The salt monopoly and the purpose of state-owned enterprises

For those interested in the intersection of obscure Chinese industries, regulatory politics and ancient history (you know who you are), the top story of the week is without question the long-awaited announcement of some reforms to liberalize China’s salt monopoly (here’s a news story and the original Chinese document).

China’s salt monopoly is one of the best examples of a more general principle: state-owned enterprises are often used as a substitute for regulation. Where institutions are weak and compliance difficult to enforce, as they are in most developing countries, state-owned enterprises can be a reasonably effective way to accomplish policy goals. Rather than create a whole complex of rules and try to convince people to follow them, the government can just tell an SOE what to do. The policy goal the salt monopoly accomplished for China was ensuring that salt was iodized, an important public health measure. Although news stories love to emphasize the salt monopoly’s ancient roots, in fact its latest iteration is only a couple of decades old, and was the result of a conscious decision to revive the monopoly to achieve this specific goal.

china-national-salt

My favorite account of this history is a classic WSJ piece by Leslie Chang from June 2001. I’m quoting from the piece at length because I cannot find it on the WSJ website, probably because it is so old. As she makes clear, the monopoly was able to achieve the public health goal, though this did not come without costs and distortions. And making the transition away from the SOE model to a more sustainable system is quite tricky, as the long debate over reforming the salt industry shows.

LIZI, China — Pei Nuwa touches her neck where she has a swelling the size of a small melon. She remembers a time when almost every extended family in this farming village had someone with a goiter like hers.

“The ones who had it have all died, and now the young people and the children don’t have this,” says Ms. Pei, a 67-year-old who has tiny eyes and skin wrinkled like parchment.

Ms. Pei doesn’t know why goiters became rare, but the answer is sitting in a clear plastic bag on a grimy counter in her single-room house. It is iodized salt. Minute amounts of iodine consumed regularly — the equivalent of just a teaspoonful over a lifetime — can prevent goiter and other thyroid-related disorders.

How this bag of salt arrived in this farming hamlet in the northwestern province of Gansu represents a triumph of public health. Five years ago [i.e., 1996], only a third of the Chinese population, then 1.2 billion, consumed iodized salt. The lack of iodine in the diet caused a range of health problems, from goiters to the severe mental retardation known as cretinism to lower IQs, among a generation living in rural areas. Today [i.e., 2001], more than 90% of Chinese eat iodized salt.

But this success also underscores the halfway nature of economic reform and decentralization in China. While Beijing has quietly shifted the responsibility and funding for key social services such as education and health care to provincial governments, there are no self-regulating mechanisms or built-in incentives that force officials to carry out their duties. …

To ensure that millions got iodized salt, Beijing officials reinstated a national salt monopoly that had existed in some form for more than 2,000 years, until private operators emerged about a decade ago. The state fixed salt prices to restore the industry to profitability and wrote laws that criminalized the sale of private salt. Hundreds of private salt producers were closed, and the remaining operators were consolidated into giants that formed the monopoly. The state also put together a 400,000-person bureaucracy to run the operation, including a 25,000-strong “Salt Police” with officers in gold-braided uniforms.

The original salt monopoly was set up in 117 B.C. during the Han dynasty. For nearly two millennia, the imperial family controlled the lucrative monopoly, one of the empire’s biggest sources of revenue. Salt financed campaigns of expansion, built the fabulous villas of the merchants of Yangzhou and inspired one of the most famous policy debates of the imperial era. In 81 B.C., supporters of a monopoly in iron and salt argued that it would serve the public good, while opponents said it would stifle individual enterprise.

The monopoly’s current revival stemmed from public-health concerns. By the 1980s, Chinese officials had made headway in fighting iodine deficiency by providing iodine injections in villages with a high incidence of goiter. But the same years brought economic liberalization and an explosion of private enterprise, including manufacturers flooding the market with usually cheaper noniodized salt. By the early 1990s, this unregulated salt trade, combined with little official oversight, was erasing the public-health gains of the command-economy days. In Gansu, consumption of iodized salt dropped to just over 60% in 1991 from 90% two years earlier. …

The network of control and the costs have a downside: They heighten the appeal of smuggling illegally produced salt, which can be sold more cheaply and without paying taxes. In a case two years ago, a group of salt smugglers from neighboring Ningxia beat up five salt policemen who caught them trying to ship three tons of rock salt into the province. The ringleader is still at large. Another case involved a high-speed car chase, the confiscation of six tons of unlicensed salt, fines and jail time for the perpetrators. In faraway Hebei, several officials were recently brought in for round-the-clock questioning in connection with widespread sales of private salt. …

Health experts say that system’s functioning depends on whether official attention — and the monopoly — can be sustained. Some are troubled by recent state media reports linking monopoly-affiliated companies with smuggling, which could feed arguments that the monopoly should be dismantled. Its supporters say the market should be opened to competition, but only after good production methods and habits are ingrained. “China needs to maintain this monopoly for at least 10 more years,” says Ray Yip, a Unicef adviser in Beijing. “After that, it will be safe.”

A bit more than 10 years, it turns out. This seems like good news at the margin, though it certainly does not look like China is now ready to let a regulatory apparatus replace the policy functions of its SOEs across the rest of the economy. In many strategic areas, like energy and telecommunications, regulation-by-SOE seems to be as strong as ever.

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