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.