China Airpocalypse II: Effects on the economy

Apart from the climate and health impacts I have mentioned in my last post, air pollution also  hinders economic growth in China in three ways:

• The cost of air pollution and its negative externalities consumes large sum of national income, which limits government budget on other aspects such as education, public health, infrastructure which helps to increase productivity in the long-term. According to Zhang Gaoli, who is one of the ruling Communist Party’s elite Politburo Standing Committee, environmental degradation has been the cost of decades of breakneck economic growth China. The Chinese government has spent $10.5 billion on efforts to tackle the smog and environmental protection.

• Health is a form of human capital. Increased probability of getting respiratory or cardiovascular diseases triggered by aggravated air pollution reduces the quality and productivity of the country’s human capital. This should lead to a fall in average output per worker, and a slowdown in economic growth. According to Weil’s Growth accounting framework, the economic output Y (also known as the Cobb-Douglas aggregate production function) is expressed in terms of inputs K (capital) and H (labour composite).

1. 
   where A represents level of productivity of the economy, labour composite H depends on education, health and raw bodies. So it gives,
   
   
   where h is per-worker education human capital, v denotes per-worker health human capital, and L marks the number of workers in the economy.
   
   As such, fall in h should reduce labour composite H productivity and final output. This assumption takes health impacts caused by air pollution as the only variable, any health impacts related to chronicle diseases and government intervention on public health are irrelevant in this case. In addition to this, workers have to spend a greater portion of their income to deal with the costs related to air pollution i.e. medical treatments, masks consumption, air filters, etc. As such, workers have a smaller budget on consumption and their ability to increase living standard is reduced.

• The issue of aggravated air pollution has led to closure of schools in various cities, even though it just lasted for a day. In terms of economics, the event reduces students’ opportunity of getting education, and so impacting the quality of potential education human capital, despite it is a one-day closure and should not lead to any significant effect in future economy. But more importantly, the decision made by the city authorities proved that the air pollution problem has now becoming an issue that will affect our daily life routines, industrial production and market operations. This makes the problem difficult to ignore and that the government should take realistic action with a pro-active attitude to gradually reduce the level of hazardous air pollution. 

The causal factors of this hazardous particulate pollution are mainly the overly-expanded manufacturing sector in the economy which a majority of them uses fossil fuel (coal) as their energy source, and the country’s unreasonable modes of energy consumption. In light of China’s growth slowdown, an economic update released by the World Bank suggests an economic reform to a more moderate and balanced economy, by reducing excess capacity in industry and better indigenous capacity for innovation for instance.

The economy is gradually shifting from industry to servicing sector, despite the robust in the latter is relatively weak and immature in sustaining growth. Source: World Bank staff calculations based on CEIC data

Shifting the economy from smoke-stack industries to tertiary servicing is likely to stimulate economy recovery and reduce GHGs emissions. The economic reform are supported by the rise of middle-class, which has a higher preference for services, and a fall in industrial activity due to a buildup of excess capacity (over investment) and decelerating export growth (fall in import demand in the EU market). The reform, however, is a long-term economic solution in regards to the air pollution problem.

Source: World Bank staff calculations based on CEIC data

The government should also start investing in other renewable or cleaner energy sources instead of burning fossil fuels. From a bottom-up perspective, citizens should adapt a more sustainable use of energy. A simple cartoon below illustrates possible solutions to achieve energy-efficiency in our home. 

Source: BBC Bitesize

Here comes the time when the public needs are consistent with the government preference, in the case, air pollution is the most imminent issue that affects both public health and economic growth. The Chinese government has to prioritise its environmental issues over economic stability as the former provides a strong and fundamental foundation for the economy to thrive and sustain.