Water Policy Assessment in a Computable General Equilibrium Setting: Morocco, Mexico, Turkey, South Africa

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1 Water Policy Assessment in a Computable General Equilibrium Setting: Morocco, Mexico, Turkey, South Africa Terry Roe University of Minnesota Material taken from the working papers, and Journal Articles Country teams led by: Morocco: R. Doukkali; Mexico: Antonio Yunez; Turkey: E. Cakmak, South Africa: R. Hassan. Consultants: X. Diao, J. Thurlow, Y. Tsur, T. Roe; Directed by: A. Dinar

2 Outline I. The why of water in general equilibrium II. Basic features of CGE models incorporating water A. Spatial B. Sectoral C. Resources D. Households III. A picture of a CGE model A. Macro B. Micro IV. Empirical results A. Ground water B. Growth in urban demand C. Elasticity of water demand V. Conclusions

3 I. Introduction The why of water in general equilibrium? 1. Agriculture is an intensive use of water (80%), and agriculture is a trade competing good in most economies. Trade policies and water policies become inter linked Food policy (self sufficiency) and water More importantly

4 2. Water is an economy side resource; in the process of economic growth a. Share of work force (and often number) in agriculture declines while capital deepening per work increases b. Most often this implies an increase in the intensification of water use in agriculture c. Increase in the share of GDP accounted for by the nonfarm sector implies Increase in residential water demand Increase in demand by both manufacturing and service sectors If factor demand for water in the non farm sectors is of a Leontief nature, then water can be a major constraint to economic growth, and inhibit this transformation process

5 3. Like most economic objects, water has timespace from dimensions Spatial (horizontal, vertical) hydrological information very important Temporal (seasonal longer run: climate change) Purity/quality The spatial dimensions can be modeled, the temporalpartially, purity/quality problematic Key objective is help in design of policy that leads to increased welfare (this has implications to scientific methods)

6 4. The needs of policy makers Water issues/policy typically transcends bureaus divisions of government Horizontal divisions Example: Morocco trade lib., then water markets or the reverse Vertical divisions National water policy in agriculture Effect of water policy by: (i) region, (ii) type of farm (what is produced, modern, traditional) Water policy is made more coherent if/when policy dialogue can transcend these horizontal and vertical divisions

7 II. Analysis: basic features of empirical models A. Spatial aspects Spatial aspects are linked both to both vertical and horizontal dimensions (Morocco example).

8 South Africa; Water shed management areas (20) & transfer schemes

9 B. Sectoral aspects (South African model) 1. The production side of the economy Agriculture. Agriculture Agriculture Industry Service Field crops 1 Summer cereals (maize, sorghum) 2 Winter cereals (wheat, barley) 3 Oil crops & legumes (groundnuts, beans) 4 Fodder crops (Lucerne, grain maize) 5 Sugarcane 6 Cotton & tobacco (incl. other field crops) Horticultural crops 7 Vegetables 8 Citrus fruits 9 Subtropical fruits 10 Deciduous fruits and viticulture 11 Other horticulture (tea, nuts) Livestock 12 Livestock sales (cattle, sheep, pigs) 13 Dairy Services 14 Poultry (chickens, eggs) 15 Other livestock products (wool, game) 18 Mining (coal, gold) 19 Food & agricultural processing 20 Textiles, clothing & footwear 21 Wood & paper products 22 Chemicals & petroleum 23 Nonmetallic mineral products 24 Metals & Machinery 25 Electrical machinery 26 Scientific equipment 27 Transport equipment (incl. vehicles) 28 Other manufacturing (incl. furniture) 29 Electricity Generation 30 Domestic & light industrial water 33 Retail & wholesale trade 34 Hotels & catering 35 Transport 36 Communication 37 Financial & insurance services 38 Business services & real estate 39 Community & other private

10 2. The resource side of the economy (South Africa) Labor high skilled Skilled Unskilled Capital Land Irrigation water (surface and ground as separate sources by water shed) Need to separate the productivity of water from other resources Need to measure\determine cost of pumping, cost of transporting, and capacity Intermediate factors of production (sector i to j )

11 3. Households Households: Urban Separated from Rural by Region Used survey data to focus on income categories Quintile 1 (low income) through Quintile (high income)

12 III. A picture of the model (Morocco); the CGE model Non agriculture Six sub sectors Agriculture: 66 crop production activities, 5 livestock and 11 food processing Irrigation. distr. one Non agricultural Imports and exports to the rest of the world including capital flows Embedded micro farm model: includes monthly water allocation by crop Up to 4 separate irrigation perimeters Irrig. distr. seven Up to 33 prod. act. including 22 irrigated 11 rain fed Agriculture out side of irrigation districts, both rain fed and irrigated, with input and output links to the respective irrigation districts Agricultural foreign trade Imports and exports to rest of world Imports and exports to the European Union Markets: Input output links to non agriculture, irrigation districts, agriculture outside the districts, and households. Water supplies and demand are irrigation district specific; Some restrictions on labor flows between rest of economy and ag. Households: six groups, four in agriculture, one non agriculture and public group Structure of Production: 88 activities; 49 commodities; up to eight primary factor inputs plus intermediate factors of production for each activity Policy Instruments: Include taxes, subsidies, tariffs, and water charges, quotas by region

13 B. Linking the vertical policy dimension 1. The farm model Why the need to link macro to the micro? (for economists this is an application of the Le Chaterlier Principle) Example: Question: Change trade agricultural policy: What is effect on farm of type Z? (1) Use farm model to determine the direct effect, (2) Solve CGE model to determine economy wide effects with particular attention to farm wages, water shadow values etc. (3) Give these new values to the farm model to determine the total effect. (4) Subtract (2) from (3) to determine indirect effect. The indirect effects often counter and dominate the direct effects Perform same analysis with water policy

14 . C. A picture of the farm model Production of ten irrigated crops {y}; Purchased & inter. inputs {x} Constraints Annual crops Multiple cropping Production input/output relationships Resource balance constraints Family supplied inputs Production input/output relationships & resource allocation constraints Monthly water assignments by crop {h} Land planted by crop {d}

15 III. Some empirical results Discuss briefly: Increase in ground water pumping costs Growth in non farm water demand The GE price elasticity of water demand in agriculture Other highlights from Turkey, South Africa

16 A. Increase ground water costs; conjunctive use (Morocco). Increase in Groundwater Pumping Cost (Surface Water Supply Remains the Same) Decrease Groundwater Supply Increase Water Shadow Price Rural Wage Increases, Otherwise Differential Effects Depend Upon Share of Ground Water in Total Water (e.g. Souss Massa ): Push Resources Out of Affected Irrigated Crops Sma ll Negative Urban Effects from Decline in Final and Derived Ag. Demand Decrease Manufacturing & Service Output Decrease Urban Wages, Decrease Capital Return Economy wide Effects: Real GDP: Rural Income: Small Farm Income: Med. Farm Income: Large Farm Income: Urban Income: Ag. Trade Deficit: High Perimeter Sh are Non Ag Trade Deficit: Larger Change in Shadow Price of Water Larger Change in Shadow Price of Land Change in Ag. Revenue Depend on Water Intensity of Crops Grown

17 B. Growth in urban water demand (Morocco) Policy: Reallocate Water From Rural to Urban Sector (Urban Shock) Decrease Surface Water in Three ORMVA Increase Urban Water Supply Push Resources Out of Irrig. Crops Increase Shadow Price of Water, Increase Ground Water Use Increase Manufacturing & Service Output Increase Household Water Consumption Macroeconomic Effects (%): Real GDP Rural Income Small Farm Income Decrease Production of Crops in Three ORMVA Decrease in Production of Some Dairy, Meat, Other Processed Foods Lower Factor Price in Agriculture Increase Crop Prod. in Non Irrg. & Some Non Water Withdrawal Irrig. Areas Decrease Farm Income Increase Urban Wages, Increase Capital Return Med. Farm Income Large Farm Income Urban Income Ag. Trade Deficit Non Ag Trade Deficit

18 C. The GE elasticity of water demand Why different elasticities by region? Relative factor intensity? F ig. 1 W a te r S h a d o w P r ic e s In P r o p o r tio n T o B a s e Shadow Price, Change From Base = D o u k1 Do u k2 G h a r 2 G h a r 3 Ha o u 3 H a o u 1 H a o u 2 L o u k2 L o u k1 L o u k3 M o u l1 M o u l2 M o u l3 M o u l4 S o u s 1 S o u s 2 S o u s 3 Ta d l1 T a d l2 NI G h a r W a t e r s u p p ly : B a s e = 1

19 IV. Conclusions : part 1; General 1. Economic reforms outside of agriculture affect the productivity of water in agriculture 2. Reforms outside of agriculture have strong affects on incomes of rural agricultural households 3. Water policies that remain rigid in the presence of reforms outside of agriculture can increase the disparity in water productivity among farmers and crops, and potentially lower the overall productivity of water 4. Economic reforms outside of agriculture create opportunities for water market reform because of the increase in the dispersion of water shadow prices

20 5. The gains from linking macro economic and water market reform grow over time as capital is reallocated. 6. Macro economic and water market reform together cause a reallocation among crops and farmers, but no evidence was found to suggest that some crops would not be produced. 7. Reform does not appear to cause a drastic reallocation in the long run even though water productivity grows

21 8. Thus, increasing the productivity of water tends to Increases the value of production, Increases returns to farm resources, Increase the incomes of the poor, and Has other positive macro economic effects

22 IV. Conclusions: Part 2 South Africa Rapid changes in the location/concentration of economic activity is placing great pressure on the need for water in an already seriously stressed water environment Regional irrigation water market liberalization to equate water shadow prices: decrease production of water intensive crops, expand ag exports, increase price of food crops Liberalizing interregional water markets Favors production of high value crops and regions with positive macro economic impacts improving employment Water restricted urbanization Benefits urban growth centers, raises water shadow prices in agriculture and speeds up rural to urban migration

23 IV. Conclusions: Part 3 Turkey Negative impacts of climate change will be relatively significant on Turkish irrigated agriculture with spillovers to the broader economy and foreign trade Turkey s water resources will help agriculture to respond to higher world prices for agricultural goods that are expected to prevail in the future, with significant contribution to foreign exchange earnings Rapid urbanization/industrialization will place pressures on water supplies currently allocated to agriculture; the rise is water shadow prices will favor those crops that do not use water intensively (such as horticultural crops)

24 IV. Conclusions: Part 4, methodology Some weaknesses 1. Dynamics: evidence suggests that a static analysis can not only understate the effects of policy reform, but can lead to misleading conclusions growth changes structure and comparative advantage 2. Lack of validation: results need to be contrasted with economic events to test model forecasting ability and insights into economic structure; the results from dynamic models are fare easier to validate 3. Need to better incorporate hydrological data/models 4. Need to remove the black box syndrome 5. Need to better integrate into the policy making process