metadata: authors: 0: author: Dinar, Ariel
count: Morocco,Southern Africa,Türkiye,Mexico
docna: 0: docna: Economy-wide implications of direct and
            indirect policy interventions in the water sector: lessons
            from recent work and future research needs
docty: Policy Research Working Paper
subtopic: Climate Change and Agriculture,Crops and Crop Management Systems,Water and Food Supply,Hydrology,International Trade and Trade Rules,Food Security
teratopic: Water Supply and Sanitation,Water Resources
abstracts: cdata!: Water is increasingly becoming a
            limiting factor for sustainable economic growth and
            development in many countries. Its allocation has
            significant impacts on overall economic efficiency,
            particularly with growing physical scarcity in certain
            regions. Greater water supply variability further increases
            vulnerability in affected regions. Water also has become a
            strategic resource involving conflicts among those who may
            be affected differently by various policies. This paper
            analyzes various policy interventions aimed at improving
            water allocation decisions, using a novel approach that
            incorporates macro and micro level considerations in a
            unified analytical framework. The framework facilitates
            assessment of various linkages among policies and their
            impacts within individual sectors and economy-wide. Drawing
            on country based studies in Morocco, South Africa, Turkey,
            and Mexico, the analysis reveals difficult tradeoffs among
            various policy objectives, including priorities placed on
            different sectors, regional advantages, and general economic
            efficiency gains versus broader social impacts. The
            comparison of policy impacts demonstrates the usefulness of
            the framework in information that policy makers can use to
            rank the policy interventions according to the emphasis
            placed on different policy objectives. The paper also
            compares approaches used in other studies that apply
            computable general equilibrium models in various contexts of
            water, environment and agriculture.
geo_reg_key: 107234,80464,80475,80451,107233,80461,80463,80450,80465
repnme: repnme: Economy-wide implications of direct and
            indirect policy interventions in the water sector: lessons
            from recent work and future research needs
display_title: Economy-wide implications of direct
            and indirect policy interventions in the water sector:
            lessons from recent work and future research needs
listing_relative_url: /research/2012/05/16260450/economy-wide-implications-direct-indirect-policy-interventions-water-sector-lessons-recent-work-future-research-needs
topicv3: Irrigation and Drainage Methods m1325970 151,Agriculture and Food Security m1326205 435,Water m1326522 137,Crop Production m1326627 174,Trade m1326924 698
publishtoextweb_dt: 2012-05-01T00:00:00Z
historic_topic: Water Supply and Sanitation,Water Resources
no_of_pages: 71
author_keys: 0: author_key: NA
model_extractions: WPS6068 Policy Research Working Paper 6068 Economy-Wide Implications of Direct and Indirect Policy Interventions in the Water Sector Lessons from Recent Work and Future Research Needs _Ariel Dinar_ The World Bank Development Research Group Environment and Energy Team May 2012
Policy Research Working Paper 6068

# **Abstract**

Water is increasingly becoming a limiting factor for sustainable economic growth and development in many countries. Its allocation has significant impacts on overall economic efficiency, particularly with growing physical scarcity in certain regions. Greater water supply variability further increases vulnerability in affected regions. Water also has become a strategic resource involving conflicts among those who may be affected differently by various policies. This paper analyzes various policy interventions aimed at improving water allocation decisions, using a novel approach that incorporates macro and micro level considerations in a unified analytical framework. The framework facilitates assessment of various linkages among policies and their impacts within individual sectors and economy-wide. Drawing on country based studies in Morocco, South Africa, Turkey, and Mexico, the analysis reveals difficult tradeoffs among various policy objectives, including priorities placed on different sectors, regional advantages, and general economic efficiency gains versus broader social impacts. The comparison of policy impacts demonstrates the usefulness of the framework in information that policy makers can use to rank the policy interventions according to the emphasis placed on different policy objectives. The paper also compares approaches used in other studies that apply computable general equilibrium models in various contexts of water, environment and agriculture.

This paper is a product of the Environment and Energy Team, Development Research Group. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at adinar@ucr.edu. Further information about the research underlying the paper can be obtained by contacting Mike Toman, Environment and Energy Research Manager, at mtoman@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Economy-Wide Implications of Direct and Indirect Policy Interventions in the Water Sector: Lessons from Recent Work and Future Research Needs**

Ariel Dinar Water Science and Policy Center, Department of Environmental Sciences, University of California, Riverside Key words: water resource allocation. sustainable development. general equilibrium analysis. JEL Codes: Q25. O13. WB Sector: Water.

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# **Economy-Wide Implications of Direct and Indirect Policy Interventions in the Water Sector:**

# **Lessons from Recent Work and Future Research Needs**

Ariel Dinar<sup>**1**</sup> Water Science and Policy Center, Department of Environmental Sciences, University of California, Riverside

## **Introduction**

Water is a scarce resource in many arid and semi-arid regions, where economies are highly dependent on water. In many countries, due to climate and landscape, the spatial distribution of supplies and demands is such that while water resources originate in one part of the country, most of the population and economic activity are in regions where water is not available. Therefore, competition over and allocation of water involves serious policy considerations. The state faces difficult decisions regarding management and allocation of its water, land, environmental amenities and development priorities.

Because of its central role in many economies, both developing and developed, water resources have been the focus of many intervention policies. These policies have been aimed at achieving multiple objectives, including income transfer, food production, environmental sustainability, and resource conservation. For example, it is quite common that agriculture consumes the lion share 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 limiting factor. While focusing on policies that target irrigated agriculture may lead to an immediate improvement in irrigation water use, still, other implications may negatively affect other water-using sectors, and indirectly also the agricultural sector. This system of cause and effect holds also for the urban water sector, as well as for the industrial and environmental sectors. The fact of the matter is that water, to a large extent, plays a central role as an inter-sectoral mechanism that has to be considered at the economy-wide level when being allocated among competing uses.

Until recently, the economic literature evaluated policy interventions by governments, using a plethora of policy interventions such as pricing, quotas, water right assignments and development of water trading, but with focus only on a subset of waterusing sectors (e.g., Johnson et al., 2002; Dinar and Saleth, 2005, Tsur et al., 2004; Tiwari and Dinar, 2002). Policy interventions could be water-directed (e.g., water regulations) or not water-directed (e.g., trade policies, labor policies). Another typology of policy intervention could be the level at which they are applied, namely as macro policies imposed on the state as a whole, or micro policies imposed on a region, a sector, or individuals. But because

> 1 Based on and extracted from discussions and joint work with Erol Chacmak, Xinshen Diao, Rachid Doukkali, Rashid Hassan, Terry Roe, Yacov Tsur, and Antonio Yunez-Naude during the two phases of the World Bank research project “Macro-Micro Linkages of Irrigation Water Management” during 2000-2007. The author acknowledges the help in conducting the search for and compilation of references of recent published studies on economy-wide and water studies by Juanita A. Frisbie.

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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.

While policy interventions at the regional (micro) levels could lead to desirable results, local considerations may also lead to a sub-optimal outcome from a social point of view. This point is demonstrated in recent findings from works on economy-wide considerations and linkages, where, for example, it was found that reforms outside agriculture have major impacts on rural household income, and that water reforms that are designed without taking into account reforms outside the major consumer of available water—irrigated agriculture—may lower overall productivity of irrigation water and have negative impact on the other sectors competing on that limited resource.

Water policies thus can no longer be seen as localized interventions. The need for a comprehensive rather than fragmented—sector wise—assessment of policy interventions is essential. Likewise, policy intervention need not be seen as a top down decision-making process, but rather a participatory and iterative process that involves all stakeholders. Country sector and structural adjustment work that recognize such situations and opportunities call upon having analytical tools to allow assessment of water policies in an economy-wide manner and to stimulate a broad-based dialogue on policy interventions among many stakeholders.

In recent years we have also witnessed increased globalization and climate change considerations, both of which strongly suggest that water policy is no longer a sectoral, or regional, but an economy-wide matter. Recognizing this trend gave rise to studies of an economy-wide nature (see review in Dudu and Chumi, 2008; Johansson 2005). While many economy-wide analyses (mainly Computable General Equilibrium—CGE—models) have been published in the economic literature on water, little can be generalized mainly because these studies use different assumptions and structures of the economy. For example, many 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, spatial variation within economies makes that assumption of little use for simulation of real world policy interventions.

Recognizing the importance of having the ability to assess different policy-linkage and performance interactions, this paper considers policy interventions aimed at improving water allocation decisions, and assessing the impact on regions and sectors, by including both macro and micro considerations in a unified analytical framework. The paper draws from a recently completed set of country based case studies on water management policy interventions in Morocco, South Africa, Turkey and Mexico, all using a similar macro-micro CGE framework (Roe et al. 2005; Diao et al., 2008; Hassan et al., 2008; Cakmak et al., 2008; Yunez-Naude and Rojas Castro, 2008; Hassan and Thurlow, 2011). The country studies allow, for the first time, a comparison of a variety of policy interventions across various economic, institutional and physical situations, and generalization to situations in other countries.

The paper explains the macro-micro methodology used, the policies considered and applied, and the results and general conclusions. The paper is written to target policy makers. All technical aspects will be explained so that non-technical readership comprehends and appreciates the challenges faced by the researchers in developing and applying an economy-wide framework to analyze policies for water management. For the 3
technical aspects that readers are referred to, the technical publications cited in this paper provide the necessary details.

The four country-based studies reveal difficult tradeoffs among various policy objectives, including weights put on different sectors, regional advantages, and general economic efficiency gains versus social impacts. The results underscore that no one policy is able to achieve a balanced set of outcomes for the various objectives **.** The comparison demonstrates the usefulness of the macro-micro linkage framework in addressing the effectiveness of various policy interventions and providing information that policy makers can use to rank the policy interventions according to their preferences among the objectives.

The paper starts by identifying the importance of irrigated agriculture as the sector that uses most of the available water in a country. Then the theoretical framework of the macro-micro linkage approach is set and explained and contrasted against the various economy-wide studies in the literature that are reviewed in Annex 3 so that the advantages and drawbacks of each are fully understood.. The results of the analyses of the macro-micro linkage approach that was applied to Morocco, Mexico, South Africa and Turkey are presented and contrasted so that the tradeoffs between different social allocation preferences are clearly identified in terms of their impact on sectoral productivity, on welfare distribution, using economy-wide performance indicators. The paper is concluded by identifying areas (e.g., climate change, globalization, food crisis, migration, distributional effects) in need of more research and will provide a proposed framework for their inclusion in such analysis. The paper provides a set of recommendations for a balanced policy intervention options that take into account the competing needs by various sectors and the existing institutional arrangements in several countries, including the countries analyzed (Saleth and Dinar 2004:Chapter 7).

# **Special attention to irrigated agriculture**

Irrigated agriculture is an important sector in many developing, as well as developed countries. It uses a major share of the available water resources in the country, provides employment opportunities to rural population, and supports, in some countries, their food security goal.

Most economic analyses of policy intervention in the irrigation sector address questions at the farm or regional levels, or at most, at the sector level. Results of the various interventions vary, depending on the local institutional setups. However, many countries are also interested in valuing irrigation water resources and their services at the national level for another, albeit often related, reason. Aside from directly setting or estimating the value for water at the farm-gate, policymakers are interested in the implicit impacts of macroeconomic policies on the irrigated agricultural sector, especially as related to agricultural trade reform. The Doha WTO negotiation was centered on the issue of removing barriers to agricultural trade. For developing countries in particular, the foreign exchange that can be potentially earned from growth in exports of crops is critically important to financing imports, not only of food grain and meat products, but other intermediate factors of production that embody advances in technology for all sectors of the economy (Roe et al., 2005a, 2005b).

If developing countries allow trade opportunities to prevail in their agricultural sectors, then the shadow price of water allocated to these crops will rise. This rise will likely not be regionally neutral, with some areas benefiting more than others. For example, such policies will likely be more effective in farms that have access to a wider technology set. Similarly, large farms with better access to capital and information may be in a better position to gain from such policies. Small farms may need some help in the form of 4
improved information through extension services or cheap credit to be able to adjust to the changing environments associated with water pricing reforms. Further, micro-climates, differences in soil characteristics, and differences in the seasonal availability of irrigation water, among other factors, typically cause one irrigation district to specialize in crops that are distinct from other districts in the same country (Diao, Roe, and Doukkali, 2002).

# **Scope of the country based studies**

<u>Mexico. Water resources management is one of Mexico‘s most urgent environmental and</u> resource problems, and one that imposes heavy costs on the economy. Mexico has made significant headway, but still faces major challenges in the water sector. These include issues regarding sustainability, economic efficiency (or limits to growth), and equity. For example: (i) increasing and continued over-exploitation of water resources has significant negative impact on the resource‘s near- and long-term availability; (ii) distorted prices, subsidies, and/or other incentives in the water and related sectors encourage unsustainable water resource use practices and discourage water allocation to its highest productive uses; (iii) the institutional systems that administer laws, regulations, policies and investments, which create the conditions for unsustainable water use and/or distortions often result in an inequitable allocation of fiscal resources.

The identification of priorities and tradeoffs vis-à-vis water allocation requires careful and timely attention to address an ever growing range of complications due to the impact of various interlinked considerations, such as sustainability of water resources, fairness, pollution, environment, basic services, development, competition, and globalization. National policies, both within the water sector and for the overall economy, need to accommodate these issues. Otherwise, the trend in undervaluing and overexploiting water resources will lead to increasingly significant negative impacts on the overall economy and society.

Agreement on the multi-sector solutions required to fully address these challenges has not yet been reached. Consequently, the need for a comprehensive framework to allow various relevant stakeholders to assess and prioritize policy interventions is essential.

The impact of policy interventions is assessed using an economy-wide model that is static in nature, distinguishes among regions, sectors and economic activities, farm types, household wealth types, and water resources. It doesn‘t allow technological change, but allows investment in improved water productivity. It allows for transfer of water among basins, including int‘l agreements. Such model provides flexible structure for testing various hypotheses and assumptions and thus, is a good platform for dialogue.

The policy interventions investigated under this ESW include:

- Reduction in water supply for irrigation

- Reduction in water supply for irrigation + investment of fee (based on shadow water value) collection in improved productivity by WUAs.

- Inter-basin water transfer

- NAFTA liberalization

- NAFTA liberalization + elimination of crop subsidy programs

- NAFTA liberalization + reduction in water supply for irrigation

- Application of VAT on foodstuff + reduction in water supply

- Regional impacts of climate change

5
<u>Morocco. Agriculture consumes the lion‘s share—between 75-90 percent—of annual</u> renewable fresh water on earth, including Morocco. 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. Most economic analyses of policy intervention in the irrigation sector address questions at the farm or regional level. However, while policy interventions at the farm and regional (micro) levels could lead to desirable results, narrow considerations may also lead to a sub-optimal outcome from a social point of view. 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.

Recognizing the importance of having the ability to assess different policy-linkage and performance interactions, this work considers policy interventions aimed at improving irrigation water allocation decisions by including both macro and micro considerations in a unified analytical macro-micro framework. The macro-micro approach shows how various levels of the economy are directly and indirectly linked to the irrigation sector.

With increased pressure on the limited water resource base due to population growth and urbanization. Several selected policy (top-down and bottom-up) interventions and external shocks that affect the water sector were analyzed:

- Changes in farm-level water rights assignments

- EU and USA related trade reforms

- Allocation of irrigation water to urban centers

- Across-the-board water reduction to irrigation

- Establishing institutions to allow conjunctive use of ground water and surface water

<u>South Africa. While agriculture contributes a small share to national output and export, still,</u> the agricultural sector draws 75% of the country‘s water resources and serves as a policy tool in the reform that South Africa introduced regarding equity and opportunity of various societal segments. In addition, South Africa faces water resources that are especially scarce and the country is very rapidly approaching a water stress situation. Recent trends also indicate increased competition for water from other use sectors and developmental needs and hence a declining share and availability of water for irrigation activities. Several selected policy interventions and external shocks that affect the water sector and the economy were analyzed:

- Strategic plans promoted by the government to increase rates of economic growth in the future, while providing water basic needs

- Rapid urbanization fostered by recent major shifts away from primary production activities

- Policy changes with implications for the performance of irrigated agricultural exports:

- adjustments in the rate of foreign exchange

- allocation of larger shares of water at subsidized prices to small holder farmers and for basic human need

- Trade protocols with SA‘s major trade partner, the European Union (EU)

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- Future regional economic cooperation within the Southern African Development Community (SADC) as well as other African countries

- Impact of climate change

<u>Turkey. Agriculture has remained relatively important in the economy with its 14 percent</u> share in the GDP, 35 percent share in total employment, consumption of 85 percent of the available water resources in 2002. Turkey has about 25 million hectares of irrigable land. Nearly 20 percent of the cultivated area is irrigated. Because of the climatic conditions, rainfed agriculture is very limited, and irrigation plays an important role in the agricultural sector. Irrigated agriculture, industry and residential demands, compete on labor, investment in infrastructure, water and other factors, all of which are limited. Some of the scenarios analyzed in the study of Turkey include:

- Introducing world agricultural price shocks

- Rural-to-Urban migration

- Climate change

# **What is new? A short literature analysis**

Two extensive literature reviews on CGE and water can be found in Johansson 2005, and in Dudu and Chumi, 2008. Annex 3 in the present paper is an annotated bibliography of extensions that include literature beyond that was reviewed in Johansson 2005 and Dudu and Chumi, 2008. The reader can also visit Annex 1 for a technical comparison of the various studies.

One can divide the body of works reviewed in Annex 1 into several groups. One distinction is the works dealing with global economy models (e.g., the various studies by Calzadilla et al. and by Berrittella et al.) vs. state-level economy models (e.g., van Heerden et al. 2008; Phuwanich and Tokrisna 2007). A couple of studies combined CGE with detailed hydrologic modeling (Dixon et al. 2005; Smajgl et al. 2006). Another distinction is the studies that employed dynamic CGE (e.g., Briand 2007; Schreider 2009; Diao and Roe 2000, 2003) vs. static CGE frameworks (some of which have been already included in the typologies above). Several studies assess the impact of water market on various sectors and the economy as a whole (e.g., Gomezz et al. 2004; Tirado et al. 2010). Interactions between irrigation and environment and the role of various policy interventions (taxes, subsidies) are reported in (e.g., Dixon et al., 2011; Peterson et al. 2005). Many of the studies report the effectiveness of water pricing on water efficiency, economic development and equity (van Heerden et al. 2008). Many papers deal with the impact of climate change on the water sector and the economy (e.g., Juana et al. 2008; Krayball 2010). And finally, a big number of studies are concerned with trade reforms and their impact on water allocation and economic development (Berrittela et al. 2005; Berrittella et al. 2007b).

The literature reviewed in Johansson 2005 and in Dudu and Chumi 2008, and the review of the recent studies in this paper points to the importance of distinguishing between types of policies, namely micro-level and macro-level policies. A special attention to this distinction has been provided in a set of studies conducted by the World Bank in Morocco, Mexico, South Africa and Turkey (Cakmak et al. 2008; Diao et al. 2008; Dudu et al. 2010; Hassan et al. 2008; Hassan and Thurlow 2011; Roe et al. 2005a; Roe et al. 2005b), based on the macro-micro linkage framework that was developed for that purpose. In the following 7
section the macro-micro linkage framework is presented, with focus also on the links between policies and their impact on the various sectors in the economy.

# **Description of the policy interventions and simulations in the 4 countries**

To put things in perspective, this section details and compares the policies used in the studies of the four countries (Morocco, Mexico, South Africa and Turkey) conducted by the World Bank that are the focus of this paper. While each of the four countries practices different policy interventions, and thus, different outcomes, still there are several policies that, at least nominally, are similar across the countries. We will describe very briefly the policies (also summarized in a table in Annex 2).

## **Mexico**

The joint strategy of the Government of Mexico and the World Bank for 2004-2006, under the framework of the Country Partnership Strategy, identified four priorities with regard to challenges for development. These are: reduction of poverty and inequality; increased competitiveness; strengthening of institutions; and promotion of sustainable development. Under the latter, the water sector has received special attention, with four priority aspects in need to be addressed: overexploitation of surface and ground water; minimization of the use of scarce water for crops with low added value; difficulty to reach strategic consensus among key actors due to institutional complexities that impede efficient coordination among key actors; inadequate management of water rights; and high subsidies for the pumping of surface and ground water and inadequate water prices.

## **Morocco**

The potential trade arrangements of Morocco with the EU are likely to increase competition for cereals while increasing opportunities for the export of fruits and vegetable products. Domestic policies support directly and indirectly the production of other commodities such as sugar, bananas, livestock and vegetable oils. Other policy barriers include adjustment in capital markets to encourage foreign direct investment, particularly in those sectors for which Morocco can compete in international markets. Irrigated fruit and vegetable products are among these sectors.

Closely linked to the macro economic issues is the question of a policy to better allocate water within and among irrigated perimeters to maximize the returns to this scarce re-source. This entails a reconsideration of how water is priced and allocated to farmers, concerns with the equity of this process and poverty reduction. Moreover, due to the uncertain temporal and spatial effects of weather, policy must also take into consideration the mechanisms by which these uncertainties can be managed, and particularly so in an environment of a continuing growth in non-farm water demand. A scheme of the feedback links between economy wide (macro) and farm-perimeter-district level (micro) policies is presented in Table 1.

## **Turkey**

Turkey embarked on an ongoing structural adjustment and stabilization program towards the end of 1999. Agriculture has been selected to undergo heavy adjustment due to the ineffective set of policies and its increasing burden on government expenditures in the last decade. Another important factor is the rural-to-urban migration and the increased demand 8
for urban water. A policy reform has been started encompassing both the channels and organization of agricultural support, without any changes in the major policy objectives: increases in production and productivity, targeting mainly import substitution, with a special concern for farm income.

The major objectives of the reform are to decrease the distortions and the financial burden of government support to the sector. The reform includes removal of the input (especially fertilizer and credit) subsidies to decrease the state procurement activities, privatization of state enterprises, and restructuring of the cooperatives sales. An important new policy tool involves farm income support based on the cultivated area with limited targeting. The main linkages between macro and micro policy interventions of trade reforms, water pricing reforms, and direct income support policy are summarized in Table 1.

## **South Africa**

Over the past few years agriculture in South Africa (SA) has seen major structural adjustments in response to a number of critical macro and sector level policy changes. Broad macroeconomic (fiscal and monetary) reforms that led to major changes in managing the foreign exchange and capital markets coupled with wide liberalization of agricultural marketing and trade regimes have exposed the agricultural sector in SA to shifts in relative world commodity and factor prices (international terms of trade). Particularly, competitiveness of agricultural exports has been significantly affected with the removal of various forms of protection, interest rate and export subsidies and substantial currency devaluations. At the same time, a number of other reforms in domestic policies governing the distribution of and access to key resources such as land and water among others have been introduced to address the social and economic inequity of the past. Although the agricultural sector has already undergone significant changes as a result, adjustment is far from complete and the effects of many of these reforms, some only recently implemented, will be felt for years to come. The main linkages between macro and micro policy interventions of trade reforms (both regional-SADC, and international-EU), water pricing reforms, and labor regulation reforms are summarized in Table 1.

# **The macro-micro linkage framework**

Agriculture utilizes the lion share—between 75-90%—of the available water on earth. This is a good reason for policy makers to focus their efforts on improved performance of water use in irrigated agriculture, especially when water scarcity may affect policy outcome. While policy interventions at the farm-regional (micro) levels could achieve policy objectives, they may also lead to a sub-optimal outcome from a social point of view. Especially where linkages among sectors and factors of production are much more apparent, the linkages among micro and Macro policy interventions are far more important and allow policy makers to better assess the outcome of their interventions.

The macro-micro linkage framework was proposed to analyze policy interventions aimed at improving irrigation, and thus decisions related to other sectors, water allocation decisions by including both macro and micro considerations in the analytical framework. The approach is demonstrated by analyzing selected policy interventions and external shocks that affect the entire water sector directly and indirectly. Top-down and bottom-up policy interventions are part of the framework. Macro policies associated with removing various trade and domestic barriers to open up the economy are examples of top-down links 9
affecting the irrigation sector indirectly, which were called ̳trade reform‘. Water management policies at the farm/perimeter/district level, such as assignment of water rights to farmers or different schemes to price irrigation water (e.g., per area, volumetric, marketbased) are examples of bottom-up links that affect the irrigation sector directly. But after being adopted by a large number of farmers, such policies have indirect effects on the economy as a whole, which in turn feeds back (largely through factor markets) and affect the micro level; such policies are called ̳water reforms‘.

In addition to policy interventions one can also assess the impact on the economy of water projects (such as expanding areas under irrigation perimeters, constructing dams), shocks to available farm water supply (either due to weather or the growth of metropolitan areas). And finally, one can also claim that the sequence of introducing policy reforms (water reforms and trade reforms that are included in the analysis) can be critically important. For example, implementing water markets when policy protects, for example, irrigated sugar and wheat producers, can lead to a Pareto inferior outcome by causing water to move from nonprotected to protected activities. The analytical framework can provide the sequence of reforms that lead to continually Pareto superior outcomes.

The focus of the macro-micro approach is on irrigation water due to its significant share in the use of the available resource. However, the same line of argumentation regarding linkage and holds for other sectors, such as the residential and industrial sectors, albeit, with much less impact on the economy. While not all countries have mechanisms to move water across sectors (Box 1), still the macro-micro framework allows testing of the value associated with having such mechanisms. The country level simulations for Morocco, Turkey, and South Africa include the institutional arrangement for water transfer from the irrigation to the urban sector.

# **The building blocks**

We begin by outlining the micro (farm, perimeter, district) model and describing micro level decisions and the economic environment in which they are made. The micro framework distinguishes between those variables that are exogenous to micro level decisions and those that are endogenous. In this way feedback effects between the micro and macro levels are broken down to direct and indirect effects. Direct effects correspond to partial equilibrium effects (e.g., the effect of a ceteris paribus change in farm output prices on crop supply). Indirect effects are due to general equilibrium effects. The overall effect of a policy is the sum of direct and indirect effects. This conceptual approach has its analytical foundation in the LeChatelier principle. (See for example Varian, (1992, p47), and has been applied in a number of studies (Binswanger (1989) and in the studies directed by Krueger, Schiff and Valdez (1991) on the political economy of agricultural price policy.) 10
Box 1: Legal and institutional mechanisms for water trade among sectors Allowing for water transfer among sectors or regions is rare in the countries to which the macro-micro approach was applied. Below are short description of the water right transfer situations and the evaluation of water trade simulation in the CGE models.

<u>Mexico. Administration of water rights, although considerably modernized relative to</u> pre-1990, remains inadequate. Legal and institutional uncertainties, complications related to rights concessions, inadequate enforcement of existing legislation and regulations, and limited economic incentives to promote more efficient intra- and intersectoral water use are some of the main issues to be addressed over the coming years (Asad and Dinar, 2006:6).

<u>Morocco. Morocco has a long tradition of water-rights in dealing with allocation</u> issues. However, the public ownership provision and the prohibition of water rights transfer independent of land made all formal water markets obsolete (Tsur et al. 2004:195. The 1995 water law in Morocco recognizes the increased urban water demands and allows a higher share of ag-to-urban water to be provided by the administrative authorities (ORMVAs) to account for significant ag-to-urban migration (Doukkali 2005:86). Diao et al. (2008) empirically evaluate the impact of an rural-to-urban surface water transfer to address increase in urban water demand. They find that while there is a slight increase in the total GDP in the country, the inequality between rural and urban population and especially between the big vs. small farmers increases.

<u>South Africa. The National Water Act of South Africa allows for water trading both</u> on a temporary or permanent basis. As observed, water trading is practiced especially in water stressed basins and among irrigators, between farmers and municipalities, mines and other industries. However, it also was observed that water trading is also associated with racial inequality and thus it had been limited by the Department of Water Affairs until proper mechanisms are in place to prevent negative effects of water trade (Moseki et al. 2011:172; Backeberg, 2005:113).

<u>Turkey. Water resources development and management in Turkey are handled by the</u> state as water is a public matter. Assigned user-rights enjoy the right of prior use, and can neither be sold nor transferred. The present national water right recording system does not provide incentives for an economic use or for orderly transfers among sectors (Kramer et al. 2011:4). Cakmak et al (2008) simulate a transfer of water from rural to urban uses in anticipation for demand increase resulting from rural to urban migration, especially in the western regions of Turkey. The CGE simulation suggests that as a result of such transfers overall production of all crops decline. The decrease in the agricultural production, coupled with the domestic price increase, is further reflected in the net trade. Agricultural imports increase with a higher decline in agricultural exports.

The economic linkages in the empirical model are complex, inter-linked and often depend upon the importance of factor inputs in the production of one irrigated crop relative to another. The empirical model is disaggregated and too complex for showing the major economic forces driving the results. Therefore, this difficulty can be handled by narrowing our focus to the most simple general equilibrium model in order to illustrate the major economic forces. This analysis will be sufficient to show the major forces at work. The analysis shows that the importance (or intensity of use) of water and other resources in production is essential to understanding how a change in macroeconomic policy can cause the shadow price of water to rise or fall, and who benefits and who loses from reforms.

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These same forces are also essential to understanding how the reallocation of water to equate its marginal value product among alternative crops affects the rental rates of other resources, such as labor, capital and other economy-wide resources.

# **Micro-macro links**

# **Micro (farm, perimeter, district)**

The basic decision making unit in a water economy is an irrigated-land farm operator. In the short run, farmers take the production technology, input prices and output prices as given and decide on input allocation—including irrigation water—and consequently on output supply. The overall quantity of water demanded at different water prices constitutes the (aggregate) demand for irrigation water. The supply is represented by the marginal cost of water supply (the cost of supplying the next, marginal unit of water).

Water can be derived from local sources (a local aquifer, an adjacent stream flow or reservoir) or conveyed from external sources. Cheaper water is supplied first, thus the water supply curve begins with the marginal cost of supplying water from the cheapest source, switches to the second cheapest source when the first reaches its capacity limit and so on. When water supply entails economies of scale, various institutions (e.g., water user associations) emerge to handle water supply at the perimeter, district, region or country levels.

A micro unit consists of a group of farmers in a confined geographical location, operating under the same agro-climatic, economic, and institutional conditions and extracting irrigation water from the same sources. Figure 1 presents a micro level demand for and supply of irrigation water: Figure 1: Water supply and demand <!-- Start of picture text --> Water price<br>($/m 3 )<br>Marginal cost of<br>water supply<br>Demand<br>(m 3 )<br>Source 1 Source 3<br>capacity Source 2 capacity<br>capacity<br><!-- End of picture text -->

# **Macro (economy-wide)**

The economy consists of many sectors that interact at the marketplace to determine the prices of goods and services (including agricultural inputs and outputs). In addition, prices of traded inputs and outputs are set at the world market and are affected by domestic trade polices (quotas, tariffs and other trade barriers). Irrigators compete for inputs (water, capital, labor) with other sectors and its overall supply of agricultural products affects their prices. The direction of the impacts, macro-to-micro and micro-to-macro, are important and are explained below.

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# <u>Macro-to-Micro links</u>

(i) An obvious macro-to-micro link entails the prices of purchased inputs and outputs, which are determined at the macro level and taken as given by farmers. These prices are sensitive to government policies (taxes and subsidies) and affect the derived demand for irrigation water. (ii) Trade policies (tariffs and other trade barriers) affect prices of traded agricultural inputs (fertilizer, pesticide, seeds) and outputs.

(iii) An important macro-to-micro link involves national or regional water projects (e.g., construction of dams), which affect water supply constraints and the cost of water supplied.

# <u>Micro-to-Macro links</u>

These links include water allocation reforms at the micro level (perimeters, districts), such as changing water assignment rules, changing water pricing methods (e.g., from per area charges to volumetric pricing), or introducing institutions and mechanisms for trading water and water rights. Such reforms affect farmers‘ water (and other inputs) use and agricultural production. When applied in a number of regions these changes will affect input and output prices at the national level. The changing prices will then feedback, affecting the micro units (households, farms, perimeters). Figure 2 provides a schematic view of the micro-macro links.

Figure 2: Overview of micro-macro links <!-- Start of picture text --> Farm<br>(input/output allocation)<br>Perimeter<br>(water allocation)<br>District/region<br>(water allocation)<br>Country<br>(input/output prices)<br>Trade<br>(traded goods prices)<br><!-- End of picture text --> Source: Adapted from Roe et al 2005a

# **The farm model**

Here only the micro (farm) level decision process is laid out and identifies the endogenous and exogenous variables.

There are a number of cultivable crops and farmers must decide the input allocation for each crop. These inputs include area planted, the monthly quantity of irrigation water, as well as fertilizer, machinery, pesticide, labor and other inputs. The input allocation implies output supply for each crop through a production technology that for each input bundle assigns a particular output level. In their input allocation decisions, farmers take as given the prices of purchased inputs (labor, machinery, fertilizer, pesticide) and output, the production technology, the quantity of irrigable land, and the supply of irrigation water according to the water authorities‘ assignment rules. If irrigation water is assigned by month and for each 13
crop then the water restriction is per month and per corp. If water is assigned annually, then water restriction is per year only.

The input decisions are chosen so as to maximize profit, subject to the land and water constraints (and possibly other constraints such as crop rotation). The result is the restricted profit function, which is a function of all the exogenous variables - input and output prices, farm size and water constraints. The shadow prices of water are defined as the derivatives (the marginal change) of the restricted profit function with respect to the respective water constraint. It is calculated as the Lagrange multipliers of the respective water constraint. By changing a particular water constraint, leaving all other constraints and exogenous variables unchanged, one obtains the derived demand for irrigation water associated with this constraint (e.g., demand for water at a particular month for a particular crop). As was explained above, the derived demands associated with the different water restrictions are essential ingredients in the procedure—and in any water pricing scheme for that matter.

A unique feature of the farm model is that its specification and calibration to data results in a solution to the model that reproduces the farm plan exactly as depicted by the data. This greatly facilitates and makes its use much more practical in policy analysis.

# **The macro model**

First, the simplest possible general equilibrium open-economy analytical model is constructed to show the key linkages between macroeconomic reform as illustrated by trade reform, and sectoral changes as illustrated by water reform. Then, this model is generalized by simply stating the key reduced form analytical equations that are necessary to link the macro (economy-wide) and micro (farm) analyses.

This analytical approach illustrates how the macro and micro empirical framework interlinks and will be used in the analysis. Agricultural goods are produced by two sectors (could be crops, farm types, regions), using labor and an assignment of water allotted by a water authority that exhausts total water supply. Commodity markets clear at given (world) prices, and the labor market clears at an endogenously determined wage rate. In this structure, the shadow price of water in each sector is unambiguously determined as the profits per unit of water used in each sector. Each sector's profits (or shadow price of water) are a function of the sectors output price, and wages. Wages in turn are a function of the economy's resource endowments, i.e., the amount of water assigned to each sector and the world prices. Thus, by considering trade reform one can trace the impacts through the effects on wages, and the shadow price of water. By changing the sectoral allocation of water, wages change and so does the shadow price of water. A drought, for example, leads to a decrease in the total quantity of available water, which impacts wages and again, the shadow prices of water in each sector. It was shown that the magnitude and direction of change in the shadow price of water depends upon the initial water assignment, and the relative factor intensity of labor and water in each sector's production function. These features are critically important to explain the ̳behavior‘ of the large empirical model (Roe et al. 2005b).

<u>The effect of trade distortions on the shadow prices of water. Consider the case of a</u> tariff imposed on an import competing good. A policy that changes (or lifts) the tariff will directly change the relative output prices and will indirectly affect demand for—hence prices of—inputs. The changes in input demand include irrigation water; hence the shadow price of water is likely to change too. As shown in the Empirical Results section after the trade reform, producers of one good can be made worse off in the sense that the total returns to 14
their water assignment (i.e., their profits) may decline. If, however, prior to the trade reform a water market were introduced (say, between rural and urban users), then this would equate the shadow prices of water between the two sectors and the economy could be made better off. The key implication is that the sequencing of economic reform in a water economy can, as predicted by the theory of the second best, be critically important.

<u>The effect of water market reforms on the shadow prices of water. Water market</u> reform can have dramatic effects on the shadow prices of water. Consider the introduction of water markets within a system in which water is assigned for each crop at each month. If farmers can only relocate water between crops, the water market would equilibrate the shadow prices of water between crops. If farmers can also trade water between months or seasons, it will further equilibrate the monthly shadow prices of water. It was shown that, depending on the importance of water relative to other inputs of production (or relative factor intensity), a market that equilibrates the marginal value product of water among its various uses can cause the shadow price of water to fall, remain unchanged, or rise. The prices of all other factor inputs, such as labor, are also likely to change. If a water market reallocates water to labor intensive crops, then wages rise, thus benefiting the poor whose income depends on rural labor opportunities.

The basic features of the simple analytical model developed above are easily generalized to a multi-sector and multi-factor small and open economy as will be demonstrated in the Morocco case.

The discussion in the following section refers to macro to micro and micro to macro linkages.

# **Feedback links**

It is shown first the macro to micro linkage by considering an economy wide reform illustrated by a trade reform. Then, turn to focus on the direct effect on farm profits from a crop's water assignments, and the indirect feedback effect when water assignments are changed for all farms. These two reforms are also considered in the empirical analysis for Morocco.

<u>Macroeconomic reform, macro to micro linkages. As noted above, farmers take as</u> given input and output prices. Any change in these prices will affect farmers input allocation decisions and the ensuing output supply. The direct effect associated with a trade reform corresponds to these changes in input allocation. But the culmination of changes in input demand and output supply, as all farmers adjust to the macro reform, has an economy-wide effect on other prices, e.g., the price of labor. As these prices re-equilibrate factor demand and supply, and these (indirect) changes in turn also effect farmers‘ decision. Often, these indirect effects have the opposite impact on incentives than do the direct effects. The overall effect of a trade reform is the sum of direct and indirect effect. A partial equilibrium analysis can only account for direct effects. A general equilibrium analysis, performed here, accounts for both the direct and indirect effects.

<u>Microeconomic reform, micro to macro linkages. The illustration is that of a change</u> in a farmer's water assignment. The farm model shows how the farmer responds by changing the level of crop and livestock production, changes in purchased input levels, and changes in the shadow prices to farm specific resources including the water assignment. This is the direct effect. However, since all available water is allocated, this change induces additional changes in water assignments among other farmers in the perimeter. This causes a re-equilibration of factor market demand and supply, with shifts in final demand due to corresponding changes in income earned. This "feedback" effect alters the broader 15
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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are constrained in many of the most attractive locations for certain industries. At the same time the industrial sector is said to be a significant polluter, creating emissions of organic water pollutants. Water resources availability and poor quality are increasingly becoming constraints to economic development and growth in important northern and central parts of the country.

# **Morocco**

Agriculture accounts for about 15 percent of Morocco's gross domestic product, and employs about 40 percent of the country's labor force. Agricultural products account for an average of 19 percent of the country's total imports and about 18 percent of total exports. Of the 9.2 million hectares of arable land, ten percent is irrigated but the products from irrigated agriculture account for 75 percent of total primary and processed agricultural exports. Agriculture is a key sector in the domestic economy, and it is a major trade sector and thus prone to macro-economic shocks and to the trade policies of the country's major trading partner, the European Union.

The irrigation sector consumes about 85 percent of the country's total available water supplies. Besides the uneven geographic distribution of Morocco's water resources, the country faces an uneven and erratic rainfall pattern with large year-to-year variation from the arid South to the Northern regions of the country. Per capita annual renewable water resources are estimated at 800 m<sup>3</sup> , implying that Morocco is already a water stressed country. Morocco has invested heavily in developing its water resources, and is now reaching the physical limits of water availability from ground and surface sources (snow melt in the Atlas Mountains). The management of this critical resource for irrigation is carried out by nine administrative authorities (ORMVAs) in each of nine large scale irrigation schemes (regions), seven of which account for over 90 percent of the total irrigation water managed by the public authority. The investment in and development of these irrigation districts has contributed in major ways to sustaining the income of rural areas, and employment opportunities. It is generally recognized that both economy wide and farm level policies are needed to increase water use efficiency.

# **Turkey**

Agriculture has remained relatively important in the economy with its 14 percent share in the GDP, its 35 percent share in total employment, and its consumption of 85 percent of the available water resources in 2002. Turkey has about 25 million hectares of irrigable land. Nearly 20 percent of the cultivated area is irrigated. Because of the climatic conditions, rainfed agriculture is very limited, and irrigation plays an important role in the agricultural sector.

The sources of irrigation water and irrigation systems display both inter-regional and intra-regional diversity. Over half of the land in the Aegean, Southeastern and Mediterranean regions, constituting nearly 50% of the irrigated land in the country, is irrigated from dams and artificial lakes, and thus benefits more from subsidized water (SIS, 2003). Equity issues are at the heart of needed policy intervention in Turkey. Small farmers (<5 ha), which make up 70 percent of the farmers, own slightly over 20 percent of the land. The larger farmers (>20 ha) constitute 5 percent of the holdings and own 35 percent of the land. Moreover, the distribution of the land quality is skewed to the right, which means that more often land quality of a larger farm is better than that of a smaller farm. Larger lands tend to be irrigated from dams and artificial lakes constructed and subsidized by 17
government, whereas smaller farms are more likely to derive irrigation water from local wells at the farmers‘ expense.

## **South Africa**

Agriculture contributes a small and declining share of total economic output but relatively higher shares in total export (including secondary value adding processing) earnings and employment. Nevertheless, the agricultural sector draws 75% of the country‘s water resources. While this may be typical of agriculture worldwide, it bears special importance in the case of South Africa where water resources are especially scarce and the country is very rapidly approaching a water stress situation. Recent trends also indicate increased competition for water from other use sectors and developmental needs and hence a declining share and availability of water for irrigation activities.

The total potential irrigable land in SA is estimated at 1.57 million ha (NDA, 1996). Most of the irrigated land is used for large-scale commercial farming of horticultural crops (grapes, fruit and vegetables), grains and pastures and forages. Less than 4% of the irrigated area is under smallholder farms growing various combinations of these crops within a number of irrigation schemes (WRC, 1996).

# **The empirical framework**

The empirical framework is described first in general terms and then applied to the case of Morocco, Turkey, South Africa and Mexico. The results for Morocco reflect also on the policy linkages in Turkey, South Africa, and Mexico as highlighted in Table 1.

## **Key features for Morocco**

Special features of the empirical framework include: (1) spatial identification of irrigation districts and the perimeters within each district, (2) linking the micro, farm-level model to the macro model within the irrigation district(s), (3) disaggregating the macroeconomic policy instruments, by separating the country's trade pattern between the EU—Morocco's major trading partner—and the rest of the world,<sup>3</sup> and (4) modeling architecture designed to accommodate the availability of data depending upon the country to which it is applied. This architecture will allow application to other countries but will not be carried out here.

The spatial identification is particularly important because of the spatial heterogeneity of irrigated agriculture, the proximity of major metropolitan areas to some water districts whose growth affects the scarcity of water in some regions relative to others, and the obstacles of transporting water over space and elevation.

## **The basic structure of the macro-micro model for Morocco**

The Moroccan economy is disaggregated in the CGE model into 88 production activities, which produce 49 commodities and employ eight primary input including intermediate inputs produced in own and other sectors. On the demand side, there are five private household groups and one public group. The non-agricultural component of the economy is captured by six activities or sub-sectors. Since the European Union (EU) is a major trading partner, as mentioned above, Morocco‘s trade patterns between the rest of the world and the

> 3 This is also the structure in the case of Turkey and South Africa.  For Mexico, it is the NAFTA agreement.

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EU are identified separately. There are five different macroeconomic policy instruments that are embedded in the data, including taxes, subsidies, tariffs, and payments for water.

Morocco‘s irrigated agriculture is organized in 9 water districts (ORMVAs), 2 of which are isolated and barely involved in the economy. Thus, the modeling framework refers to the remaining 7 ORMVAs. Among the 82 agricultural and agriculture-related production activities, 66 are in crop production, five in livestock, and 11 in processing agriculture, both up and downstream from the farm firm. To capture the spatial nature of irrigated agriculture, 66 crop production activities are further distinguished according to whether they are within or outside the seven ORMVAs. Among the 33 activities within the water authority perimeters, 21 are irrigated crop production and 11 are rainfed. Because water is either costly or presently impossible to transport between perimeters, the seven ORMVAs are further subdivided into 20 perimeters.

The data are organized into a social accounting matrix (SAM). The data include perimeter level information on water charge fees, cropping mix, water and land allocation by crop and area, employment of labor and capital and intermediate input use by crop. National level data on employment, trade, nonfarm production and resource flows are also entered into the SAM. These data are used to calculate the parameters of the model.

Unlike a standard SAM that often includes only national level data, the Morocco SAM in this study is multi-dimensional, taking into account crop production activities. A schematic presentation of the major features of the macro framework is presented in Figure 3.

Data for the farm model ( ̳micro‘ model) are from the same data source as those for perimeters in the ̳macro‘ model, i.e., each perimeter is aggregated from farm level data. For this reason, the production activities in the farm model are compatible with the ̳macro‘ CGE model. For the analysis preformed here, the representative farm is chosen from the irrigated area, and hence, only irrigated crops are included in the farm model.

The farm model accounts for monthly water allocation by crop. Typically, the representative farm only grows some of the crops produced in the perimeter. Only a number of crops (10) are included in the farm model. Just as the case with the CGE model, the farm model is calibrated to the data in such a way that the solution of the farm model for the base period reproduces the observed farm data exactly.

While the farm model only captures farmer‘s decision-making in production activities, the CGE model, as a general equilibrium model, captures inter-sectoral interactions of the decision making process in the economy. For this reason, prices, including prices for output and factors of production, are endogenously determined by the CGE model. Factor markets clear such that total available supplies of land, capital, and labor have to equal their respective demand. In the farm model, the representative farmer faces given prices for output and factors. The farm model treats the supply of land and monthly supplies of water as constraints. Otherwise, the farmer can hire labor, employ capital and use intermediate inputs at exogenously (to the farmer) given prices without supply side constraints. But these prices are endogenously determined in the economy wide markets. A schematic presentation of the major features of the farm-level model is given in Figure 4.

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Figure 3: Depiction of the major features of the general equilibrium model including sectoral and spatial disaggregation and embedded farm model <!-- Start of picture text --> Non-agriculture<br>Six sub sectors Agriculture: 66 crop production<br>activities, 5 livestock and 11 food<br>Irrig. distr. one processing<br>Up to 4<br>separate Agriculture out –<br>irrigation side of irrigation<br>Embedded perimeters districts, both<br>rain fed and<br>micro-farm<br>model: irrigated, with<br>includes Irrig. distr. seven input and output<br>links to the<br>monthly<br>water Up to 33 prod. act. including 22 respective irrigation<br>allocation by irrigated 11 rain districts<br>crop fed<br>Markets: Input-output links to non-agriculture, irrigation districts, agriculture<br>outside the districts, and households. Water supplies and demand are irrigation<br>district specific; Some restrictions on labor flows between rest of economy and ag.<br>Imports<br>Non-agricultural and exports to the rest of the<br>world including capital<br>flows<br>Agricultural foreign trade<br>world<br>Imports and exports to rest of<br>Imports and exports to the European Union<br><!-- End of picture text -->

# Source: Roe et al., 2005b

Note: A similar structure, except for the sectoral specifications was used also for Turkey, South Africa and Mexico.

## Note for Morocco:

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: taxes, subsidies, tariffs, and water charges, quotas by region.

# Figure 4: Illustration of the major features of farm level model

<!-- Start of picture text --> Production of ten irrigated crops; Purchased & inter. inputs Constraints<br>Annual crops<br>Resource balance constraints<br>Production input/output relationships<br>Multiple-cropping<br>Family supplied inputs<br>Monthly water assignments by<br>Production input/output<br>relationships & resource crop<br>allocation constraints<br><!-- End of picture text --> Source: Roe et al. 2005a Note: Similar structure was used also for the case of Turkey, South Africa and Mexico.

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In principle, the farm model can be handled in two ways: full linkage, i.e., embedding the farm model into the CGE model, or top-down (stand-alone) linkage. The stand-alone linkage is illustrated in the analysis section of this paper. The full linkage treats the representative farm as a small part of the economy included in one of the perimeters. In the top-down linkage, the prices that are exogenous to the farm model are determined by the CGE model. When shocking the CGE model and when prices change through this linkage, the farmers (in the farm model), facing different prices, adjust their production decision to maximize profits. These effects are separated into direct, indirect and total effects.

# **Empirical results for Morocco**

Two sets of policy analysis were used to illustrate how the macro-micro linkage framework works for the case of Morocco. The first set of policies is at the macro level, and trade reform is chosen to illustrate the macro-to-micro analysis. The second set of policies is at the micro level, and water reform is chosen. The results are reported in tables 2-8 in Roe et al 2005b. A qualitative description of the links and impacts is provided in Figures 5-7.

# <u>Macro-to-micro effects of a trade reform</u>

A full trade liberalization scenario is used as an illustration of a macroeconomic reform, and focuses on the macro-micro linkage effects due to liberalizing both agriculture and nonagriculture sectors.

<u>Macroeconomic effects. The trade reform (removing tariffs on the imports of all</u> commodities, agricultural and non-agricultural) scenario is first conducted in the economywide (CGE) model. Removing trade protection causes all endogenous variables to change and the economy moves to a new equilibrium. Table 2 (Roe et al 2005b) summarizes selected aggregate/macro-economic variables and their change. As predicted by the trade theory, the country as a whole benefits from the trade reform. Real GDP increases by 1.54 percent from its pre-reform level, and total consumption increases by 1.51 percent. A depreciation of the real exchange rate causes exports to increase. The resulting total exports to the EU, Morocco's major trade partner, increases by 11.26 percent and the agricultural component of exports increase by 38.93 percent. Morocco's agricultural import competing commodities, such as wheat, sugar, and other industrial crops, are highly protected. Removing protection increases the imports of these commodities.

Table 2 (Roe et al 2005b) also reports the aggregate effect on agricultural production within and out-side the irrigation perimeters. As described in the previous section, the CGE model includes seven ORMVAs and 20 perimeters. Due to data constraints, livestock production within perimeters has to be ignored (and is included in the outside perimeter agriculture). Total crop production within perimeters accounts for about 25 percent of national crop production. Due to the decline in the production of the protected crops (wheat, sugar, and other industrial crops), total agricultural output within the perimeters declines by 2.3 percent. Crop production outside of the perimeters (mostly rain-fed agriculture) also declines, but only by 1 percent. However, these aggregate changes mask increases in the output of fruits and vegetables.

Trade reform generally results in more efficient allocation of resources. As output and input markets re-equilibrate following macroeconomic reform, one can observe changes in output and factor prices (not presented). Most of the commodities for which prices have fallen received some form of trade protection. Tables 3 and 4 (Roe et al 2005b) report changes in factor prices (wages and capital). In the CGE model, labor is an economy-wide factor, but capital is fixed at the perimeter level, i.e., capital can only move within a 21
perimeter. Thus, the ̳rental rate‘ of capital (e.g., farm structures, irrigation equipment) varies by perimeter. The slight decline in rural wages suggests that trade policy tended to protect those sectors of agriculture that are relatively labor intensive. This finding bears some important implications related to the debate on ̳self-sufficiency‘ policies of developing countries. Trade protection and water assignments are partially designed to encourage the production of staple crops in-house, and to secure jobs for the poor. Our analysis shows that the first objective comes at the expense of the second and policy makers need to consider the trade-off between the two.

Trade reform affects the shadow prices of water (i.e., the productivity of the authorities‘ water assignment), by crop and perimeter. For the protected crops, trade reform tends to lower the shadow price of water assigned by the respective ORMVA to these crops. As other input and home goods‘ prices re-equilibrate to this adjustment, the shadow prices adjust accordingly. In general for most perimeters, the shadow prices of the formerly protected crops are lower. However, since input prices faced by farmers are also generally somewhat lower after the trade reform (as is discuss below), the shadow price of water allocated to non-trade protected crops tends to rise.

Since farmers only pay a nominal water charge, changes in the shadow price of water translate directly into changes in farm profits. Equity implications in irrigated areas are also apparent. Farmers producing bananas, for example, tend to be of larger scale with relatively capital-intensive operations. These producers experience a decline in returns to water that is assigned by the water authority to these protected crops, while the smaller scale unprotected fruit and vegetable crop producers experience a rise in the shadow price of water assigned to their crops.

Farm level direct effects of output price changes. Table 5 (Roe et al 2005b) reports the change in crop output from the farm model due to trade reform; these effects are separated into direct, indirect and total. In response to the changes in output price, keeping everything else constant (i.e., considering only the direct effect), the farmer often reduces production of crops for which prices fall (e.g., wheat and sugar cane) and increases production of crops for which prices rise (e.g., water melon and potato). However, as sugar cane and soft wheat account for 42 and 24 percent, respectively, of farmland (not shown), reducing the production of these two crops releases an amount of land that can significantly increase the production of other crops, even those experiencing a price decline. Thus, although peanut prices fall, the farmer still decides to increase peanut production (by 1.7 percent for early peanut and 2.4 percent of the late peanuts) to assure the full employment of farm resources.

<u>Farm level direct and indirect effects of changes in output prices. To capture the full</u> effect of changes in output prices the model allows prices for both crop outputs and purchased inputs (including intermediate inputs, labor, and capital) to change according to the results of the CGE model (see tables 3-4 in Roe et al 2005b)). In general, the indirect effect from declines in factor and intermediate input prices work in opposite direction to the direct effects discussed above. That is, the decline in some input prices help to countervail the decline in output prices due to the reform's direct effects. Thus, it can be observed that the decline in sugar cane production falls less (-5.4 percent, table 4) under the total effect scenario, and change in soft wheat production actually increases (+2.1 percent). However, for the other small crops, the total change in output is larger than (i.e., dominate) the direct effect. The decline in purchased input prices (intermediate inputs, labor, and capital) benefit farmer's production, and hence, induce the farmer to increase (or reduce less) each crop's production after the reform. Interestingly, due to differences in input intensity among crops, 22
the demand for labor and capital, as well as land reallocation change differentially in response to reform interventions (Table 5). This analysis then shows clearly the importance of linking and identifying the separate macro-micro effects on farm decisions.

Since farmers are heterogeneous, their supply response to the trade reform will also vary. For this reason, it is necessary for policy makers to distinguish between the aggregate (all farms) effect of trade reform on agricultural production and the distribution effect across farm types. This analysis can be done by using the economy-wide (CGE) model, in which not only the macro economic variables can be obtained, but also sector level (agriculture by crops) variables, such as changes in total supply of each crop, can be observed.

Due to the differential effect on crop production, crop and input prices and land holdings, trade reform impacts on farm incomes vary with farm size. Table 6 (Roe et al 2005b), reports the income effect of trade reform by household groups in the CGE model. Due to our cur-rent data constraints, this income grouping does not distinguish between farmers in or out-side the perimeters. The results show that small farmers incur the largest income loss due to the trade reform. As a group, small farmers‘ income declines by 17 percent. The urban household group benefits from the reform, and its income increases by 8.6 percent. These results reflect the fact that the non-farm sector of the economy is also negatively impacted by the country‘s current trade policy. This result, while at first may appear perplexing, is actually encouraging. It suggests that the basic economic forces of growth and development observed in successful economies, namely, the forces tending to pull from agriculture surplus labor to more productive opportunities in the non-primary agricultural part of the economy, are also strongly present in Morocco.

# <u>Micro-to-macro links of water reforms</u>

We now analyze how a water policy reform at the farm level has direct effects on the farm firm, how these effects affect the broader economy when adopted in all perimeters, and then, how these adjustments feed-back (indirect effects) to affect the economy of the firm. In terms of the simple theoretical model, extending the reform of water policy from the firm to the national level is considered in terms of trades in water user rights. This type of national level reform will equate shadow prices within each perimeter. The results appear in tables 2-5 in Roe et al 2005b.

<u>Farm level direct effects of water reforms. Starting at the micro level, the reform</u> analyzed is to relax the water authority‘s water assignment rule, which is the respective ORMVA‘s assignment of water by crop and month. To model such policy reform, one has to start from the farm model, and allow the farmer to equate the marginal cost of water across crops (by month) to maximize their production profit. Without considering the possible effect on other economic factors (i.e., holding all exogenous variables in the farm model constant), the farmer responds by reallocating water more efficiently, according to the marginal-value product-of-water rule. Thus, water moves out of the crop production in which the government has assigned an amount of water that causes the marginal value product of water in this crop to lie below that of other crops. Hence, the shadow prices (opportunity cost) of water for growing such crops (such as soft wheat and sugar cane) are lower than for those crops receiving a lower water assignment (e.g., strawberries and water melon).

The direct effect of reform at the farm level (results not shown) is to cause water allocated to the production of soft wheat and sugarcane to decline by 36.6 and by 3.7 percent, respectively. The water released from wheat and sugar cane is allocated to other crops. Except for the late peanuts, water allocation increases in all other crops. Water 23
reallocation is accompanied by the reallocation of land as well as labor and capital (not shown). Moreover, although the direction of change in the reallocation of land and other inputs are consistent with water reallocation, due to the relative factor intensity of the resource employed in each crop and the water-land ratio, the magnitude of the changes in the other inputs is not in direct proportion to water reallocation.

For example, the water-land ratio is low in soft wheat, as the crop only needs to be irrigated for three consecutive months (March to May). The water-land ratio is very high for greenhouse products, such as strawberries, which are irrigated throughout the year. For these reasons, the magnitude of reduction in water demand in wheat is much larger than the reduction in land used in wheat production, while the magnitude of the increase in water demand for strawberries is much larger than the increased land allocate to strawberry production. Change in the allocation of water and land, and in the demand for other inputs results in a change in farmer's crop production. Comparing the results in table 5 for trade and water reforms, one can observe that the change in the direction of sugar cane and wheat are consistent in both scenarios, implying that the trade policy and water policy often protect similar crops.

Herein is an important finding. This result suggests a path dependency to reform. For example, if water markets were created to allocate water to equate its marginal value product in all perimeters, in the absence of trade reform, it is likely that some water would be re-allocated from the unprotected to the protected crops, thus leading to a Pareto inferior outcome compared to the current, observed allocation. Instead, the Pareto superior path is to reform trade before water. The important feature of sequencing the reform‘s components is of special value in irrigated agriculture and deserves additional research. For instance, it is well known that the beneficiaries of policy change easily become entrenched to future reforms that lead to a decline in benefits of former policies. If the sequence of reform is a Pareto superior path, then either new reforms lead to no decrease in benefits, or if benefits fall to a sub-group, they can, in principal, be compensated without another group being made worse off. Thus, a policy reform is easier to implement and likely to remain more sustainable if carried out in a particular sequence.

Finally, notice that the magnitude of the output change due to water reform is often larger than the change due to trade reform, indicating the importance of water policy to farmers‘ production decision.

<u>Farm level direct and indirect effects of water reforms. If many farmers in a region</u> (e.g., a perimeter or an ORMVA) participate in a water reform, the allocation of a perimeter‘s total disposable water supplies among crops and farm types is most likely to depart substantially from those of the water assignments. If, for example, the government were to grant to farmers the user rights to the ORMVA‘s previous assignment of water, some farmers may have the incentive to rent out some of their water to other farmers, or to rent in from others. In this case, a different combination of crops could be produced and different combinations and levels of resources could be employed at the farm level. These changes in turn will cause factor markets for labor and other purchased inputs to reequilibrate. For this reason, the economy-wide model (CGE) is used to simulate a similar water reform policy that might be carried out on a national basis.

In contrast to the farm model, in which it is assumed that the reform simply allowed farmers to reallocate monthly water assignments across crops rather than be constrained by the monthly and crop specific assignment, it assume that the government makes a water assignment, but then allows farmers to hold user-rights to this water. The rights allow trade among farmers and for the farmer to receive payments for water rented out up to the total 24
water assignment. Effectively, this policy allows water to be reallocated by a perimeterspecific water market so that the water shadow price is equated among farmers and crops throughout the perimeter. Water trades are not allowed across perimeters due to technical limitations regarding water conveyance.

We assume that this policy is adopted for each perimeter in each of the seven ORMVAs. This policy will cause the economy to re-equilibrate, with new prices for labor and goods that are not traded in world markets (including some purchased inputs).

Table 3 (in Roe et al 2005b) report the change in wage due to such a water reform, while Table 4 ( in Roe et al 2005b ) presents changes in factor prices, which the farm takes as given. The difference between the total and direct effects gives the indirect effects of water reform. These results are reported in Table 5. In most cases, the indirect effects are of opposite sign to the direct effects.

Sugar cane illustrates the case where the indirect effects at the farm level dominate the direct effect of water re-allocation. It turns out that for the farmer represented by our data, the reallocation of water alone, all else constant, provides an incentive to decrease sugar production by 3.7 percent, but the indirect effects, through changes in purchased input prices and changes in the prices of home goods (sugar in this case is mostly traded in the domestic economy), provide an incentive to increase production by 6 percent. Since the indirect effect dominates the direct effect, the end result is that the farmer increases sugar production by about 1.36 percent. Thus, the total effect is to induce the farmer to reallocate water back to sugar cane production with the result that sugar production on this particular farm increases.

It is important to note that the farmer simulated in our farm model does not represent all farmers‘ decisions and that his decisions are constrained by the initial cropping system of his particular farm. At the aggregate level, sugar cane production and hence water allocation actually declines (not shown). This result further indicates that it is not necessary for the economy-wide model and farm model to generate exactly the same result. This type of information should be of particular interest to policy makers.

<u>Effects on the shadow prices of water. The total effect of water reform on the</u> productivity of water in each of the seven ORMVA's, by perimeter, is reported in table 7 (in Roe et al 2005b). The values shown are the change in the shadow price due to the provision of water user rights that farmers may trade among themselves as a percent of the shadow price of water (as estimated by the model when calibrated to data) associated with water assignments in each perimeter of each ORMVA, by crop. The trading in water rights should equalize the shadow price of water. In an analytical model with multiple factor inputs, the change in the shadow prices of water is indeterminate.

Of the twenty perimeters, only four experienced a decrease in the shadow price of water due to water trade reform. The intuition explaining this result is that (a) given the initial water assignments, and (b) the reallocation of water among crops and farmers in all ORMVAs, together caused an increase in the prices of other factor inputs that the crops in these four perimeters employ relatively intensively. This caused the new shadow prices for the crops grown in these four perimeters to fall. In the case of Doukkala perimeter 1, sugar beets account for over 10 percent of total output, melons for about 8 percent and other tree crops for 12 percent. The allocation of water out of sugar beets, and the increase in other input prices simple caused the productivity water in the perimeter to fall in marginal value relative to the base as the prices of other inputs increased.

The other 16 perimeters experienced an increase in the shadow price of water relative to base. The largest increase, about 52 percent, occurred in perimeter 2 of the 25
Haouz ORMVA (Table 8 in Roe et al 2005b). This increase occurred as water was allocated out of cereals and fodder production and into crops that are relatively more water intensive such as vegetables. This reallocation released more non-water resource from cereals and fodder production than could be profitability employed in other crop production and the pre-reform resource prices. The result was an increase in the shadow price of water in this perimeter.

The effect of reforming water policy on the macro economy and income distribution of household groups is shown in Table 2, (4th column) (Roe et al 2005b). Total agricultural output in the seven ORMVAs increases by 7.54 percent due to the water reform. This is a substantial increase in output that is obtained without the additional net use of resources. It can be seen that change in most other aggregate or economy-wide variables are modest. Such modest effects are due, in part, to restricting reform to the perimeter level, and holding urban demand for water constant. It must also be kept in mind that irrigated agriculture is a relatively small share of the total economy, although it employs a disproportionately larger share of the nation's rural work force.

<u>Farm level effect due to combined trade and water reforms. The overall effects of</u> the two policy reforms on farmer's total revenue and net profit are used to represent the possible welfare gains/losses of the policy reforms for the modeled farm, recognizing that farms of different types and enterprises may experience different effects. The results show that for this specific farmer who is heavily dependent on income from growing sugar cane and soft wheat, the trade reform leads to relatively large decline in output revenues and farm profits (defined as total production revenue minus all purchased inputs, thus equaling returns to farm specific resources). The direct effects of reform cause total production revenue and net profits fall by 15.7 and 50.7 percent, respectively. The indirect effects compensate the direct negative effects only marginally, by a positive one percent on revenue and 10 percent on profits. Thus, the total effect of trade reform for this particular farm is a decline in revenue of 14.7 percent and a decline in profits of about 40.3 percent.

On the other hand, the farmer benefits from the water reform. In this case, the indirect effects are larger than the direct effects, and more importantly they operate in the same direction. The direct effect of the water reform is to increase revenue by 3.7 percent and profit by 16.5 percent. The total effect is a 9.6 percent or 35.6 percent increase on revenue or profit, respectively.

Putting the two, trade and water reforms, together, the particular farm modeled is still made worse off (35.6% - 40.3 %), but the water reform can almost totally compensate the farmer for the losses incurred by the trade reform. This result illuminates the importance of taking a broader view on reforms. It also suggests that the chronological order at which the reforms are implemented is important. Farmers will be more agreeable of a combined trade and water reform when they know that the water reform will compensate some or all of their losses due to the trade reform.

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Figure 5: The Macro-micro Linkage Effects of Removing Subsidies to Processing of Sugar, Oil and Wheat in Morocco Source: Roe et al. (interim reports to the World Bank during 2003-2005) Figure 6: The Macro-micro Linkage Effects of Increase in Groundwater Pumping Cost in Morocco <!-- Start of picture text --> Increase in Groundwater Pumping Cost<br>(Surface Water Supply Remains the Same)<br>Decrease Groundwater Supply Small Negative Urban<br>Effects from Decline in<br>Final and Derived Ag.<br>Demand<br>Increase Water Push Resources Out of Economy-wide Effects:<br>Shadow Price Affected Irrigated Crops Decrease Real GDP: <br>Manufacturing & Rural Income: <br>Service Output<br>Small Farm Income: <br>Rural Wage Increases, Otherwise<br>Med. Farm Income: <br>Differential Effects Depend Upon Share<br>of Ground Water in Total Water (e.g. Large Farm Income: <br>Souss-Massa): Decrease Urban Wages, Decrease Capital Return Urban Income: <br>Ag. Trade Deficit: <br>High Perimeter Share Non-Ag Trade Deficit: <br>• Larger Change in Shadow Price of Water<br>• Larger Change in Shadow Price of Land<br>• Change in Ag. Revenue Depend on Water<br>Intensity of Crops Grown<br><!-- End of picture text --> Source: Roe et al. (interim reports to the World Bank during 2003-2005) 27
Figure 7: The Macro-micro Linkage Effects of Reallocation of Water from Rural to Urban Uses <!-- Start of picture text --> Reallocate Water From Rural to<br>Urban Sector (Urban Shock)<br>Decrease Surface Water<br>Increase Urban Water<br>In Three ORMVAs<br>Supply<br>Increase Shadow<br>Price of Water, Macroeconomic Effects:<br>Push Resources Out of Increase Manufacturing Increase Household Real GDP Rural Income <br>Irrig. Crops Increase Ground & Service Water Small Farm Income <br>Water Use Output Consumption Med. FarmIncome <br>Large Farm Income <br>Decrease Production of Crops in Three ORMVA Lower Factor Price in Agriculture Increase Urban Wagesand Urban Income Ag. Trade Deficit Non-Ag Trade Deficit  <br>Capital Return<br>Decrease Production of<br>Some Dairy, Meat,Other Increase Crop Decrease Farm<br>Processed Food Prod. in Non-Irrg. Income<br>& Some Non-<br>Water Withdrawal<br>Irrig. Areas<br><!-- End of picture text --> Source: Roe et al. (interim reports to the World Bank during 2003-2005) Figure 8: The Macro-micro Linkage Effects of Drought Resulting in Reduction of Surface Water Available for Irrigation Source: Roe et al. (interim reports to the World Bank during 2003-2005) 28
# **Empirical features for Mexico**

In the study of Mexico a regional agricultural production model and a macroeconomic (CGE) model were developed.<sup>4</sup> Both models focus on the Río Bravo Basin, but the CGE model also incorporates additional regions and sectors, comprising the entire Mexican economy. The detailed and technical description can be found in Dinar and Asad (2006), Yunez-Naude and Rojas Castro (2008), and Howitt and Medellin-Azuara (2008).

# <u>The Regional Farm production model</u>

The regional production model is linked to a hydrological model<sup>5</sup> of the Río Bravo Basin <u>(http://www.crwr.utexas.edu/riogrande.shtml). The regional agricultural model is based on</u> production models of representative farm types. The production models were calibrated to small (area<10ha), medium (10> area <50ha and large farms (area >50ha), based on the farm sample that was used by FAO. Then, using CONAGUA statistics on farm distribution in the study area, the farm models were extrapolated to construct the regional model that represents the agricultural sector in the 4 Rio Bravo Riparian states Chihuahua, Coahila, Nuevo Leon, and Tampaulipas. Several sets of policy interventions were simulated. The production model, a partial equilibrium framework, distinguishes between farm types and is used to assess the impact of the following policy issues:

1. Reduced water availability

2. Increased water cost 3. Smaller elasticity of crop supply (to reflect ―water secured‖ crops with lower sensitivity to changes in crop prices) + change in water availability 4. Smaller elasticity of grain crop supply + increased water cost 5. Reduced labor availability 6. Increased labor cost 7. Changes in crop price support programs While specific policy intervention results are discussed in Dinar and Asad (2006), and to a greater detail in Howitt and Medellin-Azuara (2008 Tables 1-17) for the farm level model, and in Yunez-Naude and Rojas Castro (2008 Tables 1-25) for the macro model, several general observations are presented here. The policy simulations suggest that the farming sector is more responsive to policy interventions that affect level of the resource that is available to the farmers rather than to policies that affect the cost to the farmers of using that resource. In other words, using economic terminology, farmers in the Rio Bravo Basin are quantity rather than price rationed. Both the reasons for that and the general policy implications will be discussed later.

Another general observation is that the various farm types respond differently to the policy interventions. It should be emphasized again that the differences among farm types are the result not only of size, but also of technology, access to credit, markets, and knowhow—all of which affect the crop mix and productivity levels. While this is an obvious observation that may not be ground breaking, the ability to quantify the impacts and to

> 4 See “Regional and Macroeconomic Analysis of Policy Interventions in the Water and other Related Sectors in Mexico” authored by a team from Colegio de México (COLMEX) and led by Antonio YunezNaude, as part of Dinar and Asad (2006).

> 5 The study team collaborates with the bilateral Mexico-USA project that has been initiated between the University of Austin Texas and several research institutes in Mexico, including IMTA.

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# identify the magnitudes is of importance.

Eight crops were included in the farm model, that in total capture the majority of the cultivated land in the Rio Bravo Basin (Alfalfa, Wheat, Maize, Cotton, Melon, Sweet Potato, Beans, and Sorghum). Three of these crops, Alfalfa, Maize, and Sorghum are grown by all farm types. Therefore, these crops will be used to test crop-related policy interventions.

# <u>Policy Intervention Simulations</u>

The starting point to consider for the policy interventions simulations is that there are significant differences among the farm types that will probably affect their response to the various interventions. First, cropping patterns of small farms include also melons and beans, which are not grown by medium and large farms. Second, there is a reciprocal trend of applied water per unit of land with farm size, for all crops. On average, medium farms use 10% more water per unit of land than large farms, and small farms use 100% more water per unit of land than large farms (these significant differences are not necessarily the case when specific crops are compared). With farm size distribution in the basin, the policymaker has already a pre-stated priority as to where the problems are and the efforts should be focused.

To save space only a handful of policies that were applied are discussed. A more comprehensive discussion can be found in Dinar and Asad (2006).

<u>Reduction of water availability for irrigation by up to 40 percent (reduction from 100</u> to 60%) suggests an important economic term—the opportunity (shadow) value of water to the farm, which indicates the economic value of an incremental unit of water to that farm. This policy intervention could represent either an external water availability shock, or a shift in allocation policy, if politically allowed. Shadow values are quite similar for large and medium farms but about 25-50 percent lower, for similar levels of water reductions, in small farms. Shadow values demonstrate a steep increase, for all farm types, as water becomes less available, indicating inelastic demand function for all farms. However, small farms‘ demand functions are relatively more elastic than those of the medium and large farms.

The lower shadow values and the more elastic demand behavior by the small farms is the result of their inability to respond better to this policy intervention. Small farms reduce the irrigated area of each crop grown on-farm as water availability decreases. Large farms reduce the area of most crops, except melon that remained constant and sorghum that was increased. Medium size farms responded to reduced water availability by reduction in the irrigated area of some crop and increase in the area of wheat and sorghum An immediate explanation to this diverse response is that small and large farms have other constraints that cannot be captured by the model, such as technological limitations in the case of small farms, and rigid infrastructure that prevents changes in on-farm water allocations, for the case of all farms. The increase in certain crops reflect also, in part, government crop prices subsidies.

<u>Increasing irrigation water cost to farms by up to 50 percent may reflect change in</u> water charges, or electricity subsidy removal policies. One immediate observation of this policy intervention results is the lesser impact on farms compared with reduction of water availability. Generally, under this intervention, reduction in irrigated area reached not more than 10% when water cost increased by 50 percent. The derived conclusion is that in order to achieve a larger decrease in area (and probably also in water use), a more substantial increase in water cost is necessary, which may bring in additional political considerations. But it is clearly the present behavior of the farms that suggests that the value of water is much higher than its cost (price) to the irrigators.

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Specific area reduction results suggest that small farms are again, affected the most by this policy for the same reasons indicated earlier. Specific water use-intensity results suggest that for the range or water cost increases, very little effect has been made on all parameters, namely area irrigated, cropping patterns (switching to more water value crops), and reduced water per land area. Focusing only on the water application per land, for the three crops grown by all three farm types, it is clear that farmers are not price responsive at all. Increase of 50 percent in water cost yielded 10-13 percent reduction in water application per land unit for all farm types and crops with the exception of maize in small farms that was associated with a reduction of 42 percent reduction in water application.

<u>Changing labor availability and its cost reflect policies that increase off-farm</u> employment, increase in urban migration, or increased demand due to international trade. A general observation is that none of the crops grown on any of the farm types exhibited a significant change in water use intensity. The biggest change was in the case of small farms, where maize and sweet potato took a cut in water per ha of 14 and 11 percent, respectively. We can conclude therefore, that water is not a substitute for labor in this region. Farmers just reduce irrigated area as labor becomes scarce or more expensive, and this is how the irrigation water demand is affected. Small farms were also most hit by this policy intervention.

# <u>The Macro Model</u>

The regional-CGE framework is used to assess the impact of the following set of policy issues:

1. Progressive increase in water supply 2. Progressive reduction in water supply 3. Reduction of 50% in water supply for irrigation 4. Reduction of 50% in water supply for irrigation+investment of fee (based on shadow water value) collection in improved productivity by WUA.

5. Water transfer from Rio Bravo Basin to close by regions (North, Central) 6. NAFTA liberalization 7. NAFTA liberalization+elimination of PROCAMPO 8. NAFTA liberalization+reduction of 50% in water supply for irrigation 9. Application of 15% VAT on foodstuff+reduction of 50% in water supply 10. Elimination of Agricultural subsidies 11. Climate change regional differential impact on rainfall and water supply

# <u>Results of the Macro Model Simulations</u>

Cropping patterns in Mexican agriculture are clearly more sensitive to factor availability than to factor price (or total cost increments). So, in regards to surface water for irrigation in the RBB, policies aimed to increase total cost of water for agriculture may not substantially change behavior of farmers as they are reflected in current cropping patterns and usage of other factors. A similar result was obtained using the macro-economic model. That is, reductions in water supply for irrigation have much stronger effects on irrigated agriculture (and on the remaining of the Mexican economy) than changes in water costs to users. This finding is explained in part by the fact that in Mexico, total surface water costs are just a composite of water fees paid to the Water Users Associations or WUAs (i.e. water is not fully valued and its opportunity cost is extremely low). In addition, dry land and irrigated land rents respond differently, as demand for dryland increases.

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According to the macro-economic model, reductions in surface water supply for irrigation benefit the finances of the WUAs. If additional water fees received by the WUAs are used to increase efficiency of irrigated crops‘ production activities, the negative economic effect of water supply reduction diminishes.

If agriculture and food processing trade restrictions are abolished in a context of less water availability for irrigation, the positive consequences of an agricultural freer trade with no water restrictions diminishes. However, the impacts of restricting water availability for irrigation are quite low (Figure 10).

The positive general equilibrium effects of agricultural trade liberalization on rural households‘ income do not disappear when we add water restrictions on addition to instituting free trade. By contrast, and under free trade, the elimination of PROCAMPO income transfers to maize producers reduces rural households‘ incomes.

Agricultural trade liberalization plus a value added tax (VAT) to foods and a 50% decrement in water supply for irrigated agriculture counterbalances the positive effects of agricultural free trade in the rural economy. However the VAT has a positive impact on public resources that can be used for investment.

Climate change impact on water availability will be differential across the river basins of Mexico. The macro model was able to capture this variable impact and assess the regional and macro economy consequences. Except for the Southwest, all regions will suffer mild to significant reduction in rainfall quantity. Most crop yields and area will be reduced and crop prices will increased, diary and livestock prices will be reduced as well as other durable commodities and services. More cropping under rainfed will replace irrigated crops. Urban real wages will drop and the same holds for rural wages in the North and in the RBB. Irrigated lands rents will also drop for the North, the RBB, and the Southeast.

Finally, the elimination of subsidies (mainly granted to crop production under irrigation) also has negative consequences on Mexican agriculture, as well as on Mexico‘s rural and urban households, especially so for rich rural households. As in the VAT policy intervention, the positive effect of this policy is that public resources increase.

A the linkage and interaction of impact channels of a trade liberalization policy alone, on the various sectors and factors of production is shown in Figure 9 below. And the linkage and interaction of impact channels of a water supply reduction to irrigation, charging by shadow value and investment of proceeds by WUA, on the various sectors and factors of production is shown in Figure 10 below.

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Figure 9: Channels of impact and interaction in the CGE model of a trade liberalization policy <!-- Start of picture text --> Economy-wide effects of<br>AG TRADE LIBERALIZATION<br>(NAFTA)<br>Rural Urban<br>∆domestic prices Pushes resources<br>Small negative<br>↓ non competitive Out of non-competitive<br>effects on income<br>↑ competitive In of competitive<br>↑ Factor prices<br>↑ Factor prices<br>↑ Water shadow prices Wages<br>Wages<br>↑ charges of water Land rents Land and capital rents<br>↑ WUA savings<br>↑ Household income<br><!-- End of picture text --> Source: Yunez-Naude (Interim reports submitted to the World Bank during 2005-2006) Figure 10: Channels of impact and interaction in the CGE model of a water supply reduction to irrigation, charging by shadow value and investment of proceeds by WUA <!-- Start of picture text --> CGE effects of reductions in water supply<br>for irrigation<br>Rural/Agriculture Urban/Manufactures<br>Pushes resources ↓ Food processing<br>↑ Water shadow out of irrigated Ag. ↑Other manufactures<br>Value<br>Factor demand varies<br>according to ↓ Wages Small ↓ in<br>↑ WUA savings Crop & region • Real GDP<br>• Household incomes<br> (rural rich, the biggest<br>Investment for efficient ↓ Wages &<br> losers)<br>use of water Land rents<br>↑ Exports & Imports<br><!-- End of picture text --> Source: Yunez-Naude (Interim reports submitted to the World Bank during 2005-2006) A more detailed impact description by region and explanation of the linkages is provided in Tables 2-5 for selected macro policy intervention and external shocks.

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# **Empirical features for South Africa**

Over the past few years SA agriculture experienced major structural adjustments following a number of critical macro and sector level policy changes, including major changes in managing the foreign exchange and capital markets coupled with wide liberalization of agricultural marketing and trade regimes. All of that led to the exposure of the agricultural sector to shifts in relative world commodity and factor prices. Particularly, the competitiveness of the South Africa‘s agricultural exports has been affected with the removal of various forms of protection, change in interest rate and export subsidies and substantial currency devaluations (Hassan et al 2008). In parallel, a number of domestic policy changes mainly in the allocation of and access to key resources such as land and water were implemented.

The key water sector (micro) policy changes stemming mainly from implementation of the National Water Act (NWA) are expected to have important direct and indirect implications for future water use and allocation and associated macroeconomic consequences. The NWA introduced measures to enhance future equity in access to water resources, and promotion of efficiency in water use and allocation among competing sectors such as irrigation, mining, manufacturing and services.

One immediate response to the initial move towards economic efficiency following increased water charges was a switch of land and water from low value field crops such as maize to high value horticultural products for export and shifts to use more efficient irrigation technologies (Hassan et al. 2008). The NWA also promotes trade in water leading to efficiency gains in water use in some areas (Hassan et al. 2008). In addition, the NWA secures ecological demand and basic human needs for water. This by itself affects water availability for economic activities.

# **Policy considerations**

Some of the main macroeconomic changes that are expected to have important influences on water use and allocation and overall economic wellbeing include:

1. Strategic plans promoted by the government to increase rates of economic growth in the future, while providing water basic needs.  This will lead to increased competition for water between agriculture and non-agricultural activities (domestic and industrial).

2. Rapid urbanization fostered by recent major shifts away from primary production

- a. activities such as agriculture to industrial and services sectors and lifting restrictions

- b. on internal migration. The rural-urban migration has major implications for competition for water particularly between domestic and other uses.

3. Policy changes with implications for the performance of irrigated agricultural exports:

- a. adjustments in the rate of foreign exchange;

- b. allocation of larger shares of water at subsidized prices to small holder farmers and for basic human need (i.e. provision of access to water and sanitation to previously excluded communities).

- c. Trade protocols with SA‘s major trade partner, the European Union (EU). d. Future regional economic cooperation within the Southern African Development Community (SADC) as well as other African countries.

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- e. In addition to the above, important global phenomena such as climate change (CC).

The impact of these policies on the productivity of irrigated agriculture, rural poverty and food security in South Africa will be simulated by focusing on the impacts of a selected set of four policy interventions: (1) removal of major non-price restrictions that constrain reallocation of water between activities, sectors and regions; (2) allowing trade in water among various users (i.e. allocation of water on the basis of economic efficiency through a water-like market); (3) water-restricted competition from higher urbanization; and (4) waterliberalized competition from higher urbanization.

# **The structure of the CGE model for South Africa**

Apart from its treatment of water, the model contains detailed information on production, trade, and consumption. The model uses a new structure for highly disaggregated agricultural sector activities.

The model contains 40 sectors/commodities, including 17 agricultural and 15 industrial sectors. Agricultural production is divided into field crops (summer cereals; winter cereals; oil crops and legumes; fodder crops; cotton and tobacco; and sugarcane), horticultural crops (vegetables; citrus fruit; subtropical fruit; deciduous fruit and viticulture; and other horticulture), livestock (livestock sales; dairy; poultry; and other livestock products) and fishing and forestry. Field crops are further separated into irrigated and rainfed whereas all horticultural production is assumed irrigated. Together, these agricultural sub-sectors account for 4.3 percent of national gross domestic product (GDP) – making agriculture a relatively small part of the South African economy (Hassan et al 2008:13). The model introduces for the first time a breakdown by water management areas (WMAs), which are delineated by, more or less, the river basin borders. This has important relevance to policy in South Africa as the government agencies and WMAs are in charge of allocation of water and other resources within these borders.

Agricultural and nonagricultural production in the CGE model is therefore disaggregated across each of the 19 WMAs. In total there are 874 representative producers in the model (each of the 19 WMAs contain 40 sectors, with the 6 field crops further disaggregated into irrigated and rainfed). Thus, while the regional dis-aggregation of the model is motivated by WMAs, it also captures the varying importance of agriculture and other sectors in different parts of the country.

# **Results for South Africa**

The South Africa Water CGE model examines a number of water-related issues in SA and the economy-wide (micro and macro) impacts of the following policy scenarios have been evaluated. They include (Hassan et al. 2008) (I) intraregional irrigated-water-market liberalization to examine the impact of liberalizing local water allocation among crops so as to equalize the shadow price of irrigation water across crops within each WMA. It is called <u>Regional Irrigation Market. Since the trade is allowed only within each WMAs, some shadow</u> price values may rise or fall by lager magnitudes relative to the base than others. Therefore, the initial shadow values only provide a partial prediction of the direction of the final result. This scenario leads to estimation of general equilibrium shadow process for irrigated water for the various WMAs; (II) changes in inter-regional transfers of water for irrigation use based on existing water transfer schemes in addition to liberalizing regional (within WMA) irrigation water markets (as in I). Water allocation between agricultural and nonagricultural 35
use remain unchanged in this scenario which liberalizes national irrigation water trade. It is called _National Irrigation Market_ . This scenario equalizes irrigation water shadow process both within and between all WMA‘s and thus establishes a national general equilibrium SP; (III) Introducing increased competition for water from predicted expansions in non-agricultural uses and rapid urbanization through rural to urban migration. Under this scenario there is no liberalization of water markets. It assumes that urbanization and industrial expansions will greatly increase urban water demand in the future. It is called _Water-Restricted –Urbanization_ ; and finally, (IV) Liberalizing water markets allowing for market-based water transfers out of irrigated agriculture to municipal areas to meet the growth in demand for domestic and industrial use introduced under scenario III. It is expected to transfer significant amounts of water out of irrigation agriculture leading to declines in agricultural GDP, rural employment and incomes. This scenario is called _Water-Liberalized Urbanization_ .

The quantitative results can be found in Hassan et al. (2008) tables 1-21. In Table 6 below the reader can find the impact matrix of the 4 simulated policy scenarios in South Africa on major variable. The interesting finding is that some of the policies such as those that favor urbanization further polarize the competition between the rural and the urban sector in the country, which will be discussed in the conclusion section.

# **Empirical features for Turkey Structure of the CGE Model for Turkey**

The Turkish CGE model includes the three main sectors in the Turkish economy, namely the production activities, the institutions, and the foreign sector. The model disaggregates the economy into 20 agricultural and 9 non-agricultural activities. Agricultural activities are categorized by field crops, livestock, fishing and forestry (classified as ̳other agriculture‘). Nonagricultural activities include mining, consumer manufacturing, food manufacturing, intermediates and capital goods, electricity and gas, water, construction, private services and government services.

Of the agricultural activities, field crops and livestock are further disaggregated into production in four main regions and one micro region of the country: West, East, Central, Southeastern, and the micro-region, LSCB (Lower Seyhan-Ceyhan Basin). Fishing, forestry and non-agricultural activities remain at the national level. The institutions sector includes households, the government and the Water User Associations (WUA). Households are disaggregated into rural and urban households. Rural households are further disaggregated according to their geographical location. The model includes five rural households and one urban household type. Import, export and tariffs concerning the 25 EU countries and the rest of the world constitute the foreign sector of the model.

According to Cakmak et al (2008:29), ―Production technology in each activity is defined by a CES function of value added and aggregate intermediate input use. The value added in each activity is given by a CES production function of factors used (labor, capital, irrigated land, rainfed land and water, if applicable). Aggregate domestic output is distributed among domestic use and exports (EU and rest of the world). All producers take factor and commodity prices as given, and are all profit maximizers. Urban and rural household types in each region have a simple consumption pattern in the sense that they devote a fixed share of expenditures on each consumption item. Each household type has a different consumption pattern depending on household income and savings. Implicitly in this structure, households are assumed to minimize expenditures on consumption, taking as given the price of each commodity. Urban households earn income from labor services and capital rent, while each rural household earns income from services of labor and capital, as 36
well as land rents (irrigated and rainfed) and income from the WUA‘s via transfers from government. The government also has a fixed consumption pattern in the sense that it devotes a fixed share of expenditures on each commodity. The government derives income from various types of taxes (import, export, production, sales, etc.) and also saves. The government in this model also acts as an intermediary between the WUA‘s and the rural households in the sense that the water charges collected from agricultural producers by the WUA‘s are then distributed to rural households in their respective regions by the government.‖ Water demand in agriculture (which uses about 80% of available water in Turkey) is estimated, using the concept of shadow prices in order to derive the water demand. The shadow prices are derived from a programming model for each of the various rural household types that face different levels of available water quantity. In this setup the shadow price for the water constraint is the value of the marginal product of irrigation water. In order to get the derived demand for irrigation water, one should change the water constraint starting from zero when irrigation water is not binding (Tsur et al, 2004, p.6).

# **Linkage between the farm model and the CGE**

The farm model is used to estimate the shadow value of water in agricultural production. In this setup, shadow rent is the difference between the farmers‘ surplus and the price at the level of consumption of water. It was estimated that the shadow rent for water is twice the actual payment made to water. Under these findings this shadow rent was added to the payments made to irrigation water as a factor of production in the CGE model.

# **Results for Turkey**

Qualitative results of the policy intervention simulations for Turkey are presented in Table 7 below. The first set of simulations involve the effects of changes in world agricultural prices; the second set of simulations examine the impacts of rural to urban water reallocation within each region; the third set of simulations evaluates the impact of climate change on agriculture. Below are highlights of main results.

<u>Introducing world agricultural price shocks has two primary effects. First, agricultural</u> imports and exports change significantly. Increasing demand for exports changes the equilibrium price and quantities in the goods market. Price changes are higher for maize, pulses and other animal products. These products have a relatively higher share in agricultural exports and lower elasticities implying a lower substitutability of domestic and imported goods. Domestic production increased significantly in almost all activities. Nonfarm households are adversely affected by increasing food prices. Demand for the factors used by agriculture is likely to increase, while factor demand by industrial sectors is expected to decline. Land and water use in maize also increases significantly, at the cost of employment of these factors in the other sectors.

The overall conclusion for this simulation is that change in world prices have significant welfare implications that varies among urban and rural households. A change in prices brings about a decline in import demand while increasing the export supply. Consequently, domestic prices increase and adversely affect the urban households while increasing the income of rural households. Agricultural world price increase negatively affects industrial sector due to the direct competition for factors of production with agriculture, and in intermediate demand for agricultural products that are now relatively more costly. This further suppresses urban households purchasing power income.

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<u>Urban migration in Turkey is affected by various factors such as a ―high population</u> growth rate, industrialization, mechanization of agricultural production, shifts in land ownership, inadequate education and health services, a desire to break away from traditional social pressures and feuds in rural areas, as well as increased transportation and communication facilities‖ (Kahraman, et al., 2002, cited in Cakmak et all 2008:43). But, increase in urbanization rate will lead to increase in rural-urban competition for water within each region. Increased urbanization and water is simulated by increased water supply in urban areas in the West region and reduced irrigation water availability for agriculture by the same share (rural to urban and industrial water allocation) in the West region. Two subscenarios were considered: increasing urban water supply by 30% (Scenario 2.a) and 50% (Scenario 2.b) with a similar reduction in water irrigation water. Both sub-scenarios have the same direction of effects with corresponding magnitudes.

The results indicate a decline in overall production (the sum of both irrigated and rainfed land) for all crops. The drop in production in irrigated agriculture releases factors of production that are re-allocated to rainfed activities, leading to increase in production in rainfed activities. However the productivity of rainfed agriculture doesn‘t compensate for the loss of irrigated productivity. As a result, prices of all agricultural commodities increase at varying rates, while prices in national non-agricultural activities (except for food manufacturing, electricity, gas and government services) fall at varying rates. The price of water as an urban commodity by falls drastically following the increased available quantity in the West region.

This scenario also changes labor use patterns, as labor is released from irrigated agriculture, but wages paid to labor slightly increase as a result of the decrease in irrigation water in the West region. Water shadow value in irrigated agriculture increases dramatically. Rainfed land rent increases in the West Region because rainfed agriculture enjoys the increase in prices without bearing the cost for increasing water prices. The decrease in agricultural production, and the corresponding domestic price increases, lead imports to increase and exports to decrease in these activities.

<u>Climate change</u> is expected to reduce precipitation in most regions of Turkey. Climate change is expected to lead to severe adverse effects on rainfed agriculture, increase in irrigated agricultural demand for water as a result of reduced precipitation and increased evapotranspiration, and increase in the urban demand. All of that will mount pressure on water resources. The effects of the anticipated climate change are simulated by shocking the yields of various crops. The following section presents the aggregate results for the scenarios. A thorough discussion on the design of the scenarios together with the obtained results can be found Cakmak et al (2008) and Dudu and Cakmak (2011).

Three sub-senarios are considered: a reduction in rainfed crops‘ yield of 30% (Scenario 3.a); a reduction in irrigated crops‘ yield by 10 percent (Scenario 3.b); and a differential reduction in all crops‘ yield ranging from 0 to 30%, depending on the region and whether the crop is rainfed or irrigated. All three scenarios have the same direction of impact and similar range of impact on the various variables, as can be seen in Table 7 below.

# **Conclusion**

The simulations conducted in the four countries demonstrated similarity in impact directions and linkages between policy interventions. However, explanations and interpretations of the magnitudes are unique to the conditions in each country and will be discussed separately.

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# **Morocco**

The top-down (macro-to-micro) links considered in our analysis for Morocco are of a trade reform type. The bottom-up (micro-to-macro) links pertain to changes in farm water assignments and the possibility of water trading. For each policy the direct, indirect and total effects are analyzed. It was found that the productivity of water is strongly influenced by these policies, with direct effects modified by general-equilibrium, indirect effects and sometimes even reversed by them.

It is expected that the basic forces will also be present in the other countries, but their magnitudes and possible direction of change will of course vary by country specific situations, with important policy implications.

The impacts of the two reforms that were assessed were found to be different, with trade reform having an absolute impact of a higher magnitude than the water reform. It is expected to find both differences in relative and absolute magnitudes in the other three countries, based on institutional, economic, and physical conditions.

The importance of packaging and sequencing reforms is an issue that deserves further research. Our analysis of the Moroccan economy reveals that this is an important factor, affecting a successful implementation of any reform. The model developed here can be used to evaluate policy reforms in other situations, pending appropriate data, and is therefore of wide application. The three countries considered here are of varying degrees of initial conditions and relative effectiveness of policy interventions. Applying the analysis to other countries will allow testing the hypotheses related to reform packaging and sequencing under different circumstances (Roe et al, 2005b).

# **Mexico**

In the context of the comprehensive analytical framework the present study seeks to develop as a policy dialogue tool, the above findings provide the basis for evaluating the economic impact of selected policy interventions. Applying the analytical models (regional production and CGE) developed as part of the overall study yields a number of relevant conclusions that further validate and/or extend the findings indicated above. These conclusions are highlighted below. However, again, the objective of the current study is to develop a comprehensive analytical framework that can inform a policy dialogue. In keeping with that focus, the results of the current study also include a strategy for ongoing consultations and dissemination among various relevant stakeholders.

Considering the over exploitation of aquifers nationally and in the Rio Bravo Basin, combined with rapid urban growth, it seems unlikely that preserving current water allocations for agricultural uses can be sustained. Part of the complication arises from allocating much more water for agricultural uses relative to urban uses. As such, meeting urban demands would likely only require small reductions in available water for agriculture, leading to moderate reductions in total cultivated land and level of production. Moreover, some policy interventions to achieve this result have relatively lower negative impacts than others, so they are more politically feasible.

Many farmers seem to be quantity-responsive rather price (cost)-responsive to both land and water. In other words, given current pricing and subsidy realities, policy alternatives that target irrigation water supply reduction (rather than irrigation water supply price increases) may be more likely to induce greater water use efficiency for agricultural purposes. Moreover, reducing water supply can be implemented more equitably, and would therefore be more politically viable, compared to policies that focus on eliminating energy subsidies for pumping groundwater. As compared to poor and medium income rural 39
households, rich Mexican rural households (especially those in the North and in the RBB) are the ones that are affected the most when water availability is reduced and when water costs increase.

Many negative impacts that may result from reducing irrigation water supply can be offset by allowing water user associations (WUAs) to retain revenues from water charge collections, and locally reinvest the proceeds raised by charging fully according to the value of water in water-productivity improvement technologies.

Policy changes that imply more resources to the WUAs and to the government, could improve government finances and be used for redistributive purposes; for example, by promoting a more efficient crop production of poor rural households. The above is particularly important for the portion of poor rural households that are indigenous, that is, for the poorest of the Mexican poor.

Free trade policies may facilitate many of the policy alternatives discussed above. For example, the negative impacts from restricting water supply for irrigation would be relatively low compared to the positive impacts from agricultural trade liberalization. These impacts may offset negative consequences to richer rural households, whose incomes are the most affected when water availability is reduced and/or water costs increase. The same holds when a value added tax on foodstuff is introduced and/or when agricultural subsidies to certain crops are eliminated. For example, reductions on water supply for irrigation in a context of free trade are less harmful to rural households than the elimination of PROCAMPO.

Climate change is likely to affect Mexico with differential impacts by regions. The high reduction of water availability for irrigation in Northern Mexico and in the Rio Bravo Basin caused by lack of rainfall negatively affects crop production all over Mexico and Mexico‘s household real incomes. Rich rural households are the ones suffering highest income reductions, especially so in the North and in the Rio Bravo Basin agricultural regions. Such differential impacts call for localized policies.

Localized policies seem appropriate to address the fact that impacts from changing water availability vary across regions, households, and cultural groups (Dinar and Asad, 2006).

# **South Africa**

SA is a water stressed country. The pressure on existing water resources is predicted to worsen with planned growth strategies, observed recent demographic changes, ongoing radical water sector reforms which aim to correct for previous social injustices and economic inefficiencies in water use and allocation and unfavorable global climatic and economic conditions. The fact that many of these changes and policy reforms serve conflicting objectives and often work in opposite directions necessitates adoption of an economy-wide approach to properly evaluate their net impacts on rural livelihoods and economy at large.

The four policy simulated scenarios provide a wide set of results that represent the likely trend in the South African economy.

Liberalized regional irrigation water markets improves the efficiency of water allocation within each WMA. It also expands agricultural production and exports, and creates additional employment for farm laborers. This is especially important for lowerincome rural households employed mainly on farm. However, regional water market liberalization would also increase the price of cereals, thus increasing SA‘s dependence on imported grains and raising concerns for urban consumers.

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Liberalized interregional irrigation water markets to equalize water shadow prices within irrigated agriculture across all WMAs will allow market-based transfer between crops and WMAs. This policy will lead to more production of higher value crops and regions with positive macroeconomic impacts and improves employment and income levels for lowincome households, so increasing agricultural GDP. However, such policy favors also greater production of high-value crops (citrus fruits) at the expense of cereals and other field crops. This raises the price of these crops, which leads to the same final impacts as in the case of liberalized regional irrigation water markets.

Water-restricted competition from higher urbanization policy introduced competition for water from non-agriculture urban uses with irrigated agriculture. This leads to much higher competition and higher water shadow prices for irrigation water with reduced income and employment benefits to rural households and higher gains for nonagricultural households.

Water-liberalized competition from higher urbanization considers competition from industrial expansion and urbanization but transferred water from irrigated agriculture to domestic use to maintain the national water price unchanged. This has major negative consequences on the agricultural economy and may not be politically acceptable (Hassan et al. 2008).

# **Turkey**

Turkey has a very heterogeneous landscape and spatial water distribution. Therefore, the used in the study yielded opposed impacts across sectors, and subsectors, and across regions. The highest effects on major macroeconomic indicators occurs in the climate change simulations. Nominal GDP declines drastically, but the real impact is limited. The changes are relatively smaller in the world price increase scenario when compared to all climate simulations. The results indicate that Turkey is very sensitive to climate change impact on the performance of the overall economy. It is obvious that the impact of the climate change will not only be confined to the agricultural sector. Irrigation is the most important adaptation measure to ease the negative impact of climate change, especially on farmers‘ income. While adaptation to climate change was not addressed in this study, still adaptation policies that include pricing of water, subsidies for technology adoption, crop diversification, etc... the model allows us to evaluate them in detail.

The increase in the world prices led to decrease in all selected macroeconomic indicators, except the agricultural exports. Increasing world prices hampers non-agricultural sectors as well, which then dissipates to suppress the income of rural households.

As a result of the rural-to-urban water transfer, overall production of all agricultural crops decline. The decrease in the agricultural production, coupled with the domestic price increase, is further reflected in the net trade. Agricultural imports increase with a higher decline in agricultural exports.

The over exploitation of ground water in some regions and the increased scarcity of surface water in other regions has already started to affect also quality of the available water, with severe environmental impacts, and hamper agricultural production. One of the conclusions of the study is that a policy response of building additional infrastructure to store water and ease water availability constraint raises serious doubts as a sustainable policy for the irrigation sector (Cakmak et al. 2008).

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# **How does the macro-micro linkage CGE approach benefit economywide analysis?**

By linking macro- and micro-level policies with micro-level decision making into one analytical framework, the analyst is able to better capture direct, indirect, and total effects of either policy interventions or external shocks. In a simple table we provide a general summary of the common features of the macro-micro linkage approach that was applied to each of the four countries, and how these features fared in the analysis.

In Table 8 we can see the several policy interventions and external shocks that were featured along with the structures of the economies in the analyzed countries. The macromicro linkage framework allows the analyst to address not only efficiency aspects of policy interventions, but also equity/distributional implications of the interventions and the shocks. The discussion in the previous sections suggests that given the uneven distribution of natural resources (e.g., land and water) across the landscape of a country, and given the different endowments and abilities of various households in each of these regions, policy interventions would have different impacts across regions and types of households. Because the macro-micro linkage allows us to differentiate between macro and micro policies, and between direct, total, and indirect effects, the analyst is capable of evaluating the tradeoff between social objectives and how each policy intervention/external shock impacts such tradeoffs.

# **Lessons learned and future research needs**

Water has a central role in many economies. Water resources have been the focus of many intervention policies. Policy interventions have been aiming at achieving multiple objectives, including income transfer, food production, environmental sustainability, and resource conservation. The detailed analysis in the case of Morocco, Mexico, South Africa, and Turkey that were discussed in this paper reveal difficult tradeoffs between various policy objectives, sectoral preferences, regional advantages, and general economic gains vs. social impacts. Indeed, in each of the 4 countries the CGE results demonstrated that there is no one policy that will be able to achieve a balanced set of the societal objectives.

This observation brings us to the first two suggested research directions. First, the need to evaluate a combination of policy instruments rather than one policy instrument at a time. The concept of packaging and sequencing of policies that was suggested by Saleth and Dinar (2004) and was applied in the CGE model in Morocco (Roe et al. 2005b) has indeed demonstrated how important the sequencing of policies is. Roe et al. 2005 show that there is a significant difference in the economy-wide performance if a trade openness policy follows a water market intervention, compared with the opposite sequence. The policies experimented in Mexico, South Africa and Turkey in the studies reviewed for this paper included single policies. Future research, where a combination of policy instruments is modeled, will provide better assessment of the linkage between the policies and the impacts/tradeoff between the outcomes.

Another observation in the various country cases is the heterogeneous nature of water productivity across the various countries. This water productivity heterogeneity stems from the variation in physical conditions and water availability across space, previous policies that preferred certain regions or groups of people and led to uneven economic performance, and other conditions. The physical as well as the economic factors leading to such observed performance over space would need to be addressed by differential policy structure rather 42
than blanket policy structure. This is especially critical in the case of Mexico, South Africa, and Turkey as was also indicated in the results.

One observed weakness of the CGE framework or at least in its application (including also the studies reviewed in the literature review section) is the lack of institutional analysis. Supporting institutions are known to go hand in hand with policy reforms and the inclusion of institutional setups with the various simulations in the CGE experiments would enhance the performance of the policy. For example, a water market liberalization simulation in the CGE analyses in all 4 countries was undertaken under the assumption that the market would perform without any added transaction cost. It is not obvious that the many individual small users would participate in that water market and how well would they perform. It is suggested that alongside the establishment of a water market the CGE framework could also include an institutions such as a Water User Association. Such institution represents the many members in setting the quantity and price to be traded and increases the market efficiency.

And finally, the cloud of climate change was casted over all 4 country case studies. It is obvious that additional analysis of impact of and adaptation to climate change is needed. In addition, more emphasis is necessary on policy interventions that could incentivize adaptation responses. The way climate change was handled in both the macro-micro linkage studies and the other studies that were reviewed, seem to be mechanistic and based on simplistic assumptions, such as fixed yield reduction, fixed water supply reduction, etc... Future research could benefit from handling both the impact of and adaptation to climate change endogenously in the farm or household model within the CGE framework.

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Table 1: Selected policy and policy linkages used in the 4 analyzed countries

|Key Policy Issues affec<br>irrig|ting the use and productivity of<br>ation water|Likely I|mpacts|
|---|---|---|---|
|Macro Policies|Micro Policies|Macro to Micro Linkage|Micro to Macro Linkage|
||Me|xico||
|1. NAFTA<br>liberalization.|1. Water transfer from Rio<br>Bravo Basin to close by regions.|1. Possible impact will be on<br>reduction in maize price and<br>processed maize, and<br>significant increase in export<br>of fruits and vegetables.<br>Regions neighboring with<br>the Rio Bravo and the<br>border with the US will<br>benefit the most. Water use<br>for producing non-<br>competitive crops will<br>decline but and rises for<br>fruits and vegetables in all<br>regions. Rural and urban<br>household incomes increase<br>in all regions as well.|1. A transfer of water in the<br>RBB to the North and<br>Central regions will<br>counterbalance several of<br>the negative impacts<br>associated with reduction in<br>water supply to the<br>irrigation sector in each<br>region. Land rents will<br>decrease, and water shadow<br>value increase. Impact on<br>rural and urban wages is<br>positive as manufacturing<br>of durable goods increase.|
|2. NAFTA+elimination<br>of the PROCAMPO<br>subsidies for staple<br>food.|2. Significant (50%) reduction<br>in water supply.|2. This simulation combines<br>the effect of NAFTA trade<br>liberalization with<br>eliminating PROCAMPO<br>income transfers to maize<br>producers by 10% of the<br>gross value of their maize<br>production. While the<br>impact of a combined<br>NAFTA and removal of<br>ProCAMPO subsidies are<br>similar in general, the only<br>important difference is<br>reflected in rural households‘<br>income drop when<br>PROCAMPO is simulated.<br>The drop in rural<br>households‘ income is more<br>or less equally distributed<br>across household types<br>(poor, medium, rich), but<br>not across regions. The<br>RBB region suffesrs the least<br>and the North and Center<br>regions suffer the most. In<br>contrast urban household<br>incomes increases across all<br>regions and household types.|2. A 50% decrease in water<br>supply will affect water use<br>in all regions. Rich<br>households will<br>significantly affected in all<br>regions. Prices of food<br>commodities increase,<br>other durable and services<br>increase due to decrease in<br>domestic supply of all<br>foodstuff; exports of raw<br>and processed food stuff is<br>reduced, and replaced by<br>imports for most items.<br>Dry land rent increase,<br>irrigated land rant decrease,<br>wages in ag decrease and<br>water shadow values<br>increase.|

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||Mor|occo||
|---|---|---|---|
|1. Modification of policies<br>(both<br>Moroccan<br>and<br>European based) to allow<br>Morocco better access to<br>the EU-Market.<br>2. Free trade agreement<br>with the US on access to<br>agricultural markets.|1. Change in farm-level and<br>regional<br>water<br>policy:<br>Institutions, water entitlements,<br>water pricing.<br>2.<br>Agricultural<br>development<br>policy: expansion in irrigation<br>area,<br>investment<br>in<br>water<br>conveyance<br>infrastructure,<br>investment<br>in<br>farm-level<br>irrigation<br>technology/management,<br>fertilizers<br>and<br>other<br>input<br>pricing.|1.<br>The<br>possible<br>trade<br>arrangements are likely to<br>increase<br>competition<br>for<br>cereals<br>while<br>increasing<br>opportunities for the export<br>of<br>fruits<br>and<br>vegetable<br>products.|1. Improved equity among<br>small and large farms.<br>2.<br>Better<br>inter-regional<br>allocation<br>of<br>water<br>to<br>address regional relative<br>advantages.|
||South|Africa||
|1. Adjustments in the rate<br>of foreign exchange as the<br>value of the SA currency<br>continues<br>to<br>fluctuate<br>toward<br>more<br>stable<br>equilibrium levels.<br>2. Negotiations on trade<br>agreements between SA<br>and its main trade partner,<br>the EU.|1.<br>Movement<br>toward<br>full<br>recovery of water supply costs<br>in water charges<br>2. Regulation of the rural labor<br>market through introduction of<br>a minimum wage rate for farm<br>workers<br>and<br>regulation<br>of<br>dismissals.|1.<br>Competitiveness<br>of<br>agricultural<br>exports<br>significantly affected with<br>the removal of various forms<br>of protection, interest rate<br>and export subsidies and<br>substantial<br>currency<br>devaluations.<br>2. Change in the land<br>allocated to int‘l market<br>crops.|1. Efficiency of water use.<br>Gradual reductions in the<br>high subsidies enjoyed by<br>irrigation farmers. Switch<br>of land and water resources<br>out of low value field crops<br>such as maize to high value<br>horticultural products for<br>export and shifts to use<br>more<br>efficient<br>irrigation<br>technologies<br>2. Reduced employment in<br>agriculture and expected to<br>continue affecting factor<br>intensities<br>of<br>farming<br>toward less labor intensive<br>operations.|
|3.<br>Future<br>regional<br>economic<br>cooperation<br>within<br>the<br>Southern<br>African<br>Development<br>Community (SADC) on<br>strategic food commodities.|3. The new water act provide<br>for allocation of higher shares<br>of water at subsidized prices to<br>small holder farmers and basic<br>human need.<br>4. Protecting of the ecological<br>demand and basic human need<br>for water.|3. Possible increase in Corn<br>production.|3.<br>Impact<br>on<br>the<br>productivity<br>of irrigated<br>agriculture, rural poverty<br>and food security.<br>4. Reduced availability of<br>water<br>with<br>large<br>reallocations<br>away<br>from<br>agriculture to meet such<br>demands.|

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|<br>|<br>|Tur<br>|key<br>||
|---|---|---|---|---|
|1.<br>Bilateral<br>liberalization<br>agricultural<br>with EU.|<br>trade<br>in<br>products|1. Changes in water pricing<br>methods and assignments of<br>water rights.<br>2.<br>Targeted<br>direct<br>income<br>support to farmers.|1. Help in settings the<br>priorities<br>of<br>public<br>investment and increase the<br>competitiveness<br>of<br>the<br>agricultural sector, and may<br>ease the transition towards<br>the EU membership.<br>2. The shift towards more<br>market oriented agricultural<br>policies<br>accompanied<br>by<br>decoupled<br>transfers<br>to<br>farmers represents a major<br>policy change in agriculture.<br>The effects of this change on<br>the<br>regional<br>(including<br>rainfed<br>and<br>irrigated)<br>production pattern may have<br>implications about the level<br>and distribution of income.|1. More effective use of<br>existing water resources.<br>2. Targeting of safety net<br>program will affect equity<br>distribution.|

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- <u>Table 2: Policy Intervention/shock NAFTA Liberalization Using the CGE Model Simulation Results for Mexico</u>

|**Impact on**|**North**|**Central**|**Southwest**|**Southeast**|**Rio Bravo**|
|---|---|---|---|---|---|
|Water use forgrains||||||
|Water use for fruits<br>and vegetables||||||
|Water shadow value||||||
|**Comments**|To simulat<br>part of NA<br>beans was<br>5%, and pr<br>most signif<br>processed<br>and vegeta<br>27 and 16<br>production<br>liberalizati<br>and the N<br>non-comp<br>In all regio<br>regions as|e agricultur<br>FTA, the p<br>reduced by<br>ice of veget<br>icant impac<br>maize (1.4%<br>bles (12%).<br>%, respectiv<br>suggest tha<br>on reflects c<br>orth regions<br>etitive crops<br>ns. Rural a<br>well.|al and food proc<br>rice of composi<br>20% and 10% r<br>ables and fruits<br>t is the reductio<br>),and significan<br>Maize and bea<br>ely. Changes in<br>t the distributio<br>loseness to the<br>benefiting the<br>declines and ri<br>nd urban house|essing trade libe<br>te commodity m<br>espectively, dair<br>were increased<br>n in maize price<br>t increase in exp<br>ns imports have<br>returns to factor<br>n of benefits fro<br>border, with the<br>most. Water use<br>ses for fruits and<br>hold incomes inc|ralization as<br>aize and<br>y products by<br>by 5%. The<br>(9%) and<br>ort of fruits<br>increased by<br>s of<br>m the trade<br>Rio Bravo<br>for producing<br>vegetables.<br>rease in all|

Source: Dinar and Asad (2006) Note: We use the following symbols to compare impacts:

-  ,  Significantly positive or negative impact on the said variable through all range of policy intervention values;

-  ,  Positive or negative impact on the said variable through all range of policy intervention values;

-  No consistent, but small, impact on the said variable (by crops and by regions for the farm models and for the CGE model, respectively) through all range of policy intervention values;

-  , No consistent, but large, impact on the said variable (by crops and by regions for the farm models and for the CGE model, respectively) through all range of policy intervention values;

-  No significant impact of the policy on the said variable.

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<u>Table 3: Policy intervention/shock-NAFTA liberalization+elimination of PROCAMPO Using the CGE Model Simulation Results for Mexico</u>

|<br>**Impact on**|<br>**North**|<br>**Central**|<br>**Southwest**|**Southeast**|**Rio Bravo**|
|---|---|---|---|---|---|
|Household income<br>(urban)||||||
|Household income<br>(rural)||||||
|**Comments**|This simul<br>with elimin<br>by 10% of<br>impact of a<br>subsidies a<br>reflected in<br>simulated.<br>equally dis<br>not across<br>and Center<br>incomes in|ation combi<br>ating PRO<br>the gross v<br>combined<br>re similar in<br>rural hous<br>The drop in<br>tributed acr<br>regions. Th<br>regions suf<br>creases acro|nes the effect o<br>CAMPO incom<br>alue of their mai<br>NAFTA and re<br>general, the on<br>eholds‘ income<br>rural househol<br>oss household t<br>e RBB region s<br>fer the most. In<br>ss all regions an|f NAFTA trade<br>e transfers to m<br>ze production.<br>moval of ProC<br>ly important dif<br>drop when PR<br>ds‘ income is m<br>ypes (poor, med<br>uffesrs the least<br>contrast urban<br>d household ty|liberalization<br>aize producers<br>While the<br>AMPO<br>ference is<br>OCAMPO is<br>ore or less<br>ium, rich), but<br>and the North<br>household<br>pes.|

Source: Dinar and Asad (2006) Note: See note to Table 2.

Table 4: Policy intervention/shock-NAFTA+reduction of 50% in water supply for irrigation Using the CGE Model Simulation Results for Mexico

|**Impact on**|**North**|**Central**|**Southwest**|**Southeast**|**Rio Bravo**|
|---|---|---|---|---|---|
|Land Use(Fruits and<br>vegs)||||||
|Land Value (other<br>crops)|<br>|<br>|<br>|<br>|<br>|
|Household income||||||
|**Comments**|This simu<br>openness<br>NAFTA i<br>slightly dif<br>in crop an<br>of combin<br>policy res<br>compared<br>Employm<br>maize acr|lation addres<br>for water sca<br>s simulated.<br>fer. Drops<br>d other com<br>ed NAFTA<br>ults in reduct<br>to increase<br>ent increases<br>oss all region|ses the issue of<br>rcity. The impa<br>However, the m<br>in crop prices ar<br>modities prices<br>and water supp<br>ion in price of f<br>(5%) in price in<br>in fruits and ve<br>s. In other crop|compensation o<br>ct are the same<br>agnitudes of the<br>e more moderat<br>are more moder<br>ly reduction. Th<br>ruits and vegeta<br>the case of NAF<br>getables and de<br>s the impact is|f trade<br>as when just<br>impacts<br>e and increase<br>ate in the case<br>e combined<br>bles (1.5%)<br>TA alone.<br>creased for<br>differential.|

Source: Dinar and Asad (2006) Note: See note to Table 2.

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Table 5: Policy intervention/shock: Climate Change Regional Differential Impact on Rainfall and Water Supply Using the CGE Model Simulation Results for Mexico

|**Impact on**|**North**|**Central**|**Southwest**|**Southeast**|**Rio Bravo**|
|---|---|---|---|---|---|
|Land value(Dry)||||||
|Land Value(Irrig)||||||
|Employment(Rural)||||||
|Household income<br>(Rural,all classes)||||||
|**Comments**|Climate ch<br>different f<br>on the fiv<br>RBB, Nor<br>33% in So<br>prices are<br>other dura<br>rainfed re<br>holds for r<br>rents also|ange is exp<br>orce. A dif<br>e regions, n<br>th, Center a<br>uth West.<br>increased, d<br>ble commo<br>place irrigat<br>ural wages<br>dropfor th|ected to affect d<br>ferential water a<br>amely reduction<br>ns South East, r<br>Most crop yields<br>iary and livestoc<br>dities and servic<br>ed crops. Urban<br>in the North an<br>e North,the RB|ifferent regions<br>vailability change<br>of 50, 50, 4, and<br>espectively, and<br>and area are red<br>k prices are redu<br>es. More croppi<br>real wages drop<br>d in the RBB. Irr<br>B,and the South|of Mexico in a<br>was imposed<br>6.5 % on<br>an increase of<br>uced and crop<br>ced as well as<br>ng under<br>and the same<br>igated lands<br>east.|

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Table 6: Impact Matrix of Simulated Policy Scenarios in South Africa

||Liberalize|POL<br>Liberalize|IC Y SCENARIOS<br>||
|---|---|---|---|---|
|POLICY IMPACTS|regional<br>irrigation<br>water<br>markets|national<br>irrigation<br>water<br>markets|Water-restricted<br>competition<br>from higher<br>urbanization|Water-liberalized<br>competition from<br>higher urbanization|
|Irrigation water use|change|change|<br>|<br>|
|Non-agriculture|change<br>|change<br>|<br>|<br>|
|Irrigation water|||||
|Total GDP|<br>|<br>|<br>|<br>|
|Agricultural GDP|||||
|Non-agriculture|||||
|Absorption|||||
|Production of food|||||
|Price of food crops|<br>|<br>|<br>|<br>|
|Exchange rate|||||
|Consumerprices|||||
|Rural incomes|<br>|<br>|<br>|<br>|
|Urban incomes|||||
|Total employment|<br>|<br>|<br>|<br>|
|Rural employment|||||
|Non-agriculture|||||
|Total exports empl.|||||
|Agricultural exports|||||
|Non-agriculture|||||
|Total imports|||<br>|<br>|
|Agricultural imports|||||
|Non-agriculture|||||

Source: Hassan et al. (2008) Note: For notation see note in Table 2.

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Table 7: Impact Matrix of Simulated Policy Scenarios in Turkey

|Scenario<sup>a</sup><br>Variable|**1**|**2a**|**2b**|**3a**|**3b**|**3c**|
|---|---|---|---|---|---|---|
|Absorption|||||||
|Household Consumption|||||||
|Investment|||||||
|Government Consumption|||||||
|GDP at Market Prices|||||||
|Net Income Tax|||||||
|GDP at Factor Costs|||||||
|Total Exports|||||||
|Total Imports|||||||
|Agricultural Exports|||||||
|Agricultural Imports|||||||

Source: Cakmak et al. 2008 aScenario 1: World price increase; Scenario 2: Rural-to-urban water transfer in West Region (2a-30% of irrigation water transferred; 2b-50% of irrigation water transfered) Scenario 3: Climate change (3a-30%reduction in rainfed crop yield; 3b-10% reduction in irrigated crop yield; 3c-0-30% reduction in all crop yield depending on crop and region);. Upward and downward arrows indicate the level of the positive or negative impact with longer arrows larger higher impact.

Note: Symbols in the table correspond to Note under Table 2.  and  mean extremely positive or negative impact on the said variable through all range of policy intervention values.

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**Table 8: Comparison of the policy interventions and economy structure used in the Mexico, Morocco, South Africa, and Turkey analyses**

|**Country**|**Mexico**|**Morocco**|**South Africa**|**Turkey**|
|---|---|---|---|---|
|**Inte**<br>|**rvention/Sho**<br>|**ck**<br>|||
|Rural to urban migration and water allocation<br>from rural to urban centers|√<br>|√<br>|√<br>|√|
|International trade liberalization|√<br>|√<br>|√<br>||
|Reduction of water supplyfor irrigation|√<br>|√<br>|√<br>||
|Climate Change|√|√<br>|√<br>|√|
|Trade in water within and amongsectors||√<br>|√||
|Conjunctive use of GW and SW||√|||
|World agriculturalprice shocks||||√|
|**Eco**<br>|**nomy structu**<br>|**re**<br>|||
|Rural/urban distinction|√<br>|√<br>|√|√|
|Household types|√<br>|√<br>|||
|Farm types|√<br>|√<br>|||
|Irrigation/rainfed|√<br>|√<br>|√<br>|√<br>|
|Regional differentiation|√|√|√|√|

52