Baby formula woes lay China failings bare

Edward Wong’s terrific frontpage article in The New York Times on Friday is as good an encapsulation of the issues currently facing China and its economy as anything you’re likely to read on the subject. As it tries to move from a fast-growing, export-oriented, developing economy to a more mature economy, it keeps bumping up against problems that could prevent it from becoming the kind of economic power it so clearly longs to be. These problems are almost entirely self-inflicted.

Mr Wong’s article was about, of all things, infant formula. Specifically, it was about how Chinese parents with connections and money scramble to buy formula abroad, even though there is plenty available in China. They hire people who will go into stores in Britain and elsewhere and buy formula for them. Or they buy formula that has been smuggled in from Hong Kong — where smuggling infant formula is now a serious crime. Mainly, Chinese parents want to ensure that the formula they are feeding their babies has never been touched by a Chinese company.

The reason is obvious. In 2008, six babies died and some 300,000 became ill after their mothers fed them baby milk products that were tainted with the chemical melamine. Ever since, Chinese mothers haven’t trusted domestically made baby milk products — starting with formula.

In fact, as I learned during my recent visit to China, Chinese consumers don’t trust a lot of Chinese-made goods. In recent years, there have been food scandals surrounding cooking oil, eggs and meat, for starters. A few months ago, according to Time magazine, three people were caught processing pigs that had died of infectious diseases. A few years ago, contamination of Chinese-produced heparin, the blood-thinner, was linked to 81 deaths. Chinese consumers don’t even favour Chinese cars — foreign models dominate the market — because they fear that someone may have taken a shortcut (or worse) that will cause the car to die.

So problem No. 1: At a time when China is trying to build a domestic economy to match its export economy, there is a complete lack of faith in Chinese companies. ‘‘It is not about branding,’’ an American businessman living in Shanghai told me. Rather, he said, there is a sense among consumers that no matter what the industry, too many Chinese businesspeople are willing to scam their own customers to make a buck.

With corner-cutting deeply ingrained as a Chinese business practice, it’s really up to the government to change that ethos through regulation and enforcement. But while the central government is more than happy to pass nice-sounding laws, there is virtually no enforcement, and no real culture of regulation either.

That’s problem No. 2. Provincial governments that are supposed to oversee, say, the food supply, are often either in on the scam, or look the other way because they fear that a crackdown might impede economic growth. And officials are evaluated almost exclusively on the basis of growth. Problem No. 3: bad incentives.

And if your car does break down in six months because a supplier sold faulty parts — or your child dies from tainted infant formula? There’s not a thing you can do. Yes, when a big scandal breaks, some crooks go to prison, but even the biggest scandals don’t lead to systematic change. Nor is there any way to seek recompense in the courts; in the West, that has long served to help keep companies on the straight and narrow. The lack of a real rule of law is problem No. 4.

As Mr Wong notes in his article, the government is now investigating foreign companies selling infant formula in China for price-fixing. (Since the scandal, the price of a can of foreign formula has risen by 30%.) Whether there is pricefixing or not — market forces are a more likely culprit — this response is exactly the problem: instead of enforcing regulations that would give consumers confidence in their own country’s products, the government instead is finding ways to make life more difficult for those who make products its citizens want.

The US,at the turn of the last century, was as riddled with scam artists as China is today. Snake oil salesmen — literally — abounded. Food safety was a huge issue.

In 1906, however, Upton Sinclair published The Jungle, about the meatpacking industry. That book, pointed out Stanley Lubman, in a recent blog post in The Wall Street Journal, is what propelled Theodore Roosevelt to propose the Food and Drug Administration. Which, in turn, reformed meat-processing and other things, giving consumers confidence in food products and other goods. That’s what China needs now.

Infant formula just scratches the surface. ©2013 THE NEW YORK TIMES