The Covid-19 pandemic has shaken up the Singapore economy. Many of us have been forced to think anew about how best to craft policies that can take us to a better future. There are many policy areas that need an overhaul, but one that does not get sufficient attention is consumer protection. Indeed, a persuasive case can be made that Singapore needs a much more vigorous approach to consumer protection. That will better ensure we achieve the two goals by which policies are measured against — whether they achieve fair treatment of the average citizen and whether economic growth is maintained at a vibrant level.
Why consumer protection — the issue of fairness
Encouragingly, Singapore has started to strengthen consumer protection laws in recent years. The Consumer Protection (Fair Trading) Act was passed in 2003 — but that was 24 years after the founder of the Consumer Association of Singapore first proposed it. It was further amended in 2016 to strengthen some of its provisions. The question is whether these enhancements have gone far enough.
A few personal experiences in the space of just a few days got us thinking that maybe the law is still far from providing sufficient protection to consumers. One was finding out that doing a colonoscopy-cum-endoscopy at a private hospital now costs hugely more than just six years ago — even though there is little evidence of major improvements in the way the procedure is done and even as the price increase is certainly, almost outrageously, ahead of average inflation. To add insult to injury, it appears that medical insurance policies may not help the average person defray the total cost as much as before. Another experience was finding out that cholesterol medication here costs three times more than in Malaysia or Thailand: Yes, you read that right, Singaporeans pay three times the price compared to our neighbours for certain medicines. A final affront to this consumer was finding out that one could be charged a $3 fee for a simple $10 credit card transaction.
So, the fundamental reason to pursue more rigorous consumer protection is the issue of fairness to the archetypical small guy, whether he or she is a consumer or a small business.
In most cases, that person’s level of knowledge cannot match that of the supplier. Neither is he or she financially able to pursue expensive litigation in the courts against more powerful firms that might have mistreated him or her. This issue of asymmetrical knowledge and power is particularly evident in areas that matter greatly to the welfare of the consumer — medical care and financial services.
Doctors know a lot more about diseases and treatments than patients ever will. Patients are, in addition, usually quite fearful that not following a doctor’s advice could lead to bad health outcomes or even death. That makes them more vulnerable. Most doctors are decent and ethical enough to try their best for their patients. But they are also human and sometimes the opportunity to generate supernormal profits may be too great to resist. Even if the doctor as an individual avoids that temptation, will the large for-profit hospital groups that now run much of private medical care in Singapore do the same? Similarly, banks and other financial institutions are powerful and have much more knowledge about specialised financial issues than the average borrower or saver has.
Can fairness be pursued without compromising economic growth?
Against the straightforward principle of ensuring fairness to the small guy, there is the more complicated issue of whether regulating the economy for fairness might compromise economic growth. We want to grow the size of the economic cake so that the average citizen has a good job which pays a decent wage, enabling him or her to lead a comfortable life. The concern is that excessive regulation could raise costs and crimp the flexibility that businesses need to grow.
Our view is that far from depressing growth potential, a commitment to fairness can actually improve economic growth outcomes in the long run. However, we concede that there are awkward trade-offs to take into account, which we set out below:
- Occasionally, the need for scale economies and the existence of network effects might mean that some industries should be allowed to be dominated by large firms with huge market power — as we have seen in banking or in Big Tech areas such as Internet searches or online retail. Consumers benefit from more choices and lower costs but could be poorly treated by such dominant players, for instance, in how their personal data is used. For this reason, it was thought that a light-touch approach to regulating Big Tech was optimal for all — though that is now beginning to change.
- There could also be occasions where a small country seeking a trade deal with a more powerful large country may have to make concessions that harm the consumer in some areas while generating substantial economic benefits overall. For example, the large country may press the small country to allow its pharmaceutical companies to charge much higher prices in exchange for giving the small country market access and other benefits that would considerably improve the small country’s competitiveness and economic potential.
But if we delve more deeply, there are reasons why a light-touch regulation of consumer protection may actually diminish economic vibrancy in the long term:
- First, if light-touch regulation leads to higher costs in key areas such as healthcare and financial services, those higher prices will seep into the economic structure, raising costs insidiously. For example, if healthcare providers start making large profits, it will not be long before their landlords realise they can charge much higher rentals. Those higher rents will influence other landlords who will also feel that they can raise their rents. Their tenants, including restaurants and supermarkets, will have to raise their prices as well. Businesses that cannot afford those higher rentals will be forced out. Soon, rental costs in the overall economy will be higher, denting competitiveness and reducing standards of living.
- Second, as medical costs rise, the premiums charged by insurance companies will have to rise or the insurance companies will have to limit coverage. Recent controversies over the rise in insurance premiums show that this is not an unfounded fear. For example, a major insurance provider caused consternation by limiting insurance coverage for certain types of endoscopy, only to be forced by the reaction to retract its decision. We do not want to end up in a situation such as in America where medical insurance premiums are sky-high but medical outcomes are poor relative to other rich countries.
- Third, we must always remember that economics is all about incentives. Free markets and light-touch regulation can make sense in some cases. But there are many ways to design free markets. Different market designs create different incentive structures, so how legislation and regulation contribute to market design is critical to determining whether the eventual outcomes are good for the average person. Do we, for instance, want an economy which incentivises powerful companies to make supernormal profits by exploiting the small guy? That would create a rentier economy — where a minority of the population does well by imposing costs on the rest of the economy rather than by creating real value. Instead, markets must be designed so that businesses are incentivised to keep reducing costs by raising their efficiency and by improving the quality and range of goods and services provided to the average citizen.
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So, what are the policy implications?
In the past, it appears to us that Singapore adopted a light-touch approach to regulation of consumer protection. The interests of producers were emphasised, the reason being that this approach would boost overall economic growth, jobs would be created, incomes would rise steadily, and all manner of business opportunities would proliferate to the benefit of individual Singaporeans as well as Singapore companies. For similar reasons, free trade agreements were pursued without placing consumers at the centre of concern. During the heady years of high growth and expanding globalisation, these benefits easily offset the downsides such as some companies charging higher prices than they should for their goods and services. With economic growth slowing and inequality rising, and with the benefits of hyper-globalisation now being questioned, it is time to rethink this approach. This raises some important considerations for policymakers.
First, we need to enhance the regulatory framework, placing the interests of the small guy at the centre:
- Consumer protection laws should be broadened beyond focusing on outright fraud or deception. There should be a more pro-active monitoring of instances where consumers are being exploited through unfair price increases or unjustified reduction of services that were promised.
- Currently, consumer protection is regulated by the Competition and Consumer Commission of Singapore (CCCS). The CCCS has performed well in its earlier role as purely a competition authority and has started to flex its muscles in its new and additional role as a protector of the consumer good. It is an impressive institution. However, the ambit of its powers and coverage needs to be broadened. It may become necessary at some stage for consumer protection to be hived off to a dedicated agency rather than be combined with the separate issue of competition policy.
- The process by which a consumer seeks recompense if he or she is mistreated by a supplier needs to be improved. Currently, in too many cases, the individual consumer is left to pursue the matter through the courts, at his or her own expense and without the support and moral authority of a well-resourced government agency. Not only is this costly, it is also risky because the consumer would have to pay very high legal costs upon losing.
- Finally, in the process of tightening regulation, policymakers must take into account the benefits as well as costs of regulation. Regulations should be designed so that the costs of compliance are not unduly high. Fortunately, there is a lot of good experience in other countries that can help guide us in Singapore.
Second, it is true that sometimes — as in the case of free trade agreements — the overall national interest requires consumers to take losses in some areas. That is hard reality. But in that case, there should be some mechanism by which those who lose out are compensated and not made to bear the burden of something that is for the national interest. For example, if cholesterol medication has to be so much higher, then state subsidies should be granted to bring the market price down.
The bottom line
It is not possible in a column like this to cover every single issue. What is attempted here is to show that there is a need to change the policy approach and to sketch out some of the broad parameters that could guide where policy goes. There is a compelling need to strengthen consumer protection. We think this will help promote fairer outcomes for consumers while not compromising economic growth.
Manu Bhaskaran is CEO at Centennial Asia Advisors
