China’s clean-tech success isn’t a win for a statist policy frame
Its leadership here is a story of capitalism rather than state props
1% earned less than today assumes that tax compliance has been uniform throughout this period.
various studies point to the progressivity of India’s tax structure and fiscal policies, including Kundu and Cabrera (‘Fiscal Policies and their Impact on Income Distribution in India’, April 2022) and Datt, Ray and Teh (‘Progressivity and redistributive effects of income taxes: evidence from India’, October 2021). According to Kundu and Cabrera, fiscal transfers pertaining to health and education reduce the Gini coefficient (a measure of inequality) by 0.05 percentage points. Thus, the paper’s findings of a regressive tax structure are contrary to existing literature.
the paper, by singularly focusing on the top 1%, misses India’s emerging middle class. According to Rajesh Shukla (2010), the Indian middle class doubled in size between 2001-02 and 2009-10, growing from 5.7% of all households in 2001-02 to 12.8% in 2009-10. As per recent estimates from PRICE , the middle class comprises nearly 31% of our population and is expected to rise to 61% by 2046-47.
while inequality is a relative concept, absolute poverty is a more urgent and tangible reality lived by millions of people. The Niti Aayog’s ‘National Multidimensional Poverty Index Report’, 2022, shows a remarkable decline in multidimensional poverty in India, attributable in large part to the government’s strategic focus on achieving universal access to basic amenities. The largest improvements were reported in states like Bihar, Madhya Pradesh, Uttar Pradesh, Odisha and Rajasthan, with rural areas leading the decline in poverty. India is on a path to achieving SDG Target 1.2, of reducing multidimensional poverty by at least half, well ahead of its 2030 deadline. For the average aspirational Indian, data showing that 248 million people escaped multidimensional poverty between 2013-14 and 2022-23 matters much more than the number of billionaires in the country. Reduction in poverty, not inequality, is the litmus test of inclusive growth.
a decline in inequality of consumption in India in the decade before the economic reforms of 1991 can be attributed to regulatory distortions and state interference that suppressed incentives for individual effort and innovation, leading to low levels of inequality but with high poverty incidence. Regardless of what the authors think, it is doubtful if those Indians who have emerged from poverty in recent decades would prefer to go back to their pre-1991 living standards.
it is a popular idea that redistribution is the solution to raising living standards at scale, alleviating poverty and inequality in one stroke. This approach has two major problems. Firstly, the infeasibility of taxing wealth is widely discussed in academic literature; for example, in ‘Taxing our wealth,’ Working Paper No. 28150, National Bureau of Economic Research, by Scheuer and Slemrod (2020), and in ‘Not So Fast: The Hidden Difficulties of Taxing Wealth’ by Fleischer (2017). Like many European countries , India did away with its wealth tax (in 2015), in line with Chelliah Committee (1993) and Kelkar Committee (2002) recommendations, while increasing income tax surcharges for top earners.
several authors have pointed out many incorrect claims made in Thomas Piketty’s work. In ‘Challenging the Empirical Contribution of Thomas Piketty’s Capital in the 21st Century’ (2014), for example, Magness and Murphy wrote, “We find evidence of pervasive errors of historical fact, opaque methodological choices, and the cherry-picking of sources to construct favourable patterns from ambiguous data.”
In a recent paper ‘Income Inequality in the United States: Using Tax Data to Measure Long-Term Trends’
No. 3, Volume 134, 2024), Auten and Splinter wrote that using US tax data correctly showed lower income shares for the top 1%, and that after-tax top income shares have changed little. This is in contrast with Piketty’s findings on inequality in the US.
Further, in ‘How Pronounced is the U-Curve? Revisiting Income Inequality in the United States, 1917–60’ (March 2022), Geloso, Magness, Moore and Schlosser wrote that Piketty and Saez overstated inequality in the period between 1917 and 1980 in their 2003 paper.
Finally, in fairness to Piketty and his co-authors, we acknowledge a confession they made, even though they have tucked it away in a footnote (No. 36 to be precise). It reads: “Our results are tentative given we do not observe both income and wealth for the same set of individuals and instead draw inferences based on the full distributions of income and wealth we estimate.” That is a QED moment. Now, if only they had put it right up front, we could have spared ourselves the tedium of ploughing through some 85 pages.
These are the authors’ personal views. Deep Narayan Mukherjee and Karan Bhasin contributed to this article.
There’s a comforting but erroneous explanation for why solar panels, home batteries and electric vehicles (EVs) are increasingly likely to be made in China. With an economy awash in easy money, its renewable manufacturers are undercutting rivals across the world; ergo, China’s comparative advantage isn’t scale, cost efficiency or innovative prowess, but cheap government subsidies. In the EV industry “everybody has an endless supply of loans and support from the local government,” the quoted Jörg Wuttke, former president of the European Union Chamber of Commerce in China, as saying in a recent article. This theory provides a justification for trade restrictions. If Chinese manufacturers survive on government cash, there’s no way overseas rivals can compete. Tariffs and other hurdles should keep out their products and give homegrown competitors a chance.
It’s true that swathes of China’s economy really do run this way. In the middle of the 2010s, all-but-forgotten Dalian Wanda, Anbang Insurance, HNA Group and Fosun went on a multi-billion-dollar shopping spree for foreign companies. The bursting of that bubble prompted another to inflate in real estate. Its bursting has hit property developers Evergrande, Country Garden Holdings and China Vanke. You can see the pattern in the published accounts of Fosun, which is divesting businesses amid a credit squeeze. It spent a net 112 billion yuan on acquisitions and other investments over the decade through June 2023, but generated 65 billion yuan in operating cashflows. Were it not for the 127 billion yuan in cash from financing, the vast majority of it debt, there is no way the company could have paid its bills.
The contrast with Berkshire Hathaway, the company that Fosun is most often compared to, could not be more stark. Warren Buffett’s $341 billion of investments over the past decade were more than covered by the $384 billion in steady, predictable operating cash his businesses generated. Just $51 billion came from financing.
Is the same thing happening with clean technology? It doesn’t look that way. If Chinese solar, wind, battery and EV makers are doing well because of easy credit, it should leave clear fingerprints on their financial statements. You can measure this by comparing their operating cash-flows to the average debt they held during the year: Where cash is low relative to debts, it’s going to take a very long time to pay back creditors. Looking through a group of 145 renewable companies with at least $1 billion in annual revenues—77 of them Chinese—this is the result you get.
As you’d expect in a sector experiencing rapid growth, leverage is often relatively generous, but it doesn’t look significantly higher among Chinese companies. Many of the most feared and aggressive renewable exporters, such as Longi Green Energy, Tongwei and JA Solar Technology have very low borrowings relative to their cashflows. Plenty have enough cash-flow to pay off 25% of their debts in the current year. This doesn’t look like a sector being propped up by government loans, or indeed loans of any sort.
For the sake of comparison, let’s look at an industry that was clearly a beneficiary of easy money: real estate. What’s notable here is that long before the crisis hit, Chinese real estate companies already had markedly poorer coverage ratios than their global competitors. If you measure things in terms of the amount of time it would take for operating cash-flows to pay off total debts, the median Chinese renewable manufacturer comes in at just under 10 years, a fraction of the nearly 27 years in the data for real estate. Non-Chinese companies came in a little under eight years, regardless of which industry they were in:
To be sure, Chinese manufacturers still enjoy powerful advantages. Generous and consistent purchase support for EVs and solar panels gives owners confidence to invest aggressively, just as the same policies do in Europe and the US. The government remains fixated on keeping costs low: China is home to nearly half of the world’s special economic zones (SEZs), whose advantages are cheap land, easy regulation and low taxation. It also offers reduced corporate tax rates for companies in new technology industries. Fundamentally, it’s the biggest single market for clean technology, so domestic factories have scale advantages that rivals elsewhere can only dream of.
The problem for developed countries is that, when applied to their own economies, these measures are all supported as oldfashioned pro-business policies, rather than unfair mercantilism.
It would comfort the US if China’s success in clean tech was a result of easy credit from a centrally-run communist state. In truth, though, this boom is a capitalist success story on a grand scale.