The Chinese Government’s Impoverishing Economic Growth

Resolved: Developing countries ought to prioritize economic growth over environmental protection.

Consider though that “economic growth” is hard to measure and is not always the same as economic prosperity or human flourishing. Especially in China.

The Chinese government has a renewed top priority to boost economic growth. The government’s priority is to hit its 7% target, even if they have to massage (though not fabricate) the data.

Mark DeWeaver’s opinion article in the July 31, 2015 Wall Street Journal reports on the central government’s new fiscal stimulus efforts increase funds available to local governments for infrastructure and other projects:

This has a more immediate and powerful effect on GDP growth and job creation, but it comes at a high cost: overinvestment in local projects and the misallocation of capital. China’s landscape is littered with unused highways and airports, redundant steel and cement plants, unnecessary municipal office buildings and “ghost cities” filled with empty high-rises and deserted shopping malls.

From 2009-13, “ineffective investment” amounted to a stunning 41.8 trillion yuan ($6.8 trillion), according to research published in 2014 by Xu Ce of China’s National Development and Reform Commission and Wang Yuan of the Academy of Macroeconomic Research.

Governments can adopt economic growth priorities or environmental protection priorities, or can “prioritize” both. But what do such stated priorities really mean? The Stoa LD topic doesn’t directly state that governments of developing countries like China are to be the actors. But this tends to be assumed as legislators and executive branch officials set the priorities.

The example of China’s economic growth priorities suggestion caution. Dropping an estimated $6.8 trillion on “ineffective investment” is a whole lot of “bridges to nowhere.” Setting government priorities can short-circuit natural economic processes. Neither central government officials nor local ones have adequate information or incentives to be effective in framing or facilitating economic growth. They can prioritize highways by approving funding, but government officials are unlikely to guess the where highways should be built. Governments can prioritize and allocate funds for new airports, industrial developments, and whole cities, but again, won’t know where they should to build. Strong evidence for that lack of knowledge can be found in the quote above, and in empty constructions littered across China.

Private sector companies can make mistakes too. Privately-financed highways were constructed in Mexico in the 1990s, but were a failure and firms went bankrupt as the car and truck traffic projected did not materialize. In that case though, investors lost money rather than taxpayers.

On the environmental protection side, Chinese central and regional governments have invested in various environmental projects, including large solar and wind power operations. DeWeaver also discusses a combined economic and environmental priority effort in China:

A State Council executive meeting on June 24 approved a wide range of priority areas, covering everything from logistics and smart grids to environmental protection and the modernization of agriculture. Officials appear to have been given a broad mandate to invest in practically anything that can be justified as Internet related.

This year local government projects are set to make a major contribution to keeping China’s GDP growth on target. Once again, however, much of the new investment will be inefficient, contributing to the country’s already considerable stock of underutilized infrastructure while perhaps introducing novel species of IT white elephants as well.

China’s export-driven economy depends on access to customers in developed countries, especially in Europe and the United States. So environmental groups opposed to coal-burning are a major potential threat to China’s economic future. The fear is that environmental groups joined with protectionists in Europe and the U.S. will pass carbon taxes that apply to imports as well as their own firms. Manufacturers in Europe and the U.S. use far less energy, and cleaner energy, in their advanced factories. So manufacturers wanting protection from low-cost Chinese firms support environmental groups who call for carbon-based taxes as an environmental priority, and these taxes would hit Chinese manufacturers the hardest.

Partly in response to this fear of environmental protectionism, China’s central government has prioritized “green energy,” subsidizing vast amounts on wind power according to this February 13, 2015 article:

Last year’s installed wind power capacity represented a 23 percent jump from the 2013 level of 16.09 million kilowatts. 

China still produces about 80 percent of its total energy and about 60 percent of electricity by burning coal. 

In November, the government pledged to produce 20 percent of the country’s total energy through non-fossil fuels by 2030, doubling its current level, while capping growth in its carbon emissions by the same year, it not earlier. 

Already, China is a world leader in solar and wind energy production and has announced plans to further boost renewable energy investment. At the same time, China burns about half of the world’s coal and emits twice as much carbon as the United States, the second biggest emitting country.

So that’s wind power, but how about solar? Bloomberg Business, April 19 2015, reports “China Adds Solar Power the Size of France in First Quarter”

China connected 5.04 gigawatts of solar capacity to grids in the three months ended March 31, the National Energy Administration said in a statement on Monday. The Asian nation now has a total 33 gigawatts of solar-power supply.

Also in the report:

China is seeking to approve and install as much as 17.8 gigawatts of solar power this year, or nearly 2 1/2 times the capacity added by the U.S. in 2014. 

Fortune reports, in a June 18, 2015 article, that “China is utterly and totally dominating solar panels“:

China has emerged as the world’s largest market for solar panels and in 2015 is expected to be home to a quarter of the planet’s new energy capacity from solar panels, according to a new report from GTM Research. China is rapidly adding as much power generation as possible, and solar is just one source of new energy generation in the country.

The Fortune article further reports that the:

… new growth in solar panels in China is being pushed by a new feed-in tariff program in the country (solar generators can be paid a fixed competitive price for the energy created), and the Chinese government’s ambitious “Five Year Plan,” which calls for a certain amount of solar installed in the next few years. 

It is unlikely that this new wind and solar power is good for China’s economy. Lots of people like the idea of solar power (I do. For ten years I’ve had a nifty three-level solar-powered water fountain, though the solar panel now doesn’t work.)

The problem is the whole idea of a government “Five Year Plan.” Planners for the central government can guess what priorities and subsidies might be good for the economy, but they’ve been wrong before–from the first five-year plans during communist times up to the present. If the goal is to reduce burning coal, new wind and solar power installations may or may not be cost-effective compared to electricity from combined-cycle natural gas installations.

The article notes that: “China pledges to eliminate 20 gigawatts of coal capacity over the next five years to help with air pollution.” That’s a pledge to hold off the environmental protectionists overseas, as well as to reduce pollution from dirty coal. Importing cleaner coal could also reduce pollution levels, and would provide the least expensive power, but wouldn’t satisfy environmentalists overseas.