Case study on the use of genuine progress indicator to measure urban economic welfare in China

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1 available at ANALYSIS Case study on the use of genuine progress indicator to measure urban economic welfare in China Zongguo Wen a,, Kunmin Zhang b, Bin Du a, Yadong Li c, Wei Li d a Department of Environmental Science & Engineering, Tsinghua University, Beijing , China b State Environmental Protection Administration of China, Beijing , China c Department of Civil & Environmental Engineering, Jackson State University, Jackson, MS 39217, USA d Department of Environmental Economics & Management, Renmin University of China, Beijing , China ARTICLE INFO Article history: Received 1 December 2006 Accepted 6 December 2006 Available online 18 January 2007 Keywords: Genuine progress indicator Gross Domestic Product Urban Economic welfare Sustainability China ABSTRACT The Gross Domestic Product (GDP) has been widely used to measure the economic growth of a region or a country. However, it does not distinguish between economic activities that improve the well-being and those that impair it. It does not reflect the social, economical, and environmental sustainability either. This paper presents a case study using the newly developed economic indicator Genuine Progress Indicator (GPI) to evaluate the economic performance and human well-being in China at an urban level. The study also shows how the deficiencies of GDP in measuring the economic performance and well-being can be overcome by GPI. Four cities in China (Suzhou and Yangzhou in Jiangsu province, Ningbo in Zhejiang province, and Guangzhou in Guangdong province) were chosen in the case study. Important components of GPI for cost and benefit analysis were developed to address the depletion of nonrenewable resources, cost of environmental pollution, and net capital investment, etc. The comparison between GDP and GPI for the four cities and the comparison among the GPIs of the four cities and other countries were made over the period of Based on the GPI results, recommendations on policy-making and infrastructural development were made for the improvement of the overall economic welfare of the cities. The advantages and limitations of the GPI method were discussed Published by Elsevier B.V. 1. Introduction The Gross Domestic Product (GDP) was introduced as a monetary measure of wartime production capacity during the World War II. Today, it is widely used by policymakers, economists, and the media as the primary scorecard of a nation's economic health and welfare. However, GDP has some unavoidable deficiencies as a measure of economic performance (Lawn, 2003; Hamilton, 1999; Wen et al., 2004), and is incapable of measuring peoples' well-being. The major problem is that GDP makes no distinction between economic transactions that add to welfare and those that diminish it (Cobb et al., 1995). It includes all expenditures, assuming that every monetary transaction adds to peoples' welfare. GDP also ignores the contributions of nonmarket transactions such as the household work and voluntary services, and the natural environment. There have been several attempts to develop indicators to reflect the changes in human well-being that is ignored in GDP (Richard, 1998). The recent developments included the Genuine Saving (Pearce and Atkinson, 1993; Corresponding author. address: wenzg@tsinghua.edu.cn (Z. Wen) /$ - see front matter 2007 Published by Elsevier B.V. doi: /j.ecolecon

2 464 ECOLOGICAL ECONOMICS 63 (2007) Zhang and Wen, 2001; Bolt et al., 2002) by the World Bank and the Index of Sustainable Economic Welfare (ISEW) by Daly and Cobb (1989, 1994), Beatriz (1999), which has led to a lively debate on a series of methodological and measurement issues and the construction of similar indexes in several other countries (Neumayer, 2000). The ISEW has been revised and given a variety of different names (Guenno and Tiezzi, 1998) including the Genuine Progress Indicator (GPI) (Redefining Progress, 1995; Anielski and Rowe, 1999; Cobb et al., 2001) and the Sustainable Net Benefit Index (Lawn and Sanders, 1999; Lawn, 2000). The GPI includes reasonable estimates of costs and benefits and covers twenty-five activity measures that are ignored in GDP. Although many institutions and scholars had started the research and monitoring of the regional economic welfare in China (RTSDIS, 1999; Ceng, 1999; Zhang et al., 2000, 2003a,b) and made some progresses, this was the first case study that used the GPI method to evaluate the urban economic welfare progresses in China (Wen et al., 2005). Many other countries including Australia (Hamilton, 1999) and USA (Redefining Progress, 1999) have tested this method. Four cities in the welldeveloped region in the southeast China including Ningbo in Zhejiang Province, Yangzhou and Suzhou in Jiangsu Province, and Guangzhou in Guangdong Province, were chosen for this study. Some important contributions have been made to the application of the GPI method at an urban level by incorporating many significant components. In Section 2, the defects of GDP as compared to GPI are first discussed, and then the framework of the GPI method is presented. Section 3 describes the detailed data and calculations of the primary GPI components such as the costs of environmental pollution and the depletion of natural resources. The GPI results and the comparisons among them for the four cities are given in Section 4. Based on the results, strategic suggestions for a sustainable development are given to the local policymakers in Section 5. The advantages and limitations of the GPI method are discussed in Section The GPI approach 2.1. GDP and GPI The GPI was designed to overcome the shortcomings of the GDP and address the economic health and human well-being. The biggest problem with GDP is that it counts only monetary transactions of economic activities; they are always positive as long as money changes hands, making no distinction between costs and benefits, well-being or deterioration and adding everything as a gain. This is why GDP is always growing positively. First, GDP treats crime, divorce, legal fees, and other activities that cause social problems as economic gains. Car wrecks, medical visitations, locks and security systems, and insurance are also pluses to it. Furthermore, GDP omits much of what people value and the serves that meet people's basic needs. For example, it does not count free services such as the community voluntary work and care of children and the elderly. These services would not show up in the GDP if they were not paid for. GDP also ignores the value of leisure time spent in recreation, relaxation, or with family and friends. Second, the GDP ignores the environmental costs of economic activities. It gives no account to the depletion of natural resources used to produce goods and services. On the contrary, it counts pollution as a double gain to the economic growth. For instance, the production of oil that creates pollution adds to the GDP, and then the clean-up of the toxic waste sites ups the GDP even more. In treating the depletion or degradation of natural resources as income rather than depreciation of an asset, the GDP violates the basic accounting principles. In addition, the GDP omits crucial contributions of the environment, such as pure air and water and moderate climate. These resources, which the earth provides for free, could become expensive if they needed to be purchased instead. Third, growth in GDP does not benefit all people. For example, from 1973 to 1993 while the GDP of USA rose by 55%, the real wages declined by 3.4%. In the 1980s, the bottom poorest one fifth of the American families lost 0.5% of their income each year, while the top 5% of the households increased their real income by 3.9% per year (Cobb et al., 2000). This study demonstrated that these obstacles can be overcome through the proper application of GPI. The GPI differentiates between what most people perceive as positive and negative economic transactions, and between the costs for producing economic benefits and the benefits themselves. The following nonmonetary benefits ignored in GDP are included in GPI: the value of time spent on household work, parenting, and volunteer work; the value of services of the durable goods such as cars and refrigerators; and the value of services of highways and streets. Three categories of expenses that do not improve people's well-being are included: (1) defensive expenditures that are defined as money spent to maintain the household's level of comfort, security, and satisfaction to cope with the declines in life quality due to such factors as crime, auto accidents, or pollution. Examples include personal water filters, security systems, and hospital bills from auto accidents; (2) social costs such as the cost of divorce, household costs of crime, and loss of leisure time; (3) depreciation of environmental assets and natural resources, including loss of farmland, wetlands, and old-growth forests, and reduction of the reserves of natural resources such as the fossil fuels and other minerals. Over twenty economic, social, and environmental components as listed in Table 1, which GDP ignores, were addressed in this study. The GPI approach used the consumer expenditures adjusted for income inequality as its base, then added or subtracted the values determined for all the components based on whether they enhance or lessen the human wellbeing, regardless of whether or not money changes hands. The GPI values were also converted into GPI per capita for more accurate comparison GPI and weak sustainability It is very unlikely that GPI alone can tell all we need to know about the sustainability of a society since sustainability itself is such a multi-faceted concept. Sustainability is basically seen by neoclassical economists as a problem of managing a nation's portfolio of capital to maintain it at a constant level. It includes natural capital in principle, but it also allows for virtually unlimited substitution between man-made and

3 465 Table 1 Summary of GPI components in the study Economic Social Environmental Consumer expenditure Income distribution coefficient Weighted personal expenditure Service of consumer durables Service of highways and streets Cost of consumer durables Cost of commuting Net capital growth Net foreign lending or borrowing Value of housework and parenting Value of volunteer work Cost of crime Cost of family breakup Change of leisure time Cost of underemployment Cost of automobile accidents Cost of household pollution abatement Cost of water pollution Cost of air pollution Cost of noise pollution Change of wetlands Change of farmland Depletion of nonrenewable resources Cost of long-term environmental damage Cost of ozone depletion Change of old-growth forest natural capital. An operationalized version of Hicks Hartwick Solow weak sustainability has been suggested by Pearce and Atkinson (1995), Pearce et al. (1996). Weak sustainability implicitly assumes that savings are invested in manufactured capital or human capital and that the latter are perfectly substitutable for natural capital (Brekke, 1997). The strong sustainability requires that some minimum amounts of a number of different types of capitals (economic, ecological, and social) be independently maintained in physical terms. The major motivation for this insistence is derived from the recognition that natural resources are essential inputs in economic production, consumption, or welfare and cannot be substituted for by physical or human capital. It is understood that some environmental components are unique and that some environmental processes may be irreversible over relevant time horizons. A compromised version of strong sustainability focuses on ecosystems and environmental assets that are critical in providing unique and essential services (such as life-supporting service). The GPI is developed as a measure of weak sustainability. It cannot be used for strong sustainability (Zhang et al., 2003a). The GPI alone cannot conclude whether an economic activity is more or less sustainable. Other supplementary approaches such as the Ecological Footprint (EF) are needed to determine what is happening to natural capital over time (Du et al., 2006). The EF designed by Wackernagel and Rees (1997) represents a quantitative assessment of the biologically productive area (the amount of nature) required to produce the resources (food, energy, and materials) and to absorb the wastes put out by the residents of a country or a city over the course of one year. The gap between local carrying capacity and the requirement of economic activities can be revealed by comparing the computation results of the EF with the service capacity provided by the nature capital. This model only reflects the effect of economic policy on the environment; it omits other important influences from land utilization, such as the land degradation resulted from urbanization, pollution, and erosion. The GPI is intended to provide citizens and policy-makers with a moderate barometer of the overall health of the economy and the change of the national condition over time. It reveals the relationship between factors conventionally defined as purely economic and those purely social and environmental GPI methodology in this study The GPI method has been used as an alternative indicator to measure the economic welfare for Scotland over the period of (Hanley et al., 1999). It was concluded that the economic welfare of Scotland was unsustainable and worsening although its GDP was rising. The Australian Institute also employed the GPI as a new index for changes in the wellbeing of Australia (Hamilton, 1999; Hamilton and Richard, 2000; Lawn, 2001, 2003). Our study extended the application of GPI to the measurement of the economic performance and human well-being at an urban level. In this study, the GPI components were divided into three categories as given in Table 1. The first reflects the economic sustainability, including nine components such as the services of consumer durables (cars and refrigerators) and highways and streets. The second measures the social sustainability that includes social costs such as the costs of divorce and crime and nonmonetary benefits such as the value of time spent on household work, parenting, and volunteer work. The third indicates the environmental sustainability with ten cost items such as the costs of the depreciation of environmental assets and natural resources. Some components are benefits ignored in GDP, and others are expenses that do not improve the cities' welfare. Using the consumer expenditures adjusted for income disparities by the Gini coefficient as its base, GPI then adds or subtracts components of spending based on whether they enhance or reduce the city's well-being. For example, the costs of crime, environmental decay, and family breakup are subtracted to account for the economic activities beyond money exchange. At last, the indicators GPI, GPI per capita, and ratio of GPI to GDP are arrived at. Because GDP and GPI are both Fig. 1 Change of index of income inequality for the four cities over

4 466 ECOLOGICAL ECONOMICS 63 (2007) measured in monetary terms, they can be compared on the same scale for different times and different regions. This study covered the data for the period of for the four selected cities in China. The following section discusses the details on the data collection, derivation, and estimation for all the GPI components for the four cities. 3. Data of GPI component 3.1. Index of income inequality The income inequality has been increasingly widened in China and is becoming a major social problem. In this study, an index derived from the normalization of Gini coefficient to the base year 1990 was used to reflect the income inequality. The Gini coefficient is one of the most common measures for distribution equity. It is generally defined as the ratio of the area between the Lorenz Curve and the 45 line to the area below the 45 line in a frame of axes (Yang, 1997). The data of individual incomes were available from the Statistic Yearbooks of the local Bureau of Statistics. Both economic theory and common sense tell that the poor benefit more from a given increase in their income than the rich do. Accordingly, GPI rises when the poor receive a larger percentage of national income, and falls when their share decreases. Greater distribution equity leads to a higher level of GPI. The calculated values of the index of income inequality for the four cities, as shown in Fig. 1, were continuously on the rise during the period of 1991 to 2001, indicating an increasing gap between the incomes of the poor and the rich. The Gini coefficient for Guangzhou City is always the highest among the four cities, and it reaches 0.31 in Dividing the consumer expenditure by the index of income inequality, a weighted consumer expenditure can be calculated Housework and voluntary work Much of the work in caring for the health and welfare of citizens such as childcare, home repairs, and voluntary community service is done by family members and volunteers. The contribution of such activities is entirely excluded from GDP because no money changes hands. To correct this omission, GPI assigns values to these household work and volunteer work figured at the approximate costs of hiring others to do works. The values are arrived at by multiplying the estimated annual hours allocated to housework and/or voluntary work by the market prices of these local services. The study revealed that the hours spent on household work have declined in the four cities since For example, the average time spent in housework in Suzhou city fell by 20% from about 17.5 h a week in 1991 to about 14 h in The value of housework and volunteer work of Suzhou is estimated at 14.6 billion Yuan in 2001, accounting for nearly 20% of the total GPI value. The values of housework and voluntary work for the four cities over are shown in Fig. 2. The values increased with time primarily because of the gradual increase of market price of these services. Guangzhou had the largest GDP among the four cities, and also has the highest value for the housework and voluntary work. The main reason is that the fast economic growth of Guangzhou resulted in a rise of the average hourly wage. Although the hours allocated to domestic work are decreasing, increasing of the total population and household labors lead to more hours in total, which also ran up the value of these services. Other three cities also displayed the same trend as Guangzhou Depletion and degradation of natural resources Consumption of nonrenewable resources If today's economic activities deplete the natural resources available for the future, it is not really improving the welfare; rather, it is borrowing from the future generations. GDP counts such borrowing as income: the more consumption of natural resources, the faster economic growth. In contrast, GPI counts the depletion or degradation of wetlands, farmlands, and nonrenewable energy resources, and minerals as a cost. In practice, the depreciation of natural capital is quantified only for market-priced extractive resources such as forest products, fish or minerals. Repetto and Gillis (1988), Repetto et al. (1989) at the World Resources Institute have performed detailed studies for a number of countries, including Costa Rica, Indonesia and the Philippines. In our study, the net price method is used in the estimation of the depletion of nonrenewable resources. In order to keep the stock of nonrenewable resource, the rent from the extracted resources would be required to reinvest, namely the rent is equal to the cost of the depletion and can be measured as the market value of extracted materials minus the average extraction cost. Therefore, an account framework needs to be set up for each of the nonrenewable resources such as the energy resources of coal, crude oil, and natural gases and the mineral resources of copper, iron, and zinc, including the production volume, the international market price, and the average unit production cost. Details about this estimation method can be found in our monographs (Zhang et al., 2003a,b; Wen, 2005) Deterioration of forest and natural habitats Ideally, both the depletions of nonrenewable resources and renewable resources such as fishery and forests were included. However, only very limited data on the reserves and flows of the resources were available, which was especially true for information on prices and cost of production. Thus, only the most significant resources forests and the natural habitats Fig. 2 Values of housework and voluntary services for the four cities over

5 467 including farmland and wetlands were included in the calculation of GPI in this study. Forests play a very important role in urban ecosystem. Whenever forests are cut for timber or roads, a wide range of ecological values are lost at least until the forests are regenerated to the same level as when they were cut. In theory, a monetary measurement of forest ecosystems can be used to account for the loss of forest ecosystem integrity and ecological services as well as the cost of unsustainable forest management practices (Anielski and Rowe, 1999). Our estimate of the loss of old-growth forests was largely based on the change in the reserve of the old-growth forest. According to the related study in China (CCICED, 1997), the economic loss of the forest reserve is 879 Yuan per cubic meter considering the factors of timber harvesting, ecological services, and the ecosystem integrity and biodiversity. Wetlands contain some of the most productive habitats in the world. Yet their value is not represented in economic accounts because their beneficial functions such as regulating and purifying water and providing habitat for fish and waterfowl are generally public goods for which there is no overt price. When a farmer drains and fills a marsh, the GDP rises by the increased output of the farm. However, the loss of ecological services from wetlands goes uncounted. The GPI rectifies this by estimating the value of the services that are given up when wetland's acreage is converted to other purposes. Loss of wetlands in these cities is mostly due to the conversion to farmlands in order to raise food productivity. Sustaining the productivity of farmlands is fundamental to meet the basic need for food of the local households. Due to the continuing urbanization and the deterioration of soil from erosion, over cultivation, and loss of water and soil as a result of poor land management (Zhang et al., 2002), the productivities of the farmlands in the four cities are decreasing. The associated loss of welfare from the damage to the long-term productivity of the farmlands should therefore be counted in the GPI calculation Costs of depletion and degradation of natural resources The depletion of nonrenewable resources should be deducted from the capital account of current generation. The resources considered in this study included coal, petroleum and diesel oil and some important mineral resources such as copper, iron, and zinc. The consumptions of these resources were available in the local Statistical Yearbook. The prices of these resources were assumed to be the same as the wholesale prices of the energy or minerals. The sum of the costs reflects the economic losses from the depletion and degradation of the nonrenewable resources. These losses showed an increasing trend for all the four cities. They should be subtracted from GDP. To calculate the economic loss/cost of farmlands and wetlands, the total reduced area was multiplied by an annual production and ecological value that could have been provided by the areas if they were not lost. The main costs are given in Table 2, which were the results of a study at the Chinese Academy of Social Sciences (Liu and Yang, 2000). Because of the scarcity of wetlands and the difficulty to repair once destroyed, the value per unit area of wetlands was assumed to increase annually (Anielski and Rowe, 1999; Wen, 2005). An annual increase rate of 10% was used. Data on areas of wetlands and farmlands of each year were collected from the local municipal Land Bureaus. Linear interpolations were used to supply the gaps from the missing data. While both the natural and the artificial damages contributed to the loss of wetlands and farmlands in the four cities, the latter was found to be the main cause. In Ningbo City there had been a loss of about ha of wetlands from 1991 to 2000, about 3% of the total in 1991, and a loss of 40,945 ha of farmlands, about 14% of the total in And in Suzhou City, the area of wetlands also declined from about thousand hectares in 1986 to ha in 2001, which was estimated as an economic loss of 1.81 billion Yuan. During , the total loss of farmland area in Suzhou City was 60.5 million hectares, which was estimated at 3.22 billion Yuan. The loss of farmlands in Guangzhou city increased from 98.2 million Yuan in 1991, which was only 4% of the total cost of resources depletion and degradation, to 1831 billion Yuan in 2001, 29% of the total loss of natural resources. The proportion of the cost from the depletion of the nonrenewable resources to the total cost of the depletion and degradation of all resources for the four cities was always over 90% during the study period. The cost of the loss of wetlands in the four cities appeared to increase rapidly over time. On the other hand, the land coverage and the reserves of forests in Ningbo, Guangzhou, and Yangzhou, had been increasing continuously since the beginning of 1970s. Although the increase provided some economical and ecological benefits for these cities, the overall cost of the depletion and degradation of natural resources still increased during the study period. Taking Guangzhou as an example, the total cost rose steadily from an estimated 2.56 billion Yuan in 1991 to 8.19 billion Yuan in 2001, which accounted for 3.1% of the GDP in the same year Value of leisure time People should have increasing latitude to choose between more work and more free time for family or other activities. Like employment opportunities, people hope to obtain more leisure time, which is valuable. If the change of leisure time is positive, it is a benefit for GPI. GDP ignores this loss of free time, but GPI treats leisure as something of welfare. The Table 2 Estimated costs of farmland loss and wetlands loss Cost item Cost of farmland loss Cost of wetlands loss Cost breakdown Cost of productivity capacity Cost of environmental service functions Cost (Yuan/ha) Total cost (Yuan/ha) Cost of prevention and control Cost of land rents 1890 Cost of ecological services functions 1095 a 1095 a Considering the scarcity of wetlands, its cost increases by 10% every year.

6 468 ECOLOGICAL ECONOMICS 63 (2007) value of every nonworking hour for leisure was estimated at the average wage rate. The time for leisure or nonworking hours has increased since 1980s in the four cities. For example, the holidays in Suzhou have gradually increased from 62 days per capita in 1991 to 114 days in Multiplying the wage rate of 54.5 Yuan per day in 2002, the value of leisure time for the 735 thousands workers was estimated to be 2.21 billion Yuan, which was about 9 times more than that in Defensive expenditure The economic process always involves some activities that generate undesirable side effects. The defensive expenditure here is defined as the money spent to maintain the level of comfort, security, or satisfaction of households. In this study, the following expenditures are subtracted from GPI as defensive expenditures: (1) the cost of household pollution abatement; (2) the medical and repair cost of car accidents; (3) the cost of crime; and (4) the cost of family breakup. The costs of pollution imposed on the households are the expenditures for the defensive equipment such as air and water filters. The spending for the pollution abatement was estimated from the sales of the related products. For example, the expenditures on air filters of households were estimated by multiplying the price of air filters (300 Yuan per set in 2001) by the sales of the filters. The damage due to car accidents was available directly from the local Transportation Bureaus. It was 0.73 billion Yuan in Guangzhou in Crime exacts a large economic toll on society. We treated it as cost based on the expenditures undertaken by consumers and governments. The budgetary expenditures of public security, court of justice, procurator activity, and police were used to estimate the public safety cost of the government. Police services and security guards accounted for most of the expenditures. The personal cost of crime was estimated based on the expenditure on their property insurance for the prevention or avoidance of the crime impact. Family breakup imposes large economic costs on individuals and society in the form of legal fees, medical expenses, and traumatic impact on children (Anielski and Rowe, 1999; Xu and Shan, 2001) and adults, while the GDP treats such expenses as additions. The most important asset and service sector today is the family (Redefining Progress, 1999). The cost of divorce was estimated in two parts the direct cost to the adults involved and the indirect cost to the children affected. The cost to adults was based on an estimate of the expenses for legal fees and counseling which are available in local Statistical Yearbook. In Suzhou, for instance, thousand couples divorced in 2002 and 9.76 thousand children were affected. The cost of divorce to children was estimated to be 2.2 thousand Yuan per child (Zhang et al., 2003b; Wen, 2005) multiplied by the number of affected children. Adding the legal fees to the adults, the total cost of family breakup is 0.22 billion Yuan in Suzhou in Costs of environmental pollution The GPI subtracts the costs of environmental pollution as measured by actual damage to human health and the environment, which include the expenses on health care and reduction in industrial and/or agricultural productivities, etc. Since the damage to national production has been counted in conventional system of national accounting (SNA) (for example, the damage of acid rain to crop is translated into the reduction of agricultural output), this study was focused on the costs of health problems caused by environmental pollution and the expenditures of pollution control and treatment. In reference to some international experience, the relationship between the environmental quality and the death rate or morbidity of a disease caused by pollution was constructed and adjusted based on the surveys on the medical treatment cases and environmental quality in the four cities. Based on the average concentration of air pollutant or the related infectious rate from water pollution, the change of morbidity and the physical damage on health could be estimated. The cases of illness caused by certain pollution were obtained by the consideration of the exposed population. Two methods Willingness-to-pay (WTP) and Humancapital Approach (HCA) were used to calculate value of health and life. HCA was used in transforming these pathological losses such as hospitalization and sick leaves into monetary cost. Besides the wage loss caused by premature deaths and work absence, the medical treatment expenditures on diseases were also considered. Based on the principle and the mathematical model of the WTP method, the WTP amounts would usually increase with the improvement of individual income (Peng and Tian, 2003; Wen et al., 2005), so the willingness to pay in other years need to be extrapolated according to the difference of residents' incomes. The result from HCA was the lower limit while that from the WTP method upper limit. Using the HCA, the loss of a premature death in Guangzhou was estimated at 642 thousand Yuan in 2000, and that in Ningbo 410 thousand Yuan in Cost of air pollution The air pollutants primarily include sulfur dioxide (SO 2 ), total suspended particulates (TSP), and nitrogen oxide (NO x ). The China Class II National Standards for Ambient Air Quality (GB ) issued by the State of Environmental Protection Administration (SEPA) and the Air Quality Standard recommended by the World Health Organization (WHO) were used as the baseline of health standard. The reports on the state of the environment of these four cities showed that the concentrations of SO 2 and NO 2 met the Class II National Standards for Ambient Air Quality over the past ten years. Therefore, the cost of health effect by SO 2 and NO 2 was assumed to be negligible. The TSP was found to be the main air pollutant in these cities. Data of TSP concentrations were available in the local report on the state of the environment published by the local environmental protection bureau. The total cost of air pollution was estimated by adding up the cost of health damage, expenditures of visits to the physician, and the wage loss from the days off work. With the lower limit estimation, Fig. 3 shows the proportion of air pollution loss to GDP for the four cities. In Guangzhou City, the cost of air pollution rose from 6.8 billion Yuan in 1991 to the peak of 87.3 billion Yuan in 1999, which accounted for 4.3% of the GDP

7 469 Fig. 3 Proportion of total cost of air pollution to GDP. Fig. 5 Proportion of total cost of environmental pollution to GDP. in the same year. The cost declined after 1999 because of the improvement in air quality Cost of water pollution Sufficient water resources are essential for maintaining a sustainable economic welfare. Water pollution causes damage to human health, fisheries, and agriculture, resulting in associated health and economic losses. The opportunity cost approach and the restoration cost method were used to estimate the cost of water pollution. The opportunity costs of water pollution included the costs of health loss, medical expenditures, and income loss for absence from work caused by water-related illness. Restoration costs included the expenditures for the treatment of wastewater and the expense on construction of drainage pipe network. These methods could not account for the long-term costs of water pollution such as the costs of some diseases that would happen many years later and the loss of ecological functions of water resources. Still, they could give a general picture of water pollution loss over the study period (see Fig. 4). The upper-limit cost of water pollution in Guangzhou was estimated to be billion Yuan in 2001, which accounted for 3.9% of the GDP in the same year Cost of noise pollution Urban noises mainly origin from traffic, factories, constructions, and service industries. There have been some studies to estimate the economic loss of noise pollution in China in recently years. Most of the studies used the market prices method. This method could not quantify the complete loss. In this study, the contingent valuation method and benefit transfer approach were used. The study on noise pollution loss in Dalian city (Xu and Shan, 2001) was used as a reference case because Dalian and the four cities in this study had many things in common. For example, the economic conditions in these cities were similar: the GDP per capita in Dalian was 20,497 Yuan and that in Ningbo was 21,735 Yuan in Incorporating in the income differences between Dalian and the cities studied, the WTP of noise pollution in Dalian was converted to that in these cities. Adding this to the expenditures on noise pollution control, the total cost of the noise pollution was derived. It was generally much lower than that of the air pollution or the water pollution. Among the four cities, Suzhou and Yangzhou had higher noise pollution costs. They grew continuously during the study period because of the progressively worsening noise pollution. In 2000, the percentage of areas where the noise level exceeded the China National Noise Standard was 33.4% in Yangzhou and 25% in Suzhou, but only 0.1% in both Ningbo and Guangzhou. The sum of the above three pollution costs indicated that except Suzhou City, the losses of environmental pollution were all in an increasing trend during the study period as shown in Fig. 5, implying a worsening welfare of the citizens. Fig. 4 Proportion of total cost of water pollution to GDP. Fig. 6 Carbon dioxide emissions for the four cities over

8 470 ECOLOGICAL ECONOMICS 63 (2007) estimated to be 4.44 billion Yuan in 1991 (17.5% of GDP) and reached billion Yuan in 2001 (10.5% of GDP) Long-term environmental damage Fig. 7 Net capital growth in the four cities during Take Suzhou as an example, the total cost of the above three pollution rose from 1.39 billion Yuan in 1991 (5.5% of GDP), to 4.05 billion Yuan in 2001 (2.3% of GDP) when the lower limit estimation. When the upper limit was used, the cost was The GPI treats the consumption of certain forms of energy and of ozone-depleting chemicals (ODC) as costs. The climate change incurs long-term costs arising from the use of fossil fuels. These costs do not show up in ordinary economic accounts. This holds true for the depletion of the stratospheric ozone due to the use of chlorofluorocarbons (CFC). In fact, much of the current economic practice will show their ill effects on the environment after a long period, such as the greenhouse effect from CO 2 emission. The current generation might not see the direct greenhouse effects, but future generations have to bear the consequences of the economic activities today. Two types of long-term environmental damages were accounted in this study. One was the effect of CO 2 emissions on the global Table 3 Comparison of GPI components among the four cities and USA for year 2000 GPI component Suzhou Ningbo Guangzhou Yangzhou USA a GPI's starting point Consumer expenditure Costs ignored in GDP Economic costs Proportion to GDP 9.2% 19.3% 10.7% 24.5% 23.6% Adjustment for unequal income distribution Net foreign lending borrowing Cost of consumer durables Social costs Proportion to GDP 1.4% 1.0% 3.2% 5.2% 12.5% Cost of crime Cost of automobile accidents Cost of commuting Cost of family breakup ,000 Loss of leisure time Cost of underemployment Environmental costs Proportion to GDP 12.7% 13.6% 23.5% 19.0% 41.0% Cost of household pollution abatement 14 Cost of water pollution Cost of air pollution Cost of noise pollution Cost of wetland loss Cost of farmland loss Depletion of nonrenewable resources Cost of long-term environmental damage Cost of ozone depletion Loss of old-growth forests Benefits ignored in GDP Proportion to GDP 26.4% 23.7% 28.5% 34.0% 37.9% Value of housework and parenting Value of volunteer work Services of consumer durables Services of highways and streets Net capital growth Total GPI GPI per capita (US dollars) GPI to GDP ratio 35.5% 17.4% 19.0% 21.5% 28.5% The unit for the four Chinese case cities is million dollars. The unit for USA is billion dollars (1996 constant price). a Cobb et al. (2001).

9 471 example, the indicator for Guangzhou fell from 231 t per million GDP in 1991 to 56 t per million GDP in In 2000, the CO 2 emission per million GDP for Suzhou was the lowest (70 t), while that for Ningbo was the highest (348 t). In the mean time, the values for Guangzhou and Yangzhou were 64 and 67 t respectively in The cost of the long-term environmental damage from the CFC emissions kept steady because these substances have been substituted gradually and nearly clear today. The proportion of this cost to GDP was around 0.3% for all the four cities over the study period. For Guangzhou, the CO 2 emission cost was estimated at 2.5 billion Yuan and that of ODS consumption 0.7 billion Yuan in They summed up to be 1.2% of GDP, falling from the 2.7% in Net capital growth Fig. 8 (a). Changes of the costs, benefits, and calculated GPI for Guangzhou during (b). Change of the weights of different costs, benefits, and GPI in GDP for Guangzhou during The Net capital growth (NCG) was included in the personal expenditure base in this study although the inclusion of NCG into GPI is controversial. The increase in the net capital can be seen as a source for additional future consumption. The capital yields a flow of services greater than the value of the resources embodied in the initial capital stock. It indicates the variation in capital stock necessary to compensate for the increase in population and the labor force over time. Therefore, a certain level of income and personal consumption must be kept in order to be sustainable over time. The Fisherian concept of income and capital implies that additions to the stock of man-made capital climate; the other is the damage of CFC emissions to the ozone layer. The consumptions of fossil fuels including coal, crude oil, gasoline, and diesel oil in these cities were available in local Statistical Yearbook. Using the emission factors, the consumptions of fossil fuels could be converted to the amounts of CO 2 emissions. The global marginal environmental cost of a tonne of carbon emitted was assumed to be 167 Yuan (Fankhauser, 1994) in It was deflated for other years using China's GDP deflator. The environmental cost of CO 2 emissions was calculated by the multiplication of this unit cost and the consumptions of the fossil fuels. Similarly, the marginal environmental cost of the ODC emissions was assumed to be 126 Yuan per kilogram (Anielski and Rowe, 1999). The environmental cost of the ODC emissions was estimated by the multiplication this unit cost and the accumulative amount of ODC consumption since From 1991 to 2000, the excessive consumption of coal and oil led to a rapid increase of CO 2 emissions in the four cities as indicated in Fig. 6. In Ningbo City alone, the CO 2 emissions increased from 5.9 million tonnes in 1991 to 15.3 million tonnes in 2000, and the cost was estimated at 628 million Yuan in 1991 and jumped to 2.53 billion Yuan in The environmental costs of CO 2 emissions increased accordingly over the study period in the four cities. The indicator of CO 2 emission per capita GDP is used to reflect the energy efficiency. It appeared to decrease gradually. This was a result of the improvement of energy efficiency. For Fig. 9 (a). Changes of the costs, benefits, and calculated GPI for Suzhou during (b) Change of the weights of different costs, benefits, and GPI in GDP for Suzhou during

10 472 ECOLOGICAL ECONOMICS 63 (2007) togdpwerepresentedtorevealthechangeofthepeoples'wellbeingandtheeconomicperformance. Fig. 10 GPI per capita in the four case cities over should not be counted as income (Lawn, 2003). Because of the complementary relationship between the man-made capital and the natural capital, sustainable economy requires both forms of the capitals to be nondeclining. In terms of man-made capital, this implies that the quantity of products per worker must not fall. Therefore, the stock of the products should be greater than the minimum demand (Lawn, 2003). The NCG can be calculated as NCG ¼ DK CR CR ¼ K 1 DL=L DK ¼ K K 1 ; DL ¼ L L 1 Where K is the capital stock; CR is the capital requirement; and L is the labor force; and K 1 and L 1 are respectively and the capital stock and the labor force of the previous year. The data for the capital stock and the labor force are available in the local Statistical Yearbook. A five-year average of changes in labor force and capital stock was used to smooth out yearto-year fluctuations. The change of NCG over the study period can be seen in Fig GPI results 4.1. GPI Comparison among the four cities Starting from consumer expenditure, the GPI calculates economic costs, social costs, and environmental costs as well as the benefits ignored in GDP. The results of the GPIs and each GPI component for the four cities in 2000 are presented in Table 3. The items could be either costs or benefits depending on their contributions to GPI. The cost items included those that should be subtracted from GDP, and the benefit items included those that should be added to GDP. Table 3 also shows the GPI calculation process and the result comparison across the four case cities. For comparison at an international level, the average GPI of USA in 2000 is also included in the Table. It is obvious the GDP per capita and GPI per capita of thefourcitiesweremuchlowerthanthoseofusa.forthe proportion of GPI to GDP (GPI/GDP), the value for Suzhou ranked thefirst,usathesecond,followedbyyangzhou,guangzhou,and Ningbo. The proportions of the values of the major cost categories Analysis of major cost categories The variations of the economic costs, social costs, environmental costs, and the benefits ignored in GDP over the study period for Guangzhou and Suzhou are presented in Figs. 8 and 9 respectively. The economic costs for Guangzhou, for instance, increased continuously to billion Yuan in 2001 from 4.05 billion Yuan in 1991, and the respective proportion to GDP rose slightly from 10.5% to 11.2%. This result indicated little improvement of the economic performance because of the worsening income inequality and NCG. As a standard measure of income distribution inequality, the Gini coefficient increased near 0.4 and approached the international alerting line. Gains from economic development did not help reduce the poverty, but accrued increasingly to the rich. In the mean time, loans from foreign countries that must be paid back in the future grew from 0.73 billion Yuan in 1991 to 2.13 billion Yuan in The social costs in Guangzhou increased from 1.7 billion Yuan in 1991 to about 6.39 billion Yuan in The respective proportions to GDP were 5.4% and 3.9%. The large social costs in these cities were primarily due to the increase of commuting cost resulted from the outdated public infrastructure and the rise of unemployment. The environmental costs were commonly larger than the economic costs and the social costs, even larger than the sum of them. The results showed a constantly growing trend over the study period. In Guangzhou, as shown in Fig. 8(a) and (b), the environmental costs rose from 9.6 billion Yuan in 1991 to 57.9 billion Yuan in 2001, while the proportion to GDP fluctuated around 23%. Among the environmental cost items, the cost of air pollution ranked the first for Guangzhou in 2001, followed by the costs of water pollution, nonrenewable resources depletion, and long-term environmental damage. In other three cities, the patterns were different. In Suzhou, for example, the weight of environmental pollution cost in GDP declined from 16.3% in 1991 to 8.7% in In 2001, the cost of the loss of wetlands and farmlands was the largest, followed by the costs of nonrenewable resources depletion, water pollution, and air pollution. The cost of water pollution started to exceed the cost of air pollution in In general, the economic activities in the four cities brought Fig. 11 Variations of the annual growth rates of GDP per capita and GPI per capita for Guangzhou during

11 GPI per capita vs. GDP per capita Fig. 12 The increasingly widening gap between GDP per capita and GPI per capita in Guangzhou from 1991 to serious deterioration of ecological system that resulted in a large deficit in the environmental account Analysis of major benefits categories The benefits ignored in GDP rose quickly in the four cities during the study period. This was primarily due to the increase of the services of consumer durables and household work and the NCG. The monetary values of the benefits and their weights in GDP for Guangzhou and Suzhou are given in Figs. 8 and 9 respectively along with the costs. In Suzhou, the benefits rose for 7.6 billion Yuan in 1991 to 54 billion Yuan in 2001; their respective weights in GDP also rose from 24.3 to 28.6%. In Guangzhou, however, the weight of the benefits in GDP declined from 33.3% in 1991 to 24.5% in Integrated analysis of GPI factors The resultant value of the all costs and benefits can be used to judge peoples' well-being in a city. This result is closely connected with such factors as economic structure, energy efficiency, and the policy on environmental pollution control. The ratio of GPI to GDP was used to indicate the real economic performance and welfare or sustainability in the cities. The GPI/GDP in Guangzhou fell from 29.8% in 1991 to 17.4% in 2001 as shown in Fig. 8(b), indicating a declining economic performance and welfare. By contrast, the GPI/GDP in Suzhou increased from 31.1% in 1992 to 40.7% in 2001 as shown in Fig. 9(b). Therefore, the sustainability in Suzhou was better than that in Guangzhou. The GPI/GDP in Suzhou was also higher than that in USA. The proportions of the economic, social, and environmental costs to GDP in Suzhou were mostly lower than those in Guangzhou. For these four cities, the environmental costs increased continuously, while the economic and social costs presented a slight increase as can be seen in Figs. 8(a) and 9(a) for Guangzhou and Suzhou. The GPI per capita for all cities rose in different degrees, and the rising rates were all higher than that for the USA during the same period. The GPI per capita of Suzhou ranked the highest in 2000, followed by Guangzhou, Ningbo, and Yangzhou. The average GPI/GDP over the study period was calculated, and Suzhou ranked the highest (32.9%), followed by Yangzhou (27.2%), Guangzhou (24.0%), and Ningbo (19.7%) Change of GPI per capita The GPI per capita increased with time in all the four cities as shown in Fig. 10. Suzhou had the highest increase rate in GPI per capita, increased six times from 1.78 thousand Yuan in 1991 to 12.3 thousand Yuan in The GPI per capita in Guangzhou rose over three times during , which was remarkably less than the growth rate of GDP per capita. In the first two years, the GPI per capita of Guangzhou was higher than that of Suzhou. After 1993 its growth rate decreased and even became negative in several years (Fig. 11). It can be seen in Fig. 10 that the GPI per capita of Suzhou surpassed that of Guangzhou starting 1997, while those of Ningbo and Yangzhou increased slowly over the study period. The GPI per capita of Ningbo rose from 818 Yuan in 1991 to 3797 Yuan in 2000, and that of Yangzhou from 668 Yuan to 2252 Yuan over the same period Growth of GDP and GPI The growth rates of GDP and GPI were found to be very different, indicating how the market prices fail to reflect the true costs of economic activities. For example, the rising fossil fuel use adds to GDP, but reduces GPI because GPI considers that the excessive use of fossil fuel brings negative effects on the nation's welfare. These effects include depleting the nonrenewable resources, polluting the atmosphere with the industrial and vehicle emissions, increasing traffic congestion and accidents, and contributing to climate change. All these lower the quality of life. In the four cities, the gaps between GPI per capita and GDP per capita grew larger and larger over the study period. Using Guangzhou as an example, the GDP per capita rose quickly but the GPI per capita increased slowly as shown in Fig. 12. As a result the gap between them grew rapidly, reflecting an increasingly worsening sustainability of local economic welfare. The GDP per capita in Guangzhou increased six times from 1991 to 2001 with an average annual growth rate of 19%. The annual growth rate of GPI per capita was lower than that of GPD per capita in most years; the average was around 13%. In several years (1993, 1997 and 1999), the growth rate of GPI per capita even became negative (Fig. 11). In 1991, the GPI per capita was 6420 Yuan lower than GDP per capita, and was 29.8% of the GDP per capita. Although the value of the GPI per capita rose to 6533 Yuan in 2001, the proportion to the GDP per capita declined to 17.4%. This result reinforces the truth that the people's well-being is increasingly departing from the economic performance. 5. Conclusions and suggestions The GPI method used in this study considers, at an urban level, over twenty components that the traditional GDP ignores. These components are integrated to produce composite measures such as GPI, GPI per capita, and GPI/GDP to weigh the benefits of economic activities against the costs. The values of both market and nonmarket activities are included to provide a long-term perspective. The case study with the four cities in China proved that GPI can be accepted as an alternative measure of economic growth and welfare development to the