Water Scarcity and Virtual Water Trade in the Mediterranean

Abstract

Virtual water trade refers to the implicit content of water in the production of goods and services. When trade is undertaken, there is an implicit exchange of water, and countries can therefore be classified as net importer or net exporter of water. Furthermore, when water gets scarce, water intensive goods become more expensive to produce and the economy compensates through higher water imports. This paper is about applying the concept of virtual water, in a general equilibrium framework, to the problem of future water scarcity in the Mediterranean area, also induced by the climate change. The aim is assessing to what extent water trade is a viable adaptation option to the problem of water scarcity. To this end, a computable general equilibrium model, with specific disaggregation singling out Mediterranean countries, is extended with satellite data on sectoral water consumption. Information on the marginal productivity of water (a non-marketed, hidden production factor) is used to simulate the effect of reduced water availability in the multifactor productivity of agriculture industries. Scenarios of water availability, in turn, are taken from climatic models. Anticipated results are that virtual trade may curb the negative effect of water scarcity, yet the consequences in terms of income and welfare remain quite significant, especially for some regions.