochet lost that plebiscite, and his chosen successor lost the
Presidential election in 1989. Thus the military returned power to a civilian government
sooner than they had planned, but their Constitution determined the process and timing,
and, to a large extent, the pattern of subsequent political and economic activity.

THE ECONOMIC CONSTITUTION

The Constitution's economic provisions are brief but fundamental. They
establish what is called the "public economic order" (orden publico econ6mico), which
consists of broad private economic rights accompanied by tight limits on state
economic activities and regulatory powers. The heart of these provisions is in Article
19, which lists all constitutional rights, specifically Numbers 21 through 26. Together
with Art. 1 they express the principle of the "subsidiary state," though the term is not
explicitly mentioned. 27
Art. 19, No. 21 guarantees private economic freedom as the general rule: "the
right to develop any economic activity which is not contrary to morality, public order,
or national security, respecting the legal norms which regulate that activity." The
freedom of the private sector is also protected by the autonomy of "intermediate
groups" declared in Art. 1.28 The state's entrepreneurial freedom, however, is more
restricted. State entities can undertake or participate in economic activities only when
authorized by special legislation requiring higher than usual majorities (ley de qu6rum
calificado). Even so those entities enjoy no extra privileges and must compete under
the same conditions as private enterprises, unless again authorized by special
legislation. The state is also prohibited from "arbitrary discrimination" in granting
benefits to particular sectors, activities, or geographic areas (No. 22).
Private property rights are expanded and fortified, though they continue to be
limited by their "social function." Art. 19, No. 23 was an innovation in Chilean law in
that it creates a right to acquire property, a right which was intended to limit state
ownership of certain public resources. No. 24 guarantees property rights "in their
diverse forms over all types of material and immaterial goods." In 1967, the Frei
government had amended the property clause of the 1925 Constitution in order to
facilitate the Agrarian Reform passed that same year. The 1967 Amendment declared
that the "social function" of property included promoting its wider distribution within
society, and allowed the government to defer compensation to expropriated landowners
by issuing long-term bonds. (Given Chile's chronic high inflation, long-term bonds at
fixed interest rates resulted in severe losses for landowners.) The 1980 Constitution
redefines "social function" as a category which does not include redistribution, but
instead "the general interests of the Nation, national security, public utility and health,

18

Against the Current

and the conservation of environmental patrimony." Water rights are explicitly

mentioned in both the 1967 Constitutional Amendment and the 1980 Constitution, as
discussed in the following chapter. 29 No. 25 guarantees intellectual property rights,
copyrights, and patents.
The state retains the power to place limits on private economic rights, ranging
from regulating how they are exercised to expropriating property. But these powers are
now more restricted. They can be wielded only by legislation, not by administrative
decree. To expropriate property, the state must first pay compensation in cash before
taking action. People can challenge these state actions in the ordinary courts, rather
than in special tribunals such as those set up by the Agrarian Reform, which many
landowners considered biased against them. The courts are strongly sympathetic to
property rights and they now have a more powerful tool to defend them in the recurso
de protecci6n, discussed in the following section. In fact, the courts have broadened the
scope of what counts as "property" in order to protect other constitutional rights as
well: they argue that people "own" these other rights and hence can defend them as
property.30 Furthermore, legislation is constrained by the open-ended guarantee of Art.
19, No. 26: limitations or regulations "shall not be able to affect the essence of rights,
nor impose conditions, taxes, or requirements which prevent their free exercise"
(emphasis added). This provision was considered too vague by some within the
Constitutional Commission, but it was adopted anyway in order to tie the hands of
future legislators from passing additional regulations?l
Finally, there are several other provisions that complete the "public economic
order." Some aim to ensure the government's financial discipline and macroeconomic
stability. The Central Bank is made autonomous from the rest of the government (Arts.
97-98), and Congressional budgetary powers are sharply reduced. Another of the
Constitution's innovations is Art. 19, No.8, establishing the right "to live in an
environment free of contamination." This is not usually considered an "economic"
right, and it has weaker judicial protection than the economic rights already discussed.
Nonetheless, the environmental right implies some restriction on those other rights.
In spite of the political alliance between neoliberals and gremialistas, the
economic provisions make up only a small part of the 1980 Constitution. They were
little discussed within the Constitutional Commission. This reflects the traditionally
wide gap between the legal and economic professions in Chile, a gap that is beginning
to narrow today in response to the needs of international business transactions. This is
why Jaime Guzman's role as bridge was so important. From the lawyers' standpoint in
the 1970s, constitutional law had always been dominated by political and institutional
issues, in Chile as in most other countries. Economic issues had been generally absent
except for basic rules about property rights and expropriation. Chilean lawyers, judges,
and legal scholars had little or no familiarity with economics, nor understanding of how
to translate economics into legal or constitutional terms. Many members of the
Constitutional Commission considered passing over the economic issues, because of
their doubts and uncertainty about this new field. But the ambitious scope of the new
institutional order and the goal of preventing a return to the statist past required some
mention of them. The Commission finally turned to these issues in its 384th session, in
June 1978, after almost five years of work. At that point, when the bulk of its draft was

Constitution

19

finished, the Commission heard the brief proposals of the government's economic team
and adopted most of their essentials.32
For their part Chilean economists lacked much knowledge of or interest in
legal issues. In the mid-1970s, as the neoliberals consolidated their dominance of the
government's economic policies and prepared to expand into social policies as well,
they left the Constitutional Commission to its work. They thought that the lawyers'
preoccupation with formal political institutions was premature given that the deeper
changes in social and economic structures had yet to be completed. In this sense the
neoliberals agreed with their ideological foes, the marxists, that a society's material
base determines its superstructure, i.e. that economic systems determine the nature of
legal and political systems. When the time came to consider the Constitution's
economic aspects, the neoliberals' goal was clear: to consecrate the fundamental
principles guaranteeing private economic rights and liberties and restraining the state,
without many details. They considered incorporating specific economic policy
measures or quantitative targets, but the idea was rejected as inappropriate to the nature
of a constitution.
The Constitution does not explicitly require a free market economy. Instead it
aims to ensure the legal, political, and social conditions necessary for such an economy
to develop. It is a defensive document in many ways, more concerned with making a
return to socialism unconstitutional than with fully laying out the new model. 33 To
enforce the model the Constitution strengthens the judicial system, giving the courts
new powers to protect private rights and to review state legislative and administrative
actions.

THE NEW AND CONTRADICTORY ROLE OF THE JUDICIARY

The new role of the judiciary has gone almost unnoticed outside of Chile, and
even within Chile it is little known except to specialists. The courts have a strategic role
to play in a legal-economic model dominated by private freedom and initiative. They
must protect private rights from excessive state regulation and resolve conflicts among
private parties where state agencies have less power to intervene. The 1980
Constitution strengthens the judiciary more than ever before in Chilean history, giving
it more power to review state legislative and administrative actions. The Supreme
Court has greater political influence as well as administrative control of the judicial
system and profession. The Constitutional Tribunal was established as a body separate
from the judicial system and given the final word on constitutional questions. At the
level of public policy and regulation, the Appellate and Supreme Courts are
increasingly required to rule on complex issues with significant economic and social
consequences. Overall, the changes are a step towards the U.S. model of independent
and policy-oriented judges?4 However, the institutional capacity of the Chilean
judiciary to fulfill its more strategic role is dubious.
Historically Chilean courts have had little control over state administrative or
legislative actions, even when constitutional rights were affected. This reflects the civil
law tradition followed by most nations in continental Europe and by their former

20

Against the Current

colonies in other parts of the world, including Latin America. The Chilean Civil Code,
adopted in 1855, was particularly influenced by the French model, the Napoleonic
Code. Civil law systems have a somewhat different arrangement for the separation of
powers than Anglo-American common law systems, placing the jUdiciary in a more
subordinate position to the legislative and executive branches. Judges have a narrowly
defined mandate and conception of their job: while the other two branches have the
authority to make laws, the judges' function is only to apply them and not to innovate.
One result is that judicial decisions do not create binding precedents as in common law.
This separation of powers is reinforced by the traditional civil law distinction between
"private" and "public" law. Private law deals with the relations among individuals (for
example, over family, commerce, or property), whereas public law concerns the state
and its relations with citizens; private law falls within the judicial sphere of authority,
but much public law does not. 35
Suspicion of judicial power was incorporated in Chile's 1925 Constitution
and was matched by the judiciary's own self-restraint. The 1925 Constitution
recognized the need to review state administrative actions when challenged by private
parties, and announced the establishment of a new system of special administrative
courts (tribunales contencioso-administrativos), separate and independent from the
existing judicial system. The ordinary courts could not review such actions because that
would violate the prevailing view of the separation of powers. But Congress never
passed the enabling legislation needed to set up the administrative courts, and in their
absence the ordinary courts refused to assume jurisdiction even though that refusal left
a vacuum in administrative law. For nearly fifty years, the Supreme Court insisted that
without explicit constitutional mention the ordinary courts could not review
administrative actions. This left injured parties with no legal recourse during the
decades of greatest expansion of the modem administrative state. 36
As state intervention in social and economic affairs grew steadily after 1925,
the lack of external control on state administrators became a more acute problem.
Under the reformist Frei government in the 1960s, state officials began to claim
increasing powers to regulate and control private property. The most famous example
is the Agrarian Reform, begun in 1967, which aimed to expropriate and redistribute
large landholdings with the dual purposes of expanding the class of small landowners
and modernizing agricultural production. 37 Tensions rose further under the more radical
Allende government in 1970-73. The Allende government was world-famous for its
commitment to the so-called "Chilean road to socialism," a peaceful revolution to be
carried out through the existing capitalist legal institutions. This required the creative
use of laws which had been long forgotten or written for other purposes, a tactic
justified by the doctrine of "legal loopholes" (resquicios legales). Government officials
claimed discretionary authority to modify or disobey judicial orders. This eventually
brought them into direct conflict with the courts and added a constitutional crisis to the
worsening social and political crises. The process culminated in a bitter exchange of
letters between President Allende and the Supreme Court in 1973: Allende argued that
laws should be interpreted broadly in view of changing social conditions, while the
Court responded that it was the legislature's job to change the laws. But the legislature
was dominated by Allende's opponents. 38

Constitution

21

The Allende period left the judiciary traumatized and explains a good deal of
its subsequent loyalty to the military regime. Many supporters of the military coup
believed that the Allende government was "anti-juridical" and had undermined the rule
of law and twisted legal arguments for its own political ends. According to the regime,
"No one disputes that the Government of Allende was legitimate in its origin ... but it
lost that legitimacy in the course of its exercise, by distancing itself so gravely and
repeatedly from the Constitution, that the Chilean institutional order was practically
destroyed.,,39 For the military and their allies, the coup was formally unconstitutional
but morally and politically legitimate: it violated positive law but was true to natural
law. In academic circles interest in doctrines of natural law revived under the military
regime, as conservative Catholics looked for legal and ideological justification for the
situation.4o
To end state agencies' immunity from challenge, in 1976 the military
government created a new legal mechanism to assert and defend constitutional rights,
later included in the 1980 Constitution. The recurso de protecci6n (suit for protection)
grants wide standing for people to request immediate judicial review when certain
rights are violated, whether by state agencies or by other private parties.41 Jaime
Guzman was one of the recurso's chief proponents, considering it "perhaps the
Constitution's most notable juridical creation" for strengthening individuals' defenses
against the state. 42 Suits go directly to the regional Appellate Courts, which are
supposed to rule quickly and have broad authority to order whatever measures they
may 'judge necessary to reestablish the rule of law and the due protection of the
affected person.''''3 This authority is analogous to U.S. courts' power to order injunctive
relief, a new power for Chilean courts whose remedies have traditionally been limited
to ordering payment of financial damages. In theory, decisions on recursos are to right
an immediate wrong, and not to substitute for the more thorough civil procedures
needed to sort through complex problems. Even so, this new form of judicial review
has arguably made special administrative courts unnecessary (courts which were still
mentioned in the 1980 Constitution and then abandoned in the 1989 reforms).
Appellate Courts' decisions on recursos are often appealed to the Supreme Court. 44
In practice, the recurso de protecci6n has had marked strengths and
weaknesses. Most Chilean lawyers like it: it is often a fast and effective way to get a
response from a legal system plagued by formalities and delays. It is an ad hoc
response, but to the people involved that may be better than none. The recurso's
popularity has grown as a result and it has become common in the routine practice of
law. This is sometimes called the "constitutionalization" of private law: lawyers now
carry their copy of the Constitution to court, whereas before it was of interest only to
scholars.45 The leading national expert on the recurso argues that it has caused a "silent
revolution" in judicial performance, as judges have begun to wield their new powers
actively and creatively. Other legal experts agree that the recurso is in effect creating
administrative law, though they have different opinions about the results.46
However, the recurso's speed and ad hoc character are also its flaws as a
mechanism of administrative law. Appellate Courts throughout the country have been
faced with growing numbers of these cases, often involving economic and regulatory
issues with significant policy implications. Judges must decide based on limited

22

Against the Current

information or technical expertise, few legislative or constitutional guidelines, and little

time for deliberation. While their decisions are sometimes creative and flexible, not
surprisingly they are also unpredictable or contradictory. Nonetheless, the recurso is so
popular that despite its limited purpose and scope, it has in fact replaced many of the
slower procedures of the lower courts. Neither the Appellate Courts nor the Supreme
Court have so far provided much unifying or systematic doctrine in this area. Court
decisions are not likely to evolve in the incremental way familiar to common law
systems, because in Chile such decisions do not establish binding precedents for other
cases.

DIAGNOSIS AND REFORM OF THE JUDICIAL SYSTEM

The pros and cons of the recurso de protecci6n reflect the general condition
of the Chilean judicial system. The courts have been the subject of a great deal of
debate in Chile since the return to democracy, for political and professional reasons that
are hard to separate. Much of the debate has been driven by criticism of the courts'
behavior during military rule, when they were notoriously sympathetic to the regime in
matters of political repression and human rights violations. In 1990, newly-elected
President Aylwin established a National Commission for Truth and Reconciliation,
with broad political representation, to investigate the worst human rights abuses under
the regime (that is, deaths and disappearances). The Commission's report was openly
critical of the judiciary.47 Since then the Concertaci6n has proposed a series of reforms
to strengthen the judiciary's commitment to democratic institutions and rebuild public
confidence in the legal system. Nevertheless, the topic is politically sensitive, as the
Supreme Court has rejected any criticism, and the military and the right have tended to
close ranks in support.48
There is a much broader consensus that the legal system is too obsolete and
inefficient for a dynamic modem economy. For decades the judiciary has been underfunded and under-staffed, lacking adequate infrastructure and administrative support. It
was the only arm of the state that was neither taken over by the military government
nor subjected to its modernizations. Although the government had named the judicial
system as one of the "Seven Modernizations," it alone remained basically untouched,
apparently because the Supreme Court resisted and the Junta was unwilling to risk
losing its political support.49 The legal system's burden has increased with the
country's economic growth and globalization and has become plagued with long delays
and elaborate procedures. Since 1990, the governing Concertaci6n and the rightwing
opposition have agreed that reforms are overdue. Reforms will depend first and
foremost on a larger budget, and include raising judicial salaries, improving
professional training, installing and converting to computers, creating additional courts,
and streamlining civil and criminal procedures.so
Nonetheless, the system's problems are deeper than lack of resources. They
also reflect the structure, tradition, and culture of the judicial and legal professions. In
Chile, as in other civil law countries, judges are lifetime employees in the civil service.
They enter the system right out of law school and move up the hierarchy of courts and

Constitution

23

provincial postings over the course of their careers. Judges have lower salaries and less
social prestige than private attorneys, law professors, or politicians, and so the judiciary
tends to attract law graduates with less ambition, fewer social connections, or lower
qualifications. Lawyers from outside the judicial profession are not brought into the
higher courts as judges, though they sometimes play an adjunct role. Such a closed
system has helped to perpetuate the deeper flaws of Chilean legal education and
thought: the tendencies to rote memorization and narrow focus on the letter of the law,
as well as a belief that law is a technical science based on highly formalistic reasoning.
Judges have been trained in strict and literal interpretation and have usually preferred to
make decisions on formal or procedural grounds. They have refused to consider nonlegal factors and avoided entering substantive political and policy issues. This
professional formation explains a good deal of the judicial readiness to apply without
question the laws of the military regime. 51
Judicial reformers have paid special attention to the Supreme Court. The
Court is at the top of a highly centralized bureaucratic structure, keeping tight control
over its administration and over the careers of the nation's judges. In general, the
tendencies to excessively formalistic and abstract reasoning are stronger in the higher
courts and strongest in the Supreme Court. The Supreme Court has been criticized for
failing to perform one of its essential functions: to systematically clarify and shape
legal doctrines. Instead it has devoted itself to settling large numbers of specific
disputes without broader legal significance, often without even explaining its
reasoning. This makes many decisions opaque and unpredictable, sending confusing
signals to the lower and Appellate Courts while at the same time discouraging their
independence.52
The most ambitious reform proposals have aimed to broaden judges'
approach to the law and to their own role in applying it. This would reduce the
judiciary's isolation from the country's social and political life. One such proposal was
to open the profession, at least at the higher levels, to lawyers with careers outside the
civil service.53 Another would have increased the voice of Congress in some judicial
appointments so that courts would more closely reflect national political preferences.
Yet others would have established a National Council of Justice at the ministerial level
to handle the system's policy and administrative aspects, and a National Judicial
School to provide continuing professional training and evaluation, and to implement
more rigorous standards of performance. The basic argument underlying these
proposals is that law and politics cannot be separated in the rigid and artificial way
typical of Chilean judicial tradition. While the reformers agree that judicial
independence is crucial to democracy and the rule of law, they argue that
"independence" should not mean pretending that courts are purely objective or
rejecting all political contact or influence. 54 Note that for the most part economists have
neither participated in nor followed closely the debates over judicial reforms. Since it is
economists who dominate debate over regulatory issues in Chile, this is a significant
omission and shows the continuing gap between the country's legal and economic
professions.55
Most of these proposals for deeper reforms have been defeated by the
opposition of the judiciary itself, led by the Supreme Court, as well as that of some

24

Against the Current

staunch conservatives. They have rejected the critical analyses of judicial behavior and
denied the existence of a so-called ')udicial crisis," maintaining that the real problem is
simply lack of resources. They are extremely sensitive to any attempts to "politicize"
the courts, which, in view of their exaggerated distinction between law and politics, can
mean almost any kind of outside influence. Indeed, the Supreme Court remains so
hostile to interference that it has often resisted the more technical forms of
modernization as wel1. 56 Judges' adherence to that distinction explains as much of their
behavior under military rule as their legal formalism does. 57 As a result, only the least
controversial reforms have been or are likely to be approved. 58

CONCLUSIONS
This chapter has examined the legal and institutional framework of the
Chilean economic model. Despite the economic model's international fame as a free
market success story, this framework is little known outside of Chile. I argue here that
the Constitution of 1980 is the nation's basic economic as well as political blueprint. It
defines a legal and institutional framework intended to foster a free market economy,
combining broad private property rights and economic liberties with a "subsidiary"
state, whose economic and regulatory powers are restricted. The Constitution thus
reflects the Chicago approach to law-and-economics, discussed in Chapter One. By
guaranteeing the legal security of property and free enterprise, this framework has
undoubtedly favored capital investment and economic growth since the mid-1980s.
Another overlooked feature of the new institutional order is the more
powerful and strategic role of the judiciary. Two tasks are essential in a model built
around private initiative and market transactions: to protect private rights from undue
state interference, and to resolve conflicts when private bargaining fails. These tasks
have been given to the courts. Thanks to the innovation of the recurso de protecci6n,
courts now have greater authority to review state actions and must also settle disputes
that were formerly decided in other branches of government or political arenas. As a
result the courts are frequently faced with difficult policy issues whose resolution has
significant economic and social consequences. These changes represent a shift towards
the U.S. judicial model of independent and pragmatic judges. However, the judicial
system in Chile lacks the staff, financial resources, professional training, and legal
tradition to perform this new role effectively. Chilean judges have a highly formalistic
approach to the law: they interpret it strictly and literally and they are reluctant to
consider non-legal factors. This has typically led them to avoid substantive issues on
procedural grounds, although at times they have used their wide discretionary powers
to rule on issues for which they are ill-prepared. In short, the courts are a critical
weakness in the current institutional framework.
The following chapters illustrate these arguments in the case of water rights.
In a growing economy dependent on exporting natural resources, the environmental
impacts of development have been high and conflicts among different resource users
have increased. River basin management exemplifies these problems, since it requires
coordinating mUltiple water uses that are tied to different economic interests. As these

Constitution

25

conflicts have gotten worse, they have shown the institutional framework's restrictive
effects on policy making and regulatory capacity (see Chapter Five). The threat of
judicial review has made state administrative agencies careful to observe the letter of
the law describing their powers and duties. Agencies are more likely to be legalistic
and passive than bold and assertive, especially when faced with tough choices or
ambiguous laws, which of course is what the Constitution's designers intended. The
tendency is reinforced by the legal and financial scrutiny of the Controller General.
However, when the lack of administrative discretion is combined with an underfunded, formalistic, and conservative judiciary, it leaves a partial vacuum in public
decision-making. This tends to reinforce uneven power relations, favoring the people
and organizations with the resources and influence to act in different legal and political
arenas.
To fill this vacuum would require continuing attention from the law-making
branches of government, the President and Congress. For many regulatory issues,
however, this is slow, clumsy, or politically infeasible. Thus the process for sorting
through and resolving resource conflicts is flawed: it is often incomplete, superficial, or
opaque, and hence lacking widespread social legitimacy. It demands a high degree of
legal and technical expertise from any non-governmental organization attempting to
influence government policy, an outcome consistent with the Constitution's general
principle of favoring technocratic (non-elected) authority and restricting public
participation. The intermediate groups, after all, cannot meddle in politics.
In sum, fundamental judicial reform is more critical to the long-term success
of neoliberal economic reforms than is commonly believed. It is an essential
component in the restructuring and "modernization" of the state. 59 This conclusion
applies to other countries besides Chile. Many Latin American governments have
adopted similar economic policies and institutional reforms, without realizing the
profound implications for the role of the courts. Although other countries may not want
to follow the Chilean Constitution, if they seek to institutionalize the neoliberal model
they face the same problem: how to establish legal mechanisms that strengthen private
rights, restrict state action, and settle the resulting disagreements. It is understandable
that free market economic theory, because it is a predominantly u.s. intellectual
tradition, would assume or require a U.S.-style legal system. Few neoliberals have
recognized how important an effective, policy-oriented judiciary is to the market
model, with Hayek the most notable exception. 6o However, Latin American legal
systems and traditions are very different. 61 They must be transformed if they are to
perform their new regulatory functions, or there will be no alternative but to strengthen
other state institutions. The dilemma should remind us that there is more to law-andeconomics than simply the economic analysis of law.

26

Against the Current

NOTES TO CHAPTER TWO

1. An earlier version of this chapter appeared as Bauer (1995A). For the text of the Constitution see Republica
de Chile (1991). Useful Chilean references and commentary are Blanc et al (1990); Bulnes (1981); Cea
(1988); Fontaine (1991); Instituto Chileno de Estudios Humanisticos (1985); Nogueira (1988A); and "La
Constituci6n de 1980," special issue of Revista de Dereclw PUblico, Nos.29-30 (1981). For foreign
cornmentary see Angell (1993A); Ensalaco (1994); Loveman (1991); O'Malley (1990); A. Valenzuela (1991).
Corbo et al (1995) is an economists' look at the institutional framework, which includes some debatable legal
and political analysis.
2. Cumplido (1984); Instituto Chileno de Estudios Humanisticos (1985); L. Rios (1989); Zaldivar (1995).
3. This argument was first articulated in 1984 by Patricio Aylwin, the Christian Democratic politician and
constitutional scholar who was elected President in 1989. See Instituto Chileno de Estudios Humanisticos
(1985).
4. Bertelsen (1989); Verdugo (1989). Chile's foremost political journalist put the 1989 refonns at the heart of
his analysis of the transition from military to civilian government (Cavallo 1992). See also the foreign
commentary cited in Note 1.
5. Chile's Constitution is very similar to the reforms advocated by rightwing and libertarian lawyers in the
United States during the Reagan era. See Dom (1991); Dom and Manne (1987); McKenzie (1984); Siegan
(1980). See also Chapter One, Note 1.
6. Barros (1996).
7. In this section I rely on several excellent accounts of the evolution and internal politics of the military
government: Cavallo et al (1989); Constable and Valenzuela (1991); Fontaine (1988); A. Valenzuela (1991);
Vergara (1985). For historical background on twentieth century Chilean conservative thought, divided into the
three currents of nationalism, corporatism, and neoliberalism, see Cristi and Ruiz (1990) and (1992).
8. E. Silva (1991).
9. Andrade (1984) and Carrasco (1980) have complete descriptions of the steps in the drafting and approval of
the new Constitution. The Constitutional Commission first sent its draft to the Council of State, an advisory
group of notables appointed by the Junta. The Council, led by former President Jorge Alessandri, objected to
and rewrote many sections of the draft, but the objections were later ovenuled by the Junta. BUlnes (1981)
includes the text of the key documents. The Commission was also known as the Comisi6n del Estudio de la
Nueva Constituci6n and as the Comision OrtUwr, after its president Enrique Orruzar. Its proceedings have
been published as Gobiemo de Chile (1983), and its draft has also been published as Comisi6n del Estudio de
la Nueva Constituci6n (1978). For criticism of the Constitution's legitimacy, see Note 2.
10. Gu:uruin's thought and arguments about the Constitution and other matters are collected in Fontaine
(1991). Gu:uruin went on to help found Chile's most neoliberal and rightwing political party, the VOl (Union
Dem6crata Independiente). He was elected Senator in 1989 and assassinated by leftwing guerrillas in 1991,
giving him somewhat mythic status in Chile today.
11. See Note 1.

Constitution

27

12. The National Security Council is composed of the heads of the four Armed Forces and four civilians (the
President, the President of the Supreme Court, the President of the Senate, and the Controller General) (Art.
95). Supreme Court justices are named by the President from a shortlist prepared by the Court, and are
invariably appellate court judges. Of the designated senators, two are named by the President, three by the
Supreme Court, and four by the National Security Council (Art. 45). Of the seven members of the
Constitutional Tribunal, three are named by the Supreme Court and two by the National Security Council (Art.
81).
13. See Malloy (1977) and Stepan (1978) on corporatism and the "organic-statist" view of the state in Latin
America.

14. On the gremialistas see Clerc (1991); Fontaine (1991); Rozas and O'Shea (1983); Salazar and Modiano
(1984). On the subsidiary state see also Aimone (1979); Quiroz (1987); Vial and Couso (1988). See also the
citations in Note 7.
15. See Caldera (1990); Soto (1988); and the citations in Note 1.
16. See Fontaine (1991) and the citations in Note 13.
17. In Chapter III of the Constitution, entitled "Constitutional Rights and Duties," Art. 19, No. 15 states that
"Political parties shall not intervene in activities which are foreign to their own activities, nor shall they have
any privilege or monopoly over citizen participation." Art. 23 declares: ''The community's intermediate
groups and their leaders who misuse the autonomy that the Constitution recognizes, by intervening improperly
in activities which are foreign to their specific ends, will be punished in confonnity with the law. The higher
directive posts of social organizations (organiwciones gremiales) are incompatible with the higher directive
posts, national or regional, of political parties. The law will establish the sanctions to be applied to those
leaders of social organizations who intervene in political party activities and to those political party leaders
who intervene in the functioning of the social organizations and other intennediate groups indicated by law."
Art. 23 was modified by the 1989 Constitutional reforms (see Note 4): formerly any simultaneous
membership in social and political organizations was prohibited, rather than only the higher posts.
18. See Note 7 above, and also Chapter One, Note 6.
19. For historical background on the Chilean state's economic role, see Loveman (1988); Munoz (1992);
Vergara (1986).
20. See Centro de Estudios PUblicos (1992); Valdes (1989); and Note 7.
21. See Centro de Estudios PUblicos (1992); Friedman (1962); Hayek (1960); Monn (1978). The distinction
between general and specific rules was Hayek's. While he conceded a significant role for the state in
structuring the economy, Hayek argued that the "rule of law" did not allow redistributive social policies
because they were inherently based on political discretion and "specific rules."
22. The terms are from Vergara (1985). See also Note 7.
23. See Note 7.
24. See Note 14, especially Clerc (1991).

28

Against the Current

25. See citations in Chapter One, Note 6.

26. The Transitory Dispositions were written by neoliberaVgremialista Sergio Fernandez, then Minister of
Interior (Fernandez 1994). See also Note 7.
27. On the "economic Constitution" see Cea (1988) and (1991); Departamento de Derecho Econ6mico
(1979); Evans (1986); Guerrero (1979); Montt (1978) and (1983); Yramizaval (1987).
28. On the constitutional autonomy of the pnvate economic sector, see Soto (1988), particularly his discussion
of a landmarlc 1985 Supreme Court decision about the Chilean stock market.
29. Art. 19, No. 24. On the social function of property, see Evans (1967) and (1986); Karst and Rosenn
(1975); Rios (1987). Art. 19, No. 23 is "the freedom to acquire ownership of all classes of goods, except those
which Nature has made common to all men or which must belong to the Nation as a whole as established by
law." It can be limited only by special legislation and when required by the "national interest." No. 24 also
contains several paragraphs about mining property declaring the state's "absolute, exclusive, inalienable"
ownership of all mineral resources, though allowing "concessions" or pennits through which private parties
can develop that public property. The clauses on mineral property were a hard-fought victory within the
regime of the nationalists over the neoliberals (Cavallo et al 1989). Mining rights are discussed briefly in
Chapter Three.
30. Other rights protected as "property" have included the right to one's status as a university student, the right
to one's job as a public employee, etc. These doctrinal tendencies are deeply entrenched: for a recent critique
and defense, see Vergara (1991C) and Soto (1992).
31. Evans (1986); Gobierno de Chile (1983).
32. Guerrero (1979); Gobierno de Chile (1983); Vial and Couso (1988). Vial and Couso argue that the
neoliberals were partly "frustrated" because they ended up having to compromise on some of their original
wishlist.
33. Barros (1996).
34. On the judiciary's more powerful role, see E. Correa (1983); J.I. Correa (1991), (1992); Del Valle (1988);
Gaceta Juridica (1988); Instituto Chileno de Estudios Hurnanisticos (1985) (especially papers by F. Cumplido
and S. Diez). The Supreme Court's political influence includes the power to choose three of the seven
members of the Constitutional Tribunal and two of the "designated" senators, as well as having a seat on the
National Security Council (see Note 12).
35. On the civil law tradition in comparative perspective see Merryman (1985); Shapiro (1981); Zweigert and
Kiitz (1987). On law and judicial systems in Latin America, see Brumm (1992); Karst and Rosenn (1975);
Rosenn (1987); Stotzky (1993); Verner (1984).
36. This situation has been much discussed and criticized by Chilean legal scholars. See Fiarnrna (1985),
(1986), and (1992); Pantoja (1987); Pierry (1981); Rios (1981); Soto (1977), (1980), and (1982). In this
chapter I do not discuss the Controller General, a government agency which scrutinizes the details of the legal
and financial actions of other state administrative bodies. As a watchdog the Controller General's powers are
more limited than judicial review (even before the 1980 Constitution), but their exercise keeps public officials

Constitution

29

highly aware of the letter of the law. Thus the Controller General reinforces state agencies' tendencies to
legalistic behavior.
37. See Ganido et al (1990); Jarvis (1985), (1988).
38. The most notorious example of a resquicio legal was the government's resurrection of a dormant statute
from a short-lived socialist government in the Depression era, which allowed state intervention into private
firms to prevent them from shutting down production. The Allende government used the statute to effectively
take over private firms without actually expropriating them, i.e. without paying compensation. On the general
constitutional crisis, see "Documentos: EI derecho chileno y el Presidente Allende," Revista Chilena de
Derecho VoU (1974), pp.414-16, 707-32; Novoa (1976), (1993); Velasco (1976); Viera-Gallo (1972).
39. Gobierno de Chile (1974), pp.9-1O.
40. See Blumenwitz and Gaete (1981); "Conclusiones de las Primeras Jornadas Chilenas de Derecho
Natural," Revista Chi/ena de Derecho Vol.1 (1974), pp.281-285; and "Documentos" cited in Note 38.
41. The recurso de protecci6n was first established in 1976 in Constitutional Act No.3, and then included in
the 1980 Constitution (Art. 20). It was patterned after the existing recurso de amparo (now Art. 21), which
allowed immediate judicial review of state deprivations of individual freedom (similar to habeus corpus in
other legal systems). The classic text on the recurso is Soto (1982). See also Cea (1988); Evans (1986);
Fiamma (1978); Junta de Gobierno (1981); Soto (1986). On jurisprndence see Diaz (1989); Verdugo-(l~88).
The recurso covers most of the rights listed in Art. 19, including the economic rights discussed in
the preceding section, but not the rights to health, education, or social security (Art. 20). Personal liberty is
covered by the recurso de amparo. The right to live in a clean environment can be defended only by a weaker
and more restricted recurso de protecci6n. To win a normal recurso the plaintiff must show the defendant's
"act or omission" to be "arbitrary or illegal"; to win an environmental recurso, the defendant's "act" (not
omission) must be "arbitrary and illegal." See Cea (1988); Evans (1986); Soto (1982).
42. Cavallo et al (1989), p.313.
43. Constitution, Art. 20.
44. like the 1925 Constitution, the 1980 Constitution originally said that special administrative courts would
be established, although this time located within the judicial branch (see Note 36). The Constitutional
Commission had dropped the idea in favor of review by the ordinary courts, but the Junta put the special
courts back in the final version. However, the military government never got around to creating the
administrative courts, and they were finally abandoned in the 1989 Constitutional reforms (see Note 4).
Additional background on these issues is collected in Junta de Gobierno (1981).
45. Interview with Jose Bidart, Professor of Law, University ofConcepci6n, 17 December 1992.
46. The leading expert is Soto (1986). For arguments that the recurso is a useful device but not an adequate
substitute for administrative law, see Aylwin (1984); Gaceta Juridica (1993); Pierry (1981), (1991); Vergara
(1991C).
47. Comisi6n Nacional de Verdad y Reconciliaci6n (1991), also known as the Rettig Report after the
Commission's chairman. See also Americas Watch (1991); Constable and Valenzuela (1991).

30

Against the Current

48.1. Correa (1989), (1993); J.I. Correa (1992); Corte Suprema (1991); Fiss (1993).
49. Cavallo et al (1989). On the Seven Modernizations, see text at Notes 22 and 23.
50. For diagnoses and critical evaluations of the judicial system, see Comisi6n de Estudios del Sistema
Judicial (1991), which is the more remarl<able for having been organized by Chile's most prominent neoliberal
thinktank, the Centro de Estudios Pliblicos; Nogueira (1988B); Peiia (1994); Vargas and Correa (1995).
51. There are many criticisms of judicial formalism in Chile. See the preceding note and also Barros (1981),
(1991); Comisi6n Nacional de Verdad y Reconciliaci6n (1991); Grupo de Estudios Constitucionales (1979);
Hilbink (1997); Ruiz-Tagle (1990); Squel\a (1992). The criticisms are not new: in the 1960s the Chile Law
Program was a major U.S.-Chilean effort to refonn the same aspects of legal education and the legal
profession: see Gardner (1980); Lowenstein (1970).
52. G6mez (1987); E.Valenzuela (1991).
53. The Constitution allows but does not require the judiciary to include such outsiders in the shortlists
prepared to fill vacancies (Art. 75), and it has rarely happened.
54. Comisi6n de Estudios del Sistema Judicial (1991); J.I. Correa (1992); J. Correa (1993); Fiss (1993).
55. See Beyer (1992) for a rare example of Chilean law-and-economics.
56. See Note 49. For arguments favoring more limited judicial reforms, see Del Valle (1988); Eyzaguirre
(1992); Instituto Libertad y Desarrollo (1991), (1992); and cf. Rufz-Tagle (1990). The views of a fonner
President of the Supreme Court can be found in Aburto (1995) and in his 1993 annual address, reported in
Marfa Isabel de Martini, "Aburto Rechaz6 Todas las Reformas," La Nacion, 2 March 1993, pp.2-3; "La
Semana Polftica," p.A3, and Soledad Miranda, "Reforma Judicial: Esperando la Sentencia," pp.D9-10, El
Mercurio, 7 March 1993.
57. Hilbink (1997).
58. By 1995 the ConceTUlcion had managed to pass laws approving the creation of a Judicial Academy and
some reorganization of the Supreme Court's functions (particularly what kinds of cases it hears). "Publicada
Segunda Refonna al Poder Judicial," El Mercurio, 19 February 1995, p.C!. In mid-1997 the Supreme Court
was rocked by a connption scandal as its President was accused of involvement with drug traffickers. The
scandal widened to include other members of the Court. Although the accusations were eventually voted
down by Congress, they dramatically changed the political climate. The government took the opportunity to
reaffinn the need for deeper judicial reforms, and this time was supported by the principal rightwing party,
Renovacion Nacional. The outcome is still uncertain. See Marcela Miranda Cabezas, " 'Corte' por 10 Sano:
Tarea Dificil: Cambiar el Poder Judicial," El Mercurio, 6 July 1997, p.DlO; "Jarpa y Romero Respaldan
Reforma Judicial," El Mercurio, 13 July 1997, p.C3.
59. The World Bank has recently recognized the importance of judicial refonn. See Buscaglia and Dakolias
(1996); Dakolias (1996); Rowat et al (1995).
60. Hayek (1960). Richard Posner, a prominent Chicago law-and-economics scholar, takes such a judiciary
for granted, able to resolve property conflicts when transactions costs are too high for private bargaining

Constitution

31

(1986, pp.49-50). Rare Chilean exceptions include A. Fontaine (1993); Guerrero (1979), a fonner lawyer for
the Central Bank who argued that judicial procedures to resolve private conflicts had to be simple and fast or
they would force more state intervention. Some U.S. neoconservatives have emphasized the need for a
stronger judiciary in order to control government regulation, see Note 5.
61. See Note 35. See also Mattei and Bussani (1995) for a critique of extending law-and-economics from First
World to Third World contexts; Brurnm (1992) for a comparative analysis of Latin American and AngloAmerican public law.

CHAPTER THREE
WATER RIGHTS AND THE LAW
OF THE PENDULUM:
LEGAL AND POLITICAL HISTORY
OF THE 1981 WATER CODE
The "law of the pendulum" (ley del pendulo) is a Chilean phrase that
describes dramatic changes from one extreme to another. During the twentieth century
such swings have been common in Chilean political and economic thought and
practice, and the realm of water rights is no exception. With its 1981 Water Code,
Chile's military government swung the pendulum away from the "statist" policies of
the preceding decades, which had culminated in the 1967 Agrarian Reform Law that
greatly expanded state authority over water use. 1 The 1981 Code aimed to reverse that
trend by strengthening private property, increasing private autonomy in water use, and
favoring free markets in water rights to an unprecedented degree. It created several
market mechanisms, based on separating water rights from land ownership, and
attempted to foster a market mentality among water users. As a corollary it sharply
reduced the state's role in water management and regulation. The new Code follows
the institutional structure of the 1980 Constitution, and like the Constitution it was
written and approved while neoliberal ideology in Chile was at its most ascendant,
before being somewhat discredited by economic crisis (see Chapter Two).
Nevertheless, the 1981 Code's market logic has some inconsistent features,
reflecting compromises reached after years of bitter debate within the military
government and among its civilian advisors and supporters. While nearly everyone
agreed that private property rights to water had to be strengthened, they disagreed over
how far this should go and, in particular, over how closely to follow free market
economic theory. In this sense the conflict over water rights mirrored the deeper
conflict within the government over neoliberal policies in general. There were
essentially two positions: the neoliberals (nearly all of them economists) favored fully
adopting the market model, but they were opposed by more conservative elements
within the armed forces, the agricultural sector, and the state's irrigation bureaucracy.
Agriculture has historically been the dominant water use in Chile, and it was the sector
most interested in reforming the previous Water Code. This history is also reflected in
the fact that Chilean water rights law is much more concerned with water quantity
(allocation) than water quality (contamination). The two issues are often inseparable,
however, as illustrated in several cases in Chapter Five.

34

Against the Current

This chapter describes the nature and background of the 1981 Water Code. I
begin by discussing the Code's objectives and essential features, and then contrast them
with earlier legislation, from the Civil Code of 1855 through the two previous Water
Codes of 1951 and 1967. The bulk of the chapter examines in detail the conflicting
positions and proposals debated within the military government from 1976 to 1981, in
order to explain how the present Code took its final form. My goal is to reconstruct the
"legislative history" of a law passed by an authoritarian government whose internal
processes were frequently hidden. 2 Although the Chilean military held power by force,
from the beginning they also put great emphasis on the legal form of their government.
The Junta was made up of the commanders of the armed forces (Army, Navy, and Air
Force) and the national police (Carabineros). The four members of the Junta acted as
the legislature during military rule, with Pinochet as President also representing the
executive branch. This legalistic mentality also shows the importance of the 1980
Constitution.3

GOALS AND PRINCIPLES: PRIVATE PROPERTY AND FREE MARKETS

The 1981 Water Code had two main objectives which reflected the different
interests within the government that were pushing for reform. The objectives were to
increase the legal security of private water rights (putting an end to the confusion over
ownership left by the Agrarian Reform), and to raise the efficiency and productive
value of water uses by relying on market forces. Farmers and other agricultural
interests supported the first objective, as did most water lawyers and irrigation
engineers in both public and private sectors. They argued that secure property rights
would encourage investment in irrigation and revitalize the dormant canal users'
associations. Neoliberal economists favored both objectives. While favoring
privatization, they argued that the real boost in efficiency would come from price
incentives and private trading. Market mechanisms would motivate people to save
water in order to sell the surplus, and to transfer rights to higher-valued uses within
agriculture or to other sectors of the economy. The final version of the Code was a
compromise negotiated between the two positions. In particular, agricultural interests
and their allies defeated a proposal to promote reallocation of water rights by taxing
them separately from land, which neoliberals had argued was vital to the new system.
In form, the new Code declares that water resources are public property to
which the state can grant private rights of use. Waters are defined as "national property
for public use" (bienes nacionales de usa publico), as they have been since the Civil
Code of 1855 (see the following section). This is a legal category of property which is
owned by the nation as a whole and whose use belongs to all of its inhabitants. Such
property cannot be alienated from public ownership nor enter into private commercial
relations; other examples include roads, streets, plazas, bridges, and beaches. In
substance, however, the Code strengthens private control over use-rights in several
innovative ways. For the first time in Chilean history, water rights are now completely
separate from land ownership. They can be freely bought, sold, mortgaged, and
transferred like real estate. The government water rights agency, the General Water

Water Code

35

Directorate (Direcci6n General de Aguas, DGA), grants requests for new rights free of
charge whenever there is water physically and legally available. Once constituted,
however, all water rights are governed by private or civil law rather than public or
administrative law. They are subject to the general system of real estate title registration
and are fully protected as private property in the 1980 Constitution.4 The Water Code
also recognizes all rights granted or acquired under previous laws. In theory all water
rights must be measured in terms of volume per unit of time (for example, liters per
second), but in practice many are expressed as proportional shares of available flows.
Under Chilean civil law, ownership (dominio) means the right "to arbitrarily
enjoy and dispose of' (alienate) the thing owned, as long as others' rights are not
violated. 5 Thus, an individual can own a right to use water but cannot own the water
itself, since it is only the former that he is free to sell. The same legal distinction is
made in other countries including the United States, but in Chile it seems more
artificial; indeed, many Chilean water lawyers-even if personally pro-market-have
considered the Water Code to be juridically incoherent, because it effectively privatizes
a resource which it simultaneously defines as inalienably pUblic.6 Others defend the
Code's approach as the only way to harmonize market logic with the essential
"peCUliarity" of the resource. Because of water's mobility and other physical
characteristics, it is often impossible to possess a particular "piece" of it, and people's
claims are only to the use of the resource in a particular place. In other words, the only
way water can be privately owned is in the form of a use-right, one step removed from
the substance itself.?
Compared to earlier legislation, private liberties are broad and state authority
is constrained. Rights-holders can freely change the types and methods of use of water
rights without administrative approval by the DGA (except when changing the location
of diversions from a river channelS). Applicants for new rights no longer have to
specify nor justify their intended uses to the DGA. The agency has no discretion to
deny such requests if there is water available, nor to decide among competing
applicants. There is no legal preference among different types of water use. If there is
not enough water to satisfy simultaneous applications, the DGA must hold a public
auction and sell the new rights to the highest bidder. Otherwise rights-holders pay no
taxes or fees for acquiring rights from the state or for keeping them over time. But
unlike earlier laws, they now have no obligation to use their rights and face no penalty
nor risk of cancelation for lack of use. Such measures were left out of the Code because
they were considered to be invasions of private freedom. Taken together these
provisions allow unregulated speculation in water rights. 9
The DGA now has little authority over private water use, except during
official drought emergencies. Most water management decisions are made by private
individuals and especially by private canal users' associations, which have a celebrated
tradition in Chile of building and operating canals and distributing water to their
members. \0 The DGA cannot cancel or restrict water rights once constituted, except by
expropriating and paying for them. It has also lost its adjudicatory powers over water
use conflicts to the ordinary courts. Nonetheless, the agency retains several important
technical and administrative functions, such as gathering and maintaining hydrologic
data, inspecting larger water works such as dams and canals, enforcing the rules

36

Against the Current

governing private water users' organizations, and keeping official (though incomplete)
registries of water rights and users' organizations. The DGA can also prepare studies,
plans, and policy recommendations, but none of these have regulatory force unless
approved by other branches of government.
The Water Code does not mandate or establish a market in water rights, but
instead tries to set up the legal preconditions and incentives for such a market to
emerge by itself. There are two additional aspects of the Code that I will discuss in
Chapters Four and Five. First, it has several ''Transitory Articles" which establish
procedures intended to "regularize" the chaotic state of water rights titles. The
confusion was due primarily to the Agrarian Reform's land redistribution and the 1967
Water Code's abandonment of record-keeping (see the following section). Second,
because the Code's main concern is irrigation, it says little about mUltiple water uses or
river basin management. The exception is the creation of "non-consumptive" water
rights, a new type of right intended mainly for hydroelectric generation. (Nonconsumptive rights appeared in the Code late in its formulation; they were not
mentioned in the materials discussed in this chapter. See Chapter Five.) The Code
grants autonomy in routine administration to several kinds of private water users'
organizations, but all are designed solely for irrigation. Thus the coordination of
relations among agricultural, industrial, hydroelectric, domestic and other water uses
depends on the Code's general logic rather than on specific provisions. Simply put, it
depends on voluntary bargaining and negotiation among private rights-holders and
their representatives. Since the DGA has little power to intervene when private parties
clash, such conflicts go to the ordinary courts for resolution.

HISTORICAL BACKGROUND: CHILEAN WATER LAW UP TO THE 1970S

Chilean law since the Spanish colonial period has been ambivalent about the
ownership of water. The Spanish legal tradition considered water to be a public and
collective resource, owned and controlled either by the Crown or by local
municipalities and communities. Public authorities could grant private parties rights to
use public waters; these grants were known as mercedes. Although subject to
regulation, these use-rights were often treated in practice as private property,
appurtenant to land ownership. Irrigated agriCUlture was the dominant water use and
the primary concern of water rights law. II

The 1855 Civil Code: Both Public and Private Waters

Colonial legal ambiguity was carried over into the republican Civil Code, the
most important Chilean legal document of the nineteenth century. Written by the
renowned jurist Andres Bello and adopted in 1855, the Chilean Civil Code reflected the
contemporary legal tradition of continental Europe, heavily influenced by Roman law
and by the French Civil Code of Napoleon. It established a highly formal and rational
classification of legal rules, imbued with the ideology of nineteenth century liberalism.

Water Code

37

The Civil Code is still in effect and has a prominent place in legal education and
practice, although many provisions have been replaced by later legislation. 12
Like Roman law, the Civil Code defines property rights as the relationship
between people and the things that they own (derechos reales), rather than between
people themselves (derechos personales). In consequence, the nature and content of
different property rights vary with the characteristics of the things owned: whether they
are material or immaterial, movable or immovable, and so forth.13 There is a spectrum
from fully private property through different forms of national property, to those things
"which Nature has made common to all men, such as the high seas, [which] are not
susceptible to ownership.,,14 According to Art. 582, "Ownership (also called property)
is the right over a material thing, to enjoy and dispose of arbitrarily, so long as this does
not violate the law or others' rights." (Emphasis in original.) The roots of later
confusion over the legal status of water rights can be found in the following Art. 583:
"There is also a kind of property over immaterial things. Thus, the holder of a
usufructary right has ownership of that right.,,15
In the realm of water rights, the Civil Code distinguished between publicly
and privately owned waters. 16 Private waters were the smaller category, including small
streams or bodies of water fully contained within a single landed property, and, more
importantly, waters flowing in "artificial" channels, i.e. canals. The latter rule was
intended to provide incentives for private irrigation development by recognizing rights
to waters once they had been diverted from rivers. The great majority of waters in
natural channels, however, were declared "national property for public use" (bienes
nacionales de uso publico), a category of property which is owned by the nation as a
whole and whose use belongs to all of its inhabitantsY This declaration was later
repeated in all three of the Water Codes adopted during the twentieth century, including
the 1981 Code.
Declaring waters to be "national property for public use" had important legal
consequences, which were sidestepped in both the 1951 and 1981 Water Codes. As
noted above, according to the Civil Code such property by definition can never be
alienated or commercialized: the state cannot transfer ownership of these waters to
private hands, nor can they become the object of private commercial or legal relations.
The state can grant permits or concessions to private parties for the exclusive use of
public waters, concessions which were known as mercedes because of their similarity
to colonial grants of water rights. But such use-rights were governed by public,
administrative law, and in theory could be administratively modified or cancelled
without compensation. ls
For nearly a century after 1855, water law followed the general guidelines of
the Civil Code while continuing to develop in fragmented fashion with many local
variations. In his message to Congress presenting the Code, Andres Bello said that his
aim in the area of water law had been merely to establish some overall principles, since
different regional geographies would require different local rules. There were several
key innovations during this period: first, the mechanisms for distribution and public
regulation of water rights under conditions of drought or scarcity, especially in the arid
North (called tumos); second, the special provisions for the organization and

38

Against the Current

functioning of private canal users' associations; and third, the beginnings of a system of
registering water rights titles.!9

The 1951 Water Code: Private Rights and State Regulation

In 1951 the scattered tendencies and elements of Chilean water law were
systematized in the nation's first Water Code. 20 The 1951 Code combined traditional
rules and practices with the stronger state intervention which was then believed
necessary for national economic development. Its balance between state regulation and
private property rights was more even than that of the two subsequent Water Codes.
However, this balance rested on a new, sui generis, and not entirely coherent definition
of water rights.
The 1951 Water Code kept the Civil Code's distinction between private and
public waters, but created a more elaborate doctrine and procedure for granting private
use-rights to public waters. These rights were now called "rights of advantageous use"
(derechos de aprovechamiento). They originated as state administrative concessions,
but once granted, they became private property. Henceforth they were governed by
private, civil law rather than public, administrative law: these rights could thus be
bought and sold, they were required to be registered in the local Real Estate Title
Offices, and the state could not cancel them without compensation. They could be
traded within canal systems with the approval of the canal users' associations. In theory
these use-rights still corresponded to "national property for public use," but in practice
they were treated as private property.2! All of these features were subsequently
incorporated in the 1981 Code.
While it strengthened private property rights, the 1951 Code also restricted
their exercise. It centralized state administrative functions in a new agency in the
Ministry of Public Works called the General Water Directorate (DGA). (These
functions were in fact carried out by the Ministry's Irrigation Directorate for almost
two decades, until the DGA was finally created in 1969.) Applicants for new water
rights had to specify the intended use and location as well as the physical works
necessary to use the water. The DGA could then grant provisional rights that became
definitive only upon later proof that the works had been completed and the waters put
to actual use. In cases of competing applicants the DGA followed a legislatively
established order of preferred uses, and if they were for the same type of use gave
preference to the earlier applicant. 22 Rights-holders were not allowed to change the
specific uses for which their rights had been granted; instead they had to return their
rights to the state and request a new concession for the new use from the DGA. In
addition, the DGA could cancel existing water rights if their owners did not use them
for a period of five years (Art. 280).

Water Code

39

The 1967 Water Code: State Regulation without Private Property

The 1951 Water Code was in effect only 16 years before being replaced. The
second Code was a by-product of Chile's controversial Agrarian Reform, begun during
the Christian Democratic government of Eduardo Frei. The Agrarian Reform aimed to
expropriate and redistribute large landholdings with the twin purposes of expanding the
class of small landowners and modernizing agricultural production?3 This required
redistributing water as well, and the Agrarian Reform Law of 1967 included a section
on water rights which was later republished as a separate Water Code. The 1967 Water
Code24 had two main goals: to facilitate land redistribution and to increase the
efficiency of agricultural water use. To achieve these goals the Code favored stronger
state administration rather than private initiative. Part of the impetus came from
dissatisfaction with the 1951 Code's poor results in raising irrigation efficiency. The
DGA was finally established in 1969 after having been authorized in the 1951 Code.
To increase state authority the reformers also amended the 1925
Constitution's provisions on property rights. The 1967 Amendment declared all waters
to be "national property for public use," even those which had been considered private
since the Civil Code. This allowed the public expropriation-without compensationof all existing private water rights. As the first mention of water rights in a Chilean
Constitution, the use of the term "expropriation" implicitly recognized that existing
water rights were indeed considered private property, even if no compensation was
offered. 25 Although water rights continued to be called "rights of advantageous use,"
they lost their status as property and reverted to being administrative concessions,
governed once again by administrative rather than civil law. They could not be
privately bought, sold, traded, or separated from the land to which they had been
assigned without administrative approval-which was almost never granted. As a
result water rights were no longer registered as real estate titles, and so there were no
records of subsequent transactions (which in theory were illegal under this Code). This
lack of record-keeping would generate serious confusion and uncertainty about water
rights titles by the late 1970s, when private property was reestablished.
The state's regulatory powers were extensive. The 1967 Code had the
ambitious objective of redistributing water rights according to new, technical
"standards of rational and beneficial use" (tasas de uso racional y beneficioso). These
standards were to be determined by government scientists and technicians who would
establish the amounts of water needed for different crops under different agronomic
and geographic conditions. Water rights would then be allocated or reallocated to
particular land parcels according to the local standards of use. 26 This system of water
rights was evidently tied closely to particular patterns of agricultural land use, which
were then being altered by state planning. At the river basin level the state had
authority to declare particular basins to be "areas of rationalization of water use,"
including non-agricultural uses. Within those areas it could reallocate water rights
according to the standards of use and other planning criteria.27 In addition, the DGA
was given adjudicative power over water use conflicts. The role of the judiciary was
greatly reduced, as it was in matters of land expropriation (for which the Agrarian
Reform established special courts, as noted in Chapter Two).

40

Against the Current

The 1967 Water Code under the Military Government

Such a technocratic system would have been hard to implement under the best
of circumstances. During the years from 1967 to 1973, however, the growing
radicalization of the Agrarian Reform process, and polarization of Chilean society and
politics in general, made land tenure too unstable to rationalize water use. The military
coup in 1973 put an end to land expropriation, and the military government soon began
to "normalize" the agricultural sector. This meant fortifying private property rights,
confirming private titles to expropriated land, encouraging an agricultural land market,
and reducing the state's role in agricultural production and commercialization-all in
the context of adjustment to the new economic model and opening to the world
economy. These changes reversed and undid the land reform of Frei and Allende.
However, the military government returned only a small proportion of the expropriated
land to the original owners, and instead seized the opportunity to modernize
agriculture. Most of the land in state hands was sold to private buyers, or subdivided
and transferred to campesinos together with a long-term mortgage obligation. From the
viewpoint of the military government, these changes carried out the original intent of
the Agrarian Reform Law, by finally distributing to private owners the land which had
been expropriated to that end. 28
Throughout this process, the government left the water rights situation
unresolved for over five years, a secondary priority. The National Agriculture Society
is the organization of Chile's most powerful and conservative agricUltural interests.
From 1974 through 1978 the Society'S monthly journal made no mention of water
rights, despite its continuing preoccupation with the normalization of land titles and the
modernization of the agricultural sector in genera1. 29 The 1967 Code was not repealed
until 1979, and in the meantime the DGA continued to try to implement the "standards
of rational and beneficial use." In a country as geographically diverse as Chile,
however, these efforts were hampered by the DGA's lack of staff and resources.
Another obstacle was the poor condition of the physical infrastructure needed to
redistribute water rights. 3o
In summary, by the late 1970s the Chilean water rights system was a mess. It
had a state-centered water law which was incompatible with the new, market-oriented
political and economic order. The legal insecurity of water rights discouraged private
investment in water development or management, and the system's inflexibility
prevented transfers to higher-valued uses. Water rights titles and transactions were
especially uncertain because they had not been recorded since 1967.

STEPS TOWARD A NEOLmERAL WATER CODE, 19761981

By the mid-1970s most government officials and their civilian advisors
agreed that water rights needed stronger protection as private property. However, they
were deeply divided over how extreme or pro-market the reform should be, a division
based partly on different views about the purposes of private property. The conflict was
played out not only in the political clash between neoliberals and more traditional

Water Code

41

conservatives (especially those tied to the agricultural sector), but also in the
contrasting perspectives of different professional disciplines. In Chile, engineers, and to
a lesser extent lawyers, have been the professionals with most knowledge and
experience of water use. Nevertheless, the economists ended up having the dominant
influence on the reform process. Many people who observed or participated in those
debates have commented informally on the bitterness of the disagreements. 3!

Constitutional Commission (1976): Private Property without Markets

The more conservative position dominated the ftrst discussions. In early 1976
the Constitutional Commission took up the issue of water rights in its more general
consideration of property rights.32 The Commission members, who were all lawyers,
had some initial doubts about whether material as technical as water rights should be
given constitutional rank. Because of the problems in the agricultural sector, however,
they decided to include a brief statement of principle favoring private property, as a
fust step toward greater legal security. They left the bulk of the 1967 Water Code in
effect until replaced by later legislation.
Advised by prominent irrigation engineers, the Commission members
essentially advocated a return to the 1951 Water Code, combining private rights and
state regulation. Their main argument was that the insecurity of water rights under the
1967 Code had removed private incentives to build and maintain irrigation canals,
which were said to be deteriorating throughout the country. Canal users' associations
were in decline for the same reason. Strengthening water rights, the Commission
members believed, would stimulate private investment in irrigation works and
revitalize the canal associations. However, their position was far from pro-market: most
of them emphasized the public aspects and obligations of water use, and they rejected a
proposal to allow water rights to be sold separately from land as an incentive to
increase water use efficiency. They concluded instead that such transactions should be
restricted to certain specifted situations and carefully regulated by legislation.
In the end, the Commission agreed on the following statement which was
eventually included in the 1980 Constitution: "The rights of private parties over waters,
when recognized or constituted according to law, will grant their owners property over
those rights.,,33 Note that it is property over the rights and not over the waters which is
constitutionally protected. The Commission deliberately did not use the term "derecho
de aprovechamiento" ("right of advantageous use") because of its connotations of
public ownership and administration, although the term would reappear in the 1981
Water Code. But when the Junta dictated Constitutional Act No.3 six months later, in
September 1976, it omitted the Commission's statement and said only that "a special
statute will regulate everything concerning mining property and ownership of
waters.,,34 Meanwhile, the 1967 Code remained in force. The reasons for this decision
are not entirely clear, but it seems that the members of the Junta still had doubts about
whether the state or private individuals could own water. Less than two weeks before
Constitutional Act No.3 appeared, the Commission's President Enrique Ortuzar and its
leading ftgure Jaime Guzman argued for the more substantive statement in a meeting

42

Against the Current

with the Junta. The Junta's Legislative Secretary objected that waters should remain in
public ownership. OrtUzar agreed in theory but clarified that the idea was to increase
the legal security of use-rights by treating them in effect as property rights. Apparently
he was not convincing enough. 35

Decree Law 2,603 (1979): Private Property and Free Markets

A more neoliberal position came to the fore in 1979, when the neoliberals had
risen to dominate government policy in general. In April the government dictated the
strongly pro-market Decree Law 2,603, its first substantive legislation about water
rights and the foundation for the new Water Code two years later.36 In addition to
ideological forces there were two concrete issues driving this legislation. First, clearing
up the confusing water rights situation had become a higher priority now that the
military government had completed its agrarian counter-reform. The expropriated land
had been sold or transferred to private owners. The 1967 Water Code was incompatible
with the increasingly active private land market. Many argued that water rights had to
be privatized to prevent the state from intervening in land tenure in the future,
especially if attempted indirectly through the control of water.
Second, the government's economic team was resisting pressure from
agricultural interests to return to the state's former role in irrigation development, that
is, to repair deteriorating infrastructure and to build projects that made available new
water supplies. The Chilean government had begun to finance, build, and operate
irrigation projects in 1914, and its role grew steadily over the next 60 years. By the
1970s state canal systems watered some 300,000 hectares, one fourth of the nation's
total irrigated acreage. Private canal systems, although typically smaller, watered the
rest. The neoliberals criticized this policy as a typical example of state inefficiency and
the military government sharply reduced spending on irrigation. In 1975 the
government created the National Irrigation Commission, an inter-ministerial body, to
study and promote irrigation development, but it had limited funds and built no
projects.37 The neoliberals attributed problems of water scarcity to the low level of
irrigation efficiency and the predominance of low-value water uses, both of which they
blamed on the statist logic of the 1967 Water Code. Instead they sought to create
economic incentives for private investment in irrigation construction and maintenance.
The government later attempted to transfer ownership of existing state canals to their
users' associations, with mixed success.
Decree Law 2,603 strengthened private property rights by amending
Constitutional Act No.3 to read as the Constitutional Commission had suggested.38 It
separated water rights from land ownership for the first time and allowed them to be
freely bought and sold. It reestablished the system of registering water rights in the
Real Estate Title Offices, and required that all transactions be recorded there. (In fact
the Decree Law did not explicitly declare that rights were tradable, but implicitly did so
by requiring that trades be recorded.) The Decree Law also attempted to "regularize"
the uncertainty of existing titles by declaring a presumption of ownership in favor of

Water Code

43

those who were currently using water rights de Jacto (Art. 7), and by proposing to hold
public auctions for all expired or cancelled rights.
A major innovation in the new law established that water rights were to be
taxed like other real estate, the idea being that water and land would be appraised and
taxed separately, with the total not to exceed the taxes formerly paid on the irrigated
land. (Under the existing system water rights were taxed indirectly through land taxes
since irrigated land was worth much more than non-irrigated land, though such taxes
were and remain quite low.) Government economists argued that these policies would
boost efficiency as well as water conservation by encouraging rights-holders to regard
water as a commodity and an economic good, rather than a free attribute of land
ownership. In their view, the efficiency of water use would improve only if water had a
real economic cost, reflected in higher prices, and if rights were defined as private,
exclusive, and transferable?9 With higher prices and the freedom to sell water rights
separately from land, rights-holders would have an incentive to invest in better
irrigation technology and management in order to sell the rights to the water saved. The
annual tax would be an added incentive to sell unused or surplus waters in order to
reduce their tax burden. Finally, although the law was directed primarily at the
agricultural sector, it also hoped to encourage inter-sectoral transfers. In other words, it
aimed to improve irrigation efficiency so that the excess waters could be transferred to
more highly-valued uses, both within agriculture and in urban and industrial sectors,
whose demand for water was increasing. 4o
The market logic of Decree Law 2,603 and the 1981 Water Code was fiercely
debated within the government, and diluted as a result. The original version of the
Decree Law had been even more pro-market, with sweeping claims about the benefits
of fully commoditizing water rights. It had explicitly declared them to be fully
alienable and allowed their uses to be freely changed. It had proposed to allocate all
water rights by public auction, both existing rights that had been cancelled and future
rights as well. 41 In a meeting with the Junta in February 1979, the Ministers of National
Planning and of Agriculture explained the problems caused by the 1967 Code and
defended the market logic of the proposed law. They emphasized that along with
privatizing rights the crucial element needed for the new logic to work was the
mechanism of separate water rights taxes, in order to give water a real cost and create
the incentive for its efficient use. But several military lawyers present were concerned
about the familiar issue of public ownership, and warned that neither the property status
of use-rights nor the validity of the term "derecho de aprovechamiento" were clear.
The Junta provisionally approved the proposal, subject to clarification of those
doubts,42 but the version that emerged two months later was missing the strongest promarket language. It dropped the sweeping declaration of market logic and the full
commoditization of water rights, referring more modestly to the "national necessity of
initiating the process of normalization of everything related to waters and their different
forms of beneficial use," consistent with the regime's general principles. Instead of
auctions of both cancelled and new water rights, it established the former only.43
The neoliberal argument was also opposed by most Chilean water experts,
who were mainly engineers and lawyers. Whatever their political views-and many
were officials in the military government, after all-the experts' training and

44

Against the Current

experience led them to put more emphasis than the economists on the public aspects of
water resources. The main opposition, however, came from the agricultural sector, the
country's biggest water user. With the Agrarian Reform fresh in their minds, farmers
and landowners were far more worried about private property than about market
efficiency. The dominant private sector agricultural interests supported the new Decree
Law as part of national modernization but downplayed its market features. This reflects
the overall political position of these interests: although loyal to the military
government, they protested for years the impact of neoliberal policie~ on agriculture.
The National AJUiculture Society and the Confederation of Chilean Irrigators
echoed the argument made three years earlier by the Constitutional Commission,
namely, that more secure private rights would boost investment. (The Confederation of
Irrigators was and is the gremio representing the country's more prosperous farmers in
water issues.) While in principle these agricultural interests supported the freedom to
change water rights and uses without state interference, in practice they expected few
transactions and little reallocation to take place. 44 Farmers' lack of interest in water
markets was underlined when the new Water Code was published in October 1981.
The President of the Confederation of Irrigators again praised the guarantee of security
of property but doubted that there would be much trading of water rights. He either did
not understand or disagreed with the economists' objective of reallocating water
resources. Market transactions, he said, "will probably not play an important role since
the great majority of water rights have already been awarded. They might be relevant in
more virgin rivers." He was also uncertain about how market incentives might work in
practice. Rather than investing in more efficient technology in order to sell the water
saved, he thought that irrigators might sell water rights first in order to finance such
investment.45 For its part, the NAS journal (El Campesino) did not even mention the
promulgation of the new Code in 1981, being completely preoccupied with the deeper
problems then afflicting the agricultural sector, as the national economy slid into
crisis.46

CONCLUSIONS
The final version of the 1981 Water Code was a compromise between the
neoliberal economists and their more conservative opponents. It faithfully reflected the
institutional structure of the 1980 Constitution. The neoliberals got most of what they
wanted: a laissez-faire legal framework that allowed private market transactions and a
limited state role in spending and regulation. The close connection between water
rights reform and state irrigation policy is shown by the fact that the new Code was
accompanied by a law establishing the norms for financing state irrigation projects,
published the same day in the Diario Oficial (the official legal newspaper).47 Those
norms were so demanding that while they were in force no projects were approved.48
Nonetheless, the neoliberals conceded the financial measures that would have raised
water's cost, measures which they had argued were crucial incentives to market
discipline and efficiency. The Code abandoned the proposed system of water rights
taxes, and did not impose any other fees for acquiring new water rights from the state

Water Code

45

or for enjoying them over time. The Code also required public auctions for a smaller
category of water rights than had been proposed earlier-not for all new or cancelled
rights, but only when there are two or more simultaneous requests for the same new
rights.
Taxes and fees were blocked primarily by the agricultural sector, which as the
nation's dominant water user was the most affected by the new law. Most farmers were
in financial trouble after years of painful adjustment to the new economic model and
could not afford to start paying for a resource which had always been free. They were
evidently not convinced by the neoliberals' argument that the total amount of land and
water taxes would not rise. There were alSO practical administrative objections to a
system of taxes or fees. Given Chile's highly diverse geographic conditions and the
uncertainty of water rights titles, to determine the appropriate amounts and enforce
their collection would be a daunting task, both technically difficult and politically
unpopular.49
Hence the neoliberals had to settle for a market-oriented scheme that
depended on weaker price signals than they had hoped for. While they would have
preferred a system of water rights taxes to change water users' economic thinking and
to induce water rights trading, they hoped that with a permissive legal framework there
would be enough voluntary transactions that a market would eventually take shape.
The head of the DGA at the time (an engineer) emphasized that water rights prices
would not be accurately determined until markets became sufficiently active. 5o The
neoliberals were less concerned about foregoing fees for new rights because their main
objective was to limit administrative discretion and transfer ownership from public to
private hands. Market logic would operate only after that transfer. We will see in the
next chapter that problems of water prices and values have become more important in
the 15 years since the Code's passage. They explain much of the market's inactivity,
and have become the subject of growing debate about reforming the Code.
In conclusion, the 1981 Water Code reflected the deeper political tension
within the government between neoliberals and an assortment of other conservatives.
The two sides agreed on strengthening private property rights and weakening state
intervention, but clashed over the full application of free market logic. The
disagreement highlighted their different conceptions of private property and its
purposes. The neoliberals saw property rights as commodities, the basis for private
bargaining and trading that would increase economic efficiency. Their opponents,
including the great majority of water users themselves, wanted autonomy and legal
security as ends in themselves and were less interested in commoditization. The
process of designing the Code also demonstrates that political decisions and legal rules
have a major impact on price signals and economic values, and hence on how markets
work. In this sense market mechanisms can never be "neutral" or "objective," even
when they are intended to operate unhindered, since they must incorporate such prior
decisions.

46

Against the Current

NOTES TO CHAPTER THREE

1. For a prominent water lawyer's use of the phrase to describe the 1981 Code, see Manriquez (1992), p.68.
Manriquez was then the head of the national water rights agency, the Direccion General de Aguas. The Code
was dictated as Decree with Force of Law 1,122, published in the Diario Oficial (the official legal newspaper)
on 29 October 1981. In Chile a D.F.L. is issued by the executive but has the force of legislation. For
overviews of the 1981 Code, see Bauer (1993A); Figueroa (1992); Gandara (1989); Instituto Libertad y
Desarrollo (1993A); Lobo (1982); Manriquez (1992); Munoz (1986); Navarrete (1989). Accounts in English
include Bauer (1995B) and (1997); Rfos and Quiroz (1995); Rosegrant and Gazmuri (1994). More technical
references include Agurto (1986); Direcci6n General de Aguas (1982); Manriquez (1981); Universidad de
Chile (1982). Several Chilean law school theses have also analyzed the Water Code: Borquez (1986);
Machuca (1985); Munoz (1992); Soriano (1986).
2. This chapter would have been impossible to write without repeated interviews and conversations during
1991-1993 with the following Chilean lawyers, economists, and engineers: Rafael Del Valle, Luis Sim6n
Figueroa, Jorge Galvez, Luis Gurovich, Gerardo Jofee, Eugenio Lobo, Gustavo Manriquez, Enrique Marquez,
Gabriel Munoz, Fernando Peralta, Juan Antonio Poblete, Fernando Valdes, and Alejandro Vergara. I am
grateful for their time and cooperation.
3. See Chapter Two, Notes 7 and 9; Barros (1996).
4. Constitution, Art. 19, No. 24, final paragraph.
5. Civil Code, Art. 582. See Republica de Chile (1990); Alessandri et al (1990).
6. See Ellenberg (1980); Soriano (1986); Vergara (1990), (1991A).
7. See Escudero (1990); Figueroa (1992); Instituto Libertad y Desarrollo (1993A). There is a very similar
debate over the legal coherence of mining "property" in Chile. Although the 1980 Constitution reaffirms the
inalienable public ownership of minerals, in what was a victory within the regime for nationalists and military
conservatives over the neoliberals, subsequent legislation undercut this by guaranteeing private property rights
to mining "concessions." Concessions are government permits that allow private exploitation of public
minerals. Owning a concession entails no obligation to use it, but if it is not used the owner must pay an
annual fee to maintain it. The legislation was written by a leading neoliberal, Jose Pinera. See Cavallo et al
(1989); Pinera (1986). For a critical view see Vergara (1992A).
8. Water Code, Art. 163.
9. In other words, there is no requirement of "beneficial use," as it is called in the Western United States (Sax
et alI99l). Chile is apparently the only country in the world whose water legislation includes no obligation to
use water rights (Solanes 1996). For more on speculation, see Chapter Four.
10. See Barrueto and Marquez (1986); Cerda (1987); Matus (1986); Peralta (1989A). Some three-fourths of
Chile's total irrigated acreage is watered by private canals built before 1920, and the rest by state projects built
since then.
11. On the colonial period see Stewart (1967), (1970), and Vergara (1992B), both of whom emphasize the
confusing nature of the public-private distinction. Meyer (1984) describes a similar pattern in Spanish colonial
Mexico.

Water Code

47

12. For the Civil Code itself, see Republica de Chile (1990). See also Alessandri et al (1990), a well-known
Chilean text and commentary, and Zweigert and Kiitz (1992), p.118. Bello's Code has been widely praised for
its clarity and logic, and has had great influence in codification efforts elsewhere in Latin America. On
comparative law and the civil law tradition in general, see Chapter Two, Note 35.
13. See Book II of the Civil Code, entitled "Of Different Goods and their Ownership, Possession, Use, and
Enjoyment." Dereclws reales are defined as those rights ''which we have over a thing without regard to any
other person in particular" (Art. 577), whereas dereclws personales "are those which can be claimed of certain
people who have contracted obligations, either by their own actions or as required by law" (Art. 578).
14. Civil Code, Art. 585. Cf. the famous principle of the Institutes of Justinian (Book IL Title I): "By natural
law the air, the flowing water, the sea, and therefore the shores of the sea are common to all." Lee (1956),
p.1l3. For national property see Note 17.
15. "Immaterial things" include rights themselves (Art. 576). There is a doctrinal dispute in Chile over
whether the very concept of "public property" is coherent. Critics argue that property and ownership are
fundamentally concepts of private law, which necessarily involves exclusive and alienable control. The state's
powers over national property, in this view, stem not from "ownership" but rather from its superior regulatory
authority to promote the common good. See Alessandri et al (1990); Vergara (1992A).
16. On water rights in the Civil Code as well as in later nineteenth and early twentieth century legislation, see
Soriano (1986); Stewart (1967), (1970); Vergara (1990), (1991A), (19918).
17. Civil Code, Arts. 589 and 595. The other form of national property is called state or govemment property
(bienes jiscales), and belongs to the state rather than to the people as a whole (Art. 589).
18. See Alessandri et al (1990), and the citations in Note 16.
19. The Civil Code had created a nationwide system of local offices of title registration for real property.
These Real Estate Title Offices (Conservadores de Bienes Ra[ces) became the administrative basis of private
property nationwide. They did not then register water rights. See also Note 16.
20. The Code was passed as Law No. 9,909, published in the Diario Ojicialon 28 May 1951. See Borquez
(1986) and the citations in Note 16.
21. According to the water law scholar Ciro Vergara (1960), the "right of advantageous use" was a new
concept in Chilean law. Because of its intermediate position between administrative concession and private
property, he argued that it should be considered a new, third category of national property, rather than simply a
subset of ''national property of public use." Cf. Note 17.
22. In descending order of preference, the uses were for drinking and domestic purposes, irrigation, generation
of electricity, and other industrial purposes (Art. 30).
23. A great deal has been written about the Chilean Agrarian Reform. Good overviews are Garrido et al
(1990); Jarvis (1985), (1988). See also Comite Interamericano de Desarrollo Agricola (1966).
24. The Agrarian Reform Law was No. 16,640. The Water Code was published separately in 1969 as Decree
with Force of Law No. 162, but it took effect in 1967. I will refer to it as the 1967 Code in order to reinforce
its links with the Agrarian Reform. Useful sources on the 1967 Code include Ellenberg (1980); Faundes
(1969); Instituto de Capacitaci6n e Investigaci6n en Reforma Agraria (1968); Jensen (1970); Machuca (1985);
Medina (1970); Parks (1976); Thome (1979); Vergara (1990).

48

Against the Current

25. Some compensation was offered at least nominally, as explained in the following note. The constitutional
amendment about water rights was a last-minute addition to the broader 1967 Amendment of the property
rights clause (Art. 10, No. 10 of the 1925 Constitution). The 1967 Amendment was necessary to facilitate the
Agrarian Reform as well as urban redevelopment. It expanded the scope of the "social function" of property
and thereby restricted private rights, with the pragmatic objective of allowing land expropriation through longterm deferred compensation (government bonds). See Chapter Two, and Evans (1967), (1986); Garrido et al
(1990); Machuca (1985).
26. Besides their technical purpose, the "standards" were also a device to minimize the compensation paid to
existing rights-holders. The Agrarian Reform Law required compensation only if those rights-holders were not
granted new concessions equivalent to the local standards of use. Because the standards were more demanding
than previous methods of use, the burden was on the existing rights-holders to adjust to smaller quantities of
water by improving their efficiency of use.
27. Jensen (1970) describes an example of this process and its difficulties in the Choapa Valley in northcentral Chile.
28. See Note 23.
29. See El Campesino, the Society's journal.
30. Parlcs (1976) has a good discussion of the technical and administrative difficulties of implementing the
standards and redistributing water rights. He concludes that abandoning that approach for a policy
emphasizing improved irrigation technology and management at the farm level would be much more effective
at increasing economic returns to water use. See also CEPAL (1960).
31. Interviews cited in Note 2.
32. On the Constitutional Commission see Chapter Two, text at Note 9. The Commission's sessions on water
rights were Nos. 182-184, held in January - March 1976, Actas Ojiciales de la Comision Constituyente,
republished in Revista de Derecho de Minas y Aguas Vo1.1 (1990), pp.227-259. See also Machuca (1985).
33. See Decree Law 2,603 of 1979 and the 1980 Constitution, Art. 19, No. 24, last paragraph.
34. Constitutional Acts Nos. 2, 3, and 4 were dictated in September 1976 as a step toward consolidating and
systematizing the evolving legal order of the regime. In January 1976 Constitutional Act No. 1 established the
Council of State. On the Junta, see text at Note 3.
35. See Act No. 280, 3 September 1976, Actas de Sesiones de la Honorable Junta de Gobiemo (unpublished).
36. Decree Law 2,603 was published in the Diario Oficial on 23 April 1979. Although it repealed and
replaced fundamental elements of the 1967 Code, it left the bulk of that Code intact until an entirely new one
could be promulgated. Useful references are Dougnac (1989); Ellenberg (1980); Escudero (1990); Machuca
(1985); Venezian and Gurovich (1980); Vergara (1990).
37. See citations in Note 10. The proportions and totals of irrigated land remain similar today.
38. Quoted above at Note 33.

Water Code

49

39. This argument had also been made in the early 1970s in "the brick," the document which formed the basis
of the military government's first economic policies. See Centro de Estudios PUblicos (1992), and also
Chapter Two, text at Note 20.
40. For the economic arguments in favor of the Decree Law, see Btichi (1993); Figueroa (1993); Instituto
Libertad y Desarrollo (1993A); Venezian and Gurovich (1980). According to Ellenberg (1980), the taxation
scheme was adopted after rejecting a proposal to charge fees for water use (see the following section).
41. Compare the Proyecto de Decreto Ley with the final version, in Decretos Leyes Dictadas por La
Honorable Junta de Gobiemo: Transcripci6n y Antecedentes, Torno 167, Folio 1-356, in the Biblioteca del
Congreso Nacional. The initial proposal was prepared by staff of the Minister of Agriculture, Alfonso
Marquez de la Plata (Machuca 1985).
42. See Act No. 364, 7 February 1979, Actas de Sesiones de La Honorable Junta de Gobiemo (unpublished).
The Minister of Planning was the influential neoliberal economist Miguel Kast; the Minister of Agriculture
was Alfonso Marquez de la Plata (see previous note). General Pinochet declared himself especially concerned
about the insecurity of water rights: ''This Decree Law is costing me a lot of sleep. This business has been a
permanent, life-long bomb in the countryside: people kill each other. Now, my great worry .. .is that this may
serve so that the people who have water can blackmail the poor ones who lack it...until the latter get bored and
have to sell their land."
43. See Note 41. At one point the idea was floated of annual auctions of all water rights, but it was rejected
because of the legal and economic uncertainty it would cause, the rigidity of the irrigation infrastructure
already in place, and the repeated emphasis it would give to the fact of public ownership.
44. See the interviews with the Minister of Agriculture, Marquez de la Plata, and the President of the
Confedemtion of Chilean Irrigators, Rule Bismarck, in El Mercurio, 24 April 1979, pp.AI, A12. See also the
editorial, "Ley sobre derechos de aguas: Un fomento a inversi6n," pp.2-3, and a second interview with
Bismarck, "Luz verde para invertiren obm de riego," pp.14-15, in El Campesino, May 1979, the magazine of
the National Agriculture Society. A year-and-a-halflater the President of the NAS said that he knew only the
broadest outlines of the Water Code in preparation and wished he knew more; see "Medidas para agilizar eI
desarrollo agricola," El Campesino, November 1980, p.22.
There was another attempt to roll back Decree Law 2,603's pro-marlcet bias in August 1979, in a draft
Water Code prepared for the Minister of Agriculture. The dmft aimed to improve efficiency and claimed to
follow the Decree Law's principles of private property and marl<:et logic, but in fact it widened the scope of
state intervention even more than had the 1951 Water Code. As in the 1951 Code, requests for new water
rights had to specify the intended use, and irrigation was preferred over hydroelectricity. Rights were gmnted
provisionally until the waters were actually put to use; unused rights were cancelled and then auctioned, with
the proceeds going to the former owner. Uses could not be changed without state administmtive approval. The
authority of private canal users' organizations was increased, but the state was given power to redistribute
water rights as part of the mtionalization of canal systems, and to dictate the management rules for multipleuse reservoirs, including giving hydroelectricity priority over irrigation. The Minister rejected the draft and set
up a new committee to prepare what eventually became the 1981 Code. See Anteproyecto del COdigo de
Aguas, by lawyer Jose Luis Perez Zaiiartu, 30 August 1979 (unpublished).
45. See interview with Rule Bismarck in El Mercurio, "Nuevo C6digo de Aguas impulsani la inversi6n," 31
October 1981, p.C3; also Gurovich (1980), p.23. For a stronger argument in favor of the Code's marlcet logic,
see the editorial in El Mercurio, "C6digo de Aguas," I November 1981, p.A3.
46. See the historical summary in Chapter One.
47. The Water Code is D.F.L. 1,122 (see Note I); the irrigation law is D.F.L. 1,123.

50

Against the Current

48. In 1985 the government passed Law No. 18,450 to subsidize small and medium scale private inigation
projects, as discussed in Chapter Four.
49. See Ellenberg (1980); Figueroa (1989); Instituto de Ingenieros (1993). Parks (1976) concluded that neither
water pricing by volume nor by marl<et forces was feasible in Chile, because the canal infrastructure was illsuited and the institutional costs were too high.
50. Lobo (1982). Soon after the Code's passage the agency held several auctions in the upper Mapocho River
basin near Santiago, not to gain revenue but to try to generate infonnation about potential prices in a still nonexistent marl<et.

CHAPTER FOUR
BRINGING WATER MARKETS
DOWN TO EARTH:
WATER RIGHTS TRADING IN

PRACTICE, 1980-1995

The 1981 Water Code set up the legal framework for free trading of water
rights and left the rest to private initiative. This chapter looks at the results of the
water market during its first fifteen years. Chilean water markets have enjoyed good
press recently, shining in the reflected glow of the country's dynamic economic
growth. Influential voices within Chile and in the World Bank have praised the
Water Code as a model of successful neoliberal reform, showing the benefits of
privatization and free markets. Neighboring governments-e.g. in Peru, Bolivia, and
Ecuador-have been encouraged by such voices, and in their admiration for Chile's
economy, they have considered copying its water law as well. Unfortunately, these
claims for the Water Code's success are exaggerated and incomplete. They rest on
political or ideological beliefs rather than empirical support. A closer look at the
evidence shows the Code's impact to have been uneven, geographically diverse, and
quite complicated.
I argue in this chapter that the Water Code's market mechanisms and
incentives have so far been its least effective features. This chapter focuses on the
agricultural sector, where we would expect the water market to be most active. Sales
of water rights separate from land have been routine, but fairly infrequent, and have
involved little reallocation of resources. Incentives to increase the efficiency of
water use and sell the resulting surplus have had almost no impact. The Code's less
market-oriented features have been more important to water users, particularly the
increased security of private property and the autonomy of private users'
organizations in day-to-day management.. Such mixed results point to a more general
conclusion about markets: they are not neutral, automatic, or self-regulating
mechanisms. How they work depends on wider legal and institutional frameworks,
political and economic conditions, and geographic context.
The following section discusses the evidence that water rights trading has
been minimal in most of the country. To explain these results I analyze the variety of
factors that limit the water market and weaken its incentives to raise efficiency.
After briefly describing the Code's impact on peasant farmers, I examine the
political debate provoked by recent proposals to reform the Code. Both governments
of the Concertaci6n, that of President Patricio Aylwin elected in 1989 and that of

52

Against the Current

President Eduardo Frei Rufz-Tagle elected in 1993, have proposed reforms, which
so far have been blocked by the right. (Eduardo Frei Rufz-Tagle is not to be
confused with his father, the former President Eduardo Frei Montalva.) Chapter
Five examines the areas where the Code's imp.act has been more negative: multiple
water use, river basin management, environmental protection, and conflict
resolution.

IRRIGATED AGRICULTURE IN CHILE: TWO STUDY AREAS

In Chile the climate is hot and dry in the north and becomes colder and
wetter to the south. The nation's agricultural heartland is central Chile, characterized
by mediterranean seasonal conditions of hot, dry summers and cool, wet winters,
which is highly productive when irrigated. Moving farther south, less favorable
climatic conditions cause lower yields and force cultivation of lower-value crops,
until agriculture gives way to livestock grazing and forests in Regions VIII and IX.
(Chile is divided administratively into thirteen Regions, numbered I through XII
from north to south, with XIII being the Santiago Metropolitan Region in the center,
between V and VI.) Since the 1950s the country's total irrigated area has been about
1.2 million hectares, with an additional three-fourths of a million that are irrigated
irregularly as water supplies permit. Private irrigation development in the nineteenth
and early twentieth centuries accounts for some 900,000 hectares, or 75% of the
total. Since then state canal projects have watered the remaining 300,000 hectares
and have improved the existing infrastructure of another 300,000. Nationwide, most
irrigated land is used to grow grains, other annual crops, and pasture, with less than
20% dedicated to permanent crops such as fruit plantations and vineyards.!
In addition to climatic differences, Chilean agriculture is commonly
subdivided into traditional and modernized sectors. The traditional sector dominates
central and southern Chile and produces annual crops, livestock, and dairy products
for the domestic market. It is a diverse sector, ranging from commercial farmers
using modern technology and chemicals to small farmers and peasants (campesinos)
with few such resources. (I will use the term "peasant" to refer generally to all small
farmers and producers.) In 1986 there were over 200,000 peasants nationwide,
occupying almost 30% of the total agricultural land area. The traditional sector has
been in economic difficulties for many years, especially since the military
government opened the country to international competition in the 1970s. The
modernized sector, in contrast, is heavily export-oriented and concentrates on fruit
products in which the country has a comparative advantage internationally. This
sector is located in central and northern Chile and has been dynamic and prosperous
for the past 20 years. 2
This chapter's case studies come from two areas that illustrate these
contrasts. The traditional sector is represented by the Province of Bfo Bfo in Region
VIII, at the southern end of the central valley system. The modernized sector is
represented by the Province of Los Andes in Region V, at the northern end. (See
Map 1.)

53

Water Markets

Nort~

Region V" _'

1 ,

Region IX

Water Market Study Areas:

I - Los Andes Province

2 - Bfo Bfo Province

-I

Boundaries

I I
~

Scale

IOOkm

International ____ _
Region ___ _
Province - - - - -

Map 1: Water market study areas: Central Chile

54

Against the Current

Region VIII is the transition zone between the nation's agricultural center
and its forested south. Known also as the Region of the Bfo Bio after its principal
river, it produces annual crops for the domestic market, with about one-fourth of the
nation's total acreage of grains (mainly wheat), peas and beans, and industrial crops
(oilseeds and sugar-beets). During the 1980s the Region's average annual planting
included 142,000 hectares of wheat, 22,000 of oats, 51,000 of peas and beans, and
14,000 of sugar-beets. There are also 800-900,000 hectares of pasture and 30,000 of
permanent crops, mainly vineyards of wine-grapes. Agricultural production is
divided in roughly equal shares between the two provinces of Bfo Bfo and Nuble.
Both occupy the central valley and Andean foothills, with Bio Bfo Province located
in the Bfo Bio river basin and Nuble Province just to the north in the Itata River
basin. Bio Bio has more pasture, livestock, and dairy; Nuble has more vineyards and
other field cropS. 3
Small agriculture is especially important in the Region, where 45,000
peasants make up almost 25% of the national total. While most work marginal land
in the coastal mountains and Andean foothills, some 8000 are in the irrigated central
valley. In general, in Region VIII as well as nationwide, the peasants who are best
off are the parceleros, the owners of the small individual land parcels that resulted
from the military government's disposal of some of the land expropriated during the
Agrarian Reform. The national total was initially almost 38,000 such parcels,
although a significant number have subsequently been resold and land ownership
has become more concentrated in many areas. In Region VIII there are several
thousand parceleros. 4
Region VIII has a significant agro-industrial base, including two large
sugar refineries, a number of dairies, and other plants processing meat and vegetable
products. 5 The Region has also become the heart of Chile's booming forest sector in
recent decades. Acreage in tree plantations has greatly expanded-mostly pine and
some eucalyptus-and there are half a dozen major industrial plants producing pulp,
paper, and other wood products, as well as many smaller sawmills. Most of the tree
plantations are in the coastal mountains and the Andean foothills, but some have
also taken over formerly agricultural land in the central valley. We return to Region
VIII's non-agricultural sectors in Chapter Five. 6
Bfo Bfo Province is the largest agricultural area in the Bio Bio River basin.
With rainfall abundant but seasonal, there are 175,000 hectares of irrigated land and
well over 10,000 irrigators and canal users. One fifth of this area pertains to land
parcels resulting from the Agrarian Reform. In the late 1980s about 25% of the total
was in grains, 40% in other annuals, and 35% in pasture. Irrigation development
came later to this part of the country than farther north, and depended heavily on
state projects. Almost 90% of the province's irrigated area is watered by nine canal
systems that were built wholly or partly by the government's Irrigation Directorate;
since the 1970s most of these systems have been transferred to their private water
users' organizations. As a result the major infrastructure is more modern than the
national norm. Six of these canals divert water from tributaries of the Bio Bio and
the other three from the river itself. (See Table 1.) The most important is the Canal
Laja which waters 70,000 hectares to the south of the Laja River, the Bfo Bio's

Water Markets

55

largest and northernmost tributary. More than a third of the province's irrigated area
lies in the comuna of its capital city of Los Angeles. 7 (A comuna is equivalent to a
township or county.)
Table 1.

Area irrigated by canals built wholly or partly by

the state, Bio Bio Province (hectares)

Canal Antuco
Canal Bfo Bfo Negrete

400
11,000

Canal Bfo Bfo North

5,800

Canal Bfo Bfo South

36,000

Canal Coreo

3,500

Canal Duqueco-Cuel

7,000

Canal Laja
Canal Quillaileo
Canal Zanartu
Total

70,000
2,000
20,000

155,700.

Sources: Candfa (1986); Marquez (1988).

Although the main canals are relatively modern, the condition of secondary
infrastructure is poor. Local irrigation methods and technology are fairly primitive
and have not changed for many decades. Canals are usually unlined earthen ditches
or crude wooden channels with large seepage losses. The most common irrigation
practice is simply to flood the fields (known as riego tendido). Water use efficiency
at the farm-level averages about 20-30%, typical of most of Chile. Note that the
overall water use efficiency at the level of river basins is significantly higher, since
many farmers benefit from the waters not fully consumed upstream. s
The contrasting case is Los Andes Province in Region V in the upper
Aconcagua River basin, a classic example of the "fruit boom." Region V is hotter
and drier than Region VIII, and for several decades has been the site of some of
Chile's most intensive and capitalized agriculture. Agriculture occupies much less
land than in Region VIII: in 1990 it was about 75,000 hectares with another 200250,000 in pasture. Fruit plantations and annuals each occupy 30,000 hectares20% of the national total-and the rest is in vegetables and flowers. The Region has
historically had a strong concentration of agro-industry and food processing, though
its relative importance has declined with the boom of fresh fruit exports. 9

56

Against the Current

Fruit production has been Region V's most dynamic agricultural activity
since the 1950s. About 70% of it is concentrated in Los Andes and San Felipe
Provinces, in the upper half of the Aconcagua Valley. These two provinces account
for only 20% of the Region's acreage in annual crops and almost no pastureland.
The first big expansion of fruit plantations took place in the 1960s, at least fifteen
years before the wider Chilean fruit boom. Expansion continued through the 1980s
and the Region maintained its 20% share of the nation's acreage in fruit. Nearly all
of this expansion came at the expense of annual crops since there was very little new
land to bring into production (though in recent years some hillsides have been
cultivated by installing drip irrigation systems) Table grapes are far the most
important fruit produced, with half the acreage, followed by avocados, peaches,
nectarines, kiwis, and others. 10
In Los Andes Province (including the neighboring comuna of Santa Marfa),
there are 25,000 irrigated hectares, the great majority in fruit plantations, watered by
27 canals and more than 5400 irrigators. This area corresponds to the First Section
of the Aconcagua River. ll Since 1975 there has been an active local land market,
fueled by the boom in fruit exports and the resale and consolidation of many of the
parcels resulting from the Agrarian Reform. These changes in land tenure were
accompanied by further modernization of agriculture, often including major
investments in irrigation technology. The province's basic canal infrastructure has
not changed since the 1870s; the only newer construction is the Canal Chacabuco, a
state project built in the 1930s to transfer water out of the basin to the south. At the
farm level, however, there have been many improvements in water use efficiency,
due especially to new sprinkler and drip irrigation systems. Local water users and
canal associations are well organized by the First Section's vigilance committee,
which supervises water distribution and defends irrigators' interests to the state and
other water users.12

THE WATER MARKET IN PRACTICE, 1980-1995

Sales and transfers of water rights that are separate from land have been
uncommon in most of Chile. While they take place routinely, they have involved a
very small percentage of water users and relatively little reallocation of resources,
and the resulting markets are fairly inactive. There are local exceptions to this
generalization, especially in the desert North, but they depend on such unusual
conditions that they confirm the larger argument. These are not the results I expected
to find. When I began fieldwork in 1991 I interviewed many people about their
experiences of the positive and negative impacts of the water market, only to be told
time after time that they had little to say about it because there was no such thing.
Eventually I realized that the real question was why was the water market so
limited?
This assessment was shared by the great majority of many dozens of people
interviewed, both in local study areas and at the national level. They included
farmers; the engineers and administrators of the more important private canal

Water Markets

57

associations; government officials and technicians in the local, regional, and national
offices of various agencies in the Ministries of Agriculture and Public Works
(including the DGA); staff of the local Real Estate Title Offices; lawyers working in
water rights; staff of non-governmental organizations working in agricultural and
rural development; university professors; and experts in United Nations
organizations. The consensus is remarkable considering the diversity of these
observers' experiences and political views: many people with conflicting opinions
about whether a water market is desirable have similar perceptions about how
limited it has been in practice. There are also some dissenting views claiming that
the market has been active which I discuss below.
Reliable information about water rights trading in Chile was still scarce in
1995. Since 1979 sales of water rights have had to be recorded in the Water Rights
Registers in local Real Estate Title Offices (Conservadores de Bienes Ra{ces).13 The
Registers underestimate some aspects of market activity since they have no
information about rentals, leasing,. or other informal transfers. So far there is only
anecdotal evidence about these temporary trades; while they are said to be common
between neighbors, this has always been true and is not due to the current Water
Code. Such transactions take place almost entirely among members of the same
canal systems, which means that the private canal associations tend to have the most
accurate information about them.
Both of the study areas confirm the inactivity of the water market. In Bfo
Bfo Province, the comuna of Los Angeles has several thousand irrigators and 65,000
hectares of irrigated land, more than one third of the provincial total. From 1980
through 1991 there were about 150 sales of water rights separate from land recorded
in the Water Rights Registers of the Los Angeles Real Estate Title Office, an
average of only 13 per year. (See Table 2.) The staffperson in charge of maintaining
these records described separate water rights sales as "pocfsimas" (very few), an
opinion echoed by the administrators of local canal associations. These sales
amounted to less than 25% of the total water rights sales recorded; the other 75%
simply accompanied land in land transactions. The great majority of sales involved
small quantities of water, from one to five regadores (a regador is a unit of
measurement which in this area is equal to about 15 liters/second, sufficient to
irrigate eight to ten hectares).14
In Los Andes Province, during the same period there were about 300
separate water rights sales, averaging 23 per year. (See Table 3.) This is almost
twice as many as in Los Angeles in an area with about one third of the irrigated land.
The higher frequency is presumably due to the more intensified local agriculture, the
higher value of water, and the relatively large numbers of small land parcels. Even
so, it seems a fairly marginal reallocation of resources for such a dynamic area with
over 5000 irrigators. As in Bfo Bfo Province, local experts agree that sales are quite
uncommon. Here too, separate water rights sales make up about 25% of the total
sales registered, with the rest recorded as part of land sales. IS
Grants of new permanent water rights have had little impact on local water
markets, because in central and northern Chile most available rights to surface water
had already been claimed by the 1980s. In Bfo Bfo Province the DGA granted 44

58

Against the Current

new consumptive rights in 1982-1992, five of them for groundwater. 16 In Los

Andes Province the DGA granted 26 new consumptive rights in 1980-1993.
Eighteen of them were for groundwater, reflecting the greater scarcity of surface
water in this area. 17

Table 2.

Water rights sales, Comuna of Los Angeles, 19801991

With
Land

Without
Land

Total

Canal
Laia

1980

52

60

n.a.

1982

60

15

75

n.a.

1984

37

14

51

n.a.

1986

41

13

54

1988

34

18

52

31

1989

36

14

50

35

1990

47

10

57

39

1991

52

15

67

17

Total

359

107

466

127

% of Total

77

23

100

---

Annual Avg.

45

13

58

25

Note: The totals are for the eight years shown. During 1981, 1983, 1985, and 1987,
there were 191 water rights sales, but it is unknown what proportion were separate
from land. It seems reasonable to assume that the proportion is similar to the other
years. If we add these sales to the 466 in the table, there were a total of 657 sales in
12 years, for an annual average of 55 (including sales with land and without it).
The Canal Laja is not included in the total, as explained in Note 14.
Source: Registros de Aguas. Conservador de Bienes Ralces. Los Angeles, Chile.

Subsequent research in other parts of the country has confirmed these

results. In 1993-1994, Robert Hearne studied four areas in central and northern
Chile, all dominated by fruit production and all chosen because they were expected
to have active local water markets. The areas were the Maipo River basin in central
Chile (including the Santiago metropolitan area); the Limarf and Elqui River basins,

Water Markets

Table 3.

59

Water rights sales, Province of Los Andes, 19801992

With Land

Without
Land

Total

1980

42

45

1982

34

32

66

1984

75

16

91

1986

61

54

115

1988

38

32

70

1990

89

17

106

1992

96

104

Total

435

162

597

% of Total

73

27

100

Annual Avg.

62

23

85

Note: The totals are for the seven years shown. The figure of 300 total sales
without land mentioned on page 57 was obtained by extrapolating the annual
averages in the table to the intervening odd-numbered years (six years times 23
equals 138. plus 162 in the table).
Source: Registros de Aguas, Conservador de Bienes Raices. Los Andes. Chile.

300-400 kilometers to the north; and the Azapa River basin near the Peruvian
border. Hearne concluded that there had been some economic gains from water
rights trading in the Limarf and Elqui basins. Nonetheless, in three of the four areas
he showed that transactions were very limited, for several reasons that I discuss in
the following section. The only exception was the Limari basin, where active trading
is facilitated by three medium to large storage reservoirs (built by the state) and by
well-organized canal associations. The reservoirs allow banking and transfer of
specific volumes of water, which is rare in Chile. The Limari case is widely
considered the country's most successful example of a functioning water market. In
the case of the Elqui, although there were some sales they involved paper rights that
had long been unused rather than "wet water.,,18
Most Chilean experts with a national perspective agree that transactions are
few in most of the country. This includes the last three heads of the state water rights
agency, the DGA, covering the entire period since 1981, as well as the current head

60

Against the Current

of the Irrigation Directorate. Since 1993 both of these agencies have undertaken
empirical studies of water markets, whose results concur.19 In the private sector, the
President of the Confederation of Chilean Irrigators agrees that trading has been
limited even though he is an avowed proponent of the water market. In fact, the lack
of trading is his argument for rejecting criticisms that the market has had negative
socinl and environmental effects. He claims that trading has increased in the past
few years but admits there are no data to prove it. 2o
Several recent publications have made the opposite argument, claiming that
Chilean water markets have been active and have successfully delivered many of
their promised benefits. According to these claims, the efficiency and technology of
water use have improved, private investment has increased, waters have been
significantly reallocated both within agriculture and to other sectors, conflicts
among users have declined, and peasant farmers are better off. Unfortunately, many
of these arguments are based on confident assertions with little supporting
evidence-either highly debatable or simply wrong. These advocates typically do
not mention other or conflicting studies. There is clearly room for different
interpretations of how "active" or "effective" the market has been, but some of these
claims are so sweeping that they are best understood as political or ideological
statements rather than empirical analysis. (See the discussion of Water Code
reforms later this chapter.) Some of these publications have been associated with
the World Bank, although not all the Bank's water experts have such neoliberal

21
VIews.
The great majority of water rights transactions that do take place are
between irrigators within the agricultural sector. Sales from one sector to anotheri.e. transfers from one type of use to another-are less common. They have occurred
in two different situations. The first is where cities have expanded into the
surrounding rural areas, particularly in the case of Santiago but also near some
smaller cities to the north. The second situation is also particular to the north, where
a sustained mining boom has increased the demand for water and mining companies
have bought rights from farmers. This is highly controversial in some areas where it
threatens local agriculture with extinction, especially where indigenous communities
are affected. In general, however, inter-sectoral relations have been more concerned
with coordinating multiple uses than with market transfers (see Chapter Five).

WHY WATER RIGHTS TRADING IS LIMITED

Why have water rights sales separate from land been so limited in Chile? I
discussed this question in dozens of interviews and conversations in both study
areas, in Santiago, and in other parts of the country. The answer is that a range of
factors raise obstacles and transactions costs, including limitations imposed by (1)
physical geography and infrastructure, (2) legal and administrative complexities, (3)
cultural and psychological attitudes, and (4) ambiguous or contradictory economic
signals of price and value, indicating that water's value is both high and low. Many
of these obstacles occur throughout the country. Some of them might be overcome

Water Markets

61

by changes in law and policy, or by increases in the demand for water; others are
unavoidable. Furthermore, while many of the details are particular to Chile, the same
general factors are common in other countries, including the United States.
Geography and Infrastructure

Chilean geography strongly influences the potential for transferring water.

Most of the country's irrigated land is in the narrow central valley, which begins at
the Aconcagua River basin and runs south for hundreds of miles between the low
coastal mountains to the west and the high Andes to the east. (See Map 1.) It is
divided from north to south into a series of fairly small, steep river basins separated
by hills, with rivers plunging from the Andes westward to the sea in a mere 100
miles. As a result it is both difficult and expensive to move water from one basin to
another, or from downstream to upstream areas within the same basin. The Andean
snowpack helps irrigators by providing natural short-term water storage which
substitutes for artificial reservoirs. Snowmelt begins every spring and continues till
late summer, filling the rivers through most of the irrigating season. Irrigation
systems have traditionally been built and operated on the basis of diverting water
from unregulated rivers, whose flows change daily, seasonally, and annually. This
has also had a major historical influence on Chilean water law and administration.
Water rights are traditionally defined not as fixed quantities but as proportional
shares in whatever amount of water is available at a given time.
Existing infrastructure is generally too rigid or otherwise inadequate to
redistribute much water. Chile has few medium to large reservoirs and only one of
them-Lake Laja in the Bio Bio River basin-is big enough to store more than a
year's flow. Some of these reservoirs are shared between irrigators and hydroelectric
plants, although the seasonal demands of the two water uses are in conflict (see
Chapter Five). For most canal systems the key structure is the bocatoma, the barrier
that diverts water directly from the river's edge to the head of the canal. The barriers
are typically temporary works rebuilt every year, made of stone, wood, brush, etc.
Where there are more permanent concrete structures, they have been designed to
divert specific volumes or proportions of flow, and are often hard to convert to
different specifications. Within canal systems most distribution works are similarly
inflexible. Flow dividers (marcos partido res) are fixed barriers that divide the flow
of larger canals into smaller secondary canals according to their respective water
rights, thereby distributing constant proportions of varying flows. As a result, most
transfers of rights from one location to another require modifying all of the
intervening flow dividers in order to ensure that the water corresponding to thirdparty rights is delivered unaffected. These changes are often prohibitively expensive,
except between nearby members of a shared canal. A related cost is the necessary
payment to the owners of any canals used to transport water to its new destination,
unless both parties to the sale are members of the same canal association. Finally,
since most canal-works are crudely constructed and poorly maintained, it is hard to
be precise about changing water distribution. 22 There are special problems on many

62

Against the Current

parcels resulting from the Agrarian Reform, since canal systems originally built for
large farms were usually inadequate to deliver water to many smaller ones.

Legal and Administrative Factors

The principal legal obstacle to water rights trading is the continuing
uncertainty of many titles. In theory, under the 1979 Decree Law and the 1981
Water Code, all water rights must be registered in the local Real Estate Title Offices.
But the Code also recognizes all rights granted or acquired under earlier legislation,
going back to the nineteenth century and before. Few of these have ever been
registered and even fewer updated after changing hands in land transactions or
inheritances. It is important to recall that registering water rights was not required
until the 1951 Water Code, and was then abandoned by the 1967 Agrarian Reform
Law (see Chapter Three). Furthermore, water use in the Chilean countryside has
always been characterized by de facto situations rather than formal law. 23
The military government addressed the problem by giving preference to the
actual users of water rather than the owners of paper titles. In 1979 the government
declared a presumption of ownership in favor of the owner of the land where the
waters were then being used, or secondarily in favor of whoever was then making
"effective use" ofthem. 24 The 1981 Code created special procedures to "regularize"
ownership, allowing existing water users to get a declaration of title from local
courts or to sort out the water rights associated with land expropriated in the
Agrarian Reform. The procedures were in the so-called "Transitory Articles,"
although they remain in effect and there is no sign of their being repealed.
Transitory Article Two favored people who had been using waters for at least five
years, even if the rights had been registered before to someone else. 25 Transitory
Article Five authorized the Agriculture and Livestock Service to commission and
carry out the technical studies necessary to define and allocate water rights for the
land parcels that resulted from the Agrarian Reform. These studies were done
throughout Chile in 1985-1988. 26
Many more water rights have been regularized than bought or sold. In Los
Angeles, the Water Rights Registers that recorded 150 sales in 1980-1991 also
contained 1000 instances of local courts approving use of the Transitory Articles;
90% of them involved land expropriated in the Agrarian Reform. In Los Andes the
figures are similar?7 Since 1990, when the Concertacion government came to
power, the DGA has encouraged regularization as part of its program to form water
users' organizations, with partial success. Part of the incentive for rights-holders is
that unregistered rights cannot be bought, sold, or mortgaged. The higher courts
have somewhat undermined the process of regularization by giving unregistered
rights full constitutional protection, insisting that such property rights are not lost
through failure to be registered. The courts have even suggested that rights which
were once registered cannot be regularized to someone else, even if unused for
decades, contradicting Transitory Article Two. Thus in many areas there are an
unknown number of legally valid rights which in theory could be asserted at any

Water Markets

63

time. 28 The uncertainty obviously discourages private transactions and investment.

This problem has received more attention in recent years as demands for water
increase and the government marshals its arguments for reforming the Water Code. 29
Possible transactions are also hindered by the uncoordinated system of
record-keeping and by information that is costly or hard to obtain. There are three
sources of information about water rights ownership. The only one that is legally
definitive is the Water Rights Register of the Real Estate Title Office. These Offices
are local in coverage (about the size of a comuna or township) and the information
is not compiled or systematized at the provincial, regional, or national levels. In
different canals a share (acci6n) corresponds to a different amount of water, but
such discrepancies are sometimes overlooked when transfers between canals are
recorded in the Registers. Second, the most accurate and up-to-date sources are
often the records of the private canal associations with respect to their own
members. They do not count as proof of title, however. Third, the DGA keeps its
own Water Rights Registers and is trying to expand them, but they are still very
incomplete. They include only the rights initially granted by the state (not those
constituted under earlier laws), with no information about subsequent transfers.
They also do not count as legal title.
A final administrative obstacle is the need to protect third parties from
injury, as the Water Code requires. There is no agency that reviews all transfers.
Water rights owners affected by someone else's change or transfer of use can protest
either to the canal associations involved or to the civil courts. The DGA must
approve changes in the locations where water is diverted from a natural stream, but
otherwise has no authority to intervene in or settle water conflicts. That power
belongs only to the courts, if requested by an injured rights-holder. Because Chilean
judges are rarely competent in technical aspects of water rights and because the legal
system is overburdened, these procedures tend to be slow and erratic (see Chapter
Five). Even if they were streamlined, however, by better combining legal authority
with technical expertise, they would remain a restriction on free transfers. Thirdparty effects and externalities have also been major obstacles for water markets in
the Western United States?O
Cultural and Psychological Attitudes

Strong cultural and psychological influences in the countryside also hinder

water rights sales. It would be hard to exaggerate the real and symbolic importance
of irrigation in this semi-arid country, where it has taken centuries of labor and
willpower to bring water to dry lands and transform them into productive fields.
Spanish irrigation traditions have predominated, due to the long period of colonial
rule and to the fact that central Chile's mediterranean climate is so similar to
Spain's. This history, combined with the constant threat of drought, reinforces
Chilean farmers' ingrained determination to hold onto their water supplies at almost
any cost. They strongly resist selling water rights and returning land to its original
non-irrigated condition. On the contrary, the perpetual desire for more water rights

64

Against the Current

is proverbial in the agricultural sector. In addition, many water users, particularly

peasant farmers and those in more traditional areas, are still ignorant of the new
Water Code's provisions and continue to manage water as did their grandparents. As
one expert explained, "In Chilean irrigation the weight of history is heavy.,,3)
In other words, despite the explicit intent of the current Water Code, many
people continue to believe instinctively that water rights should not be bought and
sold separately from land nor treated as just another commodity. Some argue that
market logic is inappropriate for water precisely because it is so vital and scarce. It
is common to hear emotional comments that "water is life," too fundamental to
human existence to be entrusted to commercial motives. This view evidently
contradicts the neoclassical economic argument that it is the very scarcity of
resources which makes it important to allocate them efficiently via the marketneoliberalism has not yet succeeded in "modernizing" traditional agricultural
mentalities in Chile. It is hard to measure the weight of these cultural factors, but
they clearly affect people's responses to price signals and market incentives.32

Prices and Value

Faced with all of these obstacles and transactions costs, a market can arise
only if the value of water is fairly high. The economists who designed the Water
Code expected prices to rise once water rights were made freely alienable, driven by
increasing urban and industrial demand in a developing economy. As water rights
were transferred out of agriculture, farmers would be forced to irrigate more
efficiently with their remaining supplies, and some would shift to higher value crops
(see Chapter Three). But it has not worked out that way in practice: price signals in
much of Chile remain uncertain, ambiguous, or contradictory, indicating that water
is simultaneously cheap and costly. Presumably the water market's relative inactivity
contributes to preventing it from straightening out these discrepancies?3
"The value of water is much higher than its price," as one lawyer put it. 34
Most farmers who want to keep farming refuse to sell even a fraction of their water
rights. They have strong economic motives in addition to the cultural attitudes
already mentioned. Without its water supply, land from northern to south-central
Chile loses most of its productivity and its value drops sharply: in the central valley,
irrigated land is worth four to ten times as much as non-irrigated land. In theory, the
price of water rights should be equivalent to the difference between the two or, in
other words, should be nearly as high as the price of irrigated land. In practice
buyers have rarely offered this much without including the land, toO. 35 This helps to
explain why most water rights sales are still part of land transactions, because sellers
have little incentive to hold onto land without water. People willing to sell water
rights separately tend to be either getting out of agriculture, disposing of inheritance,
or economically desperate, as in the case of many peasants. It appears to be an
irreversible move, since there is no guarantee of being able to buy rights at an
affordable price in the future. 36

Water Markets

65

Furthermore, potential buyers have not offered prices high enough to

compensate for water rights' value as "drought insurance." In Chile's mediterranean
climate dry years are frequent, but unpredictable, and cause major crop losses.
Because water rights are typically defined as proportional shares rather than fixed
quantities, the only way to have secure supplies during a drought is to hold excess
rights in reserve the rest of the time. This is especially critical for fruit plantations
and other permanent crops, where the investment at stake is much greater than the
loss of a single year's production. In normal and wet years people let their reserve
rights flow by unused, benefiting non-owners downstream, but they are not
"surplus" nor available for sale.
Finally, many owners of water rights refuse to sell because they are
speculating. All signs indicate that water's value will rise in the near future, which is
a strong incentive to hold onto existing rights indefinitely even if they are not
currently used to produce anything. It is obviously easier to do this when the law
imposes neither financial obligations such as taxes or fees, nor legal duties such as
requiring "beneficial use" (a "use it or lose it" doctrine).37 Speculation has been one
of the Water Code's most controversial aspects in Chile, criticized across a wide
range of the political spectrum and defended mainly by staunch neoliberals, as
discussed below. While it seems to have had a significant impact on development in
the hydroelectric sector-involving non-consumptive water rights-in agriculture
the concern has so far been exaggerated, except in the case of peasants (see the
following section).
Why don't buyers bid up the prices enough to convince sellers, then, if
water rights are so valuable? They do not partly because the transactions costs are
so daunting, and partly because, in fact, water is not yet as scarce in most of Chile as
popular myth would have it. People who need water and have the means to pay for it
have cheaper alternatives than buying existing rights, or they simply buy land with
associated water rights.
In the first place, if such people already have any water rights, they can
increase their available supplies by investing in more efficient use; with a national
average irrigation efficiency of about 25%, there is plenty of room for improvement.
The water saved is for their own use for expanding irrigation and is not for sale. 38
Second, they can pump groundwater. This has initial costs for well-drilling and
equipment, and energy costs over time for pumping, but supplies are still abundant
and relatively untapped in central and southern Chile. In recent years there have
been growing numbers of applications for new groundwater rights and rising rates of
extraction. 39 Third, people can apply for new "contingent" or junior water rights
(derechos eventuates) and build capacity to store the water. "Permanent" rights have
the first claim on available water. They are allocated until they total the average flow
of a river or stream, which the DGA then declares "exhausted" (agotado). However,
the DGA can continue to grant contingent rights to any waters that remain after
permanent rights have been satisfied. 4o These temporary surpluses typically happen
only in winter and spring, when river flows are highest due to rain and snowmelt and
agricultural demand is lowest; as a result, owners of contingent rights must build
storage works if they want to use the water during the summer growing season.

66

Against the Current

Although any of these options may be cheaper than buying water rights, they are
evidently beyond the reach of peasant farmers.
A low value for water would also help explain why market incentives to
conserve have been so ineffective. Despite expectations to the contrary, there has
been almost no private investment in irrigation technology for the purpose of selling
rights to the water saved. In most of central and southern Chile, including Bfo Bfo
Province, water use efficiency remains at its traditional level of 20-30% with flood
irrigation the dominant practice. This presumably reflects water's relative abundance
and the low values of the area's traditional crops, which are not profitable enough to
justify the expense of better technology. In the Aconcagua Valley and other fruit
zones near Santiago, on the other hand, many landowners have installed expensive
modern drip-irrigation systems and significantly raised efficiency at the farm level.
However, they have been motivated by agronomic and financial factors, not by
scarcity of water, even though the climate is more arid. Fruit plantations are much
more productive, and make better use of other inputs like fertilizers and pesticides,
when they are irrigated with small but carefully controlled amounts of water.
Furthermore, after the initial expense the costs of labor, operation, and maintainance
are much lower. These factors make the investment worthwhile for many
irrigators-together with the government subsidies mentioned below-and despite
high costs to repay they rarely sell any rights to the water saved. Instead they let the
surplus flow by but hold onto the rights for the reasons already discussed. This
argument was confirmed in many interviews in Los Andes and in the Santiago area,
where most people could not recall a single example of a local irrigator selling
excess water rights after investing in more efficient technology.41
The biggest private sector irrigation interests recognized the failure of the
Water Code's market incentives several years after its passage, although they
downplayed its political significance. The National Agriculture Society and the
Confederation of Chilean Irrigators lamented that private investment in irrigation
had been much lower than expected. In 1985 they convinced the military
government to pass a new law providing eight years of state subsidies to build or
improve small- to medium-scale private irrigation projects. 42 Five years earlier the
two organizations' principal argument in favor of the new Code was that legal
security would boost private investment, while they expected little from the water
market (see Chapter Three). The irrigation subsidy law has been widely supported in
the agricultural sector, despite some criticism for favoring more prosperous farmers,
and in 1993 it was extended for another eight years. It may well be a good policy.
But it would not have been necessary if the incentives for private investment had
worked as well as they were supposed to, or if water's price had been higher.
A final example of the constraints on market mechanisms is the fate of
public auctions of water rights. Although the Code requires such auctions whenever
there are simultaneous applications for the same water, they have been very rare in
practice. In the early 1980s the DGA auctioned some rights in the upper Mapocho
River near Santiago, mainly to try to generate information about prices; the agency's
head at the time emphasized that prices would not be accurately determined until
markets became sufficiently active.43 Later the military government intervened

Water Markets

67

directly to prevent auctions in several cases with inter-sectoral implications,

particularly involving hydroelectric projects. The government was unwilling to leave
such crucial allocative decisions to the free market, and either denied the
applications or simply assigned the rights to the aplicant preferred on the basis of
"exceptional circumstances and general interest." In this way the government
exercised its power to make directly political decisions about allocation when it
seemed important.

PEASANT FARMERS AND THE WATER MARKET

Most peasant farmers lack secure water supplies or legal title to water
rights. They may have customary or informal claims to use other irrigators' overflow
or surplus. During the irrigating season water flows continuously through canal
systems, 24 hours a day; rights-holders rarely want all that water and smaller farmers
are often allowed to divert some of it at night or on weekends. Peasants' canal
infrastructure is generally cruder and worse maintained than average. They have a
weak voice in local canal associations, which tend to be run in the interests of larger
farmers. In general peasants are poorly able to assert and defend their interests in
water use, handicapped by lack of the resources and influence needed to
successfully navigate the formal legal and administrative system. They prefer to
avoid that system, which makes it hard to find good information about their
circumstances. It is harder still because until recently water rights received little
attention from either the government agencies or non-governmental organizations
that work in small-scale agricultural development. 45
These problems have deep historical roots and reflect peasants' poverty
and low social position more than recent changes in water law. Nonetheless, the new
Water Code seems to have made them worse off in several ways. In the first place,
the mere fact of an abrupt legal change caused problems for people who were slow
to be informed or marginalized from courts and state agencies. This was due more to
poor implementation than to market logic itself. In the 1980s the military
government did not undertake campaigns of public information or education about
the Code's new features, and did not offer legal or technical advice about how to
apply for new rights or regularize old ones. By the time peasants and their
organizations learned of the new procedures, the available water rights in many
areas had already been granted by the DGA or had been regularized by those more
legally adept. An important exception is the case of the parce/eros, the beneficiaries
of the military government's subdivision and privatization of land expropriated in
the Agrarian Reform. After 1985 the government funded consultants to help the
Agriculture and Livestock Service determine and regularize the water rights attached
to that land (partly in an effort to gain rural political support before the 1988
plebiscite).46
In the second place, peasants lack the essential prerequisite for entering the
market to acquire water rights-money. To benefit from the water market they
depend on current owners increasing efficiency and making available enough extra

68

Against the Current

water to lower its selling price. So far this has not happened, as discussed above.
Peasants are probably the group most injured by speculation or hoarding of unused
rights, since they are denied secure access to waters that they see flowing by,
physically but not legally available. Since 1990 the governments of the
Concertaci6n have established programs to promote and subsidize small-scale
irrigation, but a number of proposed projects have been denied funding because the
beneficiaries could not get legal title to unused waters. 47 Finally, peasants' lack of
political and economic clout is a more severe problem in today's context of minimal
state regulation, in which private parties must rely more heavily on their own
bargaining power to resolve conflicts or coordinate interests.
In short, the Water Code's overall distributional impact on peasant farmers
has probably been negative. It seems clear that for lack of resources they have been
unable to participate effectively in the water market or in other private transactions.
Without better advocacy and organization they will remain marginalized in water
use. The strongest proponents of the Water Code have reached the opposite
conclusion and claim that it has made peasants much better off, but they provide no
supporting evidence and appear not to have consulted any of the government and
non-government organizations mentioned above (Note 45).48

REFORMING THE WATER CODE

The Concertaci6n was elected In 1989 and assumed power from the
military in 1990. The new government's primary goals were to consolidate
democracy, increase spending on social programs, and continue market-driven and
export-oriented economic growth (see Chapter One). This required a delicate
balance between maintaining the essential features of the political and economic
model, while choosing some aspects to try to reform. One of the government's lesser
goals was to reform the 1981 Water Code, which it considered to be a prime
example of the previous regime's excesses of privatizing zeal. In 1990, the DGA
was instructed to consult with other state agencies, the private sector, and nongovernmental organizations, and to prepare a new "National Water Policy." This
policy was to diagnose the current situation and identify problems for which a
laissez-faire approach was inadequate, including environmental protection and other
public interests. The policy was to include proposals for any legislative changes
needed. The government sent the proposals to Congress in December 1992.49
The Concertaci6n government's main criticism of the Water Code has been
that it is too permissive with public resources, allowing speculation and lack of
productive use. This has long been one of the Code's most controversial aspects.
The DGA argued that this state of affairs was socially unjust and economically
undesirable, allowing private interests to profit from public property without
performing a useful social function in return, and holding back economic
development by discouraging productive activities. A large majority of the people I
interviewed agreed with this criticism, including most of those tied to the
agricultural sector. They favored some kind of "use it or lose it" rule. 50 Neoliberals,

Water Markets

69

on the other hand, have responded that speculation makes markets work better by
helping to identify social demands for different resource uses and thereby
determining prices more accurately. They deny that speculation has instead distorted
those prices due to unequal bargaining power or monopoly control. Neoliberals
argue that it does not prevent economically efficient water uses because speculators
who demanded excessive prices would end up selling nothing. 51
With respect to agriculture and consumptive water rights, this debate has
been about principles more than concrete problems, as even the critics of
speculation generally recognize that in practice it has not yet had much impact on
irrigation (except for peasants). There are many cases of irrigators applying for or
otherwise acquiring water rights in excess of their immediate needs, typically in
order to protect themselves from rival claimants and to allow for their own potential
expansion sometime in the future, a strategy which is a fairly weak form of
"speculation.,,52 Speculation has been a more serious problem with non-consumptive
rights in the hydroelectric sector. Hydro-power is one of Chile's most important and
profitable economic activities and holding unused water rights serves as an entry
barrier to new competitors. 53 The country's largest electric utility, ENDESA, has
complained that some of its potential future projects have been hindered by having
to negotiate with speculators who were savvy enough to apply first for the available
water rights. 54 Because non-consumptive rights were a new category, they were
initially available from the DGA throughout the country, except where there were
vested rights for power generation. Nevertheless, ENDESA has generally been the
beneficiary and not the victim of speculation and monopoly power in water rights.
(ENDESA is the National Electric Company, Empresa Nacional de Electricidad,
which was a state enterprise until privatized in the late 1980s.)
The DGA proposed going back to the earlier rule-part of both previous
Water Codes and familiar in Chilean water circles-that acquiring and owning water
rights required actually using them. According to the proposal, any rights not used
for a period of five years could be cancelled without compensation and then
reallocated to other users with more immediate needs (whether by administrative or
court order was yet to be determined). The DGA argued that because water itself is
still public property, the state can impose conditions on private rights to use water
without violating their constitutional guarantee as property. This would not weaken
legal security, but was instead a moderate response to an extreme situation which
itself posed a threat to that security. The government also proposed reforms that
somewhat increased the DGA's authority over water pollution and channel
protection, including the power to require a "minimum ecological flow" in future
grants of water rights. Finally, the proposal would have created new river basin
organizations, albeit vaguely defined, to coordinate multiple water uses. 55
The proposed five-year rule met strong opposition from both rightwing
political parties, Renovaci6n Nacional and UDI, and from private sector interest
groups, especially the larger farmers and agricultural interests, led by the National
Agriculture Society and the Confederation of Chilean Irrigators. Many of these
opponents shared the government's concern about speculation and non-use, but said
that the proposal was the wrong solution. In the first place, they rejected it as

70

Against the Current

obviously unconstitutional, arguing that the state could not place new restrictions on
vested property rights without paying compensation. Their argument was in line
with the intent of the military government and its Constitutional Commission,56 and
the Supreme Court and Constitutional Tribunal would almost certainly agree. More
broadly, they attacked the package of reforms as a typically "statist" approach,
reminiscent of the dark days of the Agrarian Reform, which showed how shallow
was the Concertacion's proclaimed commitment to the free market model. The
reforms would increase "administrative discretion" (i.e., abuse of bureaucratic
power) and undermine the model's basic elements: economic liberty, the security of
private property, and the neutrality of the market. The more extreme of the
government's opponents claimed that the water market had worked very well and no
changes were needed. They rejected rejected virtually any additional state authority,
even if clearly constitutional, such as the proposal that the DGA be able to require
minimum ecological flows as a condition for granting future water rights. Others
accepted that the Water Code had flaws, but said that these should be corrected in a
way compatible with the Code's market logic. That meant dropping the five-year
rule in favor of an economic incentive such as fees or taxes. 57
By late 1993 the opposition had forced the government to withdraw its
proposals and regroup. The Concertacion was re-elected in December with Eduardo
Frei Ruiz-Tagle replacing Patricio Aylwin as President. Although the five-year rule
was no longer a possibility, the government rescued the notion of an economic
instrument, an idea which the opposition had accepted at least in principle and which
could be more easily defended in constitutional terms. In the several years since then
a consensus has grown in favor of some kind of patente, or fee for non-use of water
rights. It would be modeled on the patente in Chilean mining law: the owner of a
mining concession has the right to develop public property (i.e., minerals), but must
make actual use of this right or else pay an annual fee to maintain it. In this way the
public interest is served either by encouraging development or by gaining revenue.
In July 1996 the government sent its new proposals to Congress; these again
somewhat increased the DGA's authority and added an annual fee for all unused
water rights. The fees would vary by region-they would be much higher in the arid
north-and would go up sharply over time; they would also be much higher for nonconsumptive than for consumptive rights. The rightwing opposition and its allies in
the agricultural sector once again criticized these now watered-down reforms for
many of the same reasons as in past years: as a return to statism and a threat to
economic liberty and private property. The fate of the new proposals remains
unclear. 58
The debate about water markets within Chile has gotten more sophisticated
in the last few years, as the issue has taken on greater national importance and has
become more familiar. The economic stakes have risen as demands increase, and the
Chilean news media have given more frequent coverage to water problems.
Government agencies have started to collect information about water rights
transactions, as officials marshal their arguments about the imgerfections of the
current market and hence the need to modify the legal framework. 9 Local university
researchers have begun to do studies and consultants to write reports. What is clear

Water Markets

71

to Chileans but often unknown to outsiders is how politicized this debate remains.
The Water Code is such a faithful and symbolic reflection of the larger neoliberal
model that most discussion of water rights and water markets is strongly colored by
deeper disagreements-about the Agrarian Reform, the military government, the
Chicago Boys, and so forth. People's claims about the performance of the water
market are closely related to their overall political views. Raising the ideological
stakes, of course, tends to simplify the arguments and prevent more empirical
evaluation.

CONCLUSIONS

Chile's recent experience with water markets has been mixed. The results
of the fifteen years following the passage of the 1981 Water Code illustrate both
strengths and weaknesses of the free market approach to water rights. Several of the
Code's provisions have been beneficial. Water users strongly support the increased
legal security of private property rights. In some agricultural areas this has
encouraged investment in more efficient irrigation technology at the farm level,
particularly in those parts of central and northern Chile which grow high-value fruit
crops for export. Stronger property rights have also helped to consolidate the
autonomy of local canal users' associations, which vary greatly in organizational
capabilities but in many places do a reasonable job of day-to-day water
management. Furthermore, in a dynamic economy the Code's private liberties and
decentralized decision-making make it easier to change the allocation and use of
waters. This flexibility is potentially an important advantage even if it has had fairly
limited effects so far. The Code may have slightly increased the activity of the land
market, although the importance of this has been exaggerated. 60
On the other hand, the Water Code's most directly market-oriented
mechanisms have been less effective. Despite some claims to the contrary, the bulk
of the evidence shows that water rights sales and transactions separate from land
have been routine but relatively uncommon in most of the country. They have
involved a small percentage of water users and relatively little reallocation of
resources, either within the agricultural sector or from one sector to another. Water
markets, in short, have been fairly inactive due to a range of transactions costs and
other obstacles. The one exception is the Limarf River basin in north-central Chile,
which is unique in having adequate storage capacity for irrigation thanks to
reservoirs built by the state.61 Moreover, the Code's market incentives to conserve
water have had even less impact. There has been almost no private investment in
more efficient water use in order to sell the resulting surplUS. Where such investment
has been made, it was for other reasons, and the surplus has not been sold. Since
1985 the government has had to subsidize private investment, contrary to the Code's
original purpose.
So has the water market been a "success"? The results are open to
interpretation. The fact that markets have been fairly inactive does not mean that
they have failed. On the contrary, a number of people have argued that water

72

Against the Current

resources were already allocated efficiently by the early 1980s, after the
restructuring of the agricultural sector and the end of land reform, so that few
transactions were needed. 62 This seems questionable in view of Chile's sustained
economic growth during the subsequent 15 years, which has included many changes
in land tenure and agricultural production, as well as the expansion of nonagricultural water uses. On the other hand, even a small margin of transferable water
might significantly increase economic efficiency.63 It can also be argued that the
very lack of sales shows that the market has worked, since water is evidently not yet
scarce enough to drive up the price. 64 We might expect some local markets to
become more active in the future as continuing economic growth increases demands
for water, and indeed this seems to be happening already in some areas near
Santiago and in the arid north.
However, we have seen that price signals for water in Chile are ambiguous
or contradictory. When combined with the many obstacles to trading and
transactions costs, these ambiguous signals weaken the market incentives that in
theory are the Water Code's main advantage. Part of the incentives' weakness is due
to the military government's original decision to privatize water rights without
imposing financial costs or other conditions on their owners. This decision was
politically understandable and its consequences for market operations may be
politically acceptable. Nonetheless, it underlines the larger point: market
mechanisms depend on their wider contexts and preconditions. They can never be
"neutral," automatic, or self-regulating, as some of their proponents claim. How they
work is influenced by legal rules, political decisions, institutional arrangements,
economic and geographic conditions, and cultural practices. Price signals are
ambiguous measures of economic value because they reflect underlying factors and
realities that are unavoidably complicated. 65 On the whole these results in Chile are
quite similar to the results of water markets in the Western United States, whose
complications in practice have been widely discussed. 66
The real lesson of the Chilean experience is that implementing free market
water policies is much more difficult than it may seem. The problem is not that
Chilean water markets have failed, but that their success has often been so
exaggerated. In fact, their results have been mixed, and probably negative in the
case of peasants. Furthermore, these mixed results apply to the aspect of the water
market that we would expect to be the most straightforward and effective, namely,
the exchange of irrigation rights within agriculture. The limitations of the market
mechanisms are more serious when it comes to more complicated problems such as
multiple water uses, river basin management, environmental protection, and conflict
resolution. In Chile these problems have been getting worse in recent years as
economic development has put growing pressures on water resources. The next
chapter argues that such problems are too difficult for free market solutions: they
can rarely be solved by a simple exchange of rights, and when private bargaining
breaks down, the ensuing conflicts highlight the need for legal and political
institutions beyond the market.

Water Markets

73

NOTES TO CHAPTER FOUR

1. See Matus (1986); Pereira (1991); and the citations in Chapter Three, Note 10. Older references are
Comite Interarnericano de Desarrollo Agricola (1966); Ministerio de Agricultura (1968). According to the
latter, in 1965 the nation's irrigated land consisted of 250,000 hectares in grains (mainly wheat), 300,000 in
other annuals, 550,000 in pasture, and 120,000 in fruit plantations and vineyards.
2. On Chilean agriculture in general, see G6mez and Echenique (1988); Jarvis (1985). On small agriculture
in particular, see Echenique and Rolando (1989), the source of the data cited in the text.
3. Regional agricultural data are taken from Candfa (1986); Grupo de Investigaciones Agrarias (1992A);
Marquez (1988); Sanhueza (1991). See also Dietz (1989); S. Rfos (1989); Rodriguez (1990).
4. Echenique and Rolando (1989). On changes in land tenure in the Refonn Sector, see the citations in Note
2 and also Echenique and Rolando (1991); Garrido et al (1990); Grupo de Investigaciones Agrarias (1979A),
(1979B); Jarvis (1988).
5. See Note 3 above.
6. On the forest sector, see Contesse (1990); Contreras (1988); G6mez and Echenique (1988); Faranda and
Parra (1992). On the Region's economy, see Boisier (1991); Intendencia de la Regi6n del Bfo Bfo (1991);
Sanhueza (1985); and citations in Chapter Five, Note 23.
7. See Candia (1986); Marquez (1988); Salgado et al (1992). The data on the Refonn Sector were provided
by Jose Vicente, Agricultural and livestock Service, Ministry of Agriculture/Region vrn, Concepci6n. Data
on water users also come from the DGA Water Users' Registers (Catastros) for the Bfo Bfo and Laja River
basins: see Direcci6n General de Aguas (1988), (1989), (1991A).
8. See CEPAL (1960); Peralta (1989A); Salgado et al (1992); Valenzuela and Salgado (1988). The situation
in Nuble Province is very similar but without the benefits of state irrigation projects. The Province's history
of small-scale, uncoordinated private development has made it common for several small canals to run
adjacent and parallel to each other, with seepage losses between them. See Arias (1980); Garrido (1983).
9. On agriculture in the Aconcagua Valley, see Comisi6n Nacional de Riego (1982); Grupo de
Investigaciones Agrarias (1991), (1992B); Korovk:in (1992); Martinez and Suvayke (1989); Naciones
Unidas (1980); Rodriguez and Venegas (1989); Suvayke (1990).
10. See preceding note.
II. Direcci6n General de Aguas (1993A).
12. Many Chilean rivers are legally divided into different stretches called "sections" (secciones), with the
uppennost section called the first, the next downstream the second, and so forth. These sections are treated
as separate rivers for purposes of allocating and distributing water rights, and rights-holders in one section
have no claim to waters in another. In other words, upstream sections have no obligation to downstream
sections, and thereby have the more secure water supplies. Each section can have its own vigilance
committee. I discuss vigilance committees in more detail in Chapter Five.

74

Against the Current

13. The first empirical study using these data was my own research, published in 1993 (Bauer 1993A); see
also Bauer (1995B) and (1997). Compiling information from the Water Rights Registers is laborious work.
The registers are bound volumes or archives, in which are recorded chronologically all registration and
transfer of title of water rights. One must read the entry for each transaction in order to distinguish between
water rights sales tied to or separate from land, because the registers' annual indices are unreliable. There are
also marginal notations, sometimes cross-referenced to other transactions.
14. The figures cited do not include over 100 exceptional sales made after 1986. After more than ten years'
delay, in 1984 the DGA granted the Region's largest canal association, Canal Laja, new contingent
(')unior") rights to add to its permanent rights in the Laja River. The canal association then disposed of these
rights in small increments to many of its members in order to rationalize and legitimize existing water
distribution. The canal's permanent rights are to 42 cubic meters/second and the contingent rights are to 13
cubic meters/second.
15. As in Los Angeles, the staffperson in charge of the Water Rights Registers in the Los Andes Real Estate
Title Office said that separate water rights sales were very rare, except in a few cases where expanding cities
have converted agricultural land to uroan uses, with the water rights sold to other farmers. Interview with
Virginia Brandt, Los Andes, October 1993.
16. See the DGA's Water Rights RegisterlRegion Vll, in Santiago. These figures include permanent rights
only. Prior to 1981 the state had granted almost 300 provisional rights in the Province, of which one third
were later recorded as definitive.
Of the over 500 applications filed with the DGA's Provincial Office in 1983-1992,30% were for
new rights and 65% were to regularize titles under the Water Code's first two Transitory Articles (see the
following section). Most of the regularizations took place in 1985-1990, showing a belated surge of local
concern to protect unregistered rights from possible future claims by others. Interview with Marcos
Saavedra, engineer, DGNBio Bio Province, Los Angeles, November 1992.
17. See the DGA's Water Rights RegisterlRegion V, in Santiago.
18. Hearne (1995); Hearne and Easter (1995). For more on the Limari River basin, see Confederaci6n de
Canalistas de Chile (1993). In 1996, a more detailed study of Limarf was begun by Ereney Hagigeorgalis, a
Ph.D. candidate in agricultural economics at the University of California-Davis.
19. Interviews with Eugenio Lobo, Gustavo Manriquez, Humberto Peiia, and Pablo Anguita, Santiago,
1991-1995. See also their unpublished documents: Anguita (1995); Lobo (1993); Manriquez (1995); Peiia
(1996).
20. Interviews with Fernando Peralta, President, Confederation of Chilean Irrigators, Santiago, 1991, 1995.
See also Peralta (1995).
21. See especially Rosegrant and Gazrnuri (1994); Rosegrant and Binswanger (1994). They rely mainly on
research by Renato Gazrnuri, who worked in agricultural affairs in the military government for several years
and is now a prominent conservative political figure in Chile. They provide some data indicating routine
water rights transactions in Santiago and in Nuble Province in Region Vll. It may be a minor point but they
get two key dates wrong: the Agrarian Reform Law was enacted in 1967 not 1966, and water rights were
made tradable in 1979 not 1976 (e.g. Rosegrant and Gazrnuri 1994, p.60). Others who have praised the
Water Code include Figueroa (1992), (1993) (like Gazrnuri, a former official in the military government);
Instituto Libertad y Desarrollo (1993A) (a center of neoliberal policy analysis associated with Chile's most

Water Markets

75

rightwing political party, Union Dem6crata Independiente (UDl), criticizing refonns proposed by the
Concenacion); Valdes (1993) (a Chilean World Bank economist who asserts that the water market has been
critical both to the flexibility of the land market and to the overall transformation of agriculture, without
citing any evidence); World Bank (1994) (containing a highly inaccurate and misleading description of the
Chilean Water Code aimed at persuading Peru to copy it). There was also an exchange of letters to the Editor
of The Economist magazine, from M. Thobani (author of World Bank 1994) and myself (2 September 1995,
16 September 1995).
The Bank's recent Policy Paper on Water Resources Management is somewhat more balanced:
it recommends privatization within an adequate regulatory framework, though placing emphasis on the
former (World Bank 1993). A later Bank publication, Rios and Quiroz (1995), broadly agrees with my
analysis in Bauer (1993A) and (1995B), while drawing more positive conclusions about the water market's
results.
22. The description of canal technology and irrigation practices in CEPAL (1960) is still accurate in much of
Chile.
23. Agurto (1988); Escudero (1990); Stewart (1967), (1970).
24. See Decree Law 2,603, Art. 7, and commentary by Dougnac (1989).
25. The person claiming title must apply to the DGA, including a technical report in his favor and allowing
affected third parties to object. The DGA then submits all of the material to the local courts for a ruling. If
the ruling is favorable, the claimant can then register his rights in the local Real Estate Title Office.
Transitory Article One is simpler, applying to owners whose water rights had once been registered but not
updated, and who have evidence to prove it.
26. My thanks to Carlos Carrera, Felipe Vial, and Jose Vicente of the Agricultural and Livestock Service for
explanations of this process. Interviews, Santiago, January 1992; Concepci6n, June 1992. See also Barrueto
(1986); Correa and Delaveau (1986); Urrutia (1989).
27. In Los Andes there were 575 regularizations in the seven even-numbered years from 1980 to 1992,
which can probably be extrapolated to a total of more than 1000 for the entire period, over 80% involving
the Agrarian Reform. See also Note 16 above.
28. See the Supreme Court decisions in Mozo con SENDOS (12 March 1985), Fallos del Mes, No. 316,
pp.33-38; Colegio de Ingenieros con Guzrruin (13 November 1990), Fallos del Mes, No. 384, pp.662-675.
See also Agurto (1988); Dougnac (1989); Montecino (1991).
29. The present head of the DGA, for example, argues that the real significance of the trading in the Elqui
basin (see text at Note 18) is that most of the sales involved paper titles that had been long unused, rather
than ''wet water." Interview with Humberto Pena, October 1995. See also Pena (1996). The courts have been
faced with a recent increase in cases about regularizing titles, which has generated some legal commentary.
See e.g.lnforme Constitucional No. 917 (17 November 1994), No. 1036 (18 May 1995), No. 1046 (1 June
1995), No. 1068 (6 July 1995), No. 1079 (21 July 1995).
30. See Gould (1988); Livingston (1993); and the citations in Chapter One, Note 3.
31. Interview with Fernando Peralta, President of the Confederation of Chilean Irrigators, Santiago, October
1991.

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Against the Current

32. See also Chapter Three. For other criticisms of the commodity view of water, see Brown et al (1982);
Brown and Ingram (1987); Maass and Anderson (1978).
33. Saliba and Bush (1987) make the same argument about the Western United States.
34. Interview with Rafael Del Valle, lawyer, Santiago, July 1992.
35. The figures on irrigated vs. non-irrigated land values, although approximate, were mentioned
independently by several lawyers and irrigation experts with experience especially in central Chile (Regions
V, VI, and XllI). The gap is somewhat smaller in Region vrn. I did not collect quantitative data on water
rights prices because of their wide local variations and intimate relation with local land markets, about which
there were no existing studies to build on. In theory, an economic analysis of the value of water rights in
Chile could be based on indirect measures provided by such differences in land values. Evidently, however,
such analysis would have to start with the land market.
36. Conversation with Michael Hanemann, Professor of Agricultural Economics, University of CaliforniaBerkeley, February 1996. Another example of willing sellers are some irrigators located at the lower ends of
canal systems, whose water often does not arrive due to transport and seepage losses. They may be able to
sell these paper rights to people in the upper part of the system, where the rights are still "wet."
37. See Chapter Three, Note 9.
38. According to a water expert at the United Nations Economic Commision for Latin America and the
Caribbean, the large potential for efficiency gains at the farm level explains much of the water market's
inactivity. Interview with Terence Lee, Santiago, September 1993.
39. Anguita (1995); Peralta (1989A), (1989B).
40. See Water Code, Arts. 16-18. The distinction is similar to that between junior and senior appropriation
rights in the Western United States.
41. See also "El riego por goteo ha sido mi mejor inversion," El Campesino, May 1979, pp.34-37. This
article in the National Agriculture Society's magazine describes a Los Andes fruit producer who had
invested in drip irrigation. He said that he had had no shortage of water beforehand, but that the investment
had been well worth it strictly in terms of improved yield. Also note that he made his investment even before
Decree Law 2,603 had been passed in 1979, obviously not worried by the supposed lack of security of
property rights to water.
42. Law No. 18,450. See Confederacion de Canalistas de Chile (1989); Comision Nacional de Riego (1991);
Grupo de Investigaciones Agrarias (1986); Peralta (1986); and two articles in El Campesino: "SNA:
Programa de Desarrollo Silvoagropecuario, Antecedentes y Proposiciones, 1984" (June 1984, pp.28-30), and
"Ley de Riego" (December 1985, pp.l4-16).
43. See Chapter Three, Note 50.
44. Water Code, Art. 148. See the case of the Maule River basin, described in Chapter Five.

Water Markets

77

45. I rely here on interviews and field-visits with irrigation experts, canal administrators, and the staff of
governmental and non-governmental organizations. These organizations were the Agriculture Ministry's
Institute for Agricultural Development (INDAP) and the NGOs AGRARIA, GIA (Grupo de Investigaciones
Agrarias), and SEPADE (Servicio Evangelico para el Desarrollo). Most of the field-visits were in Bfo Bfo
and Nuble Provinces in Region VID. See also Asociaci6n de Comunidades Agrfcolas del Choapa (1986);
Gandara (1989); Grupo de Investigaciones Agrarias (1986); Montecino (1989); SEPADE (1989). On the
situation of small farmers in canal associations before 1970, see Medina (1970); Thome (1979). For an
overview of "small agriculture" in Chile, see Echenique and Rolando (1989).
46. See Notes 4 and 26 and accompanying text.
47. Maffei and Molina (1992). Interviews with Genaro Millas and Rodrigo Garda, agronomists,
INDAPlRegion VID, Chillan and Concepci6n, November 1992.
48. See Rosegrant and Gazmuri (1994); World Bank (1994). Also see Note 21.
49. Proyecto de Ley sobre Modificaciones del C6digo de Aguas (2 December 1992). See Direcci6n General
de Aguas (1991B), (1991C), (19910), (1993B); Manriquez (1992). Since the Proyecto de Ley was notably
more modest than some of the earlier drafts in 1991-1992, the DGA evidently watered them down in
response to comments received.
50. See the speech of Manuel Valdes, the President of the National Agriculture Society, in Confederaci6n de
Canalistas de Chile (1986), pp.19-20; he also criticized water rights auctions for favoring non-agricultural
sectors, which can usually outbid irrigators. See also Del Valle (1989); and the conclusions of the Second
Nationallnigators' Convention, in Confederaci6n de Canalistas de Chile (1989). On the "use it or lose it"
(beneficial use) doctrine in the United States, see Chapter Three, Note 9.
51. Figueroa (1989); Instituto Libertad y Desarrollo (1993A). Speculation in new rights is more controversial
than in existing rights, because new rights are free and involve no risk or investment on the part of the
speculator. At least one person associated with the neoliberal Instituto Libertad y Desarrollo has said that
speculation without any risk prevents accurate price determination and therefore is unjustified.
52. Interview with Rafael Del Valle, lawyer, Santiago, July 1992.
53. Bitrful and Saez (1994); Blanlot (1992).
54. ENDESA (1993).
55. See citations in Note 49. I discuss the proposed river basin organizations in Chapter Five.
56. See Chapter Three.
57. See Direcci6n General de Aguas (1991C); Donoso (1994); ENDESA (1991 A), (1991B), (1993);
Figueroa (1992), (1993); Guzman (1993); Instituto de Ingenieros (1993); Instituto Libertad y Desarrollo
(I 993A), (1993B); Larenas (1991); Perinetti (1993); Sociedad Nacional de Agricultura (1993); and the
editorial, "Retroceso en Regimen de Aguas," El Mercurio, 19 February 1993, p.A3.

78

Against the Current

58. Indicaci6n al Proyecto de Modificaci6n del COdigo de Aguas (4 July 1996). See Carolina Gazitua, "Las
Aguas de la Discordia," El Mercurio (8 September 1996), pp.Bl, B12; "Canalistas de Chile Rechazan
Cambios a C6digo de Aguas," El Mercurio (15 December 1996).
59. See citations in Note 19.
60. Valdes (1993).
61. See Note 18.
62. Hearne and Easter (1995); Rios and Quiroz (1995).
63. Howe et al (1986).
64. Larenas (1991). Interview with Luis Gurovich, Professor of Agricultural Engineering, Catholic
University, Santiago, April 1993.
65. Conversation with Michael Hanemann, Professor of Agricultural Economics, University of CaliforniaBerkeley, February 1996.
66. See citations in Chapter One, Note 3.

CHAPTER FIVE

PRIVATE PROPERTY AND

RIVER BASINS:
WATER USE CONFLICTS, THE
MARKET MODEL, AND THE COURTS
River basins present one of the most difficult and complicated problems in
natural resource management: how to coordinate multiple water uses in the same
drainage. To deal with this problem requires sorting through conflicting uses which
involve different sectors of regional economies, where the stakes are often high. This
chapter examines how such problems have been handled under Chile's current Water
Code, with its strong free market principles. The free market approach to river basin
management relies on property rights to water that are private, exclusive, and
transferable. Water uses are to be coordinated through private bargaining, in a process
reminiscent of the Coase Theorem. As discussed in Chapter One, the Coase Theorem
states that bargaining among private property owners allocates resources more
efficiently than government regulation. I argue that the Chilean case highlights that the
overall legal and institutional framework is crucial to how markets work. Many
proponents of free market policies, particularly neoliberal economists, oversimplify
what is involved in several key processes that market forces depend on but cannot carry
out themselves: defining property rights, resolving conflicts, and dealing with
externalities.
Because the 1981 Water Code's main concern was irrigation, it said little
about mUltiple water uses or river basin management. The exception was nonconsumptive water rights, and even there the Code did little more than establish their
existence. Coordinating different uses thus depends on the Code's general logic and
institutional structure rather than specific provisions; that is, it depends on private
bargaining and exchange among property owners. These arrangements also reflect the
1980 Constitution and its model of broad private economic rights, limited state
regulation, and a stronger judiciary. The Water Code describes several kinds of private
water users' organizations and grants them autonomy in day-to-day management, but
all of them were designed for irrigation purposes. The state administrative agency, the
DGA, plays a "subsidiary" role and has little authority to intervene in water use
conflicts. Instead, when private bargaining fails, the conflicts go to the ordinary civil
courts, which have the expanded powers given to them in the new Constitution (see
Chapter Two).

80

Against the Current

Over the past fifteen years, river basin problems in Chile have gotten worse as
economic growth has increased pressures on water resources. Demands for water have
risen in agricultural, urban, industrial, and hydroelectric sectors. Due to the nature of
the resource-water's mobility and interconnectedness-property rights are inherently
bound up with third-party effects, or what economists call externalities. This means that
private uses of water and private transfers of water rights have impacts on other water
users and on the environment; that is, there are costs and benefits external to the
original action or transaction. Most water conflicts are about third-party effects and
externalities. In Chile there are many such conflicts, involving urban and industrial
water pollution, competition between irrigation and hydroelectricity, water transfers
from one basin to another, and the environmental impacts of dams. To deal with these
problems requires determining how to allocate the costs and benefits of the water uses
in question, which means that resolving conflicts involves defining property rights.
Market sales and exchanges are limited mechanisms for coordinating overlapping
claims to shared resources over a long time period. When private bargaining fails to
resolve these conflicts, the state regulatory agencies and courts must contend with
them.
In this chapter I argue that multiple water uses and river basin management
have revealed critical flaws in the current legal and institutional framework. Some of
these flaws are specific to the Water Code. Others reflect the structure of the 1980
Constitution and hence apply to many other areas of environmental policy and
regulation. The chapter begins by describing the general behavior of the courts in water
rights cases. I look briefly at how the local courts handle irrigation disputes in one of
the study areas, around Los Angeles in Bio Bio Province. I then discuss general
tendencies in the higher courts, focusing especially on judicial review of the DGA, by
analyzing the decisions of the Appellate Courts and the Supreme Court from 1981
through 1995. The bulk of the chapter describes inter-sectoral relations in two of the
country's most important river basins, the Maule and the Bio Bio, in central and southcentral Chile. In both cases the emphasis is on the issues raised by non-consumptive
rights and the tension between irrigation and hydroelectricity, although other regional
water problems are included as well. The chapter concludes with a look at the recent
debate over proposed reforms of the Water Code's approach to river basins. The
reforms were part of the package that the Concertacion government sent to Congress in
late 1992, as discussed at the end of the previous chapter.

JUDICIAL BEHAVIOR IN WATER RIGHTS CASES

Legal expertise in water rights issues is scarce in Chile. Few lawyers or judges
know much about the Water Code and even fewer are familiar with water use in
practice. The subject has rarely been taught in Chilean law schools and has never been
lucrative enough to attract many lawyers in private practice. This lack of expertise is a
bit surprising in a semi-arid country where irrigation is historically so important and
water disputes are so common in local folklore; it is a striking contrast to the Western
United States, another semi-arid region, where water lawyers abound and prosper. In

River Basins

81

Chile these disputes have generally been small scale disagreements between
neighboring farmers, more readily settled informally or through private canal
associations than by involving lawyers or courts. Irrigation engineers have been the
professionals traditionally most knowledgeable about water rights in Chile. This has
begun to change in the 1990s, as the economic stakes involved in water rights and uses
have risen.
Water rights conflicts enter the legal system through either the local civil
courts or the regional Appellate Courts. (The Appellate Courts follow the nation's
administrative division into regions.) The lower courts have had no role in issues of
multiple water use. They have acted almost exclusively within the agricultural sector,
regularizing water rights titles and ruling on disputes between neighboring irrigators.
Within their ambit, these courts may handle water rights issues more effectively than
the higher courts, because they are closer to the concrete problems and have less
tendency to narrow and formalistic reasoning. Inter-sectoral conflicts, however, go
straight to the Appellate Courts and often to the Supreme Court afterwards. In this way
the water cases with broadest scope and implications are decided by the courts with the
greatest distance from the substantive issues.

Local Civil Courts in Los Angeles, Province of Blo Blo

The 1981 Water Code created a new legal mechanism to settle water rights
disputes called the amparo judicial de aguas ("amparo" means "shelter" or
"protection").! The judicial amparo replaced the administrative amparo of the previous
Water Code, which had given the DGA jurisdiction over such disputes. The procedure
is simple and is open to any owner or "presumed owner,,2 of water rights, allowing that
person to petition the local judge for a court order against anyone interfering with those
rights. After the amparo has been filed, the judge has five days to notify the defendant,
do a field inspection, and request a technical report from the provincial or regional
offices of the DGA. DGA staff prepare the report on the basis of field visits and
documentary records. The plaintiff must pay for both judicial and DGA field visits,
although the costs may sometimes be waived. The judge can order immediate relief for
the plaintiff but may not make a more declarative judgment, because the procedure was
meant to be a rapid, emergency measure only. In this sense the amparo is very similar
to the recurso de protecci6n, which gives the courts broad powers and little time to rule
on immediate conflicts. In practice, however, the recurso de protecci6n has functioned
to make substantive declarations rather than merely emergency orders (see Chapter
Two). Some Chilean lawyers have criticized the amparo de aguas for being
inconsistent in the same way as the recurso: despite being intended for temporary
decisions, to be effective these procedures have to delve into the meat of the dispute?
Research in Los Angeles indicates that local courts may do a reasonable job
of deciding amparos, but they are undoubtedly slow. Only a few amparos were filed
annually in an area with several thousand water users, making a total of 42 in the First
and Second Civil Courts from 1982 through 1992. Of the 29 cases whose archival
records were available, 18 were brought to completion, in an average of almost six

82

Against the Current

months each.4 In most cases the judge did a field inspection within a few weeks. In
nearly all cases the DGA did a report, though it was often delayed for months because
of a shortage of staff or because plaintiffs failed to cover the expenses in advance as the
DGA required. The judges were often able to sort through the concrete problems with
little formalism. However, they depended heavily on technical help from the DGA and
generally followed the agency's recommendations.
A few examples illustrate typical amparos. In a 1985-1986 case, the plaintiff
claimed that the defendant was illegally pumping water from a shared canal. Within a
week both the judge and the DGA's provincial office had made field visits and
confirmed the plaintiff s description of the facts. Several weeks later the defendant
showed evidence that he was temporarily renting water rights from another member of
the canal, and a second DGA visit found that the defendant was actually pumping less
water than the amount to which he was entitled. The court rejected the amparo six
months after it had been filed. The judge refused to sanction the defendant for missing
an earlier deadline, stating that amparos were meant to be a flexible procedure, and he
ruled in passing that the Water Code clearly permitted such rental transactions. 5
In a 1989-1990 case, the plaintiff claimed that the defendant was re-routing a
shared canal (ditch) through sandy soil, which would cause higher seepage losses. At
first the plaintiff wrote to the DGA's regional office, which replied that it had no
authority over such problems and that the rights-holders involved had to settle it
themselves or else go to court. The judge inspected the site two weeks later but reached
no conclusions. Two months later the DGA reported that the new canal was losing
water and causing increased erosion and sedimentation on the plaintiff s land. The
agency recommended a return to the older canal. After another two months the judge
approved a settlement between the two parties: the defendant argued that the changes
were necessary to drain and get access to half of his land, while the plaintiff said that he
had not yet suffered any damages. They agreed to maintain the older canal as a back-up
in case the plaintiff was injured in the future. 6
In a 1990-1992 case, the plaintiff claimed that his water supply was being cut
off by the defendant whose land the canal crossed, and who refused to let the plaintiff
onto her land to clean the weeds out of the canal. The DGA's regional office made a
field visit which confirmed the plaintiff s description but could not verify that he had
any water rights. The judge eventually ruled for the plaintiff on the basis of his own
field inspection: he found the plaintiffs canal works to be clean, well-maintained, and
at least ten years old, and therefore granted him standing based on presumed ownership
of water rights. The judge ordered the defendant to remove the obstacles to the water's
flow and to allow the plaintiff access to clean out the canal?
The amparos are an inefficient way to settle routine water rights disputes.
Although the local courts did well in these three cases, they were slow, which is
characteristic of the Chilean legal system. Judges depended heavily on the DGA's legal
and technical expertise and administrative resources, an additional source of delay.
Furthermore, it is evident that in practice the amparos have often served as declarative
judgments rather than emergency measures. Because the court procedures are slow,
costly, and unpredictable, water users try to avoid them. Many irrigation disputes are
settled instead by local canal associations. The gap between the courts' authority and

River Basins

83

the DGA's staff and expertise has been hard to bridge, but there are no likely
alternatives. Both creating special water courts and strengthening the DGA's
adjudicative powers would be politically controversial and probably unconstitutional.
The gap is also a problem in regularizing water rights titles, since the Water Code's
Transitory Articles rely on the cooperation between local courts and the DGA (see
Chapter Four).

The Appellate Courts and the Supreme Court

The higher courts' treatment of water problems has been ambivalent and
somewhat erratic. From 1981 through 1993, there were about 80 higher court decisions
published about water rights or the Water Code; I also analyzed five decisions that
were unpublished. About 60% of the cases were brought as recursos de proteccion, far
the most common procedure. The recurso is the new judicial action discussed in
Chapter Two and mentioned just above. The rest of the cases were divided equally into
more conventional appeals, on the one hand, and the specialized appeals provided in
the Water Code, on the other. The Code established a recurso de reclamacion ("suit to
protest"), which allows people to challenge DGA decisions in the Appellate Courts
(Art. 137). Overall, half of the cases involved a challenge to some action of the DGA.
A majority of Appellate Court cases were appealed to the Supreme Court, but less than
one-fourth of the decisions were reversed. 8
In many cases Appellate Courts and the Supreme Court have been zealous to
defend private property rights, and vigilant for errors or abuses by the DGA. For
example, they have revoked new water rights granted by the DGA when existing
rights-holders showed that they were injured or that the DGA had given them no
chance to object.9 In other cases, the courts have forced the DGA to grant rights by
declaring its reasons for refusal unfounded. \0 When in doubt, the courts have tended to
give full constitutional protection to water rights whose legal status is quite debatable.
Such rights include those which have never been legally registered, 11 rights that were
provisionally granted under the 1967 Water Code but never made definitive,I2 and
newly granted rights which the government tried to revoke because there had been
administrative errors. \3
Despite these outcomes, the higher courts have supported the DGA in twothirds of its conflicts with private parties. Several factors explain this pattern, which are
illustrated in the case studies described below. First, judges are reluctant to intervene in
technical matters beyond their competence, and often defer to the agency's specialized
expertise. 14 Second, in a number of cases judges have adopted highly formalistic
arguments in order to avoid ruling on substantive policy issues. This tendency has been
strongest in the Supreme Court, which is farthest removed from the facts of any
particular case. Third, the DGA has proven itself very careful to obey the limits of its
regulatory powers and duties. The agency's staff are so wary of being scrutinized by
the courts and by the government's Controller General that they follow a strict and
legalistic interpretation of their functions. IS The DGA's administrative behavior, in

84

Against the Current

other words, is more likely to be passive than active, which eases the burden of judicial
review.
The combination of administrative and judicial formalism has worked
reasonably well in routine matters. However, it has been much less functional when
faced with more difficult problems, such as river basin conflicts. The system has tended
to produce a partial vacuum of decision-making, which, not surprisingly, has been
filled by those interests with more political influence and the resources to act on their
own behalf in various arenas.

NON-CONSUMPTIVE RIGHTS AND RIVER BASIN MANAGEMENT

The Water Code's major innovation regarding multiple water use was the
creation of a new kind of property right: the "non-consumptive" water right. A nonconsumptive right allows its owner to divert and use water as long as the water is
returned unaltered to its original channel (Art. 14). The goal was to encourage
hydroelectric power development in the mountains and foothills of the Andes without
harming the existing rights of irrigators downstream in the central valley. By 1981,
most of the surface water resources in northern and central Chile had already been
allocated as consumptive rights. (Until then all water rights were assumed to be
consumptive even if they were used for power generation, which reflects the
predominant influence of irrigation in Chilean water law.) By creating a new category
of rights, the government aimed to intensify the use of water resources without having
to compensate the owners of existing rights. It was a step toward more integrated water
management, and showed foresight about the growing importance of hydroelectricity. 16
Unfortunately, that foresight was limited, and the Water Code's rules about the
relation between consumptive and non-consumptive rights are brief and ambiguous.
Coordinating the two has been more difficult than expected and has revealed flaws in
the Code's language and institutional structure. The first problem is that it is not clear
whether either type of right has preference in case of conflict. The Code generally does
not recognize any priorities among different types of water uses, for example when
new rights are granted; private owners and the market are to determine how waters are
used. On the other hand, several provisions suggest that non-consumptive rights are
subordinate to more traditional consumptive uses. The most important such provision is
Article 14, which defines non-consumptive rights and requires that "the extraction or
restitution of waters shall not damage the rights of third parties to the same waters, in
terms of their quantity, quality, substance, opportunity of use, and other details." Other
articles declare that consumptive rights can be freely bought and sold without regard to
the effect on non-consumptive rights, while the latter face extra restrictions on
exercising rights-of-way over others' property. Article 97 imposes other obligations on
the owners of non-consumptive rights: in exercising a right-of-way, they cannot detain
the flow of water without permission from the owners of consumptive rights;
moreover, they must avoid sudden surges and reductions of flow, and they cannot
prevent consumptive owners from modifying their canals or closing them for
maintenance.17 Nonetheless, even in Article 14 the Code fails to offer any further

River Basins

85

guidelines about the rules for using non-consumptive rights. Instead it provides that
these rules be determined individually for each right when it is formally granted or
acquired.
The second problem is that the rules for decision-making within vigilance
committees were biased in favor of non-consumptive rights. Vigilance committees
(juntas de vigiiancia) are the largest water users' organizations in Chile. They are
essentially federations of the individual canal associations that take water from the
same river or section of a river.18 The committees' main function is to enforce the
distribution of waters to the different canals according to their rights. Traditionally they
have been composed almost entirely of irrigators. Under the present Water Code,
however, the owners of non-consumptive rights are also members of vigilance
committees. Important decisions within the committees are made by majority vote of
the members, who cast votes in proportion to their water rights. But the Code's drafters
apparently failed to notice that because there is a separate right for each nonconsumptive use of the same water, the non-consumptive rights will outnumber and
outvote the consumptive rights in any river that has more than one hydroelectric plant.
(The bias in voting rights seems to have been inadvertant rather than deliberate, though
it is hard to know for certain.) In practice, the vigilance committees remain dominated
by irrigators who in self-defense tend not to invite the non-consumptive members to
meetings. The power companies, in turn, deny the committees' authority over them. 19
The conflicts between consumptive and non-consumptive rights-holders have
been sharpest in the management of dams and reservoirs. Electric power generation
and irrigation have conflicting seasonal demands for water: power companies want to
store water in the summer to supply high national electric demand in winter, while
farmers want to store water in the winter for use during the summer growing season.
The will to cooperate is undermined by a deeply rooted, single-use mentality about
water rights. Irrigators tend to consider a river "theirs" because it has long supplied
their canals, regardless of the later appearance of other water users and rights-holders.
Power companies, on the other hand, have built and paid for dams and reservoirs and
take for granted their freedom to manage the works as they choose. The Water Code's
ambiguity about the relationship between the two uses reflects the fact that when it was
drafted, there was little discussion of the future privatization of ENDESA. Before its
privatization in the late 1980s, there seemed little need to take regulatory precautions
because the dams were state-owned and water management was under state control.
The military government did not modify the Water Code when it privatized ENDESA
and the company's water rights were included among its assets. ENDESA was created
by the government in 1944 to develop a nation-wide system of generating and
distributing electric power. Since privatization it has been one of Chile's largest and
most profitable corporations,z
Finally, for certain key reservoirs the rules for coordinating irrigation and
hydroelectric uses were established decades before the current Water Code. In both the
Maule and the Bio Bio River basins, the state agencies in charge of irrigation and
electric power development-the Irrigation Directorate of the Ministry of Public
Works and ENDESA-signed formal agreements to convert a natural lake into a
reservoir, and to cooperate in building, financing, and operating the necessary storage

86

Against the Current

works. The agreements are still in effect and have provided some stability in river basin
management, although their wider political and economic context has become more
complicated in the past ten to fifteen years.

HYDROELECTRICITY AND RIVER BASIN CONFLICTS IN SOUTH

CENTRAL CHILE
Chile relies heavily on hydroelectric power, taking advantage of favorable
geographic conditions. Rain and snow fall in the Andes Mountains that run north-south
for thousands of kilometers along the border with Argentina. Rivers are short and steep:
they drop fast out of the mountains and foothills, where hydroelectric potential is
highest, and move west across the narrow central valley before cutting through the low
coastal range to the Pacific Ocean. Hydro power supplies about 75% of the national
electric grid, the Central Interconnected System (Sistema Interconectado Central, or
SIC). The SIC covers Regions ill through X: it has 75% of the nation's total generating
capacity and serves 90% of the population. The other 25% of national generating
capacity pertains to a separate grid and supplies several large mining operations in the
northern desert, Regions I and II, where lack of water forces reliance on thermoelectric
plants burning fossil fuels. There are also small isolated systems in the far south,
Regions XI and XII. Nonetheless, except for Lake Laja, Chile's reservoirs have
relatively little storage capacity. Most hydro plants are basically run-of-the-river (called
de paso or de pasada), and even the bigger reservoirs can store only a fraction of the
annual flOW. 21
Two river basins in south-central Chile have produced over half of the SIC's
electricity since the 1970s, the Laja in Region Vill and the Maule in Region VII. The
Laja River is the largest and northernmost tributary of the Bio Bio River, and hence is
part of the Bio Bio River basin. By the late 1980s the Laja had three hydro plants
producing 30% of the SIC's total power, and the Maule River basin had four plants
producing 25%, with a fifth under constuction. The Bio Bio River itself had no dams
until the Pangue project was completed in the mid-1990s.z2 In the following discussion
of these river basins, I include the Pangue Dam in the Maule case study because of the
legal issue of non-consumptive rights.
Please note that when I refer to "irrigators" throughout this chapter, I mean
medium to large agricultural landowners rather than peasants. It is the larger farmers
who dominate the canal associations and vigilance committees, and who have the
resources to go to court to defend their interests against other, non-agricultural water
users. These irrigators are commercial farmers producing for the domestic market,
since neither the Maule nor Bio Bio basins have been part of the fruit boom.

The Bio Bio River Basin: Multiple Uses and Coordination Problems
The Bio Bio River is prooably the most economically important river in
Chile. It is the country's second largest and has the highest hydroelectric potential. The

River Basins

87

river dominates Region VIII (also known as the Region of the Bio Bio) and supplies
four major water uses: irrigation, 'hydroelectricity, industry, and urban consumption.
The metropolitan area of Concepcion, the Region's capital city, is Chile's second
largest urban and industrial center, after Santiago. Concepcion is located at the river's
mouth and has three quarters of a million people (including the neighboring city of
Talcahuano). The Bio Bio basin is larger than most Chilean river basins because it
drains an area on the eastern side of the high Andes before turning west to drop through
the foothills to the central valley. It is a local exception to the general rule that the high
cordillera forms the border with Argentina. 23 (See Map 2.)
The Bio Bio's northernmost tributary, the Laja, was the country's biggest
energy producer for years. The Laja River begins at a mountain lake of the same name
that was converted to a dual-purpose reservoir by ENDESA and the Irrigation
Directorate, after signing an agreement in 1958.24 ENDESA built three power plants
below the lake's outlet: Abanico was finished in 1948, EI Toro in 1973, and Antuco in
1981. They amounted to nearly half of the SIC's generating capacity until ColbunMachicura came on line in the Maule River basin in the mid-1980s, which caused the
Laja's share to fall to about 30%. Because Lake Laja is the only reservoir in Chile big
enough to provide multi-year storage, it serves as the "reserve battery" for the entire
national grid. This is especially critical in a country with such heavy dependence on
hydroelectricity. The lake's strategic importance is reflected in national electric rates,
which since the early 1980s have been calculated by a model based on the lake's
marginal costs of operation?5 Lake Laja is managed by ENDESA according to the
rules established in the 1958 agreement. The lake's importance for irrigation is
discussed later this chapter.
Most of the Bio Bio River's hydroelectric potential lies in the upper basin, in
the mountains and foothills. Agriculture is the main water user in the middle basin, the
central valley, where canal systems irrigate some 175,000 hectares of land (see Chapter
Four). Other major water users in this area include forest and agricultural industries;
there are several large pulp and paper mills concentrated where the Bio Bio is joined by
its main tributaries, the Laja and Vergara Rivers, and there are plants to process sugarbeets and dairy and meat products in and around the city of Los Angeles. Then the
lower basin narrows as the river cuts through the coast range to meet the ocean at
Concepcion. In its lower reaches the river is the sole water supply for the city and for
major industries such as steel and petrochemicals. Since the 1960s the lower Bio Bio
has been seriously polluted by industrial and urban wastes, coming especially from the
pulp and paper mills upstream and from the metropolitan area near the river's mouth.
Because water quality regulation has long been ineffective, the Laja River has provided
the only relief for the lower Bio Bio by diluting the pollution with large flows of clean
water?6

The Laja River Auction and its Consequences

Region VIII's first major conflict over multiple water use was triggered by a
proposed inter-basin transfer. The conflict began in 1984 when two companies in the

88

Against the Current

,,-,~0-,-"-'\

~
Region VII

North

"--

c-, :_~
)

-.

Region VIII

. z
~\
I
L,,

E-c

~)

l.

3 Z"

\.'
/'

/'

---,""\..\

I, <

'.

\
<r. ",
Region IX
,/

Hydroelectric Dams & Power Stations:

1 - El Toro . Abanico. Antuco

2 - Pangue
3 - Ralco

Scale

Boundaries

50km

Map 2: Bio Bio River basin

..)

International ____ _
Regional ___ _

River Basins

89

forest industry applied for new consumptive water rights in the Laja River. Both
companies planned identical projects to transfer water northward out of the basin to a
future hydroelectric plant on the Itata River. The point of diversion was to be on the
northern bank near the town of Tucapel, opposite the headgates of the Canal Laja on
the southern bank. The Canal Laja is the region's largest, as described in Chapter Four.
Because there was not enough water to satisfy simultaneous applications, according to
the Water Code the DGA had to hold an auction for the available rights (see Chapter
Three). As a result the DGA became the focus of debate.
The proposed transfer was strongly opposed by many downstream water users
in the Bfo Bfo basin. Opponents included local irrigators and canal associations, the
regional business and university elite in Concepcion, and the regional offices of two
other government agencies, the National Services for Sanitary Works and for Tourism.
Opponents protested that the transfer would increase the concentration of pollution in
the lower Bfo Bfo and dry up the famous Saito del Laja waterfall. The falls are a
dramatic sight visible from the country's main north-south highway, and therefore seen
by the thousands of Chileans who drive south every year for summer vacation.
Irrigators protested the threat to their water security. Their leading representative, the
Association of the Canal Laja, feared being caught in a "sandwich" between two big
water projects that were both out of its control: ENDESA's power plants upstream and
the new diversion across the way.
The DGA studied the situation and tightened some of the conditions for the
new rights, but decided to go ahead with the auction in November 1985. The conditions
were that the rights could be used only during the winter rainy season and that a
minimum flow of 30 cubic meters per second had to be maintained at the Laja Falls. At
the last moment several business and university interests in Concepcion filed a recurso
de protecci6n against the DGA, claiming that the auction violated their constitutional
right "to live in an environment free of contamination." Although this right can be
defended by a recurso de protecci6n, it is more restricted than stronger constitutional
rights such as property and economic freedom. In view of the restrictions it is not clear
why the plaintiffs chose not to assert those other rights as well. 27 The DGA responded
that it recognized the problem and therefore had tightened conditions on the new rights,
but that the agency had no regulatory power over pollution control. That authority
belonged instead to the National Health Service and to municipal governments. In
consequence, the DGA argued that it was required to carry out the auction. Far from
acting "arbitrarily and illegally," the agency was holding strictly to the letter of the law
by refusing to exercise any expert discretion to call the whole thing off, even in the face
of unresolved and worsening water quality problems. 28
Half a year later, both the Appellate Court of Santiago and the Supreme Court
rejected the recurso and fully supported the DGA's position. The Courts' reasoning
was entirely formalistic and showed their reluctance to get involved. They ruled that
the DGA's actions in keeping strictly to the law had been neither "arbitrary" nor
"illegal," and that since there were no procedural errors the judges were not required to
probe the substantive constitutional issues. In practice, the suit served the plaintiffs'
purpose by buying them time to negotiate a political solution. The Minister of Public
Works intervened and eventually the two forest companies agreed to drop the projects

90

Against the Current

in the interests of good public relations, since both were heavily invested in the region's
economy. However, it was a troubling sign of how administrative formalism could
combine with judicial formalism to sidestep a tough problem. 29
The affair aroused widespread public concern in the Bfo Bfo Region.
Residents suddenly became aware of how much the region's economy and way of life
depended on its water resources, while realizing at the same time that the key decisions
were made in Santiago, not Concepcion. Beginning in 1986, the region's leading actors
in public and private sectors took steps to better coordinate water uses at the river basin
level. Business and professional associations, government agencies, and universities
organized a series of meetings, conferences, and other events to foster public education
and debate?O They wanted better basinwide water management both to reduce local
problems and to assert regional control against Santiago.
The first concrete effort was organized by the Regional Development
Council, an organization established in the 1980 Constitution and dominated by the
private sector. The Council created an advisory committee to study the problem and
propose a solution. The committee was made up of two local university experts and
two regional government officials, one from the Ministry of Agriculture and the other
the regional head of the DGA. The committee members rejected a state-centered, topdown approach-they referred to the Tennessee Valley Authority-as politically
impossible and incompatible with the neoliberal model. Instead they recommended
creating a private non-profit organization to "coordinate and administer" different
water uses across the entire river basin. The new organization would be directed by a
board representing the basin's major public and private interests in water use, although
the board's composition and internal structure were not specified. The organization
would have no executive or enforcement powers and would rely on voluntary
compliance by water users. The hope was that such compliance would be widespread
because of the organization's strong private sector backing. 3!
Meanwhile, the DGA's regional office in Concepcion undertook a related
effort: the ambitious task of signing up all of the Bfo Bfo basin's water rights owners.
This was a crucial step towards creating any new voluntary organization of water users,
whatever shape it finally took. The effort was actively promoted by the DGA's regional
director, a member of the advisory committee, and was funded in part by local cities
and pulp and paper companies. The DGA hired a consulting engineer and divided the
Bfo Bfo basin into seven sub-basins, each of which was to have its own new vigilance
committee, since the basin had no existing committees. The vigilance committee was
chosen as the model because it has the largest scope of the water users' organizations
defined in the Water Code, of which the canal associations are generally most
important. In 1989 the consultant travelled throughout the basin to meet with water
users and try to persuade them that forming the committees would help prevent future
conflicts like the Laja River auction. This would require many users to register their
water rights for the first time, since only the owners of legalized rights could join such
organizations.32
In the end, however, both efforts ground to a halt. Neither the new basin
organization nor any of the seven vigilance committees were ever created?3 The efforts
were not fruitless since they raised regional awareness and improved communication

River Basins

91

about river basin issues. Nonetheless, the failure to achieve more concrete results
indicates the problem of relying so heavily on voluntary private bargaining. Once the
immediate threat of an out-of-basin transfer had passed, there was little external
pressure to unify conflicting local interests. Many water users refused to voluntarily
submit themselves to the authority of a new and unknown organization, fearing that
they would lose more than they would gain. For example, irrigation and agro-industrial
interests failed to send their representatives as agreed to key organizational meetings.
The management of one of the forest industries wrote the DGA that they supported
voluntary coordination but no additional regulation nor the creation of a new
organization. Similarly, ENDESA cooperated but kept a low profile. 34
Furthermore, the vigilance committee had proven an awkward model for river
basin management. The committees' traditional function has been to distribute
riverflow to the headgates of different canals. They were neither prepared nor legally
empowered to monitor or control their members' water pollution, nor to modify the
timing of distribution so as to improve water quality. The experience led the DGA's
regional director to propose reforming the Water Code to strengthen the vigilance
committees. 35 Finally, wider national political conditions undermined the organizing
efforts. Chilean politics became increasingly tense and uncertain as the country geared
up for a plebiscite in October 1988 on whether to approve eight more years of General
Pinochet's rule as President. After Pinochet lost the plebiscite, the country prepared for
democratic elections in December 1989 and the transition to civilian government in
March 1990. Under these conditions people preferred to lie low and await events rather
than commit to bold action to solve complicated water problems?6
The controversy also helped to establish a new institute of environmental
studies at the University of Concepcion. The Centro EULA (short for Europe-Latin
America) was a cooperative project between the University of Concepcion and a group
of Italian universities. The Bfo Bfo River basin was chosen for a pilot project which
would later be repeated in other Latin American river basins. The Center's initial goal
was to carry out a three year, multi-disciplinary inventory and study of the basin's
natural resources. It was to conclude with recommendations for policy and then
continue to function as a center of academic and non-academic environmental research.
The Center began work in 1990 and played a vocal role in the subsequent water
conflicts discussed below?7

Multiple Uses of Lake Laja

The next mUltiple use conflict heated up in 1990 and again involved Lake
Laja and the Laja River. According to their 1958 agreement, ENDESA and the
Irrigation Directorate each have rights to use specific shares of the lake's reserves,
depending on the season and the water level. ENDESA manages the lake and must
release a minimum flow to protect the owners of existing water rights downstream, of
which the Canal Laja is the most important. Downstream rights-holders are not parties
to the agreement, however, and have no rights to or control over the lake, as though the
river were separate from the lake that gives it birth?8 For many years ENDESA has

92

Against the Current

made full use of its share while the Irrigation Directorate left its own reserve
untouched. In the 1950s and 1960s the Directorate designed the "Plan Laja" to exploit
its share of the lake. The plan was to build canals heading north and south from the
Laja River, the former to irrigate land in the ltata River basin (the precursor of the
Canal Laja-Diguillfn, discussed below), and the latter to water the whole area south to
the Bfo Bfo.39 These plans were not realized before the coup in 1973, however, and
until 1990 the military government placed a moratorium on big state irrigation projects,
as discussed in Chapters Three and Four.
In 1988-1991, central Chile suffered a three year drought which severely
affected all water uses. As the rivers and reservoirs dried up, ENDESA and other
power companies had only two alternatives to meet national electric demand: to turn to
more costly coal and oil-burning generators and to draw down Lake Laja, the nation's
reserve battery. The downstream irrigators of the Canal Laja-the region's largest and
most influential canal association, which often spoke for smaller canals as well-grew
increasingly worried about how much water ENDESA was releasing from the lake to
generate power. In the summer of the third year of drought they filed a recurso de
proteccion against ENDESA. The irrigators had no say over the lake's operation since
they were not parties to the 1958 agreement, but they argued that by overdrawing the
lake ENDESA was threatening the security of their rights in the river. They were
protesting future water shortages, not present ones; on the contrary, in the short term
ENDESA's increased use of the lake had caused larger flows in the river below. The
courts dismissed the recurso for lack of evidence that ENDESA had in fact violated the
terms of the agreement. The immediate problem disappeared when the drought ended a
few months later, but it had been made clear that, of the lake's different purposes,
energy production was the national priority. According to staff of the Canal Laja, one
reason that the Laja River has no vigilance committee is that it would be a futile
endeavor without control of the "faucet" of the lake above.40
Nevertheless, soon after taking office in 1990 the Aylwin government
approved plans for large state irrigation projects in several parts of Chile. Unlike the
military government, the Concertacion favored building and financing such projects in
order to promote rural social and economic development. This position was influenced
by the availability of funds from the Japanese government and the World Bank. One of
the projects would finally use the state reserve in Lake Laja. Like the Plan Laja in the
1960s and the proposed hydroelectric diversion in the 1980s, the new canal would take
water from the north bank of the Laja River opposite the Canal Laja's headgates, near
Tucapel. The water would flow north out of the Laja and Bfo Bfo basins to add to the
Diguillfn River and other tributaries of the Itata River; hence the project is called the
"Canal Laja-Diguillfn." It would irrigate 63,000 hectares in the Itata basin; 48,000 for
the first time, and 15,000 whose water security would increase from 25% to 85%.41
The Canal Laja-Diguillfn has been highly controversial and has led to bitter
conflict between the neighboring Provinces of Nuble and Bfo Bfo. (The Itata basin
roughly corresponds to Nuble Province and the Laja basin to Bfo Bfo Province.) In
addition to the Irrigation Directorate, the supporters of the project have included most
people who favor agricultural modernization in Nuble: farmers, related agro-industrial
and commercial interests, and local government officials. They argued that lack of

River Basins

93

water has limited the area's agricultural development in the past and will block its
future transformation-that is, the shift to producing higher value crops instead of
grains and other annuals, in response to international competition. The Irrigation
Directorate said that the canal was feasible because its studies showed that there was
enough water available that prior rights in the Laja River would not be harmed. The
project would combine water from three sources: (1) the state's reserve in Lake Laja, to
be released downstream to the new canal's headgates; (2) new contingent water rights
in the Laja River, to be granted by the DGA; and (3) a number of unused streams in the
Itata basin. The Directorate insisted that in times of shortage the pre-existing rights in
the Laja River would have priority over the new canal. 42
Opposing the project were most of those who had opposed the Laja River
auction in the mid-1980s. The urban and industrial interests of Concepcion have been
prominent among them, worried as always about water pollution in the lower Bfo Bfo
and hence about how much Laja River water arrives to dilute it. The canal's proponents
in Nuble Province recognized this problem but argued that they should not be the ones
punished for poor regulatory enforcement in the Bfo Bfo.43 Businesses and
organizations dependent on tourism worried again that the Laja Falls would dry up
from time to time. Irrigators and canal associations in Bfo Bfo Province helped to
mobilize an active campaign to defeat the project, led by the staff of the Canal Laja,
who had the recent drought and conflict with ENDESA fresh in their minds. Some of
the flavor of the conflict can be captured by the billboards put up in 1992-1993. Where
the Pan-American Highway passes the Laja Falls, a sign says: "Let's save the Falls! No
to Canal Laja-Diguillfn!" Meanwhile, in different townships in Nuble billboards were
put up that said: "Welcome, Canal Laja-Diguillfn-[Pemuco] needs you." (Off the
record, a number of people interviewed said that the irrigators of the Canal Laja have
long been accustomed to taking more water from the river than they were entitled to
and using it inefficiently, so that their protests should be taken with a grain of salt.)
The critics of the Canal Laja-Diguillfn argued that it was founded on legal and
technical uncertainties and obsolete agricultural policy. Prominent local engineers
declared that the available hydrologic data were too scarce and unreliable to support the
state's claim that there was plenty of water, and warned that the regional stakes were
too high to take such a risk. The local experts were not necessarily unbiased: one was
the senior engineer of the Canal Laja, and another was a former member of the
Regional Development Council's advisory committee who now represented
CORBIOBIO, the regional organization that had sued the DGA to block the Laja River
auction seven years earlier. Experts at the Centro EULA criticized the Irrigation
Directorate's analysis, toO.44 Despite the state's assurances about priorities in case of
drought, many people doubted that such a big and costly canal would really be cut off
in favor of smaller rights-holders. Other critics questioned the broader wisdom of
investing so heavily to subsidize the agricultural sector in a region where its
profitability has been declining for years, and where pasture and croplands have been
steadily replaced by tree plantations. They raised the specter of returning to the newlyirrigated farmland some years after the project is finished and finding it planted in
eucalyptus. 45

94

Against the Current

Some argued that the Lake Laja agreement should be changed to reflect the
35 years of economic development since it was signed. In this view, because of the
lake's primary importance as a national energy source, the Irrigation Directorate should
give up its reserve rights. The lake would keep its unique strategic role in the power
sector due to its large storage capacity, though its percentage of national production
will fall as new hydroelectric plants are completed elsewhere in the country. Changing
the lake's management by building the Canal Laja-Diguillfn would presumably raise
generating costs, though it is not clear by how much. This in tum would raise national
electric rates, which are determined by a model based on Lake Laja. ENDESA itself
has kept a low profile in the debate, affirming that it will comply with the 1958
agreement and deliver the Directorate's share when required.
The state's role in this case differed from the Laja River auction a few years
earlier, because the Canal Laja-Diguillfn is a state project. It was approved by the
President, and in a centralized political system like Chile's, all agencies dependent on
the executive branch had to act accordingly whatever their own positions might have
been. The Irrigation Directorate and the National Irrigation Commission minimized the
importance of any water quality impacts on the Bfo Bfo, which were not examined by
the environmental impact statement that the two agencies commissioned. 46 Other
agencies responsible for dealing with those impacts-the regional offices of the
Ministry of Health and the National Tourism Service, and the state-owned water supply
and sanitation company for Concepci6n (ESSBIO)-were publicly known to oppose
the canal but had to officially toe the line. This was evident at the public seminar on the
project's impacts, where none of these agencies showed up to present their views. 47
I do not pretend to draw a firm conclusion about whether or not the Canal
Laja-Diguillfn would be a good project. Enough doubts had been raised that
construction had still not begun in late 1995, as the Directorate redesigned the project
to take less water from the Laja River. 48 The point here is that it is another example of
how intricate river basin problems can be, and how erratic and unsystematic the current
institutional framework has been in addressing them. I develop this argument further in
the case of the Maule River basin and the relationship between consumptive and nonconsumptive rights.

The Maule River Basin: Irrigation and Hydroelectricity

The Maule River basin was the site of Chile's first major conflict between
agricultural and hydroelectric water users. The basin is part of the country's traditional
agricultural heartland, dominating Region VII some 250 kilometers south of Santiago.
The basin has about 200,000 irrigated hectares-15% of the nation's total-and
produces grains, other annuals, and livestock pasture for the domestic market. Most of
this acreage is in the first or uppermost section of the river, which includes the Andean
foothills and most of the central valley. The section has a total of thirty-four canals and
some 10,000 irrigators, who are members of the Maule River Vigilance Committee.49
These irrigators are a diverse group and include a range of sizes and types of farms.

River Basins

95

Hydroelectric development in the Maule basin began in the late 1940s, shortly
before Chile adopted its first Water Code. The source of the Maule River is a mountain
lake with the same name. In 1947, the Irrigation Directorate and ENDESA signed an
agreement to convert the lake into a dual-purpose storage reservoir, as they later did
with Lake Laja. According to the agreement, each agency has rights to a share of the
lake's waters, which can be released separately as needed for different downstream
uses. 50 The agreement is still in effect. The two agencies held the water rights in state
ownership, until ENDESA's rights were privatized along with the company in the late
1980s. Unlike the case of Lake Laja, the Irrigation Directorate manages Lake Maule,
delivering its own share free of charge to private irrigators and canal associations in the
central valley. Like the Laja case, the irrigators themselves have no rights to or control
over the lake, although they have prior rights to water in the Maule River and its many
tributaries. For its part, ENDESA has the rights to its own share of the lake and also to
generate power with the waters released by the Directorate for irrigation purposes. By
the mid 1960s ENDESA had built a power plant on the river a short distance below the
lake, as well as a dam with a second power plant on one of the river's upper tributaries,
the Cypress River. (See Map 3.)
Large-scale hydroelectric development began in the 1980s. In 1983, the DGA
granted ENDESA the basin's first non-consumptive rights for two adjacent multipurpose darns-ColbUn and Machicura-then being built where the Maule River
leaves the Andean foothills. The two reservoirs have been operated jointly since their
completion in 1985: ColbUn is the larger and Machicura is immediately downstream,
helping regulate the discharge to irrigators below. Use of the new rights was required to
avoid harming any existing consumptive rights, as these were distributed and enforced
by the river's vigilance committee. The grant of rights defined a month-by-month
schedule of guaranteed minimum flows for the owners of rights below the dams, flows
which are highest during the summer irrigating season. ENDESA also built or modified
the canal-works needed to deliver water to irrigators affected by the project. 51
In 1984, ENDESA was granted additional non-consumptive rights in the
upper Maule River and in its main tributary, the Melado, for the future Pehuenche
Dam. The dam was to be located on the Melado just before the two rivers' confluence,
some thirty kilometers upstream from Colbun. The rights were awarded by special
Presidential decree, which avoided the auction that the Water Code would otherwise
have required, since two canal organizations had simultaneously applied for the same
rights for a couple of smaller hydro projects.52 In both cases, ColbUn-Machicura and
Pehuenche, the rights granted to ENDESA declared the company to be a member of
the Maule River Vigilance Committee. With the Colbun-Machicura Dams the Maule
basin's share of the SIC's generating capacity was 25%; with Pehuenche Dam it would
become 40%.53 Note that when ENDESA was privatized in the late 1980s, the military
government made the Colbun-Machicura Darns a separate company which remained in
state ownership. The goal was to prevent ENDESA's monopoly of the electric sector. I
will generally refer to the Colbun-Machicura Dams and power company as simply
Col bun. The Pehuenche Dam, however, was made a separate company but was soon
bought by the newly privatized ENDESA, to become an almost wholly-owned
subsidiary. 54

96

Against the Current

Region VI

Region VII
Linares

Region VIII

r ~-J

c,
Hydroelectric Dams & Power Stations:
1 - Colbun - Machicura
2 - Pehuenche
3 - Lorna Alta - Curillinque
4 - Isla -

0
'

Scale

Boundaries

SOlem
,

Map 3: Maule River basin

International _
Regional _

___ _
__ _

River Basins

97

Colb-un was originally planned for both irrigation and power development. It
was to include a large new canal to carry water nearly one hundred kilometers to the
south to supply much of the Province of Linares. However, the Canal Linares was
never built and ColbUn's management has been dominated by power generation
instead. This is largely because when the twin dams were built in the early 1980s,
ENDESA had money to contribute while the Irrigation Directorate did not. As
discussed in previous chapters, the military government refused to finance new state
irrigation projects, considering them a classic example of public sector inefficiency.
Electric power development, on the other hand, was something else entirely and
ENDESA was well funded. Thus ENDESA paid for and built the two dams and
assumed the right to run them as it saw fit, as long as it released the required minimum
flows to irrigators. When ColbUn was made a separate public company, its water rights
and obligations remained the same. The government of Eduardo Frei has aimed to
partially privatize ColbUn beginning in 1996, intending the new owners to compete
with ENDESA.

Conflict and Stalemate in the Maule Basin, 1990-1992

Before 1990 there was relatively little friction between the two competing
water users. Irrigators objected to some provisions in Resolution No.105 (the DGA
decree which granted ColbUn's rights), protesting that its monthly definition of
minimum flows restricted their access to water during the summer. 55 They went to the
Appellate Court of Talca, the region's capital, but to no avail. The more serious
problems arose when the Pehuenche Dam was finished in late 1990. The dam is located
on the Melado River just before it joins the Maule. In addition to blocking the flow of
the Melado, Pehuenche Dam also diverts water from the upper Maule into its reservoir.
After passing through the turbines, the combined waters are released back into the
Maule some kilometers downstream. Pehuenche Dam has approximately the same
generating capacity as Colbun-Machicura, though much less reservoir storage. As
mentioned above, the Pehuenche power company belongs to ENDESA, now a private
company. I will often refer to Pehuenche in the following account, because the
company that owns and runs the dam is legally distinct, but ENDESA is the real owner
and decision-maker.
The dam's construction was finished in November 1990, during the third
consecutive year of drought in central Chile. November is early summer in Chile and
regional tensions about water scarcity were high. The company closed the dam's gates
in order to fill the empty reservoir, so that it could start generating power several
months later as required by its contract with the national electric grid. Irrigators
downstream thus suddenly found much of their water cut off just as the growing season
moved into its hottest and driest months. The irrigators protested to the Maule River
Vigilance Committee, which asked Pehuenche to let the water flow by the dam. (Recall
that Pehuenche's water rights made it a member of the Vigilance Committee.) The
company refused and the Committee went to court.

98

Against the Current

The Vigilance Committee filed a recurso de protecci6n against the Pehuenche

company in the Appellate Court of Santiago. The Committee claimed that Pehuenche
was violating the irrigators' property rights by detaining the river-flow. The Committee
also argued that the power company was treating non-consumptive rights as if they
were consumptive by storing the water at Pehuenche Dam and thereby making it
unavailable downstream. Instead, the Committee argued, the company should either
wait until autumn to fill the reservoir or else buy the necessary rights from ColbUn.
Because Colbun is downstream, such a deal would mean that Colbun would release its
own stored water to the irrigators, allowing Pehuenche to accumulate the flows
upstream. Recall that the Colbun-Machicura power company was state-owned and that
the Concertaci6n was now the government.
At first, both the Appellate Court and the Supreme Court ruled in favor of the
irrigators. The Courts ordered Pehuenche to let enough water pass to meet the
irrigators' needs. However, the two decisions were marked by key differences. The
Appellate Court reasoned at some length that non-consumptive rights were subordinate
to consumptive rights when the two came into conflict, as discussed in the second
section of this chapter. The court said nothing, however, about what Pehuenche's other
options might be. The Supreme Court, in contrast, removed all discussion of the
priority of consumptive rights from the Appellate Court's decision, and stated only that
in this particular case the irrigators' property was threatened. The Court then referred
the substantive conflict to the DGA to resolve, despite the agency's limited powers to
do so. The Court's deference to the agency was based on two rarely used provisions in
the Water Code. One of them authorizes the DGA to settle problems caused when
water projects alter stream-flows, though this has not been construed as granting the
DGA adjudicatory powers (Art. 303). The other gives the DGA temporary power to
redistribute waters during officially declared drought emergencies (Art. 314).56
Several days later, in the height of summer, the DGA followed the Supreme
Court's lead and ordered the Pehuenche Dam to open its reservoir gates. The next day
the DGA approved a deal between Pehuenche and its parent company, ENDESA, to
fill the new reservoir with waters released from ENDESA's shares in the two reservoirs
further upstream, especially Lake Maule. 57 As ENDESA's subsidiary, Pehuenche
apparently paid nothing in exchange. A week later, Pehuenche also agreed to pay
ColbUn to release water temporarily to the irrigators while the new reservoir filled. The
Irrigation Directorate facilitated the transfer by releasing part of its own reserve in Lake
Maule, in part to relieve the irrigators and in part as a loan to ENDESA, which the
company would repay out of its share of Lake Maule in the following year. Both the
Irrigation Directorate and the DGA are in the Ministry of Public Works, and the
Minister's control of the lake via the Directorate was his main leverage over the parties
in the dispute. 58 The Vigilance Committee opposed the transfer from ENDESA to
Pehuenche and appealed the DGA's decision to approve it. The Committee argued that
ENDESA's rights in the upper reservoirs were non-consumptive by nature and
therefore could not be used to fill a reservoir, which was a consumptive use. 59 The
DGA rejected the argument and criticized the irrigators for protesting the transfer even
though they were not injured by it and had no rights to the lake in any case.60

River Basins

99

Meanwhile, through its Pehuenche subsidiary ENDESA continued to

challenge the DGA's initial order to open the reservoir gates. ENDESA outlined for the
first time what would be its legal position in the future. The company argued that the
Water Code established no priority between consumptive and non-consumptive rights,
and so the DGA's actions protecting irrigators undermined the property of power
companies. ENDESA further declared that non-consumptive rights must implicitly
include the rights to fill reservoirs and regulate water-flow: any other interpretation of
the Code's language would defeat the whole purpose of hydroelectric development.
The DGA flatly rejected ENDESA's position, stating that the Code clearly required
non-consumptive rights to work around pre-existing consumptive rights. 61
The suits brought by ENDESA and the Vigilance Committee were
consolidated and decided together, but the first round of conflict ended in stalemate,
with the advantage to ENDESA. In March 1991, the Appellate Court of Santiago ruled
once again that the irrigators' rights were being violated, and ordered compliance with
the decisions handed down in December and January. The court added that the problem
was too complex for a recurso de protecci6n. In April the Supreme Court set aside this
ruling but chose to avoid deciding the substantive issues. By then, the harvest was over
and the rainy season was near. The Supreme Court convinced the private parties
involved-ENDESA, Pehuenche, and the Vigilance Committee-to agree to a
settlement which simply dropped their various suits without a resolution of the issues.
All sides retained the right to argue the same positions in the future. In fact, they would
do so within the year. The Vigilance Committee in particular accepted the settlement
only because in practice it was too late: the Pehuenche reservoir was already full. 62
The next summer the conflict worsened, although the drought had ended
during the intervening winter and the reservoirs were full. The issue now was
Pehuenche's routine operation of accumulating water at night and releasing it during
the day when electric demand was highest. The reservoir's storage capacity is fairly
small, but it can regulate flows on a day-to-day or week-to-week basis. Through the
Vigilance Committee, the irrigators protested the frequent and unpredictable changes in
the flow reaching their canals. The regional head of the DGA responded by ordering
Pehuenche to respect the "opportunity of use" of the consumptive rights by stopping all
regulation and storage of the flow, and operating as a strictly run-of-the-river power
plant.63
ENDESA promptly sued the DGA for violating its property rights, in the
Appellate Court of Talca. The power company denied the DGA's authority to regulate
its water use, arguing that it was up to private rights-holders to take legal action if they
were injured. The company insisted, as it had the previous summer, that nonconsumptive rights should not be defined so rigidly as to prohibit any alteration of
flow: some degree of temporary storage was essential to electric power development.
In ENDESA's view, the irrigators' rights were not harmed by brief delays in water
delivery. In a rather forced and implausible interpretation, the company argued that
where the Water Code prohibited non-consumptive rights from interfering with the
"opportunity of use" of other rights, the true intent was to favor the technical needs of
power generation, not irrigation. 64

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Against the Current

This time farmers and the DGA were not ENDESA's only opponents. In
January 1992 the Colbun-Machicura company protested as well, since it was in effect
paying for the Pehuenche Dam's plan of operations. Because the ColbUn-Machicura
Darns are legally obligated to release certain minimum flows to the irrigators, they had
to moderate the fluctuations caused upstream by the Pehuenche Dam. In other words,
because ENDESA managed the flow at its convenience to generate power when
electric prices were highest, ColbUn lost money by having to generate in off-peak
periods. At one point, Colbun briefly cut off some of its releases and blamed the
Pehuenche Dam in order to increase the irrigators' pressure on its rival. Soon after, the
members of the Vigilance Committee voted unanimously to ask Pehuenche to suspend
operations, as usual to no avail. 65
The DGA agreed with ENDESA that the agency lacked authority to order
changes in water use. However, the agency rejected the company's other arguments.
The water rights for Pehuenche had been granted on condition that they not interfere
with others' pre-existing rights; in this case they were clearly interfering. The grant said
nothing about the right to regulate or store water flow, and the DGA denied that such
powers were implicit in non-consumptive rights because the Water Code neither
recognizes nor requires specific uses for water rights. The DGA's position was firm:
Pehuenche had no rights to alter the flow at all. According to the DGA, the company's
only legal option was to negotiate a solution with other rights-holders. 66
Throughout the dispute, however, the DGA's firmness was undermined by
pressures not to complicate electric power generation. As a key component of
economic growth this was a high priority for the new government. Both the National
Energy Commission and the agency that manages the national electric grid told the
DGA that Pehuenche's operation should not be tightly restricted. Because its
production was so vital to increasing energy supplies, without it either electricity prices
would rise or rationing would become necessary. The two energy agencies believed
that injuries to irrigators could be readily prevented by coordinating Pehuenche's
operation with Colbun's.67
Taking its cue from the Supreme Court, the Appellate Court of Talca also
refused to address the substance of the problem. Instead, in January 1992 it insisted that
Pehuenche and the irrigators choose a pair of expert arbiters to negotiate an
agreement. 68 At the same time Pehuenche and Colbun reached a temporary
compromise according to which Pehuenche agreed to moderate restrictions on its
operations. A nationally prominent law professor, Alejandro Silva Bascunan, was
named chief arbiter. However, with the end of the drought, the process slowed to a
crawl. More than four years later it remained unresolved. In the meantime, the next
landmark event in multiple water use was the court battle over the Pangue Dam on the
upper Bfo Bfo River.

PangueDam
The Pangue Dam was the first to be built on the Bfo Bfo River, the river with
the greatest hydroelectric potential in Chile. Pangue Dam is better known as an

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101

environmental controversy and a dispute over indigenous people's rights than as a

water rights case. The dam sparked national and international protest because of its
environmental and cultural impacts, exposing to development an isolated area with
unique ecosystems inhabited by several thousand indigenous people known as the
Pehuenche (no relation to the dam of the same name). The project's timing was
important as well. Its design and planning neared completion as the government of the
Concertaci6n took office in 1990, by which time ENDESA was fully private. Thus
within Chile, the issue became symbolic as the first major environmental conflict under
the more open political conditions of democratic rule, and received wide newspaper
and television coverage. Many environmentalists hoped that the Concertaci6n would
be more sympathetic to their concerns than the military government had been. During
military rule environmental issues rarely generated much public debate, since people
had more pressing political and economic concerns. Pangue also put the spotlight on
Chile's new environmental legislation, which the government and the rightwing
opposition were slowly putting together and which would eventually be passed in
1994. The new law was a first step, aiming to establish an overall framework of rules
and procedures rather than comprehensive regulation. One of the most prominent of the
new provisions required environmental impact studies for significant projects.
Although the environmental law was not retroactive and hence would not apply to the
Pangue project, it was an important part of the political context. 69
ENDESA began studying the Bfo Bfo's hydro potential in the 1950s as part of
its national electrification plan. It eventually identified six possible dam-sites in the
upper basin, which together would double the nation's 1990 generating capacity. The
two most promising projects were named Ralco and Pangue: Ralco would be the
largest reservoir, the key structure in regulating the river's flow, while Pangue would
be a much smaller reservoir downstream, in the foothills. But for several decades
ENDESA concentrated instead on building dams in the Laja, Maule, and Rapel River
basins. The company finally turned to the Bfo Bfo in the 1980s after Colbun-Machicura
Darns had come on line and when the construction of Pehuenche Dam was soon to
begin. Pangue was chosen to be the first project because it would generate a lot of
power despite its limited storage capacity. It would be primarily a run-of-the-river
operation, with less environmental impact than a larger reservoir. Like Pehuenche Dam
in Region VII, the Pangue Dam was built and is owned and operated by a subsidiary of
ENDESA, the Pangue Electric Company. The World Bank was one of the project's
major supporters, lending money through the International Finance Corporation, which
is the Bank's arm for lending directly to the private sector. The Bank's involvement has
been the focus of the international controversy. 70
The project was strongly criticized for its likely environmental and social
impacts. The most visible opposition was led by Chilean non-governmental
organizations, particularly the Action Group for the Bfo Bfo (Grupo de Acci6n por el
Bfa Bfa, GABB). GABB was created by a coalition of environmental and indigenous
organizations in order to coordinate the opposition to Pangue. They denounced the
direct impacts on the site of the dam itself and its surroundings, due to clearing forests
and flooding, as well as the wider effects of opening up an isolated area to rapid
modern development. The area has been inhabited by the Pehuenche Indians in recent

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Against the Current

centuries. About 10,000 Pehuenche live in the entire upper river basin, though only a
few hundred are near the dam site itself. Their mainly subsistence way of life would be
severely disrupted by the dam's construction-and perhaps more importantly, by the
forest exploitation made possible by the new paved road that was built to the dam site.
The dam's operation would also subject downstream water users to frequent, though
temporary, fluctuations of flow, which would interrupt irrigators' access to their water
supplies and cause changes in water quality in the lower Bfo Bfo. Other impacts would
include increased channel erosion below the dam as the river replenished the sediment
load trapped above, and sudden surges (go/pes de agua) which might damage irrigation
works and other structures.71
ENDESA's argument has been simple: since the mid 1980s Chile's economic
growth has increased the demand for electricity by at least 5% per year, and hydro
power is abundant and non-polluting. Without new dams, the nation's economic
development would be handicapped by higher costs or even rationing of electricity.
ENDESA argued that its opponents have exaggerated the dam's negative impacts and
ignored the company's efforts to mitigate them. The company voluntarily
commissioned two environmental impact assessments, even though it was not required
to do so by law. The first assessment was done by the University of Concepci6n and
recommended more study before approving the project; the second assessment was
done by a North American consulting firm and was more favorable. ENDESA also
contributed funds to support Pehuenche cultural activities and a center for local
ecological study, although this was evidently a public relations gesture. The debate in
Chile has been extremely polarized, with many of Pangue's critics describing it a total
catastrophe while ENDESA has denied or discounted nearly all environmental
concerns. The company has long insisted that Pangue's environmental impact should
be considered in isolation from other possible dams on the upper Bfo Bfo, even though
the planning for Ralco was well-advanced.72
On the whole, the ConcertaciOn government has supported the Pangue
project, agreeing with ENDESA's arguments that the benefits outweighed the costs.
The government's top priority was to maintain rapid economic growth, which required
increasing energy production. The National Energy Commission had already
incorporated Pangue's future production into its long-term projections of national
electric supply and demand. The government was especially concerned to encourage
private capital investment in infrastructure of all kinds. To some degree the
government's hands were tied by the military regime's earlier approval of the project
without any environmental restrictions, since the Concertaci6n did not want to
jeopardize business confidence by changing the rules of the game. Nonetheless, some
members of the governing coalition became convinced that Pangue's impact on the
environment and on third parties downstream had not been carefully considered. They
argued that it was reasonable to clarify some rules and require some modifications, and
that Chile should begin to study and promote energy conservation rather than
automatically preferring new construction in undeveloped areas. In any event, these
critics insisted that the dam should not be built without prior agreement on how it
would be operated.73

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103

Having failed to sway the government, ENDESA's opponents also went to

court. A crucial aspect of the legal dispute hinged on the dam's effects on downstream
flows and water rights. In 1993, the coalition of environmental and indigenous
organizations opposing the dam, represented by one of Chile's best known
environmental lawyers, Fernando Dougnac, filed a recurso de protecci6n against
ENDESA. 74 They claimed that the Pangue Dam violated their constitutional rights to
live in a clean environment, in part because the dam's storage of water would reduce
downstream flow and increase the concentration of pollutants. A group of irrigators
owning consumptive water rights in the middle Bio Bio also joined the plaintiffs. This
gave the suit more legal weight by adding property rights claims to the environmental
arguments. 75 The irrigators feared that Pangue's operation would expose them to
alternating low water levels and sudden surges, over which they would have neither
control nor even advance information.
Dougnac elaborated on the arguments the DGA and the Maule River
Vigilance Committee had made earlier in the Maule basin conflict. He argued that the
only reasonable interpretation of the Water Code was that non-consumptive rights had
to work around prior consumptive rights, not vice versa. ENDESA could not alter the
flow in any way without the irrigators' consent, and certainly could not store and
release water at will. In its defense, ENDESA repeated its position in the Maule case
that non-consumptive rights must include temporary storage and regulation of flow,
and that this does not significantly harm either the owners of consumptive rights or the
environment. Even when the flow was completely cut off at Pangue, the dry channel
would start to recharge a few kilometers below the dam from groundwater and other
tributaries. Essentially, the company argued that the dam's impacts had been
exaggerated.76
In June 1993, the Appellate Court of Concepcion ruled against ENDESA, just
as its counterpart in Santiago had done when first confronted with the problem. The
court interpreted the Water Code to mean that non-consumptive rights did not include
flow regulation if it injured consumptive rights. The court also held that the DGA's
grant of water rights for Pangue explicitly required a minimum flow and prohibited
sudden surges, both conditions which the dam's plan of operation seemed likely to
violate. As a result, the court ordered ENDESA to halt construction until it had either
modified that plan or reached a compromise with the affected water rights owners. This
victory for the dam's opponents indicated the tension underlying their alliance. While
the environmentalists wanted to block the dam entirely, the irrigators and other water
users might be satisfied with a compromise whereby ENDESA agreed to pay some
compensation and obey certain rules of reservoir management.
The Appellate Court's decision triggered a heated national debate.
Environmentalists celebrated and dissenting politicians, including two Senators from
Region VIII, welcomed the second chance to modify the project and reform national
energy policy. Many other people in both public and private sectors warned that the
decision would make hydroelectric development impossible, forcing up energy prices
and sending the wrong signals to investors. 77 Six weeks later the Supreme Court
reversed the decision. For the first time, the Supreme Court abandoned its protection of
the property rights of consumptive water users and seemed to address the substantive

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Against the Current

issues. The Court fully accepted ENDESA's arguments in favor of non-consumptive

rights, and dismissed the plaintiffs' claims as exaggerated and premature. In part, the
Court relied on a DGA report in which the agency reversed its position in the Maule
case; the agency now said that the reservoir did not necessarily threaten downstream
water rights, although its operation should be monitored in case of problems in the
future. The Court allowed ENDESA to proceed with Pangue's construction, and said
that any injured parties could sue later. 78
Under other circumstances, the Supreme Court's apparent lack of formalism
might have been a welcome sign. The extreme positions of the different parties seemed
to call for a compromise, since neither kind of water right could reasonably be given
complete supremacy over the other. Hydroelectric development has important benefits
which would be severely limited by prohibiting all regulation of river flow.
Nonetheless, such development should have some obligations to other water users and
should include real consideration of environmental protection and energy conservation.
Similarly, irrigators must learn to live with growing demands and interference by
newer water users. But while irrigators should not claim absolute priority nor the right
to simply veto newer water uses, at the same time they should not have to bear the
burden of adjustment alone. In short, although the Supreme Court flirted with
substance, its decision was ultimately formalistic. Its decision rests on the essentially
procedural grounds that no immediate injury was threatened, even though future
problems were easy to foresee. The Court's decision also took a narrow and superficial
approach to policy by defining one kind of property right in isolation from others, and
dismissing environmental concerns.
By accepting ENDESA's winner-take-all interpretation of the law, the
Supreme Court abruptly announced significant limitations on the vested property rights
of consumptive water users, without requiring non-consumptive users to concede
anything in exchange or even to agree to any restrictions in the future. The Pangue
decision allowed a major transfer of wealth from farmers and the agricultural sector to
the power companies: a political decision with significant distributional consequences.
One Chilean law professor pointed out, only partly tongue-in-cheek, that this was the
Supreme Court's first decision using law-and-economics, since it ruled in favor of the
most economically valuable resource use. 79 However, the Court's move was too
simplistic. It missed a vital opportunity to promote a balanced compromise with
broader legitimacy among water users, or to call for new legislation to clarify the
situation, leaving the conflict and bad will to fester. In late 1996 the Pangue reservoir
was filled and downstream rights-holders still did not know its plan of operations,
much less have any say over it. In theory, ENDESA has agreed to maintain a
"minimum ecological flow," at a level that the company itself established according to
its own criteria. The problems of coordination and conflict will only get worse when
ENDESA builds the Ralco Dam upstream, which will have a much larger reservoir and
storage capacity. Environmental issues and the situation of the Pehuenche remain
pending, and recently forced the World Bank to withdraw its support for ENDESA, as
discussed below.

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105

Continuing Development in the Maule Basin, 1993-1995

The Supreme Court's Pangue decision was soon echoed in the Maule River
conflict. Despite the arbitration process under way there since 1992, the exchange of
lawsuits continued, with the irrigators generally losing but refusing to give up. The
irrigators have continued to challenge DGA Resolution No.105, which limited their
previous rights to the river's entire flow by specifying the minimum flows that the
Colbun-Machicura Dams had to release each month. 80 While irrigators have clearly
benefitted from Colbun's more secure water supplies, they are also bound to its
calendar: they cannot extend their irrigating season to meet the different water needs of
the new export crops that many would like to introduce. They have also protested their
loss of operational control over the infrastructure for water delivery. In May 1992, the
Appellate Court of Santiago rejected such a challenge by one of the Maule River canal
associations, on the procedural grounds that the organization had no standing to sue on
behalf of its members without their explicit consent (consent which it undoubtedly
had).81 A year later, the Maule River Vigilance Committee lost a similar case protesting
against the Irrigation Directorate's management of Lake Maule: the Appellate Court of
Talca found that the Directorate had complied with the 1947 agreement, and confirmed
that the irrigators had no claim to the lake in any case. 82
Two months after the Pangue decision, the Appellate Courts of both Santiago
and Talca used the Supreme Court's ruling to settle cases involving the original 1991
clash over Pehuenche Dam. The Santiago Court referred to Pangue in dismissing
renewed suits against the DGA by ENDESA, through its Pehuenche subsidiary, and by
the Maule River Vigilance Committee. In opposite ways each suit protested the
agency's actions during the reservoir's initial filling. 83 Similarly, the Talca Court ruled
squarely for Pehuenche in a suit against the DGA's December 1991 order to stop
altering flows. Both Colbun-Machicura Electric Company and the Vigilance
Committee joined the DGA in arguing for some restrictions on non-consumptive
rights; however, the court denied the DGA's power to intervene and invoked the
Pangue rule allowing temporary interruption and storage of flow. The court again
refused to offer any further guidance on how to balance different rights. It left the
problem to the arbiters and said that any injured parties could sue later if necessary.84
Meanwhile, the arbitration process has moved slowly and narrowed in scope.
Both the Vigilance Committee and the DGA withdrew from the process after 1992 as
negotiations came to focus solely on the relationship between the Pehuenche and
ColbUn-Machicura Dams. The two power companies agreed that Pehuenche had the
right to alter the river-flow, but disagreed about Colbun's claim that it should be
compensated for moderating the impact on irrigators. In spite of the legal uncertainty,
both companies have been building new, medium-size, run-of-the-river power plants
that were scheduled to come on line in 1995-1997. Colbun has added one plant (called
San Ignacio) below the Machicura reservoir, before its outflow returns to the river. Part
of the pressure behind Colbun's expansion was to improve its legal and financial
position before the government began to privatize the company in late 1996. ENDESA
has added two more plants on the Maule River, upstream from the Pehuenche reservoir
(called Lorna Alta and Curillinque). Thus the basin now contains a total of eight hydro

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Against the Current

plants. Nonetheless, there is still no agreement either between the power companies or
involving the irrigators about how all the plants are to be coordinated.
In short, water rights in the Maule basin are uncertain and conflictive in
several ways. The Irrigation Directorate and private irrigation interests worry that the
region's agricultural development has stagnated because of confusion over water rights
titles and because of the growing dominance of hydroelectric power.85 Those two
factors have helped prevent an active local water market: there are many more paper
rights than "wet water," the scope and content of consumptive rights are in doubt, and
the hydroelectric infrastructure limits the possibilities for redistributing water.
Uncertain titles and rigid infrastructure are major constraints on water markets
throughout Chile, as discussed in Chapter Four. Part of the Irrigation Directorate's
motivation in clarifying the water rights situation is to find enough water to supply the
proposed Canal Linares, which the Directorate still hopes to build southward from
ColbUn. Meanwhile, the DGA has implemented its own program to regularize water
titles, following criteria that are more generous than those of its sister agency, causing
further confusion and some controversy.86
Among different power companies the rules for coordinating dams are still
unclear. The companies seem to expect problems to be handled through the regulatory
framework of the electric sector rather than through the Water Code or the DGA.
However, regulations about the generation of power and its transmission through the
national grid were not intended to consider other water uses. Moreover, Chile's electric
sector has been frequently criticized for allowing excessive monopoly powers, which
makes its regulatory framework an untrustworthy guide for river basin management. 87
Finally, the conflict between irrigation and hydroelectricity continues unabated.
Irrigators resent the power companies for doing whatever they want, blame the
government for letting them get away with such behavior, and continue to organize
lawsuits and political pressure. A recent World Bank mission to Chile reached similar
conclusions about the situation in the Maule basin, commenting that the inter-sectoral
conflicts, although serious, had been made worse by institutional failures. 88

REFORMING RIVER BASIN INSTITUTIONS

In 1992 the Concertacion government proposed several major reforms of the
Water Code, as discussed in the last chapter. The reforms aimed to tighten some of the
Code's more "permissive" aspects and to somewhat expand the DGA's administrative
duties, reforms that were eventually rejected by private sector interest groups and the
rightwing parties in the Chilean Congress. I return to that debate here in the context of
multiple water uses and river basin management. It is remarkable that neither the
government's proposals nor the resulting public debate raised the issues discussed in
this chapter. There was almost no mention of the relationship between consumptive
and non-consumptive water rights. There was no discussion of guidelines for managing
multi-purpose reservoirs, nor proposals either to modify the existing compacts
governing Lake Maule and Lake Laja, or to try to negotiate a new agreement in any
other river basin. Moreover, no one mentioned the role of the courts or the policy

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107

implications of their decisions. The neglect of these issues is surprising in view of their
importance and controversial nature, and in large part reflects their political sensitivity.
The debate came closest to addressing these issues in the matter of river basin
or watershed management. River basin conflicts did not become a serious problem in
Chile until the 1980s, despite some early concern in the 1960s. In recent years, as this
chapter has illustrated, sustained economic growth has increased pressures on water
resources throughout the country. The specific problems of water quality and quantity
vary from one region to the next, but the common diagnosis is that current institutional
arrangements have not been able to adequately coordinate water uses. By 1990 river
basin management was a familiar topic in Chilean water policy circles, consistently
promoted by United Nations agencies in Santiago, the Food and Agriculture
Organization and the Economic Commission for Latin America and the Caribbean.89
There has been a lot of debate about how to improve the situation and a wide range of
positions. Some would prefer to keep relying on voluntary cooperation by the
interested parties. Others have proposed creating a new administrative organization
with real enforcement power. Some have proposed limiting participation to private
rights-holders, others would include only the relevant state agencies, and still others
would prefer various combinations of public and private participation.90
In its 1992 reform package, the government-represented by the DGAproposed creating new regional agencies for selected river basins. These
"administrative corporations" would be hybrid agencies composed of the major public
and private actors in basinwide water use. The model was quite similar to the
organization recommended for the Bio Bio river basin in 1986-1988, by the regional
advisory committee created in the wake of the proposed Laja River auction. 91 The new
basin agencies would include the participation of not only water rights owners and their
organizations, but also government agencies, public enterprises, municipal
governments, universities, and other private sector and non-governmental
organizations. The proposal said nothing about the details of how the new agencies
would work: for example, what would be the procedures for making and enforcing
decisions, the proportions and voting rights of different members, the sources and
amount of financing, or the agencies' powers and duties in relation to existing
organizations? Nor was there any mention of non-consumptive rights. 92
The DGA's proposal was fiercely criticized for being both heavy-handed and
vague. Neoliberals and other rightwing interests blasted the river basin agencies for the
same reasons they rejected other elements of the reform package: the proposal was a
"statist" attempt to undermine property rights and the free market. Many water users
and canal associations feared losing their autonomy to a new and unknown
bureaucracy. One illustrative incident was the DGA's presentation of the proposal to
the Third National Irrigators' Convention, in Los Angeles in November 1993. A senior
DGA official was bombarded with astute and hostile questions by the audience of
irrigators and canal administrators, to most of which he could only reply that the details
had not yet been worked out. However, the critics differed in their preferred solutions.
The more ideological critics claimed that the present Water Code and water market
were working fine and no changes were called for. 93 Others agreed with the
government that basinwide management was needed, but favored improving existing

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Against the Current

users' organizations rather than creating new ones. Such reform would require
strengthening and expanding the vigilance committees, whose inability to regulate
multiple uses was evident in both the Maule and Bfo Bfo River basins. In any case, the
proposal's critics rejected the idea of widening the basin agencies to include people
who had no water rights. 94
Opposition to the proposed reforms forced the government to withdraw its
proposals by late 1993, as discussed in Chapter Four. It is unclear how the basin
agencies would have handled the issue of consumptive and non-consumptive rights,
because it would have depended entirely on the details of their structure and
composition. The critics' fears of massive state intervention were exaggerated, since in
general the Concertaci6n understood that placing new restrictions on existing property
rights would be unconstitutional and politically impossible without the support of the
right and the private sector. In fact, in view of the political context, it is hard to explain
why the DGA put forth such an ill-defined proposal for river basin management,
seemingly doomed to opposition and defeat. Since 1994 the government has continued
to argue for some sort of basin organization, but has moved the issue far down on its
agenda because of its complexity and political sensitivity. Proposals about multiple
water use were not included in the new package of Water Code reforms that the
President sent to Congress in July 1996.95

CONCLUSIONS
I argue in this chapter that Chile's legal and institutional system has done a
poor job of coordinating multiple water uses and dealing with river basin conflicts.
These are tough problems for any system, among the most complex in natural resource
management, because private actions have many third-party effects and external costs
and benefits. There are no easy solutions. Nonetheless, the Chilean experience shows
that a laissez-faire approach that relies mainly on private bargaining is not sufficient
and in some cases makes conflicts worse. Together the 1981 Water Code and the 1980
Constitution established a neoliberal institutional framework, made up of strong private
property and economic rights, free market transactions, and a "subsidiary" role for state
agencies, which have limited regulatory authority or administrative discretion. The
framework is backed up and enforced by a stronger jUdiciary with greater powers and
responsibilities. River basin conflicts have put this framework's capabilities to the test
and thereby revealed some crucial flaws. In short, this chapter illustrates and supports
the more general criticisms of Chile's institutional model discussed in Chapter Two.
In two of Chile's most important river basins, the Maule and the Bfo Bfo,
private bargaining has failed to resolve conflicts between the owners of consumptive
and non-consumptive water rights-i.e. between irrigators and hydroelectric
companies. Because private rights are so strong relative to the DGA's regulatory
authority, the bigger and more powerful water users have little incentive to negotiate.
The power companies have little to fear either from the DGA or from smaller water
users. Irrigators, on the other hand, have less bargaining power, reflecting their lesser
economic and political clout and the greater obstacles and costs involved in organizing

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109

themselves. Moreover, the electric companies are national political players while the
irrigators' influence is more local and regional. Private water users' organizationscanal associations and vigilance committees-have been unable to settle these disputes
or to impose their decisions on their non-consumptive members. As a result, the
disputes have repeatedly ended up in court.
Both the DGA and the higher courts share a strong preference for strict
interpretation and legalistic behavior. In routine matters this combination of
administrative and judicial formalism has worked fairly well: the DGA has been
careful to observe the limits of its authority and the courts have usually deferred to its
technical expertise while occasionally correcting administrative errors or abuses.
However, with more complex problems the combination has been less functional.
When faced with substantive policy issues and ambiguous laws, such as those
involving non-consumptive water rights or inter-basin water transfers, the DGA has
tended to adopt a legalistic position in order to defend itself from criticism. The agency
has been so wary of stepping beyond its explicit regulatory duties that it has been
passive rather than interventionist. This behavior has been reinforced by the scrutiny of
the Controller General, and is clearly what the military regime intended in the 1980
Constitution.96 However, the judiciary has often ducked its own larger responsibilities.
The courts have found formal or procedural reasons to avoid the substance of difficult
issues, or they have ruled superficially based on insufficient analysis of the range of
interests at stake. The Supreme Court, unfortunately, has led the way in this respect,
and in Chile the Supreme Court exerts strict and centralized control over the rest of the
national judicial system.97
These institutional arrangements have left a partial vacuum in public decisionmaking, involving precisely the difficult issues that demand political judgment. The
most direct way to resolve the uncertainty about consumptive and non-consumptive
rights would be through new legislation. Indeed, to work well and avoid paralysis, the
current institutional model seems to require regular intervention by the law-making
branches of government, the President and the Congress. So far, such intervention has
been prevented by political deadlock and eclipsed by other governmental priorities, and
there is no reason to expect this to change in the near future. What is more troubling is
that the irrigation-hydroelectric clash is a fairly straightforward problem, albeit
difficult. The model's limitations are more serious in other river basin conflicts with
added layers of complexity. The Bio Bio basin illustrates these more complex
problems, which vary in different parts of Chile but generally have worsened with
continued economic development. They include water pollution from urban, industrial,
and agricultural sources, the need to protect minimum flows for environmental
purposes, inter-basin water transfers, and groundwater management.
In this context, creating new basinwide organizations as they are currently
discussed in Chile would almost certainly be ineffective. They would be handicapped
by the private economic rights of their members, who may refuse to comply with new
regulations. How the division of authority between the basin organizations and existing
state agencies would be established is not clear, and sorting this out in practice would
be slow and complicated. Even if the new organizations had some adjudicatory powers
over their members, they would not replace the ordinary court system and would

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Against the Current

themselves be subject to judicial review through the recurso de proteccion. Ultimately,

to be effective the basin organizations would have to rest on some kind of legal
agreement negotiated by their members, both public and private, dealing explicitly with
the constitutional and property rights issues involved. Such agreements between
ENDESA and the Irrigation Directorate have provided stable rules for managing
certain reservoirs for decades, but they were signed when both parties were state
agencies and followed government instructions. To expand this pattern today to include
other water users would require a degree of political determination and consensus that
is nowhere in sight, and that is unlikely to appear until the problems become even more
severe.98

EPILOGUE
Several recent events have kept these river basin conflicts alive and in the
public eye. First, in early 1997 Chile's Anti-Monopoly Commission ruled in favor of
the DGA in a dispute with ENDESA over the company's applications for new nonconsumptive water rights. The Commission accepted the DGA's argument that
grantin.j ENDESA more rights would unduly restrict competition in the electric
sector. Second, the summer of 1996-1997 was Chile's worst drought year of the
twentieth century. In addition to agricultural losses, reservoirs were drained so low that
the government finally had to impose electricity rationing until the arrival of the winter
rains. tOO Third, ENDESA's dams on the upper Bfo Bfo River remain bitterly contested.
In 1996-1997 international pressure forced the World Bank to investigate ENDESA's
compliance with the social and environmental conditions of the Bank's loan for the
Pangue Dam. When confronted with the Bank's questions, ENDESA pre-paid the loan
and secured other financial backing, a highly unusual procedure that indicates the
company's economic strength. The planned second dam, Ralco, has been given
qualified approval by the government and is now the focus of national and international
opposition. tot

NOTES TO CHAPTER FIVE

1. Water Code, Arts. 181-185.
2. "Presumed owner" refers to anyone who has been using water rights in fact but without legal title, as
defined in the 1979 Decree Law 2,603, Art. 7. See also Chapter Three.

3. See Pornes (1982); Soriano (1986).

River Basins

111

4. Thirteen of the 42 cases had no available archival records, presumably because they were involved in ongoing legal actions. According to administrative staff at the Courts, most people preferred to file in the First
Court because its judge was considered to be the most competent in water disputes. Anyway he was faster: the
average case in the First Court took almost three-and-a-half months to decide, While in the Second Court it
took more than twice as long. The staff also told me that the number of amparos had increased since the late
1980s, although their records did not confirm that. I did not check the records of the Third Civil Court.
5. See Carmona Farina con Barrueto Naranjo, Ro156,325 (1985), First Civil Court of Los Angeles. In Chile
cases are named for the plaintiffs and defendants, taking the form "X con Y" ("con" means ''with''). This is
analogous to the form "X v. Y" in U.S. law.
6. See Concha Onega con Munoz Gutierrez, Ro159,373 (1989), First Civil Court of Los Angeles.
7. See Gangas Balboa con Villarroel Orellana, Ro129,576 (1990), Second Civil Court of Los Angeles. On
"presumed ownership" see Note 2.
8. 53 of 85 Appellate Court decisions were appealed to the Supreme Court. Chile has no official court reporter
to publish all higher court decisions, presumably because judicial precedent is not binding as it is in the
common law system. Instead there are several legal journals that are typically associated with universities,
whose editors select which decisions to publish. The journals are Revista de Dereclw y Jurisprudencia,
Gaceta Juridica, Fallos del Mes (Supreme Court decisions only), and as of 1990 Revista de Dereclw de
Minas y Aguas, which was renamed Revista de Dereclw de Aguas in 1993. This system ensures that the most
important decisions are published (often more than once), along with many less important decisions, but it is
not exhaustive.
9. For example, Kegan con DGA (Appellate Court of Santiago, 17 June 1985; Supreme Court, 4 July 1985),
Fa/los del Mes, No.320 (1985), pp.370-379; Baeza con.DGA (Appellate Court of Santiago, 21 April 1986;
Supreme Court, 22 April 1986), Revista de Dereclw y Jurisprudencia, Vol.83 (1986), pp.75-84.
10. For example, Empresa Etectrica Aysen con DGA (Appellate Court of Santiago, 4 December 1985),
Gaceta Juridica, No.86 (1986), pp.48-50; ENDESA con DGA (Appellate Court of Santiago, 30 December
1991), Revista de Dereclw de Minas y Aguas, Vol.2 (1991), pp.383-384. The courts have decided against
private objections to grants of new contingent water rights, ruling that permanent rights are not injured
because the new rights are subordinate to them. See Cala! con DGA (Appellate Court of Santiago, 21 April
1989), Gaceta Juridica, No.l06 (1989), pp.37-40; Junta de Vigilancia del Rio Aconcagua con DGA
(Appellate Court of Santiago, 17 December 1992), unpublished.
11. There are a large but unknown number of rights in this category, as discussed in Chapters Three and Four.
The landllUlIK case protecting unregistered rights is Mozo con SENDOS (Appellate Court of Arica, 24
December 1984; Supreme Court, 12 March 1985), Fallos del Mes, No.316 (1985), pp.33-38. In another case
the Supreme Court undermined the Water Code's rules for regularizing titles (in the Transitory Articles), by
declaring that the registered owner of water rights could not lose them even though someone else had been
using them for twenty years: see Colegio de lngenieros con Gumuin (Appellate Court of Santiago, 7 May
1990; Supreme Court, 13 November 1990), Fallos del Mes, No.384 (1990), pp.662-675.
12. Sociedad de Servicios Urbanos con Contralor General de la Republica (Appellate Court of Santiago, 3
October 1988; Supreme Court, 3 August 1989), Fallos del Mes, No.369 (1989), pp.483-488.

112

Against the Current

13. Compaiifa Manujacturera de Papeles y Canones con DCA (Appellate Court of Santiago, 4 March 1985),
Caceta Juridica, No.57 (1985), pp.56-59.
14. Martini con DCA (Appellate Court of Temuco, 7 May 1987; Supreme Court, 17 June 1987), Fallos del
Mes, No.343 (1987), pp.308-312; Sucesion ConlJilez con Mac Lean (Appellate Court of Punta Arenas, 13
September 1989), Caceta Jurfdica, No.l13 (1989), pp.46-49; Junta de Vigilancia del Rio Teno con DCA
(Appellate Court of Santiago, 24 January 1990; Supreme Court, 16 April 1990), Caceta Jurfdica, No.l29
(1990), pp.l 07-11 0; Canal Arrau con Junta de Vigilancia del Rio Ruble (Appellate Court of Chillan, 18
February 1991; Supreme Court, 14 March 1991), Revista de Derecho de Minas y Aguas, Vo1.2 (1991),

pp.352-355. Sometimes the courts have granted the DGA more authority than it wanted: for example, one
Appellate Court responded to a thorny water rights conflict on land expropriated during the Agrarian Reform
by ordering the DGA to do a technical study and to recommend how to distribute the waters. But the Supreme
Court reversed. See Morales con Molina (Appellate Court of San Miguel, 16 May 1989), Caceta Jurfdica,
No.l07 (1989), pp.52-54; (Supreme Court, 20 September 1989), Fallos del Mes, No.370 (1989), pp.555-557.
15. The Controller General is an autonomous state agency which supervises the fine points of the legal and
financial actions of other state administrative entities. As a watchdog its powers are more strictly limited than
judicial review, but their exercise keeps public officials highly conscious of the letter of the law. See Chapter
Two, Note 36, and concluding section.
16. The Water Code does not specify that non-consumptive rights are for hydroelectric power, although that
was certainly their main purpose. Other industrial water uses such as cooling or processing can also be nonconsumptive if they meet the conditions of Article 14. So far non-consumptive rights have not been used for
environmental purposes, e.g. to maintain a minimum flow. Creating non-consumptive rights was like the
creation of "contingent" water rights (derechos eventuales) in the late nineteenth century, which have carried
through to the present Code. Contingent rights are claims to surplus waters that are occasionally available after
"permanent" rights have been satisfied; the distinction is similar to that between junior and senior
appropriative rights in the Western United States. The goal was to promote additional irrigation in areas where
the most secure supplies were already taken. Interview with LUIS Sim6n Figueroa, lawyer, Santiago, March
1993.
17. W.Code, Arts. 15 and 97.
18. On sections of rivers, see Chapter Four, Note 12.
19. Vigilance committees are described in Arts. 263-282. The provisions on voting rights are in Arts. 222 and
276.
20. See Blanlot (1992); Comisi6n Nacional de Energfa (1989); Hachette and Uiders (1992).
21. See Comisi6n Nacional de Energfa (1989), Chapter 4.
22. Comisi6n Nacional de Energfa (1989); ENDESA (1989); Von Bennewitz (1990).
23. On the BlO BlO River basin, see ENDESA (1989); Faranda et al (1993); Faranda and Parra (1992); Murcia
(1988A), (1988B); Von Bennewitz (1990); Wagemann (1986). On the economy of Region VIII, see Boisier
(1991); Boisier and Silva (1985); Dresdner (1991); Intendencia de la Regi6n del BlO Blo (1991); Sanhueza
(1985).

River Basins

113

24. Convenio Sobre Regu/aci6n del Rio Laja, between Irrigation Directorate and ENDESA, signed 24
October 1958, approved by Minister of Public Works Decreto Supremo No.2534, 29 October 1958.
25. See citations in Note 22.
26. On water pollution in the Bfo Bfo, see Chuecas (1988), (1989); COREMA (1992); lntendencia de la
Regi6n del Bfo Bfo (1991); Klattenhoff (1991); Munari et al (1992); Murcia (1988A), (1988B); Parra (1992);
Paz (1991); Weinert (1988). For concerns dating from the 1960s see CIDERE B10 B10 (1968); Wagemann
(1986).
27. The right to live in a clean environment (Cons!., Art. 19, No.8) can be defended only by a weaker and
more restricted recurso de protecci6n. To win a normal recurso the plaintiff must show the defendant's "act
or omission" to be "arbitrary or illegal"; to win an environmental recurso, the defendant's "act" (not
omission) must be "arbitrary and illegal" (emphasis added). See Cons!., Art. 20 and Chapter Two, Note 41.

28. Soto con Director General de Aguas (Appellate Court of Santiago, 6 August 1986; Supreme Court, 15
September 1986), Fallos del Mes, No.334 (1986), pp.584-594. The DGA denied acting "arbitrarily" because
the plaintiffs had not pursued all available channels to oppose granting the forest companies the new rights.
The plaintiffs had opposed the initial applications but did not appeal the DGA's Resolution ordering the
auction, neither to the DGA itself (Art. 136) nor to the courts (Art. 137).
29. The following year the DGA and the Appellate Court of Santiago reached a similarly formalistic decision
in another inter-basin transfer case. A mining company bought agricultural land with water rights in the upper
Aconcagua River Valley, in order to transfer the water to the upper basin of the Mapocho River for industrial
purposes. When the DGA approved the transfer, it was sued by a hydroelectric company and by the
Aconcagua River Vigilance ColIllIlittee, both of which were downstream in the Aconcagua Valley. They
claimed injury, arguing that the rights in question should be reclassified from consumptive to nonconsumptive in view of their importance downstream. The DGA replied that it had no power to do so, nor to
restrict the mining company's use of its rights unless there were third-party damages; the agency apparently
ignored the plaintiffs' claims. The Appellate Court ruled for the DGA, asserting somewhat inconsistently that
only the ordinary civil courts could adjudicate such a conflict, but refusing to investigate the matter. See
Generadora Etectrica Sauce-Los Andes con DGA (Appellate Court of Santiago, 19 May 1987), Gaceta
Juridica, No.83 (1987), pp.67-69.
30. Murcia (1988A), (1988B).
31. See Larrain (1992); Larrain et al (1987), (1988); Navarrete et al (1988). Both Alberto Larrain and Pedro
Navarrete were members of the advisory colIllIlittee. I interviewed them in Concepci6n in 1992-1993.
32. Documentary materials about the program are assembled in DGA/Regi6n VIII (1989).
33. A partial exception was the voluntary association formed in 1987 by a half-dozen major uroan and
industrial water users in the lower B10 Bfo, all victims of upstream pollution. But the association had no
authority to do more than facilitate conversation. See Bustos (1991).
34. DGA/Regi6n VIII (1989).
35. Ibid.

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Against the Current

36. Larrain (1992).

37. See Faranda et al (1993); Faranda and Parra (1992). I was affiliated with the Centro EULA in 1992-1993
during my fieldwork in Region VIII.
38. This legal separation of reservoirs from the rivers that drain them is an historical peculiarity in Chile. It
arose as an incentive to modify natumllakes in order to increase their storage capacity, granting rights to the
waters thereby made available. In hydrological terms the separation makes little sense, and the coexistence of
both rights adds to the confusion of the situation today.
39. See Direcci6n de Riego (l963A), (l963B), (1969).
40. See M&'quez (1989), (1992A); and Asociacion de Canalistas del Laja con ENDESA (Appellate Court of
Concepci6n, 7 January 1991; Supreme Court, 20 March 1991), Revista de Derecho de Minas y Aguas, Vo1.2
(1991), pp.345-351. Also interviews with Enrique M&'quez, engineer, and Hector Sanhueza, administrator,
Canal Laja, Los Angeles, 1992.
41. For descriptions of the project, mostly favorable, see Arriagada and Selles (1992); Comisi6n Nacional de
Riego (1990); Contreras (1992A), (1992B); Direcci6n de Riego (1992); Heytmanek (1986); M&'quez
(1992A); Raczynski (1989); Uni6n de Comites Pro Canal Laja-Digui\lln (1992).
42. For the hrigation Directorate's position see Contreras (l992A), (1992B); Direcci6n de Riego (1992); and
the presentations of Pablo Anguita and Jose Contreras at the seminar entitled "/mpacto Proyecto LajaDiguiUin," held in Concepci6n in September 1992. Also see "Proyecto Laja-Diguillin: El Canal de la
Discordia," Revista Tattarsall, No.74 (August 1991), pp.4-S.
43. Presentation by Francisco Heytmanek, President of the Diguillfn River Vigilance Committee, in the
seminar cited in the preceding note.
44. For their presentations in the seminar cited in Note 42, see M&'quez (1992B); Wagemann (1992). For the
Centro EULA analysis, see Nardini (1992); Nardini and Montoya (1992).
45. Interview with Daniel Contesse, engineer, Forestal Mininco, Concepci6n, 1992.
46. Comisi6n Nacional de Riego (1990).
47. The seminar is cited in Note 42.
48. Interview with Pablo Anguita, National Director, hrigation Directorate, Santiago, November 1995.
49. Comisi6n Nacional de Riego (1977); Grupo de Investigaciones Agrarias (l992C).

50. Convenio Sobre Regu/acion del Rio Maule, between hrigation Department and ENDESA, signed 2
September 1947, approved by Minister of Public Worlcs, Decreto Supremo No.3341, 11 November 1947.
51. The water rights for ColbUn and Machicura were granted by DGA Resolution No.lOS (19 April 1983).
ColbUn-Machicura had been studied as a regional development project since the 1960s, under the ChileCalifornia Program of international aid and cooperation. For historical background, see Bulkley and

River Basins

115

Mclaughlin (1966); Direccion de Riego (1966); Dona Martinez (1975); Dona Martinez and Espinoza (1989);
Edwards and Donoso (1965).
52. The rights for Pehuenche were granted by Ministry of Public Works, Decreto Suprenw No.312 (10
October 1984). Art. 148 of the Code gives the President authority to bypass an auction and allocate rights
directly when it is justified by "exceptional circumstances and the general interest." The DGA, the National
Energy Commission, and the Governor of Region Vll all recommended that the President grant the rights to
ENDESA. Direccion General de Aguas, Orden No.748 (12 September 1984).
53. See citations in Note 23.
54. See Bitnin and Saez (1994); Blanlot (1992); Hachette and Liiders (1992).
55. See Garda Huidobro Valdes y otros con ColbUn-Machicura (Appellate Court of Talca, 27 April 1989)
(unpublished); Ramirez San Cristobal con ColbUn-Machicura (Appellate Court of Talca, 3 May 1989)
(unpublished).
56. See Junta de Vigilancia del Rio Maule con Empresa Etectrica Pehuenche (Appellate Court of Santiago,
27 December 1990; Supreme Court, 24 January 1991), Revista de Derecho de Minas y Aguas, Vol.2 (1991),
pp.321-326. Chilean water law scholar Alejandro Vergara criticized the Appellate Court's reasoning, arguing
that the Code grants no preference to non-consumptive rights. Informe Constitucional, No.48 (3 April 1991).
57. DGA Resolutions No.36 (28 January 1991) and No.38 (29 January 1991). The latter was published in
Revista de Derecho de Minas y Aguas, Vol.2 (1991), pp.330-332.
58. Interview with Carlos Hurtado, former Minister of Public Works, Santiago, December 1995.
59. Maule River Vigilance Committee, appeal for administrative reconsideration (15 February 1991)
(unpublished document).
60. DGA, Report to the Appellate Court of Santiago (20 February 1991), Revista de Derecho de Minas y
Aguas, Vol.2 (1991), pp.332-341.
61. Pehuenche Electric Company, appeal for administrative reconsideration (21 February 1991) (unpublished
document), appeal for judicial review (19 March 1991) (unpublished document); DGA, Report to the
Controller General (6 March 1991) (unpublished document). See also the following note.
62. Junta de Vigilancia con DGA (Appellate Court of Santiago, 21 March 1991; Supreme Court, 18 April
1991), Revista de Derecoo de Minas y Aguas, Vol.2 (1991), pp.327-330. The Appellate Court's decision is
criticized on several grounds by Alejandro Vergara in Informe Constitucional, No.74 (10 May 1991). For the
view that the Maule conflict shows that the Water .Code should be reformed to clarify the superiority of
consumptive rights, see the interview with lawyer Mario Silva in Revista Tattersall, No.70 (April 1991), pp.8

9.
63. DGAlRegion Vll, Orden No.716 (11 December 1991). The phrase "opportunity of use" is from Article 14
of the Water Code, quoted in the text at Note 17.

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Against the Current

64. Pehuenche Electric Company, recurso de protecci6n filed in Appellate Court of Talca (27 December
1991) (unpublished document).
65. Letter from Alvaro Gonzalez, General Manager, ColbUn-Machicura Electric Company to Santiago
Letelier, President, Maule River Vigilance Committee (14 January 1992). Letter from Jorge Bachmann,
President, Maule Sur Canal Association to Gustavo Manriquez, Director, DGA (21 January 1992). See also
"Acusan a Pehuenche por Mal Uso de Aguas," El Mercurio, 22 January 1992.
66. DGA, brief to the Appellate Court of Talca (24 January 1992) (unpublished document). Also letter from
Gustavo Manriquez, Director, DGA to Emesto Silva, General Manager, Pehuenche Electric Co. (6 January
1992).
67. Letter from Sergio Lorenzini, Executive Secretary, National Energy Commission to DGA (1 February
1991). Letter from German Guerrero, President, Centra de Despacho Econ6mico de Carga to DGA (20
December 1991).
68. Resolution, Appellate Court of Talca (29 January 1992).
69. Law No.l9,300, Ley de Bases del Media Ambiente, published in the Diario Oficial on 9 March 1994.
70. See Arias (1973); Comisi6n Nacional de Energia (1989); ENDESA (1989); Von Bennewitz (1990).
71. For descriptions and criticism of the Pangue Dam, see Centro EULA (1992); Grupo de Acci6n por el Bfo
Bfo (1992); MIDEPLAN (1992); Orrego and Valenzuela (1992); Universidad de Concepci6n (1988). Outside
of Chile the International Rivers Network, a non-governmental organization based in Berkeley, California, has
played a key role opposing the project.
72. For arguments in favor of Pangue, see ENDESA (1989); Maturana (1988); Pangue (1990), (1991); Von
Bennewitz (1990). The first environmental impact assessment is Universidad de Concepci6n (1988). For a
critique of the second assessment, see Centro EULA (1992).
73. MIDEPLAN (1992). See also the declaration of Senator Mariano Rufz-Esquide in Senate Session No.20
(5 January 1993), and the Prayecto de Acuerdo signed by over 20 Deputies in Congressional Session No.56
(18 March 1993).
74. Dougnac had won what was probably Chile's most famous environmental case in 1985, blocking an
irrigation project that would have partly drained Lake Chungara in a National Park in northeastern Chile. See
Palw y otras (CODEFF) con Direcci6n de Riego y Ministerio de Obras PTiblicas (Appellate Court of Arica,
21 August 1985; Supreme Court, 19 December 1985), Gaceta Jurfdica, No.66 (1986), pp.21-32.
75. On the difference between environmental recursos and other recursos, see Note 27 and accompanying
text.
76. See Orrego con Empresa Etectrica Pangue (Appellate Court of Concepci6n, 22 June 1993; Supreme
Court, 5 August 1993), Gaceta Jurfdica, No.l58 (1993), pp.52-62. See also Dougnac's unpublished briefs to
the Courts and Dougnac (1993). An earlier recurso brought by fishermen at the Bfo Bfo River's mouth had
failed to stop the project. The Appellate Court of Santiago rejected the Centro EULA's criticisms of Pangue's
impact as biased, while praising ENDESA's second environmental impact report. See Federaci6n Regional de

River Basins

117

Pescadores Artesanales con Pangue y otros (Appellate Court of Santiago, 27 January 1993), Revista de
Derecho de Aguas, Vol.4 (1993), pp.231-234.

77. See the public declarations and press releases of GABB, four Christian Democratic Congressmen, Pangue
Electric Company, ENDESA, and the Chilean Institute of Engineers, in July and August 1993.
78. Cited in Note 76. The lawyer Dougnac commented on the decision: "This decision is the same as with the
'disappeared,' when the Supreme Court denied their existence because that's what the government claimed.
The Blo Blo is now another 'disappeared' because the Court decided there will be no ecological damage." La
Nacion, 6 August 1993, p.J7.
79. Interview with Pablo Rufz-Tagle, Professor, University of Chile Law School, Santiago (November 1995).
80. See Note 52 and accompanying text.
81. Asociacion de Canalistas del Maule con DCA (Appellate Court of Santiago, 4 May 1992), Revista de
Derecho y Jurisprudencia, Vol.89 (1992), pp.65-68. Two years later the Supreme Court confirmed, without
explanation (28 November 1994) (unpublished).
82. Junta de Vigilancia del Rio Maule con Direccion de Riego/Region VII (Appellate Court of Talca, 5 May
1993), Revista de Derecho de Aguas, Vol.4 (1993), pp.250-252.
83. Pehuenche con DCA (Appellate Court of Santiago, 20 October 1993) (unpublished); Junta de Vigilancia
del Rio Maule con DCA (Appellate Court of Santiago, 20 October 1993), Revista de Derecho y
Jurisprudencia, Vol.90 (1993), pp.J61-165.
84. Pehuenche con DCAIRegion VII (Appellate Court ofTalca, 29 October 1993) (unpublished). A dissenting
opinion, highly unusual in water cases, argued that the Water Code was too vague, that third-party injuries
were too likely, and that the whole problem was too complex for a quick procedure like the recurso de
proteccion.

85. Direcci6n de Riego/ Regi6n VII, Asignacion de los Derechos de Aprovechamiento de la Zona de Maule
Sur, Orden No.233 (29 March 1995).
86. Direcci6n General de Aguas (1995). On regularization of water rights, see Chapters Three and Four.
87. Altomonte (1996); Bitnin and Saez (1994); Blanlot (1992).
88. Briscoe (1996).
89. E.g. CEPAL(1992A), (1992B); FAO (1991).
90. See citations in the preceding note, and also ClPMA (1992); Galvez (1991); Gutierrez (1992); Gutierrez et
al (1991); Pena (1990); Peralta (1989C); Rovira (1992); Rovira and Onate (1991); and the Proyecto de Ley
sobre Manejo de Cuencas Hidrograficas introduced by Senator Eugenio Cantuarias (Region VIII) in 1992.
91. See Note 31 and accompanying text.

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Against the Current

92. The government's proposals are cited in Chapter Four, Note 49.
93. Instituto Libertad y Desarrollo (1993A); Sociedad Nacional de Agricultura (1993).
94. CIPMA (1992); Confederacion de Canalistas de Chile (1993); ENDESA (199 I A), (1991B), (1993);
Figueroa (1992); Instituto de Ingenieros (1993). ENDESA was alone in mentioning the Code's omissions
about the relationship between consumptive and non-consumptive rights and the building and operation of
reservoirs, but the company suggested no alternatives.
95. Republica de Chile, Formula Indicaciones al Proyecto de Modificaci6n del C6digo de Aguas, Ministerio
Secretaria General de la Presidencia Mensaje No.OO5-333 (4 July 1996).
96. See Chapter Two, Note 36.
97. See Chapter Two, Note 34 and accompanying text.
98. In 1995-1996 a French consulting firm was carrying out a World Bank-funded project to propose a new
kind of basinwide organization in the Bfo Bfo, but its concrete results have apparently been minimal.
99. Comision Preventiva Central Anti-Monopolios, Dictamen No.992J636 (26 November 1996), Comision
Resolutiva Central Anti-Monopolios, Resoluci6n No.480 (7 January 1997). See also the citations in Note 87.
100. For example, "Emergencia Electrica por Sequfa: Los Costos de una Tardanza," El Mercurio, 20 April
1997, pp.Bl, B4.
101. See Adshead and Opaso (1996); Switkes (1997); P. Molina, "Conservar
March 1997, pp.D4, 06.

Producir," El Mercurio, 23

CHAPTER SIX
CONCLUSIONS
Chile's experience with free market water policies has been uneven. The
1981 Water Code has had both advantages and disadvantages, and offers valuable
lessons for other countries interested in water markets and privatized water rights. The
most general lesson is that market mechanisms can do some things well and others
poorly-that markets are not automatic or self-regulating but depend on their social,
institutional, and geographic contexts. In Chile the Water Code has worked relatively
well within the agricultural sector, although the water market itself has been limited.
The Code has worked much less well at the level of river basins, where the institutional
framework has revealed serious flaws in coordinating different kinds of water users and
different economic sectors. These flaws reflect the current (1980) Constitution as much
as the Water Code, and therefore have similar implications for other areas of public
policy and environmental regulation.
The Water Code's advantages and most effective features corrected the
excesses of the previous system. The 1967 Water Code was rigid, centralized, and
bureaucratic, as water rights were subjugated to the needs of Chile's far-reaching land
reform. The system was too complex and technical for the government water agency
(DGA) to implement, and discouraged investment by undermining the legal security of
private water users. The 1981 Code, in contrast, has strongly increased that legal
security while decentralizing most decisions about water use. In the agricultural sector,
the results have been generally positive, at least in the case of medium to large-scale
irrigators. Some water rights owners have invested in more efficient technology and
consume less water as a result. Many water users' organizations have consolidated
their autonomy from the state and some have improved their financial and
administrative capacity. Separating water rights from land ownership has allowed
flexibility in reallocating resources, even if so far water rights trading has been limited.
The water market has been less active or successful than its boosters have claimed, but
its results may well be satisfactory if we begin with modest expectations.
Other aspects of the Water Code have been ineffective or negative. Within
the agricultural sector, the law's market incentives for water-theoretically one of its
major advantages-have had little impact in practice. Market incentives have not led to
private investment in more efficient technology in order to sell the water saved, nor
have they made additional water available for new users. Instead the government has
had to continue to subsidize investment in irrigation works, contrary to the objectives
of the Code's neoliberal designers. Much of the water market's uneven performance is
due to ambiguous and confusing price signals, which the market itself has been unable
to clarify. These mixed results have been especially negative for peasant farmers.

120

Against the Current

Peasants generally lost out in the transition to the new Water Code, for lack of
information and assistance, and they have been marginalized from the water market
since then for lack of property and economic resources.
The most serious problems have been inter-sectoral relations at the regional
or river basin scale. The current legal and institutional framework has done a poor job
of coordinating different water uses and resolving conflicts between them. The
emphasis on private bargaining has typically failed in the more difficult cases, leaving
them to the DGA and the judicial system. However, the relationship between the
agency and the courts is flawed. The DGA has a legalistic approach to its regulatory
powers, avoiding assertive intervention and passing the weightier problems of legal
and economic rights to the courts. This behavior reflects the Constitution's principle of
the subsidiary state and the expanded powers of judicial review. In spite of their more
important role, the courts-especially the Supreme Court-have also preferred a
narrow and formalistic approach, which has often left the substance of difficult
problems either unresolved or resolved in an incomplete or superficial manner. In this
partial vacuum of authority, the more powerful actors can do as they please, as
illustrated by the actions of ENDESA in relation to irrigators, environmentalists, and
indigenous people. In the context of river basins and multiple water uses, exaggerated
protection of one form of private property reduces legal security in the system as a
whole.
So when can water markets work? In summary, the Chilean case suggests that
they have the best chance of working at the local level and among the same type of
water users. That usually means within the agricultural sector, though it could also
apply to the industrial sector. On the other hand, market mechanisms are likely to fail
when confronted with regional and inter-sectoral problems, such as multiple water uses
and river basin management. Even where there are cases of inter-sectoral trading, such
as rural-to-urban water transfers, there are too many social and political consequences
to leave such decisions to the market alone.
The Chilean case also suggests broader conclusions about the institutional
context of economic development, as outlined in Chapters One and Two. Proponents
of free market environmental policies-whether in Chile, the World Bank, or the
University of Chicago-tend to oversimplify the context and conditions required for
such policies to work well. Proponents often claim or assume that markets-as
opposed to governments-are neutral, objective, and apolitical. In this book I have
argued the contrary. Markets are complicated social institutions, not spontaneous or
automatic mechanisms driven by natural forces. To exist and to operate over time,
markets depend not only on economic factors of supply and demand, but also on many
extra-economic factors and prior definitions: such as political decisions, legal rules,
cultural attitudes, and geographic and environmental conditions. These factors and
definitions are affected by relations of social and political power and by the
distribution of wealth. Markets can be no more neutral than their surrounding social
contexts and underlying institutional arrangements. The same is true of economic
.
1
effiIClency.
There are several tasks or functions that are essential to markets but that
market forces and individual action cannot carry out. These functions are the definition

Conclusions

121

of property rights and the resolution of conflicts, which includes dealing with thirdparty effects and externalities. These functions are all closely related and doing one
often requires doing the others. Dealing with externalities, for example, means
allocating the social and environmental costs of private activities, which involves
different defining property rights in relation to each other and resolving conflicts.
These processes are beyond the capacity of private exchange, which cannot substitute
for legal and political institutions-that is, the state.
Many neoliberals would agree with this argument in theory, though they
might overlook it in practice. This book shares and reflects recent interest in the
institutional and legal aspects of economics, especially market economics. To some
extent I have followed in the footsteps of Ronald Coase and Douglass North. Where I
differ from them and from the Chicago approach to law-and-economics is in adopting a
less market-centered analytical framework? This is not because I reject or ignore the
benefits of markets; far from it. I also agree that some form of private property is
indispensable for economic development and political freedom. However, the focus on
exchange, commodities, and efficiency is not an adequate lens for understanding social
relations, institutions, and the natural world. That focus reinforces certain presumptions
about how property and value are defined, presumptions which ought to be questioned.
The market is a subset of society rather than vice versa, and so a market-centered
analysis of society is bound to be incomplete. 3
To define property rights to natural resources simply as commodities tramples
on difficult issues. Such property cannot be private, exclusive, and transferable,
because different resource uses are physically inter-connected and people's activities
directly and indirectly affect one another. New definitions of property rights affect not
only their owners but also other resource owners and users. Thus property rights to
nature affect collective interests, and consist partly of overlapping rights to use shared
resources, rather than private freedom to alienate and exchange. The social relations of
resource use are complicated, involving high transactions costs and the distribution of
wealth. In short, "defining" property rights is a difficult, conflictive, and continuing
process. It unfolds within legal institutions and political and social arenas. 4
A related conclusion is that neoliberal economics ignores or oversimplifies
what is involved in conflict resolution, the quintessential judicial function. The judicial
process is fundamentally different from the commodity logic of the market, and
remains an unknown for most economic theory. Markets work by comparing things
that are qualitatively different by the common numerical yardstick of price, which
reduces things' concrete characteristics to an abstract and quantitative measure of
value. While this encourages private exchange of commodities, it is not of much use in
settling conflicts over resource uses, since conflicts are precisely about the specific
qualities and concrete differences of things. Resolving conflicts requires qualitative
measures and comparisons of value, and a qualitative logic to weigh and choose among
a web of rights, rules, purposes, and interests. This again is an inherently judicial and
political task, for which private bargaining and exchange cannot substitute. The same is
true of internalizing externalities, as noted above. These tasks necessarily involve
distributional issues and are shaped by relations of power.

122

Against the Current

The capacity to resolve conflicts effectively and with legitimacy is especially

critical in a neoliberal legal and economic model, a model built around broad private
rights and liberties and a minimal state. This capacity depends on the judicial system,
which must control state regulation and balance different private rights. The courts
must be fairly independent from other branches of government, and willing and able to
rule on disputes with substantive policy implications. This judicial model resembles the
constitutional and common law traditions of the United States more than the civil law
tradition of Latin America. Free market economics is a predominantly U.S. intellectual
tradition and it seems to implicitly assume the framework of the U.S. legal system,
which is perhaps not surprising. However, Latin American legal systems and
constitutional arrangements are different from the U.S. model. The courts are more
subordinate and formalistic, seeking to avoid political and other non-legal factors,
while the executive branch commonly has stronger centralized authority than in the
U.S. The civil law tradition is shared with continental Europe, but Latin American
judiciaries are weaker because their countries are poorer. 5 Many Latin American
countries have recently adopted neoliberal economic policies and institutional reforms,
such as privatization and deregulation in a variety of sectors including natural
resources, without realizing the constitutional implications. The role of the judiciary
becomes more strategic as state regulatory authority is reduced-in this way
fundamental judicial reform is critical to the long-term success of neoliberal
economics. Privatization and free markets do not remove the need for public, political
decision-making, they just relocate it.
In Chile the legal and institutional framework will become increasingly
strained. The framework has been vital to the remarkable growth of the Chilean
economy since 1985, providing the underpinnings of legal security for private
enterprise and capital investment. Economic growth has been driven by diversified and
intensified exploitation of natural resources, accompanied by full integration into world
markets. However, the Chilean model's success in economic growth has not been
matched by success in social equity or environmental protection. The institutional
framework has succeeded in defending the current system of economic rights and
limited regulation, but has not shown the capacity to respond to environmental
concerns or to the skewed distribution of wealth and power. The framework provides
an inadequate arena for sorting out private and public interests. It is neither transparent
nor readily accessible to the public or to non-governmental organizations. In short, the
long-term sustainability of the model is dubious. Chile is faced with the challenge of
becoming a new kind of textbook case: of the reform and modernization of the state.
As the pioneering example of neoliberal economic and institutional reforms, with the
longest experience of their benefits and drawbacks, Chile is uniquely positioned to
undertake a "second generation" of reforms. These reforms will have to address the
current constitutional and ideological obstacles to policy-making and regulatory
capacity.
Water ties all these problems together. As the hydrologic cycle runs through
landscapes and ecosystems, different water uses interact and transmit the physical
effects of resource development from one place to another. As the value of water
continues to rise, competition and conflict will increase among water users and the

Conclusions

123

different political and economic interests they represent. Pressures will rise further as
Chile tightens economic integration with Argentina and the rest of the Southern
Common Market (Brazil, Uruguay, and Paraguay), countries which have also adopted
neoliberal policies. International economic integration has been led by the expansion
and integration of energy systems, especially natural gas and electricity. The impacts
on water development are likely to be significant in a region so reliant on
hydroelectricity. While these changes have potential economic and environmental
benefits, their speed and complexity pose a new level of challenge to governments'
capacity to promote sustainable development, including the challenge of harmonizing
laws and regulations across borders. It is a good time to remember the old saying, we
can't all live upstream.

NOTES TO CHAPTER SIX

1. See the work in institutional economics and legal-economic history cited in Chapter One, Notes 8 and 9,
and accompanying text.
2. On law-and-economics and the Chicago school, see Chapter One, Notes I and 2, and accompanying text.
3. See Note 1 above.
4. See the work in environmental history, ecological economics, and property rights cited in Chapter One,
Notes 7 and 11, and accompanying text.
5. See Chapter Two, Notes 35, 60, and 61, and accompanying text.

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INDEX
Aconcagua basin. See Aconcagua River
Aconcagua River, 8, 55-56, 61, 66, 113
administrative courts, 20-21. See also judicial
review
administrative law. See judicial review
Agrarian Reform of 1967, 4, 13, 17-18, 20,
33-34,36,39-40,44,54,56,62,67,7072
agriculture, 3-5,7-8, 33-34, 36, 39-41, 44-45,
52-56,64-70,81,86-89,92-94,104,
106, 119-120. See also Agrarian
Reform; irrigation
Agriculture and Livestock Service, 62, 67, 73
Allende, Salvador, 4, 13, 15,20-21,40
amparo de aguas, 81-82
appellate courts, 19,21-23,81,83,89,97100, 103, 105. See also judicial review,
judicial system
arbitration, Maule River, 100, 105
Armed Forces, 13-14, 34. See also military
government
auctions. See water rights auctions
authoritarian nationalists. See duros; military
government
Aylwin, Patricio, 5, 22, 26, 51, 70, 92
bargaining, 1-2,6,9,24,36,72,79-80,91,
108, 120-121. See also institutional
framework
Bello, Andres, 36-37
beneficial use, 35, 38, 46, 65, 68-69
Bio Bio basin. See Bio Bio River
Bio Bio Province, 52-55, 57, 66, 77, 80-82,
92-93
Bio Bio Region. See Region VIII
Bio Bio River, 7-8, 54, 61, 80, 85-94, 100104,107-110
blandos, 13
bocatoma, 61
campesinos. See peasant farmers
canal infrastructure, 41-42, 52-56, 59, 61-62,
65-67,71,82,84-85,87,89,91-99,103,
105-106. See also reservoirs

Canal Laja, 54-55, 58, 74, 89, 91-93. See also

Lake Laja
Canal Laja-Diguillin, 92-94. See also Lake
Laja
Canal Linares, 97, 106
canal users' associations, 35-36, 38, 41-42,
51,54,56-57,59,61-63,67,71,79,8182,85-95,105,107,109,119
Catholic social doctrine, 14-15
Central Bank, 13, 18
Central Interconnected System. See Sistema
Interconectado Central
Centro EULA, 10,91,93
Chicago Boys, 5, 12, 15,71. See also
neoliberals
Christian Democracy, 4, 5, 13-14,39. See also
Concertacion
Civil Code, 20, 34, 36-39
civil law tradition, 12, 19-20,22,122
civil society, 13-15, 122
Coase, Ronald, 2, 121
Coase Theorem, 2, 79
Colbun. See Colbun-Machicura Dams,
Electric Co.
Colbun-Machicura Dams, Electric Co., 87,
95-98, 100-101, 105-106
Colbun-Machicura Dams, Electric Co.,
privatization, 97, 105
Comision de Estudios de la Nueva
Constitucion. See Constitutional
Commission
commodity, 2, 43, 45, 64, 121
common law. See United States legal-judicial
model
Concepcion, 8, 87 -94, 103
Concertacion, 5,11,22,51,62,68,70,80,
92,98,101-102,106,108
Confederation of Chilean Irrigators, 44, 60,
66,69
conflict resolution. See water use conflicts.
See also institutional framework;
judicial system

Congress, 3-4, 13, 18,20,23,25,68,70,80,

106, 108-109

160

conservation. See efficiency

Constitution of 1925, 4,13,17,20,39
Constitution of 1980,8,11-25,33-35,44,7980,90,108-110,119-120,122. See also
institutional framework
Constitutional Amendment of 1967, 17-18,
39,48
Constitutional Commission, 13, 18-19,41-42,
44, 70
Constitutional reform of 1989, 11,21
Constitutional Tribunal, 13, 19,70
consumptive water rights, 58, 69-70, 84-85,
89,94-95,98-100,103-106,113
contamination. See water pollution
contingent water rights, 65, 93, 111-112
Controller General, 25, 28, 83, 109, ll2
convenios. See dual-purpose agreements
CORFO,3
copper, 3-4. See also mining
courts. See judicial system
courts, local, 35-36, 39, 62-63, 80-83
cultural attitudes, 60, 63-64
dams, 85-89, 95-106,110. See ColbUnMachicura Dams, Electric Co. See
Pangue Dam, Electric Co., Pehuenche
Dam, Electric Co. See also reservoirs
Decree Law 2,603, 42-44, 62, 76
de paso. See run-of-the-river hydro
Direccion General de Aguas (DGA), 34-36,
38-40,45,57-59,62-63,65-70,79-83,
89-91,93,95-100, 103-ll0, ll9-120
Dougnac, Fernando, 103, 116
drought, 35, 37, 63, 65, 92-93, 97-100, llO
dual-purpose agreements, 85-87, 91-92, 9497,105-106,110. See also Lake Laja,
Lake Maule
duros, 12-15
economic Constitution, 8, ll-12, 17-19,79,
108,122. See also institutional
framework
economic incentives. See efficiency; markets;
water rights taxes
economic rights and liberties. See economic
Constitution; property rights
economic theory, 1-3,6-7,121. See also neoclassical economics; neoliberals
economy in Chile, 3-5, 52, 102, 122. See also
neoliberal economic model
efficiency, 1,2,6,34,39,41-45,51,55-56,
60,64-67,71-72,119-121
electric companies. See ENDESA; power
companies

Against the Current

electric grid. See SisteflUl Interconectado

Central
electric sector regulation, 95, 106, 110. See
also ENDESA, privatization
Elqui River, 58-59, 75
ENDESA (Empresa Nacional de
Electricidad), 69,85,87-106, 108-ll0,
120. See also hydroelectricity
ENDESA, privatization, 69, 85, 95-97
energy conservation, 102, 104
engineering profession. See irrigation
engineers
environmental impact statements, 94, 101-102
environmental legislation, 101
environmental rights, 18, 29, 89, 103
executive branch, 3, 94, 122. See also
President
expropriation, 17-18, 35, 39-40. See also
Agrarian Reform
externalities, 2, 63, 79-80, 84, 102, 108, 121122
fees. See water rights taxes
Fernandez, Sergio, 28
flow regulation. See non-consumptive water
rights; run-of-the-river hydro
forests, 5, 52-54, 87, 93, 102
forest industry. See industry; water pollution
free markets, 1-2,5,16,19,33,45,67,70-72,
79,107-108,119-122. See also
neoliberals
Frei Montalva, Eduardo, 4, 13, 15, 17,20,3940,52
Frei Ruiz-Tagle, Eduardo, 52, 70, 97
Friedman, Milton, 16
fruit production, 52, 55-56, 58, 65-66, 71, 86
General Water Directorate. See Direccion
General de Aguas
geography, 6, 37, 45, 52-56, 60-61, 86-87
gremialistas, 12-16, 18. See also Jaime
Guzman
groundwater, 58, 65, 103, 109
Grupo de Accion por el Bfo Bfo (GABB), 101,
103
Guzman, Jaime, 13-14, 16, 18,21,26,41
Hayek, Friedrich, 16,25
hydroelectricity, 9, 36, 49, 65, 67, 69, 80, 84110. See also ENDESA; nonconsumpti ve water rights, 123
hydrologic cycle, 6, 122

Index

incentives. See efficiency; private investment

indigenous peoples, 60,101-104,120. See
also Pehuenche Indians
industry,54-55,87,93
institutional economics, 6, 120-121
institutional framework, 6, 8-9, 12, 24-25, 72,
79-80,84,94,106-110,119-123. See
also Constitution of 1980; neoliberal
economic model
Instituto Libertad y Desarrollo, 75, 77
in-stream flow. See minimum ecological flow
inter-basin water transfers, 87-89, 91-93,109,
113
intermediate groups, 14-15,25
International Finance Corporation, 101. See
also World Bank
inter-sectoral relations. See river basins
inter-sectoral water transfers, 43, 60,64, 7172,74, 120
interviews, 7-8, 46,56-57, 60
irrigation, 7-8, 34-36,42, 44,52-56, 60-61,6368,71-72,79-89,91-110. See also canal
users' associations
Irrigation Directorate, 38, 42,54, 60,85, 87,9198, 105-106,110. See also state
irrigation policy
irrigation engineers, 33-34,41,43,56,81,93
irrigation subsidies, 66, 68,71,119. See also
state irrigation policy
irrigation-hydroelectric relations, 8-9, 49,80,
84-110. See also dual-purpose
agreements; river basins; water use
conflicts
Itata River, 54, 89, 92-93
judicial formalism. See legal formalism
judicial reform, 12,22-25, 122. See also
judicial system
judicial review, 19-21,24-25,80,83-84,89,
98, 109-110, 120, 122
See also recurso de protecci6n
judicial system, 8, 12-13, 19-25,63,79-84,
108-109,120-122. See also appellate
courts; Supreme Court
Junta, 4, 13, 15-16, 22, 34, 41-43; See also
military government
Laja Falls. See Saito del Laja
Laja River, 54, 86-95, 101
Lake Laja, 61, 86-89,91-95, 106
Lake Maule, 95, 98,105-106
land market, 40, 42, 56-57, 64, 71-72, 75-76
law, 6-7. See also institutional framework;

161

judicial system; U.S. legal-judicial

model
law in Latin America, 12, 25, 122. See also
civil law tradition
law-and-economics, 1,6,12,24-25,104,121122
legal formalism, 20, 23-25, 81, 83-84, 89-90,
104, 109, 113, 120, 122
legal institutions. See institutional framework;
judicial system
legal journals, III
legal profession, 18,21-23,80-81
Limarf River, 58-59, 71
Los Andes Province, 52-59, 62, 66
Los Angeles, 55, 57-58, 62, 80-82, 87, 107
Machicura. See Colbun-Machicura Dams,
Electric Co.
Maipo River, 58
manejo de cuencas. See river basins; river
basin organizations
Manriquez, Gustavo, 46
Mapocho River, 66, 113
marco partidor, 61
markets, 1-2,6,51,64,69-72,79-80,119122. See also free markets; water
markets
Maule basin. See Maule River
Maule River, 8, 80, 85-87, 94-101,103,105106, 108
Maule River Vigilance Committee, 94-100,
103, 105. See also vigilance committees
Melado River, 95-97
military coup, 4, 21, 92
military government, 1,4-5,11-17,21,33-34,
40,42-45,62,66-67,70-72,85,92,95,
101-102,109
minimum ecological flow, 69-70,103-104,
109, 112
mining, 3, 28, 41, 46, 60, 70, 86,113
Ministry of Agriculture, 43, 57, 73, 90
Ministry of Health. See National Health
Service
Ministry of National Planning, 43
Ministry of Public Works, 38, 57, 85, 89, 98
multiple water uses. See irrigationhydroelectric relations; reservoirs; river
basins
Napoleonic Civil Code, 20, 36
National Agriculture Society, 40, 44, 66, 69
National Energy Commission, 100, 102, 114
National Health Service, 89, 94

162

National Irrigation Commission, 42, 94. See

also state irrigation policy
national power grid. See Sistema
Interconectado Central
national property for public use, 34, 37-39, 69
National Security Council, 13-14
National Tourism Service, 89,93-94
National Water Policy, 68. See also Water
Code reforms
natural resources, 3-7,121-123
neo-classical economics, 6, 64
neoliberals, 1-2, 5, 12, 15-19, 33-34, 40-45,
64-65,68-69,79,107,119-122
neoliberal economic model, 1,5,11-12,16,
24-25,68,71,102,122
neoliberal economics. See neoliberals
new institutional order, 11-13. See also
Constitution of 1980; institutional
framework
non-consumptive water rights, 9, 36, 65, 6970,79-80,84-86,94-100,103-110,113
non-governmental organizations, 57, 67 -68,
101,103,107,116,122
North, Douglass, 9, 121
nueva institucionalidad. See new institutional
order
Nuble Province, 54, 74, 77, 92-93
obligation to use water rights. See beneficial
use
"opportunity of use," 84, 99
Ortuzar, Enrique, 26, 41-42
ownership. See property rights
Pangue Dam, Electric Co., 86, 100-104, 110.
See also ENDESA
parceleros, 54, 56, 67
patente,70
peasant farmers, 40, 52-54, 60, 64-69, 72, 86,
119-120
Pehuenche Dam, Electric Co., 95-100,105.
See also ENDESA
Pehuenche Indians, 10 1-104
Pefia, Humberto, 74-75
Peralta, Fernando, 74, 76
Pinochet, General Augusto, 4,11,13,17,34,
49,91
Pifiera, Jose, 16, 46
Plan Laja, 92
plebiscites, 11, 13, 17, 91
political economy, 6-7
political parties. See politics
politics, 3-5,\ 1-17,20-25,33-34,44-45,68-

Against the Current

72,91,106-110. See also Concertacion;

rightwing political parties
pollution. See water pollution
Popular Unity. See Allende, Salvador
power companies, 85-87, 91-92, 95-106,108110. See also Colbun-Machicura Dams,
Electric Co.; ENDESA; Pangue Dam,
Electric Co. See also Pehuenche Dam,
Electric Co.
power grid. See Sistema Interconectado
Central (SIC)
preferences for water uses. See priorities for
water uses
presumed ownership of water rights, 42-43,
62,81-82
President, 4, 13,25,34,94-95,108-109. See
also executive branch
prices, 1-2,69,72,119,121. See also water
rights prices
priorities for water uses, 35, 38, 84-85, 98-99,
115. See also water rights auctions
private bargaining. See bargaining
private investment in irrigation, 34, 37, 40-42,
60, 63, 65-66, 71, 119. See also
efficiency
private property. See property rights
private sector, 66, 69-70, 90, 106-108. See
also Confederation of Chilean Irrigators;
National Agricultural Society. rightwing
political parties
privatization of ENDESA. See ENDESA,
privatization
privatization of water rights. See water rights
property rights, 1-3,7,17-18,33-45,68-71,
79-80,83-84,98-99, 103-104, 107-110,
120-121
public economic order. See economic
Constitution

Ralco Dam, 101-102, 104, 110

Real Estate Title Offices, 38, 42, 57, 62-63
recurso de proteccion, 18, 21-22, 24, 81,83,
89,92,98-99,103,110,117. See also
judicial review
recurso de reclamacion, 83
Region V, 52, 55-56
Region VII, 86, 94, 101
Region VIII, 52-55, 86-90, 103
Regional Development Council, 90, 93, 107
regularization of title, 36,42,62,67,74,81,
83, 106, Ill. See also water rights titles
regulatory framework. See institutional
framework; state regulatory authority
Renovacion Nacional, 5, 11,30,69

Index

reservoirs, 59, 61, 65, 71, 85-87, 91-106,110,

113-114. See also canal infrastructure;
dams; Lake Laja, Lake Maule
rights of advantageous use, 38-39, 41, 43
rightwing political parties, 4-5,11-12,22-23,
69-70, 106-108. See also Renovacion
Nacional; Union Democrata
Independiente
river basins, 6-9, 36, 39, 49, 55, 69, 72, 79-80,
84-110, 119-120. See also irrigationhydroelectric relations; water use
conflicts
river basin management. See river basins, river
basin organizations
river basin organizations, 69, 90-91, 107-110,
117. See also vigilance committees
Roman law, 36-37
run-of-the-river hydro, 86,99-101,105. See
also dams; non-consumptive water
rights; reservoirs
sales. See water markets
Saito del Laja, 89,93
San Felipe Province, 56
Santiago, 52, 58, 60, 66, 72, 74, 87, 90, 103,
105
sections (of rivers), 56, 73, 94
Senators, designated, 14
Seven Modernizations, 16,22
Sistema Interconectado Central (SIC), 86-87,
95-97,100,106
Southern Common Market, 123
Spanish legal tradition, 36, 63
speculation, 35, 65, 68-69
standards of reasonable and beneficial use, 3940
state irrigation policy, 42, 44, 66, 92, 97. See
also Irrigation Directorate; National
Irrigation Commission
state regulatory authority. See Direccion
General de Aguas; institutional
framework; judicial review
state water rights agency. See Direccion
General de Aguas
"subsidiary state," 12,14,16-17,24,79,108,
120
subsidies. See irrigation subsidies; state
irrigation policy
Supreme Court, 19-20,22-24,70,79-81,83,
89,98-100,103-104,109,120. See also
judicial system
Talca, 97, 99-100, 105
taxes. See water rights taxes

163

Tennessee Valley Authority, 90

third-party effects. See externalities
transactions costs, 2-3, 6, 65, 71-72, 121
Transitory Articles, Water Code, 36, 62, 74,
83. See also regularization of title
UDr. See Union Democrata Independiente
Unidad Popular. See Allende, Salvador
Union Democrata Independiente, 5, 26, 69,

75
United Nations, 8, 57, 107
United States legal-judicial model, 12, 19-21,
24-25, 122
United States, Western, 2, 63, 72, 76, 80, 112
University of Chicago, 1,5, 15, 120-121
University of Concepcion, 89-91, 102
urban water supply. See Concepcion
value, 1-2,64-66,72,121-122. See also
prices; water rights prices
vigilance committees, 56, 74, 85-86, 90-92,
94-100,108-109
voting rights in vigilance committees, 85
Water Code. See Water Code of 1981
Water Code of 1951,34,37-39,41,49,62,95
Water Code of 1967,34,36,39-43,83,119
Water Code of 1981,1,3,7-9,33-38,41,4345,51,62-72,79-85,89-91,95,98-100,
103,106-108,119-120
Water Code reforms, 60, 63, 68-71, 91, 106108
water conservation. See efficiency
water markets, 2-3, 7-8, 33-36, 41-45, 51, 5672,106-107,119-120
water pollution, 33, 69, 80, 87-89, 91, 93-94,
102-103, 107, 109
water quality. See water pollution
water rights, 2-3, 7,18,33-45,51,56-72,79110,119
water rights, how measured, 35, 39, 61, 63, 65
water rights auctions, 35, 43, 45, 49-50, 6667,87-90,94-95, 114
water rights prices, 43-45, 60, 64-66, 69, 72,
119
Water Rights Registers, 57-59, 62-63
water rights rentals, 57, 82
water rights sales. See water markets
water rights taxes, 34-35, 43-45, 65, 70. See
also patente
water rights titles, 36, 38-40, 42, 45, 59, 6263, 67 -68, 90, 106. See also
regularization of title
water rights trading. See water markets

164

water use conflicts, 35-36, 39, 60, 72, 79-110,

120-122. See also judicial system; river
basins
water users associations. See canal users'
associations
Western United States. See United States,
Western
World Bank, 1,30,51,60,75,92,101,104,
106,110,117,120

Against the Current