Some Thoughts on the 2019 JEL Review of My Co-Authored China Book

In 2019, Ian Coxhead wrote a tough Journal of Economic Literature review of my co-authored 2016 book Blue Skies Over Beijing: Economic Growth and the Environment (joint with Siqi Zheng of MIT).   In this blog post, I won’t comment on specifics about his review but I would like to restate our main thesis.  I hope this helps young scholars think about some open research questions.

Siqi and I approach the topic of urban quality of life in China from the perspective of applied urban and environmental economics.  I am not a big fan of the new generation of quantitative trade models in urban economics.  These models are too precise about writing down “structural” production functions” and transportation functions that in my opinion are not structural (and cannot survive the Lucas Critique). Given that they change as the economy shifts (consider the recent rise of Zoom), I am not comfortable with relying on them for out of sample predictions.

So, my preferred approach is to assemble a set of correlations that tell a consistent story.  Here is the story that Siqi and I tell about the rise and decline of pollution in urban China.  Dr. Coxhead keeps pushing that we are “Environmental Kuznets Curve” adherents and there is some truth to this but I hope you see a more nuanced approach below.  Our real “causal” variable is the rise of an urban educated and sophisticated population (income correlates with this).

Back in the late 1970s, Deng Xiaoping took over at the leader of China. China was poor and rural.  He was no dummy and he saw what Mao had unintentionally built.  Starting in the early 1980s, China’s urban manufacturing factories (state owned enterprises) started to increase production.  This poor nation relied on coal for its energy source and urban pollution soared.  When China entered the WTO in early 2000s this further accelerated the scale of coal consumption and industrial production.  The nation’s air pollution and water pollution soared and its greenhouse gas emissions sharply increased.

Given the huge count of rural people in China, a domestic passport system was introduced (the Hukoo system) to limit migration to cities by denying basic services to migrants. Migrants to a city could work but their children couldn’t attend the local schools.

As China’s Eastern cities grew richer and more educated, an interesting development took place among married couples with 1 child.  Such families became more interested in obtaining “blue skies” for their family.  More Educated Chinese people traveled to Japan and many studied in the United States and saw how others live.  Worried about their sole child’s future, they sought blue skies for their family and safe food and clean milk.  I wouldn’t load all of this on income. I would say that the rise in human capital in China’s cities has fueled the environmentalism.

In the United States, cities such as Pittsburgh and New York City and Boston and even Baltimore have become much greener cities as manufactured left these cities.  In our book, we argue that the same phenomena is playing out in China’s east coast cities as the price of land rises and as the SOE companies are phased out.  Such past industrial land is reclaimed and cleaned up for new residential towers.

A point that our reviewer missed is the correlation between pollution and productivity.  In a manufacturing economy based on coal, these two are positively correlated. In a skills economy (think of Seattle or San Francisco), they are negatively correlated.   My co-author Josh Graff-Zivin and Matt Neidell have a very nice JEL paper on this point.

As Charles Tiebout would predict, China is becoming a system of cities and people are voting with their feet to move to places that meet their needs.  Cities with low quality of life will experience a brain drain and in the modern skills economy, they will become poorer.

Note that this spatial equilibrium idea is nowhere embodied in the Environmental Kuznets Curve literature.  The EKC literature implicitly treats geographic places as isolated islands.  In contrast, our book is explicit about the dynamic spatial equilibrium as we study how the introduction of bullet trains across cities affects urban quality of life. We use hedonic real estate methods both across and within cities to report correlation evidence indicates the willingness to pay for environmental protection.  The relaxation of the Chinese Hukoo system (outside of Beijing) has created a system of cities that we explore in detail.  Applying the ideas of Rosen and Roback in a dynamic framework (we have a supply side of pollution while they treated spatially tied locational attributes as exogenously determined) is one of the many new features of our work.

Many are quick to note that China does not have elections.  Westerns jump to the conclusion that the powerful elites thus can ignore “the people”.   We argue that both the Central and the Local Governments have strong incentives to promote the green cities agenda.  Part of our arguments can be found in our 2014 paper.   Again, the key intuition is that “green cities” attract and retain the skilled and young people acquire more human capital in cities with lower pollution levels.

In this sense, China is no different from the United States. The urban skilled demand blue skies and the elites in power have strong incentives to supply these.  America’s cities that have not delivered quality of life (including my Baltimore) suffer a brain drain.  The same point holds in China.

Competition between cities creates an incentive for local politicians to supply quality of life.  This dynamic Tiebout equilibrium is a novel point that merits more research.

The reviewer critiqued us for relying on informal interviews with 2nd tier city mayors.  My view is that all evidence is evidence.   When is a data point a story and when is it data?  I would be disappointed in the reviewer was suggesting that we fudged our data.  This is not the case.  In sociology, there are active efforts to incorporate long interviews into research designs.
My colleague Robert Moffitt has a very interesting paper on this topic.

As I re-read our book, I see a relatively simple story that explains many facts about the lives of 1.4 billion people.  Those who seek pollution progress should cheer on the rise of human capital accumulation in China and the global market for technology.  Returning to Paul Romer’s points about blueprints, once we have a good idea — the Chinese will adopt it!

My 2011 New York Times piece was unpopular back then but read it now. It still makes sense today.

The reviewer is correct that our book is written for a general audience but there are many ideas embedded in the book for those seeking new research questions.  The reviewer wants a much more complicated institutional point of view that features “explicit Chinese characteristics”.   But, there are tradeoffs when you add additional parameters to a model.  Siqi and I believe that a low dimensional model of supply and demand for urban pollution (with a growing urban educated upper middle class) can explain the key facts that we see in China today.

I am aware that special features of the Central Government policy introduce nuances and I have explored that in co-authored papers such as my 2015 AEJ paper and my 2018 JEEM paper.

A final thought.  As I skim through the reviewer’s research output, he has not published applied work on China’s cities and pollution.   He has written much more on Vietnam and the Philippines.  It would interest me if our core thesis in China’s cities can explain those Asian city’s pollution dynamics. Siqi and I have approached the Asian Development Bank to study this very issue. Stay tuned!