Virtual Water Trade: The Implications of Capital Scarcity

38 Pages Posted: 25 Apr 2018 Last revised: 10 May 2018

See all articles by Mohamad Afkhami

Mohamad Afkhami

Stevens Institute of Technology - School of Business

Thomas Bassetti

University of Padua - Department of Economics

Hamed Ghoddusi

Stevens Institute of Technology - School of Business; Economic Research Forum

Filippo Pavesi

Università Carlo Cattaneo (LIUC) - Institute of Economics; Stevens Institute of Technology - School of Business

Date Written: April 22, 2018

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 Development, Heckscher-Ohlin

JEL Classification: F14, F18, O13, Q25, Q27, Q56

Suggested Citation

Afkhami, Mohamad and Bassetti, Thomas and Ghoddusi, Hamed and Pavesi, Filippo, Virtual Water Trade: The Implications of Capital Scarcity (April 22, 2018). Available at SSRN: https://ssrn.com/abstract=3166874 or http://dx.doi.org/10.2139/ssrn.3166874

Mohamad Afkhami

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

Thomas Bassetti

University of Padua - Department of Economics ( email )

via Del Santo 33
Padova, 35123
Italy

Hamed Ghoddusi (Contact Author)

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

HOME PAGE: http://www.ghoddusi.com

Economic Research Forum ( email )

Cairo
Egypt

Filippo Pavesi

Università Carlo Cattaneo (LIUC) - Institute of Economics ( email )

21053 Castellanza (VA)
Italy

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

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