Spillover effects
While basking in the euphoria of a successful Beijing Olympics, the Chinese people were stunned to learn that the Sanlu dairy company had sold tainted milk powder. The government reacted quickly to manage the crisis. Officials offered free medical treatment to babies and children who fell victim, released comprehensive results of dairy product tests, scrapped a national food inspection exemption system that had been in place for eight years, and arrested company employees. Each of these steps was executed with firm resolve and transparency.
Having watched the events unfold, we can now focus on institution building to prevent such tragedies from reoccurring. Admittedly, the ramifications of this incident involving Sanlu and other dairy companies are broad and the consequences serious. The direct cause is connected to product safety as well as a lack of social responsibility. But, ultimately, the crisis reveals that the government has failed to act in its role as a watchdog.
China's dairy industry is now open and competitive. But because dairy foods can have such a strong impact on public health, they require supervision during the production process. This is a basic responsibility of the government.
The tainted milk incident was triggered by lax supervision. It's time to promote institutional reform, separating what the government should do from what it should not do in the market economy. Only with the right system in place can industry develop properly to produce safe milk. Let this tragedy mark a new start to rebuild the reputation of the Made-in-China brand for the food industry.
What should the government do, and what should it not do? According to public consensus, it should limit its function to supervision, since any failure in dairy product safety oversight leads to serious consequences. In the market system, building an effective regulatory regime calls for a finely tuned set of institutional arrangements. Specifically, the system should address the role of regulators watching over the production process; it should inhibit 'regulatory capture' and abuse of power by regulators; and it should avoid over-regulation. To be sure, the government's function should go beyond narrow regulatory control. Keeping the market in order and ensuring independent law enforcement should be part of the mandate.
From this incident, we see a government vacuum in the regulatory regime. The government's General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) took steps to mitigate the danger of melamine in pet food exports as far back as May last year. But it failed to impose the same testing requirements on domestic food processors. Moreover, a national system for inspection exemptions has applied to baby food processors for years without review. This was serious dereliction of duty.
The AQSIQ issued a regulation on August 24 that ordered timely recalls of all 'unsafe products that cause serious threats to human health or death, or those with extensive distribution and impact on society'. But no recall was made after health officials from Gansu province discovered problems with Sanlu's milk powder in mid-July and early August. Failing to follow the regulation, Sanlu did not release information to the public. Allowing this regulation to be ignored was a serious and regretful oversight.
The Sanlu incident again focused a spotlight on the question: 'Who regulates the regulator?' Finding a way to fix the system is an urgent task.
In the Sanlu crisis, attention on a government vacuum forced many to overlook the harm caused by a 'meddling' government, even though these two conditions have existed side by side. In fact, in overstepping its boundaries by sponsoring a contest for 'China's Famous Brand' food products - and thus exempting some products from inspections - the government did more harm than good. This unholy arrangement is an example of the government not doing its job while, at the same time, going beyond its responsibilities. Running a contest for famous brands that lets the state help with marketing is putting government credibility on the line. As seen with the milk incident, a scandal that seriously undermines the government's credibility leads to a crisis in trust.
Another level of meddling has also taken place, in price interference. This year, the government imposed price controls on consumer goods, including dairy products. In a market economy, prices are set ultimately by supply and demand. When demand exceeds supply, higher prices come as a natural consequence. Keeping prices artificially low is an example of government meddling that quickly drives producers either to skimp on quality or reduce production. In the absence of regulatory oversight and industry self-discipline, the first outcome is more likely. Either development harms the industry and consumers. We can learn many other lessons. The role of government in a market economy is to uphold the law without interfering in the judicial system, and encourage transparency without limiting media access. From this perspective, the real casualty of the milk crisis is still open to question.
As a result of the Sanlu incident, we have seen progress on many fronts, and we have reason to expect more fundamental changes and more effective steps to right the wrongs. After three decades of reform, we have come a long way. Now, how to set proper limits on the functions and responsibilities of government is a hot topic as reform moves into deeper waters.
Hu Shuli is editor of Caijing, a Beijing-based business magazine
