Market Failure? China, pollution and real GDP

Published 07 May 09 01:22 PM | mrdecav

While doing some reading on Chinese quality of life and pollution last week, I noticed some interesting figures released by the WorldBank.  The estimated cost to GDP of pollution emitted by China is a total of 5.8%. That's rediculously high; every year, China is losing 5.8% of their GDP to damage to their environment.

Whats more startling is what this means for total GDP growth of the county.  In 2009, China's GDP is expected to grow by about 6.5% -- a numer low due to recession, but still considered high by global standards.  Because the cost of pollution is an externality, and to best of my knoledge is not included in the official GDP numbers, this growth does not include environmental pollution.  When you subtract the expected loss of GDP due to pollution from the total GDP of China, you're left with dismal 0.7% annual GDP growth.  Ouch! 89% of their growth is chopped from this single externality.

China is essentially gutting their natural resources and destroying their habitat with enormous amounts of externalities in order to provide us with inexpensive goods.

In most cases, this scenario leads to market failure.  China may be thinking that they can live with temporary loss while they attempt to lift their industry into the modern age - a long term investment using the capital locked in their public land. Certainly the short-term affect of removing the fully-realized costs from their exports and domestic products has been a positive one.  But with steadily increasing pollution and dwindling resources, they cannot keep it up forever.  At some point, these externalities need to be corrected or the market (and mother nature) will correct it for them.  Hopefully she'll keep the fallout off our shores.  Scary stuff! 

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Comments

# Anonymous said on May 8, 2009 12:30 PM:

As a Chinese:

I belive "GDP is expected to grow by about 6.5%" can be implent,but may be not a good news.

In china,the invest of government/nationalized business is so hot,but private company invest is so cold.

It mean that most GDP would drive form the government invest,such as railway,highway and so on.

For the pollution. Yes,it become more and more serious now,there are some factor:

1)Institution reason:compare with profits penalty is so less, which can even ignore;

2)Corruption:just need a little bribe money,it can cost down large penalty;

3)Sense:government encourage to invest buil more factory,not care what it do.if only you can pay more tax;

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