For the past thousands of years, the economy of the Arabian Peninsula depended on agriculture, raising livestock and trade. Agriculture was common in the eastern and southern regions of the Arabian Peninsula, raising livestock was common on the northern region and trade was limited to camel caravans and the annual visiting of pilgrims to the holy places in the Hejaz (holy cities, Makkah and Medina).
Saudi Arabia is located on the Arabian Peninsula and comprises around eighty percent of it, with the Red Sea in the west and the Arabian (Persian) Gulf to the east. Neighboring countries are Jordan, Iraq and Kuwait in the north Qatar, the United Arab Emirates, and Bahrain in the west and the Sultanate of Oman and Yemen in south. The total land area at Saudi Arabia is 2,250,000 square kilometers, and most land of Saudi Arabia consists of arid or semi-arid land. Arable of the land in Saudi Arabia is estimated by only 1.67 percent of Saudi land according to 2005 statistics and only 0.09 percent of the countrys land is planted to permanent crops.
The Saudis topography and climate are not homogenous between regions. So, in general the Saudi has a high mountains in the west, down almost to sea level in the east. Sandy plateau slopes downward to the Gulf, broken up by wadis, broad valleys. The extreme is reached in three deserts which extend from north to south. These deserts are Dahna, Nufud and the Rub al Khali, the Empty Quarter. These deserts are followed by some oasis such as Hasa Oasis and Qatef Oasis in the west. After this oasis, there is a coast that lies on the Arabian (Persian) Gulf. In addition, the climate of Saudi Arabia is a long, hot and almost dry summer, and short, cold winter season during which little rain occurs and annual rainfall is less than 100 mm. From this general glance to Saudis topography and climate, reader can realize that Saudis external resource is very poor. There is a limited availability of land for agriculture there is no river and no lake. However, Saudi has good internal resources oil, water and minerals.
Population in Saudi Arabia was estimated in 2006 by 27,019,731, with an annual growth rate of 2.18 percent. Of the total population, nearly 6 million non-nationals were included. However, a harsh environment and small cultivable land made the agriculture too difficult. Also, the agriculture sector was the main sector in Saudi economy and many households were dependent on agriculture to get its income. However, the economic structure of Saudi Arabia was changed in 1938 when the United States Company discovered the oil in the eastern province.
In 1960, Saudi Arabia became a member of OPIC (Organization of Petroleum importing Countries) organization. This organization raised the price of oil which caused to increase on Saudi Arabias revenue. By the time, Saudi government tried to use that revenue in developing the country by developing human resources, the transportation system and other infrastructure aspects. In 1970, the modern economic history of Saudi Arabia started when the government began with Five-Year Development Plan. The main goals of these plans were to develop the Saudis living standards, develop non-oil sector, reduce dependence on the oil source, and achieving self-sufficiency in food production by developing agriculture sector.
Self-sufficiency in food led Saudi government to use several different natural resources such as oil, land and water. The government invested the revenue which came from oil to develop the agriculture, also, used different policies to extend the agricultural sector vertically and horizontally. In another hand, the government concerned a specific committee to get the self-sufficiency in food, which is the wheat. So, developing this sector needed creating different policies to use these nature resources which they have scarcity in Saudi Arabia, that is land and water. However, to develop agriculture the water is an important input player. The primary water resource in Saudi Arabia is groundwater, which takes a lot of time to collect in the ground and it needs a lot of time to collect again if the present generation does not use it efficiently, and the agriculture consumed groundwater about 252046 million cubic meters since 1981 until 2000 and 77.38 percent comes from shallow water.
Problem Statement
Among the natural resources, the one with high economic value and social significance is the groundwater, which finds numerous uses in domestic, agricultural and industrial areas. In order to ensure sustainable usage, proper planning and understanding of the groundwater system behavior is required since the supply of groundwater is limited. However, excessive extraction of groundwater has resulted in progressive depletion of the resources and continual decline in its level. This is referred to as overexploitation of resources, i.e. when the total extraction exceeds the long term natural renewal of the groundwater system. As a result of lowering of water table, there was an increase in cost of drilling and pumping and reduction in well yield. Other associated adverse consequences were land subsidence and deterioration of groundwater quality.
Most of the Middle East Countries depend on groundwater and acres of agricultural land survive on it. With all the above said problems, mounting crisis and the need to keep the depleting levels of groundwater available for future generations and optimize its benefit, policy makers need to step in and look into efficient ways to minimize exploitation and increase productivity of groundwater.
In Saudi Arabia, water is the scarcest natural resource. Prime water resources are groundwater and it is mainly used for agricultural, domestic, municipal, and industrial purposes.
1970 marked the beginning of the modern economic era for Saudi Arabia. The Saudi government concerned with fulfilling its goal on self sufficiency of food, adopted some quick and effective strategies such as subsidies, free interest loans and distribution of land free to achieve these goals. All these strategies made agriculture sector grow faster and transformed deserts to green land.
But these policies had a downside, with growing agricultural lands and the need to achieve the goals, the government did not encourage the farmers to conserve water and cared less about farmers wasting water as water was available free sometimes and the value of it was not recognized. For instance, according to Ghanim and Aldwis (2003), in 1980, Saudi Arabia had about 500 million cubic meters of groundwater, but it declined to 289.13 million cubic meters in 1996, which meant that the groundwater declined by more than 50 percent within 16 years.
According to reports on self-sufficiency of food, the Saudi government had developed agricultural lands through different policies that led to increase in irrigated area from 1,220,000 hectares in 1974 to 4,359,544 hectares in 2005. As a result, with increase in demand for groundwater, the agricultural sector, deemed as the largest water-consuming sector, utilized about 90.5 of the total amount of water used in Saudi Arabia during the period 1980-1998. Further, groundwater in Saudi Arabia can be classified as renewable and nonrenewable. And according to Ghanim and Aldwis (2003), the agricultural sector depends on non-renewable groundwater by 66.54, while dependence on renewable groundwater is by 33.46.
With Saudi governments policies on self-sufficiency of food, wheat became a strategic commodity. The crop structure underwent a change in 1970 and the wheat considered as one of the main crops, represented 44.17 percent of the irrigated land while the formal main crop was the palm dates. Alguenibt (2004) acknowledged the huge requirements of water for wheat growth. According to him, a ton of wheat production requires 2000 cubic meters of water with salinity acceptable to levels of 1500 ppm. The wheat crop consumes 32 of deep non-renewable groundwater while consumption of all other crops takes the remaining 68. As observed, wheat consumes a lot of water and depends more on the nonrenewable groundwater.
All supporting reports clearly indicate wheat as the largest consumer of water in the agricultural sector. The subsidies given reduce the marginal cost of production and the cost incurred in pumping out the groundwater. This leads to inefficient usage and decline in the value of groundwater. To bring to note, according to Al-Ibrahim (2005), farms less than 50 hectares that cultivated wheat consumed 34 more water than what the ministry of agriculture had estimated. So, this wastage and improper usage of groundwater evinces the negligent nature and under recognized value of water.
The Saudi government has started to show concerns towards the mounting problem and the fact that groundwater is indeed undervalued, which would eventually lead to economical inefficiency. As this resource is limited, it needs to follow timely and proper distribution mechanisms to make it long lasting. Also, the government should improve groundwater resource management and save it for the future generations.
To solve this problem, the Saudi government should reevaluate its agriculture policies and adopt methods and policies that will make people aware of the water value, so as to conserve the water for future generations. Wheat, the largest consumer of water in the agricultural sector would be the first target. The government may center its policies around reduction of support prices, reduction of subsidies on input factors and opening the wheat market.
The objective of the research is to observe the dynamics of the equilibrium quantity and the price of wheat when the government makes a shock policy in the equilibrium wheat production by adopting a new policy and to determine how these policies eventually affect water conservation and its value.
There are different policies that a government could adopt, such as reducing the ratio of per unit subsidy rate, reducing the ratio of subsidy on water production, reducing the ratio of subsidy on the rest of the input factors (non water inputs factors), and reducing the ratio of subsidy on all input factors. By thorough study, the research could analyze the efficiency and viability of these policies, so a decision maker can adopt the best policy that has more effect in conserving the groundwater, heightening its value and at the same time maintaining the production of wheat. So, this research answers how each policy affects our future generation and production of wheat.
This paper is organized as follows. Section 2 presents a developing agriculture sector and focuses on production of wheat and wheat supply. Section 3 presents water sources in Saudi Arabia. Section 4 reviews policies to develop the production of wheat and how these affect water consumption. Section 4 deals with Equilibrium Displacement Model (EDM) that presents the results. Section 5 concludes and provides direction for future research.
Chapter Two
This chapter contains of two parts. The first part of the chapter shows how agriculture sector is developed and what types of polices the Saudi government used to develop this sector. Also, this part shows the developing in wheat production and views the government institution contributed to develop this crop. Then, the second part shows the water resource in the Saudi Arabia.
Developing Agriculture Sector
Agricultural sector has received increasing attention because through it the Saudi Arabia could achieve some of the objectives of economic development. The objectives were achieving food security, increasing incomes of members of the community, diversifying the production base, reducing the volume of imports and reducing dependence on oil as the mean source of national income. For that, the government adopted different policies to developing this sector.
To enable the agricultural sector to achieve this important role, the Saudi government adopted different programs and policies to support and encourage private sector to invest in agriculture sector activities. These programs and policies supported a farmer directly and indirectly.
In indirect support, it concentrated on building strong bases of agriculture such as providing electricity, drainage, secondary road system, and building dams until rainwater preserved. So, according to Agricultural Statistical Annual number 20 the lengths of agricultural roads, secondary road, in 2006 was 124157.03, and the number of dams increased from 209 in 2000 to 230 dams in 2006 with total capacity of 850327 thousand cubic meter.
In direct support, it concentrated on encouraging people to get involved in agriculture sector. So, it focused to support input like distributing uncultivated lands freely, met 45 of cost of agriculture equipments, and 50 of fertilizers cost, financing agricultural projects with free interest and purchasing local products with high price by Saudi government. So, accumulated land was distributed according to barren land distribution decree and number of beneficiaries up to the end of 2003 was 99544 and the total area was 668428 hectares. Also, the total value of agricultural subsidies granted to farmers through the Ministry of Agricultureduring the period 2002 - 2006 was SR 199,328 thousands, and the total value of agricultural subsidies granted to farmers through the Saudi Arabian Agricultural Bankduring the period 1973 - 2006 was RS 12983953 thousands and the total value which it financed the agriculture projects during 1973 2006 was SR 9356.8 millions. All these subsidies helped the Saudi Arabia to get self-sufficient of important products especially wheat, dates, eggs, milk, and to increase the production of fresh vegetables, fruit, chicken, red meat. So, all these programs and policies encouraged the agriculture sector to growth.
All these programs we noticed above affects on the GDP. The agriculture sector was shared in the GDP, constant prices, by 3.6 percent in 1969, but the sharing in the GDP increased to 6.4 percent in 1989. In 2005, the agriculture sector added 5.1 percent to the GDP. On another hand, agriculture sectors GDP share in non-oil sectors increased by 6.9 percent in 1969 and increased to 9.1 percent in 1989, but it declined to 7.6 in 2005.
So, the main goal of developing agriculture sector is self-sufficiency of food and to reduce depending on food imports. The Saudi government looks to wheat as a strategy committee because from this committee made an important thing, which is the braid. So, the government would like to be the committee (braid) available to all Saudi people. For that, it supported the wheat industry directly and indirectly.
Production of Wheat
The main cereal crops in Saudi Arabia are wheat, millet, sorghum, maize, barley, and sesame but the wheat crop represents the most important crops between all cereal crops and that will be clear from structure cereal crops. The wheat represented just 10 percent of the area which all cereal crops used, and it represent 23 percent of the production which all cereal crops produced in 1971. During 80s the wheat grew in area, used about 93 percent of all cereal crops area for wheat production and produced about 97 percent of all cereal crops production in 1985. In 2006, the area which wheat grew declined to 77.7 percent of all cereal crops area and it produced about 86.5 percent of all other cereal crops.
For that, production and productivity of wheat is growing during the last three decades, but there was diversity and vacillation of growing between increasing and decreasing in area and production of wheat. All this vacillation refers to multiple policies the Saudi government used it during the last three decades.
The Saudi government had looked to wheat as strategy food, for that it encouraged farmers to invest in wheat. So, the government adopted some policies to support farmers to increase in production of wheat. In 1984, Saudi Arabia reached self-sufficiency when it produced 1,401,644 tons of wheat. Therefore, the government had followed two ways to get self-sufficiency of wheat. The first, expansion was vertical in order to raise production efficiency through the use of modern equipments and loans to farmers. The second was horizontal expansion through establishment of irrigation and drainage project, and distribution of arable land to farmers.
Even though Saudi Arabia has a limited cultivable area, the area of wheat has vacillation between increasing and decreasing. So, as a result of horizontal expansion, the area of wheat increased from 30,156 in 1971 to 468,271 hectares in 2006. Figure 1 shows how the wheat area in 1971 was 30,156 hectares and the area expanded to 404,079 hectares in 1984 when Saudi Arabia reached self-sufficiency. Even the Saudi Arabia reached to self-sufficiency, the area of wheat continued in expansion until it reached to 924,409 hectares in 1992, then the area started to decline until it reached to 468,271 hectares in 2006.
Also, figure 1 show how the production of wheat improved from 41,908 tons in 1971 to 2,630,394 tons in 2006. Production of wheat rose to over one million in 1984 when Saudi Arabia reached to self-sufficiency. Thus, production of wheat was exceeding the amounts needed for self-sufficiency. Producers had continued to grow the wheat and it reached 3.2 million tons in 1988. In 1992, the production of wheat rose to 4.1 million. Thus, Saudi government has changed its policy to reduce the production of wheat and the production declined to 1.2 million tons in 1995, and then it increased to 2.6 million tons in 2006.
The Saudi government supported vertical expansion of agriculture in order to raise production efficiency. For that, Saudi government has subsidized the farmers to use modern equipment as well as provision of extension services and loans to farmers. As a result, this kind of expansion noted productivity of wheat. The productivity of wheat has improved during the last three decades. In 1971, the productivity of wheat was 1.4 ton per hectare and it rose to reach 3.3 ton per hectare in 1983. In 1992, where wheat area and production was the highest, the productivity was 4.5 tons per hectare. Even the area and production of wheat declined after 1992, and after that the productivity of wheat continued to increase until reached to 5.6 tons per hectare.
Policies to Improve the Production of Wheat
The Saudi government followed incentive programs to develop the agriculture sector to get its goals which are verity national gross income and security food by reaching self-efficiency. The government used subsidies to extend vertical and horizontal extension on agriculture sector. On another hand, the government looked to wheat as strategy good and it represented the security food. For that, the government has supported this good by different types of subsidies. So, the government established two firms to imply different policies to reach the goals of growing the wheat. They are Saudi Arabian Agricultural bank (SAAB) and Grain Silos and Flour Mills Organization (GSFMO).
The Saudi Arabian Agricultural bank (SAAB) established in 1964 and it started practicing at 1966. It is a government credit institution specialized in financing various areas of agricultural activity in all regions of the Saudi Arabia. The goal of SAAB is to support farmers by financing them with free interest and supporting by subsidies. SAAB finances agricultural projects with free interest for short run for working cost, med-run for small projects, and long run for a project which gets financing by more than SR five million. SAAB provides different kinds of subsidies like support wells and irrigation equipment by paying 50 percent of the official price of irrigation pumps and equipment, 45 percent for farm machinery, and 30 percent for poultry and dairy equipment.
SAAB contributes to develop the agriculture sector through subsidies and loans. SAAB financed about 133 projects by total value of SR 494.3 million in 1980, and 19.6 percent of the total value went to cereal and forage projects. Portion of cereal and forage projects increased to 59.7 percent of the total projects value in 1985 and this portion increased in 1992 to 82.7 percent. Since 1979 until 2006, SAAB had financed 1897 cereal and forage projects by 2942.3 RS million. In addition, since 1973 until 2006, SAAB had subsidized the engines and pumps by RS 5751518 million and it had subsidized agricultural machinery by RS 3951020.64 million.
So, SAAB was an important factor to improve agriculture sector but it was not the only factor that helped government to reach a self-sufficiency of food, especially in wheat. Grain Silos and Flour Mills Organization (GSFMO) contributed to develop wheat growth.
The government established a program which it is supporting price originated by Grain Silos and Flour Mills Organization (GSFMO). The goal of Grain Silos and Flour Mills Organization (GSFMO) is purchasing local wheat by high price from the farmers and providing flour to consumer for low price.
The supporting price program encouraged private sector to enter into the agriculture sector and invest in wheat project. GSFMO started to apply supporting price in 1980 when it purchased the wheat from farmers by SR 3500 per ton. In 1980, GSFMO received 32,882 tons and then increased to 1,346,943 tons in 1985. In 1985, GSFMO declined the supporting price to RS 2000 per ton but that did not reduce the amount of wheat which GSFMO had received. In 1992, GSFMO received 3.4 million tons. In 1995, GSFMO declined the supporting price to RS 1500 per ton and that price reduced the amount which GSFMO received to 1,647,957 tons. So, declining the support price and establishing quotas on wheat production reduced the amount of wheat which GSFMO received to 1,760,000 tons but it increased to 2,718,042 tons in 2004. In 2005, GSFMO reduced the supporting price to RS 1000 per ton and it purchased from producers 2,362,756 ton. Therefore, the Saudi government used the supporting price and quote programs and subsidies on input to control wheat production.
Also, the Saudi government used another policy to protect farmers who produced wheat. The government imposed a hundred percent import tariff on wheat and flour. Also, the government has been instrumental in distributing public lands under a Royal Ordinance that dates back to 1968. As of end 2003, about 3,294,645 hectares have been allocated. Of this, 20.3 percent went to individual, 70.3 percent to agriculture projects, 9.4 percent to agriculture companies. All these factors and programs were to get a self-sufficiency of wheat for Saudi Arabia because the government looks to this commodity as the most important and a strategy good.
Now, with Saudi Arabia as a member of WTO, there is something change with agriculture policy. SAAB restructures the agricultural subsidies. So, the subsidies include agricultural subsidies equipment, excludes subsidy to dig wells or pumps, and subsidy granted by 25 percent of the loan value. On another hand, GSFMO will begin reducing purchasing annually by 12.5 percent from season 2008 and it will import to bridge the domestic consumption gap. Also, the government will prevent to export local wheat. So, what is behind this new policy The main reason behind this new policy is water. Growing wheat depends on groundwater and most growers use fossil water to grow the wheat. Also, the government starts to be warred about water and manage water become important issue in Saudi Arabia. On another hand, agriculture sector consumes about 90 percent of the total water and the wheat consumes about 30 percent of what agriculture sector consume.
Water section
As we emanated before, the Arabian Peninsula has a harsh environment topography and climate. Under this environment, Saudi government adopted a huge program to develop agriculture sector and water became an important input to lead this developing. For that, the government invested in a lot of money to develop the water resource. So, in this part we describe how the government invested in the water resource and the water resources in Saudi Arabia.
Investment in water
Water is the most important input to develop the agriculture sector. Because the Saudi Arabia has harsh environment and the government followed water supply management, it adopted to invest in water sector. The government had started to invest surplus of oil revenue in water project. It started to harvest the rainfall by holding the rain to get high benefit from it by building about 230 dams of capacity 850327 thousand cubic meters in the western Saudi Arabia where the mountains are located. The largest dam is King Fahd dam, which holds 70 million cubic meters. The dams are used for agriculture and domestic uses.
Also, Saudi government invested a lot of money to provide water for municipal use by building about 35 plants. In addition, the government invested to build irrigation water projects such as Project Irrigation and Drainage in Al-Hasa, which service more than eight hectares. Therefore, the government invested the surplus of oil revenue to increase the water supply. Also, the government supported farmers by subsiding irrigation equipment, drilling wells and pumping machine.
Water Resource in Saudi Arabia
1- Rainfall
The first water resource is rainfall. Saudi Arabia has no rivers or lakes and surface runoff is intermittent because of the erratic nature rainfall. The amount of rain received is less than 100 mm annually, and the resulting runoff is estimated at 2025 million cubic meters. This amount of water distributes to three parts. Thirty percent of this amount is diverted for agriculture, 45 for recharging groundwater aquifers, and 25 is lost by evaporation (Abdulrazzak and Khan, 1990). So, Saudi government has invested a lot of money to collect this amount of water by building about 230 dams.
2- Groundwater
The second resource of water is groundwater, which is the main source of Saudi Arabia. The groundwater divides to confined aquifer (fossil water) and unconfined aquifer (alluvial aquifer). Saudi Arabia has seven major deep aquifers, which they represent the main water source and they are used by agriculture, domestic and industries. Ministry of agriculture estimated the amount of water in the aquifers by 500 in 1981 but it declined to 289.13 million cubic meters in 1996 (Qanem and Aldwis, 2003). Here, the next table shows a summary of groundwater reserve in principal aquifers in million cubic meters (MCM). These aquifers are located in the central part of Saudi Arabia, and the largest reserve is Wasia, which is located near Riyadh.
Main aquifers in Saudi Arabia
AquiferMean annual recharge(MCM)Reserves (MCM)Mean TDS (mgliter)ProvenProbablepossibleSaq
Wajid
Minjur and Dhruma
Wasia
Umm Er Radhuma
Dammam
Tabuk250
104
80
180
406
200
45565,000
30,000
17,500
120,000
16,000
5,000
560100,000
50,000
35,000
180,000
40,000
----
----200,000
100,000
85,000
290,000
75,500
----
----300-3250
500-1000
1100-2700
400-4600
500-4050
1100-2660
460-3700Source Abdulrazzak and Khan 1990
3- Desalinated Seawater
The third source of water is desalinated seawater. Saudi Arabia is the largest country in the world, which produces the water from desalination and it had 35 plants in 1997 to produce the water. The plants distributed between the eastern and western coast. The total water production of desalination plants increased from about 200 million cubic meters (MCM) in 1980 to 540 MCM in 1990. Then, it increased its production to 795 MCM in 1997. Desalinated water production is expected to reach about 1300 MCM in 2010 and more than 200 MCM in 2025 (Abderrahman, 2001). In 1990, desalinated water production was about 33 of total domestic and industrial demand, and then the water production increased to 38 of total domestic and industrial demand. By 2025, desalination production is expected to be about 54 of the total domestic and industrial demand (Abderrahman, 2001).
4- Treated Sewage Water
The final source of water is treated sewage water to use for agriculture purposes. Saudi started using sewage water as source for water since 1980. In 2003, treated sewage water served 17304 hectares and agriculture area used 51.33 million cubic meters.
To summarize the water resource in Saudi Arabia, there are four sources for water. The first one is groundwater which is the main source for water and represents 86 of total water supply. The second one is surface, which is a collection of rainfall in the mountain behind the dams. So, the surface water represents 9 of the total water supply. Then, the desalinated seawater represents 7 and treated sewage water represents 1 of the total water supply.
Categories of water Resources and Their Percentage Share of Water Requirements
NumberWater resourcesPercent share of water requirements1
2
3
4Groundwater
Confined aquifer (fossil water)
unconfined aquifer (alluvial aquifer)
Surface water
Desalinated water
Reclaimed wastewater
Total
77
9
6
7
1
100Source Mohoriy and Grigg Journal water resources planning and management.
Sources of irrigation water and Improved Irrigation System
Groundwater is the primary source of irrigation area in the Saudi Arabia. According to Minatory of Agriculture 1999, there was 85.46 percent of the total irrigated area in Saudi Arabia, which estimated 1.19 million hectares dependent on groundwater. Rainfall is the second source for irrigation where there is 13.97 percent of irrigated area and some irrigated area used treated sewage water as a supporting source. The most of agricultural production in Saudi Arabia depends on groundwater except Jizan. Jizan depends on rainfall by 83.85 percent of its irrigated area (Alomran, 0000).
The main means of rationalizing the use of irrigation water is raising the efficiency of irrigation systems and use modern irrigation systems such as drip irrigation or spraying. Therefore, irrigation systems have been developed in Saudi Arabia. According to the comprehensive census in 1999, there was 47.68 percent of the total irrigated area that used modern irrigation system, followed by the traditional irrigation system were 30.3, and the irrigation system in more than one way by 22.2 during the same year. The modern irrigation systems deployed in parts of the Saudi Arabia where the rate in the eastern region is about 82.5 of the irrigated area. In Jawf and Tabuk, 82.14 69.32 of the total area was irrigated in each region.
Saudi Arabia has a limited water resource and the main water resource is groundwater. Agricultural sector is the largest consumer of the water. So, as a result of scarcity of water, Saudi government invested a lot of money to structure a large number of projects like dams and Project Irrigation and Drainage in Al-Hasa. Even though, Saudi Arabia still suffers of water deficit.
Chapter three
This chapter contains of two parts. The first part shows the Equilibrium Displacement Model through reviews of the previous studies and show different studies that used this model in different fields of economy. The second part views the construction of the Equilibrium Displacement Model we used in this study and how we build it. Here, we build base of a set of basic equations to describe the demands and supplies of both product and factor. Then, we used total differentiating these equations and converting them to elasticities. The elasticities yield a system of linear elasticities model to examine the different policies the Saudi government could use to find the effective production of wheat and saving the ground water.
Theoretical and Model Section
Market Equilibrium
Under competitive market, the price and quantity equilibrium founds when the supply and demand curves interact. At this point the quantity supplied equals the quantity demanded and the price which the producer will accept equals the price which the consumer is willing to pay. So, when the price increases (decreases) that will lead to surplus (shortage) of good or service.
Change in Market Equilibrium
We have seen how the price and quantity of a good or service determines in a market when the demand and supply curves intersect. Also, we have acknowledged about how supply and demand shift as a result of response to change in such variable as capital costs, raw material cost, income, population. We divided the variable which affects the demand and supply to two kinds. Endogenous variables are the quantity and price which are in the model but exogenous variables are what the value determined outside the model. Now we will see how that equilibrium changes in response to shift in the supply or demand curve or both of them when the exogenous variable changes.
There are several variables that cause to shift the supply curve to right, left, upward or downward and any shifting will cause to change in equilibrium price and quantity. One of these variables is input costs or raw material cost. Input cost could reduce by subsidizing when the government intervenes. The subsidy reduces the cost of input and leads the supply curve shift to the right which led to increase the quantity of supply. As result of shifting the supply curve, the equilibrium point will change. In addition, when variables, which affect on demand curve change, the demand curve will shift and the equilibrium price and quantity also will change. Also, the changing in the equilibrium point could happen because there is a change in demand and supply together.
Equilibrium Displacement Model
An equilibrium market can face shocks from a change in exogenous variable. The change on exogenous variables leads to destruction of the equilibrium market. To measure the change on equilibrium market, there are a lot of studies used in equilibrium displacement model. The equilibrium displacement model examines the effect of a change in exogenous variable. So, the equilibrium displacement model studies the impacts of small and finite changes in exogenous variable. The endogenous variables are measured as proportionate changes and are a function of proportionate changes in exogenous variables. Also, the EDM is useful to exam the impacts of multiple changes in exogenous variable.
The equilibrium displacement model has frequently used tools in agriculture economy. The equilibrium displacement model concerns about the proportional change on endogenous variable with respect to a proportional change of some exogenous variable. This model was developed by Muth (1964). Muth developed the reduced forms for proportional displacements from equilibrium for a system of equations of supply and demand for a product dependent on two factors of production and exogenous shifters for each of the functions. So, through elasticities and shared parameters and proportional change of exogenous variable, we can estimate the proportional change of endogenous variables. Muth applied this model in his own field of special interest, which is housing and urban land economy.
The EDM has some characteristics, which they made it as important tool in agriculture economy. According to Piggott 1992, the EDM is relevant in cases where sufficient data for econometric modeling may be unavailable, data are unreliable, or where data and extensive prior research results and experience are available to develop large-scale models of complex relationships. Also, Piggott 1995 noted the equilibrium displacement model be more clear with four assumptions which are (i) elasticities of endogenous are known and constant, (ii) elasticities with respect to exogenous variables are known and constant, (iii), technology of production is known and constant, (iv), Displacements are restricted to be in the neighborhood of equilibrium.
Additionally, Davis 2001 said the EDM formwork is appealing for three reasons (i) it is extremely flexible in modeling diverse economic phenomena ( ii) it is easy to implement as it only involves inverting some matrices of parameters that are not wed to only particular data set (iii) because of two, the results may be considered rather robust to econometric misspecifications.. On another hand, some of the studies used the EDM to analyze the effects in vertical market such as Alston (1991) and Salhofer, and Sinabell (1999). Also, there are some studies that used this model in horizontal market like Piggott (1995).
There are a lot of researchers who used the equilibrium displacement model in different topics. Gardner (1975) used this model and applied to investigate the relationship of retail food prices to farm prices. Sumner and Wohlgenant (1985) applied the term equilibrium displacement modeling to measure the effects of an increase in federal excise tax on cigarettes. In that study, Sumner and Wohlgenant (1985) used a log-linear equilibrium displacement in international trade. In 1988 Mullen, Wohlgenant and Farris used this model to examine the distribution of surplus gains in substitution between farm and non-farm inputs and Alston has a paper which is research benefits in a multimarket setting a review to evaluate distribution of welfare effect.
Also, there are some researchers who used this model in international studies. Duffy and Wohlgenant (1991) used this model in international trade to measure the effects of an export subsidy on the U.S cotton industry. Also, in 1995, R. Piggott, E. Piggott, and Wright used and analyzed the effect of incremental advertising expenditure by the Australian beef, lamb, and pork industries, domestic and export markets. Brown (1995) used EDM to measure the effect of cigarette taxes and smoking restrictions on tobacco price and quantities, and revenues to tobacco producing. Beghin, Brown, and Zaini (1996) investigated the impact of domestic content requirement on the US tobacco and cigarette industries. Al-Sultan and Davies used the model to measure the impacts of WTO and water policy change on Saudi Arabia. Bradley and Sumner (2008) assessed the effects of trade barriers and domestic support by simulating the effects of policy reform on global processing tomato markets.
Constructing the EDM model
We design a system simulation model to assess how changes in financial policy and import of wheat affect the production of wheat and demand for input factors. The system contains of basic equation in the domestic wheat market, which are demand and supply. But these equations have a variable, which the Saudi government is controlled that is subsidy. In the system, there are two domestic prices one of them faced by consumer and the second equals the marginal cost and the farmers determine the level of the agricultural product production of wheat. The Saudi government uses the gap between the price the producer accepted and the consumer willing to pay to determine the production level of wheat in Saudi Arabia.
Also, the government used the subsidy input factor to make the production of wheat as cheap and let the farmers produce more. In addition, the government made the wheat market closed. The equation is what happens for production of wheat when the Saudi government used its instruments of agricultural policy, and how that affects on saving the groundwater.
The system describes three parts. The first market is the domestic market through local supply and demand and how the instruments of agricultural policy affect on it. The second market is the input market and how the government can affect on the price of input. The third part is how government can make the wheat market closed or open. The model is found combining between good market and input market.
The model built base of a set of basic equations to describe the demands and supplies of both product and factor, describe the supply and demand of input factors and market clearing conditions.
QUOTE Wheat demand
QUOTE Supply price equals marginal cost
QUOTE Supply price equals the price demand plus per unit subsidy rate
QUOTE ) Demand Price equals world price minus import tariff.
QUOTE water demand
QUOTE other input demands
QUOTE water supply
QUOTE other input supplies
QUOTE Input price supply equals the input price demand plus the subsidy
QUOTE
QUOTE
QUOTE International market clearing condition
QUOTE Import equal the quota
Equation (1) describes the demand for wheat, D, which is function of price faced by consumer, QUOTE , and other factors which leads to shift the demand curve, QUOTE ,which is income, and QUOTE which is population. Equation (2) expresses condition that supply price, QUOTE equals the marginal cost to the farmers and determines the level of the agricultural product production, wheat. C is the total cost, which is function in the price demand of water, QUOTE , the price demand of non water factors, QUOTE , and the local production, Y. Equation (3) presents the supply price is the sum of the price demand, QUOTE , and per unit subsidy rate, . Equation (4) expresses how price demand determines, so, world price, QUOTE , and is the ad valorem tariff on imported wheat. Because the ad valorem is zero in Saudi Arabia that leads to the word price, QUOTE equals to the demand price, QUOTE . Equations (5) and (6) are derived factor demand from the cost function using Shepards Lemma. Equation (5) represents water demand and equation (6) represents the non water factors demand. Equations (7) and (8) are input factor supply equations with s1 and s2 being exogenous shift variables shucks. Equation (7) explains the water supply is function on the price supply of water, QUOTE and subsidy on producing the water, s1. Equation (8) explains the non water supply is function on the price supply, QUOTE and subsidy, s2. Equation (9) describes the relation between price supply of factor and the price demand of factor. Equation (10) represents aggregate demand of wheat equals total local production of wheat plus import of wheat and there is no export because the Saudi government prevents export of wheat. Equation (11) shows the import equals the quota, Q.
This model has assumption, which describes the market situation and producer behaviors. These assumptions include the market is competitive, all firms are identical, constant returns to scale and the producers produce a single and homogenous output. Also, the producers minimize the cost.
Next, the system has to total differentiating these equations and converting them to elasticities. The elasticities yield a system of linear elasticities model. The system consists of several parameters values like elasticities, input cost shares, and elasticities of input substitution. The model follows the tradition of Muth (1964), Gardner (1978), Piggott (1992), and this model inspired of Salhofer and Sinabell (1999), Rickard and
Sumner (2008).
So, the total differentiating the wheat demand yields QUOTE , then dividing both sides by the quantity demand, D, and multiplying the right hand side of the equation by QUOTE the first term, QUOTE by the second term and, QUOTE by the third term. After that, by ordering the right hands side and reducing form of the equation to get QUOTE .
We impose identities on the system and then we take the total differentials express the results in relative change and elasticities.
QUOTE
QUOTE
QUOTE
QUOTE
QUOTE
QUOTE
QUOTE
QUOTE
QUOTE
QUOTE
QUOTE
QUOTE QUOTE
QUOTE
Where E indicates relative change QUOTE , ( is the own price elasticity of demand for wheat, QUOTE is the income elasticity, QUOTE is the population elasticity, QUOTE is the share of total wheat growing costs for input QUOTE , QUOTE is Allen elasticity of input substitution between two inputs. QUOTE is the own price elasticity of supply of input QUOTE . In addition, Piggott (1995) noted the equilibrium displacement model be more clear with four assumptions, which are (1) elasticities of endogenous are known and constant, (2), elasticities with respect to exogenous variables are known and constant, (3) technology of production is known and constant, (4) Displacements are restricted to be in the neighborhood of equilibrium.
Then, these structural equations can be rearranged so that endogenous variables are a function of exogenous variables
QUOTE
QUOTE
QUOTE
QUOTE
QUOTE QUOTE
QUOTE QUOTE
QUOTE
Arrange equations (23) to (29) in matrix form QUOTE where A is a matrix of the demand for wheat, demand of input and supply of input elasticities. QUOTE is a matrix endogenous variable, QUOTE is a matrix of elasticities or coefficient of shifter variables, and X is a matrix of exogenous variables.
(z1(z20000EZ100- 2000EZ2000000E000000EQ000010ES1000001ES2000200
1(00000ED010-(1-(200EPd00-1(2- (210EY00-1- 1101EWD1000- 1010EWD20000- 201EX110-10000EX2
This system can be solved by moving matrix A to the other side where matrixes B and X are there. The solution will be as QUOTE , and we can indicate matrix QUOTE equals, thus, the system be QUOTE .
Chapter Four
Equilibrium Displacement Model needs different parameters and at least each parameter needs a study to estimate it. This chapter shows the parameters the models need them and views these parameters through previous studies in the part one. The second part shows the plan we used to do the study.
Data and Parameters Requirements
The EDM has some characteristics, which they made it as a good tool in agriculture economy. According to Piggott (1992), the EDM is relevant in cases where sufficient data for econometric modeling may be unavailable, data are unreliable or where data and extensive prior research results and experience are available to develop large-scale models of complex relationships. By looking to previous studies to get the parameters which the model needs and estimating some of parameters by using knowns, which we got them of previous studies, we can estimate.
In this model, we are looking on several parameters which each of them we can get it in as research or we can estimate it. Through this model we need to get the elasticities,(, (z1, (z2, and the share cost of the input factors, (i, which we find them in previous studies. Allen elasticity of input substitution and the price elasticity of input supply will be calculated by using some knowns and will be calculated rest of parameters i and i through the secondary data.
Price elasticity of wheat (()
The price elasticity of demand measures responsiveness of quantity of demand to a change in price with all other factors being constant. The price elasticity on goods could be elastic or inelastic.
Kahtani and Schreiner (1995) studies six groups of food and they said the food commodity inelastic while nonfood commodity is elastic in Saudi Arabia. Kahtani and Schreiner in 1995 estimated the price elasticity of cereals which include the wheat and it was -0.368.
Al-Sultan (2002) estimated local demand elasticity for eight groups of agriculture products in Saudi Arabia by using local supply elasticity and one of these groups contains maize, corn, rice, and wheat. Al-Sultan estimated the elasticities under three scenarios. The price elasticity for this group has a range between -0.078 to -0.099 under scenarios which has no restriction imposed of Saudi Arabia agriculture products. The price elasticity with restriction has a range between -0.162 to -0.187. So, the price elasticity of commodity of food is inelastic and realized the wheat is inelastic.
Al-Hamodi (1979) estimated price elasticity of wheat and he finds the elasticity is 0.149 and it is significant at 1 percent. In addition, Battal (1992) estimated the price elasticity of wheat by -0.7, which means when the price of wheat increases by 1, it leads to the quantity demanded of wheat reduced by 0.7 .
So, price elasticity of demand for wheat in Saudi Arabia is inelastic and it in range between -0.078 to -0.7. This study will assume the price elasticity of wheat is inelastic and it equals -0.39. The study is going to assume the price elasticity of wheat is -0.39 as average of the range.
Income elasticity ((z1)
To measure how increasing or decreasing income affects on good demand, economist uses the income elasticity. The income elasticity measures how sensitive demand of a good is to change in consumers income. Through income elasticity, economist can define if these goods are normal or inferior and classify goods to luxuries or necessities. To classify good to normal or inferior, the singe of the income elasticity takes positive or negative, and to classify goods to luxuries or necessities, the value of the income elasticity takes grated than one or less.
Kahtani and Schreiner (1995) estimated the income elasticities for six groups and the result for income elasticity for cereals is significant at 10 percent and it is 0.033. Al-Sultan (2002) estimated the income elasticity for the eight groups and the result reflects the group commodity, which contains maize, corn, rice, and wheat as normal goods and necessity. Al-Hamodi (1979) estimated the income elasticity of wheat per capita and it was 1.140 but it was not significant.
With this, paper going to assume wheat as normal good and necessity and has income elasticity equals 0.033.
Population elasticity ((z2)
A change in population leads to shift the demand of goods. So, the population elasticity measures by how much percentage the demand of the good when the population changes by a percent. Battal (1992) used the population a variable to estimate wheat demand and measures the population elasticity by 2.5. The population elasticity represents increasing the population by 10 leads to increase in the consumption of wheat by 25. So, this study is going to use Battal population elasticity.
Share cost of the input factors ((i)
Input cost shares for a competitive industry are calculated as
(35) (i Xi WiQP
Where (i is the share cost of the input, Xi is the demand on input, Wi is the price of input, Q is production quantity of output, and P is the price of output (Mullen elt, 1989).
The share cost of water in wheat production is estimated by 0.18 according to Al-Attar and Al-Dossary (1957). In 1977, Ministry of Agriculture and Water estimated the share cost of water by 0.16. Al-Nashwan (1988) estimated the share cost of water by 0.164. On another hand, California Water plan (1998) estimated the share cost of water for wheat by 0.14. As a result of the previous studies, there is some difference between them to determine the share cost of water, and the study is going to adopt the California Water plan because it is the newest reverence and it is close to the old study which estimated the share cost for specific good, which is wheat project at Saudi Arabia.
Elasticity of supply input (i)
The price elasticity of supply measures responsiveness of quantity of supplied to a change in price with all other factors constant. The price elasticity on goods could be elastic or inelastic. There are a lot of studies that estimated the elasticity of food commodities demand and input factors demand for developing and developed counties. But studies on the supply elasticity of input factors are scarce (Salhofer, 1999).
There are scarce empirical studies that estimate the supply elasticity of water factors and maybe there are no empirical studies in the Middle East countries. Wheeler et al (2008) estimated the elasticities of demand and supply for water allocation for one region along the Murray River in Australia for specific period (1997 2007). They found the overall price elasticity of supply for water allocation ranged from 0.89 to 1.79. So, this study estimated the supply elasticity for a region and for surface water, but the study look for elasticity supply for groundwater.
In the other said, there are a lot of empirical studies that estimated the price elasticity of irrigation water demand. Scheierling et al (2004) investigates variation in empirical estimates of the price elasticity of irrigation water demand and they reviewed approximately 40 studies published from 1963 to 2003. Scheierling et al found the irrigation water demand elasticities has ranged from -0.002 to -1.97 with mean of -0.51 and median of -0.22. In addition Kumar (2004) estimates the water price elasticity of demand in India and he finds the elasticity is high -0.902.
Also, these empirical studies estimate the price elasticity demand of groundwater such as Ogg Gollehon (1989). Ogg Gollehon (1989) estimated the irrigation groundwater demand elasticity and it has ranged from -0.22 to -0.34 for different regions. Nieswiadomy (1985) estimated the price elasticity demand for groundwater when energy is relatively cheap in 1973 and he finds it equals -0.29. While he estimated it in 1980 when energy is relatively expensive, he finds the elasticity rises to 1.24. Also, Salman et al (2004) estimated the price elasticity of groundwater demand in Jordon and finds the price elasticity of groundwater demand in the case of safe extraction rate is -0.866, but the elasticity with actual situation is -1.275. . Also, they found the price elasticity of groundwater demand became inelastic when the water supply decreased and the elasticities have ranged from -0.31 to -0.73.
So, based on these studies, it will be assumed that the groundwater supply has the same elasticities of demand. The assumption for supply elasticity for groundwater,1, is inelastic as most studies result and the value of supply elasticity be 0.3 because the price of energy is cheap and will assume the supply of groundwater is decreased.
In another hand, according to Salhofer (1999), a reasonable range of 2 is between 1 and 3 , and that because Salhofer (1997) drives the price supply elasticities for farm labor of 3.19, for operating inputs of 1.16, and for durable investment goods of 0.96. Also, because Salhofer (1998) drives the price supply elasticities for farm labor of 1.2, for operating inputs of 1.91, and for durable investment goods of 1.46. Consequently, there is assumption for supply elasticity for non water factors is 2.
Elasticity of substitution (ij)
Elasticity of substitution is a measure of the proportionate change in ratio of inputs, capita to labor ratio as example relative to the proportionate change in marginal rate technical substitute along an isoquant. In other words, the elasticity of substitution measures how easy it is to input for another while keeping the level of output constant.
Nieswiadomy (1988) estimates Allen partial elasticities of substitution for five inputs (ater, labor, center pivot, furrow, and wheel roll system) and Nieswiadomy finds the elasticity substitution between labor and water is 3.54 and the elasticity substitution between the furrow system and water 2.42. Also, Kumar (2004) estimated the substitutability between four inputs which are water, labor, capital, and material for several industries and estimated the Allen elasticity of substitution and Morishiam elasticity of substitution. The Allen elasticity of substitution between water and Capital is -1.848 while Morishiam elasticity of substitution between water and Capital is 0.893. So, that means, the Allen elasticity of substitution represents the relationship between water and capital is complement while Morishiam elasticity of substitution represents it as substitutes.
On another hand, most studies which used EDM in agriculture industries studies assumed the value of 0.1 for elasticity of substitution between input and other inputs (Mounter, Piggott and Mulle, 2005). Consequently, an input substitution elasticity of 0.1 has been assumed between water factor and non water factors.
Share of aggregate demand ()
Most Aggregate demand of agriculture commodities in Saudi Arabia combines of domestic production and import, but in some agriculture commodities, Saudi Arabia reached to self-sufficiency such as wheat (Al-Sultan 2002). Since 1984, Saudi Arabia reached self-sufficiency of wheat and aggregate demand of it provided by local production. In 2008, the Saudi Arabian ministry of agriculture has decided to reduce wheat production by 12.5 percent annually beginning with 2009.
So, in this paper we are going to assume there are two situations, first the wheat market in Saudi Arabia is close and that was before 2009 and the aggregate demand provided by local production and 1 equals one. The second situation, wheat market in Saudi Arabia is open and the government reduces the local wheat production by 12.5 percent annually. So, 1 and 2 will change year by year.
Saudi Arabia is located on the Arabian Peninsula and comprises around eighty percent of it, with the Red Sea in the west and the Arabian (Persian) Gulf to the east. Neighboring countries are Jordan, Iraq and Kuwait in the north Qatar, the United Arab Emirates, and Bahrain in the west and the Sultanate of Oman and Yemen in south. The total land area at Saudi Arabia is 2,250,000 square kilometers, and most land of Saudi Arabia consists of arid or semi-arid land. Arable of the land in Saudi Arabia is estimated by only 1.67 percent of Saudi land according to 2005 statistics and only 0.09 percent of the countrys land is planted to permanent crops.
The Saudis topography and climate are not homogenous between regions. So, in general the Saudi has a high mountains in the west, down almost to sea level in the east. Sandy plateau slopes downward to the Gulf, broken up by wadis, broad valleys. The extreme is reached in three deserts which extend from north to south. These deserts are Dahna, Nufud and the Rub al Khali, the Empty Quarter. These deserts are followed by some oasis such as Hasa Oasis and Qatef Oasis in the west. After this oasis, there is a coast that lies on the Arabian (Persian) Gulf. In addition, the climate of Saudi Arabia is a long, hot and almost dry summer, and short, cold winter season during which little rain occurs and annual rainfall is less than 100 mm. From this general glance to Saudis topography and climate, reader can realize that Saudis external resource is very poor. There is a limited availability of land for agriculture there is no river and no lake. However, Saudi has good internal resources oil, water and minerals.
Population in Saudi Arabia was estimated in 2006 by 27,019,731, with an annual growth rate of 2.18 percent. Of the total population, nearly 6 million non-nationals were included. However, a harsh environment and small cultivable land made the agriculture too difficult. Also, the agriculture sector was the main sector in Saudi economy and many households were dependent on agriculture to get its income. However, the economic structure of Saudi Arabia was changed in 1938 when the United States Company discovered the oil in the eastern province.
In 1960, Saudi Arabia became a member of OPIC (Organization of Petroleum importing Countries) organization. This organization raised the price of oil which caused to increase on Saudi Arabias revenue. By the time, Saudi government tried to use that revenue in developing the country by developing human resources, the transportation system and other infrastructure aspects. In 1970, the modern economic history of Saudi Arabia started when the government began with Five-Year Development Plan. The main goals of these plans were to develop the Saudis living standards, develop non-oil sector, reduce dependence on the oil source, and achieving self-sufficiency in food production by developing agriculture sector.
Self-sufficiency in food led Saudi government to use several different natural resources such as oil, land and water. The government invested the revenue which came from oil to develop the agriculture, also, used different policies to extend the agricultural sector vertically and horizontally. In another hand, the government concerned a specific committee to get the self-sufficiency in food, which is the wheat. So, developing this sector needed creating different policies to use these nature resources which they have scarcity in Saudi Arabia, that is land and water. However, to develop agriculture the water is an important input player. The primary water resource in Saudi Arabia is groundwater, which takes a lot of time to collect in the ground and it needs a lot of time to collect again if the present generation does not use it efficiently, and the agriculture consumed groundwater about 252046 million cubic meters since 1981 until 2000 and 77.38 percent comes from shallow water.
Problem Statement
Among the natural resources, the one with high economic value and social significance is the groundwater, which finds numerous uses in domestic, agricultural and industrial areas. In order to ensure sustainable usage, proper planning and understanding of the groundwater system behavior is required since the supply of groundwater is limited. However, excessive extraction of groundwater has resulted in progressive depletion of the resources and continual decline in its level. This is referred to as overexploitation of resources, i.e. when the total extraction exceeds the long term natural renewal of the groundwater system. As a result of lowering of water table, there was an increase in cost of drilling and pumping and reduction in well yield. Other associated adverse consequences were land subsidence and deterioration of groundwater quality.
Most of the Middle East Countries depend on groundwater and acres of agricultural land survive on it. With all the above said problems, mounting crisis and the need to keep the depleting levels of groundwater available for future generations and optimize its benefit, policy makers need to step in and look into efficient ways to minimize exploitation and increase productivity of groundwater.
In Saudi Arabia, water is the scarcest natural resource. Prime water resources are groundwater and it is mainly used for agricultural, domestic, municipal, and industrial purposes.
1970 marked the beginning of the modern economic era for Saudi Arabia. The Saudi government concerned with fulfilling its goal on self sufficiency of food, adopted some quick and effective strategies such as subsidies, free interest loans and distribution of land free to achieve these goals. All these strategies made agriculture sector grow faster and transformed deserts to green land.
But these policies had a downside, with growing agricultural lands and the need to achieve the goals, the government did not encourage the farmers to conserve water and cared less about farmers wasting water as water was available free sometimes and the value of it was not recognized. For instance, according to Ghanim and Aldwis (2003), in 1980, Saudi Arabia had about 500 million cubic meters of groundwater, but it declined to 289.13 million cubic meters in 1996, which meant that the groundwater declined by more than 50 percent within 16 years.
According to reports on self-sufficiency of food, the Saudi government had developed agricultural lands through different policies that led to increase in irrigated area from 1,220,000 hectares in 1974 to 4,359,544 hectares in 2005. As a result, with increase in demand for groundwater, the agricultural sector, deemed as the largest water-consuming sector, utilized about 90.5 of the total amount of water used in Saudi Arabia during the period 1980-1998. Further, groundwater in Saudi Arabia can be classified as renewable and nonrenewable. And according to Ghanim and Aldwis (2003), the agricultural sector depends on non-renewable groundwater by 66.54, while dependence on renewable groundwater is by 33.46.
With Saudi governments policies on self-sufficiency of food, wheat became a strategic commodity. The crop structure underwent a change in 1970 and the wheat considered as one of the main crops, represented 44.17 percent of the irrigated land while the formal main crop was the palm dates. Alguenibt (2004) acknowledged the huge requirements of water for wheat growth. According to him, a ton of wheat production requires 2000 cubic meters of water with salinity acceptable to levels of 1500 ppm. The wheat crop consumes 32 of deep non-renewable groundwater while consumption of all other crops takes the remaining 68. As observed, wheat consumes a lot of water and depends more on the nonrenewable groundwater.
All supporting reports clearly indicate wheat as the largest consumer of water in the agricultural sector. The subsidies given reduce the marginal cost of production and the cost incurred in pumping out the groundwater. This leads to inefficient usage and decline in the value of groundwater. To bring to note, according to Al-Ibrahim (2005), farms less than 50 hectares that cultivated wheat consumed 34 more water than what the ministry of agriculture had estimated. So, this wastage and improper usage of groundwater evinces the negligent nature and under recognized value of water.
The Saudi government has started to show concerns towards the mounting problem and the fact that groundwater is indeed undervalued, which would eventually lead to economical inefficiency. As this resource is limited, it needs to follow timely and proper distribution mechanisms to make it long lasting. Also, the government should improve groundwater resource management and save it for the future generations.
To solve this problem, the Saudi government should reevaluate its agriculture policies and adopt methods and policies that will make people aware of the water value, so as to conserve the water for future generations. Wheat, the largest consumer of water in the agricultural sector would be the first target. The government may center its policies around reduction of support prices, reduction of subsidies on input factors and opening the wheat market.
The objective of the research is to observe the dynamics of the equilibrium quantity and the price of wheat when the government makes a shock policy in the equilibrium wheat production by adopting a new policy and to determine how these policies eventually affect water conservation and its value.
There are different policies that a government could adopt, such as reducing the ratio of per unit subsidy rate, reducing the ratio of subsidy on water production, reducing the ratio of subsidy on the rest of the input factors (non water inputs factors), and reducing the ratio of subsidy on all input factors. By thorough study, the research could analyze the efficiency and viability of these policies, so a decision maker can adopt the best policy that has more effect in conserving the groundwater, heightening its value and at the same time maintaining the production of wheat. So, this research answers how each policy affects our future generation and production of wheat.
This paper is organized as follows. Section 2 presents a developing agriculture sector and focuses on production of wheat and wheat supply. Section 3 presents water sources in Saudi Arabia. Section 4 reviews policies to develop the production of wheat and how these affect water consumption. Section 4 deals with Equilibrium Displacement Model (EDM) that presents the results. Section 5 concludes and provides direction for future research.
Chapter Two
This chapter contains of two parts. The first part of the chapter shows how agriculture sector is developed and what types of polices the Saudi government used to develop this sector. Also, this part shows the developing in wheat production and views the government institution contributed to develop this crop. Then, the second part shows the water resource in the Saudi Arabia.
Developing Agriculture Sector
Agricultural sector has received increasing attention because through it the Saudi Arabia could achieve some of the objectives of economic development. The objectives were achieving food security, increasing incomes of members of the community, diversifying the production base, reducing the volume of imports and reducing dependence on oil as the mean source of national income. For that, the government adopted different policies to developing this sector.
To enable the agricultural sector to achieve this important role, the Saudi government adopted different programs and policies to support and encourage private sector to invest in agriculture sector activities. These programs and policies supported a farmer directly and indirectly.
In indirect support, it concentrated on building strong bases of agriculture such as providing electricity, drainage, secondary road system, and building dams until rainwater preserved. So, according to Agricultural Statistical Annual number 20 the lengths of agricultural roads, secondary road, in 2006 was 124157.03, and the number of dams increased from 209 in 2000 to 230 dams in 2006 with total capacity of 850327 thousand cubic meter.
In direct support, it concentrated on encouraging people to get involved in agriculture sector. So, it focused to support input like distributing uncultivated lands freely, met 45 of cost of agriculture equipments, and 50 of fertilizers cost, financing agricultural projects with free interest and purchasing local products with high price by Saudi government. So, accumulated land was distributed according to barren land distribution decree and number of beneficiaries up to the end of 2003 was 99544 and the total area was 668428 hectares. Also, the total value of agricultural subsidies granted to farmers through the Ministry of Agricultureduring the period 2002 - 2006 was SR 199,328 thousands, and the total value of agricultural subsidies granted to farmers through the Saudi Arabian Agricultural Bankduring the period 1973 - 2006 was RS 12983953 thousands and the total value which it financed the agriculture projects during 1973 2006 was SR 9356.8 millions. All these subsidies helped the Saudi Arabia to get self-sufficient of important products especially wheat, dates, eggs, milk, and to increase the production of fresh vegetables, fruit, chicken, red meat. So, all these programs and policies encouraged the agriculture sector to growth.
All these programs we noticed above affects on the GDP. The agriculture sector was shared in the GDP, constant prices, by 3.6 percent in 1969, but the sharing in the GDP increased to 6.4 percent in 1989. In 2005, the agriculture sector added 5.1 percent to the GDP. On another hand, agriculture sectors GDP share in non-oil sectors increased by 6.9 percent in 1969 and increased to 9.1 percent in 1989, but it declined to 7.6 in 2005.
So, the main goal of developing agriculture sector is self-sufficiency of food and to reduce depending on food imports. The Saudi government looks to wheat as a strategy committee because from this committee made an important thing, which is the braid. So, the government would like to be the committee (braid) available to all Saudi people. For that, it supported the wheat industry directly and indirectly.
Production of Wheat
The main cereal crops in Saudi Arabia are wheat, millet, sorghum, maize, barley, and sesame but the wheat crop represents the most important crops between all cereal crops and that will be clear from structure cereal crops. The wheat represented just 10 percent of the area which all cereal crops used, and it represent 23 percent of the production which all cereal crops produced in 1971. During 80s the wheat grew in area, used about 93 percent of all cereal crops area for wheat production and produced about 97 percent of all cereal crops production in 1985. In 2006, the area which wheat grew declined to 77.7 percent of all cereal crops area and it produced about 86.5 percent of all other cereal crops.
For that, production and productivity of wheat is growing during the last three decades, but there was diversity and vacillation of growing between increasing and decreasing in area and production of wheat. All this vacillation refers to multiple policies the Saudi government used it during the last three decades.
The Saudi government had looked to wheat as strategy food, for that it encouraged farmers to invest in wheat. So, the government adopted some policies to support farmers to increase in production of wheat. In 1984, Saudi Arabia reached self-sufficiency when it produced 1,401,644 tons of wheat. Therefore, the government had followed two ways to get self-sufficiency of wheat. The first, expansion was vertical in order to raise production efficiency through the use of modern equipments and loans to farmers. The second was horizontal expansion through establishment of irrigation and drainage project, and distribution of arable land to farmers.
Even though Saudi Arabia has a limited cultivable area, the area of wheat has vacillation between increasing and decreasing. So, as a result of horizontal expansion, the area of wheat increased from 30,156 in 1971 to 468,271 hectares in 2006. Figure 1 shows how the wheat area in 1971 was 30,156 hectares and the area expanded to 404,079 hectares in 1984 when Saudi Arabia reached self-sufficiency. Even the Saudi Arabia reached to self-sufficiency, the area of wheat continued in expansion until it reached to 924,409 hectares in 1992, then the area started to decline until it reached to 468,271 hectares in 2006.
Also, figure 1 show how the production of wheat improved from 41,908 tons in 1971 to 2,630,394 tons in 2006. Production of wheat rose to over one million in 1984 when Saudi Arabia reached to self-sufficiency. Thus, production of wheat was exceeding the amounts needed for self-sufficiency. Producers had continued to grow the wheat and it reached 3.2 million tons in 1988. In 1992, the production of wheat rose to 4.1 million. Thus, Saudi government has changed its policy to reduce the production of wheat and the production declined to 1.2 million tons in 1995, and then it increased to 2.6 million tons in 2006.
The Saudi government supported vertical expansion of agriculture in order to raise production efficiency. For that, Saudi government has subsidized the farmers to use modern equipment as well as provision of extension services and loans to farmers. As a result, this kind of expansion noted productivity of wheat. The productivity of wheat has improved during the last three decades. In 1971, the productivity of wheat was 1.4 ton per hectare and it rose to reach 3.3 ton per hectare in 1983. In 1992, where wheat area and production was the highest, the productivity was 4.5 tons per hectare. Even the area and production of wheat declined after 1992, and after that the productivity of wheat continued to increase until reached to 5.6 tons per hectare.
Policies to Improve the Production of Wheat
The Saudi government followed incentive programs to develop the agriculture sector to get its goals which are verity national gross income and security food by reaching self-efficiency. The government used subsidies to extend vertical and horizontal extension on agriculture sector. On another hand, the government looked to wheat as strategy good and it represented the security food. For that, the government has supported this good by different types of subsidies. So, the government established two firms to imply different policies to reach the goals of growing the wheat. They are Saudi Arabian Agricultural bank (SAAB) and Grain Silos and Flour Mills Organization (GSFMO).
The Saudi Arabian Agricultural bank (SAAB) established in 1964 and it started practicing at 1966. It is a government credit institution specialized in financing various areas of agricultural activity in all regions of the Saudi Arabia. The goal of SAAB is to support farmers by financing them with free interest and supporting by subsidies. SAAB finances agricultural projects with free interest for short run for working cost, med-run for small projects, and long run for a project which gets financing by more than SR five million. SAAB provides different kinds of subsidies like support wells and irrigation equipment by paying 50 percent of the official price of irrigation pumps and equipment, 45 percent for farm machinery, and 30 percent for poultry and dairy equipment.
SAAB contributes to develop the agriculture sector through subsidies and loans. SAAB financed about 133 projects by total value of SR 494.3 million in 1980, and 19.6 percent of the total value went to cereal and forage projects. Portion of cereal and forage projects increased to 59.7 percent of the total projects value in 1985 and this portion increased in 1992 to 82.7 percent. Since 1979 until 2006, SAAB had financed 1897 cereal and forage projects by 2942.3 RS million. In addition, since 1973 until 2006, SAAB had subsidized the engines and pumps by RS 5751518 million and it had subsidized agricultural machinery by RS 3951020.64 million.
So, SAAB was an important factor to improve agriculture sector but it was not the only factor that helped government to reach a self-sufficiency of food, especially in wheat. Grain Silos and Flour Mills Organization (GSFMO) contributed to develop wheat growth.
The government established a program which it is supporting price originated by Grain Silos and Flour Mills Organization (GSFMO). The goal of Grain Silos and Flour Mills Organization (GSFMO) is purchasing local wheat by high price from the farmers and providing flour to consumer for low price.
The supporting price program encouraged private sector to enter into the agriculture sector and invest in wheat project. GSFMO started to apply supporting price in 1980 when it purchased the wheat from farmers by SR 3500 per ton. In 1980, GSFMO received 32,882 tons and then increased to 1,346,943 tons in 1985. In 1985, GSFMO declined the supporting price to RS 2000 per ton but that did not reduce the amount of wheat which GSFMO had received. In 1992, GSFMO received 3.4 million tons. In 1995, GSFMO declined the supporting price to RS 1500 per ton and that price reduced the amount which GSFMO received to 1,647,957 tons. So, declining the support price and establishing quotas on wheat production reduced the amount of wheat which GSFMO received to 1,760,000 tons but it increased to 2,718,042 tons in 2004. In 2005, GSFMO reduced the supporting price to RS 1000 per ton and it purchased from producers 2,362,756 ton. Therefore, the Saudi government used the supporting price and quote programs and subsidies on input to control wheat production.
Also, the Saudi government used another policy to protect farmers who produced wheat. The government imposed a hundred percent import tariff on wheat and flour. Also, the government has been instrumental in distributing public lands under a Royal Ordinance that dates back to 1968. As of end 2003, about 3,294,645 hectares have been allocated. Of this, 20.3 percent went to individual, 70.3 percent to agriculture projects, 9.4 percent to agriculture companies. All these factors and programs were to get a self-sufficiency of wheat for Saudi Arabia because the government looks to this commodity as the most important and a strategy good.
Now, with Saudi Arabia as a member of WTO, there is something change with agriculture policy. SAAB restructures the agricultural subsidies. So, the subsidies include agricultural subsidies equipment, excludes subsidy to dig wells or pumps, and subsidy granted by 25 percent of the loan value. On another hand, GSFMO will begin reducing purchasing annually by 12.5 percent from season 2008 and it will import to bridge the domestic consumption gap. Also, the government will prevent to export local wheat. So, what is behind this new policy The main reason behind this new policy is water. Growing wheat depends on groundwater and most growers use fossil water to grow the wheat. Also, the government starts to be warred about water and manage water become important issue in Saudi Arabia. On another hand, agriculture sector consumes about 90 percent of the total water and the wheat consumes about 30 percent of what agriculture sector consume.
Water section
As we emanated before, the Arabian Peninsula has a harsh environment topography and climate. Under this environment, Saudi government adopted a huge program to develop agriculture sector and water became an important input to lead this developing. For that, the government invested in a lot of money to develop the water resource. So, in this part we describe how the government invested in the water resource and the water resources in Saudi Arabia.
Investment in water
Water is the most important input to develop the agriculture sector. Because the Saudi Arabia has harsh environment and the government followed water supply management, it adopted to invest in water sector. The government had started to invest surplus of oil revenue in water project. It started to harvest the rainfall by holding the rain to get high benefit from it by building about 230 dams of capacity 850327 thousand cubic meters in the western Saudi Arabia where the mountains are located. The largest dam is King Fahd dam, which holds 70 million cubic meters. The dams are used for agriculture and domestic uses.
Also, Saudi government invested a lot of money to provide water for municipal use by building about 35 plants. In addition, the government invested to build irrigation water projects such as Project Irrigation and Drainage in Al-Hasa, which service more than eight hectares. Therefore, the government invested the surplus of oil revenue to increase the water supply. Also, the government supported farmers by subsiding irrigation equipment, drilling wells and pumping machine.
Water Resource in Saudi Arabia
1- Rainfall
The first water resource is rainfall. Saudi Arabia has no rivers or lakes and surface runoff is intermittent because of the erratic nature rainfall. The amount of rain received is less than 100 mm annually, and the resulting runoff is estimated at 2025 million cubic meters. This amount of water distributes to three parts. Thirty percent of this amount is diverted for agriculture, 45 for recharging groundwater aquifers, and 25 is lost by evaporation (Abdulrazzak and Khan, 1990). So, Saudi government has invested a lot of money to collect this amount of water by building about 230 dams.
2- Groundwater
The second resource of water is groundwater, which is the main source of Saudi Arabia. The groundwater divides to confined aquifer (fossil water) and unconfined aquifer (alluvial aquifer). Saudi Arabia has seven major deep aquifers, which they represent the main water source and they are used by agriculture, domestic and industries. Ministry of agriculture estimated the amount of water in the aquifers by 500 in 1981 but it declined to 289.13 million cubic meters in 1996 (Qanem and Aldwis, 2003). Here, the next table shows a summary of groundwater reserve in principal aquifers in million cubic meters (MCM). These aquifers are located in the central part of Saudi Arabia, and the largest reserve is Wasia, which is located near Riyadh.
Main aquifers in Saudi Arabia
AquiferMean annual recharge(MCM)Reserves (MCM)Mean TDS (mgliter)ProvenProbablepossibleSaq
Wajid
Minjur and Dhruma
Wasia
Umm Er Radhuma
Dammam
Tabuk250
104
80
180
406
200
45565,000
30,000
17,500
120,000
16,000
5,000
560100,000
50,000
35,000
180,000
40,000
----
----200,000
100,000
85,000
290,000
75,500
----
----300-3250
500-1000
1100-2700
400-4600
500-4050
1100-2660
460-3700Source Abdulrazzak and Khan 1990
3- Desalinated Seawater
The third source of water is desalinated seawater. Saudi Arabia is the largest country in the world, which produces the water from desalination and it had 35 plants in 1997 to produce the water. The plants distributed between the eastern and western coast. The total water production of desalination plants increased from about 200 million cubic meters (MCM) in 1980 to 540 MCM in 1990. Then, it increased its production to 795 MCM in 1997. Desalinated water production is expected to reach about 1300 MCM in 2010 and more than 200 MCM in 2025 (Abderrahman, 2001). In 1990, desalinated water production was about 33 of total domestic and industrial demand, and then the water production increased to 38 of total domestic and industrial demand. By 2025, desalination production is expected to be about 54 of the total domestic and industrial demand (Abderrahman, 2001).
4- Treated Sewage Water
The final source of water is treated sewage water to use for agriculture purposes. Saudi started using sewage water as source for water since 1980. In 2003, treated sewage water served 17304 hectares and agriculture area used 51.33 million cubic meters.
To summarize the water resource in Saudi Arabia, there are four sources for water. The first one is groundwater which is the main source for water and represents 86 of total water supply. The second one is surface, which is a collection of rainfall in the mountain behind the dams. So, the surface water represents 9 of the total water supply. Then, the desalinated seawater represents 7 and treated sewage water represents 1 of the total water supply.
Categories of water Resources and Their Percentage Share of Water Requirements
NumberWater resourcesPercent share of water requirements1
2
3
4Groundwater
Confined aquifer (fossil water)
unconfined aquifer (alluvial aquifer)
Surface water
Desalinated water
Reclaimed wastewater
Total
77
9
6
7
1
100Source Mohoriy and Grigg Journal water resources planning and management.
Sources of irrigation water and Improved Irrigation System
Groundwater is the primary source of irrigation area in the Saudi Arabia. According to Minatory of Agriculture 1999, there was 85.46 percent of the total irrigated area in Saudi Arabia, which estimated 1.19 million hectares dependent on groundwater. Rainfall is the second source for irrigation where there is 13.97 percent of irrigated area and some irrigated area used treated sewage water as a supporting source. The most of agricultural production in Saudi Arabia depends on groundwater except Jizan. Jizan depends on rainfall by 83.85 percent of its irrigated area (Alomran, 0000).
The main means of rationalizing the use of irrigation water is raising the efficiency of irrigation systems and use modern irrigation systems such as drip irrigation or spraying. Therefore, irrigation systems have been developed in Saudi Arabia. According to the comprehensive census in 1999, there was 47.68 percent of the total irrigated area that used modern irrigation system, followed by the traditional irrigation system were 30.3, and the irrigation system in more than one way by 22.2 during the same year. The modern irrigation systems deployed in parts of the Saudi Arabia where the rate in the eastern region is about 82.5 of the irrigated area. In Jawf and Tabuk, 82.14 69.32 of the total area was irrigated in each region.
Saudi Arabia has a limited water resource and the main water resource is groundwater. Agricultural sector is the largest consumer of the water. So, as a result of scarcity of water, Saudi government invested a lot of money to structure a large number of projects like dams and Project Irrigation and Drainage in Al-Hasa. Even though, Saudi Arabia still suffers of water deficit.
Chapter three
This chapter contains of two parts. The first part shows the Equilibrium Displacement Model through reviews of the previous studies and show different studies that used this model in different fields of economy. The second part views the construction of the Equilibrium Displacement Model we used in this study and how we build it. Here, we build base of a set of basic equations to describe the demands and supplies of both product and factor. Then, we used total differentiating these equations and converting them to elasticities. The elasticities yield a system of linear elasticities model to examine the different policies the Saudi government could use to find the effective production of wheat and saving the ground water.
Theoretical and Model Section
Market Equilibrium
Under competitive market, the price and quantity equilibrium founds when the supply and demand curves interact. At this point the quantity supplied equals the quantity demanded and the price which the producer will accept equals the price which the consumer is willing to pay. So, when the price increases (decreases) that will lead to surplus (shortage) of good or service.
Change in Market Equilibrium
We have seen how the price and quantity of a good or service determines in a market when the demand and supply curves intersect. Also, we have acknowledged about how supply and demand shift as a result of response to change in such variable as capital costs, raw material cost, income, population. We divided the variable which affects the demand and supply to two kinds. Endogenous variables are the quantity and price which are in the model but exogenous variables are what the value determined outside the model. Now we will see how that equilibrium changes in response to shift in the supply or demand curve or both of them when the exogenous variable changes.
There are several variables that cause to shift the supply curve to right, left, upward or downward and any shifting will cause to change in equilibrium price and quantity. One of these variables is input costs or raw material cost. Input cost could reduce by subsidizing when the government intervenes. The subsidy reduces the cost of input and leads the supply curve shift to the right which led to increase the quantity of supply. As result of shifting the supply curve, the equilibrium point will change. In addition, when variables, which affect on demand curve change, the demand curve will shift and the equilibrium price and quantity also will change. Also, the changing in the equilibrium point could happen because there is a change in demand and supply together.
Equilibrium Displacement Model
An equilibrium market can face shocks from a change in exogenous variable. The change on exogenous variables leads to destruction of the equilibrium market. To measure the change on equilibrium market, there are a lot of studies used in equilibrium displacement model. The equilibrium displacement model examines the effect of a change in exogenous variable. So, the equilibrium displacement model studies the impacts of small and finite changes in exogenous variable. The endogenous variables are measured as proportionate changes and are a function of proportionate changes in exogenous variables. Also, the EDM is useful to exam the impacts of multiple changes in exogenous variable.
The equilibrium displacement model has frequently used tools in agriculture economy. The equilibrium displacement model concerns about the proportional change on endogenous variable with respect to a proportional change of some exogenous variable. This model was developed by Muth (1964). Muth developed the reduced forms for proportional displacements from equilibrium for a system of equations of supply and demand for a product dependent on two factors of production and exogenous shifters for each of the functions. So, through elasticities and shared parameters and proportional change of exogenous variable, we can estimate the proportional change of endogenous variables. Muth applied this model in his own field of special interest, which is housing and urban land economy.
The EDM has some characteristics, which they made it as important tool in agriculture economy. According to Piggott 1992, the EDM is relevant in cases where sufficient data for econometric modeling may be unavailable, data are unreliable, or where data and extensive prior research results and experience are available to develop large-scale models of complex relationships. Also, Piggott 1995 noted the equilibrium displacement model be more clear with four assumptions which are (i) elasticities of endogenous are known and constant, (ii) elasticities with respect to exogenous variables are known and constant, (iii), technology of production is known and constant, (iv), Displacements are restricted to be in the neighborhood of equilibrium.
Additionally, Davis 2001 said the EDM formwork is appealing for three reasons (i) it is extremely flexible in modeling diverse economic phenomena ( ii) it is easy to implement as it only involves inverting some matrices of parameters that are not wed to only particular data set (iii) because of two, the results may be considered rather robust to econometric misspecifications.. On another hand, some of the studies used the EDM to analyze the effects in vertical market such as Alston (1991) and Salhofer, and Sinabell (1999). Also, there are some studies that used this model in horizontal market like Piggott (1995).
There are a lot of researchers who used the equilibrium displacement model in different topics. Gardner (1975) used this model and applied to investigate the relationship of retail food prices to farm prices. Sumner and Wohlgenant (1985) applied the term equilibrium displacement modeling to measure the effects of an increase in federal excise tax on cigarettes. In that study, Sumner and Wohlgenant (1985) used a log-linear equilibrium displacement in international trade. In 1988 Mullen, Wohlgenant and Farris used this model to examine the distribution of surplus gains in substitution between farm and non-farm inputs and Alston has a paper which is research benefits in a multimarket setting a review to evaluate distribution of welfare effect.
Also, there are some researchers who used this model in international studies. Duffy and Wohlgenant (1991) used this model in international trade to measure the effects of an export subsidy on the U.S cotton industry. Also, in 1995, R. Piggott, E. Piggott, and Wright used and analyzed the effect of incremental advertising expenditure by the Australian beef, lamb, and pork industries, domestic and export markets. Brown (1995) used EDM to measure the effect of cigarette taxes and smoking restrictions on tobacco price and quantities, and revenues to tobacco producing. Beghin, Brown, and Zaini (1996) investigated the impact of domestic content requirement on the US tobacco and cigarette industries. Al-Sultan and Davies used the model to measure the impacts of WTO and water policy change on Saudi Arabia. Bradley and Sumner (2008) assessed the effects of trade barriers and domestic support by simulating the effects of policy reform on global processing tomato markets.
Constructing the EDM model
We design a system simulation model to assess how changes in financial policy and import of wheat affect the production of wheat and demand for input factors. The system contains of basic equation in the domestic wheat market, which are demand and supply. But these equations have a variable, which the Saudi government is controlled that is subsidy. In the system, there are two domestic prices one of them faced by consumer and the second equals the marginal cost and the farmers determine the level of the agricultural product production of wheat. The Saudi government uses the gap between the price the producer accepted and the consumer willing to pay to determine the production level of wheat in Saudi Arabia.
Also, the government used the subsidy input factor to make the production of wheat as cheap and let the farmers produce more. In addition, the government made the wheat market closed. The equation is what happens for production of wheat when the Saudi government used its instruments of agricultural policy, and how that affects on saving the groundwater.
The system describes three parts. The first market is the domestic market through local supply and demand and how the instruments of agricultural policy affect on it. The second market is the input market and how the government can affect on the price of input. The third part is how government can make the wheat market closed or open. The model is found combining between good market and input market.
The model built base of a set of basic equations to describe the demands and supplies of both product and factor, describe the supply and demand of input factors and market clearing conditions.
QUOTE Wheat demand
QUOTE Supply price equals marginal cost
QUOTE Supply price equals the price demand plus per unit subsidy rate
QUOTE ) Demand Price equals world price minus import tariff.
QUOTE water demand
QUOTE other input demands
QUOTE water supply
QUOTE other input supplies
QUOTE Input price supply equals the input price demand plus the subsidy
QUOTE
QUOTE
QUOTE International market clearing condition
QUOTE Import equal the quota
Equation (1) describes the demand for wheat, D, which is function of price faced by consumer, QUOTE , and other factors which leads to shift the demand curve, QUOTE ,which is income, and QUOTE which is population. Equation (2) expresses condition that supply price, QUOTE equals the marginal cost to the farmers and determines the level of the agricultural product production, wheat. C is the total cost, which is function in the price demand of water, QUOTE , the price demand of non water factors, QUOTE , and the local production, Y. Equation (3) presents the supply price is the sum of the price demand, QUOTE , and per unit subsidy rate, . Equation (4) expresses how price demand determines, so, world price, QUOTE , and is the ad valorem tariff on imported wheat. Because the ad valorem is zero in Saudi Arabia that leads to the word price, QUOTE equals to the demand price, QUOTE . Equations (5) and (6) are derived factor demand from the cost function using Shepards Lemma. Equation (5) represents water demand and equation (6) represents the non water factors demand. Equations (7) and (8) are input factor supply equations with s1 and s2 being exogenous shift variables shucks. Equation (7) explains the water supply is function on the price supply of water, QUOTE and subsidy on producing the water, s1. Equation (8) explains the non water supply is function on the price supply, QUOTE and subsidy, s2. Equation (9) describes the relation between price supply of factor and the price demand of factor. Equation (10) represents aggregate demand of wheat equals total local production of wheat plus import of wheat and there is no export because the Saudi government prevents export of wheat. Equation (11) shows the import equals the quota, Q.
This model has assumption, which describes the market situation and producer behaviors. These assumptions include the market is competitive, all firms are identical, constant returns to scale and the producers produce a single and homogenous output. Also, the producers minimize the cost.
Next, the system has to total differentiating these equations and converting them to elasticities. The elasticities yield a system of linear elasticities model. The system consists of several parameters values like elasticities, input cost shares, and elasticities of input substitution. The model follows the tradition of Muth (1964), Gardner (1978), Piggott (1992), and this model inspired of Salhofer and Sinabell (1999), Rickard and
Sumner (2008).
So, the total differentiating the wheat demand yields QUOTE , then dividing both sides by the quantity demand, D, and multiplying the right hand side of the equation by QUOTE the first term, QUOTE by the second term and, QUOTE by the third term. After that, by ordering the right hands side and reducing form of the equation to get QUOTE .
We impose identities on the system and then we take the total differentials express the results in relative change and elasticities.
QUOTE
QUOTE
QUOTE
QUOTE
QUOTE
QUOTE
QUOTE
QUOTE
QUOTE
QUOTE
QUOTE
QUOTE QUOTE
QUOTE
Where E indicates relative change QUOTE , ( is the own price elasticity of demand for wheat, QUOTE is the income elasticity, QUOTE is the population elasticity, QUOTE is the share of total wheat growing costs for input QUOTE , QUOTE is Allen elasticity of input substitution between two inputs. QUOTE is the own price elasticity of supply of input QUOTE . In addition, Piggott (1995) noted the equilibrium displacement model be more clear with four assumptions, which are (1) elasticities of endogenous are known and constant, (2), elasticities with respect to exogenous variables are known and constant, (3) technology of production is known and constant, (4) Displacements are restricted to be in the neighborhood of equilibrium.
Then, these structural equations can be rearranged so that endogenous variables are a function of exogenous variables
QUOTE
QUOTE
QUOTE
QUOTE
QUOTE QUOTE
QUOTE QUOTE
QUOTE
Arrange equations (23) to (29) in matrix form QUOTE where A is a matrix of the demand for wheat, demand of input and supply of input elasticities. QUOTE is a matrix endogenous variable, QUOTE is a matrix of elasticities or coefficient of shifter variables, and X is a matrix of exogenous variables.
(z1(z20000EZ100- 2000EZ2000000E000000EQ000010ES1000001ES2000200
1(00000ED010-(1-(200EPd00-1(2- (210EY00-1- 1101EWD1000- 1010EWD20000- 201EX110-10000EX2
This system can be solved by moving matrix A to the other side where matrixes B and X are there. The solution will be as QUOTE , and we can indicate matrix QUOTE equals, thus, the system be QUOTE .
Chapter Four
Equilibrium Displacement Model needs different parameters and at least each parameter needs a study to estimate it. This chapter shows the parameters the models need them and views these parameters through previous studies in the part one. The second part shows the plan we used to do the study.
Data and Parameters Requirements
The EDM has some characteristics, which they made it as a good tool in agriculture economy. According to Piggott (1992), the EDM is relevant in cases where sufficient data for econometric modeling may be unavailable, data are unreliable or where data and extensive prior research results and experience are available to develop large-scale models of complex relationships. By looking to previous studies to get the parameters which the model needs and estimating some of parameters by using knowns, which we got them of previous studies, we can estimate.
In this model, we are looking on several parameters which each of them we can get it in as research or we can estimate it. Through this model we need to get the elasticities,(, (z1, (z2, and the share cost of the input factors, (i, which we find them in previous studies. Allen elasticity of input substitution and the price elasticity of input supply will be calculated by using some knowns and will be calculated rest of parameters i and i through the secondary data.
Price elasticity of wheat (()
The price elasticity of demand measures responsiveness of quantity of demand to a change in price with all other factors being constant. The price elasticity on goods could be elastic or inelastic.
Kahtani and Schreiner (1995) studies six groups of food and they said the food commodity inelastic while nonfood commodity is elastic in Saudi Arabia. Kahtani and Schreiner in 1995 estimated the price elasticity of cereals which include the wheat and it was -0.368.
Al-Sultan (2002) estimated local demand elasticity for eight groups of agriculture products in Saudi Arabia by using local supply elasticity and one of these groups contains maize, corn, rice, and wheat. Al-Sultan estimated the elasticities under three scenarios. The price elasticity for this group has a range between -0.078 to -0.099 under scenarios which has no restriction imposed of Saudi Arabia agriculture products. The price elasticity with restriction has a range between -0.162 to -0.187. So, the price elasticity of commodity of food is inelastic and realized the wheat is inelastic.
Al-Hamodi (1979) estimated price elasticity of wheat and he finds the elasticity is 0.149 and it is significant at 1 percent. In addition, Battal (1992) estimated the price elasticity of wheat by -0.7, which means when the price of wheat increases by 1, it leads to the quantity demanded of wheat reduced by 0.7 .
So, price elasticity of demand for wheat in Saudi Arabia is inelastic and it in range between -0.078 to -0.7. This study will assume the price elasticity of wheat is inelastic and it equals -0.39. The study is going to assume the price elasticity of wheat is -0.39 as average of the range.
Income elasticity ((z1)
To measure how increasing or decreasing income affects on good demand, economist uses the income elasticity. The income elasticity measures how sensitive demand of a good is to change in consumers income. Through income elasticity, economist can define if these goods are normal or inferior and classify goods to luxuries or necessities. To classify good to normal or inferior, the singe of the income elasticity takes positive or negative, and to classify goods to luxuries or necessities, the value of the income elasticity takes grated than one or less.
Kahtani and Schreiner (1995) estimated the income elasticities for six groups and the result for income elasticity for cereals is significant at 10 percent and it is 0.033. Al-Sultan (2002) estimated the income elasticity for the eight groups and the result reflects the group commodity, which contains maize, corn, rice, and wheat as normal goods and necessity. Al-Hamodi (1979) estimated the income elasticity of wheat per capita and it was 1.140 but it was not significant.
With this, paper going to assume wheat as normal good and necessity and has income elasticity equals 0.033.
Population elasticity ((z2)
A change in population leads to shift the demand of goods. So, the population elasticity measures by how much percentage the demand of the good when the population changes by a percent. Battal (1992) used the population a variable to estimate wheat demand and measures the population elasticity by 2.5. The population elasticity represents increasing the population by 10 leads to increase in the consumption of wheat by 25. So, this study is going to use Battal population elasticity.
Share cost of the input factors ((i)
Input cost shares for a competitive industry are calculated as
(35) (i Xi WiQP
Where (i is the share cost of the input, Xi is the demand on input, Wi is the price of input, Q is production quantity of output, and P is the price of output (Mullen elt, 1989).
The share cost of water in wheat production is estimated by 0.18 according to Al-Attar and Al-Dossary (1957). In 1977, Ministry of Agriculture and Water estimated the share cost of water by 0.16. Al-Nashwan (1988) estimated the share cost of water by 0.164. On another hand, California Water plan (1998) estimated the share cost of water for wheat by 0.14. As a result of the previous studies, there is some difference between them to determine the share cost of water, and the study is going to adopt the California Water plan because it is the newest reverence and it is close to the old study which estimated the share cost for specific good, which is wheat project at Saudi Arabia.
Elasticity of supply input (i)
The price elasticity of supply measures responsiveness of quantity of supplied to a change in price with all other factors constant. The price elasticity on goods could be elastic or inelastic. There are a lot of studies that estimated the elasticity of food commodities demand and input factors demand for developing and developed counties. But studies on the supply elasticity of input factors are scarce (Salhofer, 1999).
There are scarce empirical studies that estimate the supply elasticity of water factors and maybe there are no empirical studies in the Middle East countries. Wheeler et al (2008) estimated the elasticities of demand and supply for water allocation for one region along the Murray River in Australia for specific period (1997 2007). They found the overall price elasticity of supply for water allocation ranged from 0.89 to 1.79. So, this study estimated the supply elasticity for a region and for surface water, but the study look for elasticity supply for groundwater.
In the other said, there are a lot of empirical studies that estimated the price elasticity of irrigation water demand. Scheierling et al (2004) investigates variation in empirical estimates of the price elasticity of irrigation water demand and they reviewed approximately 40 studies published from 1963 to 2003. Scheierling et al found the irrigation water demand elasticities has ranged from -0.002 to -1.97 with mean of -0.51 and median of -0.22. In addition Kumar (2004) estimates the water price elasticity of demand in India and he finds the elasticity is high -0.902.
Also, these empirical studies estimate the price elasticity demand of groundwater such as Ogg Gollehon (1989). Ogg Gollehon (1989) estimated the irrigation groundwater demand elasticity and it has ranged from -0.22 to -0.34 for different regions. Nieswiadomy (1985) estimated the price elasticity demand for groundwater when energy is relatively cheap in 1973 and he finds it equals -0.29. While he estimated it in 1980 when energy is relatively expensive, he finds the elasticity rises to 1.24. Also, Salman et al (2004) estimated the price elasticity of groundwater demand in Jordon and finds the price elasticity of groundwater demand in the case of safe extraction rate is -0.866, but the elasticity with actual situation is -1.275. . Also, they found the price elasticity of groundwater demand became inelastic when the water supply decreased and the elasticities have ranged from -0.31 to -0.73.
So, based on these studies, it will be assumed that the groundwater supply has the same elasticities of demand. The assumption for supply elasticity for groundwater,1, is inelastic as most studies result and the value of supply elasticity be 0.3 because the price of energy is cheap and will assume the supply of groundwater is decreased.
In another hand, according to Salhofer (1999), a reasonable range of 2 is between 1 and 3 , and that because Salhofer (1997) drives the price supply elasticities for farm labor of 3.19, for operating inputs of 1.16, and for durable investment goods of 0.96. Also, because Salhofer (1998) drives the price supply elasticities for farm labor of 1.2, for operating inputs of 1.91, and for durable investment goods of 1.46. Consequently, there is assumption for supply elasticity for non water factors is 2.
Elasticity of substitution (ij)
Elasticity of substitution is a measure of the proportionate change in ratio of inputs, capita to labor ratio as example relative to the proportionate change in marginal rate technical substitute along an isoquant. In other words, the elasticity of substitution measures how easy it is to input for another while keeping the level of output constant.
Nieswiadomy (1988) estimates Allen partial elasticities of substitution for five inputs (ater, labor, center pivot, furrow, and wheel roll system) and Nieswiadomy finds the elasticity substitution between labor and water is 3.54 and the elasticity substitution between the furrow system and water 2.42. Also, Kumar (2004) estimated the substitutability between four inputs which are water, labor, capital, and material for several industries and estimated the Allen elasticity of substitution and Morishiam elasticity of substitution. The Allen elasticity of substitution between water and Capital is -1.848 while Morishiam elasticity of substitution between water and Capital is 0.893. So, that means, the Allen elasticity of substitution represents the relationship between water and capital is complement while Morishiam elasticity of substitution represents it as substitutes.
On another hand, most studies which used EDM in agriculture industries studies assumed the value of 0.1 for elasticity of substitution between input and other inputs (Mounter, Piggott and Mulle, 2005). Consequently, an input substitution elasticity of 0.1 has been assumed between water factor and non water factors.
Share of aggregate demand ()
Most Aggregate demand of agriculture commodities in Saudi Arabia combines of domestic production and import, but in some agriculture commodities, Saudi Arabia reached to self-sufficiency such as wheat (Al-Sultan 2002). Since 1984, Saudi Arabia reached self-sufficiency of wheat and aggregate demand of it provided by local production. In 2008, the Saudi Arabian ministry of agriculture has decided to reduce wheat production by 12.5 percent annually beginning with 2009.
So, in this paper we are going to assume there are two situations, first the wheat market in Saudi Arabia is close and that was before 2009 and the aggregate demand provided by local production and 1 equals one. The second situation, wheat market in Saudi Arabia is open and the government reduces the local wheat production by 12.5 percent annually. So, 1 and 2 will change year by year.
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