System-Wide Implications of Changing Water Availability and Agricultural Productivity in the Mediterranean Economies

We evaluate the structural consequences of water availability scenarios in the Mediterranean, following a multidisciplinary approach and a sequential modeling methodology. This includes an assessment of future water availability and a general equilibrium macroeconomic analysis of changes in agricultural productivity. Lower productivity in agriculture, induced by reduced water availability, generates negative consequences in terms of real income and welfare. The magnitude of the loss depends on the amount of the productivity shock, but also on the share of agricultural activities in the economy and on the stringency of the environmental regulation. We find evidence of a dramatic cut in the supply of water for agriculture in the Middle East. We consider alternative scenarios, differing in terms of stringency of environmental regulation and assumptions about water efficiency. The largest welfare losses turn out to be in Morocco and Tunisia, especially in the "worst" scenario NM. Other very relevant impacts can be observed in Turkey, Greece, Spain, Italy and Rest of Middle East and North Africa (XMENA). There are also clear differences among the scenarios. First, applying a constraint on the access to environmental water reserves only for Europe does make a big difference for non-European countries, implying that governments in the Middle East could respond to increasing water scarcity by accepting, to some extent, lower environmental quality (deterioration of aquatic environments). To avoid large drops in income and welfare, countries such as Tunisia and Morocco would not devote to environmental flows more than 10% and 5%, respectively, of their blue water resources. Second, improvements in water efficiency, as envisaged in the simulation exercise, appear to curb the economic impact of water scarcity quite significantly. This is especially true for countries in the North, whereas efficiency does not compensate for a strict environmental policy in the South.