Elite Chinese Politics and Political Economy

We all watch in horror as the government reveals more and more dairy items in which the chemical compound Melamine was found. A colleague of mine wonders why Chinese companies suddenly began to use such a harmful chemical on a product consumed by children. I have been wondering about the same thing myself.

It strikes me that the timing coincides somewhat with the imposition of price control on dairy products earlier in the year (February I think and more indirect measures even earlier). As I have argued in this blog earlier, the imposition of price control means either shortage or the deterioration of quality. In a purely planned economy, the result was shortage. However, in a quasi market economy, where SOEs are expected, indeed pressured, to generate profit, the result was the deterioration of quality. Below is the China Daily press release from February:

"During the price intervention period, operators' price increases must not be higher than the cost increase and the government can limit the manufacturers' profit rate and goods distribution difference rate. Operators must apply for a price increase to the local pricing department 10 days in advance of their expected increase."

Of course Sanlu was particularly egregious and might have started doing this a few years ago. However, the fact that 22 companies also engaged in using Melamine suggests that there was some industry wide pressure to generate profit in the face of price control. The inflation rate looks relatively good now because the price bureaus have apparently done their job by giving few price increases. However, the cost to consumers is deterioration in quality in essential food items. I would look for harmful chemicals being used in processed meats and poultry also......

Also, sadly, this is one of those instances in which some corruption might have caused a better outcome. Had Sanlu been able to bribe quality inspectors about diluted milk powder, many Chinese infants would have been a bit more malnourished, but still alive...

Then strangely, the NDRC website calls for even stricter enforcement of price control on baby formula. Why? No one is buying milk powder, so why is there the need to impose price control on it?!

www.sdpc.gov.cn
国家发展改革委发出紧急通知
要求切实加强婴幼儿奶粉价格监管


三鹿牌婴幼儿奶粉重大安全事故的发生，引起社会各界的广泛关注。为稳定婴幼儿奶粉价格，近日国家发展改革委发出紧急通知，要求各地加强价格监管，维护市场稳定。
通知指出，各地价格主管部门要密切关注奶粉市场供求和价格变化，加强对奶粉市场零售价格和原料奶收购价格的实时监测，及时掌握市场动态。
通知要求，当各地婴幼儿奶粉价格显著上涨或可能显著上涨时，各省级价格主管部门要依据《国家发展改革委关于对部分重要商品及服务实行临时价格干预措施的实施办法》的有关规定，报请省级人民政府批准，对婴幼儿奶粉价格及时启动限定差价率或者利润率、规定限价、实行提价申报制度和调价备案制度等干预措施，防止其价格不合理上涨。
通知强调，各地价格主管部门要认真开展奶粉市场价格检查和巡查，重点检查婴幼儿奶粉价格，坚决打击趁机哄抬价格、牟取暴利的行为。对串通涨价、捏造散布涨价信息、囤积居奇、哄抬物价、以次充好、变相抬价，以及不执行临时价格干预措施等违法行为，要严肃查处，严厉制裁，对典型案件要予以公开曝光。