economy, and provides incentives for farmers to also respond to these changes by, again, changing their farm plan. This indirect effect can be surprisingly large. Together, the direct and indirect effects equal the total effect of a change in water assignments.

## **How other sectors are linked and modeled**

The main sectors in addition to irrigated agriculture that is modeled are the urban sector and the government. The urban sector is represented by one or more household types, broken into income level groups. Households are linked with the economic system in various ways. Households receive income in payment for producers‘ use of their factors of production. Households pay direct taxes to government (based on fixed tax rates), save (based on marginal propensities to save), and make transfers to the rest of the world. Households use their income to consume commodities under a linear expenditure system (LES) of demand. The government receives revenues from imposing activity, sales and direct taxes and import tariffs, and then makes transfers to households, enterprises and the rest of the world.

# **Description of special features in the models of Mexico, Morocco, South Africa and Turkey**<sup>**2**</sup>

This section demonstrates the usefulness of the macro-micro linkage approach by applying it to 4 country case studies—Mexico, Morocco, Turkey and South Africa. The demonstration starts by discussing the water and macro-economic linkages in these water scarce countries where irrigated agriculture is a major sector. Then, the results from the 4 countries will be used in order demonstrate, quantitatively the impacts of various policy interventions and external shocks.

## **Mexico**

Water resources management is one of Mexico‘s most urgent environmental and resource problems, and one that imposes heavy costs on the economy. The country is slightly less than 2 million km<sup>2</sup> in size and the population has quadrupled from 25 million in 1950 to over 106 million in June 2005. Population growth has occurred nationwide, but has been greater (by internal migration) in the semi-arid and arid north, northwest, and central regions, which are the regions with greater economic activity and where water is scarcest. The resulting increased demand for water, combined with more intensive use of water (stimulated in part by price distortions and relatively weak monitoring and enforcement arrangements), has led to insufficient water availability to support natural ecosystems, and seriously constrains growth in many areas.

Although Mexico is highly urbanized, nearly 75 percent of its available water resources are used for irrigation. Roughly speaking, Mexico can be divided into two parts; the country‘s four southern regions are more water endowed than the nine northwestern, northern, and central regions. Irrigation systems in Mexico can be grouped into two major categories: small- and medium-scale (100 to 3,000 ha) and large-scale systems (>3,000 ha). While industry uses 10 percent of the water in Mexico, it has an important role, both affecting and being affected by the water sector. Several issues are worth mentioning. Mexico‘s industrial sector pays water extraction charges that are relatively higher than in other sectors. With over allocation of existing water rights, new industrial entrepreneurships

> 2 Economic and institutional information is for the time of the implementation of the World Bank studies.

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