Impacts of intersectoral transfers of water resources

• Main Author: Keskin, Pinar
• Format: Dissertation
• Language: English
• Subjects: economics, agricultural; economics, general
• ISBN: 1109197241; 9781109197242

In this study, I investigate the links between industry and agriculture, and the mechanisms through which the effects of industrial and trade policies extend from one sector to the other. I examine the role of natural resources in determining these spillover effects. In particular, I show, both theoretically and empirically, that water is a major channel through which industrial policies affect agricultural production decisions. Indeed, industrialization may hurt agricultural productivity when farmers compete with industry for water. To illustrate how the water linkage operates, I develop a three sector general equilibrium model. In the model, agriculture and two different industrial sectors use water as an input, as well as capital, labor and land. My model identifies two mechanisms through which a trade policy change may affect agriculture. First, a decrease in the overall tariff protection level in the economy drives down the average wage. This is beneficial for farmers. Second, if the trade reform leads to an increase in the relative output prices of the more water-intensive industries in a given region, then these industries will expand. This change in industrial composition increases pressure on groundwater resources. The resulting increase in the cost of water extraction reduces the profitability of growing the more water-intensive crops.
I test the predictions of my model on a district-level panel dataset from India in the 1990s. I use India's trade liberalization experience as an exogenous policy shock. I demonstrate that this trade reform affected the industrial composition in each district. I also show that the relative drop in tariff protection between water-intensive and non water-intensive industrial sectors: (a) increased groundwater depletion, and (b) reduced the profitability of growing rice. Overall, the empirical evidence I present suggests that the water linkage generates strong general equilibrium spillover effects of industrialization on agriculture.