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The environmental disaster that has unfolded over the past two weeks in the northeast Chinese city of Harbin has the makings of a great story: explosion at large petrochemical plant releases toxic pollutants into major river, threatening millions; local officials attempt cover-up; panic ensues; wiser voices prevail; corrective action is taken. Unfortunately, the real story remains largely untold. China's rapid economic development, endemic corruption and highly decentralized political system have produced a life-threatening environmental crisis for hundreds of millions of Chinese.

The statistics tell the tale. Earlier this year, China's Minister of Water Resources announced that 300 million people drink contaminated water on a daily basis. Of these, 190 million consume water so contaminated that it is making them sick. Children are particularly susceptible—more than 30,000 die annually from diarrhea due to unclean water. Wang Bin, director of the Ministry of Health's Women's Health Division, has linked environmental pollution to the 25% increase in birth defects China recorded between 2001 and 2003.

All along China's most polluted rivers—where factories simply dump their waste and sewage directly into the waterways and their tributaries—towns and villages record startling rates of cancer, stunted growth, diminished IQs and miscarriages. The economic costs are staggering, too. According to the Yellow River Conservancy Commission, river pollution costs China's economy about $1.9 billion annually. None of this should be surprising. China's State Environmental Protection Administration has repeatedly published reports indicating that more than 75% of the water flowing through China's urban areas is considered unsuitable for drinking or fishing, and 30% of the river water monitored by the Chinese government is worse than grade 5 (not suitable even for agriculture or industry).

It is easy to blame China's rapid economic growth for this devastating situation. Scant attention has been paid to the costs of pollution or resource degradation engendered by this dramatic economic development. Central government investment in environmental protection remains well below the 2.2% of GDP Chinese scientists claim is the minimum necessary to prevent further deterioration. Pollution fines are so low that factories often elect to pay them rather than take corrective measures. Water is typically priced far below replacement cost, discouraging recycling or conservation.

Fault, however, also rests deep within China's political system. While officials in Beijing routinely pass laws to protect the environment, local officials and factory managers collude to evade them. Many enterprises and municipalities are so confident in their ability to ignore the law that even when they possess appropriate waste-treatment facilities, they elect not to use them in order to avoid operational costs. Local environmental protection bureaus and courts are also beholden to local governments rather than to central government agencies, making them particularly susceptible to political and economic pressure. With few incentives for factory managers and local officials to do the right thing and even fewer disincentives to do the wrong thing, environmental officials face an uphill battle.

Inaction comes at a steep price. The environment is one of the leading causes of China's rising social unrest. Last year the government recorded 74,000 protests. This year, international and domestic media have kept busy reporting on numerous environmental protests, several of which have spiraled out of control, resulting in beatings, arrests, even deaths. In wealthy Zhejiang Province, for example, thousands of people mobilized throughout the spring and summer to protest chemical, pharmaceutical and battery factories that were polluting their land and water. In one case in April, up to 30,000 people living in and around the village of Huaxi reportedly set roadblocks, smashed windows, overturned scores of police cars and sent at least 30 police to the hospital.

The Chinese government has taken some steps to try to improve its environmental record. Much of this involves encouraging the public to report polluters, to take part in the environmental-impact-assessment process, and to use the legal system to take the most egregious offenders to court. Beijing has also opened the door to thousands of environmental NGOs that now openly tackle issues such as biodiversity protection, dam resettlement and public-health awareness. Nevertheless, the government remains wary of too much citizen activism, fearing calls for broader political reform. NGO leaders who tread into politically sensitive areas have been barred from further activity, prevented from leaving the country and even arrested.

What will be the lessons of Harbin? In the wake of SARS, China's leaders have become increasingly adept at operating in the harsh spotlight of the international community. After acknowledging some missteps and perhaps removing some culpable officials, they will likely point to the Harbin incident as further evidence of their newfound willingness to deal openly with challenges such as avian flu. Unfortunately, it is unlikely Beijing will recognize the Harbin disaster for what it really is: a wake-up call signaling that without real reform, they risk hundreds of millions of desperately ill citizens, greater social unrest and, perhaps, the end of the Chinese economic miracle.

• Elizabeth Economy
• Government inaction means millions are paying for prosperity with their health