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Determinants of Virtual Water Flows in the Mediterranean

Andrea Fracasso (), Martina Sartori () and Stefano Schiavo

No 75, IEFE Working Papers from IEFE, Center for Research on Energy and Environmental Economics and Policy, Universita' Bocconi, Milano, Italy

Abstract: The aim of the paper is to investigate the main determinants of the bilateral virtual water ‘flows’ associated with international trade in agricultural goods across the Mediterranean basin. Virtual water refers to the volume of water used in the production of a commodity or a service. The exchange of water as embedded in traded goods brings about the so-called virtual water ‘trade’. We consider the bilateral gross ‘flows’ of virtual water in the area and study what export-specific and import-specific factors are significantly associated with virtual water ‘flows’. We follow a sequential approach. Through a gravity model of trade, we obtain a “refined” version of the variable we aim to explain, one that is free of the amount of flows due to pair-specific factors affecting bilateral trade flows and that fully reflects the impact of country-specific determinants of virtual water ‘trade’. A number of countryspecific potential explanatory variables is presented and tested. To identify the variables that help to explain the bilateral ‘flows’ of virtual water, we adopt a model selection procedure based on model averaging. Our findings confirm one of the main controversial results in the literature: larger water endowments do not necessarily lead to a larger ‘export’ of virtual water, as one could expect. We also find some evidence that higher water irrigation prices reduce (increase) virtual water ‘exports’ (‘imports’).

Keywords: virtual water ‘trade’; Mediterranean countries; Bayesian model averaging; weighted average least square. (search for similar items in EconPapers)
JEL-codes: F18 Q25 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-agr and nep-int
Date: 2014
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