# FEEDBACK LINKS BETWEEN ECONOMY-WIDE AND FARM-LEVEL POLICIES: With Application to Irrigation Water Management in Morocco

# **INTRODUCTION**

Agriculture consumes the lion’s share—between 75-90 percent—of annual renewable fresh water on earth. This is a sufficient reason for policy makers to focus their efforts on improved performance of water use in irrigated agriculture, especially when water scarcity becomes a crucial policy issue. The literature shows that governments use a plethora of policy interventions such as pricing, water right assignments and development of water trading schemes (e.g., Johnson et al., 2002; Dinar and Saleth, 2005, Tsur et al., 2004; Tiwari and Dinar, 2002) to address water productivity and equity issues. Most economic analyses of policy intervention in the irrigation sector address questions at the farm or regional level. Actual results of the various interventions vary, depending on the local institutional setups (Dinar and Mody, 2004).

While policy interventions at the farm and regional (micro) levels could lead to desirable results (Tsur et al. 2005), narrow considerations may also lead to a sub-optimal outcome from a social point of view. This point is demonstrated in recent findings from work on economy-wide considerations and linkages (Tsur et al. 2004). Because interactions among sectors and factors of production are evident, the linkages among micro and macro policy interventions are far more important and allow policy makers to better assess the outcome of their interventions.

Tsur et al. (2004, chapter 5) apply a CGE framework to Morocco’s irrigation sector demonstrating the importance of macro-micro feedback effects by using water rights and international trade reforms. They find that reforms outside agriculture have major impacts on rural household income, and that water reforms that are designed without taking into account reforms outside irrigated agriculture may lower overall productivity of irrigation water. Diao et al. (2005) extend the model in Tsur et al. (2004) to include a detailed accounting of the agricultural sector in Morocco. They show the potential gains to the irrigation sector and the economy as a whole from allocating water to its most productive uses in an economy with considerable spatial heterogeneity in water availability and productivity. Their model includes seven water districts that span the entire irrigation economy in Morroco.

Most economic works on water policy and pricing and institutional reforms are partial in nature, in that they focus on small regions—mainly farms, water districts, and perimeters or irrigation projects (see the works listed in Table 1 of Johansson et al, 2001). However, efforts to reform water policy and improve water use efficiency from the perspective of the district alone, though necessary, are not sufficient. In fact, the national level efforts of macro economic policy reform are intricately and jointly linked to water policy at the micro (district, perimeter, farm) level. In the context of water policy interventions however, in addition to the works cited above, we are aware of only a few other CGE studies (e.g., Berck et al. 1991; Goldin and Ronald-Holst 1995; Diao and Roe 2000). Most CGE studies on water that have been reported in the literature treat irrigated agriculture as one sector/activity. Such structures are only appropriate in economies where physical (soil quality, water availability, etc.), economic and social conditions (crop mixes, proximity to markets, farm size, water delivery costs, etc...) are similar across regions.

However, when there are disparities among regions, a more detailed structure is needed to analyze the impacts of water policy interventions. This structure will provide in-