Commentary

Open and Accountable

We can never live in a perfectly safe world, but we can approach product safety in an intelligent manner by weighing the costs and benefits of improving safety standards. What nations should not do is allow the quest for safety to turn into disguised protectionism.

According to United States Ambassador Alan Homer, special envoy for China and the Strategic Economic Dialogue, “safety requires continuous improvement, but it’s important that any government policies in this area … not be protectionist”.

What China needs most is a more transparent legal system that protects property rights and prevents fraud. The virtues of the free market could then improve safety without recourse to overly intrusive government and corrupted markets.

The execution of Zheng Xiaoyu , the former head of the State Food and Drug Administration, for taking bribes while approving deadly drugs is a stark reminder that government oversight is not a guarantee of safe food and drugs. Even an advanced economy like the US has failed to prevent tainted products from entering the market - and, in some cases, was slow in removing them.

In the real world, neither government intervention nor the market will lead to perfectly safe food and drugs. Achieving 100 per cent safety is not an option. Utopian solutions to socioeconomic problems have always proved disastrous. The question is which mechanism - a market or a planned system - is more likely to bring about a safer environment in which the benefits of achieving safer food and drugs outweigh the costs?

In a free-market system, in which owners of food and drug firms have well-defined private property rights - and, thus, are held liable for irresponsible behaviour - the costs of putting dangerous products on the market (that is, bankruptcy, social shame and imprisonment) will revert back to the owners.

Independent rating agencies will emerge to monitor companies, and product liability laws will be enacted to protect consumers. A free press and the internet will rapidly inform consumers and investors of unsafe products. The stock prices of irresponsible firms will tumble and resources will shift to those firms satisfying consumers’ preferences.

Brand names are valuable, and companies will invest to ensure their long-term reputation. The culture of enterprise, a transparent rule of law and competition will help guarantee that innovation and product safety go hand in hand.

In mainland China, the underdevelopment of free-market institutions means there will be less concern with consumer welfare than in a fully fledged market economy. Executing one public official, or even several, will not get to the core of the problem - namely, the absence of widespread private ownership and accountability in a one-party regime without a transparent rule of law and an independent judiciary.

There is no doubt that those countries with the greatest amount of economic freedom have the safest products and the most reputable brand names. Firms that can’t compete on price and quality quickly disappear in a free-market system. Of course, some consumers are willing to accept more risk for a lower price - and those trade-offs should be allowed in a free society. But to make rational choices, people must know the costs and benefits of alternatives, and that is exactly the information a free market provides.

The role of government is to safeguard private property rights, and thus to protect people against fraud and violence. An overzealous government that tries to achieve “perfect safety” is likely to err by keeping too many good foods and drugs off the market while trying to prevent all bad foods and drugs from entering the market. In today’s global economy, it is increasingly costly for governments to monitor every product. The only viable alternative is to increase the culture of enterprise and allow private agencies to supplement government regulation to ensure the optimal amount of safety - that is, the amount that is worth what it costs.

As former US Food and Drug Administration deputy commissioner Scott Gottlieb notes: “The FDA cannot be everywhere, every time a risk arises, especially as the supply chain for both food and drug products continues to grow more diverse and more global. Ultimately, [the] FDA needs to enable companies to be inspected by reputable, private third parties that are certified by the agency.”

The problem for China is more severe; and the necessary reforms more radical. To ensure greater safety in the manufacturing of food and drugs, there needs to be more emphasis on institutional change, particularly a greater reliance on free markets that hold individuals fully accountable for their actions. Foreign competition and ownership can further that objective.

The consequences of irresponsible behaviour need to be fully capitalised in the market prices of those firms that harm consumers. It must be easier to list private firms on the stock exchanges, the exchanges need to have access to transparent annual reports, and the shares of state-owned enterprises must be fully tradeable to ensure they are not given special treatment that may result in harm to consumers. As long as officials have the power to approve new products, they will be subject to bribes, and corruption will be unavoidable. The challenge is to minimise the role of the government and enlarge the scope of the market to maximise accountability and to achieve the degree of safety that is rational in today’s world.

The danger is that officials, in their pursuit of perfect safety, will lose sight of the virtues of the free market - and, in so doing, use their power to protect special interest groups rather than the public.

James A. Dorn is a China specialist at the Cato Institute and coeditor of China’s Future: Constructive Partner or Emerging Threat?