Tuesday, February 20, 2007

Shortcomings of GDP

We recently talked about the shortcomings of GDP as a measure of economic well-being. One of our points was how GDP does not account for environmental effects. Chip suggested this article that discusses that very issue with China. The overall point is that China is growing very fast, but you should decrease that growth rate to account for the effects of its high levels of pollution.

The article discusses the example of the Shanxi province:

These are boom times for Shanxi province in northern China. The province produced 25% of the country's coal in 2005 at a time when coal prices were soaring. Shanxi's economy grew by 12.5% in 2005, well ahead of even the astonishing 10% growth for China's economy as a whole. Or maybe not.

The province is home to Linfen, Yangquan and Datong, the three most polluted cities in China. Life expectancy in Linfen is 10 years below the Chinese national average. Unchecked coal mining -- the province closed 4,800 illegal mines in 2005 -- and the drilling of illegal wells for water have created a chronic water shortage and a steady loss of farmland as it subsides into underground mine shafts and drained aquifers.

If you subtract the costs of air and water pollution from Shanxi's growth rate, local officials have told Deutsche Bank, the province's real economic growth rate is close to zero.

The article also references research that applies that method to the country as a whole and argues that Chinese economic growth should be revised to be closer to 7% or maybe even as low as 0%, as opposed to the current figure of 10%. The author is a little too Malthusian in some of his predictions for my taste, but he still discusses the point that just looking at GDP figures does not give you the whole picture of how well a country is doing.

(Source: Chip B.)


Anonymous said...

It is a well-known fact that China sacrifices a lot in terms of standard of living, overall well-being, and wholesomeness of life in order to be as materialistically productive as the nation is today. With the ultimate goal of crafting a more prosperous and productive nation (as compared to the rest of the world), the Chinese have suffered from an untold number of human-rights violations resulting from child labor and long hours in deplorable factory conditions, as well as an incredible amount of pollution entering the air they breathe and the water they drink. From this standpoint, one must come to the conclusion that a huge increase in production might not ultimately cancel out the corresponding increase in pollution—that a generally healthier and happier populace could be a better result than just producing more cars, televisions, and clothes to export. But on the other hand you must also consider that, with all of the problems industrialization has brought to China, it has brought benefits as well. Though their air may be more polluted, the Chinese people might now have more food to eat and more purchasing power—even more ability to extract themselves from a never-ending cycle of rural debt—than they would have been able to without factory jobs. So, I conclude that it would definitely be, if nothing else, far more accurate if you could somehow factor in the negative costs of pollution brought on by Chinese industrialization on the Chinese and the world. But if you do, you must also consider the positive benefits that industrialization has brought them: perhaps, when all is told, an actually higher standard of living for the Chinese majority. As far as I am concerned, it comes down to this: If you consider the drawbacks of a policy or trend, you must also consider the benefits, hidden as they may sometimes be.

Abby said...

Nicole makes a good point in her true assessment of China's GDP. While China is suffering the consequences of increased production through pollution, you must also take into consideration the benefits they have from running these illegal factories. Like the article said, The state Environmental Protection Administration knows there are power plants that operate in violation of China's envirormental regulations, but the EPA is warily to close them down because they provide jobs for the people. However, even if these companies are producing jobs that benefit the country as a whole for the time being, eventually China's envirorment will push to an end to pollution. China's reported GDP cannot be a ture measure of the general wellness of their populace because it is only a measure of numbers, not of well-being. Currently because China has an advantage of freer pollution than many of the industrial countries of the world, they can produce things like a 12.5% growth in economy. But you never know what is scarficed underneath that 12.5% increase.
Overall, like Mr. Arjona pointed out, the article took on a very Malthusian angle. Eventually China's envirorment might force them into cleaning their act up, but it is hard to predict so far into the future when technological advances or such might occur and allow them to continue life as they know it.

Andrew L said...

Relative to western nations or even Japan, China began its industrialization extremely late. The country's ability to go from a mostly rural, agricultural economy fifty years ago to the dynamic industrial economy they have today is amazing. This form of rapid industrialization has had similar effects on nations in the past, such as Russia and Japan, and many other modern developing nations, including India, Indonesia, and Malaysia, are suffering similar woes. The various negative environmental effects discussed in the article are simply a symptom of the rapid industrialization of the region. China's central provinces have mostly advanced past the stages of industrialization that cause pollution as described in the article, and I am confident that Shanxi and similar provinces will soon follow suit.

Anonymous said...

I found that it was very hard to believe that China's GDP could be predicted to ce somewhere close to zero. When taking into account all of the industrial progresses it has made, pollution cannot be greater than that. If one were to compare the increase between indutrial growth and growth of pollution, i would be shocked to see that pollution had a larger effect on the populace. The effects of pollution do not compare to the advantages of industrializing.