The Real Costs

These are boom times for China! For example, Shanxi province in northern China 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.

However, 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. 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, officials have told Deutsche Bank, the province's real economic growth rate is close to zero. It's easy to find economists who are even more pessimistic. The World Bank puts the costs of China's pollution at 8% of GDP. Some economists peg it as high as 10% of GDP. According to this accounting, China isn't growing at all.

Polluting the air or water, releasing toxic amounts of mercury, using so much water that a river runs dry -- these are all what economists call externalities. The costs of these externalities are paid by the general public, in the form of increased illness or higher death rates, and they remain external to the country's GDP accounts.

However, today's externality has a way of becoming tomorrow's on-the-books cost. Just ask any U.S., European or Japanese company about what it costs them to clean up their wastewater, scrub their emissions and safely dispose of their toxic waste today. Those were once externalities but now disposal is part of the cost of doing business.

The environmental figures out of China, even the official ones, are appalling. More than 400,000 of China's 1.3 billion people die from air-pollution-related illness each year, according to the Chinese Academy on Environmental Planning. About 300 million Chinese don't have access to clean drinking water, and 400 of the country's 668 largest cities are short of water. Acid rain falls over 30% of the country. Of the 20 most polluted cities on earth, according to the World Bank, 16 are in China.

Unfortunately, the part of the environment nearest to crisis also presents the toughest nut to crack. China is rapidly running out of water. Industries can't get enough. City dwellers can't get enough. Farmers can't get enough. Parts of the country look like they're headed into permanent drought as surging demand teams up with falling supply to produce scarcity no matter how much water the clouds bring. For the past 25 years, China has been able to feed itself, but the water shortage is bad enough to put this in doubt. According to James Kynge in his 2006 book, "China Shakes the World," China uses seven to 20 times more water per unit of GDP than the developed countries of the world.

The alternative is business as usual in China, with growth at all costs. Go far enough down that road, and the costs of paying for those environmental externalities gets big enough so that even China's booming economy can't pay it.