The Case Study of China:

I. INTRODUCTION

The People's Republic of China (PRC) has received international acclaim for its success in economic modernization and development. The dramatic rates of economic growth recorded by the PRC during the past several years -- averaging nearly 10 percent annually -- have substantially improved standards of living for the Chinese people and transformed the PRC into an economic power.

This economic growth, however, hinges on the wide-scale and unremitting exploitation of natural resources. In many regions, China now faces scarcities of water, arable land, and clean air. In some cases, the scarcity is demand-induced. As China's population grows and becomes more prosperous, per capita resource consumption increases. In other instances, the scarcity is supply-induced. The degradation and depletion of the resource, often by industrial or agricultural waste or emissions, reduces its overall availability. Finally, structural scarcity is emerging due to the increasingly unequal distribution of resources between the more and less powerful actors in China. The process of economic reform and development in China exacerbates these various forms of scarcity.

The China study is one of three cases -- the other two are of India and Indonesia -- analyzed by a project jointly sponsored by the University of Toronto and the American Academy of Arts and Sciences. Each of the case studies defines state¹ capacity by the same two sets of variables. The first set measures the intrinsic characteristics of the state: human capital (the technical and managerial skill level of individuals within the state); instrumental rationality (the ability of the state's components to gather and evaluate information relevant to their interests and to make reasoned decisions maximizing their utility); coherence (the degree to which the state's components agree and act on shared ideological bases, objectives, and methods as well as the ability of these components to communicate and constructively debate among themselves); and resilience (the state's capacity to absorb sudden shocks, to adapt to longer-term changes in socioeconomic conditions, and to resolve sustainably societal disputes without catastrophic breakdown).

The second set of variables measures state-societal relations: autonomy (the extent to which the state can act independently of external forces, both domestic and international, and coopt those which would alter or constrain its actions); legitimacy (the strength of the state's moral authority); reach/responsiveness (the degree to which the state is successful in extending its ideology and administrative apparatus throughout society, and the responsiveness of this apparatus to the local needs of the society); and fiscal strength (the financial capacity of the state or of a given component of the state).

This case study of China examines the implications of water scarcity² for state capacity. Water scarcity is the focus for four reasons. First, water is crucial to all arenas of economic activity in China: agriculture and industry require access to water. Second, China's future economic growth and development depend on adequate water supplies. Third, over-exploitation and pollution of water resources costs the government money, and this cost is rising. And fourth, therefore, the Chinese leadership expresses growing concern about the future impact of water scarcity on China.

The China case study concludes that while water scarcity is contributing to diminish state capacity, it does so primarily in an indirect manner and over the long term. Instead, political and economic reform is transforming both the landscape of China's water supply and the capacity of the Chinese state to respond to growing water scarcities. Thus, the China study incorporates additional independent variables representing the reform process, and the hypotheses set out below reflect this dual approach. (See Figure One.) In addition, in order to capture some of the regional variation that characterizes the PRC, the case study includes examples from field trips to two vastly different regions of China: Gansu Province and Beijing Municipality. While both are water scarce, Gansu is one of the most economically deprived regions of the PRC with few links to the world outside China, while Beijing is a wealthy area with unparalleled access to the resources of both China and the international community.

In China, the economic and political reforms undertaken since 1978 greatly influence the variables measuring state capacity. These reforms continuously transform the nature of the state and the traditional bases of state-societal relations. The very political, economic, and social reforms -- which fuel China's economic growth -- increase society's demands on natural resources, encourage growing disparities in wealth among the various sectors of Chinese society, and in the short term, undermine the capacity of the state to respond to its heightened scarcity of renewable resources.

Hypothesis 1: Reform and State Coherence

The devolution of power from the central to the local and provincial levels undermines the coherence of the state.

The decentralization of authority introduced by the reforms permits local and provincial elites to play a substantial role in economic decision-making and in the implementation of natural resource and environmental protection policy. Declining state coherence and devolution of power does not necessarily signify diminished state efficacy in implementing all policies. Local needs may well be better served by decentralized control. However, this study suggests that, thus far, reduced coherence does not produce more effective implementation of environmental protection measures. In many cases, this devolution of power manifests itself in informal rather than formal decision-making powers. The central government attempts to implement policies critical for sustaining national economic growth such as tax collection, interregional public goods projects, and national environmental protection standards. Meanwhile, local authorities pursue projects of parochial importance at the expense of central government imperatives. In addressing the question of the dramatic rise in pollution throughout the reform period, for example, the head of the National Environmental Protection Agency (NEPA), Xie Zhenhua, has clearly indicted local officials, noting "What is most serious is not pollution but the wrong attitudes of local authorities."³

Hypothesis 2: Reform and State Legitimacy

The transitional nature of the economic and political reforms diminishes state capacity by decreasing the legitimacy of the state.

Economic success directly benefits state legitimacy in many sectors of Chinese society. However, the personal rather than legal underpinnings of land and business transactions encourage corruption to blossom. Local level officials and enterprise heads take advantage of poorly defined and implemented laws to pursue personal economic gain. Ties between business and political leaders also influence policy at all levels of state decision-making. This corruption engenders popular discontent throughout the PRC, especially in rural areas, and poses a challenge to state legitimacy.

Hypothesis 3: Reform and State Reach and Responsiveness

The reform of political institutions at the national and local levels in the PRC has the potential to enhance the reach and responsiveness of the state.

Political reform is proceeding at a much slower pace than the process of economic transformation and the degree of dissent permitted by the leadership fluctuates from year to year. However, a number of institutional reforms in the realm of environmental protection and resource management are gradually enhancing state capacity. As a result of these reforms, the National People's Congress (NPC), the Environmental Protection Commission (EPC), NEPA, the media, the court system, and even the banking sector are more active and aggressive in their efforts to prevent pollution and protect scarce resources.

Hypothesis 4: Reform and Fiscal Strength

The reforms increase PRC integration into international organizations and accords, which enhances the fiscal strength of the state.

International actors, such as multilateral organizations and other states, now finance resource management projects in China, transfer technology, and provide training opportunities for Chinese experts. China is already the largest recipient of World Bank and Japanese environment and development assistance.

Since 1978 and the onset of reform in China, water scarcity in many regions of China has intensified. Unrestrained economic development and rapid societal change -- without attention to the ramifications of these transformations for the environment and natural resource use -- place China's already threatened water supply under tremendous stress. The causes of water scarcity include population growth and heightened water use per capita; the deterioration of China's aged water facilities; increased competition among the potential uses for water; the depletion of aquifers; the pollution of water supplies; and the rising social cost of subsidizing water usage.⁴

What impact does water scarcity have on the variables of state capacity? The coherence of the state, its fiscal strength, its autonomy and reach all may be affected by water scarcity.

Hypothesis 5: Water Scarcity and Fiscal Strength

Water scarcity will diminish the fiscal strength of the state.

Growing demand- and supply-induced water scarcity increases demands on the state from local and provincial actors for new infrastructure projects such as dams, canals, wastewater treatment facilities, irrigation systems, investment to mitigate environmental damage, and infrastructure services for ruralBurban migrants. Increasingly, these demands challenge the fiscal strength of the state.

Hypothesis 6: Water Scarcity and Coherence

Both demand- and supply-induced scarcity diminish the coherence of the state.

The increasingly scarce water resources necessary for agriculture, industry and residential use heighten interprovincial competition for shared water resources. Especially among the northern provinces, but also between the northern and southern regions of China, provincial officials are laying claim to the water resources from the major river systems of China.

Hypothesis 7: Water Scarcity and Autonomy and Reach

To address China's need for investment in infrastructure to protect its water resources, Beijing has turned to the international community and provincial officials. While this process may enhance the fiscal strength of the state, it also may diminish its autonomy and reach. River diversion projects, wastewater treatment plants, and substantial water conservation and irrigation projects are all funded to a growing extent by nonstate sources. Over the long term, this heightened role for local and foreign actors may have important implications for the autonomy of the state as well as for the capacity of the state to extend its reach to provincial and local populations.

II. RENEWABLE RESOURCE SCARCITY WITHIN CHINA

This analysis focuses on the relationship between water scarcity and state capacity. However to appreciate fully the challenge posed by the heightened demand, reduced supply and unequal distribution of water resources, an examination of the interplay of cropland and water shortages provides insights into the larger threat to development and state capacity posed by resource scarcity.

China's agricultural needs place a tremendous burden on its already scarce water supplies. As Lester Brown notes, China has more irrigated land than any other country (about 49 million hectares), and this land accounts for almost half of the total cropland area⁵ (estimated at 110 million hectares).⁶ Although overall land area devoted to agriculture is decreasing (see discussion below), irrigated cropland has been increasing steadily during the past decade (Table 1). Critically, northern China -- with two-thirds of the total cropland -- has only one-fifth of total surface water.⁷ In many northern provinces, the pumping of underground water for irrigation exceeds the recharge rate of aquifers and causes subsidence.⁸

Trends in agriculture are raising serious concerns among party leaders. Central Committee Secretary Jiang Chunyun stated in February 1995, "In the long run, China's agriculture faces, on one hand, the tremendous pressure of population growth and fast improvement in living standards and industrialization and, on the other, the severe restrictions imposed by a dwindling farmland, shortages of water resources, and a weak infrastructure."⁹

Since the late 1950s, estimates place the decline in total cropland in the PRC at 20 percent. A wide range of factors caused this decline, which include soil erosion, drought, and the expansion of land set aside for industrial development, housing, and highways. During 1993, arable land decreased by 340,000 hectares, and in 1994, this figure reached almost 400,000 hectares.¹⁰ Vaclav Smil puts such figures into stark terms, stating, "The cumulative loss of about 40 million hectares since the late 1950s is the equivalent of a loss in food production capacity for at least 350 million people."¹¹ As noted above, total farmland is now estimated at approximately 110 million hectares,¹² although at least one Western analyst suggests that this figure is low given that Chinese peasants have a strong incentive to under-report their farmland to avoid higher taxes.¹³ Industry and real estate zones encroach on an estimated 469,400 hectares to 2,000,000 hectares annually.¹⁴

The industrial waste that accompanies unregulated development is another important source of declining agricultural yields. Shanxi Province exhibits the impact of industrialization on water and cropland. In 1994, industrial waste polluted a sizable portion of Shanxi's farmland, which cost the province a 5 to 15 percent loss in agricultural yields. In Taiyuan, the capital of Shanxi and a major coal-producing region, paddy rice contains 50 percent more chromium and 25 percent more lead, and cabbage 5.5 times more cadmium, than state prescribed standards. Pollution of water resources contributed to water shortages in three hundred townships in Shanxi Province.¹⁵

Droughts and floods are also responsible for substantial variation in agricultural productivity. As discussed earlier, precipitation is uneven across regions in China. Vast areas of the country -- especially in the West -- are prone to long periods of drought. Between 1991 and 1994, the PRC experienced the worst droughts of the preceding three decades.¹⁶ Drought affected the productivity of 11.8 million hectares and rendered more than 2 million hectares totally unproductive.¹⁷ Grain prices rose exponentially during this period: in winter 1993, the price of rice increased more than 300 percent.¹⁸ Some regions of China are prone to severe flooding. As a result of centuries of deforestation in the coastal areas as well as the Loess Plateau, precipitation quickly runs off the land often causing floods. By September 1994, the total death toll from floods reached almost 3,000. According to one Western expert, the impact of floods would have been far more severe had it not been for recent improvements in the warning, prevention, and relief systems implemented by local officials.¹⁹

Chen Junsheng, head of the State Flood Control and Drought Relief Headquarters, stated that in 1994, floods and droughts together caused 100 billion yuan (US$12.1 billion) in losses.²⁰ Drought or floods struck six of the major agricultural provinces -- Jiangsu, Shandong, Sichuan, Jiangxi, Henan, and Anhui. In Sichuan Province, grain output fell by approximately 10 percent in 1994 to 42 million tons. Farmers in the province required an infusion of US$5 million (41 million yuan) aid.²¹ More than twenty of the largest cities in China introduced government coupons for grain.²² The severe grain shortages in many regions in China during this period caused widespread disturbances -- and in some case riots -- among peasants dissatisfied with local officials.

According to some analysts, the long-term ramifications of the floods and droughts on social stability have yet to be felt. In addition to the violence that erupted immediately in the wake of the grain crisis, migration of rural laborers to the coastal cities due to the poor crop yields could produce social instability. Protests or even crime may increase as rural residents, frustrated with the slow response of local officials, attempt to meet their infrastructure needs themselves.²³ For example, in one Henan village, peasants dynamited a bridge between two villages to form a temporary dam to provide for their water needs. As a result, clan-based violence erupted in the region.²⁴

The above discussion shows that although cropland and fuelwood scarcities are critical development issues in China, water scarcity is increasing social demands on the state and is affecting the capacity of the state to meet these demands.

III. THE BACKDROP TO WATER SCARCITY: ECONOMIC, POLITICAL, AND SOCIETAL TRANSFORMATION

Water scarcity in China is a function of heightened demand for the resource, rapidly escalating levels of pollution, and the geographic pattern of water distribution. Chinese residents currently face a daily shortage of 28.8 million cubic meters (m³) of water. According to one Western expert, in 1990 these shortages annually cost the Chinese economy between 5 billion yuan and 8.7 billion yuan²⁵ (US$620 million and US$1.06 billion).

In the effort to meet the growing demand for water, China confronts the unequal geographic distribution of water resources. At 2,700 m³ per capita, China's national supply of fresh water is above the World Bank's definition of a water scarce country. However, this figure does not account for the substantial regional disparities in water access. Qu Geping, head of the NPC's Environmental Protection and Natural Resources Committee and former NEPA director, notes that water distribution is highly uneven, with availability greatest in the south and much less in the north. For example, average precipitation is approximately nine times more in the southeast (1,800 mm) than in the northwest (200 mm). Over 45 percent of China receives less than 400 mm precipitation a year. The distribution of groundwater resources is similarly skewed: average groundwater deposits in the south are over four times greater than in the north.²⁶

Currently, the total national demand for water in China is 470 billion m³ a year, which is about 16 percent of China's aggregate extractable water supply. The sustainability of current water use is questionable, particularly in the north. In the north, surface water use is between 43 percent and 68 percent, and groundwater use ranges from 40 percent to 80 percent of sustainable supply. Over-extraction caused water tables to drop in more than fifty areas; groundwater levels fell 10 meters over 3 million hectares in northern provinces. Along the heavily industrialized eastern seaboard, serious subsidence plagues thirty-six cities, and seawater intrusion in Tianjin is now polluting underground water reserves.²⁷

Chinese water statistics suggest a substantial increase in demand for both residential and productive use in several key regions. For example, between 1988 and 1994, the total annual consumption of water increased by 50 percent in Shanghai and almost as much in Guangzhou (Tables 2a, 2b, and 2c). While Guangzhou has the second highest water output capacity in China, its residents on average consume 50 percent more water than their northern counterparts.²⁸ Guangzhou officials now cite water scarcity as their number one environmental concern.²⁹ With its growing industrial base, the city's water demand is expected to double between the year 2000 and 2010.

Heightened demand for water stems from China's population growth, increased wealth, changing consumption patterns and rapidly rising industrial usage in several regions. Moreover, unequal geographic distribution of wealth contributes to massive migrations from the rural to urban areas. In some cases, this migration strains urban water supplies.

At the end of 1994, official Chinese statistics reported China's total population at 1.1985 billion,³⁰ an increase of 13.33 million over 1993.³¹ With an annual population increase of approximately 15 million (a 1.1 percent annual growth rate), current official estimates put the Chinese population count at 1.3 billion by the year 2000. Although this represents a decrease in population growth rate, an increase of 15 million people per year will place additional stress on already scarce water resources.

While population numbers rise, the personal wealth of both urban and rural residents has dramatically increased. In 1990, the World Bank calculated China's per capita GDP at US$370 on an exchange rate basis; in terms of purchasing parity, per capita GDP rose to US$1,950. Some estimates place China's current GDP per capita (in terms of purchasing parity) at somewhere between US$2,000 and US$3,500.³² This growing wealth in both urban and rural areas changes consumption patterns with important ramifications for water usage. Daily showers are commonplace, and the use of appliances such as dishwashers and washing machines is increasing rapidly. All these changes contribute to greater demand for water. In several major cities, such as Guangzhou, Shanghai, and Lanzhou, the daily per capita consumption of tap water between 1988 and 1994 skyrocketed (Table 3). In other cases, such as Beijing and Taiyuan, although the total annual volume of water supply for residential use is increasing, per capita consumption remains fairly constant over time perhaps due to local population growth.

The average increase in per capita income masks substantial disparities in personal income within the general populace. The Chinese State Statistical Bureau acknowledges a growing income gap both among provinces and between urban and rural areas.³³ In the 1980s, average urban income was barely double the average rural one. Currently, urban income is three times as great, and the gap will likely continue to widen.³⁴ In urban areas, in 1994, the average annual income increased 8 percent. In rural regions, however, the increase was only 5 percent.

The income differentials among rural laborers in different provinces are especially striking. In Gansu Province, in 1994, the per capita annual net income of farmers was approximately 690 yuan (US$84).³⁵ In contrast, the average per capita income for all Chinese farmers was 1220 yuan (US$148). Farmers in the Shanghai area recorded the highest per capita income of 3436 yuan (US$419). Much of this difference may be attributed to alternative sources of income. In coastal cities such as Shanghai, a significant percentage of farmers' income is earned in secondary and service industries. In the interior provinces, 70 percent of farmers' income still comes from farming.³⁶ In addition, scarce water resources in interior provinces such as Gansu sharply limit agricultural income.

A number of social trends magnify the significance of income disparities: the transformation of the economic system, the declining attractiveness of agricultural work, and the increased freedom of movement within the PRC. Together, these trends have led to a range of new challenges for the central leadership. These challenges include rural to urban migration, growing unemployment, rural and urban instability, and heightened resource pressures.

Several of the most prosperous and populous cities in China, including Beijing, Shanghai, and Guangzhou face an enormous influx of rural migrants seeking work and higher incomes. In Jiangxi Province, the outflow of farmers to urban centers increased from 200,000 in 1990 to more than 3,000,000 in 1993.³⁷ Migrations are easier as the hukou (residential permit) system is no longer needed for food purchases. In the north and northwest regions of the PRC, this "floating population" includes a substantial number of environmental refugees as drought, desertification, and soil erosion and degradation impinge on agricultural opportunities.

According to one study, in major cities, migrants account for between 10 to 33 percent of the population.³⁸ Other studies indicate more than 1.5 million migrant laborers live in Beijing (out of a population of 7 million in Beijing proper and approximately 10 million including the surrounding areas).³⁹ Other cities also face significant migration pressures: the migrant labor population in Shanghai is approximately 2.8 million (out of about 15 million Shanghai residents), while Shenzhen has 1.9 million (out of a population of 2.8 million).⁴⁰

By most accounts, migration to urban settings will only increase. Statistics from a "relevant department" indicate that by the year 2000 China's rural population will exceed one billion and rural laborers will exceed 600 million. Half of these rural laborers are expected to move to cities to look for jobs.⁴¹ Estimates indicate that more than 100 million peasants move to urban areas annually, although this number reflects peasants who migrate to the cities for temporary work on an annual basis, returning to the countryside for part of the year.⁴²

Some Chinese experts, such as Fan Gang of the Chinese Academy of Social Sciences, believe that migration's overall effect on the economy of the PRC is positive. He notes that the migrant population (much like the overseas Chinese) is a tremendous source of wealth for its provinces and counties: "It has helped to transfer wealth from rich to poor areas of the country."⁴³ In addition, a few articles in the Chinese press support the contributions of migrant laborers. According to state statistics, 60 percent of the workers in the 500 largest township enterprises in the country are migrant farmers. These rural workers often provide services that urban dwellers are reluctant to perform, such as construction, service and repair trades, and factory work.⁴⁴

At the same time, Fan admits that by the year 2000, migrants could become "a big problem."⁴⁵ Rapid growth of the migrant population may have ramifications for future urban stability. Coastal provincial officials are anxious about the crime committed by these migrants.⁴⁶ In 1979, Chinese officials in Guangzhou estimate that crimes by migrants accounted for only 2.2 percent of all crimes. Yet by the late 1980s, migrants committed 60 percent of all crimes. In Beijing, officials claim that migrants were responsible for 43.6 percent of all crimes in 1993.⁴⁷ In Shanghai, a survey discovered that farmers who could not find jobs became a "volatile social factor."⁴⁸

Analysts have not comprehensively studied the impact of this migrant population on urban water resources. Calculations by Chinese officials suggest that migrants, despite their lack of official access to water resources, consume a significant amount of water. However, migrants still consume less water than legal urban residents. Specifically, these officials state that in the twenty-five largest cities in China, average water usage per person was 174.8 liters; if the migrant population is included in these calculations, this average would fall to only 145.7 liters.⁴⁹ The impact of migrant workers on the demand for water is likely to be especially critical in water-scarce northern cities such as Beijing.

While heightened demand places stress on water resources, increased levels of residential waste and industrial growth in the PRC pollute water sources and contribute to water scarcities. While levels of discharged industrial wastewater declined from 1988 to 1994,⁵⁰ the volume of total wastewater discharged increased. Moreover, little progress has been made to improve the percentage of wastewater that meets discharge standards (Table 4). For the year 1990, the economic losses from water pollution are estimated to be as high as 14 billion yuan⁵¹ (US$1.7 billion).

In many cases, despite the decline in the discharge of industrial wastewater, large-scale industrial projects are constructed without concern for water supply or the effects of pollution.⁵² Moreover, township and village enterprises are a rapidly growing -- and difficult to monitor -- source of industrial wastewater discharge. According to one analysis, the major sources of industrial water pollution are paper mills, print and dye factories, chemical plants, electroplating factories, and township and village enterprises.⁵³ In 1994, only about one-seventh of the wastewater discharged by the paper industry met discharge standards.⁵⁴

In August 1994, NEPA director Xie Zhenhua stated that 86 percent of the rivers flowing through China's urban areas were seriously polluted, giving rise to "riverside pollution belts." In addition, he noted, pollution in some important lakes caused damage to urban water supplies. In rural areas, he pointed out, one small paper mill might pollute a whole river.⁵⁵ According to the 1994 Report on the State of the Environment in China produced by NEPA, the pollution levels in the major rivers of China increased, especially in the areas adjacent to industrially developed cities and towns. Aquatic farming declined, and in some areas, aquatic organisms were on the verge of extinction.⁵⁶ For example, the catch of the four major fish species in the Yangtze in the 1990s is only 5 percent of the catch in the 1970s.⁵⁷ Food processing plants in Nanjing were reportedly unable to ensure that their products are safe to eat as they do not have enough clean water.⁵⁸

Throughout the PRC, growing levels of pollution affect water quality. Water supplies in several of the PRC's most prosperous cities face serious constraints that may well hamper their future economic growth.

In Guangzhou, the quality of water in the Pearl River, one of the province's primary water resources, has rapidly deteriorated due to increasing amounts of industrial wastewater and sewage. In 1985, Guangzhou's domestic sewage totaled about 300 million m³. By 1993, this figure increased to almost 630 million m³. However, the city's sewage treatment plants only possessed an annual treatment capacity of 51.5 million m³. Not surprisingly, health problems associated with the polluted water are increasingly common in the city.⁵⁹

Similarly, in the Yellow River Basin, wastewater discharge was measured at 1.73 billion m³ annually during the 1970s. By the 1980s, the discharge level had reached about 2 billion m³, and by the early 1990s it had jumped to 3.06 billion m³. According to one report, the decline in water quality has detrimentally affected public health, the quality of local industrial products, soil quality, and agricultural produce.⁶⁰

Inadequate waste treatment in Shanghai also contaminated seafood and caused two hepatitis outbreaks, which affected hundreds of thousands of people in the late 1980s. In Beijing, there have been reports of arsenic poisoning from drinking the city water.⁶¹

Domestic sewage (households) poses a threat to water quality. Residential consumption of water for showers and washing increases the level of phosphorous in lakes and streams.⁶² In addition, in major cities, migrants may contribute to water pollution levels. In Shanghai, officials note that migrant workers have "severely" affected local hygiene conditions.⁶³ In Beijing, where 60 percent of the wastewater from public restrooms is dumped untreated, migrant workers -- whose only recourse is public restrooms -- are undoubtedly helping to overwhelm already overburdened wastewater treatment plants.

Finally, inefficiencies in water usage in industrial production, household use, and storage contribute to water scarcities. For example, to produce one ton of steel in an advanced industrialized country requires 18.8 m³ to 23.5 m³ of water, while in the PRC, the requirement is twenty times greater.⁶⁴ In addition, President Jiang Zemin himself, commented on the contribution of leaky toilets in Beijing to that city's water shortages. Moreover, most underground water systems, built during the 1950s, have leakage rates as high as 15 percent in some areas.⁶⁵

Trends in the nature of economic development in the PRC suggest that water scarcities will continue to intensify. The Chinese urban economy depends heavily on a system of inefficient state-owned enterprises. As Chinese leaders attempt to modernize these industries to compete in global markets, they confront several challenges. These firms dominate the key infrastructure sectors of the economy: power generation, ferrous metals, railroads, chemicals, machinery, and even textiles.⁶⁶ Typically state-owned industries are heavy polluters and rely on outdated pollution control technology. However, Chinese leaders are very reluctant to close down these firms, as the Chinese economy and urban stability depend on them. The approximately 108,000 state-owned enterprises employ about 100 million workers (including 75 percent of the urban workforce). Almost one-fifth of these workers are considered surplus labor.⁶⁷ According to one account, one-quarter of the entire Chinese populace is in some way dependent on these enterprises for their livelihood.⁶⁸

Even if the state manages to close or restructure these firms, a relatively new but equally significant challenge is being posed by the township and village enterprises (TVEs). TVEs primarily produce light industrial goods and are now the most dynamic sector of the Chinese economy. They contribute 40 percent of China's industrial output,⁶⁹ and as of 1993, employed more than 110 million workers and accounted for 10 percent of China's exports.⁷⁰ In many cases, local and central government officials encouraged the development of such industries -- often managed and staffed by farmers as sideline enterprises -- as a means of equalizing incomes between rural and urban laborers and of encouraging farmers to stay in rural areas.⁷¹

TVEs pose a threat to the environment that in many ways equals that of the state-owned enterprises. These industries are difficult to regulate, frequently highly polluting, and often sited without consideration for land or water resources. The brick and tile, pottery and porcelain, and pulp and paper industries are considered especially bad polluters. Although NEPA announced a crackdown on small paper mills in 1994, Chinese scientists have stated that they have no means of controlling the pollution from these small scale enterprises.⁷²

Moreover, when forced to reconcile between conflicting environmental regulations and economic interests, local officials and residents frequently favor economic interests. In one case, in the early 1990s, a tannery established by farmers in a rural village in Hebei Province earned them revenues of 300 million yuan (US$36.6 million). However, in 1993, this tannery discharged 11.3 million m³ of wastewater, with a high content of sulfides and chromium, directly into sewage pits. This wastewater seriously damaged surface and groundwater, reduced crop yield, and produced "sour" fruit. However, the farmers claimed that they were indifferent to the poor yield because the tannery was far more important to their economic well-being.⁷³ Even the most committed environmentalists tacitly recognize the primacy of economic imperatives in current Chinese policy and the importance of the TVEs in the economy. When NEPA director Xie Zhenhua, himself, called for heightened control on pollution from township enterprises, he simultaneously promised that environmental regulation would not hamper rural industrial development.⁷⁴

Thus, the future poses enormous challenges for the Chinese state as the need for water grows and pollution levels show little sign of abatement. Both demand- and supply-induced scarcities are on the rise throughout many regions of China, and the prospects currently appear dim for a radical shift in these trends. By the year 2000, the head of the National People's Congress Environment and Resources Protection Committee, Qu Geping, estimates that total water requirements will exceed 700 billion m³. He argues there is little hope that China will sufficiently enhance its water supply or storage capabilities. Qu Geping states, "The storage capacity of China's water project will amount to 670 billion m³ leaving a deficit of 42 billion m³." He predicts that unless drastic measures (perhaps a substantial increase in water prices) are taken, shortages will only become more acute.⁷⁵

IV. BEIJING MUNICIPALITY AND GANSU PROVINCE

Two regions in the PRC -- Beijing Municipality and Gansu Province -- illustrate the severity of water scarcity. A close examination of these two areas suggests several trends: water scarcities are growing both in the poorest and wealthiest regions of the country; claims on the financial assets of the state to respond to these scarcities will similarly increase; competition is growing among provinces for these resources and this competition diminishes state coherence; and the central state is responding in a manner that suggests that over the long run, the reach of the state will be diminished.

Although water scarcities traditionally have plagued both Beijing Municipality and Gansu, heightened industrialization and population growth in both areas, and increased wealth -- primarily in Beijing -- threaten to produce sustained water scarcity.

Beijing Municipality has faced serious water shortages since its founding in the Yuan dynasty (1271-1368). During the past several decades, however, the situation has steadily deteriorated, with little evidence that scarcities will be alleviated in the future. The central leadership considers Beijing to be facing a crisis. Both growing demand and declining supply are contributing to the situation. In August 1994, Premier Li Peng stated that the city's development, population growth, and heightened water consumption were contributing to an "extremely serious" situation.⁷⁶

Annual total water use in Beijing is almost 3.7 billion m³. Agriculture utilizes approximately 50 percent of Beijing and the surrounding area's water supply, while industrial and residential consumption account for 25 percent each. As personal income grows, household consumption of water will probably increase. Beijing's per capita share of water resources is less than 300 m³ annually,⁷⁷ which is less than in Israel. In a typical year, Beijing is short 300-500 million m³, and it compensates for these shortages by over-extracting groundwater.⁷⁸

During 1950 to 1985, Beijing's industrial, domestic, and agricultural use of water increased forty times; irrigation accounted for the greatest percentage increase.⁷⁹ In addition, increased withdrawals on the upper reaches of the Yongding River by Shanxi and Hebei provinces, drought, and agriculture combined to produce a significant inflow reduction into the two primary reservoirs which service Beijing -- the Guanting and the Miyun.⁸⁰ One dramatic example of the impact of water scarcity occurred during the summer of 1983. Daily water shortages averaged about 94,000 m³ day during peak consumption periods. According to Qu Geping, the operation of more than 300 enterprises was severely affected. In hospitals, orderlies fetched water in buckets during surgery.⁸¹

More recently, since late 1993, Beijing has also been plagued by severe drought. Indeed, water reserves have fallen sharply in the eighty reservoirs that service Beijing. In 1994, farmers were banned from drawing water for irrigation from the Guanting and Miyun reservoirs to guarantee a sufficient supply for the urban population.⁸² By May 1994, the water levels in the Guanting and Miyun had dropped by 560 million m³ from the same time the previous year. More than 10,000 farmers in the Beijing area currently fetch water from supplies two to five kilometers away.⁸³ According to Tang Shitang, chief engineer of Beijing's Water Conservancy Bureau, "With the prolonged scorching weather and without effective water-saving measures, the reserve storage of water will be used up in the next few years. After that, it will be a crisis."⁸⁴ Originally, the water table under Beijing was 5 to 10 meters underground; now it is over 40 meters below the surface.⁸⁵ On average, the water table decreases by .5 to 1 meter annually. Changing climate in the Beijing Municipality further complicates the Beijing leadership's efforts to redress the water scarcity problem.⁸⁶

Population growth and industrial development have reduced water quality in Beijing. The pollution of groundwater is very serious: only 54.4 percent of groundwater is potable. The water quality of the Guanting Reservoir has so deteriorated that it is undrinkable.⁸⁷ Water deterioration has been caused by several factors: pollution from surface sources (1.1 billion m³/year of wastewater discharge for the entire region, including industries, and rural and urban households); air pollution (heavy metals infiltrate into the ground and affect groundwater); and over-extraction of groundwater (over-extraction leads to a falling water table and lowers the dilution capacity for pollutants).⁸⁸ In Beijing about 5,700 industrial enterprises -- not including TVEs -- produce about 1 million m³ per day of wastewater. These enterprises contribute approximately 45 percent of the volume and 60 percent of the total water pollution load in the municipality.⁸⁹ The food, machinery, metallurgy, paper and pulp, and pharmaceutical industries are especially egregious polluters.⁹⁰

Overall, the treatment rate for wastewater in Beijing is low. One Chinese environmental scientist calculated that the current total sewage discharge from Beijing and its surrounding area is about 2.2 million m³ daily. Of this total, only 12 percent receives primary or secondary treatment and the remaining 78 percent is discharged directly into the Tonghui and Liangshui Rivers. Sewage discharge has ramifications not only for water supply but also for health. In areas surrounding Beijing, there have been many instances of fluoride poisoning⁹¹ and several outbreaks of arsenic poisoning.

During the past few years, however, Beijing Municipality has taken action to improve its access to clean water. For example, the treatment rate for industrial wastewater is now close to 90 percent (industrial wastewater represents about 39 percent of all wastewater discharge). Since the Gaobeidian Sewage Treatment Plant began operation, the wastewater treatment rate in Beijing increased significantly, from 3.1 percent in 1993 to its current level of 12 percent. In addition, in November 1995, the Beijing legislature passed a radical resolution that banned all projects for commerce, tourism, swimming, and residences in the areas surrounding the reservoirs. If enterprises violate the law, they will be fined 100,000 yuan (US$12,200); if individuals violate the law by washing in the water or discarding wastewater or solid pollutants, they will be fined between 200 to 1,000 yuan (US $24-$122). In addition, Beijing Municipality has decided to resettle the people living around the reservoirs.⁹²

Gansu is located in the central part of the PRC at the juncture of the Loess Plateau, Qinghai-Tibetan Plateau, and Inner Mongolia Plateau. Throughout history, a wide range of environmental problems have plagued the region. During the Qing Dynasty, 114 major droughts struck the region. In 1928, over 300,000 people starved to death during a three-year dry spell.⁹³ Soil erosion is a serious problem; over three-fourths of Gansu's land suffers from water and/or wind erosion that poses a threat to agriculture and industry in the province.⁹⁴ Gansu suffers from a shortage of drinking water: a 1990 census indicated that 8,280,000 people lived in arid areas and 2,146,800 people resided in water-borne disease regions. Many of these people must travel significant distances to find water.⁹⁵

Gansu's demand for water far exceeds its supply. Three water systems serve the province: the Yangtze, the Inland, and the Yellow. These rivers carry approximately 61 billion m³ of which 30.1 billion m³ is sourced within Gansu. However, as determined by the Beijing Ministry of Hydroelectric Power, only 8 to 9 billion m³ of this water can be used by Gansu. Gansu officials believe that because of central government decisions, the province consistently lacks water resources.

Gansu is plagued by uneven rainfall, both geographically and temporally. The eastern part of Gansu (where the capital, Lanzhou, is located) receives 7 to 8 times more rainfall than the west. In addition, most of the precipitation falls during July and August; for agricultural purposes, rain is needed in April to June, when only 20 percent of the precipitation falls. Moreover, the geographic distribution of water and population is not even. Thirty-six percent of the water in the region flows through the Yangtze, but this river services only 10 percent of the population. In contrast, while 45 percent of the region's water flows through the Yellow River system, the system provides water for 70 percent of the population. The Inland Rivers system, with only 19 percent of the province's total water resources, services two-thirds of the irrigated agriculture.⁹⁶

Also, in contrast to Beijing Municipality, Gansu, like the majority of inland and western provinces, is poor. Its economic output ranks twenty-ninth out of thirty-one provinces and municipalities and, in 1994, the province contributed less than 1 percent of China's economic output.⁹⁷

Efforts by Gansu officials to improve economic conditions have caused extensive water pollution. The pollution of the Yellow River is so severe that it is endangering industry, agriculture, aquatic products, and human health. In Baiyin City, for example, a company discharged a substantial amount of wastewater with nitrite compounds that caused severe illness in those who drank the water. Epidemiologists have noted an increase in illnesses such as cancer in the region, which they attribute to pollution⁹⁸ (although some of this increase might also be the result of increased smoking).

Lanzhou, the largest industrial city on the upper reaches of the Yellow River, is an especially egregious offender. The city houses a high proportion of chemical, energy, raw material, and food industries.⁹⁹ Waste and polluted water in Lanzhou increased from an annual rate of 1.73 billion m³ during the 1970s, to 3.06 billion m³ in the 1990s. Pesticides, chemical fertilizers, industrial waste and wastewater, and domestic refuse were the main sources of this increase.¹⁰⁰ Lanzhou suffers from a range of other pollution problems. During the winter months, heavy smoke from heating systems covers the city, and it is one of three cities in the PRC that cannot be seen from satellites during the winter. The city consumes 6.4 million tons of coal per year (slightly above the national average -- 76 percent of total energy from coal). During the 1980s, the number two and three killers in the city were malignant tumors and respiratory diseases. Four major air pollutants all far exceed state prescribed standards.¹⁰¹

Water scarcity limits the potential for agricultural development in Gansu. Droughts plague the province: according to one Chinese report, a "light" drought strikes once every three years and a "serious" drought every five years. To overcome its variable weather patterns, Gansu attempted to develop an irrigation system. However, development of adequate irrigation infrastructure has been hindered by a lack of investment funds. Gansu has approximately 2.76 million hectares of total cultivated land. (Irrigated land accounts for only a quarter of the total cultivated area, but is responsible for 50 percent of the total crop yield.)¹⁰² In addition, factors such as desertification, salinization, soil erosion, land slides, and mud rock flow are increasing in Gansu. These factors reportedly cost the province 140 million yuan (US$17 million) annually. Nearly 526,300 hectares of farmland suffers from desertification, while sand has buried 125,000 hectares. The 1,600 km long incursion by sand dunes from Dunhuang to Gulang currently threatens 479 villages. In addition, approximately 118,500 hectares of cultivated land in the province suffer from excessive salinization and 32,894 hectares from serious salinization. Salinization causes an annual economic loss of more than 75 million yuan (US$9.1 million). Finally, Gansu, like Beijing, over-exploited its groundwater which caused its water tables to fall and water quality to decline. As a result, plants on approximately 5,700 hectares have died and 25,200 hectares of cropland have been abandoned.¹⁰³

The record of Beijing and Gansu in enforcing central directives offers evidence of the impact of limited state reach and responsiveness.

In Beijing, the Ministry of Water Resources, NEPA, and the Beijing Water Conservancy Bureau have attempted to implement state laws. These institutions are exploring additional measures to respond to Beijing's water scarcity and pollution problems. However, Beijing's efforts to improve both water quality and water access have not kept pace with growing demand. In the early 1980s, several reforms to the water distribution system were implemented. The Beijing Municipality instituted a steep increase in the block rate water fee system and assigned water supply limits to the largest water users. By 1988, a total of 692 wastewater treatment plants were installed in factories in Beijing. In addition, the discharge fee system was implemented.¹⁰⁴ Since 1986, the Standing Committee of Beijing Municipal People's Congress has passed eleven regulations on the protection and management of local water projects. These regulations provide a legal framework that have allowed the judiciary to process 6,000 cases of water law violations.¹⁰⁵ Beijing invested 8 billion yuan (US$970 million) to build an automatic monitoring system. This system will measure the city's precipitation and monitor the water levels of the two reservoirs.¹⁰⁶ Li Qiyan, the Beijing mayor, stated that heavy polluting enterprises will be allowed to go bankrupt.¹⁰⁷ Moreover, the Beijing municipal government has established special administrative groups within key polluted areas and proposed a three-year environmental protection legislation plan. This plan included legislation to protect the water resources of the Miyun and Guanting reservoirs. In addition, the Standing Committee of the Beijing municipal government organized three investigation groups to supervise and encourage relevant agencies to monitor cases of noncompliance with environmental protection laws.¹⁰⁸

None of these measures appears to be an adequate response to the challenges currently faced by the municipality's leadership. The Water Economizing Office within the Water Conservancy Bureau gives water quotas to various administrative organizations and enterprises; firms pay a level fee depending on the amount used. However, according to an official at the Beijing Water Conservancy Bureau the price is too low to change the water consumption patterns of enterprises.¹⁰⁹ In general, the water usage fees are only .35 percent of production costs for Beijing's industry.¹¹⁰ The price is 1 yuan/m³ in the city, and .02 yuan/m³ for farmers.¹¹¹ Thus far, the Water Conservancy Bureau has been unable to raise the fees due to opposition by the industrial and finance ministries, fear of inflation, and fear of public unrest.

NEPA's efforts to implement the discharge fee system are similarly hindered by a number of political and technical constraints. According to one expert, the discharge fee system encounters three problems. First, as in other regions of the country, the fees are too low. Second, the industrial bureaus, the finance bureau, and the local banks all charge industries separate fees. And third, even when enterprises retrofit themselves with pollution control systems, a survey of enterprises indicates that many end-of-the-pipe pollution control systems are considered too energy intensive and too costly to operate.¹¹²

In terms of managing the water pollution caused by Gansu's industrial development, Gansu's Environment Protection Bureau is well aware of the state's central directives to enforce water pollution regulations and its difficulty in implementing these directives. Only 30 percent of residential and 58.4 percent of industrial wastewater is treated. Currently, Gansu has about 140 pollution control projects. Half of these projects focus on protection of water resources and require an investment of 180 million yuan (US$21.9 million). For economies of scale and optimal efficiency, Gansu officials build large water treatment projects. For example, a wastewater treatment plant that is currently under construction for the Lanzhou chemical industry will also service nearby residents. A similar effort in Wuwei city, however, is being hampered by a lack of funds and investment.¹¹³

When provincial or local officials discover that a factory exceeds the local discharge standards, it is given a limited time -- this time varies -- to treat the water before it is fined. If the standard continues to be exceeded the following year, an additional charge is levied.¹¹⁴

Institutional weakness constrains Gansu's environmental protection bureaucracy. The Environmental Protection Agency employs only 500 staff in the entire province, of which nearly 60 percent are based in Lanzhou. In addition, the majority of the local level EPBs are not of sufficient quality to approve or deny siting applications from industries.¹¹⁵ Therefore, the actions of local governments and industries outside of Lanzhou remain largely unsupervised. An incident outside the Lanzhou city limits in 1992 illustrates the implications of Gansu's weak bureaucracy.

In 1992, the Organic Chemical Works of the Lanzhou Chemical Corporation and Maquan Village near Lanzhou jointly built the Lanquan Chemical Works. This enterprise was designed to produce carbon bisulphide and sulfuric acid. The total investment from the parent company and the village amounted to 8 million yuan (US$975,600), but the annual output was expected to reach 18 million yuan (US$2.2 million). The enterprise neglected to submit its production plan to the municipal and provincial environmental protection authorities. When the plant began operations in October 1992, waste gas discharged from the plant spread throughout the area. Two months later, workers and families at the neighboring No. 471 factory were forced to keep their windows closed and to cover their mouths with wet towels before they went to bed. The chemical works released wastewater every night and sent it along a natural flood drainage ditch close to No. 471. This waste was discharged directly into the Yellow River, less than 100 meters from the waterworks of the factory. Factory 471 tried to purify the water but it could not; cooking and washing clothes became impossible.

Factory 471's management complained to the Xigu district's EPB on several occasions, but the EPB ignored their concerns. The factory then reported to the EPB in Lanzhou, which, on 28 April 1993, sent a fact-finding team to the plants. In fact, the Xigu EPB had initially approved the project even though it did not possess the authority to do so. Early in July, on the order of the Lanzhou EPB, the chemical works suspended operations but on 24 July it began operations again. According to managers of the chemical works, the plant resumed operation because the government had not made any final decisions on the closure of the works. Moreover, they claimed that wastewater and waste gas were being treated properly.

This dispute divided the local community. On 30 July, Factory 471 workers protested while 500 people from Maquan Village protected the chemical works plant. The Lanzhou EPB again ordered the chemical works to close down but the chemical works refused. When the mayor of the municipal government and municipal Party secretary instructed the chemical works to stop production, the management of the works still refused. The villagers from Maquan pulled down about a dozen power lines stretching across the No. 471 Factory which cut off the supply of power and water for the factory and its residential quarters. When, on 14 August factory workers attempted to repair the power poles, they were besieged by about 400 workers from the chemical works. Before authorities could intervene, eight people were seriously injured and two people were killed in the melee.¹¹⁶

According to one Gansu EPB official, the initial complaints about a polluting factory often arise from the people in the area surrounding the factory rather than from an EPB's investigation. The EPB's resources are too limited to review all enterprises. Protests in Gansu concerning environmental issues occur on average twenty to thirty times per year, although typically not of the magnitude of the case described above. After a protest, a group from the National People's Congress, the local government, and the Environmental Protection Bureau visit the site. If there is a dispute among the local officials as to whether a factory should be shut down, the provincial governor and the head of the county make the final decision. However, according to the EPB official, these cases arise only very rarely and few of these factories are closed.¹¹⁷

In addition, the weakness of the provincial economy hampers the EPB's capacity to collect fees. The low level of economic development influences the ability of water resources and environmental protection bureaus to enforce water usage and discharge fee collection laws. In 1991, Gansu collected only about 44 percent of the water fees that it levied,¹¹⁸ and an equal percentage of the pollution discharge fees.¹¹⁹ According to an EPB official, this poor record reflects the poverty of the region. When enterprise officials state that they do not have enough money to pay the fees, the EPBs have no recourse.¹²⁰

Corruption and official diversion of funds also plague local EPB activities. During the late 1980s, a joint investigation by the State Audit Administration, the Ministry of Finance, and NEPA discovered that Lanzhou officials diverted money from discharge fees. These funds were utilized to help develop the cities' infrastructure, namely the construction of gas pipes. The Gansu EPB also came under attack for using the funds to expand the incomes of its own employees.¹²¹ Gansu's provincial party secretaries condemned widespread corruption among a number of county and local level officials.¹²² However, it is not clear what specific actions are being taken to remedy this corruption.

Both Beijing and Gansu confront levels of water scarcity that impede economic development and the provision of adequate water supplies for residential consumption. Actions to remedy this scarcity may produce interprovincial conflict over the resource and subsequently diminish state capacity.

During the past few years, Beijing has intensified its plans for a major project -- the South-North Water Diversion Project -- to divert water from the Yangtze to supply Beijing and nearby Tianjin with water. Since the early 1990s, this project has assumed a heightened sense of urgency. According to one report, "If nothing is done, Beijing's annual water deficit could exceed half of the current annual consumption."¹²³ However, the demands of this project already have caused substantial interprovincial conflict.

Experts and officials are exploring three routes for the South-North Water Diversion Project: a western, a middle, or an eastern route.¹²⁴ The western route would have the least negative impact on the environment. Both the middle and the eastern routes could have significant negative environmental ramifications. However, the middle route has gained the most support thus far. To implement the middle route, the project will cross 219 rivers and streams and will require either an 8 kilometer-long water tunnel under, or an elevated aqueduct over, the Yellow River.¹²⁵ The project requires a completion time of six years, and its cost is estimated at US$5 billion (which would undoubtedly increase as the project developed further).¹²⁶

While Beijing aggressively pursues plans for the river diversion, other provinces are resisting the project for a variety of political, economic, and environmental reasons. The plan would displace 225,000 people in Hubei and Henan.¹²⁷ Many leaders in the southern provinces claim, with good cause, that Beijing wastes a tremendous amount of water from easily addressed technical problems such as leaky toilets. Even President Jiang Zemin complained, "If a country can send satellites and missiles into space, it should be able to dry up its toilets."¹²⁸ Provinces are therefore reluctant to contribute funds and manpower to the project. Lower water levels in the Yangtze, especially during the dry season, could lead to possible sea water intrusion. This intrusion would harm industrial and agricultural production and affect municipal water supply in Shanghai.

A World Bank assessment of the project outlined a number of serious ecological ramifications. This report states that the canals would pass through major watersheds, and significantly disturb the aquatic ecology. Unless a proper lining is provided for the canals and a good drainage system installed, water transfer could cause secondary salinization of soil. The soil in the water importing area north of the Yellow River has a high salt content. Increased irrigation with imported water could cause the water table to rise, leading to salinization.¹²⁹ Salinization of the soil would be especially severe along the eastern line. In addition, because the eastern route would take in water at the lower reaches of the Yangtze River near the estuary, saline water could back up when the Yangtze River was shallow. This saline water would cause the water quality in Shanghai to deteriorate. Important freshwater fisheries would be damaged if the eastern line passed through Hongze Lake.¹³⁰ Also, urban and industrial areas along the diversion routes could pollute the water. Finally, according to one expert, the river diversion cannot transport sufficient water to solve the problem, especially during the winter months when the water is too low and there is no superfluous water flow.¹³¹

Reportedly, one-seventh of the project's budget will be dedicated to address environmental and social problems along the route.¹³² The central government and provincial governments will share the costs of the project evenly. However, the provincial governments believe that Beijing should contribute more than currently planned.

Gansu also has attempted to take action to meet its growing water demand. To enhance its limited capabilities, the province utilizes local labor, undertakes joint projects with Western nations, and solicits investment from Beijing. Although Gansu officials annually appeal to Beijing for greater access to water resources, they do not believe that these appeals will be answered. According to officials in the environmental and water resources bureaus, water scarcity limits both agricultural and industrial development in the province. Recently, they submitted a plan to Beijing to divert 700 million m³ of water to Jinchang in central Gansu from Ningxia Autonomous region. This plan is still under consideration by the Ministry of Water Resources.¹³³ Officials in Gansu also have pressured Beijing for the additional funds necessary to resolve the serious water scarcity problem that the province faces. Zhang Yan, a Gansu delegate to the Chinese People's Political Consultative Conference (CPPCC), stated in March that as many as 4.27 million people in Gansu live below the absolute poverty line: they earn an annual income of less than 300 yuan (US$36.50). Yan called on the government to allocate more funds for resettling families away from "hopeless" arid areas in the province and to "wipe out" illiteracy.¹³⁴ While Beijing has recognized that Gansu, along with Xinjiang and Qinghai, requires a wealth transfer from the coastal provinces, other provinces, especially Guangdong, strenuously object to such plans. Central leaders estimate that these inland provinces require an transfer of 2.38 billion yuan (US$290 million).¹³⁵

Unfortunately, Beijing has decreased the state's investment level in provincial and local infrastructure. While Beijing's fiscal strength may be enhanced by reduced investment, the reach and the autonomy of the state may be diminished. Beijing clearly recognizes its fiscal strength could be diminished by heightened demands for assistance from the provinces. Therefore, to protect its financial resources, Beijing responded with fiscal restraint. In developing local water conservancy projects during the 1980s, the state invested approximately 75 percent; by 1991, this figure was 50 percent. More interesting, however, is the regional disparities in state investments. In eighteen of the thirty provinces or municipalities (including Beijing), over half of the investment came from Beijing. In four of the thirty (including Shanghai), the central government invested approximately half. However in the remaining eight provinces -- Shandong, Liaoning, Fujian, Guangdong, Guizhou, Yunnan, Gansu, and Qinghai -- investment came primarily from foreign and local sources, not the central government.¹³⁶ The disparity in levels of central investment among provinces may reflect a combination of two factors: varying levels of provincial influence with the center and the urgency of the request for assistance.

In response to reduced state investment, Beijing Municipality has turned to the international community for funding. Since 1979, Beijing has received US$866 million in loans from foreign sources for ninety-six environment and development projects.¹³⁷ In 1992, the World Bank initiated a set of projects to address air and water quality problems and solid waste issues. A network of sewers were constructed to prevent pollution of groundwater and the city's waterways. The World Bank funded modernization of a number of highly polluting industries, and in some cases, these industries were relocated from the Beijing proper area.¹³⁸ Specifically, the World Bank plan includes the construction of sewage disposal treatment plants on the southern bank of the Tonghui River which will be capable of treating over half of the downtown area's sewage.¹³⁹ The United Nations Development Program (UNDP) is also funding an irrigation project in several counties surrounding Beijing, and the Asian Development Bank (ADB) plans to provide a US$6 million loan for water and soil conservation along the route from the Miyun Reservoir to Beijing. Japan has loaned approximately US$800,000 for technology transfer and an experimental irrigation system.¹⁴⁰ In addition, Japan provided substantial funds for the Gaobeidian Sewage Treatment Plant, which has already improved Beijing's water situation.¹⁴¹ Most recently, the World Bank approved Beijing's application for a US$800 million loan to begin its river diversion project.¹⁴²

Like Beijing, Gansu has looked to foreign sources of funding to compensate for its weak economic base and declining financial contribution from the center. Over the past ten years, Gansu spent approximately 7.3 million yuan (US$890,000) to build water management facilities. Also twenty-six irrigation projects, funded primarily by the United States and Europe, have been completed since 1982, which brings the total irrigated acreage in the province to nearly 1.07 million hectares. The World Bank provided loans of US$250 million for thirteen projects which covered everything from water conservancy to health. The largest project is a water diversion canal from the Datong River which will irrigate 60,000 hectares of farmland for use by 30,000 farmers.¹⁴³ A second World Bank funded project to further increase the amount of irrigated land and the province's grain output will begin 1 July 1996.

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