China 2.0

If you're a China watcher, you don't just listen to what top Beijing leaders say, but also to how many times they say it. This month President Hu Jintao has embraced a new mantra, stressing "sustainable development," "innovation" and "a resource-saving, environment-friendly society." He uttered those buzzwords in his New Year's address, then at a high-profile science and technology conference, and then again last week during an inspection tour of Fujian province. In a significant departure from his predecessors' focus on no-holds-barred GDP growth, Hu is calling for nothing less than a quantum shift in China's economic-development model, deeming it "an important and urgent strategic task."

China has already achieved a quarter century of unprecedented economic growth. Now Beijing is essentially saying that it needs to keep growing in a more responsible way, emphasizing environmental protection, more energy efficiency and cutting-edge technology. Software mavens might call this new vision China 2.0. You don't have to be a rocket scientist (or a Politburo member) to see that the mainland's winning formula of cheap labor, heavy investment and nearly double-digit GDP growth can't last forever. Without a fresh paradigm, authorities believe, China will increasingly suffer from environmental degradation, destabilizing income disparity and social unrest. The question is whether the country can afford to shift gears now--or whether such concerns could cost it the competitive advantages that have made China's economy the most-talked-about in the world today.

Certainly China is already paying a heavy price for its economic success. According to the World Bank, pollution and other environmental damage may be costing the Chinese economy between 8 and 12 percent of GDP annually, due to medical-care expenses and damage to crops and marine products. The mainland is now home to 16 of the world's 20 most polluted cities. More than three fifths of the country's rivers and lakes are tainted with chemicals, industrial waste or toxic spills like the recent Songhua River benzene slick, which contaminated the water supply in the city of Harbin for days.

Already scarce arable land is disappearing as rapacious real-estate developers gobble up farmland. Though China is desperate for energy, the country uses power inefficiently. Experts estimate that the country uses three times as much energy per unit of GDP as the United States, and nine times more than Japan. Meanwhile, rural discontent has flared over land seizures, pollution and lagging wages--roughly one third of what urban workers make. Last week the Public Security Ministry admitted that incidents of social unrest grew by more than 6 percent in 2005. "Ordinary people aren't satisfied with the results of fast economic growth," says economics professor Xia Yeliang of Tsinghua University, "so the government has embraced the idea of 'green GDP'."

Chinese leaders are essentially admitting that brains, not brawn, are the key to what Hu calls an "innovation-based economy." The concept is an echo of U.S. economist Paul Krugman's 1990s critique of East Asia's export-based economies, in which he touted the benefits of "inspiration" rather than "perspiration." Chinese experts have even revealed when they believe this paradigm shift should occur--when a country's per capita GDP reaches the $1,000 to $3,000 range. (China's per capita GDP exceeded the $1,000 threshold in 2003.)

Certainly, China has become almost obsessed with technological innovation, which will hasten the country's move up the development food chain--and away from the "embarrassing" situation of having to export 800 million shirts to pay for a single imported airplane, as one domestic newspaper recently put it. "China should not be the factory of the world any longer," says Yang Fan, a professor of commerce at the China Politics and Law University. Economic liberals have been shouting for more innovation for years, even decades, says Yang. The difference is that "this time, I think the government is taking our suggestions."

As part of his call last week to create an "innovation economy" within 15 years, Hu urged the Chinese to invent proprietary technologies and vowed to boost state R&D spending, which was just 1.23 percent of GDP in 2004. (Japan and the United States spend 3.3 percent and 2.7 percent of GDP, respectively, according to the OECD.) China is already cracking down on construction projects that fail to conduct required environmental feasibility studies. Beijing is pursuing clean-energy sources; to maintain high GDP growth rates, China needs to double its power-generation capacity by 2020.

Beijing plans to spend $185 billion by 2020 to develop renewable energy. In particular, the Chinese need to be weaned off coal, a cheap but dirty energy source that accounts for more than 70 percent of the country's power production. Although energy conservation and recycling are two other trendy catchphrases nowadays, many Chinese remain hugely wasteful. Leaky faucets are left to run, partly because urban water is only about one tenth as expensive as in Germany. Petrol is heavily subsidized, costing about one fourth of what it does in the United States. Although they've raised water fees incrementally, Chinese authorities worry that substantial water, power and fuel price hikes will prompt protests. "To realize 'green GDP,' one has to pay a big price," says analyst Li Shi of the Chinese Academy of Social Sciences.

Turning China's behemoth economy in a different direction will be a long-term challenge. And many provincial governments may resist. "Local government officials won't be happy with this idea," says Xia. "They might support it [publicly], but boycott it behind the scenes." Local authorities chase quantifiable achievements that come with making and building things. Most serve three-to five-year terms in office, explains Xia, so they want to see the kind of tangible results that lead to promotions--more factories, rising exports. Dong Baoping, dean of the Beijing Science and Technology Management College, says that local governments have often "turned a deaf ear to the notion of environmental protection."

There are no easy answers. Li says that Beijing may have to choose between "slower economic growth with high quality, or rapid economic growth with low quality." That's an unappealing trade-off in a nation that must generate at least 17 million new jobs every year for young people entering the work force. In other words, China cannot afford to let traditional GDP growth dip too low. "We have a serious employment situation; we need to balance feeding people adequately while doing a good job of environmental protection," says Li. To succeed at that task, Hu and his Politburo colleagues may well be hoping for a second economic miracle.

Join the Discussion