The article discusses the example of the Shanxi province:
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.
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.
(Source: Chip B.)