Watch & Brief #2
stratfor.com
China: The Green GDP Debate
Feb 23, 2006
By Bart Mongoven
China's national assembly will soon open debate on whether the country should adopt a "green GDP." Officials in Beijing have talked of such a step for years, but it appears that discussions will be quite serious in the assembly session that opens March 5. If the measure is adopted, it would mean that China would begin to publicize its gross domestic product not only in traditional terms, which measure economic output, but also in the "green" sense, by subtracting from the gross domestic product (GDP) the costs of environmental damage and the toll that pollution takes on human health.
If China does begin to measure and publicize green GDP, there could be ramifications throughout the global economy. For one thing, the nation's buying habits and manufacturing priorities likely would shift in ways that reward efficiency, the reduction of pollution and improved land-use practices. It is not clear exactly what this might mean for the world economy as a whole, but certainly the manufacturers of efficient and lower-polluting, or "clean," technologies would reap rewards. Moreover, the adoption of such a standard in China could encourage the industrialized world to adopt similar measures, particularly if the move gives China useful insights into what economic activities are beneficial or detrimental to the nation in the long term.
Green GDP has been held out for decades by environmentalists as a potentially powerful tool for exploring ways to "internalize external costs," -- or, in other words, to include the cost to "the commons" in the price of the product. Sen. Al Gore championed the concept in his 1990 book, "Earth in the Balance," and Norway has published a measure of green GDP since 1992. The allure of the concept is clear: Policymakers long have wandered in the dark when faced with the difficulty of determining whether certain manufacturing or industrial practices were truly beneficial or detrimental to the economy, let alone to society. Traditional GDP measures one side of the equation -- production -- but fails to consider the benefits gained versus the resources used up or destroyed in the process of production.
To borrow the classic description of this conundrum, one could describe the act of throwing a rock and breaking a window as productive effort: Laborers would be needed to clean up the damage, glassmakers and manufacturers would make a new window, and workers would be employed to install it. The green GDP methodology, however, would subtract -- at minimum -- the resources used to extract the silica for the new glass and the energy used by manufacturers in shaping the window.
In a macroeconomic sense, China has been breaking windows with rocks for more than a decade.
A Credible Debate?
Beijing appears to be in the midst of a major international public relations push in general, and China's current discussions of publishing a green GDP should be viewed in this context. At the most cynical level, the discussion could be construed as a way for Beijing to buy itself some breathing room on the international front while it focuses on difficult economic and social reforms internally. However, China does have bona fide reasons to be concerned with environmental and health issues related to growth, and at least some of the discussion appears to be quite sincere.
It is impossible to predict precisely what Beijing might learn from a green GDP measure. If based on the most widely accepted models and principles, such a measure probably would show negative growth for the Chinese economy. It follows, then, that China's measure would not strictly follow widely accepted principles. Instead, it likely would be shaped to account primarily for resource usage (coal, oil and gas) and for resources that have clearly been destroyed or taken out of productive capacity for a long period of time (such as the Songhua River, which has been heavily contaminated).
Specifics aside, any measure adopted almost certainly would show that the 9 percent annual growth rate China claims for its economy is not benefiting its population nearly as much as a lower, more ecologically benign rate might. This dovetails nicely with Prime Minister Hu Jintao's recently announced five-year growth plan, which calls for slower, more managed economic growth than did the strategy of Jiang Zemin.
Such motivations notwithstanding, it is clear that China's energy system is woefully inefficient: Industry relies primarily on old, coal-burning technologies that contribute to smog, cause lung ailments and render drinking water toxic. In fact, air and water in some parts of China are so polluted that they can scarcely support life. This is a particular problem in the East, where pollution-related illness reduces worker productivity and shortens life expectancies.
In the rapidly industrializing sections of China, this dynamic has taken on political overtones as well. The term "pollution riot" has been coined to describe uprisings in small cities and villages, with residents protesting over chemical spills, leaks, eruptions and other mishaps. For example, a three-day riot last July in Xinchang, in Zhejiang province, led to the shutdown of a local factory that was dumping untreated effluents into the area's river. For locals in such places, pollution is about much more than smog or a ruined river. It is also a symbol of a greater and intensely personal set of complaints -- about corruption, inequality and social changes -- that has dramatically altered their lives and their views about their society, their country and the safety of their families. The "pollution riots" are not started by environmentalists, and they are not about the environment per se -- but pollution is a visible outgrowth of the issues that spark the protests, and it is quite tangible in these communities.
The local officials who are targets of the public's rage are viewed as consciously trading clean air and water for rapid economic growth and, by extension, their own personal prestige and wealth. Increasingly, Chinese citizens are letting it be known that they do not approve of this trade.
By taking up the issue of a green GDP, Beijing could address both the concerns of the public and some that are harbored, for different reasons, by the central government. A green GDP measure would help to establish a subtly different set of expectations for local government officials, who heretofore have been rewarded for finding the fastest path to economic growth, regardless of the costs to the community. By factoring in other considerations, local and regional leaders -- who, notably, have become difficult for the central government to control in some areas -- could be encouraged to work toward the long-term goals of slower-paced, cleaner industrial growth rather than lunging for short-term profits. And Beijing could begin to reassert its political authority over wayward government officials, with larger social and economic concerns in mind. The central government already has begun to consider environmental issues in reviewing the performance of local officials, and Beijing would like to add energy efficiency to that process as well.
There is yet another political motive for the green GDP discussion: China's global prestige would be boosted if it established itself as a pioneer in balancing and measuring the economic and environmental costs of development. At the very least, as the 2008 Olympics approach, Beijing feels the need not only to clean up the capital city's environment but also to keep the attention of reporters from around the world focused in key areas -- China's rapid growth and dedication to environmental responsibilities -- rather than the harm that growth has caused to the environment.
At this point, China is a pariah in sustainable-development circles around the world. But in adopting an effective green GDP -- one that could become a model for other industrialized countries -- it could repair its image in the eyes of the international community. This is particularly important as international negotiations continue toward a follow-on treaty to the Kyoto Protocol. If successful, the treaty would require dramatic reductions in greenhouse gas emissions across the globe. China could benefit from having some environmental credibility when these discussions get rough.
Implications of the Debate
Exactly how far China goes toward a green GDP will depend entirely on how well the move serves the central government's concerns about social and economic stability. That said, the ramifications of a move in this direction potentially would be vast. Certainly, if Beijing were able to address even half of the problems outlined above, the move likely would be seen in retrospect as helping to preserve stability in China. The effects also could be felt around the globe.
The first outsiders to benefit would be the companies that specialize in advanced, "clean" energy technologies, which otherwise might be beyond the purchasing power of Chinese municipalities. Manufacturers of various energy-efficient products would be in demand across China. Large technology and construction companies could face dramatic increases in demand for efficient technologies, as could smaller companies developing cutting-edge, efficient technologies.
This could bring new competitors, sensing an opportunity, into the "cleantech" industry. Research into and development of cleaner technologies would increase, and a significant threshold in economies of scale might be reached. As they become less expensive, these technologies might generally outpace less efficient rivals throughout the industrialized world.
Viewed from an even higher level, increased economies of scale in the cleantech arena could -- like the consumer reaction to $50 per barrel oil -- fundamentally alter the relationship between production and energy usage. Just as energy used per unit of GDP plummeted as a result of the Arab oil embargoes in the 1970s, a revolution in energy-efficient technology (particularly if combined with shifts in consumer demand) could further de-link energy usage and economic growth.
If the green GDP movement should be successful in China, other industrialized nations would have incentives to measure their own green GDP as well. Thus far, none of the major economic powers are pursuing such a move; doing it properly is a tremendous undertaking, from both a political and statistical research perspective.
China, however, has covered significant ground already on the theoretical side. Beijing has been working with many of the leading figures in the sustainable-development movement to determine how to build a measure of green GDP. There have been consultations with leaders in economics, finance, natural resources, industry and health. If this work bears fruit, a useful model will emerge.
China's model likely could not be applied directly to the United States or other countries, however. It would have to be modified to account for differences in the way the countries value certain resources.
In the United States, the greatest hurdle would be the political battles between federal government officials and members of Congress, who would have to agree on methods for quantifying values for natural resources. If the green GDP movement were to gain traction in the United States, it is more likely that indirect means would be used. For instance, a credible institution associated with a university or think-tank would build a model and release its findings at a time that coincided with the Commerce Department's annual announcement of GDP. This, by the way, is how Wall Street and economists currently measure consumer confidence (figures developed at the University of Michigan) and business outlook (a figure determined by the Conference Board).
If a green GDP measure proves over time to be an effective way of assessing a nation's economy, the market is likely to listen -- whether the U.S. federal government embraces the figure or not.
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