The concept of virtual water as a policy tool?

Table of contents

1. INTRODUCTION

2. THE CONCEPT OF VIRTUAL WATER
2.1 Definition of “virtual water”
2.2 International trade of virtual water

3. RELATIONSHIP BETWEEN WATER SCARCITY AND VIRTUAL WATER TRADE BALANCE

4. POTENTIAL ADVERSE EFFECTS AND LIMITATIONS OF VIRTUAL WATER TRADE
4.1 Production site
4.2 Consumption site
4.3 Green and blue water

5. CONCLUSION

6. BIBLIOGRAPHY

1. Introduction

Water is distributed unevenly over the globe, making it scarce in many regions of the world. This scarcity is projected to increase significantly due to rapid population growth and increasing per capita affluence, leading to higher per capita water consumption. Global climate change may be an additional factor intensifying water shortness in some regions due to an increasing number of drought events. As water scarcity immediately effects agricultural production, food supply is at risk of becoming insecure in countries poorly endowed with water.

ALLAN introduced the concept of virtual water in mid 1990s, stressing that import of food crops and thereby of virtual water could be the solution to water scarcity and food insecurity in water deficient countries (see ALLAN, 1996). Meanwhile, the trade of virtual water is strongly promoted in the water resources literature as a policy tool serving to enhance global water use efficiency, release pressure on nations’ short water resources, ensure food security, and even to prevent wars over water (see ALLAN, 1998, p.545). This is supported by the suggestion that food staples are readily available on the world market at prices undercutting the costs of production (see ALLAN, 1996, p.1, YANG AND ZEHNDER, 2002, p.1422). Following its potential benefits, ALLAN even called it ‘‘the dream solution in water-stressed economies’’ (see ALLAN, 2002, cited in ROTH AND WARNER, 2007, p.258).

This paper aims at calling attention to the limitations of the concept and the adverse effects virtual water trade can have on the exporting aswell as on the importing countries. While the implementation of virtual water trade may lead to the desired outcome in terms of water savings, it may be socially, economically, and environmentally detrimental, if its many implications are not taken into account and economic and social adjustments to it are lacking.

The paper is structured as follows: in chapter 2, the concept of virtual water will be explained by its definition and application to international trade, thereby highlighting its potential in water saving. Chapter 3 is devoted to the analysis of the relationship between water scarcity and virtual water trade, showing that water scarcity is only in few cases the driver of importing water-intensive commodities. The chapter will close with the concluding remark, that the utility of the virtual water concept is rather limited in the allocation of scarce resources. In the fourth chapter the negative consequences of virtual water trade aswell as the limitations of the concept if used as single tool will be discussed. The conclusion will summarize the main results of the previous chapters and provide some ideas about how the concept might be applied in order to arrive at a sustainable development.

2. The concept of virtual water

2.1 Definition of “virtual water”

The discussion on virtual water came up in the mid 1990’s, when Tony Allan introduced the concept in relation to international crop trade (see ALLAN, 1996). The virtual water content of a commodity is defined as the amount of water needed to produce one unit of an agricultural or industrial good (see HOEKSTRA, 2003, p.13, HOEKSTRA AND HUNG, 2003, p.26). Being the inverse value of water productivity, virtual water content is directly related to the water use efficiency (defined as the “ratio of product output over water input” (see CANAGARATNA, 2007, p.3)) in the production process.

A product’s virtual water content can either be calculated specific to its production site, refering to the amount of water that is actually required to produce one unit of the good at its place of production, or specific to its consumption site, refering to the amount of water that would have been required to produce one unit of the good at the place of consumption (see CHAPAGAIN ET AL., 2006, p.1800). Due to distinct water use efficiencies in the country of consumption and the country of origin, virtual water content of the same product will also differ when calculated specific for either consumption or production site.

2.2 International trade of virtual water

International trade of commodities implies trade of virtual water. When a country imports / exports an agricultural or industrial good, it imports / exports water in a virtual form (see HOEKSTRA, 2003, p.13, HOEKSTRA AND HUNG, 2003, p.25, RENAULT, 2003, p.86). Following this relationship between international trade and world water resources, virtual water trade is strongly promoted in the water resources literature as a tool supporting regional water security on the one hand, and global water use efficiency on the other hand. As agriculture is the world’s major water user - it accounts for more than 80 per cent of the global water withdrawal (see YANG ET AL., 2006, p.443), a country’s capacity to produce food is intrinsically linked to its water endowments; accordingly, trade of virtual water is particularly recommended for food crops.

Regional water security can be enhanced in a water-poor country if it imports water-intensive products from a water-abundant country instead of producing them domestically, and thus can save some of its scarce water resources. The resulting water savings can be calculated by multiplying the quantity of imports by their consumption-site specific virtual water content. In this context, virtual water trade can be seen as a substitute for domestic water resources, which can contribute significantly to a regions’ water security (e.g. Jordan’s annual virtual water imports are five times that of its renewable water resources (see CHAPAGAIN AND HOEKSTRA, 2008, p.22)). According to the advocates of virtual water trade, import of water-intensive food crops will firstly reduce domestic water demand and thereby alleviate water stress in water-scarce regions, and secondly increase food security for those countries where water resources for food production are limited (see ROTH AND WARNER, 2007, p.258). YANG AND ZEHNDER state that “food imports are imperative for compensating water resource deficiency”, and project that virtual water import will gain increasing significance due to water scarcity in a rising number of countries (see YANG AND ZEHNDER, 2002, pp.1413). ALLAN even suggests, after mentioning that the Middle East countries are water deficient since decades, that “the region’s water deficit is not serious because global systems - trade - balance the (…) deficit” (see ALLAN, 1996, p.7).

Globally, physical water savings are realized, if products are traded from a place with high water productivity to places where water productivity is low. The differential between the production-site specific virtual water content and the consumption-site specific virtual water content of all traded products reveals the global saving or loss of water resulting from international trade. The analysis of international virtual water flows shows that the direction of flow is primarily from countries with high water productivity to countries with low water productivity (see YANG ET AL., 2006, p.443). On average, 1.2m³ of water are required to produce one kilogram of grain in exporting countries - in contrast 2.0m³ per kilogram would have been consumed if the grain was produced in the importing countries (see CANAGARATNA, 2007, p.4). CHAPAGAIN ET AL. estimate the saving of global water resource through international trade of agricultural products being 352 Gm³ per year, or 6 per cent of global agricultural water use (see CHAPAGAIN ET AL., 2006, p.455).

The economic rationale behind the trade of virtual water, which is suggested in the water resources literature, is that countries should export those products for which they possess a comparative advantage (products using factors abundantly available in the country), and import those products in which they a have comparative disadvantage (products using relative scarce factors) (see DIETZENBACHER AND VELÁZQUEZ, 2007, p.192, HOEKSTRA, 2003, p.14). Applied to water as a factor of production, water-intensive products should be produced at places well-endowed with water resources, and imported, where water resources are scarce.

3. Relationship between water scarcity and virtual water trade balance

Given that water is an important factor of production, in particular for agriculture, one might expect that water scarcity is the driving force behind virtual water imports, or in other words, that a correlation exists between a country’s water endowments and the value of its virtual water imports / exports. ALLAN supports this idea in stating that “a major indicator of the scale of the water deficit of an economy is the level of its food imports”(see ALLAN, 1996, p.4). This assumption does not, or respectively only partly, hold true in reality (see BERRITTELLA ET AL., 2007, p.1801, KUMAR AND

SINGH, 2005, p.759, YANG ET AL., 2006, p.443). Figure 1 illustrates that a correlation can not be confirmed when plotting renewable water resources against net export:

Figure 1: Net virtual water exports and renewable water resources. Observations above the zero line reflect net virtual water exports, while observations below the zero line reflect net imports (adopted from WICHELNS, 2010, p.2210)

For some countries very high water scarcity is the driving force behind import of water-intensive goods, e.g. Kuwait, Qatar, Saudi Arabia, Jordan, Oman. YANG ET AL. demonstrated, that below a certain water resources threshold (1500m³ per capita in the 1990s), a strong correlation exists between the cereal imports and the renewable water resources of a country (see YANG ET AL., 2003, p.115), above it no such relationship could be observed.

Some countries are well-endowed with water and are still net importers of virtual water, while other countries with rather scarce water resources decide to export food and hence, virtual water. Of the total net virtual water trade volume, 20.4 per cent flows into water-scarce countries, 68.1 per cent into water-rich countries^[1] (see YANG ET AL., 2006, pp.449). For the latter, limitations in the availability of water will hardly be the reason for agricultural imports.

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^[1] Classification according to Falkenmark’s index of physical water scarcity: water scarce countries are endowed with 1700m³ per capita or less, for non-water scarce countries the minimum is 2500m³ per capita (see FALKENMARK AND WITHSTAND, 1992, cited in YANG ET AL., 2006, p.449)