What’s worse than paying peanuts and getting monkeys?

I’m currently in the market for a motorbike helmet. I was shopping around the various options in Jakarta and was frustrated by the lack of reliable information about safety standards available to me to inform my purchase.

The frustration I felt is by no means unique to me, nor to the problem of buying motorcycle helmets. In fact, it’s an example of something that is quite the hot topic in development economics these days, so I thought I’d write about it.

Lack of reliable information for consumers harms the economy as a whole

I’m not the sort of guy that places a high premium on brands, and I try not to buy into the idea of conspicuous consumption. I generally try and go for the cheapest product that meets my needs. In the case of a helmet, that means providing an adequate degree of protection to the contents of my skull, in the event that I were ever to need it while riding my motorbike.

When I was looking for my helmet, I noticed a huge range of prices available. People were selling helmets that, to my very untrained eye, looked very similar for prices ranging from IDR 3-4 million, to less than IDR 100,000.

 Some of these things are not like the others

Some of these things are not like the others

In English, we have a saying: if you pay peanuts, you get monkeys. A similar one is: if you buy cheap, you get cheap. In short, it means, if something is cheap, there’s probably a reason for it, and that reason may be that the quality is poor. In Indonesian a similar distinction is made between murah meriah (cheap and cheery), and murahan (cheap and nasty).

The problem is, the converse is not always true. High price doesn’t necessarily denote high quality. The only thing worse than paying peanuts and getting monkeys, is paying real money, and still getting monkeys! There are plenty of examples of this, including bottled water in places where tap water is perfectly drinkable, or where people drink expensive wine at all.

So, when I was looking at the helmets I wanted to buy a quality one, I was wondering: would I be paying for true quality, or for the illusion of quality?

Government regulation to the rescue!

Helping consumers get what they pay for is one of the things that almost everyone can agree is the job of government. Even the nuttiest of small-government libertarians accept that we need a government to protect against fraud. Well, maybe not the nuttiest ones...

In the absence of a government holding people to account for misrepresenting the quality of motorcycle helmets, you have to expect that there will be unscrupulous firms misrepresenting the quality of their helmets, if there is a dollar to be made doing it.

In a world were fraud is unprosecuted, the money transferred to fraudsters, and the time and money spent by individuals trying to verify quality for themselves with only the tools and knowledge available to them as an individual represents a market failure. It is cheaper and more effective for some sort of centralised body to set, test, and enforce standards. The centralised body doesn’t necessarily have to be a government, there are cases where industry associations perform this function adequately, but in many cases, people are sceptical of an industry’s ability to regulate itself and government oversight is required.

My lack of certainty in the Indonesian motorcycle helmet industry’s ability to deliver me a quality helmet at the right price is due to my lack of confidence in what development economists call Indonesia’s instutions.

Institutions have been arguably the hottest topic in development economics for the past decade or so. This paper by Acemoglu (one of the key proponents of the idea), Johnson and Robinson gives a comprehensive treatment, while this one from the World Bank, also by Acemoglu and Robinson, gives a slightly updated view. Ha Joon Chang takes a slightly more sceptical view here, but his scepticism is more about the policy recommendations of people like Acemoglu than the idea that institutions are important.

The big idea of instutional economics is that poor countries aren’t poor because they haven’t got any money (or, at least, it’s not just that), a large part of why they are poor is because their institutions don’t let them use what resources they do have efficiently.

In Australia, I wouldn’t have such a big problem, because we have a range of institutions in place that set standards for motorcycle helmets (Standards Australia, here), and test them (the delightfully named Consumer Rating and Assessment of Safety Helmets, or CRASH), and punishes companies that either sell or manufacture helmets that don’t meet standards (the Australian Competition and Consumer Commission, or the ACCC, here). They’re not perfect, but they have been doing it long enough and competently enough that retailers and manufacturers of motorcycle helmets (and other providers of goods and services) have a reasonable degree of certainty that they will get in trouble if they fundamentally misrepresent the quality of their product.

In Australia, relatively secure in my trust in our institutions, I’d just buy the cheapest helmet that met the standards, and be on my bike. From what I can see, it seems like the cheapest ones in Australia retail for about AUD 100, or around IDR 1 million.

In Indonesia, some of these institutions exist, such as the Badan Standardisasi Nasional, and the Yayasan Lembaga Konsumen Indonesia, and the Komisi Pengawas Persaingan Usaha, but I don’t think it’s too unfair to say that your average seller of cheap helmets on Tokopedia doesn't worry too much about the wrath of any of those institutions.

In Indonesia, standards do exist for helmets set by the Badan Standardisasi Nasional and, in theory, all that meet those standards should have an SNI stamp on them. Despite this, there are plenty of helmets for sale on Tokopedia, and through plenty of other retailers including major hardware stores and grocery stores that claim to have SNI helmets for sale for IDR 100,000 (AUD $10), or less.

 SNI for IDR 80,000? Really?

SNI for IDR 80,000? Really?

When development economists use the word “institutions” they don’t just mean BSN, YLKI, and KPPU, they mean every single piece of Indonesia’s economy that contributes to the delivery of helmets to consumers, and governs the use of those helmets by consumers. This includes everything from the institutions I mentioned, to plastics manufacturers, to trucking companies, to the traffic police that are meant to check that motorcyclists’ helmets meet standards, to the court system that is meant to prosecute people that put fake stickers on helmets, to the individual consumers themselves who don’t demand or even expect helmets with legitimate SNI stickers, and so on, and so on.

The fact that I can see a helmet for sale on Tokopedia for IDR 80,000 makes me question the ability of the entire network of institutions that make up Indonesia’s motorcycle helmet industry to deliver me accurate product quality information.

So, what can we do?

One of the lessons that we have learnt in development economics over the past few decades is that solving the problem is not as simple as just saying “oh, it’s the institutions", and walking away. Given the complexity of the networks of institutions that are involved in delivering goods and services to consumers, it’s naïve to think that a single policy change, or the establishment or reform of a new institution will magically turn the Indonesian motorcycle helmet industry into the Australian motorcycle helmet industry.

Sometimes it is the case that a particular regulation, policy, or institution is acting as a key constraint, so reforming it can make a material change. But the biggest thing that creates change, and development in institutions is time. Over time, each of these individual small reforms, and the actions of the regulators, contribute to changes in the expectations of consumers and producers, which will eventually lead to consumers being delivered better quality helmets at more appropriate prices.

People can often forget that societies like Australia are built off a set of institutions that have been under development under a relatively stable system for over 200 years; and even those institutions are based off developments in the UK for going-on 500 years. By contrast, Indonesia’s institutions have undergone at least four major periods of upheaval and fundamental redesign in the last 70 years; the latest of which was less than 20 years ago!

Despite this upheaval, Indonesia does have the institutions in place that should, eventually, deliver a market for motorcycle helmets that is functionally equivalent to Australia’s. And, given where Indonesia have come from, they’re doing about how you’d expect. They could be better, but they could definitely be worse!

While I’m waiting for the institutions to change, I’ll try and do my part as a consumer by communicating my desire for good quality at an appropriate price… I ended up going through a small, but reputable company, and I bought a helmet that cost IDR 1 million: about what one that meets Australian standards costs in Australia. I don’t have any guarantee that it does meet Australian standards, but at that price, at least there’s a chance that it does!