Modeling Economywide Impacts of Water Policies in Pakistan

Sherman Robinson and Arthur Gueneau International Food Policy Research Institute (IFPRI)

December 14, 2012 - Islamabad

Plan of the Presentation

• Motivation of the work • Presentation of the CGE-W model

– CGE model: IFPRI standard model – Water model: IBMR – Links: CGE-W

• Preliminary illustrative results • Future work and conclusion

2

Motivation

• Pakistan is subject to increasing water stress – Expanding agriculture relies heavily on irrigation – Hydropower important for increased energy demand

• Water policies have a large impact on the agricultural and power sectors – Impacts are transmitted to the rest of the economy

through markets and changes in prices – Potential use of simulation models to analyze

water/economy/policy links

3

Modeling Paradigm

• CGE-W is a water/economic simulation model – Water policies influence distribution of water – Repercussion on crop yields – Yield changes shock agricultural supply – Economy reacts by reallocating production factors

through market mechanisms and price changes – Changes in prices affect farmers’ decisions for the

following year

• Economic policies also have indirect impacts on the water sector 4

IFPRI Dynamic CGE-W Model

CGE model

• Runs with economic policy options • Base-year water stress

Water demand

• Industrial and domestic water demand • Agricultural area (based on prices)

IBMR

• Optimizes the water distribution • Calculates water shortages

Water stress

• Calculates the impact of water stress on yields • Calculates the depletion of groundwater associated

CGE model

• The yield reduction (or increase) impacts the agricultural production • Calculates the new economic output

5

Why a coupled model?

• There are economic models with water factors – Do not capture the complexity of the Indus basin

• There are water models with economic variables – Do not capture economywide links between

agriculture and the rest of the economy

• Our paradigm: Let each model do what it is best at and make them talk to each other

Computable General Equilibrium

CGE model

• Runs with economic policy options • Base-year water stress

Water demand

• Industrial and domestic water demand • Agricultural area (based on prices)

IBMR

• Optimizes the water distribution • Calculates water shortages

Water stress

• Calculates the impact of water stress on yields • Calculates the depletion of groundwater associated

CGE model

• The yield reduction (or increase) impacts the agricultural production • Calculates the new economic output

7

Computable General Equilibrium (CGE) Models

• A standard tool of economic and policy analysis for the past 40 years

• Simulates operation of a market economy with supply/demand equilibrium determining prices

• IFPRI Standard CGE model (Lofgren and Robinson)

8

9

Stylized CGE Model Structure

Activities

Commodity Markets

Factor Markets

Rest of the World

Households Government Sav./Inv.

Factor Costs

Wages & Rents

Intermediate Input Cost

Sales

Private Consumption

Taxes

Domestic Private Savings

Government Consumption

Gov. Savings

Investment Demand

Imports Exports

Foreign Savings

Transfers

Foreign Transfers

IFPRI Pakistan CGE Model

• Based on the 2007-2008 SAM of Pakistan (Dorosh et al., 2012). – 63 activities and 48 commodities – Special focus on agriculture (15 agric commodities) – Large, medium, and small farms

• Distinguishes 19 types of households and 10 types of labor

• Distinguishes Punjab, Sindh, and other provinces for agricultural sector

10

IBMR Water Model

CGE model

• Runs with economic policy options • Base-year water stress

Water demand

• Industrial and domestic water demand • Agricultural area (based on prices)

IBMR

• Optimizes the water distribution • Calculates water shortages

Water stress

• Calculates the impact of water stress on yields • Calculates the depletion of groundwater associated

CGE model

• The yield reduction (or increase) impacts the agricultural production • Calculates the new economic output

11

The Indus Basin Model Revised

12

CGE-W version of IBMR

• Standalone water model • Water model does not have any internal

representation of the economy – Links to CGE model for economic variables

• Objective is to minimize the agricultural water shortage across all Pakistan

13

CGE-W IBMR Overview

• Represents the 45 main canals, as well as the link canals between rivers

• Takes into account fresh and saline groundwater, as well as public and private tubewell pumping

• Can represent droughts and floods • Includes 16 representative crops • Takes into account industrial, domestic and

livestock water demand (assumed to be drawn from groundwater mostly)

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Water Demand Module

CGE model

• Runs with economic policy options • Base-year water stress

Water demand

• Industrial and domestic water demand • Agricultural area (based on prices)

IBMR

• Optimizes the water distribution • Calculates water shortages

Water stress

• Calculates the impact of water stress on yields • Calculates the depletion of groundwater associated

CGE model

• The yield reduction (or increase) impacts the agricultural production • Calculates the new economic output

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Water Demand Module • Computes agricultural cropped area based on

the CGE model results • The water demand is then computed using FAO

guidelines • Industrial and Livestock water demand are

proportional to the amount of activity in the sector

• Domestic water demand is proportional to household revenues

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Water Stress Module

CGE model

• Runs with economic policy options • Base-year water stress

Water demand

• Industrial and domestic water demand • Agricultural area (based on prices)

IBMR

• Optimizes the water distribution • Calculates water shortages

Water stress

• Calculates the impact of water stress on yields • Calculates the depletion of groundwater associated

CGE model

• The yield reduction (or increase) impacts the agricultural production • Calculates the new economic output

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Water Stress Module

• In case of water stress, the yield of crops is reduced using the FAO Ky approach (Doorenbos and Kassam, “Yield Response to Water”,1979)

• It is aggregated to the provincial level and to economically representative cropping activities

• The ratio of the current year yield to the base year yield is used to shock the production of crops in a second run of the CGE model

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Linking the Models

CGE model

• Runs with economic policy options • Base-year water stress

Water demand

• Industrial and domestic water demand • Agricultural area (based on prices)

IBMR

• Optimizes the water distribution • Calculates water shortages

Water stress

• Calculates the impact of water stress on yields • Calculates the depletion of groundwater associated

CGE model

• The yield reduction (or increase) impacts the agricultural production • Calculates the new economic output

19

IFPRI Dynamic CGE-W Model

• Can be run dynamically over many years – Economic actors act based on the previous years and

have no forecast of the water situation • A full optimization version is being developed

– Economic actors have perfect knowledge of water conditions in the year to come and make decisions accordingly

• Can test different scenarios of economic and water policies for Pakistan

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Illustrative Results

CGE model

• Runs with economic policy options • Base-year water stress

Water demand

• Industrial and domestic water demand • Agricultural area (based on prices)

IBMR

• Optimizes the water distribution • Calculates water shortages

Water stress

• Calculates the impact of water stress on yields • Calculates the depletion of groundwater associated

CGE model

• The yield reduction (or increase) impacts the agricultural production • Calculates the new economic output

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Illustrative Results

• We run the dynamic model for 20 years (2005 to 2025) using “guesstimated” growth coefficients

• We run three different scenarios: one base year (with average flow), one dry year and one wet year

• We run these scenarios again with the presence of the Basha dam to see its impact on the economy (considering only irrigation benefits for now)

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Impact on GDP

23

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2010 2015 2020 2025

drywetBbaseBdryBwet

Irrigated Wheat Production in Sindh

24

-15.00-10.00

-5.000.005.00

10.0015.0020.0025.0030.0035.00

2010 2015 2020 2025

drywetBbaseBdryBwet

Sugar Cane Production in Sindh

25

-25.00

-20.00

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

2010 2015 2020 2025

drywetBbaseBdryBwet

Sindh Agricultural Production

-20-15-10

-505

10152025

2010 2015 2020 2025

drywetBbaseBdryBwet

Irrigated Wheat Production in Punjab

-10.00

-5.00

0.00

5.00

10.00

2010 2015 2020 2025

drywetBbaseBdryBwet

Basmati Production in Punjab

28

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

2010 2015 2020 2025

drywetBbaseBdryBwet

Punjab Agricultural Production

-10

-5

0

5

10

15

2010 2015 2020 2025

drywetBbaseBdryBwet

Illustrative Results: Conclusion

• Dry and wet years strongly impact GDP • Building the dam does have a significant impact

on agriculture: – Basha has a strong positive impact on rabi crops in

Sindh – It has a positive impact on kharif crops in both Sindh

and Punjab – It has a somewhat smaller impact on rabi crops in

Punjab

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Future Work

• Define and run other policy experiments • Water model improvements

– representation of non-Indus basin water – representation of groundwater – representation of hydropower

• Consider effects of climate change – Increased frequency of extreme events: floods and

droughts – Impacts on infrastructure (roads, bridges, buildings)

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Future Work Program

• Disseminate the model in Pakistan – UAF class in Faisalabad, Jan 28 – Feb 1, 2013 – Possible seminars in different institutions

• PSSP work program to develop collaborative research projects with institutions in Pakistan – Work program on water models, economywide

models, and linked models – Develop and update the Social Accounting Matrix

to get a better vision of the economy

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