It’s the Economics, Stupid

All readers of this blog will have seen the extensive press coverage given to the reported Chinese government requirement that all new PCs in China come with filtering software aimed at blocking pornographic sites.  The stated purpose is to ensure that children surfing the web are protected from viewing these sites.  (Tons of coverage on this; just Google; I like the WSJ reporting, which seems to get at the complexities a bit better than others).

Some coverage has focused on the political aspect, i.e., suggesting this may be a backdoor route to even tighter political censoring of the Internet in China.  But I think this is not really the main point.  It’s more about the economics.

Of course, this new regulations does highlight the differences between the (expansive) Chinese view of the scope of activities appropriately managed by the government vs. the (much more narrow (yes, even today)) view in the US, a subject I have opined on previously in this blog.  The US approach to the issue of objectionable material on the Internet is to, first of all, view it as the responsibility of parents, not the government, to decide what their kids should see on the Internet.  Then, if they want a filter, they can compare commercially available products, choose one, and buy it.

I can imagine the situation in which government and Party officials are discussing the rampant pornography on the Internet and each in turn tries to outdo the other in denouncing it and demanding a solution, sort of what we often hear from the US Congress on similar issues.  The difference of course is that our basic view of the scope of government activity in society usually prevents this kind of rhetoric from developing into concrete government mandates.  It is much easier in China, given the broader view of the role of the government, for the rhetoric to become reality.

But more significant here is how this regulation represents the distortions in the Chinese economy that come from the unhealthy relations between government and enterprises.

Keep in mind that the new regulation mandates inclusion of a specific software product (“Green Dam-Youth Escort”) developed by two government-affiliated Chinese companies with each computer.  Yikes!  Even if the US were to implement some requirement for filtering software it is almost certain that the government would specify a set of standards such software has to meet, make the standards public (following a period of public review and comment) and then certify any product that met those standards.

But equally interesting is the fact that, according to press reports, there is no requirement that the software be used.  It may be possible to meet the requirements of the regulation by having the PC manufacturer include a copy of the Green Dam-Youth Escort on a disc in the box with the computer.  Or, even if pre-installed, it can apparently be turned off.  In this sense, it still gives the Chinese consumer the option to use or not use the software, and to go out on the market and buy a competing product.  But is does ensure enormous monopoly rents will accrue to the “government affiliated” institutions that developed the software.  A bit of money will go to them for each new PC sold in China!  Great franchise.  These guys have used their relationships with the Chinese government to print money.

So, it’s great for the officials who now can feel they are “doing something” about the pornography-on-the-internet problem.  And it is great for the managers of the companies that have been granted this monopoly.  Who loses?  Just the portion of the rest of the 1.3 billion Chinese people who will be buying new computers.  The price of that computer will be higher (at least a bit) due to the mandated inclusion of the new software.  And in fact, the increased cost will be higher than it would be if one firm had not been granted a monopoly.

So, if you ask me, this new requirement represents in a microcosm a huge issue that will continue to be a drag on the Chinese economy for some time to come:  government actions taken to support favored Chinese companies at the expense of the Chinese consumer and broader economy.

Having said all of the above, I do want to note the bright side:  reporting over the past few days has highlighted the backlash in China among web users over this new mandate.  A lot of the backlash has focused on the aspect of increased government control over what people see.

This active public backlash is a sign of an increasingly free, public debate over government policies.  It highlights the fact that in many areas, people are free to express views critical of government policies.

In fact, I will stick my neck out and make a prediction.  I believe the Chinese ministry that inflicted this new measure on the Chinese people did so without adequate consultation or coordination throughout the Chinese government.  Nor did they allow for public review and comment of the regulation.  It was mostly a sweetheart deal with some well-connected institutions.  Therefore:

I predict the Chinese government within a few months will either withdraw this new regulation or allow it to die a quiet death.  This is not your grandfather’s China.

Update:  just saw the very good NYT article outlining the growing opposition to the new regulation (  That article states that the Chinese government, not the consumer, will pay for the new software, to the tune of RMB 41million.  Nonetheless, this represents government money that could have been spent for the benefit of China’s people in many ways much better than by providing monopoly profits to a couple of government affiliated companies.  That article also has the Ministry of Foreign Affairs spokesman defending the new regulation.  Nonetheless, I stand by my prediction that the regulation will not wind up being implemented in any kind of effective way.

Explore posts in the same categories: China, Economy, Internet/Media, Technology

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