Subsidies interrupt flow of 'virtual water'

A trade in so-called "virtual water" arose as dry countries began importing commodities such as wheat and other basic grains that require a lot of water. As Arjen Hoekstra, an academic expert in water management, points out, this is a classic application of the theory of comparative advantage. Economies do what they are relatively good at. Wetter and more temperate regions, where the soil holds much more water and agriculture can rely on cheaper rainfall rather than expensive irrigation, export water to hotter, drier countries.

The World Bank estimates that 1340bn cu m in "virtual water", a quarter of all the water used on the planet to grow food, was traded in 2000. This can mean overturning millennia-old patterns of production, even importing traditional staple foods.

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But like any trade, the international commerce in virtual-water crops has distortions and inefficiencies. The most familiar reason - government subsidies to farmers - is sometimes given a national food security rationale. Egypt, for instance, still grows about half its own wheat.

In truth the provision and pricing of water for irrigation sometimes owes more to the clout of rich farmers than it does to comparative advantage.

Tony Allan, an academic at the School of Oriental and African Studies in London who developed the concept of virtual water, points at the rich Jordanian farmers who export water-intensive vegetables into damp Europe.

Some of the more blatant inefficiencies are clear to see, such as the alfalfa and wheat farms incongruously planted in the Saudi desert. The farms represent a woeful waste - using revenues from the extraction of oil to subsidise the extraction of water from a non-renewable aquifer deep underground. In the process, Saudi Arabia has become a big net exporter of wheat, though it uses about 3000 cu m of water - three times the global average - to produce a tonne of wheat, with production costs between four and six times the world price.

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Just like other farm support, these payments have ambiguous effects. They lower world prices for food, benefiting consumers in food importing countries such as in Africa. But they also undercut small farmers in those countries who are trying to compete but do not receive the same subsidised water. It may be sensible for richer countries to import as much virtual water as they can, since they can more easily switch workers and investment from water-intensive to non-water intensive farming, or from farming to manufacturing and services.

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It is, however, a logic that the market in virtual water will follow, at least until the price of water around the world is brought into line with its real cost.

Interesting article. Might be worth a diary if someone has anything smart to comment. (I don't right now)

In the long run, we're all dead. John Maynard Keynes