Total Recall

February 29, 2008 Topic: Economics Tags: Communist Party Of China

Total Recall

Mini Teaser: What do the Olympics, airplanes and toys have in common? How China can reverse course, and save lives. . . .

by Author(s): Dali L. Yang

Yang large

CHINA ONCE languished, a closed economy with several hundred million people living in abject poverty. Today, it is a major engine for world economic growth. It boasts a rising middle class and 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 very label has suffered from some serious image problems. Reports of toxic Chinese-made products have mushroomed: 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 a unique intersection of the American need for instant gratification and China's poisonous 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 even 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 instead 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 twenty 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 U.S.) 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 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 put in place-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 and 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.

With the passage of time, 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. And happily, some of these institutions are becoming effective. The once toothless State Environmental Protection Agency has finally acquired some real bite in recent months, rejecting a higher percentage of projects submitted for approval on environmental concerns. 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.

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