DP9030 | The Global Economics of Water: Is Water A Source of Comparative Advantage?

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01/07/2012

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Abstract

Freshwater scarcity is bound to be a major challenge of the 21st century. Drawing on newly available data, I investigate to what extent countries make efficient use of the very uneven water resources on a global scale. In particular, I find that countries that are relatively water abundant tend to export more water-intensive products. This evidence supports the hypothesis that water is a source of comparative advantage. My findings also indicate that water contributes significantly less to the pattern of exports than the traditional production factors such as labor and physical capital. In light of climate change, this suggests relatively moderate disruptions to trade on a global scale due to changing precipitation patterns. My results do not provide consistent evidence that there is a difference in the extent to which water determines the pattern of trade between water-scarce and water-abundant countries.