The Future of China's Economy

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It's hot and damp in southeastern China this time of year.  So reports a relative of mine working in the area who called to chat a few days ago.  He was suffering through another day without air conditioning, in the middle of yet another regional power outage due to a shortage of coal.  This occurrence is evidently not uncommon.  We hear a great deal in the U.S. about the unstoppable juggernaut of the Chinese economy, but sometimes I wonder if the Chinese aren't setting themselves up for a stumble or two.

(Update: For more on resource demands, see my subsequent post "More on China's Economy, Food Production, and Food Demand".)

Many of the signs point to inevitable economic superiority.  The Carnegie Endowment for International Peace released a report last week that projects China's economy will overtake that of the U.S. by 2035 (Yahoo News). "China's Economic Rise--Fact and Fiction", by Albert Keidel, concludes that China's economy is now dominated by internal growth rather than exports, and that China's economy will be twice that of the U.S. by 2050.  Keidel gives the nod to financial and bureaucratic tangles as the primary threats to growth, but does not appear particularly concerned about environmental damage and pollution. He argues that:

The record for several other East Asian economies argues that pollution is unlikely to undermine China's growth in the coming decades. In particular, Japan, South Korea, and Taiwan all passed through similar periods of serious pollution associated with rapid industrialization. In these cases, policy responses were also delayed but eventually reduced pollution levels that in some dimensions were worse than China's today.

Maybe so, but, depending on how you look at the numbers, the cost of pollution may be wiping out all of China's GDP growth.

(Update 25 July, 2008: Here is a video feed from Fora.tv of a panel discussion at the Carnegie Endowment for International Peace discussing the "Fact and Fiction" report.  I haven't watched the whole thing yet...)

Attempting to Account for the Costs of Pollution

For most of the last decade, China's government has downplayed the cost of environmental damage to the country's GDP.  However, according The Economist, in March of 2008, Pan Yue, a deputy minster at the State Environmental Protection Agency (SEPA), publicly estimated that environmental damage reduces GDP by as much as 13%.  As recently as May, 2006, the official estimate was only 3% of GDP for 2004, a tally contained in the first and only "green audit" of the economy.

The direct costs to human life are substantial, but official estimates are also variable.  A study by SEPA and The World Bank, published last year, "The Cost of Pollution in China", estimates that pollution is directly responsible for at least 750,000 deaths a year, while in a 2006 speech Mr. Pan stated that approximately 70% of China's two million annual cancer deaths were caused by pollution.

The disparity in these figures is evidently caused by political tension between different parts of the Chinese government.  Both the health findings and the future of the "green GDP audit" were evidently compromised by political infighting between state scientists, regional leaders, and officials in other ministriesThe New York Times reported that:

The official explanation was that the science behind the green index was immature. Wang Jinnan, the leading academic researcher on the Green G.D.P. team, said provincial leaders killed the project. "Officials do not like to be lined up and told how they are not meeting the leadership's goals," he said. "They found it difficult to accept this."

Here is the point: Even a 10% reduction in Chinese GDP would, in effect, zero out the overall growth of the economy.  Viewed this way, despite its role in the global economy, any "wealth creation" and growth in China may be accounted for entirely by the cost of degrading the local environment and increasing human disease and death.  You can understand how government officials might be uneasy about publicizing this figure.

According to officials at The World Bank, its "Cost of Pollution" report was similarly abridged for political reasons; "China's environmental agency insisted that the health statistics be removed from the published version of the report, citing the possible impact on 'social stability'."  As a result, one-third of the document was reportedly withheld from publication.  The tension between open communication and central control, and between development and damage, is evident in a press release from Gov.cn, the Government's official web site:

Even though the economic growth characterized by "high consumption, high pollution and high risk" is of its own historical significance in China, China's economy has been in the bottleneck period of resources and energy today and it cannot bear any risks of resources exhaustion.

Meanwhile, Chinese society has also entered the period with various conflicts protruding in which per capita GDP is about 1,000-3,000 US dollars, which cannot bear up any social problems caused by environmental pollution.

The government is clearly aware of the social and economic threats of environmental damage.  As reported by the Shanghai Daily, the most recent five year plan; "Requires energy consumption per unit of GDP to decline by 20 percent from the previous planning period.  The total amount of major pollutants discharged will be reduced by 10 percent, and forest coverage will be raised from 18.2 percent to 20 percent."

In an effort better address environmental concerns, in March of 2008 the State Council upgraded SEPA to a full Cabinet-level ministry.  To gather, "Accurate and high-quality data [of] pollution sources," the government launched in the first pollution census in February 2008.  And yet even while the central government attempts to close illegal and polluting coal mines and coal burning plants, journalists regularly report that local and regional authorities either ignore or explicitly condone the reopening of those facilities (1, 2, 3).

It does not appear that China's reliance on coal is going to decrease any time soon.  China has recently been building coal-fired plants at the rate of one every 7 to 10 days, with plans to build 500 more over the next decade.  The fraction of newly built power plants that burn coal has increased from 70% to 90% since 2000.  Thus, without either a more unified approach to reducing pollution or a substantially stronger response to that end by the central government, environmental damage will continue to directly plague both the economy and human health.

The Future Cost of the Building Boom

Here is something I don't see discussed in the press: where are the Chinese going to get all the coal to fire all the new power plants, especially when they are already facing supply shortfalls?  (Update: To clarify, I am less concerned here with the amount of coal in the ground than supply chain issues.  If they are already having trouble moving coal quickly enough to existing plants, how will they manage the increased demand?)  And while they may have the coal in the ground, how much will it cost to mine it with labor costs rising all across the country? And what about the costs of additional transportation infrastructure?

This brings us back to my father-in-law, sweltering away in Xiamen, and one of stumbling blocks the Chinese may be literally building for themselves.  As reported by The New York Times:

Each year for the past few years, China has built about 7.5 billion square feet of commercial and residential space, more than the combined floor space of all the malls and strip malls in the United States, according to data collected by the United States Energy Information Administration.

Chinese buildings rarely have thermal insulation. They require, on average, twice as much energy to heat and cool as those in similar climates in the United States and Europe, according to the World Bank. A vast majority of new buildings -- 95 percent, the bank says -- do not meet China's own codes for energy efficiency.

All these new buildings require China to build power plants, which it has been doing prodigiously. In 2005 alone, China added 66 gigawatts of electricity to its power grid, about as much power as Britain generates in a year. Last year, it added an additional 102 gigawatts, as much as France.

Damn.  So not only is China building enormous power generation capacity, but their underlying infrastructure is inherently inefficient.  This kind of systemic inefficiency is often attributed to, excused, or even just written off as a characteristic of a particular "stage of economic development" (see Keidel for one example).  It is certainly true that the U.S., Japan, and Europe all went through periods when the focus was on generating jobs and building wealth, only later to be followed up by mining inefficiencies to squeeze more product out of each unit of water and energy.

But all of China's infrastructure, all that housing and commercial space, is brand new.  So here are more questions: Is the government's plan to replace inefficient buildings over the next couple of decades?  Will labor remain so inexpensive that Chinese infrastructure is, in effect, disposable?  What are the secondary costs of maintaining that construction boom (e.g., energy, pollution, materials)?

It would seem that without a truly radical change in energy production, China is setting itself up to rely on dirty coal for many decades to come.  And so I wonder: How it is that the country will escape continued environmental damage that is equivalent to China's GDP growth?  You can't put off dealing with those costs forever.

The U.S. is borrowing cash from China to buy petroleum, and we have to sort that out as soon as possible.  But the Chinese are using their health, and thus their future productivity, as collateral for present growth. Even if they don't stumble, they may have to pause to catch their breath.

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