An Anatomy of Failure: China’s Wind Power Development
Abstract: China is currently the world’s largest installer of wind power. However, with twice the installed wind capacity compared to the United States in 2015, the Chinese produce less power. The question is: Why is this the case? This article shows that Chinese grid connectivity is low, Chinese firms have few international patents, and that export is low even though production capacity far exceeds domestic production needs. Using the tools of Austrian economics, China’s wind power development from 1980 to 2016 is documented and analyzed from three angles: (a) planning and knowledge problems, (b) unproductive entrepreneurship, and (c) bureaucracy and government policy. From a theoretical standpoint, both a planning problem and an entrepreneurial problem are evident where governmental policies create misallocation of resources and a hampering of technological development.
JEL Classification: P21, O32, Q55, Q58, B53
Jonas Grafström ([email protected]) is a researcher at the Ratio Institute and an assistant professor at Luleå University of Technology. He is also a visiting fellow at the Oxford Institute for Energy Studies. He is thankful for comments by John Taylor, Nils Karlson, and Christopher Coyne. All errors are solely upon the author.
The headline of a 1953 article by Peter Wiles in Foreign Affairs had stated that “The Soviet Economy Outpaces the West.” Based on the official Soviet statistics, the GDP growth numbers suggested that the Soviet Union could plausibly outgrow the West, but as later revealed, the numbers did not match reality (Levy and Peart 2011). What Peter Wiles and numerous scholars at the time did not see were the cracks in the Soviet economic system (Boettke 2001, 2002a; Huerta de Soto  2010). The Soviet Union is gone; the slightly younger, seventy-year-old People’s Republic of China is still (to a large extent1) a planned economy that by some accounts appears to be on the verge of outpacing the West. However, cracks can be seen in the Chinese economy, as illustrated by its wind power industry, which is analyzed in this paper.2
There are many problems in the Chinese wind power expansion effort (see e.g., Zeng et al. 2015; Karltorp, Guo, and Sandén 2017). The installed wind capacity in China has long been twice that of the United States (IRENA 2018). However, despite having twice the installed capacity, China produces less power than the US. Grid connectivity is low, Chinese firms have few international patents, and exports are low even though production capacity far exceeds domestic needs (Cass 2009; Zhe 2011; Xingang et al. 2012; Sun et al. 2015; Zeng et al. 2015; Karltorp, Guo, and Sandén 2017; Lam, Branstetter, and Azevedo 2017; Zhang et al. 2017).
Despite robust government support, wind power in China is obstructed by various barriers like quality deficiencies, low operational efficiency, and two-year permit delays from the central government for grid construction (Junfeng et al., 2002; Han et al. 2009; Xingang et al. 2012; Luo et al. 2016; Zhao, Chang, and Chen 2016; Liao 2016; Sahu 2017). These issues have hampered China’s wind power energy output and exports (Zhang et al. 2015; Sun et al. 2015).
Boettke (2002a) found that the failure to predict the fall of the Soviet Union was due to three reasons: (1) a disregard among economists for evidence other than measurable statistics, (2) the elegance of the formal structure of central planning and the balancing of inputs and outputs, and (3) the preoccupation with aggregate measures of economic growth as opposed to detailed microeconomic analysis of the industrial structure. All, but especially the third reason, are an appropriate approach when investigating Chinese economic shortcomings.
Taking inspiration from Boettke’s insight above, the purpose of this article is to synthesize the literature that has documented problems in Chinese wind power development and theoretically explain these problems. Identifying problems should be useful for policymakers in other countries that are considering a transition to large-scale renewable energy utilization. In a broader sense, the paper adds to the discussion of the sustainability of Chinese economic expansion in the long term.
A reader who is familiar with the Chinese wind energy sector and has read influential works, such as Joanna Lewis’s 2012 book Green Innovation in China: China’s Wind Power Industry and the Global Transition to a Low-Carbon Economy, would probably perceive that on an aggregate level everything is all right. In Lewis’s book, as well as in most academic literature, the economic problems of Chinese energy are alluded to but never assembled and analyzed. In this article a less optimistic view of the state of China’s wind power development is presented.
It should be noted that the United States and other countries also have different government interventions in the wind power market and that negative effects have been documented. For example, US policies in the 1980s caused problems similar to the ones observed in China (Keller and Negoita 2013). Later the United States policies focused on promoting research and development (R&D) (Wiser and Millstein 2020). The German Energiewende (energy transition) and the Spanish solar bubble would be good cases for another paper, but this paper will focus on China since it is the largest producer at the moment and will probably be for some time to come.
The findings will be presented and followed by an analysis based on theoretical works by scholars of the Austrian school of economics which is utilized in two ways: firstly, in terms of its theoretical contributions regarding the role of entrepreneurship and its utilization of price signals,3 and, secondly, in terms of the planning debate, the use of knowledge in society, and the role of the market. Using Austrian economic theory as a starting point, it is found that both a planning problem and an entrepreneurial problem exist where governmental policies create misallocation of resources and a hampering of technological development.
The article is organized as follows: First, the Austrian theoretical background for the analysis of the wind power sector will be provided. Then, the historical context for China’s wind power development will be described. Finally, the theoretical framework will be utilized to analyze problems in Chinese wind power development.
THE LIMITATIONS OF PLANNING AND THE ENTREPRENEURIAL PROCESS
A cartoon in the Soviet satirical journal Krokodil that was published in 1952 showcases the failure of the Soviet economic system with a worker and a bureaucrat depicted under an enormous two thousand–kilo nail. The worker asked who needed such a big nail and the bureaucrat answered: “the month’s plan fulfilled” (Nove 1986, 94). The Soviet Union and its planned economy ended at the age of seventy-four years in 1991, which was a surprise for some, but not to a student of Hayek’s (1937, 1945), Mises’s (1920, 1949, n.d.) and Weber’s (1922) contributions to the great planning debate in the 1920s through to the 1940s (see also Lavoie 1985a and 1985b).
Let us contrast the outcome of a market with that of a centrally planned arrangement. In a market, profit is a powerful signal. Profit informs producers that consumers value that use of those scarce resources as compared to other alternatives (in the case of profits) or that they do not value that use (in the case of losses). Before a corrective process moves toward even an approximate equilibrium, changes in the market (individual preferences, the endowments of resources, and available technology) will distort any plan and make it irrelevant (Mises  2011; Kirzner 1982, 1999).
Hayek ( 2002) remarked that an equilibrium was too much to hope for, since an equilibrium would presume that all facts are known and that the process of competition has thus ended, rather than that there could be temporary order. Several studies highlight how state planning, with the best of intentions, often fails (see Hayek  1956; and for a modern application to development and aid, see Boettke 1994; Leeson 2008; Coyne and Ryan 2009; Williamson 2010; Coyne 2013). The case against regulation and interventions in the market (even by well-meaning planners), is based on the insight that the market will never be close to an equilibrium state since there is an ongoing corrective process.
Even though the functioning of the bureaucracy has been more fleshed out by public choice scholars, the Austrians have made contributions to our understanding of how a state bureaucracy works. For example, Niskanen (1994) pointed to the fact that Mises (1944) is often credited as one of the first scholars to approach the problems of bureaucracy from an economic point of view.
Niskanen’s and Mises’s views of bureaucracy differ in significant ways. In Niskanen’s view the bureaucracy is the result of the inability of the market to supply certain goods or services. A state bureaucracy compensates for the deficiencies of the market. According to Mises, bureaucracy appears because of government hindrances of the market process, but bureaucracy also makes economic calculation impossible (Carnis 2009). The Misesian view is more productive for the understanding of the Chinese case where the bureaucratic nature of the Chinese economy is a consequence of human action and design.
In Bureaucracy Mises contrasts different forms of economic organization and shows what happens when there is no profit motive. Mises argues that “[b]ureaucratic management is the method applied in the conduct of administrative affairs the result of which has no cash value on the market…. Bureaucratic management is management of affairs which cannot be checked by economic calculation” (1944, 47–48). If you do not have profits and losses as guide you must follow rigid rule systems. These rule systems will not allow for flexibility and will rather force the bureaucrat to compliance, whether the result make sense or not.
Constant feedback generates socially desirable outcomes without a central coordinator. Knowledge of the optimal use of scarce resources is not given ex ante but instead must be discovered through the process of individual choice (Mises 1920, 1949, n.d.; Hayek 1945). Hayek ( 2002) and Buchanan (1982) also emphasized that market “data” emerge after people interact with each other. Before the participants enter the process, they do not know what their choices will be. Hence, some economics knowledge cannot be gathered by regulators and planers before the interactions take place.
A prerequisite for successful entrepreneurial action is guidance by relative price signals and the attraction of pure profit (which requires calculation through profit and loss accounting). The price system economizes information which economic decision-makers must process. A market system produces social intelligence that no one planner or group of planners could approximate (Boettke 2002b). In the setting of a functioning market economy, the entrepreneur will try to make a monetary profit, which, as described by Smith (1776), enriches the other participants in the economy. Without these important indicators, the economic actor is lost (Mises 1949). These indicators are the product of specific institutional configurations. Absent the institutional context of a private property market society, economic actors will still strive to achieve their goals as best they can (North 1990).
There are several views on what entrepreneurship constitutes. Kirzner’s (1973) focuses on entrepreneurial alertness and the discovery of opportunities, where the entrepreneur is an actor responsible for creating and expanding businesses. The entrepreneurial process reveals previous errors, adjusts these errors, and thus improves the economy (Kirzner 1997).
Lavoie (1985a) extended Kirzner’s work regarding the entrepreneurial market process and revisited the socialist calculation debate and the problems of centralized economic planning (1985a). In Lavoie (1985b) the knowledge problem critique of socialist central planning is extended to include even modest attempts at national economic planning, such as industrial policy, where attempts at planning did not function well.
The Schumpeterian view of the entrepreneur emphasizes the entrepreneur as a creator of new combinations of knowledge (Klein 2008). In Schumpeter’s work ideas about an economy’s creative response to changes in external conditions are highlighted (Schumpeter 1934, 1942, 1947).4 Entrepreneurs are present in all societies. Under the existing institutions of any society the entrepreneurs will act to better their position,
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