Price controls may look attractive, but costs often only emerge later: PM Wong

The Prime Minister, who also holds the Finance portfolio, elaborated that while the immediate effects of holding prices artificially low can appear attractive to the public and policymakers alike, the true costs often manifest only much later. This delay in the emergence of negative consequences can create a false sense of success, leading to deeper, more intractable problems down the line. "Supply will fall short of demand, shortages will emerge, and the original problem becomes even harder to solve," Mr. Wong stated, providing clear examples such as rent controls, which can inadvertently discourage the supply of rental units, and food price caps, which frequently lead to critical shortages and black markets.

This phenomenon is well-documented in economic theory, where price ceilings—a maximum price that can be charged for a good or service—are shown to disrupt market equilibrium. When a price ceiling is set below the equilibrium price, the quantity demanded by consumers exceeds the quantity supplied by producers. This disequilibrium creates a shortage. For instance, in a housing market, rent controls might make existing units more affordable for current tenants, but they simultaneously reduce landlords’ incentives to maintain their properties, invest in upgrades, or build new units. Over time, this can lead to a deterioration of the housing stock and a severe lack of available rental properties, exacerbating the very affordability crisis they were intended to solve. Historically, cities like New York and San Francisco have grappled with the unintended consequences of strict rent control measures, including declining housing quality, reduced mobility, and the emergence of informal rental markets. Similarly, food price caps, while seemingly beneficial in times of high inflation, can lead to farmers reducing production or diverting their produce to unregulated markets, resulting in empty shelves and widespread food insecurity, as seen in various developing economies.

Beyond direct shortages, Mr. Wong pointed out that the costs of poorly conceived interventions can surface in myriad other ways. Fiscal burdens can accumulate as governments attempt to subsidise losses or manage the fallout of distorted markets. Investments, sensing an unfavourable regulatory environment, can move elsewhere, stifling economic growth and job creation. Furthermore, individuals and businesses often find ways to circumvent rules that go against fundamental economic incentives, leading to inefficiencies, corruption, and a general erosion of trust in the system.

Singapore’s government, Mr. Wong acknowledged, intervenes in many areas to correct market failures, pool risks, and achieve "important objectives." Unlike a purely laissez-faire approach, Singapore’s model embraces strategic intervention in sectors like housing, healthcare, and education to ensure equitable access and long-term societal well-being. However, he stressed a critical distinction: "But precisely because government intervenes, we need to intervene correctly." This necessitates a rigorous and disciplined approach to policymaking. "We have to diagnose the problem well, understand the incentives we are creating, recognise the costs and trade-offs, and think through the second- and third-order consequences," he asserted. This emphasis on foresight and comprehensive analysis is a cornerstone of Singapore’s governance philosophy, aiming to avoid knee-jerk reactions that might provide temporary relief but inflict lasting damage.

Maintaining this discipline, Mr. Wong highlighted, is one of the most important responsibilities of the Economist Service. Headquartered at the Ministry of Trade and Industry, the Economist Service comprises dedicated public-sector economists who conduct robust economic research and analysis to support policymaking across various government agencies. Their role is pivotal in ensuring that policies are grounded in sound economic principles and anticipate potential ripple effects. Mr. Wong, himself one of the five economists on the team when the Economist Service was formally established in 2001, expressed his gratitude for their invaluable work over the years, underscoring his deep appreciation for their analytical rigour. He urged these economists to continue upholding intellectual honesty and professional conviction, even when their analysis leads to uncomfortable conclusions for policymakers.

The Prime Minister candidly admitted that Singapore is not immune to pressures for "easy solutions," especially in the current climate. This pressure, he predicted, will intensify in the coming years amid an uncertain global environment marked by geopolitical tensions, persistent inflationary pressures, and looming technological disruptions. Economists frequently discuss "creative destruction," a concept popularised by Joseph Schumpeter, which describes the incessant product and process innovation that renders existing skills, technologies, and industries obsolete. While this dynamic process is essential for innovation, economic growth, and progress, its impact on individuals can be profoundly disruptive. "That is true for the economy as a whole. But for the individual worker whose job is being displaced and destroyed, there is nothing abstract about the disruption. The costs are immediate and personal," Mr. Wong observed.

When livelihoods are affected and people feel anxious about their future, it is entirely understandable that they will look to the government for solutions and immediate relief. The government, Mr. Wong affirmed, must respond to these legitimate concerns and actively help those adversely affected by change, ensuring that the benefits of growth are broadly shared across society. Singapore’s robust social safety nets, including initiatives like SkillsFuture for continuous learning and reskilling, unemployment support schemes, and various social assistance programmes, are designed precisely for this purpose—to cushion the impact of economic transitions and provide pathways to new opportunities.

However, even in the face of such pressures, Mr. Wong stressed the imperative to "be clear-eyed about what works and what does not." Good intentions alone, he cautioned, do not translate into good policies. Conversely, leaving everything to the market is also not the answer, as markets are prone to failures. Singapore, he noted, cares deeply about other important things that markets alone cannot provide, such as social cohesion, equality of opportunity, and environmental sustainability. The challenge lies in finding the right balance—intervening where necessary, but doing so intelligently and with a full understanding of the economic consequences.

The debate on intervention is not merely theoretical, but has practical implications for Singapore’s domestic policy. The Workers’ Party (WP), Singapore’s main opposition party, has previously called on the government to provide "indirect" support to small and medium-sized enterprises (SMEs) by easing cost pressures, with a particular focus on rents. During a parliamentary debate in August on a motion concerning Singapore’s economic growth, WP Member of Parliament Jamus Lim proposed capping annual rent increases around the historical average of 3 per cent. His argument was that such a cap would give businesses crucial time to adjust to increases in their fixed costs, thereby offering them a measure of stability in a volatile economic climate.

Professor Lim clarified his proposal, stating, "This is a limit on the rate, not the level. Market rents will still prevail in the long run." He also noted that many countries have similar restrictions, suggesting that such a policy is neither unprecedented nor inherently radical. Furthermore, he argued that even limiting this measure to government or agency landlords—such as those managing properties under statutory boards—would represent a significant step forward in alleviating cost pressures on SMEs.

However, Mr. Wong’s remarks offer a counter-perspective rooted in the potential for unintended consequences. While a cap on the rate of increase might seem less disruptive than a cap on the level of rent, economists would still scrutinise its long-term effects. Even a rate cap could distort market signals, potentially disincentivising landlords from investing in property maintenance or new developments, particularly if the capped rate falls below the actual rate of inflation or market appreciation. This could lead to a two-tiered market where existing tenants benefit, but new businesses struggle to find suitable premises, or face higher initial rents to compensate for future capped increases. The experience of other countries with rent control policies, even those that appear moderate, has often been a mixed bag, with outcomes heavily dependent on specific market conditions and policy design. Singapore’s unique land constraints and high demand, particularly for commercial properties, add layers of complexity to such proposals.

Mr. Wong reiterated his call for economists to uphold discipline in policymaking across all government agencies, urging them to leverage the more advanced analytical tools available today, including sophisticated data analytics, econometric modelling, and insights from behavioural economics. He posed a series of fundamental questions that should guide every policy deliberation: "What problem are we trying to solve? What are the trade-offs? What incentives are we creating? And what might happen next, including the consequences we did not intend?"

Successfully navigating these complex questions requires not just technical expertise, but also profound judgment and intellectual honesty. "It takes the professional conviction to speak up when the analysis points to an uncomfortable conclusion," Mr. Wong concluded. His message was a powerful reminder that robust economic analysis, rather than political expediency, must remain at the heart of Singapore’s governance, ensuring sustainable growth and prosperity for all its citizens in an ever-evolving world.