Efficiency and equity considerations in modeling inter-sectoral water demand in South Africa

Abstract

Empirical studies have shown that while global per capita freshwater availability is declining, competition among production sectors for the withdrawal of this resource is rapidly increasing. This situation is exacerbated by the rapid population growth especially in developing countries, urbanization, industrialization, externality problems, environmental sustainability and the need to increase food production. At country specific levels, policies have been designed to institute water use efficiency, equity and sustainability. The need to promote sectoral water use efficiency from the demand-side management requires a study to investigate the responsiveness of different production sectors and sub-sectors to variations in water prices. In most instances however, efficient water allocation compromises social equity, especially in a country where there is widespread poverty and where the gap between the rich and the poor is so wide that policies aimed at promoting economic growth should be carefully investigated to find whether efficient water allocation can also address the issue of equity among the different population groups. Review of empirical literature on the econometric approaches to sectoral water demand analysis shows that the agriculture sector has the least marginal value of water compared with the manufacturing, mining and services sectors. Based on this evidence it can be hypothesized that water reallocation from the agriculture to the non-agriculture sectors in South Africa can lead to growth in sectoral output. However, in a country where there is a wide gap between the rich and the poor, equity issues are high on the development agenda. Therefore, the benefits derived from efficient water reallocation should be equitably distributed to improve the standard of living of the critical population. Hence, the second hypothesis is that water reallocation from the agriculture to the non-agriculture sector can lead to an increase in the income of the critical population. To investigate these hypotheses the study: <ol><li>estimated the sectoral water demand functions and marginal values,</li> <li>used both social accounting matrix multiplier and computable general equilibrium analysis to investigate the impact of water reallocation from the agriculture to the non-agriculture sectors on output, factor payments on households’ welfare and </li> <li>analyzed the households’ welfare of the impact of global change on water resources in South Africa.</li></ol> The study used the Global Trade Analysis Project (GTAP) and United Nations Industrial Development Organization (UNIDO) data, and adopted the marginal productivity approach, and the two-stage model to estimate the global sectoral water demand functions and marginal values for thirteen sectors. This model is extended to the sectoral water demand analysis in South Africa. Thus, to validate the results of the global model, the study estimated sectoral water demand functions in South Africa by extracting data from STATSSA’s census of manufacturing and agricultural and services activities, published for each of the nine provinces in South Africa and the 2002 water supply and use accounts published by the same institution. The study tests the policy relevance of the computed marginal values for South Africa by using these values to investigate the impact of reallocating water from the agriculture to the non-agriculture sectors on output growth, value added, employment and households’ income generation.. To accomplish this objective, the study updates the 1999 social accounting matrix (SAM) for South Africa to reflect 2003 entries, computes the required multipliers and uses these to find how water reallocation on the basis of efficiency impacts sectoral output, households income generation and distribution. However, SAM multiplier analyses assume linearity, factor immobility and constant prices. The study therefore uses the computable general equilibrium analysis to investigate the households’ welfare implications of sectoral water reallocation and reduction due to global change. The SAM multiplier analysis shows that reallocation of water from the agriculture to the non-agriculture sectors leads to decrease in the output of the agriculture and the highly inter-dependent sectors. Specifically, output declines in the agriculture, food, beverages and tobacco and the services sectors, while it increases in the other sectors. However, if more than ten percent of the agriculture sector’s water is reallocated to the non-agriculture sector, net output declines, implying that the decline in output in the agriculture, food, beverages and tobacco and services sectors is more than the increase in output in the other sectors. This has consequences for factor remuneration, employment and households’ income. The above decline in the agriculture sector’s output leads to net job losses. Specifically the jobs lost in the agriculture sector are not countered by jobs created in the other sectors that benefit from the water reallocation. This is due to the fact that there are differences in skills requirements by the sectors. While the agriculture sector employs most of the unskilled workers, the other sectors require more medium and highly skilled individuals. This is reflected by changes in the wages paid to labourers. While the wages of unskilled labourers decline, there is an increase in the wages of medium and highly skilled labourers. The simulation results of the computable general equilibrium analysis show that sectoral water reallocation and reduction adversely impact the least and low-income households’ welfare, while improving the welfare of the high-income households. The interpretation is that with water reallocation or reduction, capital is substituted for water in the non-agriculture sectors and this increases the interest paid on capital, which goes to high-income households who are the owners of the capital. The adverse consequence can be reduced if food consumption by the poor households is maintained. To do this, some welfare measures are necessary. One such measure is the distribution of food stamps to the poor households.