Economic Impact of Drought on
Balanced Development of Pakistan:
Inter-disciplinary Approach of
Drought Risk Assessment
Muneta Yokomatsu, Yushi Suzuki, Hiroaki Ishiwata, Yohei Sawada,
Asif Naseer, Muhammad Jehanzeb Masud Cheema, Toshio Koike
Asian Water Cycle Symposium 2016,
University of Tokyo,
March 1-2, 2016
Introduction
Impact on Drought Stress
Drought is one of meteorological disasters that result in
serious damage to the economic activity around the world.
Serious damage occurs in the agricultural sector, the
impact will spread to households and other sectors.
Lack of water and food caused by drought, and
deterioration of sanitary condition lead to social unrest
such as immigration and conflict. Human lives are lost due
to large-scale famine and disease in the worst case.
Table Classification and definition of drought
Classification of drought
Definition
Meteorological drought
Periods that precipitation is extremely
small continue.
Hydrological drought
Periods that the water levels such as
streamflow, water reservoir, and
groundwater are extremely low continue.
Agricultural drought
Agricultural production is decreased
mainly by lack of soil moisture.
Fig. Agricultural land during drought
Reference: REUTERS (Feb. 4, 2011)
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Purpose
Economic Aspect of the Drought Risk
While the integration of knowledge about drought is
progressing in the field of meteorology, hydrology, agriculture,
etc., socio-economic risks are not recognized correctly.
Since a part of the drought damage is mainly indirect, the total
damage should be simulated with consideration of market
transaction.
• E.g.) Data of total damage such as crops and livestock in EMDAT database does not include indirect effects.
Purpose
Quantitative analysis of economic impact of drought, by
integrating a hydrological model and an economic model
Framework
Hydrological Model: Hydrological-Dynamic Vegetation Model
Express the process that meteorological drought causes
agricultural drought.
Economic Model: Multi-Sector and Multi-Region Model
Evaluate the impact that agricultural drought affects overall
economy.
Fig. Research framework
3
Reference:
Basic Framework of General Equilibrium Model
Rest of the world
Consumption
Product Markets
Factor Markets
Imports
Provision
Intermediate
demand
Labor
Households
Public goods,
Transfer
Exports
Savings
Capital
Imports
Firms
Investment
demand
Public
goods
Land, etc.
Government
savings & debts
Taxes
Government
consumption
Government
Transaction of bonds
4
Reference:
Disaster, Mitigation Policy, and Economic Growth
What is the macroeconomic benefit of the investment in disaster risk
reduction (DRR)?
without disaster
With DRR Investment
（with disaster）
GDP
Effect of DRR
Disaster
Event
Gap expanding!
Without DRR
Investment
（with disaster）
Time
5
Pakistan
Focus of the study
Frequent occurrence of draught.
Three regions in the model: Punjab, Sindh, the Rest of
Pakistan (ROP)
Table Recorded drought in Pakistan (1871-2000)
Name of Province
Drought Occurrence Year
Punjab
1899, 1920, 1935
Khyber Pakhtunkhwa
1902, 1951
Sindh
1871, 1881, 1899, 1931, 1947, 1999
Reference: Ahmad et al. (2004)
Table Overview of main provinces of Pakistan
Fig. Map of Pakistan
6
Three-Sector-Three-Region Closed-Economy Model
Pakistan
Punjab
Sindh
Service
Agriculture
Agriculture
Service
Land,
Water
Manufacturing
Manufacturing
Land,
Water
Labor
Agriculture
Service
Capital
Manufacturing
Land,
Water
Rest of Pakistan (ROP)
Market of Service and Land is closed in each region.
7
Agricultural Land
Irrigable Land
Agricultural land which is provided water by irrigation
facilities
Photo. Irrigable land
Source: Pakistan Today (Sept. 21, 2012)
Rainfed Land
Agricultural land which depends only on precipitation
8
Leaf Area Index (LAI)
Leaf Area Index (LAI)
The ratio of the total area of one side of leaves to the unit
land area
Higher LAI is, more vegetation exists, namely, more
preferable agricultural land is. (A positive correlation
between annual maximum LAI and agricultural production
is verified).
Fig. Comparison of LAI observed value by GLASSLAI and LAI simulation results by AgriCLVDAS (winter)
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The Model (1): Leaf Area Index (LAI)
Indicator of LAI composite
Weighted sum of LAI of several representative crops across several
periods
Applied to calibrate parameters of the land-water composite
The total amount of available water in the irrigable land is assumed
by the sum of precipitation, irrigation water, and ground water.
Performance level of irrigation facilities is treated as a policy variable.
Land-water composite
Available land
Available water
Indicator of LAI composite
Available water in irrigable land:
River water
Available water in rainfed land:
Precipitation
Performance
Level of canal
irrigation
Groundwater
Performance level
of underground
irrigation
10
The Model (2): Production Technology
Production Technology of Agricultural Sector
Value added of agricultural production is composed of labor, capital and
land-water composite.
Two types of the land-water composite for irrigation land and rainfed land.
Value added (Agriculture)
Labor
Capital
Intermediate Intermediate
Intermediate
goods
goods
goods
(Agriculture) (Manufacturing) (Service)
L-W composite
of irrigable land
L-W composite
of rainfed land
Production Technology of Manufacturing and Service Sector
Factor of production of value-added function of manufacturing sector: labor, capital
and land
Factor of production of value-added function of service sector: labor, capital
Both value-added functions are specified by Cobb-Douglas form.
Intermediate goods are input in a way of Leontief function.
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Event Sequence and Equilibrium
Period t
④Market equilibrium
①Determination of
precipitation rank
②Household activity
(Supply of production
factors, consumption, etc.)
⑤Increase of
total population
and total amount
of capital
Period t+1
⑥The same cycle as period t
Time
③Firms activity
(Demand of production
factors, production, etc.)
In each period,
1. Precipitation rank as random variable is determined.
Precipitation
rank
Precipitation (km3/year)
Probability
(%)
Punjab
Sindh
ROP
1
5.3
37.1
1.9
62.8
2
22.8
48.7
8.9
81.5
3
42.1
60.3
15.8
100.3
4
28.1
76.7
31.8
125.0
5
1.8
93.1
47.8
149.8
Event Sequence and Equilibrium
Period t
④Market equilibrium
①Determination of
precipitation rank
②Household activity
(Supply of production
factors, consumption, etc.)
⑤Increase of
total population
and total amount
of capital
Period t+1
⑥The same cycle as period t
③Firms activity
(Demand of production
factors, production, etc.)
Time
2. Households supply their labor and capital to firms,
consume final goods, and save fixed percentage of income.
max () : Utility
subject to
= (1 − ){ + + ∑ } Budget constraint
Consumption Income
rate
: consumption bundle (vector), : price vector,
: wage, : interest rate, : capital, : rent income
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Event Sequence and Equilibrium
Period t
④Market equilibrium
①Determination of
precipitation rank
②Household activity
(Supply of production
factors, consumption, etc.)
⑤Increase of
total population
and total amount
of capital
Period t+1
⑥The same cycle as period t
Time
③Firms activity
(Demand of production
factors, production, etc.)
3. Firms demand the factors of production and the
intermediate goods, and produce the final goods.
max Π(* ", $) = +, * − " − - K
Profit
*, ", $
subject to
Y=min ! ", $, % , Intermediate inputs
Production technology
/ : Production function, *: products, +, : value-added price, : wage,
- : interest rate, ": labor, $: capital, X: Land-water composite
Event Sequence and Equilibrium
Period t
④Market equilibrium
①Determination of
precipitation rank
②Household activity
(Supply of production
factors, consumption, etc.)
⑤Increase of
total population
and total amount
of capital
Period t+1
⑥The same cycle as period t
Time
③Firms activity
(Demand of production
factors, production, etc.)
4. All the markets (products markets and factor markets)
clear at the equilibrium: demands and supplies are
balanced at the equilibrium price , , , .
price
Supply
Demand
quantity
Event Sequence and Equilibrium
Period t
④Market equilibrium
①Determination of
precipitation rank
②Household activity
(Supply of production
factors, consumption, etc.)
⑤Increase of
total population
and total amount
of capital
Period t+1
⑥The same cycle as period t
③Firms activity
(Demand of production
factors, production, etc.)
Time
5. Population increases, and total amount of capital is
increased by investment (=households’ savings).
6. Move to the next period, and repeat the cycle from 1.
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Simulation Results: Sample Path Analysis (1)
Available water
A sample case that most severe drought (the scale of
once-in-50 years) occurs in 3rd, 7th and 12th period
Severe drought
Large precipitation
Table. Precipitation ranks, probabilities and precipitation
Precipitation
rank
Precipitation (km3/year)
Probability
(%)
Punjab
Sindh
1
5.3
37.1
1.9
62.8
2
22.8
48.7
8.9
81.5
3
42.1
60.3
15.8
100.3
4
28.1
76.7
31.8
125.0
5
1.8
93.1
47.8
149.8
ROP
Fig. Sample path of precipitation and water of canal irrigation
※ Base year (first period) is set at 2010. Exogenous technological development rate of labor is 0%.
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Simulation Results: Sample Path Analysis (2)
Production
Agricultural production drops in drought period.
Fig. Transition of Agricultural production
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Simulation Results: Sample Path Analysis (3)
Prices
Decrease of Ag-production causes price increase of Aggoods.
Ag-price drops in
period of high
precipitation.
Fig. Transition of goods of each sector
(Price of manufacturing goods is set at numéraire.)
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Simulation Results: Sample Path Analysis (4)
Sectoral GDP (= Value-added price x Production )
GDP of agricultural sector does not decrease so much
in draught period because of the price increase.
Manufacturing sector and service sector suffer indirect
damages through transaction of intermediate goods.
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Simulation Results: Sample Path Analysis (5)
GRP (Regional GDP)
Negative impact on GRP by drought is large in Punjab
and Sindh because of large indirect effect on Non-Ag
sectors.
Fig. Transition of regional GDP
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Simulation Results: Sample Path Analysis (6)
GDP and utility
GDP that includes both direct and indirect impacts of draught
drops in drought periods.
Owing to the cancelling effect of price, fluctuation of GDP is mild,
while paths of GDP per capita and utility (function of absolute
amount of consumption) is more sensitive.
Fig. Transition of GDP
Fig. Transition of GDP per capita
Fig. Transition of utility
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Policy Analysis 1: Improvement of Irrigation Facility
Comparative dynamics with respect to irrigation efficiency
Higher irrigation efficiency attains higher economic growth.
Fig. Transition of GDP
Fig. Transition of GDP per capita
23
Policy Analysis 2: Regional reallocation of river water
Reallocation of river water between Punjab and Sindh (-20% ~ +20%) by
dam control
Enlarged view
v
Fig. GRP growth of Punjab
Enlarged view
v
Fig. GRP growth of Sindh
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Policy Analysis 2: Regional reallocation of river water
Although Punjab has already been allocated more water than
Sindh, further transfer from Sindh to Punjab increases GDP.
Considering sizes of farm lands, current policy seems to allocate
too much water to Sindh.
Enlarged view
v
Fig. GDP per capita
25
Summary: Results
Integration of a hydrological model and an economic growth
model
• Leaf Area Index (LAI), derived in the hydrological-vegetation model,
was incorporated into production function of the economic model.
Hydrological results provided a rationale for relationship between
water resources and land.
Quantitative evaluation of economic impacts of drought and
irrigation facilities
• With stochastic precipitation process, economic growth paths, both
regional and sectoral, were derived as well as effects of improvement
of irrigation facilities and regional reallocation of river water.
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Summary: Future works
Monte-Carlo simulation
Dependency of productivity of land-water composite on
sequential drought
For example,
1)
2)
Dummy variable
If
and
,
, otherwise 0.
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Summary: Future works
Stepwise improvement of irrigation facilities and
consideration of construction costs
Available water in irrigable land:
Available water in rainfed land:
River water
Level of
Precipitation canal
irrigation
Groundwater
Level of
underground
irrigation
For example,
Depreciation
Investment
Cost :
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Thank you very much!
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