Presentations made at the PSSP First Annual Conference - December 13, 14, 2012 - Planning Commission, Islamabad, Pakistan

1. Modeling Economywide Impacts
of Water Policies in Pakistan
Sherman Robinson and Arthur Gueneau
International Food Policy Research Institute (IFPRI)
December 14, 2012 - Islamabad

2. 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
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3. 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
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4. 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

5. IFPRI Dynamic CGE-W Model
• Runs with economic policy options
CGE model • Base-year water stress
• Industrial and domestic water demand
Water
demand
• Agricultural area (based on prices)
• Optimizes the water distribution
IBMR • Calculates water shortages
• Calculates the impact of water stress on yields
Water stress • Calculates the depletion of groundwater associated
• The yield reduction (or increase) impacts the agricultural production
CGE model • Calculates the new economic output
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6. 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

7. Computable General Equilibrium
• Runs with economic policy options
CGE model • Base-year water stress
• Industrial and domestic water demand
Water
demand
• Agricultural area (based on prices)
• Optimizes the water distribution
IBMR • Calculates water shortages
• Calculates the impact of water stress on yields
Water stress • Calculates the depletion of groundwater associated
• The yield reduction (or increase) impacts the agricultural production
CGE model • Calculates the new economic output
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8. 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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9. Stylized CGE Model Structure
Factor Domestic Private Savings
Factor Markets Wages
Costs & Rents Gov. Savings
Taxes
Intermediate
Input Cost Households Government Sav./Inv.
Activities
Transfers
Private Government Investment
Consumption Consumption Demand
Commodity
Sales Markets
Exports Imports Foreign Transfers
Rest of the Foreign Savings
World
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10. 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

11. IBMR Water Model
• Runs with economic policy options
CGE model • Base-year water stress
• Industrial and domestic water demand
Water
demand
• Agricultural area (based on prices)
• Optimizes the water distribution
IBMR • Calculates water shortages
• Calculates the impact of water stress on yields
Water stress • Calculates the depletion of groundwater associated
• The yield reduction (or increase) impacts the agricultural production
CGE model • Calculates the new economic output
11

12. The Indus Basin Model Revised
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13. 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
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14. 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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15. Water Demand Module
• Runs with economic policy options
CGE model • Base-year water stress
• Industrial and domestic water demand
Water
demand
• Agricultural area (based on prices)
• Optimizes the water distribution
IBMR • Calculates water shortages
• Calculates the impact of water stress on yields
Water stress • Calculates the depletion of groundwater associated
• The yield reduction (or increase) impacts the agricultural production
CGE model • Calculates the new economic output
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16. 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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17. Water Stress Module
• Runs with economic policy options
CGE model • Base-year water stress
• Industrial and domestic water demand
Water
demand
• Agricultural area (based on prices)
• Optimizes the water distribution
IBMR • Calculates water shortages
• Calculates the impact of water stress on yields
Water stress • Calculates the depletion of groundwater associated
• The yield reduction (or increase) impacts the agricultural production
CGE model • Calculates the new economic output
17

18. 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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19. Linking the Models
• Runs with economic policy options
CGE model • Base-year water stress
• Industrial and domestic water demand
Water
demand
• Agricultural area (based on prices)
• Optimizes the water distribution
IBMR • Calculates water shortages
• Calculates the impact of water stress on yields
Water stress • Calculates the depletion of groundwater associated
• The yield reduction (or increase) impacts the agricultural production
CGE model • Calculates the new economic output
19

20. 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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21. Illustrative Results
• Runs with economic policy options
CGE model • Base-year water stress
• Industrial and domestic water demand
Water
demand
• Agricultural area (based on prices)
• Optimizes the water distribution
IBMR • Calculates water shortages
• Calculates the impact of water stress on yields
Water stress • Calculates the depletion of groundwater associated
• The yield reduction (or increase) impacts the agricultural production
CGE model • Calculates the new economic output
21

22. 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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23. Impact on GDP
1.50
1.00
dry
0.50
wet
0.00 Bbase
2010 2015 2020 2025 Bdry
-0.50
Bwet
-1.00
-1.50
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24. Irrigated Wheat Production in Sindh
35.00
30.00
25.00
20.00 dry
15.00 wet
10.00 Bbase
5.00 Bdry
0.00 Bwet
-5.00 2010 2015 2020 2025
-10.00
-15.00
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25. Sugar Cane Production in Sindh
15.00
10.00
5.00 dry
0.00 wet
-5.00 2010 2015 2020 2025 Bbase
-10.00 Bdry
-15.00 Bwet
-20.00
-25.00
25

26. Sindh Agricultural Production
25
20
15
dry
10
wet
5
Bbase
0
Bdry
-5 2010 2015 2020 2025
Bwet
-10
-15
-20

27. Irrigated Wheat Production in Punjab
10.00
5.00 dry
wet
0.00 Bbase
2010 2015 2020 2025 Bdry
-5.00 Bwet
-10.00

28. Basmati Production in Punjab
20.00
15.00
dry
10.00
wet
5.00 Bbase
Bdry
0.00
Bwet
2010 2015 2020 2025
-5.00
-10.00
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29. Punjab Agricultural Production
15
10
dry
5 wet
Bbase
0 Bdry
2010 2015 2020 2025 Bwet
-5
-10

30. 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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31. 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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32. 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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