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Candace WilliamsAre Foreign-Owned Enterprises Disproportionately Harming the Environment in China?
Introduction
Over the past few decades, China has accomplished a level of industrializationand development that has taken other economies centuries to attain. The past 20 years,China’s GDP Per Capita has grown by over 3200% ($230 in 1975 and $7800 in 2007 byCIA estimates). With a growth rate of 11.5%, China is poised to surpass Germany as thethird-largest economy by 2008. In 30 years, China has lifted hundreds of millions of itscitizens out of poverty. China has accomplished these goals with state sector reform:state-owned enterprises (SOEs) are being replaced with collectively-owned and privately-owned enterprises (COEs and POEs). Foreign Direct Investment (FDI) also accounts for China’s growth. In 2006, there were 41,485 FDI projects that were worth $69.47 billiondollars.Horrifying environmental woes mar China’s amazing economic achievements. In2001, the World Bank reported that 16 out of the world’s 20 most-polluted cities are inChina. In 2007, the World Bank announced that 760,000 people die prematurely eachyear because of air and water pollution, and that China loses 5.4% of its GDP ($160 billion) per year because of environmental degradation. The Chinese Ministry of Healthsays that cancer deaths in urban and rural areas have increased by 21% since 2005 as aresult of air and water pollution. China’s State Environmental Protection Administration(SEPA) estimates that in 2000, industry accounted for 40% of China’s water pollution,and 80% of its air pollution. Consumption increases also present challenges.Communist Party of China General Secretary Hu Jintao spoke about the
 
Williams 2environment at length during his October 2007 report to the 17
th
National Congress of theCommunist Party of China. For the first time, the report had a major focus onenvironmental protection via conservation and change of culture. The
 International  Herald Tribune
reports that during a ‘State of the Union’ style speech, Prime Minister Wen Jiabao referenced the “environment”, “pollution”, or “environmental protection” 48times. In July 2007, Chinese authorities promised that the government would spend $175 billion over the next five years to cut pollution and improve air and water quality. Theseenvironmental goals exist alongside a national goal of quadrupling China’s 2000 GDP by2020. Many experts say that China continues to sacrifice its environment for theeconomy. Historically, we have seen that countries exploit their resources during their development process and then use public funding to deal with environmental issues oncethey are affluent. We lack models for China’s current problem because China must dealwith environmental issues while they are still relatively poor.Scholars, the media, and nongovernmental organizations question the role of FDIin China’s environmental issues. Some posit a “race to the bottom” scenario whereforeign companies are attracted to places with few environmental regulations, and thencreate dangerous levels of pollution. Others say that foreign companies are efficient andhave access to clean technologies. Furthermore, these companies may have the goal of reducing pollution since they do not want to waste raw materials. In this paper, I assertthat FDIs are better than SOEs, POEs, or COEs at reducing pollution levels, and that thefinancial sector and citizens can provide an informal regulation system if there is a highlevel of transparency. First, I will analyze the costs of pollution to China’s economic andsocial well-being. Then, I will analyze literature that weighs the “race to the bottom”
 
Williams 3hypothesis. Finally, I will explore new programs in China that capitalize on social capitaland informal regulations.
The Costs of Pollution
Air PollutionOnly 1% of China’s city 560 million city-dwellers breath air considered safe bythe European Union (EU). The EU, United States, and international agencies say that between 40 and 50 micrograms of pollution per cubic meter of air is unsafe for human beings to breath daily. Last year, Beijing’s PM-10 level was 141 micrograms. Recentstudies suggest that China has depressed its optimal crop yields by 30% because of risingtemperatures and “brown clouds” that decrease the amount of sunlight that hits plants.Cancer is the leading cause of death in China’s urban areas. Air pollution in China isdangerous China’s economic growth. Premature death and poor health, declining foodsupplies, and forgone employment opportunities are issues that decrease China’s productivity and standard of life.China’s high levels of air pollution are driven by its reliance on coal and itstransportation boom. The International Energy Agency says that China will be the world’sleading greenhouse gas producer while the Netherlands Environment Assessment Agencysays that China is already the number one producer of greenhouse gases. China uses coalfor over two-thirds of its energy needs and burns more of it than the United States,Europe, and Japan combined. Oil provides a quarter of its energy and ‘clean’ technologiessuch as wind and hydroelectric power provide less than 10% of its energy needs. Due toits heavy reliance on energy-intensive manufacturing industries and the under-pricing of coal and oil, China is six times more energy intensive per unit of national product than
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