Water in the Macro Economy

Integrating Economics and Engineering into an Analytical Model

Hynd Bouhia

• Publisher: Routledge
• Year: 2018
• Topic: Business
• eBook ISBN:
  9781351776974
• Subtopic: Business General
• Index: Business

This title was first published in 2001. Providing a new methodology to analyze the fundamental interrelationship between the sustainable management of a country's water resources and the formulation of effective strategies for socio-economic development, this book captures the complex nature of water and its effect on a macro economy.

1

Introduction

Throughout human history, water has served as a complex religious symbol. Not surprisingly in light of its strict indispensability for life, water is seen as pointing to the emergence of the cosmos from chaos and of human life from unformed matter. In the worlds great religious traditions, water not only nourishes the body, but also purifies the soul. From the sacred waters of the Ganges, to the rebirth of the baptismal font, to the flowing green fields of the Islamic paradise, water plays a central ritual and conceptual role in human religious activity.

Perhaps partly because of its rich symbolic history, until recently water has not been treated as an economic commodity. Water has been used by individuals and countries with a full realization of its importance, but often with little cool-headed measuring and consideration of its economic value. Such traditional approaches to water were acceptable as long as there was enough water to satisfy all demands. However, in recent decades, per capita fresh water availability has dropped precipitously. Conflicting uses and users of water have emerged at both the national and international level, and there is justified concern about meeting the water needs—in terms of both quantity and quality—of rapidly growing populations and economies. Under such pressures, the necessity of moving beyond tradition and achieving planned and rationalized management of water resources has been widely recognized.

Today, water concerns are high on many national and international agendas. However, the link between the management of the water sector and national economic planning remains ambiguous. This ambiguity is often exacerbated by the absence of sufficient dialogue among the different governmental and non-governmental bodies in charge of various aspects of a country’s water, a lack of which often leads to fragmented, ad hoc decision-making. The situation can be further complicated by trying to maintain the tradition of providing unlimited water access to all users at a very low price, which in modern circumstances makes water a highly subsidized resource and can place a heavy burden on governmental budgets. For example, in many developing countries up to 90 percent of water is reserved for agriculture. Because of the traditional belief that the farmer should be kept on his farm at any cost, water is allocated to agriculture without consideration of its low productivity in that use. Channeling even a small fraction of this water into industrial and domestic use could bring dramatic economic gains. Although it is currently considered politically difficult, in a water stressed countries, such inter-sectoral water allocation can be essential for sustainable economic development. It is increasingly widely recognized that water resources can no longer be allocated in isolation from broader economic issues, but at the same time, taking an integrated approach to national water planning requires a range of supporting institutional, educational and social adjustments and reforms. Policy makers have been reluctant to embark upon this set of changes because they have not been able to assess accurately and in detail the impacts of changes in water allocation on a society and its economy. By unifying the approaches of engineering and economics in this field, the present study offers an instrument to make just that assessment: to view, and ultimately to allocate, water in relation to economic and social goals that are broader than the water sector alone.

It is a real challenge to bring water into the political arena and to consider it as a resource for the full economy. Water is now undergoing an evolution like that of energy two decades ago. Before the 1970s, energy was considered cheap and plentiful; only with the impending oil crisis did national planners make energy a central component of economic policy. Similarly, the approach of future water crises is highlighting the need to integrate water into overall national economic planning.

The research presented here is based upon two computerized models: a water resource allocation system and a water input-output table. Together they form an integrated system for policy analysis and decision making. The output of the water resource optimization model is numbers describing sectoral water demands, levels of supply by sources, shadow prices, costs and value added at various stages of water production and distribution, and amounts of effluent discharge, return flows and water losses. These outputs of the first model become data used to modify a traditional social account matrix, converting it to a water input-output table. This second model is denominated in both units of water (cubic meters) and in money, in order to perform macroeconomic analysis. Using this information and the coefficients of the input-output table and the technical coefficient matrix, a linear programming model can be employed to determine the national economic value of water, estimate the scarcity of water, identify strategic macroeconomic sectors affected by water availability and inter-sectoral allocation, and derive an economy-wide demand curve for water.

In addition to clarifying the directions of sustainable water management, the paired modeling system developed in this study can evaluate various macroeconomic reforms, and highlight the water policies needed to advance them. National goals such as a desired level of imports or exports, food selfsufficiency, or an increase in employment can be translated into constraints or objectives in the water resources model, which can then bring out appropriate supporting water policies. The system can flexibly evaluate a spectrum of policy options as a means to targeting priority investments for a strategy that aims at environmental sustainability. Using stochastic simulation, it can assess the effect of precipitation fluctuation on economic growth, and can show the effect of water availability on socio-economic indicators. It is hoped it will foster dialogue among policymakers, economists, financiers, educators, environmentalists and politicians.

This method is applicable worldwide, either at the national level or by international organizations. I have been particularly inspired by the Middle East and North African region (MENA), where the mismanagement of water resources is one of the most immediate—and correctable—impediments to sustainable socio-economic development. While the regions population continues to grow, its per capita water availability continues to shrink. As a result of pollution, overexploitation, expanded irrigation, inefficient usage and especially, institutional fragmentation, the Maghreb will soon be on the brink of a water crisis. Without integrated long-term water strategies, per capita renewable water supplies are expected to fall within two generations to one fifth of what they are today.

The economy of the MENA Region is so tightly intertwined with the use of water, that sustainable economic development is unlikely without integrated and coherent water resources management. With this in mind, I have shaped the combined models, which together make a Decision Support System (DSS) with an emphasis on countries of water scarcity, where the alarm has been raised for long-term policy reform. To name this DSS, an acronym based on the Arabic word for water, meiah, has been used: MEIAH—Macro-Economic Integrated Analysis of Hydrology. The Kingdom of Morocco is used as a concrete case for analysis.

To ground the methodology introduced here comprehensively, the book centers on Morocco, where the author grew up—a country which has been transformed in a single lifetime from a water-rich, fertile region into one facing a severe water crisis and a host of attendant ramifications. Moroccos story is a call for an all-embracing national plan that incorporates water resource strategy and treats water as an integral part of the overall economy.

Morocco is blessed with a well-structured water system of dams and canals, a legacy of not only the sophisticated engineering work done during the period of French rule but also a series of proactive post-independence governmental interventions. The original raison d'etre of the system was a vision of Morocco as an export-oriented breadbasket based on irrigation-fed agriculture. The system was further developed in a large-scale effort to replicate the success of California’s agricultural sector, followed a little later by a national goal to bring one million hectares of the country under irrigation. As in many other nations, however, Morocco’s water system would be even more useful if it were integrated into in a comprehensive economic national plan.

What complicates the prospect of policy reform is that a substantial part of Morocco’s social structure has developed around the current water system. Lifestyles and occupations have come to depend on it. In addition, as part of Morocco’s economic backbone, the water system is tightly integrated into international markets and any change in it is likely to induce market responses. While a general program of education and awareness-raising is a vital component of any politically feasible reform, even more important is the prior project of assessing—in a single integrative framework—water’s trigger effects in the macroeconomy in a language that policy-makers can absorb and work with.

Today, the expansion of Morocco’s large but water-stressed agricultural sector and irrigated areas has created a delicately thorny dilemma: whether to prioritize the farm sector’s massive need for water or focus on satisfying the urban sector’s water demand. How can we strike the balance between these competing needs? Indeed, how can we even think about them within the same conceptual framework? Population growth, rural-to-urban migration, environmental side-effects, political constraints, and national aspirations for economic development have made it clear that water management can no longer be conducted sector by sector but rather must find a holistic approach that encompasses the entire range of national imperatives, including social stability and economic betterment. That is the challenge taken up by this book.

Chapter 2 provides background for the development of the methodology. It first underscores the importance of considering water as an economic good, not only because of the large investments required by the water sector, but also due to water s pervasive effects throughout the economy as a whole. It also provides an overview of the existing methodologies for economic planning, the emergence and large demand for environmental-economic accounts, and a brief resume of the existing engineering techniques related to water systems.

The MELAH Decision Support System is outlined in the first part of Chapter 3. The details of the water resource model are provided, highlighting the engineering and hydrological concepts behind it. (The models formulation is given in Appendix 2.) The second part of Chapter 3 describes in detail the methodology developed in this study, emphasizing the innovation of incorporating the results from a water resource allocation system into an input-output table. After showing the different components of the water budget, the economic value of water—as computed by the water model through shadow prices—is used to determine the flows of water in both physical and monetary units and thereby to capture the trigger effect of hydrology on the economy. The newly defined water-input-output table yields a set of multipliers—output, income, employment and water use— and ratios, which can be manipulated to analyze potential investments and to bring out their policy consequences for evaluation. A macro-economic demand curve is generated using a linear programming approach providing an economy-wide value of water. The last section of this chapter offers a suggestion for using the MEIAH model to assess different policy options, formulate an integrated strategy, and outline a sustainable national plan.

Chapter 4 also gives the necessary background for the practical illustration of this research; the case study is then further developed in that chapter as an application of the methodology to the case of Morocco. After giving an overview of the water situation of Morocco and a description of the studied region of the Oum Er Rbia, Bou Regrag and Sebou (OBS) river basins, the creation of water input-output table is illustrated step by step, showing the water balance at the national level and the incorporation of the water sector into a 1995 Social Accounting Matrix. Like other countries of the MENA region, Morocco suffers from large fluctuations in water availability, which reverberate throughout the economy. Appendix 4 provides MEIAH with ways to take account of flow uncertainty in policy evaluation.

Chapter 5 discusses the policy implications of the MEIAH system for Morocco, through the presentation of different options, which range from sustaining the environment, to implementing agricultural reforms and encouraging international trade. Also, a hypothetical situation with full flexibility in the agriculture sector and a free trade agreement, shifting Morocco from subsistence to food security, is explored. After an exercise determining the most profitable way to allocate one million dirhams among various economic sectors, a set of conclusion and recommendations is presented in Chapter 6.

The system developed here is intended to be user-friendly, and to be available on CD-ROM, and perhaps additionally via the Internet. The reader is encouraged to follow its development, and indeed, operate it directly, using Microsoft Excel.

2

The Water Environment and National Planning

Water in the Economy

Water, a requirement for life, is critical to all production chains of the economy. When it is scarce, we cannot avoid recognizing it as an economic good. Water resource planning and management must then take into consideration both the vertical and horizontal linkages of water to the other sectors and components of the economy.

Priority of the Water Agenda

Agenda 21, negotiated at the 1992 UN Conference on Environment and Development in Rio de Janeiro, spelled out a comprehensive program of action to achieve sustainable development. For the water sector, it stated: “Effectively integrated management of water resources is important to all socio-economic sectors relying on water. Rational allocation prevents conflict and enhances the social development of local communities, as well as economic planning and productivity. Efficient demand management allows water-using sectors to achieve long-term savings on water costs and stimulates resource-conscious production technologies. Health conditions and environmental quality should also improve, either as a result of integrated development planning or as a beneficial consequence of improved environmental or social conditions.”

More definitive statements of good water policies were developed by a preparatory session for the UNCED meeting in Rio, the International Conference on Water and Environment held in Dublin, 1992. Four basic principles were outlined:

• Fresh water is a finite and vulnerable resource, essential to sustain life, to development and to the environment.
• Water development and management should be based upon a participatory approach, involving users, planners and policy-makers at all levels.
• Women play a central role in the provision, management and safeguarding of water.
• Water has an economic value in all of its competing uses and should be recognised as an economic good.

Agenda 21, as well as the Dublin principles, have been widely accepted by water specialists worldwide. International water organizations, such as the Global Water Partnership and the World Water Council, seek to implement the Dublin principles and spread the concept of water as an economic and social good in the world.

Investments in the Water Sector

In several parts in the developing world, the water sector absorbs a large percentage of the available public investment funds. For example, in Brazil, 30% of the total investments goes to the water sector (Asad et al., 1999). For the most water scarce region of the world, the World Bank reports that in the second half of the 1990s, Algeria, Egypt, Jordan, Lebanon, Morocco, Tunisia and Yemen have invested together about US$ 1.5 Billion annually in water development, of which about US$ 1 Billion originated from official development assistance from other countries. (World Bank, 1995b) This represents on average 1 percent of their combined GDP, but the Bank believes that the dry MENA¹ Region s annual investment in water should increase from about US $ 4.5 to US $ 6 Billion, representing up to 2 percent of the regions GDP. Such investments have large impacts on the national budgets, and clearly must be planned with great care to avoid unnecessary spending and redundancy in the projects undertaken.

In some major sectors of the economy, such as energy, investments have been generally well-linked to national planning. However, the link is not clear and well developed in the water sector. There is a need to move from river basin-by-river basin, or even project-by-project planning, toward broader approaches, much more closely integrated into overall national planning. This is in part because water investments not only must be targeted to yield the greatest returns, but because they depend for their success on coordination with supportive policy reforms. Investments will yield few returns if the right incentives and institutions are not in place. Water resource investments also need to consider such cross-sectoral implications as the problem of displacing people and disturbing ecosystems.

How does the Water Sector Relate to the Economy as a Whole?

Economics has been described as the science of allocating scarce resources among alternative goals. “From the consumers’ point of view, their task is to allocate scarce income to purchase competing goods and services to maximize their satisfaction. Businesses employ scarce resources, such as capital, labor and land in alternative productive activities in order to maximize their profit. And finally, societies allocate their resou...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Contents
• List of Figures
• List of Tables
• Acknowledgements
• Preface
• List of Abbreviations
• 1. Introduction
• 2. The Water Environment and National Planning
• 3. The Methodology
• 4. Application: Case Study of Morocco
• 5. Economic Analysis and Policy Implications
• 6. Conclusions and Future Development
• Appendix 1: Case Study of Morocco
• Appendix 2: The MEAIH-1 Model: A Decision Support System
• Appendix 3: Background on the Input-O utput Table Used in MEIAH, and on Parallel Work by Others
• Appendix 4: Dealing with Uncertainty in Policy Decisions
• Bibliography