China once languished, a closed economy
with several hundred million people living in
abject poverty. Today, it is an engine for world
economic growth, boasts a rising middle class and
has the world’s largest foreign-exchange reserves.
There can no longer be talk about global trade
without mentioning the dragon, and the American
consumer would be hard-pressed to live without
goods bearing the "Made in China" label.
For the past year, though, that label has
suffered from some serious image problems. Reports
of toxic Chinese-made products have lengthened:
toys covered in lead paint, melamine-tainted pet
food, defective tires, toothpaste containing
diethylene glycol, contaminated fish and more.
There is also talk of unlicensed
Chinese chemical companies
eager to manufacture and supply fake, subpotent or
adulterated drug products.
To be sure, the
bulk of Chinese exports to the United States are
made or assembled to American specifications.
Nonetheless, the lengthening list of unsafe goods
from China also points to the simple fact that, in
their quest for lower costs and higher profits,
far too many China-based manufacturers are willing
to cut corners at the expense of consumer safety.
At their heart, China’s real and
exaggerated brand-image problems stem from an
intersection of the American need for instant
gratification and China’s witches’ brew of a
"post-communist personality" with few moral
moorings and an unfailing enthusiasm for getting
rich.
Too often now, the acquisitiveness
so palpable in Chinese society knows no scruples,
shifts the costs to others, and is married to
opportunism and cunning. Of course, there are many
businessmen who have made it big by working hard
and honestly, but it’s the anything-goes mind-set
that rests at the root of many undesirable
practices in China: from decadence to all manners
of fake certificates, fake products, adulterated
food and drinks, rampant official corruption and
sheer disregard for the rights of workers in
sweatshops. For many, socialism with Chinese
characteristics has a lot in common with the early
stage of capitalism Karl Marx described as
primitive accumulation.
This phenomenon
finds its roots in the Chinese brand of communism
from which it was borne and the reforms from which
it was shaped. Begun in the 1970s, the
proliferation of unruly manufacturers and
exporters in China sprang from an environment
where the potential for entrepreneurship among
peasants and tradesmen was stifled. Technicians
were jailed for moonlighting as consultants, and
collective farms were enthralled to the
party-state. Private business activities were
severely punished or suppressed.
But after
years of oppression, the government began to allow
market-oriented reforms to modernize China’s
economy. Within a decade, the forces of enterprise
were unleashed, but hand in hand with growth came
rampant corruption. Reform making and profit
making have often meant getting ahead of official
policies and bending and breaking existing laws
and regulations.
Along with these market
reforms came preferential treatment for those of
the Party. China’s leaders (and especially Deng
Xiaoping) opened the floodgates, allowing
government and party agencies, the armed police
and the People’s Liberation Army to supplement
their budgets with profits that they generated on
their own. Here we see the strange melding of the
strong party-state that desired a profit with the
willingness to bend the rules: government control
and unruly capitalism.
By the 1990s, the
Chinese mentality was then fully transformed.
Though the Tiananmen crackdown of 1989 closed the
route to political reforms, the raw energy
unleashed in China was channeled to the pursuit of
material wealth. Mammon became the new religion.
Business fever took over.
The amazingly
quick turn from the asceticism of the Mao era to
the cult of Mammon under the leadership of the
same communist party has landed China in what
author Xiaoying Wang termed "a moral wasteland".
Indeed, this is the world of doublespeak, with
everybody mouthing the rhetoric of the moment as
dictated by the party and yet often doing exactly
the opposite of what’s prescribed. Wang asserts
that the Chinese have acquired what she calls "the
post-communist personality":
The post-communist personality has
emerged against a background of nihilism ...
respond[ing] ferociously, almost uncontrollably,
without a sense of proportion or limit,
approximating as closely as humanly possible an
unorganized assemblage of desires. Having lost
its patience with all forms of asceticism, this
ex-practitioner of communist asceticism and
altruism has become a hedonist and egoist with a
vengeance.
This spirit has animated
China’s headlong rush to capitalism and then some.
It is fitting that one of the most popular books
in today’s China, written by Li Zhongwu in 1912,
highlights how thick skins and cunning were the
ingredients for getting ahead in Chinese history.
The reality of this "personality" can be
frightening, leading many manufacturers to search
for loopholes to slip through to get a leg up due
to the relentless pressure for cheaper products.
Their goal is to make some quick money, using
deceit if necessary. This was apparently the case
for suppliers who provided lead paint to the
ill-fated toy makers. Likewise, some Chinese
suppliers of wheat gluten deliberately added
melamine, an industrial chemical, to artificially
boost their product’s protein reading and thus
grade and price.
In this situation,
Gresham’s Law prevails; honest firms find it hard
to stay in business by competing on price. Even
though a fix is available - manufacturers can
lower costs and increase profits by improving the
efficiency of production processes - oftentimes
they just seek to substitute cheaper components.
That can be done without sacrificing quality, but
that often doesn’t happen.
Yet, even with
all this finger pointing, we have to keep in mind
that the Chinese can’t be blamed for all of the
safety problems with products manufactured
in-country. According to a Canadian analysis of
data on toy recalls over the last 20 years, the
majority of the recalls involving millions of toys
manufactured in China were caused by design
defects, with primary responsibility lying with
the toy companies. Indeed, a Mattel executive
recently admitted that the "vast majority of those
products that were recalled were the result of a
design flaw in Mattel’s design, not through a
manufacturing flaw in China’s manufacturers."[1]
In such cases, the solution for the resultant
safety problems needs to come from the (mostly US)
toy companies.
Unfortunately, the rest of
the product-quality and -safety cases are
generally related to the continuing quest by
manufacturers to lower production costs in the
face of distributors buying at low prices, a
rising currency, and rising labor and raw-material
costs.
But this unbridled drive to profit,
with all its market obstacles and ensuing
corruption, has not escaped the Chinese
government. Almost from the beginning, it was
clear that some reining-in was needed. So the
contemporary history of economic growth and market
expansion is also a history of the modern
regulatory state. First steps were taken -
imperfect, but an encouraging start - and all hope
for a "morally reformed" China is certainly not
lost.
Building the foundation No
fools they, in the early 1990s the Chinese
leadership took an initial stab at regulation
after recognizing the need to build and rebuild
the institutional infrastructure for a market
economy.
No modern economy allows the
unbridled pursuit of self-interest, especially
when that pursuit causes harm to others. In
addition to the obvious internal problems, the
collapse of communist regimes in the former Soviet
Union and Eastern Europe and, later, the downfall
of governments in South Korea and Indonesia during
the Asian financial crisis, spurred Beijing on
even more. The Chinese leadership first
reconfigured the tax and fiscal system to
strengthen the central government’s fiscal
capabilities then revamped the central banking
system to enhance financial supervision and
promote financial stability.
Of special
significance was the divestiture program
undertaken amid the Asian financial crisis. In one
bold move, the Chinese leadership got the People’s
Liberation Army, the armed police, the judiciary
as well as a host of other party and state
institutions out of the business of doing
business. This divestiture helped bring rampant
smuggling and related corruption under control and
was critical to the development of a level
economic playing field.
China’s leaders
have also undertaken several rounds of government
streamlining and restructuring to deal with an
unruly market and rapidly changing socioeconomic
conditions. In China, as in other developed
nations, a bureaucratic alphabet soup of bodies
has emerged to protect the rights of consumers,
investors and workers. The advent of a consumer
society and growing public awareness, in
particular, have pushed safety and quality to the
fore of policymaking. Some of these institutions
are becoming effective.
The once toothless
State Environmental Protection Agency has acquired
some real bite in recent months, rejecting on
environmental concerns a higher percentage of
projects submitted for approval. The State
Administration of Work Safety and the associated
State Administration of Coal Mine Safety have
worked hard to close dangerous coal mines and
bring down the large number of deaths from
coal-mine explosions.
In a typical move to
use cheaper components to lower costs, Chinese
toothpaste makers substituted diethylene glycol,
an ingredient banned in the United States and
other countries but permitted in China, for its
safe but more expensive chemical cousin,
glycerine. After the seizure of the toxic
toothpaste, the Chinese government banned the use
of diethylene glycol in an act of regulatory
harmonization. Problem uncovered and resolved.
Yet the picture remains less than perfect.
These steps were encouraging but anomalous. While
improved regulatory capability - up-to-date
product standards, abilities to monitor, test and
punish - is a necessity and can go a long way
toward the mitigation of product-quality issues,
it is generally less effective when dealing with
rogue businesses whose intentions are to evade
detection and make a quick buck. Shutting down a
toxic plant after a scandal is one thing. Using
bureaucracies for effective preventive measures is
another.
Cracks in the
mortar The Chinese government realized that
simply creating an array of institutions was not
enough - the bureaucracy must also function well,
something especially difficult to achieve in
developing societies. From poor interagency
cooperation to a lack of resources and sheer
logistical difficulties, troubles remained. Herein
lies the crux of the problem for regulators and
consumers in the United States and elsewhere when
it comes to the quality of products imported from
abroad.
While China has established
various regulatory agencies, enforcement has not
been optimal. Regulatory authority is now
fragmented among a multitude of government
agencies - each mindful of its own turf and
interests - that often fail to work together,
especially at the local levels. The main
regulators of food safety, for example, include
the Ministries of Agriculture, Commerce, Health
and the General Administration of Quality
Supervision, Inspection and Quarantine; the
General Administration for Industry and Commerce;
and the State Food and Drug Administration (SFDA).
Failure among the regulators to coordinate and
cooperate with each other is believed to have
contributed to the deadly milk-powder scandal that
came to light in 2004.
Making matters
worse, the interests between central and local
authorities often diverge. In particular,
lower-level authorities may be more tolerant of
counterfeiters and other dishonest businesses in
their jurisdictions simply because these
businesses generate employment and tax revenue. In
the words of a Business Week reporting team: "Even
if Beijing has the best intentions of fixing
problems such as undrinkable water and
unbreathable air, it is often thwarted by hundreds
of thousands of party officials with vested
interests in the current system."
Partly
to mitigate such divergence, the Chinese
government has in recent years promoted the
hierarchical integration of regulatory
administrations, especially within the provinces.
But, as pessimists argue, "China has built a
bureaucratic machine that at times seems almost
impervious to reform."
China’s sheer scale
and vast regional disparities present major
challenges, too. While the major cities can deploy
more personnel, resources and technology to
enhance regulatory supervision, this is far from
the case in outlying areas, where many of the
small businesses, including counterfeiters, are
often located.
Last but certainly not
least, corruption has plagued some of the
regulatory agencies, both in the headquarters and
in the localities. Under Zheng Xiaoyu, the former
head of the SFDA, and his close associates, some
pharmaceutical companies were able to obtain a
large number of new drug approvals by submitting
fake data and bribe money. Zheng was executed for
bribe taking and dereliction of duty in 2007.
A history of Chinese regulatory
developments in the reform era is thus one about
the struggle to curb regulatory corruption and
deal with and overcome various institutional
flaws. As China’s
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