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Virtual Water Trade: The Implications of Capital Scarcity

Mohamad Afkhami (), Thomas Bassetti (), Hamed Ghoddusi () and Filippo Pavesi
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Mohamad Afkhami: Stevens Institute of Technology
Hamed Ghoddusi: Stevens Institute of Technology

No 03/2018, Working Papers from University of Verona, Department of Economics

Abstract: The original idea behind the virtual water (VW) concept is that water-abundant countries will become producers of water-intensive goods and consequently net exporters of water, and this will alleviate the initial unequal distribution of hydric resources. We criticize this optimistic view by introducing empirical evidence that is consistent with the Heckscher-Ohlin model of international trade. We find that, though virtual water exports are increasing in the combined availability of water and arable land when comparing countries with a similar level of available water-land resources, those with higher (lower) levels of physical-human capital tend to be net importers (exporters) of water. This result relies on the intuition that high levels of capital accumulation lead water to become a relatively scarce factor in developed countries. Thus, while more developed countries shift away from agriculture, less developed countries that lack sufficient capital do not have this option and end up using water resources even if they are not abundant. Such a trade pattern could create immediate economic benefits for less developed countries, but also exerts pressure on their water resources. Therefore, prioritizing economic development in countries that have limited water availability, may be crucial to avoid excessive usage and depletion of global water resources.

Keywords: Virtual Water; International Trade; Global Water Trade; Economic Devel- opment; Heckscher-Ohlin (search for similar items in EconPapers)
JEL-codes: F14 F18 O13 Q25 Q27 Q56 (search for similar items in EconPapers)
Date: 2018-05
New Economics Papers: this item is included in nep-agr and nep-int
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