Virtual Water: A Critical Assessment - World...
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Virtual Water: A Critical Assessment
Hamed Ghoddusi (Stevens Institute of Technology, NJ), MohammadAfkhami (Stevens Institute of Technology, NJ), and Filippo Pavesi
(University of Verona, Italy)IWREC 2016
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Agenda
Reminder about the origins of virtual water (VW)
Possible criticisms and concerns
Empirical evidence
Conclusion and future steps
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Motivation: Global Water Resources
Global versus local endowment of fresh water
Sufficient per capita renewable fresh water resources at the global level(6000 cubic meters)
Spatial mismatch: uneven distribution of water resources
Decreasing endowment and increasing unevenness over time
Popular quote: ”many of the wars of the twenty-first century will beabout water rather than oil”
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Cross Country Renewable Water Endowments Over Time
Raw Data Source: World Bank
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Virtual Water (VW)
A term for quantifying water embedded in goods (Allan 1994)
The promise: the uneven endowment problem can be mitigatedthrough indirect trade of water:
Water scarce countries can offset their shortage by importing waterintensive goods
Largest group of traded VW: cereals, meat, and oil seeds
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VW Theory from Economic Theory’s Perspective
Positive: can the trade of water be explained using international trademodels?
Normative: what are welfare effects of observed water trade?
Policy: what are optimal agriculture trade policies to promoteefficient virtual water trade?
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Extensive Literature on Evaluating VW
Theoretical trade models: Ansik (2010), Reimer (2012)
Global empirical evidence: Delbourg and Diner (2015), ...
Regional empirical studies: Hakimian (2003), Ma et al (2006), ...
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Relevant Trade Theories for (Embedded) Water Trade
Ricardian: water productivity differences
Heckscher Ohlin (HO): water endowment differences
Trade costs and gravity model: lower distance and trade costs
Krugman/Melitz: economy of scale and monopolistic competition
Crops diversity: local climate and soil characteristics
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The Heckscher Ohlin Model
2∗2∗2 trade model:
Countries X and Y with different endowments of water and capitalGoods 1 and 2Production factors water (W) and capital (K)
Country X is capital abundant and country Y is water abundant. i.e.,KXWX
> KYWY
Prediction: water-rich country will export water-intensive goods
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The Heckscher Ohlin Model
Figure: Cone of Diversification
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Critical Review of VW
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Vague or Weak Aspects
1 Definition of ”water abundant”
Empirical behavior: water versus land endowment
2 Possibility of reverse flow of water (from water-poor to water-richcountries)
3 Local versus global water scarcity
4 Green versus blue water
5 A trade model with under-priced factors
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Critical Point #1: Definition of Abundance
What is a water abundant country is one which has a high level of:
Per-capita water endowment?
Ratio of water to other production factors?
Endowment of water and land?
Absolute (no per-capita) water endowment?
Efficiency in water use?
Arguments and models for each case
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Psuedo-Trade
In order to assess the logarithmic relation between traded flows and arableland, a psuedo logarithmic function is introduced:
Pseudo − flow =
{−log(|Netflow |), if NetFlow ≤ 0
log(Netflow), otherwise(1)
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Arable Land vs Water Flow
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Arable Land vs Water Flow
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Critical Point #2: Possibility of a Reverse Flow
Net flow of water trade: from arid to water-abundant regions!
Pressure on water resources of water-poor country
Empirical evidence/observations
North-South China, East India, ...Water-poor countries: e.g., Mongolia, AfghanistanWater-abundant countries: Japan, UK.
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HO Model of Reverse Trade
Two countries:
Country A: low level of water, lower level of capitalCountry B: high level of water, higher level of capital
Autarky:
Country A: consumes water-intensive goodsCountry B: consumes capital-intensive goods
Trade:
Both countries consume the same type of goods; however, B consumesa scaled bundleA: net exporter of water, B: net importer of water
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Consumption Bundles Before and After Trade
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Critical Point #3: Local and Global Scarcity of Water
Using Virtual Water to Inform Public
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Using Virtual Water to Inform Public
Source: Vanham et al (2013)
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Producing Outside of the Cone: Land Scarce Countries
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Critical Point #4: Source of Water
Depletion of underground water resources is a chief concern: bluewater
Green water use is mainly limited to agriculture
Environmental effects of green water footprint less severe (also notreceived an attention in the literature)
Asymmetric problem: flow (green) versus stock (blue)
One side solving an optima resource extraction problem!
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Example: Iran’s Import and Export of Virtual Water
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Critical Point #5: Water Price
HO model assumes a market clearing constraint
Local scarcity determines the optimal bundles of production
Water price is zero or near-zero in many regions
Signal of scarcity?
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Total Water Content and Crop Prices
Data Source: IMF and FAO
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Blue Water Content and Crop Prices
Data Source: IMF and FAO
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Green Water Content and Crop Prices
Data Source: IMF and FAO
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Conclusion
The potential of virtual water trade to reduce water endowment canbe limited by land (and possibly capital and labor) endowments.
Definition of water abundance: “total water endowment”, “relativewater endowment”, and “per capital water endowment”
The contrast between local and global scarcity of virtual water
Better measures to compare blue/green water content to quantify thepattern of trade and the pressure on water resources of differentcountries.
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