Modeling Economywide Impacts of Water Policies in Pakistan

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

May 23, 2013 – GWSP Conference,Bonn, Germany

Plan of the Presentation

• Motivation of the work

• Presentation of the CGE-W model– CGE model: IFPRI standard model

– Water model: RWSM

– Links: CGE-W

• Results– Impact of climate change

– Impact of Diamer-Basha dam

• 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

– Groundwater mining is pervasive

– Climate change is likely to disrupt flow patterns

• Large water infrastructure projects are needed and benefits have to be assessed:– 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

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

IFPRI Dynamic CGE-W Model

6

Economic policy options and trends, with land variable

Previous (or base) year water stress

Industrial and Domestic Water Demand

Agricultural demand for water by crops

Optimizes water distribution over months in the year

Calculates water shortages per water region by month

Allocates supply of available water to crops

Calculates the impact of water stress on yields

Yield shocks affect agricultural production; land fixed by crop

CGE model solves for final equilibrium for current year

CGE

Model

Water

Demand

RWSM

Water

Stress

CGE

Model

Computable General Equilibrium

19

Economic policy options and trends, with land variablePrevious (or base) year water stress

Industrial and Domestic Water DemandAgricultural demand for water by crops

Optimizes water distribution over months in the yearCalculates water shortages per water region by month

Allocates supply of available water to cropsCalculates the impact of water stress on yields

Yield shocks affect agricultural production; land fixed by cropCGE model solves for final equilibrium for current year

CGE Model

Water Demand

RWSM

Water Stress

CGE Model

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)

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Stylized CGE Model Structure

Activities

Commodity Markets

Factor

Markets

Rest of the World

Households Government Sav./Inv.

FactorCosts

Wages& Rents

Intermediate

Input Cost

Sales

PrivateConsumption

Taxes

Domestic Private Savings

Government

Consumption

Gov. Savings

Investment

Demand

ImportsExports

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

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Water Demand Module

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Economic policy options and trends, with land variablePrevious (or base) year water stress

Industrial and Domestic Water DemandAgricultural demand for water by crops

Optimizes water distribution over months in the yearCalculates water shortages per water region by month

Allocates supply of available water to cropsCalculates the impact of water stress on yields

Yield shocks affect agricultural production; land fixed by cropCGE model solves for final equilibrium for current year

CGE Model

Water Demand

RWSM

Water Stress

CGE Model

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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RWSM-Pak Water Model

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Economic policy options and trends, with land variablePrevious (or base) year water stress

Industrial and Domestic Water DemandAgricultural demand for water by crops

Optimizes water distribution over months in the yearCalculates water shortages per water region by month

Allocates supply of available water to cropsCalculates the impact of water stress on yields

Yield shocks affect agricultural production; land fixed by cropCGE model solves for final equilibrium for current year

CGE Model

Water Demand

RWSM

Water Stress

CGE Model

The Indus Basin

Source: NASA Earth Observatory Source: IWMI

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CGE-W version of IBMR: RWSM

• Standalone water model: Regional Water System Model (RWSM).

• RWSM-Pak: Pakistan version– Hydrology similar to IBMR.

• RWSM does not have any internal representation of the economy– Links to CGE model for economic variables

• Objective is to minimize agricultural water shortages across all Pakistan

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Regional Water Simulation Model –Pakistan (RWSM-Pak)

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RWSM-Pak 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 Allocation Module

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Economic policy options and trends, with land variablePrevious (or base) year water stress

Industrial and Domestic Water DemandAgricultural demand for water by crops

Optimizes water distribution over months in the yearCalculates water shortages per water region by month

Allocates supply of available water to cropsCalculates the impact of water stress on yields

Yield shocks affect agricultural production; land fixed by cropCGE model solves for final equilibrium for current year

CGE Model

Water Demand

RWSM

Water Allocation

CGE Model

Water Allocation Module

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

• We separate the stress during the four main growing stages of the crops and use a multiplicative approach to get the final value

• The allocation objective is to maximize the value of production in each of the water model areas, while minimizing risks for the farmers

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Computable General Equilibrium

44

Economic policy options and trends, with land variablePrevious (or base) year water stress

Industrial and Domestic Water DemandAgricultural demand for water by crops

Optimizes water distribution over months in the yearCalculates water shortages per water region by month

Allocates supply of available water to cropsCalculates the impact of water stress on yields

Yield shocks affect agricultural production; land fixed by cropCGE model solves for final equilibrium for current year

CGE Model

Water Demand

RWSM

Water Stress

CGE Model

The Two-Step Procedure

• The productions from the different areas are 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

Illustrative Results

49

Economic policy options and trends, with land variablePrevious (or base) year water stress

Industrial and Domestic Water DemandAgricultural demand for water by crops

Optimizes water distribution over months in the yearCalculates water shortages per water region by month

Allocates supply of available water to cropsCalculates the impact of water stress on yields

Yield shocks affect agricultural production; land fixed by cropCGE model solves for final equilibrium for current year

CGE Model

Water Demand

RWSM

Water Stress

CGE Model

Illustrative Results

• We run the dynamic model for 45 years (2005 to 2050) using “guesstimated” growth coefficients

• Capital growth is endogenous in the CGE model

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0

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100

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3502

00

8

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26

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Baseline Projections - Historic Average Water Stress

GDP of Pakistan

Punjab Ag Production

Sindh Ag Production

OthPak Ag Production

GDP change adding variability and/or Basha dam

-2

-1.5

-1

-0.5

0

0.5

1

1.5

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08

20

11

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14

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20

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26

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50

Average with Basha

Historic Inflows

Historic with Basha

Decadal GDP change under climate change with or without Basha dam

Scenario 2010s 2020s 2030s 2040s

MIROC A1B -0.18 -0.44 -0.56 -0.77

MIROC A1B with Diamer-Basha Dam 0.24 0.06 -0.01 -0.19

MIROC B1 -0.16 -0.40 -0.53 -0.72

MIROC B1 with Diamer-Basha Dam 0.26 0.11 0.01 -0.11

CSIRO A1B -0.12 -0.30 -0.47 -0.73

CSIRO A1B with Diamer-Basha Dam 0.30 0.19 0.07 -0.15

CSIRO B1 -0.05 -0.16 -0.25 -0.42

CSIRO B1 with Diamer-Basha Dam 0.36 0.32 0.26 0.16

Decadal agricultural production change under climate change

Scenario 2010s 2020s 2030s 2040s

MIROC A1B -2.00 -4.21 -3.74 -3.42

MIROC A1B with Diamer-Basha Dam 2.36 -0.38 -0.76 -1.60

MIROC B1 -1.79 -3.80 -3.64 -3.02

MIROC B1 with Diamer-Basha Dam 2.58 0.10 -0.68 -1.04

CSIRO A1B -1.33 -2.88 -3.41 -3.45

CSIRO A1B with Diamer-Basha Dam 3.05 0.93 -0.49 -1.63

CSIRO B1 -0.58 -1.58 -1.86 -1.95

CSIRO B1 with Diamer-Basha Dam 3.75 2.23 0.95 -0.03

Conclusion

• Climate variability (and water availability change) leads to wide GDP dips for Pakistan

• Climate change represents a serious threat to the economy of Pakistan due to its reliance on irrigated agriculture

• The Diamer-Basha dam can mitigate some of these effects until the 2030s in most climate change scenarios