Japan as a Model for China’s Green Revolution?

Modern Japan is touted the most energy efficient economy in the world as well as a pioneer of electronic innovation, and increasingly, cleantech innovation as evidenced by the likes of its world leading solar companies like Sharp and Kyocera and the likes of Toyota for fuel efficient cars. Recently, Japan announced that it would revive incentives for solar power adoption, and also enact a national carbon-labeling scheme for consumer goods. Are there lessons from the Japanese experience for China to emulate?

Bill Emmott, a former editor of The Economist and author of the recently published book Rivals: How the Power Struggle Between China, India and Japan Will Shape Our Next Decade, explores in a new article in McKinsey Quarterly (subscription required, but free!) how, in this inflationary age, China can learn from Japanese socio-economic development history to steer its economy towards a more environmentally-friendly one.

Emmott reminds us that Japan’s environmental situation in the 1970s was not unlike China’s today. He then explains that there were two key factors that pushed Japan to clean up its act (bold mine):

One was popular protest, which even in a democracy dominated by a single party, the Liberal Democrats, forced government policy to change. The country’s first proper environmental laws were passed in the early 1970s, when its first environment agency was created. The second was macroeconomic: the revaluation of the yen, combined with the oil shock and the ensuing inflation. This sudden change in Japan’s circumstances brought about an abrupt switch in its industrial structure. The low-cost model was dead. Capital investment in heavy, polluting industry began to drop. Energy had become more expensive, and new taxes made it more expensive still. Companies adopted energy-saving and more efficient technologies and started to make products, especially cars, suited to the new, cleaner times. Also at this point, electronics companies, encouraged by the government, made big investments in new high-tech gadgetry, which led the economy in a new direction.

As a result, Japan’s industry underwent a transformation to the upmarket. Emmott keenly observes that the twin pressures of environmental degradation and inflation (similarly caused by currency revaluation and energy shocks today) are precisely what China is currently experiencing.

Comparing Apples to Oranges?

Can these drivers be similarly channeled towards a greening of China’s economy?

Everything there [in China] is on a larger scale than elsewhere: only India comes close in population, and only Russia, Canada, and the United States are comparable in geographic size. This can make China’s problems look more daunting than those of other countries. But that is misleading, for alongside the scale of the country’s pollution problems must be placed the scale of its resources to deal with them—if it chooses to do so. China has plenty of officials to enforce laws, the world’s largest security forces, and a central-government budget that is now happily in surplus.

However, Emmott acknowledges that, other than scale, certain other key differences that exist between China and Japan situation, and hence possible limitations to using Japan as a roadmap:

[China’s] inflationary pressures so far are milder than Japan’s in the ’70s (an annual rate of 8 percent, versus 25 percent in Japan in 1974–75). Its currency policy is in its own hands rather than Richard Nixon’s, and the pressure from environmental protests, while real and growing, is muted. The biggest problem is decentralization: China has excellent environmental laws, but local governments have so far tended to ignore them.

Another observer suggests that there are other significant unique obstacles that China faces, including “corruption, political reform, lack of water and energy, over-dependence on trade.”

The problem of decentralization is one of the principal-agent variety, whereby the agents, in this case the local government officials, do not fully execute the policy prescriptions of the principal, in this case the central government, due to a variety of reasons, such as a lack of resources, competing priorities, indifference, or even corruption. Anyone following China issues for even a short time will appreciate that China possesses some of the most progressive laws and policies, especially in the energy and environmental sphere. It is these “agency costs” that prevents the full implementation of the edicts of Beijing.

As in the corporate world, where the principal-agent problem exists between shareholders as principals and corporate managers as agents, where the tools of the law (legal duties of loyalty and good faith) and financial instruments (stock options) are used to align the interests between principals and agents, the Chinese central government is experimenting with something similar, by making energy efficiency performance as a significant promotion criteria for local government officials. And just as the government authorities may from time to time decide to spring spot-checks or investigations on certain companies, Beijing has authorized energy audits on certain major enterprises in Guizhou after the failure of the southern province to meet certain energy efficiency targets.

A Better Way?

Is emulating Japan’s path even the right course to take?

What might be good for China may not be good for the rest of the world. Japan’s greening came about by a radical transformation of its industry to more high tech, cutting edge manufacturing. But what would the impact on the rest of the world be if China were to abandon its heavy industries and mass manufacturing of consumer goods.  Yes, it is certainly a boon if China ramps up its cleantech manufacturing sector, as suggested in our last post.  But If China were to pursue the route of high-tech manufacturing and innovation at the expense of heavy industry and low-end mass manufacturing, wouldn’t such a transformation merely shift the associated environmental problems of low-end manufacturing to other low-cost countries such as Vietnam, Indonesia, and eventually even Africa? Labor shortages may already be pushing many factory jobs abroad, it seems. Is the net global result any better?

A better way forward is not to abandon its highly pollutive industries such as steel, cement and refining in favor of the high-tech, but accelerate energy efficiency gains in these very sectors through adoption of better management practices and technology. The use of voluntary agreements between major enterprises and local governments that set energy efficiency and pollution reduction targets and also provide for avenues of government assistance in achieving those goals are a useful tool, one that the likes of the Energy Foundation (China) is helping promote through its Low Carbon Development Path program.

The proper approach then is not to walk away from the problem (by offshoring), but to fix it at home.