Good Governance and Cheese... (What?)-part 3

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12/08/2014

Good Governance and Cheese... (What?)-part 3

China’s Cheese Capabilities

Brad Cunningham and Matt Andrews

After the Chinese government inspected a British dairy earlier in 2014, they put a temporary ban on cheese imports from the UK pending a further review of food safety issues. The UK authorities engaged quickly and the ban was over in just about a month. As previously discussed here, and here, the United Kingdom’s response to China’s ban is a great example of government swarming and resolving a problem. Good governance in action!

This story also turns out to illustrate both the critical role of government capabilities in economic production and the difficulty of acquiring public sector capabilities. Even better, the story contains a hint of subterfuge and espionage.

But first, a model of capabilities.

The Harvard Center for International Development (CID) has been exploring the implication of what we call the Scrabble Theory of Economic Development. In the Scrabble analogy, making a product is like spelling a word. We assume that firms make products like people make words in Scrabble. But, just as you cannot spell a word in Scrabble if you don’t have all the letters, a firm cannot make a product if the necessary capabilities are not available in the local economy.

Whereas it is easy to see letters on a Scrabble board, we are still exploring the nature of capabilities and how economies accumulate them to foster growth. One of the things we have learned is that skills are a critical capability. For example, architects and steelworkers provide different kinds of skills that must come together in order to build a skyscraper. CID research by people like Frank Neffke shows that local economies tend to get their first access to these capabilities not through training local workers, but by importing people with the necessary expertise.

Now, back to China and Cheese.

China has often gotten into new industries by attracting foreign firms that can bring all of the necessary private sector capabilities with them at once. In order to transfer the productive knowledge to local agents, China facilitates partnerships between foreign firms and domestic firms that develop domestic capabilities over time.

With nearly $200 million in imports, which is over 10 times higher than just a decade ago, cheese is a fast growing market in China. China has the climate and natural resources for a productive dairy industry of its own and the country has taken notice. To complement its natural capabilities, China has brought in foreign firms to provide the private sector capabilities. Here is an example of an Australian firm bringing its dairy sector expertise to China. For the dairy industry to be successful, however, these natural and private sector capabilities need to be complemented with public sector capabilities. The need for effective government administration of standards and food safety for the growth of the dairy industry was made clear in 2008 when more than 50,000 children were sickened by tainted Chinese milk. The authorities obviously did not have this public good capability in hand...missing a crucial letter (or set of letters in the cheese production word).

Because these capabilities reside in governments, there are no firms that can set up shop in China and immediately bring the needed public sector skills and capabilities. China cannot just invite the United States Food and Drug Administration (FDA) to become an investing partner in the country. The capabilities of the FDA are sticky, staying in the USA and often masked by tacit processes and history (the kinds of factors that make best practices very difficult to simply observe and then replicate). So: You can't just buy and bring public sector capabilities, and you also can't easily replicate by observation. This makes it challenging for countries to develop the public sector capabilities that are needed to complement private sector capabilities and make an industry globally competitive.

This makes us wonder (with some commentators on the UK cheese export ban) if Chinese officials raised a stink about British cheese just so they could learn more about the country’s public sector food safety practices. Consider that the dairy at the center of China’s original concern does not even export to China. And, as a result of this contrived grievance, China got to participate in a thorough inspection of British dairies and observe the government’s coordinated response. The UK is a world leader in food safety and has learned many lessons from their experience with Mad Cow disease, so it is a good choice for anyone wanting to piggy back on past learning.

It sounds to us like China's government cheese regulators figured out a way to get a look at some of the UK’s Scrabble letters. A genius way to learn how it's done. Especially when the learning is about public sector capabilities that are not for sale.

Who knew there was so much to learn from cheese inspectors?

Posted at 07:36 AM | Permalink

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