Behind bad baby milk, an ethical gap in China's business

The incident became public only after Sanlu's New Zealand partner, Fonterra, which holds three seats on the company board, informed New Zealand diplomats who told Chinese government officials in Beijing of the problem.

Fonterra has "been trying for weeks to get official recall, and the local authorities in China would not do it," New Zealand prime minister Helen Clark told her country's state TV broadcaster on Monday. "At the local level ... I think the first inclination was to try to put a towel over it."

Last year, after a wave of food safety scandals involving pet food, toothpaste, and seafood, the Chinese government pledged stricter controls, especially of food destined for export.

A new food safety law was presented last December to the National People's Congress, the parliament, after three years of study, and last month the Chinese Food and Drug Administration was put under the wing of the Health Ministry.

Skeptics are not convinced by such moves. "Central regulatory reform is only part of the problem," argues Richard Suttmeier, a University of Oregon expert on Chinese product safety. "There is nothing you can snap your fingers at and solve."

With nearly half a million food producing and processing companies, according to official figures, "there are more individual producers than the government could ever regulate," Prof. Suttmeier adds.

The authorities "will be defeated constantly" unless "they begin to think how you make multiple producers responsible agents," he says.

A wide range of reforms is needed, he warns, from capital markets that would starve misbehaving companies of funds to a legal system that would allow aggrieved consumers to sue firms for damages.

"What is really needed is a cultural shift," Suttmeier argues. "That will occur if they make progress with institution building" as part of China's transition from a socialist to a capitalist economic system.

Prof. Yuang also attributes the Sanlu scandal, and others like it, to "the difficulty of transforming institutions from the micro-interference of a centrally planned economy to macro-regulation.

"There is a big question mark over how effective this is," he adds.

Some observers see a silver lining in the scandal. "One positive result is that people will become more aware of food safety," says Ren Fazheng, a professor at China Agriculture University in Beijing. "Government and society will pay more attention to this issue ... and more inspection agencies will use more methods, so the level of inspection will improve."

Yet public opinion, even outrage, has limited impact, as evidenced by the stunted efforts by angry parents who lost children in the Sichuan earthquake in May to demand government accountability. While officials are still investigating why so many schools in the quake area collapsed, protests have been curtailed and media coverage on the issue banned.

Still, with Sanlu closed by government decree and its future in doubt, two men charged with crimes that can carry the death penalty, and a government investigation widening, "this serves as an extremely strong cautionary tale for the whole industry," says Professor Yang.

"Lawsuits have not worked well in China, but the costs are escalating" for companies that cheat, he argues. "Producers realize now how precious their brand name is."

Yuang is less sanguine. "The problem is structural and systematic" he warns. "If it is not tackled we will see many, many more cases like this, and it will really hurt the Chinese economy, especially its export sector."

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