Virtual Water Trade: The Implications of Capital Scarcity

We investigate whether virtual water trade may alleviate the initial unequal distribution of hydric resources. On average, countries that are relatively abundant (with respect to capital) in the combined availability of water and arable land are, in absolute terms, scarce in capital and rich in land rather than water. Thus, less developed countries that lack capital may end up specializing in water-intensive agricultural goods, even if their water resources are not plentiful. Our empirical analysis provides evidence that this may indeed be the case, suggesting that virtual water trade does not reduce the inequality in water content of consumption across countries.