E C O L O G I C A L E C O N O M I C S 6 5 ( 2 0 0 8 ) 3 5 6 – 3 6 6

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ANALYSIS

A cost-benefit analysis for the economic growth in China

Zongguo Wen⁎, Jining Chen1

Department of Environmental Science & Engineering, Tsinghua University, Beijing 100084, China

A R T I C L E I N F O

⁎ Corresponding author. Tel.: +86 10 62792921E-mail addresses: wenzg@tsinghua.edu.cn (

1 Tel.: +86 10 62798566.

0921-8009/$ - see front matter © 2007 Elseviedoi:10.1016/j.ecolecon.2007.07.007

A B S T R A C T

Article history:Received 12 February 2007Received in revised form 2 July 2007Accepted 2 July 2007Available online 23 August 2007

Currently, traditional development issues such as income inequality, depletion of naturalresources, environmental pollution as well as retardation of infrastructure have occurred inChina. In the future, more pressures would be imposed on China by the continuous fastdevelopment of industrialization, and with transfer of the world manufacture center toChina. Sustainable development, including its economic, environmental and socialelements, is a key goal of decisionmakers. This paper develops a methodology on costbenefit analysis of economic growth at macroscopic level to identify issues of China'ssustainability. In order to address some important issues on how to make policies toimprove the quality of economic growth, the CBA framework developed in this studyanalyses economic–ecological–social interaction, building three accounts that reflect threedimensions of sustainable development that includes 26 sub-models in all, and finally isintegrated into an index as Net Progress Proceeds (NPP). The estimation methods of thesesubmodels, such as cost of environmental pollution, depletion of natural resources anddefensive expenditures are described in detail. Based on the framework and methods, thispaper examines the costs and benefits of economic growth in three aspects of economy,ecology and society. The results illustrate that NPR of China's economic growth had beennegative for a long time and has just became positive since year 2000 butwas quite low. Eventhe best was only 1.6% in 2002 (the worst was −24.2% in 1982). Based on the comparisonbetween three accounts, we can draw a conclusion that ecological cost is the dominantfactor that affects China's NPR. The empirical results show that if no other innovativemeasures or policies are taken in the future the costs of growth would outweigh its benefits,resulting in un-sustainability. Basically, the long-term economic growth would beunsustainable due to increasing environmental damage and depletion of naturalresources. There are a few limitations that we consider need to be improved in our CBAframework and method, nevertheless they have many options that can be explored bypolicy makers, to make the development path more sustainable.

© 2007 Elsevier B.V. All rights reserved.

Keywords:Cost–benefit analysisEconomic growthSustainable developmentChina

1. Introduction

China has experienced a steady and high economic growthsince 1980. Yet the growth is mostly in a traditional way andhas led to a significant depletion of natural resources, a severe

; fax: +86 10 62796959.Z. Wen), jchen1@tsinghu

r B.V. All rights reserved

nationwide environmental pollution and ecological deterio-ration as well as a fundamental social change (Zhang andWen, 2007). In 2003, China accounted for 4% of the world'stotal GDP. Its consumption of crude oil, ironstone, steel,alumina and cement, however, was 31%, 30%, 27%, 25% and

a.edu.cn ( J. Chen).

.

357E C O L O G I C A L E C O N O M I C S 6 5 ( 2 0 0 8 ) 3 5 6 – 3 6 6

40% of the world totals respectively (Ma, 2004). China'semissions of pollutants remain also in a high level. Presently,for instance, China's solid waste per unit industrial outputvalue is ten times higher than that of developed countries.China's NOx emission load per unit GDP is 27.7 times that ofJapan and 2.8 times that of India, and China's SO2 emissionload per unit GDP is 68.7 times that of Japan and 26.4 timesthat of Germany (Fan, 2004).

Over the last two decades, China has regarded economicdevelopment as a national priority to improve human welfareand eradicate poverty. Such economic growth indicators as GNPhave been exclusively used to assess the successofnational andregional development policies. Given the expectation thatChina's economy will be likely to continue to grow at the samepace in thenextoneor twodecadesaswell as the fact thatChinais gradually becoming a world manufacturing center (Lu andHuang, 2003), China's natural resources, environment qualityand social dimension are facing significant challenges. There isa great concern that if China is going to develop in the samewayas it did in the last two decades, could China's economicprosperity be sustainable? What the implications would be toChina's natural resources and environment? Might this devel-opment lead China to a disastrous ecological consequence andeventually social instability? To answer these strategic ques-tions, there is a need to systematically investigate the relation-ships between economy, environment and society in China inthe last twodecades. Inparticular there is a need to examine theenvironmental and social costs China has sacrificed to itseconomic growth in the past. Based on these studies, ourfundamental objective is to identify whether there is a pathwaythat will lead China to a more sustainable development track.

This paper is devoted to answer part of the questions aboveby estimating the major environmental and social costs andbenefits related to China's economic growth between 1980 and

Fig. 1 –The CBA framework for assessin

2002. The methodology is based upon a conventional cost–benefit analysis (CBA) framework, yet with focus on the longterm changes of trend. More specifically, this paper will firstargue for the need for the consideration of the three dimen-sionsof sustainabledevelopment inSection2. An indexnamedNet Progress Proceed (NPP) is developed as an indicator toevaluate the sustainability or net benefit-cost of economicgrowth at national level, which is very different with othersimilar indicators discussed below. The greater the positiveNPP is, the more sustainable the economic growth. Therefore,an analysis model of CBA will then be presented in details toillustrate how it is conducted. Finally, different policies arediscussed to evaluate their implications to sustainability inSection 4 before we conclude this paper in Section 5.

2. The methodology

The methodology we applied in this study is the well-knownCost–benefit analysis (CBA), which has been widely used inintegrated environmental assessments (Allen, 1989; Mendel-sohn et al., 1994; Kim et al., 2003; Houtven et al., 1996; Hamiltonet al., 1999; Shreekant et al., 1996; Philibert, 2000) and others(Cobb et al., 1995; Hamilton, 1999; Richard, 1998, 2003; ITC, 2002-renewable energy development strategy) over decades. Morerecently, this methodology has been applied to assess regionalsustainable development. For instance, Islam et al. (2003)applied this approach to examine conditions upon which anoptimal sustainable growth might be achieved in Australia viaan Ecol-Opt-Growth-1 model. He estimated both the costs andbenefits related to savings, investment, technological progress,substitutability of productive factors, intergenerational efficien-cy, equity and policies. Similar studies can also be found inHamilton (1998), Moffatt et al. (1999) and Beckerman (1994).

g China's sustainable development.

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These applications, however, are of several limitations.First, most of these studies only consider the cost and benefitone-dimensionally (e.g., the depletion of natural resources orthe cost of environmental pollution), and cannot give acomplete view of sustainability. Or they focus only on aspecific issue such as the role of technology in sustainingagriculture (Joseph et al., 1998), or the impacts of policy onsustainable development (Philibert, 2000). Even in caseswhereall the three aspects of sustainability are considered, only thelump-sum results are estimated. The interactions amongenvironment, economy and society have thus not beenadequately exploited.

To fully reflect the changeof the sustainable three domains,the CBA of this study is conducted in three accounts, i.e., theenvironmental account (Gi), the economic account (Ej) and thesocial account (Sj) as shown in Fig. 1. The environmentalaccount is related to the protection of environmental quality,ecological integrity and the conservation of natural resources.The economic account describes the improvement of humanwelfare, and the social account illustrates the change ofhuman relationships and development of individual aspira-tions. Both the environmental and social accounts are difficultto be valued inmonetary term.Note that each account consistsof several sub-accounts or components, the set-up of which isbased upon three considerations (Wen, 2005). First, they aremostly the indicators that have been widely applied to assessregional sustainability (e.g., see Pezzey, 1992; Faucheux et al.,1996; Peter and Stephan, 1997; Bossel, 2000; Wen et al., 2007).Second, one component cannot be substituted by another onein order to avoid overlap of accountabilities. Last, onlysensitive components, which have shown a significant changein the last two decades in China, are included to illustrate theirpolicy implications to decision-making.

In details, the developed CBA framework consists of 24 sub-accounts, from which two indicators can be defined as, i.e.

NPP ¼X10

i¼1

Gi þX7

j¼1

Ej þX7

k¼1

Sk ð1Þ

NPR ¼ NPPGDP

� 100k ð2Þ

in which NPP is the Net Progress Proceeds and NPR is the NetProceeds rate. Both indicators can be directly used to representa country's sustainability. The greater their negative valuesare, the less sustainable the economic growth.

3. The data

3.1. The economic account

3.1.1. Personal expenditure and income distribution indexPersonal expenditure on goods and services, a key GDP growthdriver, is a benefit component and can lead to a direct improve-ment of nationalwelfare. The incomedistribution index reflectsthe income gap, and has been increasingly widened in Chinaand become a major social concern. In this study, this index isderived from normalization of the Gini coefficient with 1980 asthe base year. The Gini coefficient is calculated from data ofindividual income, which are available from the statistic year

bookbyNationalBureauofStatistics ofChina (NBSC). If personalexpenditure is divided by this index, we can then have thepersonal expenditure adjusted for income inequality.

3.1.2. Consumer durables and public infrastructureIn China's national account system (NAS), there is a difficultyto distinguish between expenditure on consumer durables andits services. In CBA, however, services are regarded as benefitswhile their initial purchase prices are costs. In an economicterm, annual services can be defined as the sum of deprecia-tion rate and interest rate (Patterson, 1992). Assuming that theaverage depreciation and interest rates in the study period areapproximately 15% and 7.5% respectively (Hamilton, 1999;Zhang et al., 2003), the services could then be estimated to be22.5% of the value of the net stocks of consumer durables (e.g.,cars, appliances and furniture etc) at the end of each year. Inthe same way, we could estimate services of public infra-structures (e.g., highway and roads), which provide services bythe public sector to increase our consumption base. Theservice value is usually calculated as a percentage of the totalvalue of entire existing stock of public infrastructures. In ourstudy, their average depreciation and interest rates are 2.5%and 7.5% respectively (Hamilton, 1999; Zhang et al., 2003).

3.1.3. Cost of commutationAlthough traffic congestion is undesirable andhasa significantimpact on economic and social development, GDP regards it asa contribution. In China, commutation time has steadilyincreased since 1980s. A recent survey in Ningbo city revealedthat commutation time was at average 120 min in year 2001, a50% increase from 1990 (Wen, 2005). Similar results were alsofound in Guangzhou and Yangzhou (Zhang et al., 2003), andtheir commutation time was 90 and 150 min respectively inyear 2001. In this study the indirect costs of commutation (i.e.,the value due to time lost) are calculated as the total annualcommutation time multiplied by the average income of anemployee based on the statistical yearbook of labor.

3.1.4. Net capital investmentFor an economy to prosper over time, capital supply (buildings,machinery, and other infrastructure) must be maintained andincreased tomeet the demands of increased population. If thisis not possible, the society will consume its capital as income.Capital investment is thus an important element of sustain-able economic growth. In this study, the net growth of China'scapital stock is calculated by multiplying the growth rate oflabor force with the level of net investments in each year, i.e.,

NCG ¼ DK� CR ð3Þ

CR ¼ Kt�1DL=Lt ð4Þ

DK ¼ Kt � Kt�1 ; DL ¼ Lt � Lt�1 ð5Þ

where NCG is the net capital growth; Kt and Kt−1 is the capitalstock in year t and t−1 respectively, which are available fromChina Statistical Yearbook of Fixed Assets Investment; Lt andLt− 1 are the labor force in year t and t−1 respectively, and areavailable from China Statistical Yearbook of Labor; CR is thecapital requirement (i.e. the sum of variations in productivityand labor force). To avoid large fluctuations in the calculationsabove, a moving average algorithm is applied to smooth the

2 Sources: http://www.cneac.com/article/list.asp?id=30. In thestudy of World Bank, they assumed the rate of exposurepopulation at the risk of air pollution was 80% (World Bank, 1997)

359E C O L O G I C A L E C O N O M I C S 6 5 ( 2 0 0 8 ) 3 5 6 – 3 6 6

labor forceand capital stockdata, and theaverage time intervalis ten years over data from 1970–2002.

3.1.5. Balance of paymentThe economic sustainability of a country is also subject to theextent towhich it relies on foreign funding to finance its currentconsumption. A net surplus of exports over imports indicatesthat the country is of the capacity to increase its futureconsumption of imported goods. In this study, China's balanceof payment is selected to illustrate whether China is moving inthe direction of net lending or borrowing. It includes currentaccount, capital and finance account as well as reserves assets.A positive value indicates that the country's capital assets areincreasing and this component will be a benefit. A negativevalue illustrates that the country's capital formation is based onwealth borrowed from foreign loads that must eventually berepaid with interest, and this component will be a cost. Weadjust the annual net international balance values for inflationand then use a five-yearmoving average to smooth out year-to-year fluctuations. The involved data are available directly fromthe Balance of Payment in China Statistics.

3.2. Ecological account

The ecological account includes ten sub-accounts which can beclassified into five categories, i.e., the cost forhouseholdpollutioncontrol, the cost for water, air and noise pollution control andremediation, thecostdue todepletionofnonrenewable resources(e.g., fossil fuel and mineral resources), the cost due to dete-rioration and destruction of ecosystem (e.g., wetland, farmlandand forest) and the cost from long-term environmental damages(e.g., ozone depletion and climate change).

3.2.1. Cost of household pollution controlThe costs of pollution imposes on the households are thedefensive expenditures made for equipments such as air andwater filters. These expenditures merely compensate for theexternality of the pollution as a result of economic activity. Weestimate the spending for pollution abatement from the outputvalue of related industries. For example, in year 2002, theproduction value of car air purifiers in Chinawas 4 billion Yuan.The expenditures on air filters of households can be estimatedthroughmultiplying the price of air filters (300 Yuan per set) bytheproducts stock. Thenwesumup the twoparts to get the costof household pollution abatement at 10.16 billion in 2002.

3.2.2. Cost of environmental pollution control and remediationPollution cost includes expenses on health care and reductionof industrial/agricultural outputs. Because impacts on nation-al production has been counted in conventional SNA (e.g., acidrain lead directly to crop yield reduction), our focus is on thecosts of health problems caused by environmental pollutionand the defensive expenditure of pollution control.

To estimate the expenses on public health caused bypollution, we first need to build up the dose-response relation-ship between environmental quality and the death rate ormorbidity of a given disease. This is achieved through extensivesurveys onmedical treatment cases and environmental qualityin several selected cities including Suzhou, Yangzhou, Ningbo,Guangzhou,Yantai and Sanming city inChina (Wenet al., 2005).

By multiplying the exposed population with the estimatedmorbidity and physical damage on health, we can derive thecases of illness caused by a given pollution. Finally, theWillingness-to-pay (WTP) method and Human-capital Ap-proach (HCA) are applied to evaluate the monetary loss of thephysical damage from illness (Wen, 2005). The HCA is used totransform the pathological losses (i.e., sick leave and days offdue to visit to physician, hospitalization or recovery at home)into monetary cost. Besides the wage loss caused by earlierdeaths and work absence, the medical treatment expendituresare also considered. The WTP method is used to estimate theloss from environmental pollution by directly surveying onindividual's willingness to pay for pollution abatement aswidely applied (Johannesson et al., 1993; Subramanian andCropper, 2000; Kahneman and Jack, 1992). As the willingness topay usually changes with the increase of individual income(Wen, 2005; Peng and Tian, 2003), its results need to be adjustedaccording to the difference of residents' income.

3.2.3. Cost of air pollutionBesides the direct expenditures on air pollution control, weprimarily consider herein the impacts on human healthcaused by the emissions of NOx, TSP (total solid particulate)and SO2 as these pollutants are the dominant pollutants inChina. The investigated health concerns include prematuredeath, respiratory disease, and the days of activity-limited,asthma and chronic bronchitis. Taking TSP as an example, thecases of premature death caused by air pollution can beestimated based on the following dose-response function inpathology,

D ¼ Q � DFR ¼ Q � 0:096� C� C0ð Þ � FN100

ð6Þ

whereD is the number of people at the risk of health effect;Q isthe exposed population and is assumed to be 75% of the totalurban population as given by an SEPA study2.; ΔFR is thepollution-induced change of death rate; C is the observedconcentration of pollutant in the atmosphere and is availablefrom the Report on the State of the Environment of China publishedby SEPA every year; C0 is the benchmark concentration of thepollutant and can be assigned from Air Quality Standard issuedby SEPA or recommended byWHO; FN is the natural death rateand is available from China Yearbook of Population.

To estimate the monetary losses of those disease cases, wetake the calculation in 2002 as an illustration. Given that theaverage loss of life caused by air pollution is 10–12 years (Yanget al., 2002), the HCA and WTP methods estimate the costs ofpremature death per case in averagewas 154,000 and 1,382,000Yuan respectively. In order to compare with other similarstudies, we adopt the results estimated by WTP method. Themedical expenditures on diseases (e.g., respiratory disease,asthma and chronic bronchitis) treatment per case can becollected fromChinaYearbook of Sanitation. The results of thetwo parts (392 billion Yuan together) above are summed upinto the expenditures of air pollution control (such as smoke

.

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desulfurizinganddisposing, etc. for example, the total expensewas 43.2 billion Yuan). The total loss from air pollution is thenestimated as 435.2 billion Yuan, 4% of China's GDP in 2002.

3.2.4. Cost of water pollutionThe same as the cost of air pollution, the economic cost of waterpollution includesbothexpenditures formunicipal and industrialwastewater treatment, the cost of urban sewage system con-struction, and the effect of water pollution on human health (i.e.dysentery, typhoid fever, paratyphoid fever, etc.) (see Table 1).

The cost loss of public health can be calculated by thefollowing dose-response function,

D ¼ a� c� bð Þ � Q ð7Þ

where a is the correlation coefficient between the concentra-tion of water pollutants and natural morbidity rate; b is thenatural morbidity rate without impacts from water pollution;c and Q are the observed water quality and the exposedpopulation in a given region respectively.

According to our survey in investigated cities (Zhang et al.,2003; Wen, 2005; Wen et al., 2007), the parameter b for hepatitis,dysentery and typhoid fever are 475, 198 and 396 cases permillion population respectively. Based on these parameters, wecan estimate that the hepatitis cases caused by water pollutionin year 2002 are 245,435. Given that the average medical expen-diture of a hepatitis case is 9787 Yuan in year 2002, the total costofmedical treatment for hepatitis caused bywater pollutionwillthen be 2.4 billion Yuan. In the same way, we can estimateexpenditures on medical treatment, wage loss from days-off,and loss of premature deaths. In sum, the total cost of waterpollution is calculated as 650 billion Yuan, 6.1% of GDP in 2002.

3.2.5. Cost of noise pollutionThe loss of noise pollution in case cities (Liu, 1999) can beconverted to national level according to average incomedifference between case cities and the whole country. The

Table 1 – The effect of water pollution on human healthand estimation of their related economic loss

Type ofeffect/damage

Relateddisease

Estimation method anddata

Expenditureson medicaltreatment

Hepatitis,dysenteryand cancer

Calibrated dose–response function andliterature references,costs of medicaltreatment from localstatistical data

Wage loss fordays off fromwork

Hepatitis,dysenteryand cancer

Loss of working days forpatients; local incomeper capita in a givenyear

Loss ofprematuredeaths

Cancer a WTP and HCA methodsto estimate the loss ofearly death b

a According to relevant studies (e.g., Yang et al., 2002)and our survey (Wen, 2005), 25% of cancer cases areassumed to be caused by the water pollution.b The average days off from work caused by illnessrelated to water pollution is supposed to be 7 years(Yang et al., 2002; Wen, 2005).

aggregate cost of noise pollution has been weighted accordingto the population living in urban areas, because we assumedthat only that portion of the population is affected. The totalcost of noise pollution can then be estimated to be 1.6 billionYuan in year 2002.

By summing up all the costs caused by the three types ofpollutions above, the total cost of environmental pollution inChina is 1092 billion Yuan in 2002, 10.2% of GDP.

3.2.6. Cost of nonrenewable resources depletionNote that consumption of nonrenewable resources is countedinto GDP as a benefit. It is, however, a cost to the futuregeneration, which could be assumed to be the total resourcerents and estimated by the method of “net price” (Wen, 2005;Repetto et al., 1989). In order to keep the stock of nonrenewableresources, the rent from the extracted resources is required toreinvest, namely the rent is equal to the cost of depletion, andcan be measured as the market value of extracted materialsminus the average extraction cost. Note that this is anapproximation of the Net Price valuation method. Accordingto the Hotelling Rent concept, we can have,

HN ¼ Q � Pm � Pað Þ ð8Þ

where HN is the Hotelling Rent of nonrenewable resources; Q isthe production volume; Pm is the internationalmarket price andPa is the average unit production cost.

The nonrenewable resources considered in this study includefour typesof energy resourcesand ten typesofmineral resources.The former includes crude oil, natural gas and coal (hard andlignite). The latter includes bauxite, copper, gold, iron, lead,nickel, phosphate, silver, tin, zinc. The data of energy productionvolume are available from China's Statistical Yearbook of EnergyandStatisticalReviewofWorldEnergy3,butacompletesetofdatarelated to Pm and Pa is not available from a sole source. Therefore,data of energy resources was obtained from different ways, withpriority given to the most complete and reliable sources used inthe following order: British Petroleum (BP), International EnergyAgency (IEA), International Petroleum Encyclopedia (IPE) andUnited Nations (UN). The data ofmineral resources are also fromdifferent sources. The prices are primarily from World MonthlyCommodity Price Bulletin, and the production cost was partlyderived from the US Geological Survey. In occasions where dataare not available, linear interpolation is applied to fill the gaps.

3.2.7. Cost of forest depletionSince wood stocks are renewable, extraction of wood is notnecessarily a disinvestment in the future. The cost of forestrydepletion can thus be measured as the rent on the amount ofextraction which exceeds the natural increment in woodvolume (Angeles et al., 1988; Bolt et al., 2002), i.e.,

HR ¼ Qr � Qið Þ � Pa � Pr ¼ Qr � Qið Þ � Pa � Pm � PiPm

ð9Þ

whereHR is the Hotelling Rent of forestry;QR is the roundwoodproduction; Qi is the natural increment in wood volume; Pa isthe average price; Pr is the rental rate and is about 40% in

3 The review was published by British Petroleum (BP) Corpora-tion every year and can be downloaded from BP online database:www.bp.com/downloads.

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China (Bolt et al., 2002; Wen, 2005); Pm is the market price; Pi isthe production cost. The relevant data are mainly from theFAO (Food and Agricultural Organization) forestry database aswell as China's Yearbook of Forest.

In year 2002, the rent of forestry depletion in China wasestimated at 4.98 billion Yuan.

3.2.8. Depletion of wetlands and farmlandsOver the last two decades, a large amount of agriculture landand wetlands have been converted to other land uses, andbecome one of themajor factors leading to the deterioration ofecological system. To calculate this economic loss, wemultiply the total reduced areas by the annual agriculturalproduction or ecological value. The cost of farmland reductionincludes productivity decline, the loss of ecological capacityand the land rents as well as the expenditures on farmlandrestoration (See Table 2), while the loss of wetlands primarilyincludes the value of ecological services (Liu and Yang, 2000;Bolund and Hunhammar, 1999; Anielski and Rowe, 1999).

The loss of the ecological assets above is of an accumulativenature in the sense that lost wetlands are difficult to recoveryand the value of per unit wetlands would increase annually(Anielski and Rowe, 1999; Wen, 2005). The lost wetland areashould thus be added to the one lost in previous year. Here weuseanannual growthrate of 10% forwetlandvalueper area, andthe data of farmland and wetland are available from China'sYearbook of Agriculture and the Report on State of Wetlands ofChina. Over the last 50 years, the area of natural wetlands inChina has been reduced 40% andwas only 25.94million hectarein year 2000. The estimated losses ofwetlands and farmland are153.2 and 24.0 billion Yuan respectively in year 2002.

3.2.9. Cost of the long-term environmental damagesEconomic activities could lead to not only acute environmentalimpacts but also long term chronic environmental damages. Inthis study, we consider only two such pollutants, i.e., CO2 andOzone Depletion Substances (ODS). Despite the low CO2

emission per capita in China, its consideration can promoteenergy conservation and the substitution of fossil fuel (ZhangandWen, 2001). Twodatasources are available toobtainChina's

Table 2 – The economic loss of farmland and wetlands,Yuan/hectare

Calculateditem

Estimationcomponent

Cost Totalcost

Farmland Decline ofproductivity

7500 35,640in all

Loss ofecologicalservices

7500

Expenditure ofpreventionand treatment

18,750

Loss of landrents

1890

Wetland Loss anddeteriorationof ecologicalservices

1095, consideringthe scarcity ofwetlands, its costper area increasesby 10% every year

CO2 emission each year. One is from the World Bank's CarbonDioxide Analysis Centre and the other is tomultiply the net CO2

emission factor4 of each fuel (e.g., nature gas, coal, crude oil,gasoline anddiesel oil) by their consumption amounts inChina.The globalmarginal cost of ametric ton of emitted carbon couldbe assumed to be $20 (Fankhauser, 1994), yet is modified withChina's GDP deflator along the years. Note also that the trans-form coefficient fromCO2 to carbon is 12/44. Similarly, we couldestimate the long-term environmental costs from ODS, themarginal cost of which is assumed to be 15.26$/kg (Anielski andRowe, 1999). In summary, the total cost of the two long-termdamages is estimated 818 billion Yuan or 7.6% of GDP in 2002.

3.3. Social account

3.3.1. Value of household work and volunteer workMuch of important work in a society is done through house-holds or community, e.g., childcare, home repairs andgardening. Although these works are not considered in SNA(Wen et al., 2004), they are regarded as benefits in this studyand are estimated by multiplying the involved labor time bytheir market prices.

The hours that devoted to household labor are availablefrom the census of the State Bureau of Statistics of China(SBSC). It is found that 85% of household work is done byhousewife and the average time is 4.01 h per day in 2000, yetthis number has been decreasing since 1980 (Wen, 2005). Themarket prices are available from the Yearbook of Labor as wellas the census reports from the government. For volunteerwork, only those required by in law are considered herein (e.g.,the tree planting in Arbor Day and volunteer activities incampus). Thereafter, the value of unpaid households labor orvolunteers was estimated 2996 billion Yuan in year 2002.

3.3.2. Defensive expendituresDefensive expenditures are defined as one's spending tomaintain comfort, security and satisfaction in a householdto avoid the declines of life quality. They may include forinstance expenditures on medical care, car repairs as well asmeasures against crime. The loss from traffic accidentsrepresents a cost of industrialization and increasing trafficdensities. This cost is directly available from the StatisticalYearbook of Transportation (e.g., 55.9 billion Yuan in 2002).Crime costs include both expenditures by the governmentsand public. The former can be estimated by the budgetaryexpenditures of public security, court of justice and procura-tion. The crime cost to public is based on the related insurancecompensation from the China Insurance Yearbook (e.g., thefamily property loss and insurance). In summary, the totalDefensive cost is estimated to be 268.8 billion Yuan in 2002.

3.3.3. Cost of family breakdownSocial breakdown imposes considerable costs to individualsand society in the form of legal fees, medical expenses andimpact on children (Anielski and Rowe, 1999; Xu and Ye, 2001).We estimate the divorce costs in terms of both the direct costto the involved adults and the indirect cost to the affected

4 Net emission factor of each fuel (C): coal=0.54; crude oil=0.8374gas=0.8465; diesel oil=0.8613; fuel oil=0.9.

;

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children. The former is based on the estimated expenses forlegal and counseling fees, and is available from the ChinaStatistical Yearbook. The latter was based on the estimate thatthe indirect divorce cost to a child is 16,449 Yuan (Wen, 2005;Zhang et al., 2003). Adding up the two costs together, the totalcost of family breakdown was 16.5 billion Yuan in 2002.

3.3.4. Cost of unemploymentUnemployment is also a social cost as limited work opportu-nities may lead to frustration, suicide, violence, crime, mentalillness, alcoholism and other substance abuse (Anielski andRowe, 1999). The information of unemployment is provided bythe China Labor Statistical Yearbook, and it is found thatunemployment rate has been increasing in China since 1985up to 2002 (from1.8% to 4.0%). The cost of unemployment couldthen be estimated by the un-provided hours multiplied by anaverage wage, and the result was 95.7 billion Yuan in 2002.

3.3.5. Change of leisure timeWith the increase of a nation'swealth, her citizenwouldusuallyhave more free time for family or other leisure activities, whichis regarded as a benefit. Note that the average hourly wage in

Table 3 – The costs and benefits of China's economic growth in

Year 1980 19

Personal expenditure 2317 45Cost of economic growth −2562 −48Cost of economic growth/GDP (%) −56.3 −Cost of economic account −378 −13Cost of economic account/GDP (%) −8.3 −

Cost adjusted for income inequality 0 −6Cost of consumer durables −378 −7

Cost of social account −289 −5Cost of social account/GDP (%) −6.3

Cost of crime −67 −1Cost of automobile accidents −57 −1Cost of commuting −119 −2Cost of family breakdown −3Cost of underemployment −41 −

Cost of ecological account −1896 −29Cost of ecological account/GDP (%) −41.6 −

Cost of household pollution abatement −5 −Cost of water pollution −236 −4Cost of air pollution −337 −7Cost of noise pollution −1Depletion of nonrenewable resources −1137 −13Loss of wetlands −41 −Loss of farmland −13 −Change of forests −10 −

Cost of CO2 emission −110 −2Cost of ozone depletion −5 −1Benefit of economic growth 1672 31Benefit of economic growth/GDP (%) 36.7

Value of household work and parenting 617 10Value of volunteer work 4Change of leisure time 8Net foreign lending or borrowing 30Services of consumer durables 926 17Services of public infrastructure 71 1Net capital investment 17 1

NPP=Benefits−Costs −890 −17NPR (%) −19.6 −GDP 4551 87

China was 49.5 Yuan in 2002. The total leisure value of the105.58 million workers would then be 288.7 billion Yuan basedon the legal hours of holiday.

4. The results

4.1. The costs and benefits of the three accounts

Basing on the methodology above, we can estimate the valuesof all the sub-accounts over the period of 1980–2002. Table 3presented the results in selected years, and it can be foundthat the Net Proceeds Rate (NPR) has been in an increasingtrend, though slowly, over the years (see also Fig. 2). A detaileddiscussion will noe be given below.

4.1.1. Costs of economic accountThe proportion of the costs of economic account in GDP hadbeen increased over years and then leveled off at −20 to −23%after 1994 (see Fig. 2). This is primarily due to the increasingincome inequality since 1980s, as revealed by the Gini coeffi-cient, which has changed from 0.25 in 1980 to 0.384 in 2002, and

selected years, 100 million Yuan

85 1990 1995 2000 2002

89 9113 26,945 42,896 48,53562 −10,458 −29,777 −46,308 −56,72855.3 −57.1 −50.9 −51.8 −52.890 −3632 −13,001 −20,516 −23,30515.8 −19.8 −22.2 −23.0 −21.719 −2146 −9029 −15,113 −16,93770 −1486 −3972 −5402 −636921 −1066 −2895 −4510 −9547−5.9 −5.8 −4.9 −5.0 −8.934 −277 −731 −1335 −212939 −229 −356 −490 −55913 −451 −1427 −1978 −5738−8 −26 −95 −149 −16527 −82 −286 −558 −95651 −5761 −13,880 −21,283 −23,87533.6 −31.4 −23.7 −23.8 −22.212 −27 −49 −82 −10257 −1069 −3360 −5994 −655005 −1008 −2598 −3662 −4352−2 −4 −12 −15 −1603 −2251 −2920 −3320 −285989 −207 −747 −1227 −153223 −28 −50 −165 −24023 −65 −171 −59 −4434 −601 −1449 −1893 −233102 −501 −2525 −4866 −584942 7250 27,300 45,006 58,48135.7 39.6 46.7 50.4 54.470 3321 11,809 21,859 29,8877 14 46 59 73

14 30 1797 2322 288756 222 1099 1267 210617 3289 9984 14,836 17,36641 295 986 1746 253837 79 1580 2918 362321 −3208 −2477 −1302 175419.6 −17.5 −4.2 −1.5 1.692 18,320 58,511 89,341 107,514

Fig. 2 –The percentage of the costs and benefits of the threeaccounts in GDP.

Fig. 3 –The change of major components in the ecologicalaccount in GDP.

363E C O L O G I C A L E C O N O M I C S 6 5 ( 2 0 0 8 ) 3 5 6 – 3 6 6

over0.4 today.Theenlarged inequalityhascontributedover 60%of the NPR decrease in the economic account. Meanwhile, thepercentage of personal expenditure in GDP has dropped from53% in 1981 to 45% in 2002. In summary, the unhealthyeconomic growth in China today is due to the over-emphasisto the performance of substance wealth, while indifference topeople's livelihood (i.e., the employment opportunity, growth ofincome and consumption).

4.1.2. Costs of ecological accountThe cost of ecological account in GDP has been in a highproportion over the years, though it has decreased considerablyto a level of −22 to −24% before 1994 (see Fig. 2). This changepattern is mostly because of both the cost decreases of airpollution and the depletion renewable resources in GDP. Theformer was reduced from 7.4% in 1980 to 4.1% in 2002 and thelatter from 14.8% to 2.7% as shown in Fig. 3. The reason for thatcould be due to both an stricter air pollution control and thedecrease of coal proportion inChina's total energy consumptionDifferently, however, the cost of water pollution in GDP hascontinued to increase and exceeded 6% due to the high levelpollution discharge loads to receiving waterbody as well as thewide pollution of drinking water resources. After 1990, the costof water pollution has overtaken the cost of air pollution andbecome the major loss in ecological account (see Fig. 3).

In addition, the cost of CO2 emission is tightly related to theconsumption of nonrenewable resources. Comparing thesefactors, it is very important for us tonotice that the little dropofecological cost recently (see Fig. 2) was temporary and wouldpossibly further increase due to the issues of depletion ofnatural resources and environmental pollution faced today.Finally, the sharp destruction and deterioration of wetlandscaused decline of China's ecological system, which made itscost near to the depletion of nonrenewable resources. In 2002,the contribution to the total cost of ecological account can beranked as water pollution, ozone depletion, air pollution,depletion of nonrenewable resources, CO2 emission and loss ofwetlands, and their proportion cost in GDP were 6.1%, 5.4%,4.1%, 2.7%, 2.2% and 1.4% respectively.

4.1.3. Costs of social accountThe cost of social account in GDP was quite stable before 1999,slightly fluctuating around −5%, yet decreased rapidly to 8.9%of GDP in 2002. The reason for that could be in two aspects, i.e.,the increased commuting cost caused by ineffective publicinfrastructure and the increase of unemployment rate.

4.1.4. Benefits of the three accountsThe benefits of China's economic growth shows a continuousincrease from 42.7% in 1980 to 54.4% of GDP in 2002, mostly dueto the increase of the services of consumer durables andhousehold work, and the large net capital investment. Thetotal benefits are estimated at 5848 billion Yuan in 2002. Of thethree accounts, the social account increased considerably from13.8% in 1980 to 30.6% of GPD in 2002 and became the mostimportant one. The economic account kept as a dominantbenefit over the studiedperiod, though itwas slightly decreasedfrom 28.9% in 1980 to 23.8% of GDP in 2002. On the other hand,however, the servicesof public infrastructurewas only 4–4.5%ofGDP, reflecting the insufficient support of China's publicinfrastructure to economic activities. Differently, the economicactivities have led to serious deterioration of ecological system,which was in a significant deficit over the years.

4.2. Change of the net proceeds rate

By summingup the costs and benefits of the three accounts, theNPR can be calculated as an integrated indicator for assessingthe quality of China's economic growth. As shown in Fig. 4,China's total NPR of economic growth only became positiveafter year 2000, yet still in a very low level, and only 1.6% of GDPin 2002. Basically, theNPR inChina could be classified into threephases, the discussion of which we now turn to.

4.2.1. The adjustment phase (1980–1987)In this phase, the NPR of economic growth fluctuated around−20%. This was a period that China started to implement heropen policy, yet with a planned economy system. AlthoughChina's industries began to grow rapidly, they manufactured

Fig. 4 –The NPR in the three accounts along different phasesof economic growth.

Fig. 5 –The cost and benefit components of China's economicgrowth in 2002.

364 E C O L O G I C A L E C O N O M I C S 6 5 ( 2 0 0 8 ) 3 5 6 – 3 6 6

mainly crude and primary products with a low efficiency ofnatural resources and a high discharge of pollutants. At thesame time, however, the NPR of social account was stable dueto the presence of a traditional concordant community,though the income per capita was very low.

4.2.2. The steady increasing phase (1988–1998)In this phase, the NPR increased rapidly due to a number ofsignificant changes in China's society. First, China is in adetermination to develop a market economic system, forwhich she improved considerably her efficiency of economicactivities and reduced the economic costs. Second, the NPR ofsocial account began to increase steadily with the increase ofnational income. Finally, the Chinese government started tocontrol the environmental pollution problems and declared tocarry out the national strategy of sustainable development. Itis in this period that China formed her environmentallegislation and policy framework, and began a large scale ofenvironmental pollution control program. The efficiency ofresources and energy is also rapidly improved to a new level.Consequently, the NPR of ecological account has beenincreased steadily. But because of the industrial structureand the rapid urbanization, environmental pollution in Chinais still in a serious condition.

4.2.3. The fluctuation phase (after 1999)In this phase, China further strengthened the control andclean-up of environmental pollution by considerable increaseof investments, mainly through national loans. For example,during the Ninth Five-Year Plan Period (1996–2000), the totalinvestment in pollution control was 346 billion Yuan, 0.93% ofChina's GDP, and it was increased to 162.7 billion Yuan in 2003,1.39% of China's GDP. In the same time, the policies onenvironmental protection have been developed and imple-mented more systematically and efficiently, including achange from end-of-pipe treatment to source control, achange from point source control to integrated regionalenvironmental management and a change from administra-tive regulation to a wide application of economic instruments.However, due to the increasing role of China as a worldmanufacture workshop, the rapid development of heavy andchemical industries and their dependence on naturalresources, pollution loads in China is still in a high level and

decreases the improvement of ecological account. Given thatChina may grow in the same pattern in the next two decades,the future sustainability of China would thus significantlydepend upon whether China could successfully resolve itscurrent challenges including reforming its industrial struc-ture, a smooth urbanization and more importantly aneffective control of its environmental pollution.

4.3. A component analysis of CBA and GDP

A component analysis is applied herein to investigate thefundamental forces that drove the long term increase of GDPand stagnation of NPP. One reason for that could be that thenegative components of welfare (e.g., income inequality, lossof land, depletion of nonrenewable resources and long termenvironmental damage) have increased much faster than thepersonal consumption base and other positive sub-accounts.As far as China's NPP is concerned, it has been negative andimplies that the current development strategy is threateningfuture wealth. In 2002, the NPPs of the economic, social andecological accounts were −341, 2904 and −2388 billion Yuanrespectively as shown in Fig. 5.

There has been a high dependence of the total NPR ofeconomic growth upon the NPR of ecological account, thecorrelation of which is 1.13 (see Fig. 2). This reveals the longterm importance of environmental pollution, ecological deg-radation and depletion of nonrenewable resources in thedecline of national welfare. For example, the cost of environ-mental pollution went down from 12.6% of GDP in 1980 to10.2% of GDP in 2002. It is very important to regard that theweight of environmental degradation in GDP has remainedconstant, but increased rapidly again after 1998.

In order to realize the goal of “completely well-off society in2020” that was set by China central government, it isnecessary to keep a high growth rate of economy during thenext two decades. However, with the scale-up of economy andthe demand for environmental quality increasing withnational income, larger depletion of resources and morepollutant emissions would make China meet the challenge

Fig. 6 –The shape U curve with respect to the NPP and GDPper capita.

365E C O L O G I C A L E C O N O M I C S 6 5 ( 2 0 0 8 ) 3 5 6 – 3 6 6

of further expansion in the cost of ecological account thatwould possibly become a key constraint factor to affectChina's sustainability in the following decades.

The NPP of ecological account in China has followed a Ushape (Fig. 6 over the past two decades. The NPP pattern isopposite to that of an Environmental Kuznets Curve (EKC)(Stern et al., 1996; Shafik and Bandyopadhyay, 1992.). Whilethe level of environmental degradation and depletion ofnatural resources declines with increasing income per capita.The evidence shows by the NPP presented here is against thistheory because they show a decreasing trend of welfare asincome grows. Although the NPR index does not show adecreasing trend from the 1980s (see Fig. 4), however, as wehave mentioned before, the level of environmental pollution,depletion of nonrenewable resources and ecological degrada-tion has remained approximately large over times and doesnot show the inverted U shape suggested by the environmen-tal Kuznets curve.

5. Conclusion

Aiming at the issues of economic growthChina faces,we build aCBA framework under the principles of sustainable develop-ment, including three dimensions of ecology, economy andsociety. Thismethodologywedeveloped in this study canmakea systematic examination to evaluate the costs and benefitscaused by economic growth atmacroscopic level. It is necessaryto select a long study period during which CBA framework andmethod are used to evaluate the effect of economic growth, or itwould fail only with data of a year. Secondly, we need tocompare the trends of the three accounts over times, especiallythe weight of every sub-account in GDP. At last, the economicgrowth affects sustainability in too many ways, so theframework is still not perfect and complete and can be furtherexpanded to includemore sub-accountsmeasured inmonetaryterms. How to measure those sub-accounts need more experi-encesandstudy.Of course, therearestill some limitations inourCBA framework as follow: (1) The value of non-market productsand services is very difficult to measure and needs a revisedaccounting system; (2) the assignment of sub-accounts in thethree accounts is still arbitrary. Anyway, we consider this CBAmethod as a useful tool to identify the existent problems foreconomic growth of a country or region, and it provides an

unconventional angle of view for the policy decision onsustainable development.

The results derived from this study obviously show thelarge bubble of China's external growth of economy. The NPPis still very low because China's economic activities havebrought serious costs in the aspects of economy, ecology andsociety, which is the strong evidence that economic growthcan in many cases, be associated with declining welfare.Inequality, increased pollution, traffic congestion and a senseof disconnectedness from the community can all be by-products of the unbridled growth of economy. In conclusion,the larger and larger gap of income distribution is the mainfactor of economic cost, and social cost primarily comes fromthe lag of infrastructure building and the underemploymentpressure in China. However, the dominant factor among allthe costs is the ecological account. It alwayswas in the state ofserious deficit so as to almost counteract the total NPP ofsocial account and economic account. That is, the costsresulted from issues of environment and natural resourcesoffset half of the total benefits of economic growth. Therefore,themost important we need to focus on are natural resources,ecological environment and pollution control.

Today, China has stepped into the mid-term phase ofindustrialization and met the turning point and regulativephase for many important matters (e.g., upgrade of industrialstructure, urbanization, environmental protection and ecolog-ical conservation, development and management of naturalresources, etc.). Based on the component analysis in eachaccount, the primary factors that would affect China's sustain-ability in the future can be outlined as below: industrializationand industrial structure, urbanization, efficiency of resourcesconsumption, investment and efficiency of public infrastruc-ture, environmental protection and ecological conservation.

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