The tax and subsidy system in Egypt in 1986-88 was very distorted, involving large, sectorally variegated, output taxes and subsidies. In agriculture, there were also major input subsidies and no charges for water. In this paper, an 11-sector,computable general equilibrium (CGE) model is used to capture this mix of policies,focusing on land and water use in agriculture and on the links between agriculture andthe rest of the economy. The model combines an optimizing, programming model of land and water use in agriculture with a simulation model of the non-agricultural sectors. Empirical results indicate that policies in 1986-88 were biased against agriculture and led to a water-conserving structure of agricultural production. Had Egypt introduced markets for water in 1986-88, the equilibrium market price would have been close to zero — land, not water, was the binding constraint. Policy reform increases both aggregate welfare and the demand for water. Water demand is inelastic and policy reform on the output side would strain the existing system of water distribution, since water would become much more valuable than land to agricultural producers. Given the initial policy bias against agriculture, policy reform would favor rural employment and lead to reduced pressure for rural-urban migration.
the economywide impact of policy reform
International Food Policy Research Institute (IFPRI)