China has
a rare and important opportunity to kill two birds with one stone. A
successful rebalancing of the Chinese economy -– moving away from excess
reliance on investment and exports and embracing more of a
pro-consumption growth model -– would be a huge plus.
By Stephen S. Roach -- Morgan Stanley Global Economic Forum
March 9, 2007 -- NEW YORK -- Pollution
is invariably one of the first impressions visitors form of China.
From bicycles to cars in 25 years, urban China rarely sees much in the
way of blue sky anymore. Rapid and large-scale industrialization only
compounds the problem. The Chinese government knows full well it must
take prompt and forceful actions to avoid an environmental crisis.
There are encouraging signs it is now rising to the occasion. Can
China pull it off while, at the same time, staying the course of its
remarkable economic development strategy?
On a per capita basis, China’s
pollution problem hardly jumps off the page. Its ratio of carbon
emissions per person is less than half the global average and less than
one-tenth that of the world’s biggest polluter -– the United States. China’s enormous population, of course, distorts those comparisons. On an absolute basis, it’s a different story altogether. China’s total carbon emissions are more than double those of Japan and Russia, fractionally behind the European Union, and a little more than half those of the United States. The essence of the Chinese environmental degradation problem is both its scale and growth. Over the 1992–2002 period, CO2 emissions in China
have expanded at a 3.7 percent average annual rate -– more than two and a half
times the global average of 1.4 percent. At that rate, according to a recent
report issued by the International Energy Agency, China will surpass
the United States as the global leader in carbon emissions by 2009.
In terms of sulfur dioxide, China’s
current rate of discharge is already double its so-called environmental
capacity -– responsible for an acid rain that now covers about one-third
of China’s total land mass. According to SO2-based measures of air pollution, seven of the ten most polluted cities in the world are in China. With respect to the emissions of organic water pollutants, China leads the world by more than three times the number two polluter -– the United States. Moreover, fully 90 percent of China’s urban rivers are polluted, and 90 percent of its grassland has been degraded. (Data cited above are from Al Gore’s Inconvenient Truth [2006], Nicholas Stern’s The Economics of Climate Change
[2007], and a recent paper prepared by the Development Research Center
of China’s State Council, “China: Accelerating Structural Adjustment
and Growth Pattern Change” [2007]).
China’s
environmental moment of truth is now at hand. The problem is twofold,
in my view: It is not just an issue of moving from dirty to clean
technologies that drive production, distribution, and transportation
platforms, but it is also a matter of shifting the macro structure of
the Chinese economy from a pollution-intensive to an
environmentally-friendly mix. This latter point is a key and often
overlooked aspect of China’s environmental challenge. It is also a crucial element of the rebalancing challenge that shapes China’s
macro debate. The issue, in a nutshell, is that the Chinese economy is
heavily skewed toward exports and fixed investment -– two sectors that
now collectively make up over 80 percent of China’s
GDP. This concentration represents the most lopsided mix of a major
economy in modern history. It is not sustainable from a macro point of
view in that it threatens to produce the twin possibilities of a
deflationary overhang of excess capacity and a protectionist backlash
to an open-ended export boom. And it is not sustainable from an
environmental point of view because the industrial-production-driven
export and investment booms have a natural bias toward excessive carbon
emissions.
This latter conclusion is
key but, unfortunately, difficult to quantify in light of the paucity
of data on the carbon intensity of the various sectors of the Chinese
economy. Bear with me as I take you through a brief, but important,
digression that uses the United Kingdom production model to illustrate what China is up against. The Stern Review contains a detailed breakdown of the carbon intensity of 123 production sectors in the UK economy. Not surprisingly, services are at the low end of the UK
spectrum in terms of carbon emissions -– averaging around 0.3 on the
carbon intensity scale; for manufacturing industries, the range is wide
–- motor vehicles ( 0.5) and sporting goods/toys (0.8) are at the low
end while the paper (2.4) and steel (2.7) industries are at the high
end. A comparable dispersion is evident in the energy share of total UK business costs –- with non-transportation services at the low end of the spectrum and manufacturing industries at the high end.
OK, China is not exactly England.
But I strongly suspect -– and this is my key analytical leap of faith –-
that the relative dispersion of the carbon- and energy-intensity of the
major sectors of the Chinese economy is comparable to that of the UK. In other words, just as manufacturing is more carbon-intensive than services in the UK, the same ranking is likely in China.
Under that presumption, consider the following: The latest data put
China’s industrial sector at around 52 percent of its GDP -– well in excess of
the 32 percent share of the average developed economy and considerably higher
than the 37 percent average of the low- and middle-income countries of the
developing world. That means the manufacturing-intensive Chinese
economy is most likely highly skewed toward a pollution- and
energy-intensive model of economic activity.
In the case of China,
there is an important twist -– it is the heaviest consumer of coal of
all the major economies in the world today. According to China’s
Development Research Center, coal-driven power accounted for fully 79 percent
of total electricity generated in 2003 -– eight percentage points higher
than in 1990 and essentially double the 40 percent share of coal-powered
electricity for the world as a whole. The adverse environmental
implications of coal power are well known; according to the Stern
Review, the CO2 emissions of coal per unit of energy generation
are twice as much as those associated with the combustion of natural
gas and about 50 percent more than those generated by oil-burning
technologies. Inasmuch as UK coal consumption -– fueling 34 percent of the country’s total energy generation –- is less than half the share in China,
there is actually good reason to believe that the pollution
implications for the Chinese economy per unit of GDP would be a good
deal worse than those implied by the British results cited above.
The India comparison is also an interesting one in putting Chinese environmental issues in perspective. India’s per capita carbon emissions are only about half those in China and its total emissions are about one-third those of the Chinese. But the 4.3 percent average annual growth rate of Indian CO2
emissions over the 1992-2002 period is more than 15 percent faster than the
rapid growth evident in China over the same period –- suggesting that if
India stays its current course, its environmental threats will quickly
get out of hand. Even so, the structure of Indian GDP -– a much smaller
industrial portion (28 percent) than China (52 percent) and a much larger services share (53 percent) than China (34 percent) is biased toward a less pollution- and energy-intensive growth trajectory. That’s not to let India off the hook on environmental issues but only to stress that China is very much in a league of its own.
China has
a rare and important opportunity to kill two birds with one stone. A
successful rebalancing of the Chinese economy -– moving away from excess
reliance on investment and exports and embracing more of a
pro-consumption growth model -– would be a huge plus in dealing with two
key issues: On the one hand, it would enable China to avoid the
capacity excesses and protectionist risks that might arise from a
continued irrational expansion of a severely unbalanced real economy.
But it would also have the advantage of tilting the mix of Chinese
output away from a pollution- and energy-intensive growth trajectory.
The latest statements from official Beijing
are quite encouraging in addressing this conjoined problem. Premier
Wen Jiabao’s 5 March “Work Report” to the National People’s Congress
strongly endorsed a strategy of macro rebalancing, energy conservation,
and environmental remediation. Just as China
has had the will and determination to deliver on the reform front over
the past 28 years, I am hopeful that it will rise to the occasion and
deliver on the rebalancing front. In the end, there is no other
choice. And time is growing short.
LINK: Morgan Stanley