Economy-wide impact of water reallocation decision in a small open economy


School of Economics

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Archival Material/Manuscript

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This study examines the economy-wide effects of water reallocation decision. It takes off from the point that the existing surface water supply cannot be increased by tapping groundwater or building new dams which could take years to construct and operationalize. Thus, the available surface water supply must be reallocated to pursue certain policy objectives. This requires rigorous empirical analysis to ensure that such decision can improve or inflict the least negative impact on lhe economy. In line with the results of existing literature, this study has attempted to test the hypothesis that water reallocation can produce negative impacts not only on the sectors whose water supply is reduced but on the entire economy as well. In testing the hypothesis, the study focuses on one policy objective: accelerating induslrialization that requires a reallocation of water from the agricultural sector to the industrial sector. It uses a small CGE model for an open economy with water being explicitly included as one of the factors of production. The simulation results suggest that withdrawing some amount of water and transferring ii to the industrial sector to support a rapid industrialization of the economy can indeed produce a negative impact on the economy. This may well be a reflection of the structure of the Philippine economy in which key manufacluring sectors such as food processing and beverage sectors are heavily dependent on agricultural outputs as their primary inputs. The results, which appear consistent with existing literatures, send signals to policymakers to look at the economy-wide impacts of water reallocation policies. Future work on the issue of water reallocation decision can perhaps yield better insights when more disaggregated data become available to warrant the use of a larger CGE model with less constraints.



Agricultural and Resource Economics


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Water use—Philippines; Water-supply—Philippines

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