The Global Economics of Water: Is Water a Source of Comparative Advantage?

Abstract

T he recent severe drought in key US farming states has focused attention on water issues. While some observers worry primarily about rising food prices in the wake of droughts, others see the drought as evidence that freshwater scarcity is bound to be a major challenge of the twenty-first century. Almost one-fifth of the world's population currently suffers the consequences of water scarcity, and this number is expected to increase (World Water Assessment Programme 2009). Population growth, rising standards of living, and the diet and lifestyle changes they imply will continue to increase the demand for water and strain available water resources. Pollution may also challenge the fresh water that can be used. In addition, discussions of climate change and the implied disruptions of the hydrologic cycle have only heightened concerns about water scarcity. In spite of the reports about an impending water crisis, it is important to realize that major concerns about water availability stem especially from the very uneven global distribution of water. The world as a whole is not running out of water. For one, the hydrologic cycle of evaporation, condensation, and precipitation makes fresh water a finite, but renewable, global resource. In addition, there are enormous quantities of water available, on the order of trillions of gallons of water per capita.1 However, while many countries 1 See Young and Haveman (1985). Even though only a very small fraction of this amount is not salty and accessible, there is more than enough fresh water on earth to satisfy the growing demand, especially since water desalination is always an option, See Gleick (2009) and Richter (2012).

Determinants of Virtual Water Flows in the Mediterranean

“…Among the many, we identify four categories, some of which have been used by other studies investigating similar issues, at regional or global scale, by applying a gravity model of trade or different methodologies (as instance, see Yang, et al, 2003;Lenzen et al, 2012;De Fraiture et al 2004;Ramirez-Vallejo and Rogers 2004;Yang and Zehnder 2007;Debaere 2014;Fracasso 2014;Novo et al 2009). A first group of candidates is composed by the variables expressing the mass of the countries involved in trade, that is the population of both the exporting and importing country, taken in logs.…”

“…Kumar and Singh (2005), for instance, show that water endowments should be considered in relative terms with respect to the amount of arable land. Indeed, if one investigated the impact of water scarcity on VW 'flows', in line with the concept of relative factor abundance encompassed in the Hecksher-Ohlin international trade theory, she would need to focus on the relative endowments of all productive factors across countries and on the relative factor-intensities of all (traded and non-traded) products (see Debaere, 2014 andFracasso, 2014). While Debeare (2014) finds evidence that water availability affects the composition of trade flows in a way consistent with the Hecksher-Ohlin paradigm, Fracasso (2014) concludes that bilateral VW 'flows' are affected both by the classical determinants of trade and by national water endowments as well as by the level of pressure on water resources.…”

Agricultural virtual water flows within the United States

“…In particular, the global food trade system impacts water resources, since the vast majority of water withdrawals goes toward producing food [Godfray et al, 2011;Gleick, 2011;Foley et al, 2011]. In fact, since water is such a crucial factor in the production of food, it influences the trade patterns of nations [Reimer, 2012;Debaere, 2014]. The water resources used to produce food commodities are ''virtually'' transferred with these commodities, in a ''virtual water trade'' [Hoekstra and Chapagain, 2008], with important implications for both food and water security [Porkka et al, 2013].…”

Water markets as a response to scarcity

“…The basic problem is that water availability and needs are mismatched in space and time, and rearranging water's availability with human needs can be very expensive and ecologically damaging. As a result, increasing water demand due to population growth and rising living standards is straining locally-available water resources in many parts of the globe, and climate change will worsen an already bad situation in many water-scarce areas (Droogers et al, 2012;Debaere, 2013). Calls for better water management to alleviate scarcity are being heard around the world (United Nations, 2012).…”