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POLICIES AND TECHNOLOGIES FOR A

SUSTAINABLE USE OF WATER IN MEXICO:

A SCENARIO ANALYSISCarlos Lpez-Morales

a& Faye Duchin

a

a Rensselaer Polytechnic Institute, Department of Economics,Troy, NY, USA

Available online: 30 Nov 2011

To cite this article: Carlos Lpez-Morales & Faye Duchin (2011): POLICIES AND TECHNOLOGIES FORA SUSTAINABLE USE OF WATER IN MEXICO: A SCENARIO ANALYSIS, Economic Systems Research, 23:4,387-407

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POLICIES AND TECHNOLOGIES FOR A

SUSTAINABLE USE OF WATER IN MEXICO:

A SCENARIO ANALYSIS

CARLOS LOPEZ-MORALES AND FAYE DUCHIN

Rensselaer Polytechnic Institute, Department of Economics, Troy, NY, USA

(Received 6 July 2011; In final form 27 September 2011)

Water stress in Mexicois intimately linkedto agriculture, as irrigation claims 75%of national water withdrawals. TheMexican mixof irrigation technologies is dominatedby flood techniques, utilized on 93%of irrigated land, while dripand sprinkler systems, both with higher application efficiencies, are utilized on only 7% of irrigated land. This paperexamines the extent to which government policies can induce the adoption of alternative irrigation technologies topromote a sustainable pattern of water withdrawals. The framework is an inter-regional input output modelformulated as a linear program that solves for cost-minimizing allocations of output that are constrained byregional factor availability. The model features endogenous choice among alternative agricultural technologiesand determines commodity prices based on factor costs and on scarcity rents for limiting factors of production.The study defines and quantifies sustainable endowments of water at the regional level and analyzes scenarios thatcombine fees or caps on water withdrawals with the availability of alternative irrigation technologies. We find thatwater policies can induce technology adoption to achieve water sustainability, although the national price ofagricultural output rises 5% to 8% relative to baseline levels. Furthermore, pricing water for irrigation cangenerate enough public revenue for the government to cover the full costs of technology adoption.

Keywords: Irrigation technologies; Water sustainability; Interregional input output model; Linearprogramming; Mexico

1. INTRODUCTION

The diverse development challenges that Mexico faces will grow in complexity in the

twenty-first century due to sharpened environmental problems. Trends of increased popu-

lation, affluence, and climate variability will only intensify pressure on the countrys water

resources. The water stress indicator, or the ratio of yearly withdrawals to average annual

runoff, stands at 0.17, just below the 0.20 threshold of moderate stress when computed for

the country as a single spatial unit (CNA, 2010; Falkenmark and Lindh, 1976). Because of

a locational mismatch between economic activity and water availability, however, water

scarcity manifests itself as a regional phenomenon. In fact, the national average of stress

indicators for 13 Mexican regions is 0.47, greater than the high stress threshold. Activities

responsible for 80% of Mexicos gross domestic product (GDP) are concentrated in the

eight regions in the Center and in the North that exhibit stress indicators higher than the

0.40 scarcity threshold. These regions are home to 75% of the countrys population.

Irrigated agriculture in Mexico claims the largest share of national withdrawals, with

71% of the total, while industrial sectors account for 20% and households for the rest

Economic Systems Research, 2011, Vol. 23(4), December, pp. 387407

Corresponding author. E-mail: [email protected]

Economic Systems Research, 2011, Vol. 23(4), December, pp. 387407

ISSN 0953-5314 print; ISSN 1469-5758 online # 2011 The International InputOutput Associationhttp://dx.doi.org/10.1080/09535314.2011.635138


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(CNA, 2010). Mexicos irrigation infrastructure is distributed differently from regional

water availability: 37% of irrigated land is located in water-scarce regions in the Center

and in the North; water-abundant regions in the South, by contrast, contain only 3% of

the countrys irrigated land. Flood by gravity, the most frequent irrigation technology in

Mexico, is utilized on 93% of active irrigated land, while sprinkler or drip systems arepresent on only the remaining 7% (FAO-AQUASTAT, 2009). These technologies have

application efficiencies of 60%, 75% and 95%, respectively (Brouwer et al., 1989,

Postel, 1999). It follows that a different mix could reduce significantly the volume of

water withdrawn for agricultural purposes, reducing stress in water-scarce regions.

This paper examines the potential for water policies to change the regional distribution

of agriculture and the mix of irrigation technologies to achieve a sustainable pattern of

water withdrawals in Mexico. Contemplated policies include region-specific fees for irri-

gation water, which currently receives a full subsidy, and region-specific withdrawal

restrictions via the issuance of a limited number of permits. To evaluate the impact of

these measures on withdrawal patterns and economic costs, we implement an interregio-nal, multifactor, multisector model of the Mexican economy that is based on the World

Trade Model (Duchin, 2005), but applied to regions within a single country representing

hydro-economic units that reconcile their economic and hydrologic characteristics.

The model distinguishes irrigated and non-irrigated agriculture, dependent on blue and

green water, respectively, and defines and quantifies region-specific sustainable endow-

ments of blue water to assess the environmental sustainability of patterns of blue water

withdrawals. Regional endowments of green water are not quantified due to lack of

data. However, by making explicit the dependence of non-irrigated agriculture on non-

irrigated land, whose location is ultimately correlated with the location of green water

endowments, we claim to capture the main geographical features of the constraints

imposed by green water availability.

The model is used to analyze two policy scenarios that offer irrigation options, and we

compare the results to those of a baseline in the absence of water policies. A fourth scen-

ario enforces water sustainability but in the absence of irrigation alternatives. We compare

costs of adoption of water-saving technology, using a wide range of assumptions about

upfront investment costs, time-horizons, and discount rates, with revenue generated by

water pricing policies.

The rest of the paper is organized as follows. Section 2 describes the Mexican water

situation, and Section 3 reviews the relevant literature. The sustainable endowment of

blue water is described in Section 4, along with the main characteristics of the model,

including the representation of alternative irrigation technologies (i.e., a mix of sprinklerand drip irrigation systems), and the four scenarios. The results of the scenario analysis are

presented in Section 5, and the final section concludes.

2. WATER IN MEXICO

2.1. Water Withdrawals and Availability in Mexico

Mexicos Water Commission divides the national territory into 13 hydro-economic

regions on the basis of economic and hydrologic criteria (see Figure 1). The presentstudy further classifies them in three groups of high, medium, and low average yearly

388 C. LOPEZ-MORALES and F. DUCHIN


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runoff for exposition purposes. Table 1 and Figure 1 distinguish the low-availability

group, with 9% of national runoff, located in the North and the Center-North (regions I,

II, VI, VII, and XIII); the medium-availability group, with 38% of runoff, in the

Yucatan Peninsula and the Center (regions III, IV, V, VIII, IX, and XII); and the high-

availability group, with 56% of total runoff, in the southern regions of the country

(regions X and XI).

Table 1 shows that agriculture is the largest user of water in all but regions XIII and X,

the Mexico Valley and the Central Gulf, respectively. Domestic uses are the largest in

region XIII, while industrial and thermoelectric uses are important in region X. Overall,

food and energy exhibit high dependence on water, with thermoelectric plants representing

76% of the national generation capacity (SENER, 2010), and irrigated agriculture, which

occupies only one quarter of active agricultural land, accounting for half the total value of

agricultural output.

2.2. Water and Agricultural Land: A Critical Link

Regions with low and medium availability, where less than half of national runoff is gen-

erated, contain 97% of agricultural land in Mexico that is equipped for irrigation (37% and

60%, respectively; see Table 1). By contrast, the high-availability regions, with 55% of

national runoff, contain only 3% of irrigated land. Overall, one can distinguish threeclasses of regions, where:

FIGURE 1. Hydro-economic regions of Mexico.

Source: CNA (2010).

SUSTAINABLE USE OF WATER IN MEXICO 389


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TABLE 1. Mexican states, regions, availability groups, runoff, withdrawals, environmental water requirements, a

AvailabilityStates Name Region

Runoff Withdrawals

Environmental w

requirements

Group km3/yr % km3/yr % Agr. Km3/yr % of ru

Low Baja California Baja Peninsula I 5 1 4 81 1 20Baja California NorteSonora Northwest II 8 2 6 85 3 30Coahuila, Chihuahua Bravo Basin VI 12 3 9 82 4 30Nuevo LeonDurango, Zacatecas Central-North VII 8 2 4 87 2 30San Luis PotosEstado de Mexico Mexico-Valley XIII 3 1 5 47 1 20Distrito Federal

Medium Sinaloa North Pacific III 27 6 10 91 8 30Guerrero, Michoacan Balsas Basin IV 22 5 10 57 7 30Puebla, Tlaxcala, MorelosAguascalientes, Colima Lerma-Santiago VIII 34 7 13 80 15 45Guanajuato, Jalisco, NayaritHidalgo, Queretaro North-Gulf IX 25 6 4 77 9 35TamaulipasOaxaca South Pacific V 33 7 1 78 13 40Campeche, Yucatan Yucatan Peninsula XII 30 7 2 62 13 45Quintana Roo

High Veracruz Center-Gulf X 95 21 5 47 38 40Chiapas, Tabasco South Border XI 158 35 2 73 63 40

National 458 100 75 71 176 38

Sources: Runoff and withdrawals, CNA (2010). Environmental water requirements, own computations based on Smakhtin and Do


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(1) non-irrigated land is minimal (I and II, in the North);

(2) both types of land are in use (mainly in the Center);

(3) irrigated land is minimal (in the South).

A pattern of substitution and complementarity between rain-fed and irrigated productioncan be seen at this level of geographic aggregation. In the northern regions, crop require-

ments are fulfilled almost entirely by irrigation water; the Center utilizes a mix of both

sources of water, with irrigation water smoothing rain variability and boosting land pro-

ductivity; and the South, where rain is abundant, is not dependent on irrigation water. A

decrease of agricultural output in the North, due to constraints on irrigation, may

require an expansion in the use of irrigated or rain-fed land in other regions. Given the

dominance of irrigated agriculture in water withdrawals, even small efficiency increases

could possibly translate into water savings of considerable magnitude.

2.3. Water Policy

According to Mexican Federal Law, water resources are owned by the State. The govern-

ment issues a limited amount of withdrawal permits, charging a fee per cubic meter with-

drawn that depends on the geographic zone and the economic sector (Diario Oficial de la

Federacion, 2009). National average fees among geographic zones are shown in Table 2.

Positive fees are charged for industrial and domestic uses, but withdrawals for irrigation

within permitted amounts have a zero price tag. The Mexican government plans to

modify the pricing scheme, especially for irrigation water (CNA, 2008). Another policy

option is to improve the monitoring and enforcement of the quantities withdrawn under

the system of permits. The government is about to complete decentralization of theonce heavily centralized monitoring system so as to better quantify volumes withdrawn

and prevent clandestine withdrawals of water.

3. PREVIOUS STUDIES

Relatively few studies in the economic literature on water have addressed the impact of

water policy or of improvements in irrigation technologies on the environmental sustain-

ability of withdrawal patterns. In this section, we describe first the policy or technology

experiments that have been carried out in water studies and then the analytical methodsutilized in more general economic studies about water.

3.1. On Water Policy and Irrigation Technologies

Computable general equilibrium (CGE) models are used to analyze the global impact of

water prices (Berrittella et al., 2005) and of withdrawal restrictions (Berrittella et al.,

2007) in several regions of the world. These models assume profit maximizing firms

and perfectly competitive markets, represent international trade using the Armington

assumption (i.e., treat the same product produced in different countries as distinct pro-

ducts), and assess alternative scenarios using a monetary measure of welfare based onutility functions that are assumed to represent global consumer preferences. The first



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study performs several experiments in which water prices are specified exogenously for all

sectors and all regions, or for water scarce regions, or for only the irrigated agriculture

sector. The authors conclude that regional water prices have substantial impacts on the pat-

terns of agricultural production, on international trade, and on measures of economic

welfare. The second study imposes withdrawal restrictions on overdrawn aquifers and

shows how international patterns of trade are modified by reduced water supply in selected

regions.

Velazquez et al. (2007) also use a CGE model, in this case to study the effect of priced

irrigation water in Spains Andalusia region. They find that agricultural water demandresponds only very slightly to higher water prices; however, a sectoral reallocation of

water results that does reduce water use. Calzadilla et al. (2008) develop a CGE model

to study the global impacts of improved efficiency in irrigation systems. In their exper-

iment, exogenous improvements in regional irrigation efficiencies are assumed, but no

detail is provided as to the specific technologies. They find that welfare benefits are con-

centrated in water-scarce regions, while in water-abundant regions changes in welfare are

mostly negative. The global effect on welfare, however, is positive. All the CGE studies

reviewed above impose constraints on availability of some factors (capital, land, labor and,

in some cases, water), but no consistent conclusions about water savings are examined by

the authors.Llop (2008) combines water-pricing policies for Spain with exogenous efficiency

improvements in intermediate demand for water and studies the response of commodity

prices using an inputoutput (IO) price model. Her experiments assume that the water

supply can be expanded as required by the policy interventions. Similar to CGE modelers,

Llop is interested in changes in a money value for consumer welfare, which in her model is

measured by changes in expenditures resulting from modified prices for a given final

demand. Unlike CGE models, however, Llops model does not involve an optimization

process. In her results, water prices lead to substantial reductions in water use but increases

in commodity prices and therefore reductions in welfare. Across-the-board exogenous

technological improvement in water use, by contrast, exhibits the so-called Jevons

Paradox: reductions in unit water requirements of all sectors lower costs but lead to

TABLE 2. Water exploitation fees by economic use in 2009.

Use Pesos/m3

General 8.773

Domestic (1) 0.546Domestic (2) 0.272Agriculture (1) 0.000Agriculture (2) 0.130Recreation 0.008Power Generation 0.004Aquaculture 0.002

Source: CNA (2010).

Note: Fees are national averages among municipalities. General uses include industrial and other uses not

included in the remaining categories. Domestic (1): 300 liters per capita per day. Domestic (2): .300 liters per

capita per day. Agriculture (1): Use is smaller than permitted volume. Agriculture (2): Penalty per m 3 exceeding

the permit.



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higher aggregate water consumption, although the latter seems to be driven by the assumed

exogenous increase in deliveries from the water sector. The combination of pricing pol-

icies and improved technology is able to achieve water savings without the inflationary

effect on commodity prices.

3.2. Input Output Studies of Water

Several studies exploit the well-known ability of the quantity IO model to provide esti-

mates for total requirements (direct and indirect) of primary factors of production, in

this case water, at the sectoral level; these include Duarte et al. (2002) for Spain, Velaz-

quez (2006, 2007) for Andalusia, Dietzenbacher and Velazquez (2007) also for Andalusia,

and Lenzen and Foran (2001) for Australia. The main objective of this literature is to

decompose the past demand for water to identify the sectors that were the most water-

intensive both directly and indirectly. Guan and Hubacek (2008) integrate an IO modelwith a hydrological model to define extended water demand and quantify it for the

single region of northern China. Extended water demand adds to the total demand for

water the volume of water that the hydrological system would require to dilute water pol-

lution. Adding information about runoff from an external hydrological model, Hubacek

and Sun (2005) analyze scenarios to examine how changes in Chinese lifestyles could

affect the relation between Chinas water use and water supply.

Unlike the studies discussed above, IO-based linear programming models offer pro-

duction options, specify a choice criterion for selecting among them, and treat factor

endowments as explicit constraints on economic activity. In two early contributions,

Henry and Bowen (1981) and Harris and Rea (1984) apply similar linear programming

models to identify when water endowments limit economic activities for two regional

economies in the US. Both models maximize production subject to availability of labor

and water, and the authors analyze scenarios that reduce water endowments until econ-

omic activity becomes physically infeasible. The binding water constraints generate posi-

tive shadow prices for water. These characteristics of linear programming are also

exploited by Liu et al. (2009) to estimate region-specific shadow prices for water in

nine major Chinese basins.

The studies reported above operate at different spatial scales, from global multinational

regions to sub-national provinces. The most frequent geographical units are based on pol-

itical divisions: countries (treated separately or aggregated into multinational regions) or

sub-national states and provinces (such as Andalusia in Spain, or Chinas northern region).A problem that arises with administrative units has been called the aggregation fallacy

(Rosegrant et al. 2002), the assumption, whether explicit or not, of equal access to

water from anywhere within the given region, when in fact component subregions may

have very different endowments. One solution is to define hydro-economic regions that

are relatively homogeneous in both economic and hydrological attributes. Some examples

of this strategy are Rosegrant et al. (2002) and Guan and Hubacek (2008). We follow this

practice by defining 13 hydro-economic regions, making it possible to describe Mexicos

geographical distribution of water and economic activity at a level of detail we find accep-

table and preferable to working at the national level or with very large sub-national

regions. Nonetheless, some of the hydro-economic regions would clearly benefit fromfurther spatial disaggregation.



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4. METHODS

4.1. Choice of Geographical Units

This study uses the 13 hydro-economic regions defined by the Mexican National Water

Commission (see CNA, 2010 and Figure 1), which provides data on regional runoff and

withdrawals for economic use. Information about land use, employment of labor, capital,

and production were compiled at the State level from various sources (see Table 3) and

aggregated to match the hydro-economic boundaries (shown in Table 1). IO tables for

Mexican regions are available in the literature (e.g., Chapa-Cantu et al., 2009), but they

do not cover the entire country nor do they follow boundaries compatible with our

hydro-economic regions. For lack of region-level information, we assumed that all

regions share the average intermediate input structure that appears in the national input

output table (INEGI, 2011a). The availability of water and other factors of production,

however, is provided at the State level of detail from various sources (see Table 3).

Thus, both our factor use per unit of output and factor endowments are region-specific

(see Section 4.3).

4.2. Regional Sustainable Endowments of Water

The renewable supply of water, or average yearly runoff, for Mexicos hydro-economic

regions is shown in Table 1. Regional runoff captures many of the key features of

water availability, but it systematically overestimates regional endowments of water.

Both environmental water requirements and the capacity of existing withdrawal infrastruc-

ture also need to be taken into account. The latter is called the effective supply, ES; it is

measured in km3/yr and could be either larger or smaller than runoff. The fraction of

TABLE 3. Data sources for parameters and variables (for region m).

Description Source

Parameters Am Input-output matrix INEGI (2011a)Fm Matrix of factor inputs Land: SAGARPA (2009)

Labor and Capital: INEGI (2011b)Water: CNA (2010)

Exogenousvariables

Fm Vector of factorendowments

Land: SAGARPA (2009), SEMARNAT (2010)Labor and Capital: INEGI (2011b)Water: CNA (2010), this study.

y National final demand INEGI (2011b)pm Vector of factor prices Land: INEGI (2011c), Lee Harris (2002)

Labor and Capital: INEGI (2011b), Blancas(2006), Lee Harris (2002)

Water: CNA (2010)Endogenous

variablesxm Output This studyp National price vectorrm Regional scarcity

rents

Source: Own elaboration



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mean annual runoff that remains potentially available after environmental water require-

ments are subtracted we call the environmentally sustainable supply, ESS. Finally, the

effective environmentally sustainable supply of blue water, EESS, is calculated as

the lower of the two quantities (shown as Equation 1). These measures of water supply

are described in more detail by Duchin and Lopez (2011). When a regions effectivesupply is larger than the environmentally sustainable supply, sustainable withdrawals

should be restricted to the latter, even if a fraction of the capacity of the withdrawal infra-

structure must be left idle. Otherwise, the sustainable endowment is limited by the effec-

tive supply of water.

EESS = min ES, ESS{ } (1)

Environmental water requirements (EWR) for each of the 13 Mexican regions, as esti-

mated using data from Smakhtin and Doll (2004), are shown in Table 1. Nationally,

environmental water requirements amount to 38% of the national renewable supply.However, regions of low availability of water have lower environmental requirements

as they have poorer aquatic ecosystems, while regions of higher availability of water

tend to have higher requirements. In the absence of regional data on the effective water

supply, we estimate these quantities for this study (see Section 4.5).

4.3. The Inter-regional Model

For this study we adapt Duchins World Trade Model (WTM) (Duchin, 2005) for an inter-

regional analysis within a single country. Unlike many IO model applications focused on

water, the WTM is an optimization model that chooses among production options; unlike

other optimization models, including CGE models and other IO-based LP models, the

WTM minimizes factor costs for given final demand rather than maximizing production,

profits, or a consumption-based measure of welfare. Earlier extensions and applications of

the WTM include Strmman and Duchin (2006), Julia and Duchin (2007), He and Duchin

(2009), and Strmman et al. (2009). Similar to He and Duchin (2009), this study analyzes

the regional division of labor within a national economy. Like the model of Julia and

Duchin (2007), ours allows for the choice among alternative agricultural technologies

based on region-specific technologies and, within each region, distinguishing two

classes of land, irrigated and non-irrigated. The representation of the choice of alternative

technologies is based on Duchin and Lange (1992); but see a more parsimonious treatmentof the choice among alternative technologies in Duchin and Levine (2011).

Our database includes 15 economic sectors (they are shown later in Table 9) and five

factors of production (labor, capital, non-irrigated land, irrigated land, and blue water)

for each of the thirteen regions. Output produced using technology l in region i is described

by a sector-specific and region-specific set of coefficients arranged in matrices Ali for inter-

mediate inputs and Fli for factor requirements. Each region has three alternatives to gen-

erate agricultural output (i.e., l 1, 2, 3): non-irrigated agriculture, flood irrigated

agriculture, and a mix of drip and sprinkler irrigation technologies (see Section 4.4).

The optimization is constrained by two conditions: total national output must satisfy

total final and intermediate demand, and the use of factors in a region may not exceedregional endowments. The primal linear program specifies the quantity relationships



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and the dual model relates costs and prices:

Min Z =m

i=1

L

l=1

piF

lix

li

subject to

m

i=1

L

l=1

I Ali

xli =m

i=1

yi

L

l=1

Flixli fi; i = 1, . . . , m

Max W = p m

i=1

yi

m

i=1

rif

i

subject to

I Ali

p Fli ri Fli pi; i = 1, . . . , m; l = 1, . . . ,L

where the matrices A and F have dimensions (15 15) and (5 15) respectively, while

the vectors x, y and p all have dimensions (15 1). The vectors p, f and r have dimen-

sions (5 1).

For the optimal solution,Z W, assuring thattotal consumption demand, pmi=1

yi,isequal

to factor earnings across all regions and technologies,

m

i=1

L

l=1p

i F

lix

li +

m

i=1rifi. Table 3

shows the exogenous and endogenous variables, parameters, and data sources. While the

model solves for inter-regional flows within Mexico, it should be pointed out that the inter-

national trade of Mexico is included as part of the final demand vector and, like domestic

final demand, is assumed to be the same under all scenarios.

4.4. Representing the Mix of Alternative Irrigation Technologies

Water requirements per unit of agricultural output, based on application efficiencies from

Brouwer et al. (1989) and Postel (1999), are shown in Table 4. Given the lack of moredetailed (or more recent) data, these are assumed to be representative for Mexico. The

table shows the withdrawal requirements for each irrigation technology per 100 m3 of

water required. The application efficiencies require that 166.7 m3 be withdrawn to

supply this amount with flood irrigation, 133.3 m3 with sprinklers, and 105.2 m3 with

drip systems. A 5050 mix of sprinkler and drip systems can reduce by 30% the water

withdrawals relative to the requirements of flood irrigation. The mix of alternative tech-

nologies achieves an efficiency of 86%, which is shown in Table 4 to translate to withdra-

wal of 117 m3 to satisfy 100 m3 of crop requirements.

Alternative irrigation technologies also have different requirements for factors other

than water. Few studies comparing the input requirements among irrigation techniques,however, are found in the literature. IWMI (2006) suggests that alternative irrigation



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technologies produce both water savings and higher yields per hectare of land, the latter

saving of lower magnitude than the former. According to Neibling (1997) labor and

capital inputs in sprinkler and drip irrigation systems can be higher and require moreskills than traditional flood techniques. Dalton et al. (2002) likewise conclude that labor

and capital inputs vary significantly among irrigation techniques, with sprinkler and

drip systems at the higher end. Lacking data for the Mexican case, we make the assump-

tion that the mix of irrigation technologies increases labor and capital requirements by

30%, raising water costs relative to flood irrigation, as shown in Figure 2.

While these assumptions result in a somewhat stylized representation of irrigation tech-

nologies due to lack of data, we believe that they succeed in highlighting the important

differences among them and they enable the endogenous choice of technologies that

our modeling framework can provide. The cost differences among the technologies

respond to regional differences in factor costs and by regional endowments.

TABLE 4. Water withdrawal requirements for irrigation technologies.

Technique

Water Requirements(m3/unit)

ApplicationEfficiency

Withdrawalrequired (m3)

Gain relative toflood irrigation (%)

A B C A/B

Flood 100 0.60 166.7 Sprinkler 100 0.75 133.3 20Drip 100 0.95 105.3 37Mix of

technologies100 0.86 116.7 30

Source: Own computations based on efficiency data from Brouwer et al (1989) and Postel (1999).

FIGURE 2. Regional no-trade prices of agricultural output for three technologies.

Source: Own computations.



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4.5. Design of Scenarios

The baseline scenario, S0, imposes neither constraints on withdrawals nor water fees.

Since it is obvious that built infrastructure is adequate to make current withdrawals feas-

ible, we take calculated baseline withdrawals as a lower bound for the capacity of the

existing withdrawal infrastructure to be used in remaining scenarios. Data for the actual

volume of such capacity is not available for Mexico from either internal or external

sources (such as FAOs AQUASTAT), so the relation between observed withdrawals

and the capacity of built infrastructure cannot be determined. We make the assumption

that for each region the latter is greater by 30% than baseline withdrawals, which is

known to be possible with the existing infrastructure. The figure of 30% was arrived at

by studying the relation between actual withdrawals and the capacity of built infrastructure

for some countries in FAOs AQUASTAT database (FAO, 2011). Constraints for land,

labor, and capital in each region are based on documented data and remain the same for

all scenarios (see Table 3 for data sources).

We are interested in two possible courses of action for public policy to incentivize the

adoption of alternative irrigation technologies as a means of achieving sustainable regional

water withdrawals. The first policy scenario, S1, establishes a region-specific price for

water as a component of the vector pi of ex ante factor prices. (We analyzed several

water fee structures but only one is reported in the following sections.) Positive water

fees are imposed in this scenario for regions whose withdrawals are unsustainable in

the baseline scenario. The other policy scenario, S2, establishes quantity restrictions, or

caps, setting each regions water endowment at its effective environmentally sustainable

supply.

An additional scenario, S3, is formulated to assess the cost of water sustainability in the

absence of water-saving technology. Water endowments are set equal to the environmen-tally sustainable effective supply but the choice of agricultural technologies is restricted to

non-irrigated and flood irrigated. If there is a feasible solution, costs and agricultural prices

are compared with the policy scenarios in which water-saving technology adoption is

allowed. Table 5 shows the assumptions under all four scenarios.

5. RESULTS OF THE SCENARIO ANALYSIS

5.1. Sustainability of Water Withdrawals

We assess regional water sustainability by comparing water withdrawals under each scen-

ario to the regions effective environmentally sustainable supply (see Table 6). Under the

baseline S0, four regions of the low availability group (I, II, VI, and XIII) have baseline with-

drawals that are greater than the effective environmentally sustainable supply of water,

meaning that withdrawal patterns are unsustainable and reductions of water use are required.

In these regions, the effective supply is greater than the environmentally sustainable supply,

such that withdrawals must be restricted for environmental purposes.

Other regions have baseline withdrawals that are smaller than the effective environmen-

tally sustainable supply. Expansions of the former are allowed up to full utilization of the

effective supply. The pricing scenario, S1, sets positive water fees in regions with unsus-tainable water use under S0 (see Table 7 for a description of fees), while the caps scenario,



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S2, restricts water withdrawals to each regions effective environmentally sustainable

supply. Under both policy scenarios, withdrawals are sustainable for all regions. Scenario

S1 reduces baseline withdrawals by 10%, while S2 reduces them by 7% (see Table 6). In

both cases, reductions are localized in the four regions of the low availability group that

exhibited unsustainable baseline withdrawals. With water fees, withdrawals in other

regions are unchanged from S0, while caps allow for an expansion of withdrawals in

region IX, a region with medium water availability.

5.2. Technology Adoption

The distribution of land use among agricultural technologies under the baseline and the

policy scenarios is shown in Table 8. Under baseline conditions, the alternative irrigation

technologies incur in-unit production costs higher than flood irrigation and non-irrigated

agriculture (see Figure 2), and therefore they are not adopted in any region. Water policies

under S1 and S2 promote adoption of alternative technologies among the four regions with

unsustainable baseline withdrawals (see Table 8), with the result that sustainability of

water use is achieved in all regions (See Table 6). In no region from the remaining

groups are alternative technologies adopted.

With water fees in S1, flood irrigation becomes more costly than the water-saving irri-

gation technology in regions of the low availability group (see Figure 3). In the remainingregions, flood irrigation is selected as it remains less costly than the alternatives. Adopting

regions in the low availability group have adequate endowments of the other factors to

satisfy the higher factor requirements of the water-saving irrigation technology, such

that they use this option exclusively. This is not the case of region IX, in the medium

availability group, in which a positive water price was also set. Inspection of the solution

shows that the endowment of irrigated land is not fully utilized in this region because there

is not enough labor to satisfy the higher labor requirements of the alternative irrigation

technology. Overall, alternative irrigation technologies are adopted on 31% of irrigated

land in use.

With caps on water withdrawals (but unpriced water) under S2, flood irrigation remainscheaper than alternative techniques. However, a region may run out of water for irrigation.

TABLE 5. Description of scenarios.

Scenario

EndowmentsAgriculturaltechnologies

WaterfeesWater Land Labor Capital

Baseline (S0) Unconstrained Observeduse +Expansion

Observeduse

Observeduse

Non-irrigated,flood irrigation,mix of drip andsprinkler

No

Pricing (S1) Effective supply YesCaps (S2) Effective environmentally

sustainable supply No

No-adoption(S3)

Effective environmentallysustainable supply

Non-irrigated,flood irrigation

No

Source: Own elaboration



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TABLE 6. Blue water supply and withdrawals under alternative scenarios (km3

/yr).

Group Region

Water Supply Water With

A B C D ObservedBaseline

S0 Pricing S

Low I 4.6 3.7 5.8 3.7 3.8 4.5 3.3II 8.2 5.7 10.2 5.7 6.4 7.8 5.8

VI 12 8.4 13.1 8.4 8.5 10 7.4 VII 7.8 5.4 5.9 5.4 3.7 4.5 4.5

XIII 3.5 2.8 6.5 2.8 4.7 5 2.8

Medium III 25.6 17.9 15.6 15.6 10.5 12.0 12.0 IV 21.7 15.2 15.3 15.2 10.4 11.8 11.8 VIII 34.0 18.7 21.2 18.7 13.2 16.3 16.3

IX 25.5 16.6 3.7 3.7 4.5 2.9 2.9 V 32.8 19.7 0.7 0.7 1.3 0.5 0.5

XII 29.6 16.3 2.8 2.8 1.7 2.1 2.1

High X 95.5 57.3 4.3 4.3 4.6 3.3 3.3 XI 157.8 94.7 1.0 1.0 2.0 0.8 0.8

National 458.6 282.4 106 87.9 75.3 81.6 73.5

Note: Column A is regional runoff as reported by CNA (2010). Column B is the environmentally sustainable supply that results fr

from runoff. Column C is the effective supply, which equals 1.3 times baseline withdrawals (S0). Column D shows the effective env

the smaller of B and C.


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Depending on production costs and factor constraints, a given region may use the water-

saving technology exclusively, not at all, or simultaneously with another irrigation technol-ogy or with non-irrigated agriculture. All regions that adopt the water-saving technology

run into water supply constraints under S2. For regions that use it exclusively (II and

XIII), land endowments are not constraining, but they are constraining for regions with

several irrigation technologies in operation (II and XIII). For the country as a whole, the

quantity restrictions of scenario S2 promote adoption of the water-saving irrigation tech-

nology on 24% of used irrigated land, with adopting regions localized in the group of

regions with low water availability.

5.3. Impact on Commodity Prices

Commodity prices are affected by both the exogenous fees for water (S1) and endogenous

scarcity rents on fully utilized water supply (especially under S2). See Duchin and Levine

(2011) for a discussion of the two-part factor prices in the World Trade Model. Resulting

prices and production costs under the different scenarios are shown in Table 9. The pricing

scenario (S1) and caps scenario (S2) increase the price for the agricultural commodity by

5 8% relative to the baseline while barely increasing region-wide production costs.

Increased agricultural prices raise the cost of food and reduce competitiveness in inter-

national markets. However, the price increases are kept relatively small under S1 and

S2 by the adoption of water-saving irrigation techniques. By contrast, the results underthe no-adoption scenario, S3, show that the agricultural price would increase by 36%

TABLE 7. Water fees for the pricing scenario (S1) (pesos/m3).

Water availability group Region S1 S2 S3

Low I 2.22 0.02 3.7

II 1.74 3.23 2.9VI 1.32 0.41 2.2

VII

XIII 1.08 1.2 1.8Medium III

IV VIII

IX 0.42 0.7V

XII High X

XI

Sustainable withdrawals Yes No Yes

Note: Column S1 shows the exogenous, region-specific water fees assumed for the pricing scenario. They are derived

as follows. First, they were set equal to the endogenous scarcity rents for water obtained under S2, which resulted in

unsustainable withdrawals. Second, they were set equal to the higher scarcity rents for water under the no-adoption

scenario, S3, whichresultedin sustainable withdrawals. Thesenumbers weredecreased untilwithdrawals firstbecame

unsustainable, which occurred at 0.6 times the scarcity rents under S3. The latter are the fees shown in the table for S1.



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TABLE 8. Land use by irrigation technology: Baseline and policy scenarios (103 ha).

Group Region

Non-irrigated land

Irrigat

S0S1

S0 S1 S2 Flood Flood Alterna

Low I 63 63 63 258 25II 55 55 55 573 57

VI 1,408 1,408 1,408 688 68VII 2,998 2,998 2,998 472 472

XIII 837 837 837 186 2Medium III 718 718 718 830 830

IV 2,113 2,764 2,764 787 787 VIII 2,794 2,794 2,794 1,113 1,113

IX 2,280 2,280 1,821 118 118 V 360 360 360

XII 1,087 1,087 1,087 72 72

High X 812 812 812 XI 1,941 1,941 1,941

National 17,465 18,116 17,658 5,095 3,391 1,54



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relative to the baseline without the option for water-saving irrigation. This large increase

results from an enforced shift to non-irrigated agriculture due to a shortage of irrigated

land associated with sustainable water constraints.

5.4. Adoption Costs and Government Revenue

Both water pricing and restrictions on withdrawals can promote sustainable use of water

but elevate economic costs, reflected in changes in the value of the objective function

shown in Table 10. In addition to these costs, there are upfront expenditures for equipping

additional land for irrigation, which are not accounted for in the model. FAO reports

investment costs for drip and sprinkler irrigation (FAO, 2011): we utilize their low and

high estimates (see Table 11), interpreting them as present values, and compute corre-

sponding annuities at different time-horizons (5, 10, and 20 years) and discount rates(5% and 10%). These are reported and compared with government revenues, as calculated

by the World Trade Model, in Table 12.

The two policy intervention scenarios yield government income via the collection of

water fees under S1 or the appropriation of scarcity rents on fully utilized water sources

in S2. If the governments water revenue exceeds total adoption costs, then in principle

agricultural producers can be subsidized to cover their additional costs. Table 12 compares

economic costs of adoption to government revenue. Under the cap scenario, S2, water

revenue does not cover adoption costs. In the pricing scenario, S1, however, costs can

be fully covered by the governments water revenue. Provided that upfront investment

costs do not lie at the higher end of the estimated range, and time horizons of irrigationinvestments are longer than five years, farmers can be incentivized to achieve sustainable

FIGURE 3. Regional no-trade prices of agricultural output among three technologies after water feesare imposed.




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use of water. Of course, one cannot conclude on the basis of these results that this com-

pensation should be prioritized, as the opportunity costs of spending governments

resources on other projects would need to be assessed. However, our results suggest

that levying water fees is preferable to the alternative of limiting quantities of water

TABLE 9. Commodity prices under the policy scenarios (price index relative to baseline price).

Sector

Scenarios

S1 S2 S3

Agriculture 1.05 1.08 1.36Livestock, Forestry & Fishing 1.01 1.01 1.05Oil and gas 1.00 1.00 1.00Non-Oil Mining 1.00 1.00 1.00Power generation 1.00 1.00 1.00Construction 0.98 1.01 1.01Processed Food 1.01 1.01 1.05Light manufacture 1.00 1.00 1.01Chemistry, Plastics 1.00 1.00 1.00Heavy Manufacture 1.00 1.00 1.00Commerce 1.01 1.01 1.04Transport 1.01 1.00 1.03Non-Financial Services 1.01 1.00 1.02Financial Services 1.02 0.99 1.01Social Services 1.01 1.01 1.04

Source: Own computations.For non-traded commodities the average national price is shown.

TABLE 10. Increase in factor costs under policy scenarios (increase relative to baseline).

ScenarioFactor costs(106 pesos)

Pricing (S1) 4,749Caps (S2) 48,422


TABLE 11. Estimated investment cost for irrigation technologies (pesos/ha).

Range

Technology

Drip Sprinkler Mix

Low 1,429 524 976Medium 2,075 2,677 2,376High 5,934 8,430 7,182

Source: Own computations based on FAO (2011).



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withdrawn: government revenue is likely to compensate for higher costs of assuring com-

pliance in the former case, while in the latter case additional institutional frameworks are

required to enforce the permit system and collect the scarcity rents generated.

6. DISCUSSION AND CONCLUSION

This paper analyzes the potential for government policies involving pricing and caps on

water withdrawals to induce adoption of new water-saving irrigation technologies

capable of achieving sustainable water withdrawals in Mexico. We formulated a set of

scenarios and customized the World Trade Model for their analysis. The study required

designating hydro-economic regions, defining region-specific sustainable endowmentsof water resources, and compiling the required data from a variety of sources. We

found that these policies could keep water withdrawals within each regions effective sus-

tainable endowment of blue water, and government revenues were large enough to fully

subsidize costs to agricultural producers.

We envisage various extensions to the research reported in this paper. First, the agricul-

tural sector needs to be disaggregated to distinguish the requirements of different kinds of

crops. Second, surface and underground sources of blue water need to be distinguished to

isolate instances of the overdraft of aquifers. Third, the pricing algorithm should be refined

to determine the water fees that can promote sustainability at minimal economic costs.

Finally, this modeling framework can be applied to scenarios about future growth in popu-lation and affluence, changes in diets, and changes in the availability of water as a result of

TABLE 12. Costs of technology adoption and government water revenues under policy scenarios(106 pesos).

Pricing scenario (S1)

5 years 10 years 20 years

5% 10% 5% 10% 5% 10%

Low 8,311 8,817 6,746 7,259 5,986 6,560

Medium 13,298 14,512 9,542 10,772 7,719 9,096

High 29,682 33,226 18,729 22,317 13,411 17,429

Government revenue 20,936

Caps scenario (S2)

5 years 10 years 20 years

5% 10% 5% 10% 5% 10%

Low 51,199 51,593 49,979 50,378 49,387 49,834Medium 55,085 56,032 52,158 53,117 50,737 51,811High 67,856 70,618 59,319 62,116 55,174 58,305Government revenue 16,650


Note: Indicates that government water revenue exceeds total cost of adoption.



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climate change. Another challenge is to examine the quality of wastewater and policies to

avoid the contamination of water sources.

Acknowledgements

We thank Nathaniel Springer for discussions throughout the design and implementation of

the model. We also appreciate the thoughtful and thorough comments of two anonymous

referees, most of which we have incorporated.

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