ECONOMY-WIDE GAINS FROM DECENTRALIZED WATER ALLOCATION IN A SPATIALLY HETEROGENOUS AGRICULTURAL ECONOMY

ECONOMY-WIDE GAINS FROM DECENTRALIZED WATER ALLOCATION IN A SPATIALLY HETEROGENOUS AGRICULTURAL ECONOMY Xinshen Dio, Terry Roe, nd Rchid Doukkli Astrct This pper nlyzes the potentil economy-wide gins otinle from the lloction of surfce irrigtion wter to its most productive use, nd evlutes mechnism for chieving this result in n environment where considerle sptil heterogeneity in wter vilility nd use exists. The focus country for the nlysis is Morocco. The nlysis is sed on generl equilirium model tht, in ddition to the rest of the economy, cptures 82 griculturl production ctivities, 66 of which re in seven seprtely identified wter districts tht re sptilly distriuted over the entire country. The results re profound. They suggest tht decentrlized wter trding mechnism within ech perimeter of the seven districts could increse griculturl output y 8.3 percent, ffect the rentl rtes of other griculturl inputs t the ntionl level, including lor, nd hve economy-wide effects tht entil modest declines in the cost of living, n increse in ggregte consumption, nd expnsion of interntionl trde. I. Introduction Inventing nd implementing socil mechnisms for llocting wter to more productive uses remins chllenge in oth developed nd developing countries. Prt of the difficulty is due to the prolem of estlishing property rights to wter (Dinr et l, 1998, Gleick et l, 2002), nother prt to the reltively high fixed costs of dmns nd cnnels ssocited with surfce wter which rises the issue of who pys nd should mrginl cost pricing for wter e ndoned (Dinr, Surmnin, 1997, Thon, 1997, Dinr, 2002 ), still nother to the negtive externlity tht ground wter extrction imposes on the extrction of wter y others (Dio nd Roe, 1997, Tsur nd Zemel, 1997), nd emodied in ech these difficulties is the heterogeneity of wter vilility nd use within ny one country. This heterogeneity mkes difficult the formultion of uniform wter policy, nd tends to necessitte set of policies with ech tking into ccount the 1

prticulr sptil wter nd crop peculirities nd historicl prctices tht lso vry y region. At the sme time, policies must recognize tht the vrious regions re inter-linked, nd tht they compete for economy wide resources so tht wter policy on one region impcts other regions tht compete for these resources. Nevertheless, the need to overcome these difficulties is ecoming ever more importnt. The Interntionl Wter Mngement Institute (Sekler et l. 1999) for exmple hs proected tht y 2025 most regions in rod swth from North Chin cross Asi to North Afric nd northern Su-Shrn Afric will experience either solute or severe wter scrcity. In the mority of these countries, it is lso the cse tht irrigted griculture remins mor sector oth in terms of its shre in GDP nd the proportion of country s poor tht reside in the sector. The generl purpose of this pper is to otin insights into the potentil economy-wide gins otinle to irrigtion wter when it is llocted to its most productive use, nd to evlute the mechnism for chieving this result in n environment where considerle sptil heterogeneity in wter vilility nd use exists. The heterogeneity encourges more decentrlized mechnism for llocting wter while lso requiring tht policy mkers tke into ccount the indirect effect tht policies in own nd other irrigtion districts hve on the costs of other resources employed in griculture, such s hired lor nd cpitl. The intensity of wter use, reltive to other inputs, vries y region due to differences in climte, soil chrcteristics nd wter vilility. This vriility cn gretly ffect the returns to wter, the degree to which wter policy on one region hs indirect, though no less importnt, effects on other resources, nd thus the effectiveness of wter policy to llocte wter to its most productive use in on region of country in contrst to nother. The effect of wter policy on other resources is n importnt determinnt of region s competitiveness in the production of crop reltive to other regions. Understnding the economics of the sptil diversity lso helps to trget those regions tht re likely to gin the most from reform, thus helping to prioritize n lredy complex policy mking process. The mechnism for rellocting wter is lso importnt for ovious resons, ut of key importnce here, is the choice of mechnism tht might est tke ccount of heterogeneity mong irrigtion districts, nd one tht is likely to meet the lest resistnce mong frmers to implement. The country chosen for this nlysis is Morocco. This choice is sed on its sptil diversity, vilility of frm level dt, nd ecuse of previous studies upon which to uild (e.g., Doukkli, 1997, Dio nd Roe 2002). Of the pproximtely 15.8 illion cuic meters of wter moilized in n verge yer, out 83 percent is surfce wter tht is regulted y nine regionl griculturl development uthorities (ORMVA) with out 498,617 hectres of lnd equipped for nd under irrigtion in 1996-97. Regionl uthorities ssess frmers fee for wter tht is generlly lower then the wter s productivity, nd consequently, wter lloction must e dministered. The gp etween wter s productivity nd the fee chrged implies tht frmers cpture rent to their wter ssignment. Allowing the 2

wter uthority to uction wter to the highest idder would cuse frmers to forego this rent, nd thus they cn e expected to resist this method of llocting wter to its most productive use. The wter ssignments re mde t the eginning of the crop yer, nd sometimes dusted during the yer depending on rinfll nd wter supplies from snow ccumulted in mountin rnges. Agriculture is reltively lrge, ccounting for out 15 percent of the country s totl vlue dded nd out 47 percent of the popultion clssified s non-urn. The pproch is to develop computle generl equilirium model for the entire country with prticulr ttention given to modeling the griculture of seven mor irrigtion regions nd the perimeters within ech region. Ech of the regions re linked to up nd down strem mrkets, nd compete with the rest of the economy for economy-wide resources. The empiricl frmework is used to provide empiricl estimtes of the shdow price of wter in ech perimeter of the seven mor ORMVAs, given the country s current wter policy, nd to conduct n nlysis of wter user-rights mrket mong frmers in ech of the seven regions. The results show tht considerle diversity exist in the productivity of wter oth within nd etween irrigtion perimeters nd districts. The cretion of wter user-rights mrket in which frmers cn rent in or out to other frmers some of their wter user rights hs the potentil of gretly incresing the productivity of wter. The results suggest tht such mechnism could increse griculturl output within the seven ORMVAs y 8.3 percent, nd to hve noticele economy wide effects tht entil lowing of the cost of living, nd the increse in foreign trde. The pper is orgnized y first lying out the conceptul frmework tht explins the key economic forces ffecting the differences in the shdow price of wter y region. It lso defines wter user-rights mrket, how the cretion of such mrket might ffect the lloction of wter, the resulting rewrds to property-right owners, s well s serving to guide the interprettion of the empiricl results. Then, the nture of the dt nd empiricl model upon which it is sed re discussed, followed y the presenttion of results. II. The conceptul frmework The sic economic forces deriving the empiricl results cn e explined y nrrowing our focus to two sector (indexed =, ) economy tht employs two economy wide fctors, lor L, nd cpitl K, given wter ssignments T nd T. We first define the primitives nd equilirium conditions given the wter ssignments. This corresponds to the se solution of the empiricl model. Then, we define the equilirium in which frmers re given property rights to wter equl to their ssignments T nd T. The second prt shows the conditions determining how the mrket prices of wter deprt from the shdow vlues in the sence of mrket. 3

1. Primitives of the model The sector level production functions presume constnt returns to scle i (1) (, ; ) β2 1 β1 β2 y = f L K T = A L T Where L nd K re choice vriles while initilly, T denotes wter ssignments to the -th sector. Given perfect competition in ech sector, the economy-wide GDP function cn e expressed s (,,,,, ) 1 GDP = G p p L K T T β1 β2 β1 β2 Mx PA L K T L L K K ( ){, } L, L, K, K =, given tht the ssignments of wter exhusts totl wter supplies T. It lso follows tht the sector GDP functions cn e expressed s ( ) { } β1 β2 1 β1 β2,, ( ) G p w r T Mx P A L K T wl rk LK The shdow price of wter is given y π ( ) =,, G p w r The economy-wide GDP function equls the sum of the sector GDP plus pyments to lor nd cpitl ( + =, ) (,,,., ) (,, ) GDP = G p p L K T T = G p w r T + wl rk Properties of the GDP function re well known (Woodlnd ). For exmple the Hessin sumtrix G pp is positive semi-definite, due to convexity in prices, while the fctor su-mtrix G vv is negtive semi-definite, due to GDP eing nondecresing in fctor endowments. The se solution of the empiricl model is typified here y rentl rte vlues {w o, r o } such tht mrkets for lor nd cpitl cler, (,, ) G ( p, w, r) T w + w = (,, ) G ( p, w, r) T + = G p w r T G p w r T r r L K 4

The resulting shdow prices of wter re π o o o ( ) =,, G p w r The experiment performed is to grnt frmers user rights to their respective wter ssignments. They re permitted to rent in or out wter, suect to the exhustion of totl wter supply, T. Then, the equilirium conditions cn e rewritten s the existence of vlues {w *, r *, t * } such tht (,, )( ) G ( p, w, r)( t) G p w r T t w + = L w (,, )( ) (,, ) G p w r T t r G p w r t + = K r (,, ) (,, ) G p wr G p wr = 0 Where trde in wter t equtes the mrginl vlue product of wter mong sectors, i.e., equtes the shdow price of wter π (,, ) (,, ) = G p w r = G p w r * * * * * The mount of wter trnscted must e such tht = π * 0 t T And shdow prices must e positive. It now ecomes pprent tht the chnge in the shdow price of wter reltive to the se, i.e., (π * /π o ) hs to do with, first, how the relloction of wter cuses chnges in the rentl rtes w, r, nd then, how the chnge in these rtes ffect п reltive to п. We now turn to this tsk 2. Comprtive sttics of shdow prices First, we show the ffect of chnges in the wter lloction on the rentl rtes of lor nd cpitl. Note tht rentl rtes re given y the grdient of the economy-wide GDP function with respect to the fctor endowments L nd K, w = G( ) G( ), r = L K 5

Differentiting these functions with respect to the wter ssignment, nd requiring tht the wter constrint remin inding, we otin the rte of chnge in fctor rentl rtes s function of the chnge in wter lloction, w (2) w$ T$ w = ε ε T$ r (3) $ $ r r = ε T ε T$ T T The ^ nottion is the rte of chnge in the respective vrile. The elsticities re T T ε w T = 2 2 G( ) T ( ) r G T, ε T = LT w LT w And the rte of chnge in the wter used in sector is $ T T& = = ( T T ) It follows from the Hessin of the GDP function tht ε T i 0, i = w, r, =, As (2) nd (3) suggest, the signs of the chnge in the rentl rtes of lor nd cpitl re indeterminte without knowledge of the initil wter ssignment, nd whether sector employs fctor i intensively reltive to sector. Tht is, the direction of chnge in the rentl rtes for lor cn cpitl depend upon 1. the initil wter signment T, which then cn determine whether more or less wter is llcted to the sector, nd 2. the reltive fctor intensity of the sector. Suppose tht sector ws ssigned n mount of wter such tht to equte the shdow prices, wter flowed to sector. Tht is, (4) $ T 0 Then, the chnge in oth fctor rentl rtes re positive if sector is oth lor nd cpitl intensive reltive to sector. In this cse, i ε T i ε T If, in equilirium, β = wl TC > β = wl TC nd β = rl TC > β = rl TC 1 1, 2 2 6

The intuition is tht sector, hving more wter, desires to lso employ more lor nd cpitl thn the other sector is willing to relese t the previous rentl rte levels. Thus, for the lor nd cpitl mrkets to cler, their rentl rtes must rise. More generlly, given (4), ther re four possile cses: Cse 1: Sector is L intensive nd K intensive β1 > β1 β2 β2 wr 0 Cse 2: Sector is L intensive, is K intensive β1 > β1 β2 < β2 w$ 0, r$, 0 Cse 3: Sector is L intensive, is K intensive β1 < β1 β2 > β2 w$ 0, r$, 0 Cse 4: Sector is L intensive nd K intensive β1 < β1 β2 β2 wr $, $ 0 > ( $, $ ) < ( ) Where the signs re revised if (4) is positive. We now consider the ffect of the chnge in lor nd cpitl rentl rtes on the equilirium shdow prices of wter. The shdow price of wter must lso stisfy the mrket clering condition for wter given ove. Thus, using G (p,w,r), the chnge in the -th sector s shdow price of wter is given y G ( ) w G ( ) r π$ $ = + r w π r π π π π = ε + ε r$ From Hotelling s lemm, the elsticities re w r ε π w = β1 wl β π 21 rk =, ε r = = 1 β β π T 1 β β π T r $ 1 2 1 2 Sector is sid to e more lor thn cpitl intensive if β 1 is lrger tht β 2. This tells us tht we cn predict the chnge in the wter shdow price if we know how the sign of the rentl rtes for lor nd cpitl vry for chnges in the wter ssignment. More generlly, sustituting (2) nd (3) into the ove eqution, we otin w w π r r ( T T TT) r ( T T TT ) π π$ = ε ε $ ε $ + ε ε $ ε $ w In summry, for n initil wter ssignment resulting in (4), we hve four possile cses, two of which re determinte, nd two of which re indeterminte. 7

They re: Cse 1: Sector is L intensive nd K intensive ( $, $ ) wr 0 π 0 π π 0 π Cse 2: Sector () is L (K) intensive w$ 0, r$ 0 indeterminte indeterminte Cse 3: Sector () is L (K) intensive w$ 0, r$ 0 indeterminte indeterminte Cse 4: Sector is L nd K intensive ( $, $ ) wr 0 π * π In the two determinte cses occur when the rentl rtes of lor nd cpitl move in the sme, either oth rise or oth fll. The indeterminte cses occur when the rentl rtes of lor nd cpitl move in the opposite directions. In the indeterminte cses, it is likely tht the shdow price of wter for one sector flls reltive to the se while the other rises reltive to its former se, i.e. π ( ) π π ( ) 0 * * 0 = π While this discussion identifies the mor forces determining the empiricl results, the empiricl model is fr more complicted. For instnce, goods produced in the domestic economy re presumed not to e perfect sustitutes for imported goods in the sme ctegory. Consequently, the presence of wter mrket cn cuse chnges in the prices fced y frmers so tht in some circumstnce, it is possile for these forces to dominte the ffects discussed in this section. We now turn to discussion of the empiricl frmework. III. The pplied generl equilirium model nd dt The structure nd prmeters of the empiricl model exploit two sic dt sources. The ntionl level dt on employment, trde, non-frm production nd resource flows re tken from Moroccn socil ccounting mtrix (SAM). The second source is detiled input-output dt on crop production nd wter use t the frm level. These dt re otined from ech of the country s wter uthorities, ORMVA. In the SAM, the Moroccn economy is disggregted into 88 production ctivities, which produce 49 commodities nd employ eight primry inputs. On the demnd side, there re five privte household groups nd one pulic group. Since the EU is mor trding prtner, Morocco s trde pttern etween the rest of the world nd the EU re identified seprtely. There re five different policy instruments included in the dt, including txes, susidies, triffs, pyments for wter, mong others. While the rest of the economy must e cptured, the frmework focuses in fr more detil on griculture. Of the 88 production ctivities, 82 re in griculture or griculture-relted, including 66 in crop production, five in livestock, nd 11 in processing griculture, oth up nd down strem from the frm firm. The 66 crop production ctivities re further distinguished y within or outside the seven ORMVAs. Among the 33 ctivities within (or outside) the wter uthority perimeters, 21 re irrigted crop production nd 11 re rin-fed. The 66 crop 0 π * π 0 8

production ctivities produce 23 primry griculturl products, which implies tht ll crop products re ointly produced y different ctivities within or outside the ORMVAs. For instnce, soft whet is produced in oth irrigted nd in dry lnd res, nd in different regions of the country. Thus, this product is ssocited with different production function (ctivity) depending upon where nd how the crop is produced. Detiled frm level- nnul input-output dt re ville for 33 crop production ctivities t the perimeter level within seven ORMVAS. The seven ORMVAs re further su-divided into perimeters, totling 20 perimeters. This dt set provides us with frm level informtion on the wter chrge fee, cropping mix, wter nd lnd lloction, employment of lor nd cpitl nd intermedite input uses y crop nd, oviously, y perimeter. Both sets of dt were developed y Doukkli in conunction with his students nd collegues. We ssume tht there is representtive frmer (or firm) for ech of production ctivity. For crop production, we ssume tht, within ech perimeter, there re t the mximum 31 representtive frmers engged in crop production, while outside the ORMVA, there is only one representtive frmer t the ntionl level for ech of the 31 crop production ctivities. In other words, there re mximum of 621 representtive frmers (clculted s 31 x 20 + 1) involved in crop production in the model. For exmple, hrd whet cn e produced y frmers within perimeters or outside ech of the seven ORMVAs, in irrigtion or rin-fed res, which together, totl mximum of 42 representtive frmers engging in hrd whet production. In fct, s some crops re not produced in some perimeters, the totl numer of representtive frmers is smller thn 621. Ech representtive frmer (firm) is ssumed to mximize his (her) profit y choosing the mount of intermedite inputs, lor, cpitl, nd the lloction of lnd. In the se solution, which reproduces exctly the dt upon which the model is sed, frm crop level wter quot is ssigned y the respective ORMVA. Output nd input prices re given for individul producers ut re ffected y the mrket equilirium within the economy. The frmers (firms ) production function is ssumed to e constnt returns to scle in primry inputs (lor, cpitl, lnd, nd wter) with constnt elsticity sustitution (CES) form. The intensities of intermedite goods re in fixed proportion to output. Lor mrkets re notoriously difficult to model. Thus, Lor is specified s rurl nd urn. The rurl lor is moile mong ll griculturl sectors (including primry nd processing griculture), ut rurl workers cnnot e employed in the seven other non-griculturl sectors (which re urn sed). Outside the ORMVA res, Cpitl nd lnd re moile mong ll the griculturl sectors in the sense tht they cn e llocted to the production of ny of the identified crops (including livestock), while within n ORMVA, they re only moile within ech perimeter. Tht is, within prticulr perimeter of given ORMVA, cpitl nd lnd cn e llocted to ny crop ctivity produced in the perimeter, ut this cpitl nd lnd 9

cnnot e llocted to production ctivities in nother perimeter. Lnd is distinguished s irrigted nd rin-fed, nd the supply of irrigted lnd is fixed, i.e., we do not consider infrstructure investments to increse the size of the perimeter. The question of the socil profitility of expnding the re in irrigted perimeters is left to future pper. The supply of irrigted wter is employed in the production of irrigted crops, within nd outside the ORMVA res. Becuse of dt constrints, the use of wter y the urn sector nd y non-crop griculturl production is omitted from this nlysis. Wter is moile within perimeter ut not moile cross perimeters. There is no wter moility etween ORMVAs, nor from n ORMVA to regions outside n ORMVA. The study focuses on the wter policy nd wter efficiency within the ORMVAs, nd not on privte irrigted lnds outside of the wter uthority districts. Included in the nlysis is the wter chrge ssessed on frmers in the district y uthorities s given in the dt se. The wter chrge is presumed to e imposed y the method of volumetric pricing. This chrge rte to frmers is generlly viewed s only sufficient to cover opertion nd mintennce costs (Doukkli, 1997). As the wter chrge is less thn the price the mrginl users re willing to py, the distriution of wter must e dministered. When the quot of wter ssigned to frmers is elow the demnd for wter t the given wter chrge rte, then, implicitly, the shdow price for wter is positive. Depending upon the mrginl product of wter llocted to vrious crops nd wter vilility within perimeter, this price will vry ccordingly, even though the government chrges the sme price per volumetric of wter within n ORMVA. The shre of government chrges in wter s totl contriution to vluedded to production t the frm level vries from 80 to 20 percent cross perimeters. The difference etween the shdow price of wter nd the government s chrge ccrues s enefit (rent) to frmers, i.e., this is prt of frmer s profit. For ech individul frmer, s the intensity of wter use vries y crop, enefits relted to growing vrious crops vry from n estimted less thn one percent to more thn 60 percent of the vlue-dded to production. In other words, considerle heterogeneity exists cross frmers, perimeters nd regions in the intensity (importnce) of wter in production nd frmer s profits. IV. Simultion nlysis getting wter price right As government s wter chrges re elow the shdow price of wter tht vry cross different crops, efficiency in wter lloction cn e improved y getting wter prices right. Getting these prices right is defined s equting the mrginl vlue product of wter in its vrious uses within ech perimeter of ech ORMVA (note, not etween perimeters or etween ORMVAs.) The mechnism for chieving this result in the study is decentrlized one, i.e., llowing frmers within perimeter to rent in or out their wter user-rights. Frmer's entitlement to wter 10

user-rights re ssumed to e determined y the wter quot ssigned to them y the wter uthority ccording to the frming prctices in the dt. The rentl price is set t the mrket clering shdow price for wter within ech perimeter nd is solved simultneously with ll other endogenous vriles in the model. Of course, there exist numerous dudictions, technicl nd prcticl prolems in forming wter mrket, mny of which re discussed in (Thonl, 1997). While these very rel prolems re ignored here, the simultion nevertheless provides empiricl insights into the reltive nture of the possile gins from such wter mrketpricing scheme, s well s to providing insights into the regionl differences in the productivity of wter. IV.1 Where does the wter go? Following the resoning of the theoreticl model, the first question to sk is: from which ctivities is the wter llocted from nd to which ctivities is it llocted to? In generl, it is predictle tht trde in wter user-rights cuses some (not ll) wter to e re-llocted wy from crops yielding reltively low return (i.e., low shdow price in the se), nd to those crops whose shdow price of wter in the se is reltively high. Moreover, the lrger is the devition in the se wter shdow price cross crops within perimeter, the more tht wter is likely to e rellocted to equte shdow prices (i.e., to equte the mrginl vlue product of wter mong ctivities within perimeter). However, s noted in Section II.2, when wter is re-llocted cross crops, it my cuse prices for other inputs, such s wge nd cpitl rentl rtes, to chnge, s the production of different crops hve different fctor intensities in the use of wter nd other inputs, i.e., some inputs re more importnt in the production of some crops thn others. Not considered in the theoreticl section is tht the prices for output my lso chnge due to different trde dependencies cross sectors. The lower the rtio of the exports to totl supply in sector, the higher the sector s production is constrined y domestic demnd. These fctors lso ffect wter lloction such tht for region with multiple crop-mix, wter my not go to the crops with high se shdow price. The pplied generl equilirium model llows us to mesure where the wter goes nd how much wter hs to e re-llocted in order to improve wter efficiency. Tle 1 displys two results. The first column reports the stndrd devition in wter shdow prices cross crops within ech perimeter sed on the se yers dt. Tht is, in terms of the theory section, these re the stndrd devition of the 0 shdow vlues π i. The second column reports the percent of totl wter reported in the se dt for ech perimeter tht is re-llocted fter introducing wter userrights mrkets in the model. 11

The wter shdow price y crop is normlized y its men t the perimeter level (the verge returns to wter in the perimeter). The mesure of re-llocted wter is relted to the totl wter supply within the perimeter. A simple crosssection liner regression shows tht there exists significntly positive correltion etween the stndrd devition in the wter shdow price nd the mount of wter re-llocted. Tht is to sy, lrge devition in wter shdow prices implies tht the current wter ssignment is reltively fr wy from the ssignment tht would otherwise equte the mrginl vlue product of wter mong lterntive uses within perimeter, i.e. the most efficient use of wter. Thus, if wter user-rights were trded, more wter would e re-llocted to increse its efficiency. The lrger the devition oserved in wter shdow prices, the greter the incentive to trde in wter user rights, nd thus, the lrger the percentge of the totl wter tht is likely to e trded. The highest percent of totl perimeter wter rellocted is more thn 60 percent. This result occurs in the Houz irrigtion district s Perimeter 2 where the stndrd devition in shdow price of wter is 3.97. This devition is the highest of ll perimeters. The lowest rtio of re-llocted wter over perimeter s totl wter supply is 3.5 percent, nd in this perimeter (Ghr, Perimeter 1), the devition in wter shdow price is only 0.35 (tle 1x). This result suggests tht the ORMVA mnging this perimeter hs een reltively successful t llocting wter ssignments to mximize the returns to irrigtion wter, nd thus, mrket in wter user rights cnnot improve much on the efficiency lredy otined. With few exceptions, the results suggest tht trde in wter user-rights cuses wter to e re-llocted wy from crops with low (especilly very low) wter shdow price nd to those crops with high shdow price (especilly the highest one in the region). This is the result predicted y reltively simple theory posited in Section II.2. Ptterns cross regions cn lso e oserved. In most perimeters, the se yer wter shdow prices re reltively high in the production of vegetles nd fruit crops nd low in grin, sugr nd other industril crops. The reson is tht grin, sugr, nd other industril crop production hs een protected in Morocco y rriers to trde. With protection, frmers tend to grow more of these crops thn in the cse without protection (of course, this nlysis leves this protection in plce nd leves to future pper, the investigtion of trde reform on the productivity of wter). The reltively low shdow price for wter in these crops suggests tht either () the regionl wter uthorities tend to fvor these crops nd ssign wter llotments to them tht leds to reltively low returns to wter, nd/or () tht in spite of protection, these crops re still not competitive with the production of other crops which implies lower return to wter resources thn could e erned if the wter ws llocted to other crops in the perimeter. Thus, the introduction of wter mrket cuses re-lloction of wter wy from the mentioned crops nd towrds the production vegetles nd fruits. 12

This of course leds to decline in grin nd industril crop production (tle 2). However, it should e noted tht this does not men tht producers of the gin nd industril crops experience decline in income. Insted, their income rises ecuse they find it more profitle to rent out some of their wter user rights to producers of fruits nd vegetles (or increse fruit nd vegetle production themselves) thn to llocte this wter to production of the protected crops. To wht extent does the relloction of wter in the vrious regions cuse chnge in production in the rin-fed res? Declines in grin, sugr nd other industril crop production minly occur in the irrigted re, while the sme crop produced in the rin-fed res either does not fll or flls only slightly (second prt of tle 2). There re two resons to explin this. First, there is only n indirect effect of the wter policy reform on the production of rin-fed crops. The indirect effect minly comes from chnge in the prices for other inputs, such s wges, nd cpitl rentl rtes, s well s some chnge in output prices. As wter is llocted more efficiently within perimeters, the productivity of other resources is lso ffected, nd most of these effects re positive. The result is to it up the price of these other resources. This rise in prices of some inputs hs lrger negtive effects on crops tht employ them intensively reltive to other crops. Thus, producers in the rin-fed res fce slightly higher prices for some ut not ll - inputs used in their crop production. The second reson is tht choices in the cropping mix re reltively limited for the dry-lnd re, so tht frmers re limited to smller group of possile crops. Moreover, these dry-lnd crops re lso produced in the other regions outside the seven ORMVAs. The chnge in the totl output y crops t the ntionl level is much smller thn the chnge t the ORMVA level (tle 3). Overll, tles 2 nd 3 suggest tht the effects of wter re-lloction tends to cuse n increse in fruit nd vegetles production, nd to lower the level of cerel nd industril crop production. Or, stted differently, the wter ssignments to crops tend to fvor the ltter crops in the sense tht these crops re otining wter llotments even though the return to wter in these crops is lower thn it is in fruit nd vegetle crop production. An importnt cvet is tht we re not studying whether the resulting expnsion of fruit nd vegetle crop production cn find mrkets in the EU nd the rest of the world. This question is left to future pper. IV.2 Wht is the mrket price for wter? We now focus ttention to the price of wter, y perimeter, tht results fter wter mrket in user rights is introduced. Once trde in wter user-rights is possile, frmers hve motivtion to trde if the productivity of wter they hve een ssigned deprts from the productivity of wter in other ctivities within the perimeter. For most (ut not ll) frmers who hve reltively low shdow price for wter initilly (i.e., s clculted in the se), ut oserve opportunities to otin higher returns to their wter y renting some of it to others, the new resulting wter price cn e higher nd hence they hve motivtion to rent out their wter user-rights. Even though their income from growing crops using ll of their former 13

wter ssignment my fll s they rent out some of this ssignment to others, the compenstion from renting wter out cn exceed the decline in income from growing less of the former crop. For the other frmers, even though the returns to the wter ssignment tht they own property rights to my decline if the new wter price is lower thn the shdow price they fce efore trde in wter ws possile, their income will rise if they rent in wter to expnd their production. Thus, the competition in wter use mong frmers will cuse the wter mrket price to deprt from the vrious shdow prices implied y the se yer dt. In Section II.2, we noted the conditions tht would cuse the mrket price for wter to e higher or lower thn the shdow price sed on the wter ssignment, nd the conditions wherey the mrket price would lie somewhere etween the high nd low shdow prices oserved se. The empiricl results show tht, in most cses, the mrket price for wter is not higher (lower) thn the highest (lowest) wter shdow price in perimeter. Tht is, the results suggest tht, for lmost ll perimeters, the price of wter fter the introduction of wter user rights mrket lies within rnge tht is ounded y the highest nd lowest shdow price for wter oserved in the se yer (or clculted sed upon se yer dt). Given the stndrd devitions reported in tle 1, this implies there re frmers in ech perimeter hve incentives to rent in (out) wter. However, s suggest y the theory in Section II.2, if the prices for other inputs ll fll, or if the demnd for renting in wter is much higher thn the supply of renting out wter, the equilirium wter mrket price my e driven up nd could, eventully, e higher thn the shdow price tht ny frmer fced prereform. In this cse, frmers should e greter incentives to sve wter y sustituting wter with other inputs or dopting wter sving technologies. The mrket price for wter is still different cross perimeters s we ssume tht infrstructure is not in plce to chnnel wter from one perimeter to the other, nd hence wter mrket price is sptilly confined to nd determined loclly within ech perimeter. For some perimeters in which the supply of wter is reltively lrge, or the cropping mix is less wter-intensive, the mrket price for wter my e reltively low, while for the other perimeters which re reltively wter scrce, or the production structure is more wter-intensive, wter mrket price cn e high. This implies tht it my e socilly profitle to expnd wter user-rights trding eyond the perimeter order, for exmple, trding etween perimeters within n ORMVA or cross ORMVAs, or trding etween rurl nd urn res. All these re importnt questions re eyond the scope of the present pper. In order to quntittively mesure the level of the wter mrket price fter introducing trde in wter user-rights, we compre the wter mrket price with the verge returns to wter pre-reform for ech perimeter. These results re reported 14

in tle 4. Tle 4x lso reports the chnge in the returns to cpitl nd lnd, which re ssumed to e moile within perimeter ut not cross perimeters. Effectively, perimeter cpitl nd lnd re the perimeter s sector specific resource nd re thus components of frm profits. We expect the chnge in wter policy to ffect the returns to these resources. Among the 20 perimeters included in the study, there re 16 in which the mrket price for wter post-reform is higher thn the verge returns to wter prereform (see the Wter column, tle 4). This result implies tht, t the perimeter level, wter s productivity rises, on verge, (i.e., the mrginl vlue product of wter rises post reform reltive to the verge mrginl vlue product of wter prereform) due to the introduction of trde in wter user rights. Moreover, crosssection regression shows tht the mgnitude of the rise in wter productivity is closely relted to the mount of wter re-llocted due to the reform, i.e., the lrger the mount of wter re-llocted post reform, the lrger the rise in wter productivity. The two highest increses in the wter productivity re oserved in Houz, Perimeter 2 (52%) nd Moulouy, Perimeter 3 (37%), where more thn 60 nd 50 percent of wter is re-llocted post reform, respectively (see tle 4). Whether the wter mrket price post-reform is higher (lower) thn the verge return to wter pre-reform highly depends on whether wter moves wy from growing some crops tht re less (more) wter-intensive to growing other crops tht re more (less) wter-intensive. More intuitively, s wter moves from crops tht re less wter intensive to crops tht re more wter intensive, those giving up wter tend relese more non-wter resources from production t the old rentl rtes of these resources thn the wter intensive crops cn profitly employ t the old rentl rtes. Thus, mrket pressures cuse the rentl rtes of these other resources to fll, which, s shown in the theory section, tends to rise the shdow price of wter. We choose n ORMVA Souss Mss to illustrte this importnt point (see tle 5). There re three perimeters in this ORMVA. In oth Perimeters 1 nd 2, the lrgest decline in wter demnd is in fodder production, rnging from 37 to 89 percent of wter eing re-llocted from these crops) nd the lrgest increse in wter demnd is in the ctegory, other vegetle production (rnging from 42 to 93 percent of the wter eing re-llocted to these crops). Fodder production is more wter intensive thn is vegetle production (s indicted y wter s shre in totl vlue dded). Fodder employs more wter in Perimeter 1 thn in Perimeter 2, nd vegetle employs less wter in Perimeter 1 thn in Perimeter 2 (tle 5). Thus, s wter is llocted to vegetles in Perimeter 1, vegetle producers lso need to employ other resources. This need in turn cuses the rentl rtes of other perimeter resources to rise (see tle 4). This plces downwrd pressures on the rise in wter s shdow price with the end result tht the mrket price of wter is 12.58 percent of the verge shdow price pre-wter mrket reform. We see this sme tendency for the cse of Perimeter 3, ut in this cse the prices of other inputs rise nd others fll y reltively smll mounts so tht the price of wter is only slightly 15

different (3.65 percent) thn the pre-reform verge. In the cse of Perimeter 2, the post-reform price of wter is 6.87 percent higher thn the verge shdow price, pre-reform. We see from tle 4 tht the rentl rte of cpitl rose y 2.6 percent, nd thus, the 6.78 percent rise is not the result we expect from the simple theory lone. However, we find tht rurl wges fll slightly, s do the prices of some other intermedite inputs. Thus, in finl nlysis, we see consistency in the direction of chnge in wter prices. VI-3. Why returns to other fctors chnge? In tle 4 we lso oserve tht the wter policy reform ffects returns to other fctors, such s cpitl, nd the returns to oth irrigted nd rin-fed lnd. In Section II.2, we discussed this possiility in simple theoreticl frmework. In the empiricl model, rurl lor is griculturl sector-wide fctor, i.e., it cn move mong ll griculturl nd griculture-relted production ctivities (ut cnnot move into the seven urn sed mnufcturing nd service sector ctivities). After introducing the wter user-rights trde, the efficiency in wter use is improved. The increse in the crop production tht employs more wter postreform lso employs more lor thn employed in these crops pre-reform. The seven ORMVAs in totl increse lor demnd y out 1.13% reltive to the level oserved in the dt (tle 6, the lst column). Tht is, due to the improvement in wter efficiency, there is net lor inflow to the seven ORMVAs in totl. However, it is not necessry for ll ORMVAs or for ll perimeters to rise their lor demnd. Due to differences in cropping-mix nd the mount of wter rellocted post-reform, there re two ORMVAs in which there re net lor outflows. At the perimeter level, only the ORMVAs ssocited with Souss experiences rise in the demnd for lor in ll of its perimeters. In the cse of the other six ORMVAs, there is t lest one perimeter in which lor demnd flls (tle 6). The min cuse for lor inflow or outflow is due to differences in cropping-mix in the perimeter nd the corresponding differences in lor intensity cross crops. In generl, if perimeter s wter is re-llocted wy from growing more lor-intensive crops into less lor-intensive crops, then lor outflow from the perimeter should e oserved. The reson is tht the chnge in wter lloction in the perimeter results in lower demnd for lor, given the pre-reform wge rte. This downwrd pressure on wges encourges some lor to serch for employment elsewhere. The opposite sitution occurs if the wter were re-llocted wy from growing less lor-intensive crops nd towrd growing more lor intensive crops. In tle 7, we clculte the verge lor contriution in totl vlue-dded y two groups of crops in the perimeter. One group includes the crops in which more wter is employed post-reform nd the other is where less wter is employed. In the cse of Doukkl, Perimeter 1, wter moves towrd crops for which lor ccounts for reltively smll shre of totl costs, compred to the crops giving up wter. In this cse, the crops receiving wter hve the need to 16

increse employment, ut to smller mount thn the crops giving up wter, nd hence employing few workers. Compring the results in tle 6 with the clcultions in tle 7, we oserve tht for most perimeters, the model outcome regrding lor re-lloction is consistent with the resons presented here. Lor moility, induced y wter re-lloction within ll perimeters, will cuse the wge rte to chnge for the sector s whole. We oserve tht the economy-wide wge rte for the rurl lor declines slightly (0.81 percent, tle 8) fter introducing the wter mrket. As lor moility is driven y the wter relloction, which, s we nlyze in Section IV-1, is minly determined y the gp in crops yielding different returns to wter, lor would move into those crops tht compete wter post-reform (tle 9). We clculte the verge lor intensity in the rest of economy s griculture nd compre this estimte with the verge lor intensity in totl crop production of the seven ORMVAs. We find tht lor ccounts for out 15 percent of totl vlue-dded in the seven ORMVA s crop production, it ccounts for out 22 percent of totl vlue-dded in the rest of economy s primry griculture. If we only consider crop production, the lor contriution is s high s 26 percent in the rest of economy. As there is much smller contriution from wter to the vluedded in crop production in the rest of economy, lor shre is resonly higher in the rest of economy thn tht in the irrigted regions. As irrigted regions compete for lor fter wter is more efficiently llocted, lor hs een relesed from the more lor-intensive regions to the less intensive ones. Thus, the rurl lor wge rte declines, leit y reltively smll mount, 0.81 percent. This result is consistent with the prediction y the theory nlyzed in Section II.2. Cpitl rentl rtes nd returns to lnd re lso ffected y the re-lloction of wter (tle 4). As cpitl nd lnd cn only move cross crops within perimeter (nd re not le to move cross regions), the direction nd mgnitude of chnges in the cpitl rentl rte nd returns to lnd cn e different cross regions. Agin, the driving force yielding this result is the diversity in cropping mix cross regions nd the vriety in fctor intensity cross crops. For exmple, s tree crops re reltively cpitl-intensive (ut less lnd-intensive), if most of the re-llocted wter is employed in this sector, then cpitl rentl rte would rise, while returns to irrigted lnd my fll. VI-4. Does wter reform ffect the rest of the economy? Even though the seven ORMVAs only ccount for 10 percent of griculturl GDP in the economy, 1 the re-llocted of wter cross crops within perimeters hs noticele economy-wide effects. To show the sic effects, we drw upon 1 Due to dt on other economic ctivities, i.e., other thn crop production, in the seven Ormvs re not ville. Thus, when we discuss the economy of the ORMVAs, we re only including crop production within the ORMVAs, while other economic ctivities re ggregted into the rest of economy. 17

selected ggregte economic indictors t the ntionl level. These indictors re reported in tle 10. As irrigted districts frmers ecome more competitive due to the more productive use of wter, nd thus compete for lor with frmers in the rest of griculture, rel output in the rest of griculture declines slightly (y 0.01 percent). As the positive impct of wter reform in the irrigted regions domintes the negtive impct to the rest of economy in terms of output, economy-wide GDP increses y 0.17 percent, nd even the cost of living declines slightly, y.07 percent. This ggregte welfre gin is lso cptured y the increse in consumer s totl consumption, which rises y 0.25 percent. In other words, wter reform in sector tht comprises out 10 percent of griculturl GDP, cn increse ntionl GDP y.17 percent. This mounts to free gin in totl welfre without the use of dditionl resources. If other mcroeconomic reforms (such s trde lierliztion) were undertken, it is very likely tht the gins from wter reform would rise considerly, s suggested in former, though fr less detiled study (Dio nd Roe, 2002). In terms of rurl nd urn income, we oserve tht urn income rises slightly more thn the increse in the totl rurl income (0.2% vs. 0.16%). The min reson is due to the slight decline in the rurl wge rte. Notice tht rurl nonwge income, i.e., incomes erned y those frmers who own cpitl, lnd, nd wter user-rights, increses y 0.46%, while totl wge income declines y 0.66%. These results imply tht the wter reform my hurt or not necessrily mke etter off those rurl workers tht do not own ssets other thn their lor, such s lnd, nd mchinery. Moreover, for the frmers who own different mounts of lnd nd cpitl, the impct of the reform is lso different. Dt show tht the smll frmer group (which oviously own less lnd nd cpitl thn those in the medium nd lrge frmer groups) hve to depend to greter degree on wge income erned from employment either in non-frm ctivities or on the lrge frms. Thus, s group, smll frmers income only rises y 0.17%, while income rises y 0.39% nd 0.37% for the medium nd lrge frmer groups, respectively. Wter policy reform lso ffects the country s trde. Given the sttic property of the model, the totl trde deficit hs treted s given, i.e., fixed (this is common feture of sttic generl equilirium nlysis). However, trde shres with the EU nd the rest of world, s well s the structure of the trde is ffected y the wter policy. The results reported in tle 10 suggest tht the percent chnge from the se in Morocco s totl trde with EU rises y lmost 3%, especilly the surplus in griculturl trde, (rises y more thn 6%). It is well known tht the EU is mor destintion for Moroccn vegetle nd fruit exports in which Morocco hs comprtive dvntge. As most of these products re produced y employing using wter nd more wter is re-llocted into vegetle nd fruit production in the irrigted regions, exports of these commodities rises. 18

Tle 11 reports the chnge in exports y commodity group. We oserved tht crop exports, especilly exports to the EU, increse the most (more thn 3 percent). Moreover, s domestic production of whet, sugr nd other industril crops, in which Morocco tends not to hold comprtive dvntge, declines due to wter eing re-llocted wy from them, their imports rise. Thus, totl crop nd totl griculturl imports rise y 0.71 nd 0.85 percent, respectively (tle 11). An impliction is tht foreign nd domestic rriers to griculturl trde re importnt determinnts of the shdow price of wter in the districts studied here. Further, it is lmost surely the cse tht chnges in the other economy-wide policies will ffect the structure of trde to greter degree thn wter policy lone. This, in turn would e expected to further ffect wter lloction nd hence the structure of crop production, s well s the entire economy. Anlysis on the reltionship etween wter policy reform nd trde lierliztion is the focus of forthcoming pper. VII. Concluding Remrks The growing scrcity of wter in low income countries, countries in which the mority of the poor reside in the rurl sector, sector tht in turn consumes the fr mority of moilizle wter supplies, plces incresed pressures for developing mechnisms to llocte wter to its most productive uses. Of the vrious resons mking this process difficult, this pper considers the sptil heterogeneity inherent in irrigted griculture, the prolem of estlishing property rights to wter, nd the sector nd economy-wide effects tht chnges in wter policy cn hve on n economy. The design of ntionl wter policy is mde difficult y the sptil heterogeneity of griculture. Property rights mtter ecuse they influence the motivtion frmers hve to use wter efficiently, nd to determining which frmers cn use wter more efficiently thn others. The sector nd economy-wide effects mtter ecuse chnging wter policies ffect the prices of other economy wide resources, such s lor nd griculturl cpitl, while t the ntionl level, they cn ffect the level of exports, imports, nd even the cost of living, s mesured y the consumer price index, ecuse food tends to e reltively lrge shre of totl consumption expenditures. Ignoring these influences is to gretly underestimte the economic rewrds from llocting wter more to its most productive uses. To provide insights into these fctors, we develop detiled economy wide model of the Moroccn economy with mor ttention given to seven irrigted regions whose wter supplies nd distriution re mnged y seven wter uthorities, ech of which contin t lest two irrigtion perimeters. Of the 88 production ctivities modeled, 82 re in griculture or griculture-relted ctivities, including 66 in crop production, five in livestock, nd 11 in processing griculture, oth up nd down strem from the frm firm. The 66 crop production ctivities re further distinguished y eing within or outside the seven ORMVAs. Among the 33 ctivities within (or outside) the wter uthority perimeters, 21 re irrigted crop 19

production nd 11 re rin-fed. The 66 crop production ctivities produce 23 primry griculturl products, some of which re produce in irrigted griculture, s well s in rin-fed res. The intent of this detil is to cpture the sptil heterogeneity of irrigted griculture. Given policies in plce, s depicted in the dt including the wter ssignments mde y the wter uthorities within ech perimeter, the model is solved so s to reproduce the se dt, s well s to provide estimtes of the shdow price of wter for ech wter ssignment to ech crop in ech perimeter of ech of the seven ORMVAs. The level nd disprity in shdow prices provides insights into the degree to which wter is llocted to its most productive crops. Then, the ssumption is mde tht frmers re given the user rights to their historic wter ssignments. In this cse, they cn choose to llocte wter, s they hve in the pst nd internlize, s prt of their profits, the shdow price of wter. Or, they cn choose to rent out to, or in from other frmers in the perimeter some or ll of their wter, nd receive s compenstion, the resulting mrket rentl price of wter in tht perimeter. This is the mechnism y which the property rights to wter is modeled, nd how trde in wter user rights leds to the lloction of wter so s to equte the mrginl vlue product of wter in its lterntive uses within ech perimeter. The results re quite profound. They suggest tht such mechnism could increse griculturl output within the seven ORMVAs y 8.3 percent. Most likely, this estimte is conservtive ecuse some of the higher income strem will surely e invested into new griculturl cpitl, nd growth in trde should encourge growth in the imports of intermedite cpitl goods tht will help foster growth in griculture nd the rest of the economy. The results suggest tht output of fruits nd vegetles increse the most, while the production of whet nd fodder tends to decline. Wter reform is shown to hve economy-wide effects, to plce downwrd pressure on the cost of living, to increse net griculturl trde, nd to increse rurl frm income. The effect on rurl wges is slightly negtive, ut income of smll, medium nd lrger frms increse. The mrket price of wter, reltive to the verge shdow price of wter pre-wter mrket reform, rises in 16 of the 20 irrigtion perimeters contined in the seven ORMVAs detiled in the model. The increse rnges from low of 1 percent to high of lmost 52 percent, while the declines in the four remining perimeters rnge from 0.27 percent to out 25 percent. The lloction of wter to its most productive use lso tends to rise the productivity of other resources, nd hence their rentl rtes, such s griculturl cpitl nd lnd tht is specific to perimeter. While numerous technicl nd institutionl difficulties exist to implementing the type of wter mrket reform studied here, the potentil economic enefits from the lloction of irrigtion wter to its most productive uses ppers to e, not only sustntil to the rurl economy, ut to the roder economy s well. 20