Keeping Up With China’s Olympic Shine – Part I

BEIJING: “The old people in the park say that they have not seen such clean air since the 1960s.” That’s how my Chinese teacher summed up reactions of long-time Beijingers to startlingly clean air enjoyed since the second week of the Olympics. As Beijing prepares to return to its polluting ways, citizens ask: How can we return to the happy days of the Olympics? The Chinese government may struggle to answer the question, yet the success of temporary measures during the Olympics shows that cleaning up is both possible and a smart move economically.

A recent poll in Beijing found 70 percent of people supporting permanent measures to keep the air clean. Now that the Olympics are over, the Chinese government faces a host of daunting challenges – maintaining growth in a slowing world economy, addressing social disparities and repairing the environmental destruction that accompanied rapid industrialization. For most Chinese people, the environmental agenda has the most direct impact on their lives.

The environmental toll from China’s industrialization is well known: water pollution in all major rivers and lakes; 20 of the 30 most air-polluted cities in the world; deforestation reducing forest cover to 12 percent by the 1990s; and China supplanting the US as the largest source of greenhouse-gas emissions. Less publicized in the Western press is that China has made progress on some environmental issues: It has the most successful aforestation program in the developing world, restoring forest cover close to 20 percent. Rivers in the South are gradually improving, and events such as a mass swim across the Pearl River in Guangzhou last year celebrate the progress.

Still, the environmental problems are serious. Last year the World Bank and the environmental ministry prepared the first careful estimates of health costs of air pollution ever done in a developing country: The urban air pollution in China leads to hundreds of thousands of premature deaths each year. We estimated the economic costs of the losses to be 3.8 percent of GDP in 2005, or $85 billion. The air could be significantly cleaned for less cost, and so the economic case for clean-up is clear. And this estimate only takes into account measureable health effects. Psychic benefits of living in a lovely environment are hard to measure, but arguably as important.

China’s current five-year plan recognizes the value of environmental clean-up and sets a number of ambitious targets. Halfway into the plan, there’s progress, but not rapid enough to meet these targets. In two years, chemical oxygen demand emissions dropped 2 percent (target: 10 percent in five years); sulfer-dioxide emissions fell 3 percent (five-year target: 10 percent); energy intensity of GDP declined 5 percent (five-year target: 20 percent). Why isn’t China meeting its own environmental objectives?

First, the pattern of urbanization is too energy intensive. Chinese cities have built a lot of roads, made it easy to register cars and kept parking cheap. The national government has not passed to consumers the full cost of recent hikes in oil prices in the world market. The current retail price of gasoline in China would be a market price if the world price of oil were $92 per barrel. Given recent world prices of $100 to $140 per barrel, China subsidizes firms and drivers to use gasoline. Beijing and other big Chinese cities add 1,000 new cars per day on the road, and these policies encourage them to use cars to commute. On the other hand, there’s been under-investment in public transportation.

The Olympics became a natural experiment for restricting car use by odd-even license plate restrictions, introducing high-occupancy lanes for Olympic-related vehicles and expanding the public transportation system at reduced prices. The vast majority of Beijing residents support similar measures on a permanent basis. The odd-even license plate scheme is inefficient, but other measures could discourage car use: high prices for parking, higher fees for car registration or London-style fees for driving into the inner city. Keeping buses moving fast in special lanes is one of the best measures to encourage use of public transportation over cars. Well-designed policies use revenue raised from registration and parking fees to finance expansion of public transportation.

My driver joked that 70 percent of residents favor these kinds of restrictions because 70 percent don’t own cars yet. That’s exactly the point. China’s at an early stage of urbanization and motorization. It can avoid the mistakes the US made in developing a car-and gasoline-dependent economy. If it waits ten years, it will lock into inefficient energy use for a generation.

The second reason why China isn’t meeting environmental targets is that its pattern of growth is still too reliant on exports, industry and investment – all of which are energy intensive and polluting. China could grow rapidly with less pollution if it shifted toward domestic-demand driven growth – again, a target not being met.

Some voices in China argue that the rapid export and industrial development are needed to create jobs – but that’s simply not true. The industrial sector has become so capital intensive that it creates relatively few jobs. Most jobs are created in the service sector. China gradually moves on policies that would rebalance the economy toward domestic needs – that is, discourage such rapid growth of exports and encourage domestic consumption, both private consumption and government spending on education, health and other social services. The current five-year plan, adopted in 2005, sets an explicit objective of this kind of rebalancing.

The policies to bring this about are appreciation of the exchange rate, higher interest rates, collection of more dividends from state enterprises and higher energy prices. All would tend to reduce profitability in the export sectors, cooling off that part of the economy. That would open up space for fiscal spending to clean up pollution, expand public transportation, invest in health and education, and strengthen the safety net.

China is gradually taking these steps, but so far there’s been little if any rebalancing. The drop in the trade surplus from 11 percent of GDP in 2007 to a projected 9 percent in 2008 may signal some rebalancing. However, this decline is almost completely due to higher prices of China’s imports, especially oil, rather than any drop in exports. In constant prices there’s been little reduction of the trade surplus or rebalancing.

To be fair to the authorities, to redirect the economy from exports and industry to domestic needs and services – without much of a slowdown during the transition – is more art than science. Any big miscalculation would have serious consequences for the Chinese. Rebalancing will lead to some labor-intensive firms closing, with workers losing jobs. Absorbing them into expanding service industries does not happen instantly. If adjustment is too rapid, there could suddenly be many more unemployed, unhappy workers. So, there’s something to be said for a cautious approach.

But it’s clear that the public interest would be served by a shift in priorities favoring a better environment and resource efficiency, at the expense of export and industrial competitiveness. Naturally, interest groups oppose any particular policy change: exporting firms prefer to keep the renminbi’s value low; car owners complain about rising gas prices; factory managers protest costs of emission controls.

The question for the Chinese government in the aftermath of the Olympics is, can they manage these interest groups and bring about environmental policies that are in the public interest and ultimately economically beneficial? This is a much more daunting task than organizing a brilliant Olympics.