Macro problems are symptoms of numerous micro frictions which are termed as transaction costs and regulatory hurdles. When these persist over time, the agents get de-motivated, and productivity falls. The problems are not created in one day and the solutions cannot come in a day either, and then the issue of scarce government resources exacerbates the conditions.
All these are required to be nudged. Small behavioral changes here and there have their impact without incurring any or little fiscal costs. There is mistrust between taxpayers and collector and tiny behavioral interventions can result in some improvements. The concept can be extended to numerous government and private organizations, where nudging can help solve bigger puzzle.
This role of behavioral economics in policymaking was discussed in a symposium organized by Lahore School of Economics in collaboration with B4Development earlier this week. The demand of nudging and behavioral insight is increasing in public policymaking around the globe, with such units now in White House in Washington and 10 Downing in London. The foreign participants in the discussion urged the PM Office in Islamabad to host such a unit to start with.
Nudge is not a subsidy; it is used by behavioral scientists to change someone’s (or institution’s) behavior through small low cost interventions. Nudge is not a silver bullet and is not a mainstream economic concept. The measure of its success is by margin; and due to low cost, it makes sense for of such interventions. Not all nudges could succeed, it is a self-correcting mechanism.
Nudging and behavioral insight have been tested in various public policy areas ranging from health, education and human capital to public finance management to economy. Some examples are quoted where these small behavioral interventions have resulted in improving tax compliance – such as in Slovenia in a controlled experiment the tax compliance increased by 20 percent for small firms when the personal visit by tax officer on informing the inclusion of regional firms in tax audit versus just posting a letter.
Similarly, in Indonesia, the tax filing was increased due to sending a message including a link to website where tax filers could choose a date of filing, and receive reminders in the run up. A more interesting example was quoted from Brazil where lottery ticket being printed on the back of receipt resulted in 22 percent increase in revenues from retailers over four years.
Some similar interventions have been exercised in Pakistan with good results. Such as lottery on restaurants bill in Punjab has helped improve the compliance. In KP, the school system has experienced some improvements through nudging. Small interventions like having street lights functioning has improved tax compliance by communities in Punjab.
A study exhibits that small monetary or non-monetary benefits have improved public officers’ performance. Another example in Lahore where an exercise demonstrated that improved the way of information shared by officers to bosses, has resulted in better decision making in public space
These domestic examples were narrated by those involved; but are not celebrated or highlighted enough. The need is to analyze such interventions and try to expand the spectrum in other areas of policymaking. The other issue is that failure in any experiment or small intervention is regarded as failure of the concept or being shown as government inability by media, and that hinders such social experiments or more importantly spreading the word on failed experiments to have learning for future.
One of the important behavioral insights is to celebrate failures- it is success in progress. The other problem is that some interventions and changes may take time to show impact while quick win is considered a long shot in governments. There is a present bias – governments do not think beyond their tenure. One example is turbo growth in Punjab Information Technology Board (PITB), which was a flagship project under Shahbaz Sharif, but it was too centric around personalities and its own ad-hoc interventions – the institution could not fare well in political transition.
Soft changes have an impact. For example, planting tree initiative in KP is now all over Pakistan and many companies are deploying their CSR on it. The impact is long term, but the culture is building fast. The notion of Naya Pakistan is a motivational and people might not be seeing its impact; but such positive slogans and initiatives help improve productivity and public sector performance.