Morocco is in the process of formulating a rural development strategy aimed at generating rapid and efficient income growth in rural areas with positive repercussions in the rest of the economy. In this study, an economywide model focused on Morocco’s rural economy is used as a laboratory for analyzing issues at the core of such a rural development strategy. The features of the model are summarized in a separate box at the end of this summary. The base-run solutions for 1994 and 2000 are calibrated to replicate simulation results for a basic reform scenario generated by the RMSM (Revised Minimum Standard Model) of the World Bank. This scenario incorporates the implementation of a basic reform program including a smaller government, increased government savings and reduced micro-level price distortions (reduced non-tariff barriers and partial unification of the rates for indirect taxes and import tariffs), paving the way for a higher GDP share allocated to investment. The model is used to explore the effects of alternative scenarios for water tariffs and sales, and supply-side advances (irrigation expansion, and accelerated productivity growth, both in agriculture and other sectors). Among these, instruments of tax policy and irrigation expansion are under the direct control of policymakers whereas other supply-side shifts are less directly influenced by government actions.

In the base scenario, the major macro aggregates closely replicate the World Bank RMSM simulation (including growth in real GDP at an annual rate of 3.1%), involves slower growth in agriculture (especially for cereals-legumes and livestock products) than in other sectors, primarily the result of reduced border protection. While average household per-capita incomes increase by 10% between 1994 and 2000, income growth is slower in rural areas, especially for farm households, who depend on returns from water and land for the bulk of their incomes. These results reinforce the need to develop a strategy for rural development that speeds up rural income growth and generates positive economywide repercussions.

In Morocco, irrigation water is subsidized for farmers in large-scale irrigation (LSI) schemes, covering slightly less than half of the permanently irrigated area. Such subsidies lack social justification (as a group, the farmers who benefit from the subsidy are not less well off than others), and absorb resources that more fruitfully could be allocated to other purposes (for example adding to government savings and/or to government spending in areas of higher social priority). Model simulations confirm that, while the imposition of a higher water tariff has the drawback of hurting LSI farm households, it has the advantage of improving the government’s fiscal position. If the water tariff hike is combined with farmer water sales, the impact on these farmers is cushioned while significant quantities of water are liberated for use elsewhere in the economy. In addition to paving the way for a more efficient sectoral allocation of water (inside agriculture and between agriculture and other sectors), such water sales may also encourage water-saving technical change based on investments financed by the farmers themselves.

The national plan for irrigation expansion, including proportional increases in irrigated areas and water supply, has a positive impact on macro indicators and household incomes, especially for the rainfed farm households who own the land that is converted from rainfed to irrigated. However, the program has a negative impact on existing irrigated farm households (who initially control all irrigated land and water resources) since they face declining land and water rents. The benefits of the program may be measured by the increase in real factor incomes that it brings about. Benefit-cost analysis, drawing on this information and separate cost data, suggests that internal rate of return of the program (the discount rate at which the net present value is zero) is around 8-10%, i.e., a fairly moderate rate of return. Whether irrigation expansion should be undertaken or not depends not only on the rate of return for the program; it is also influenced by the returns to competing alternative projects.

Productivity growth is crucial for raising growth in production and incomes. A set of simulations explores the impact of accelerated growth in total factor productivity for different agricultural subsectors, for aggregate sectors (agricultural, rural non-agricultural, and urban), and for the economy as a whole. The effects are uniformly positive, both in terms of macro indicators (including GDP growth and employment generation) and household incomes. The gains are shared widely in the sense that no household group loses in absolute terms. However, in relative terms, urban households gain the most because they derive the bulk of their incomes from factors that are intensively used in dynamic sectors facing high income and price elasticities of demand. The only exception to this anti-rural distribution of gains is the case of accelerated productivity growth for non-agricultural rural activities, primarily producing non-tradable commodities, where the rural households gain more than their urban counterparts. This distributional effect stems from the fact that these commodities, whose relative prices decline, primarily are demanded by households and producers in rural areas. Given the aims of a rural development strategy, rural non-agriculture is a high-priority area for productivity-raising efforts.

In a final set of simulations, the model is used to explore win-win scenarios that combine elements of the above simulations — more rapid productivity growth in rural (agricultural and non-agricultural) activities, higher water tariffs, and water sales — with improved penetration of export markets for fruits and vegetables. The results demonstrate that, under realistic assumptions, it is possible to design a policy package and resulting development path that combine rapid and efficient growth in incomes and production throughout the economy with an improved relative position for the rural population.