Bhutan: Nudging itself to a better future

I’m sitting in a large room waiting for the meeting to begin. It’s the fortnightly meeting of the staff of the Gross National Happiness Commission where I’m working (GNHC is the equivalent of a Planning Ministry, coordinating and centralizing the policy among the various ministries). The Secretary of the Commission is peppering incomers with questions on the daily politics and whether they’ve read they’ve been following the news. Finally the meeting is ready to begin. First item on the agenda? Book report… Seriously?

But this is no ordinary book report… The book the Secretary brings up is Nudge. I practically fall out of my seat in excitement. For those that don’t know, Nudge is my absolute favorite book. For the next 20 minutes the secretary holds a spirited discussion about the ideas behind Nudge.

So, what is Nudge and why am I ecstatic that the GNHC (Planning Commission) has it on their reading list?

The central argument running through the book is the philosophy of Libertarian Paternalism. This may at first sound like an oxymoron. A libertarian believes government shouldn't tell us what to do. Paternalism is often used to describe heavy handed governments that think they know what is best for their citizenry. How can these two words be used together?

Libertarian paternalism preserves choice while encouraging individuals to act in their own self-interest. It’s rooted in the theories of psychology and behavioral economics which argue that under certain conditions, individuals don’t make the right choices. You can find many of the reasons why in the pop Econ books that have littered bookstores. A few of the major reasons include: Imperfect optimization (think about our inability to do complicated optimization problems in our head, our limited attention, salience effects, or use of imprecise heuristics); Bounded self-control (e.g. hyperbolic discounting—think about the difficult in fighting immediate temptations that carry immediate benefit but long term costs and our proclivity towards procrastination); and finally nonstandard preferences (think: endowment effect, loss aversion, status quo bias and context dependant preferences).

So, starting from the point that we may not always make rational choices, “nudges” help individuals to make better decisions by structuring the way in which they make them. The authors call it “choice architecture” and it may be something as simple as the layout of the buffet in a school cafeteria. By using the toolkit of nudges—such as defaults, mandatory choice, salience and framing—government can avoid the arrogance that comes out of paternalistic policies, while still improving welfare when and where behavioral biases and market failures are clearly diagnosed. Nudge talks mainly about application in industrialized countries, like the US, but there are plenty of examples from the development literature as well:

• Making information salient about the returns to schooling dramatically increases enrollment rates. In the Dominican Republic, providing information on the benefits on education significantly reduced the dropout rate. In Madagascar, providing households with information on returns was not only improved attendance, but also encouraged students to work harder thereby improving learning outcomes. The program was so cost-effective, that every $1 spent on the program induced almost 20 additional child-school-years.
• Streamlining the complicated bureaucratic enrollment process for water connections dramatically increased the take-up of more sanitary piped water in Morrocco. With the streamlined process, take-up was 70%, whereas it was only 10% when individuals had to navigate through the existing bureaucratic process.
• For people who want to save towards a goal but have trouble, commitment savings products have been shown to produce dramatic improvements in savings—increasing the ability of individuals to make large ‘lumpy’ investments (like a car or refrigerator). In the Philippines, savings more than tripled for people who opted for a commitment device as compared to those in a control group.

A key feature of each of these examples is that choice is preserved. Individuals with preferences either way can still make the informed decision to not send their kid to school, not sign up for clean piped water or not save. Nevertheless, government has a clear rationale for encouraging them to do so.

Governments make decisions about choice architecture all the time—whether designing a form for subsidized housing or structuring their health insurance policies. Most of the time, decisions over choice architecture are made arbitrarily. A nudge perspective retains free choice, while helping people make better decisions.

So why am I so happy Nudge is coming to Bhutan?

Two reasons:

1. The behavioral biases that afflict us all are particularly damaging to the poor.
   Simply put, the poor have narrow margins of error. When the poor make decision-making errors it can be literally the difference between life and death (push them below their “survival constraint” in Hana/Avery speak). One good example is insurance. We all suffer from an availability heuristic which causes us to misestimate probabilities by assessing the likelihood of an event based on immediate or recently available data. It’s a well known fact that use of flood insurance is at its lowest when there hasn’t been a major flood in recent past—despite the fact that the actual probability of a flood never changes. When a poor farmer misestimates these probabilities and therefore doesn’t buy insurance (take-up of insurance among poor is notoriously low), the result is tremendous vulnerability. When negative shocks do happen, productive assets may be sold, kids pulled out of school and meals cut (leaving lasting nutritional consequences for children).
   
   Beyond insurance, another good example is temptation goods. The natural inclination to give into temptations that we all face, consumes a larger share of the poor’s budget. When a middle-class family has a head of household who is addicted to smoking, it is usually manageable. But for an impoverished head of household, a daily cigarette eats us precious budgetary resources.
   
2. Bhutan, as a new democracy with young, inexperienced politicians, seems prone to the adverse consequences of a heavy handed, overreaching government.
   This is just my recent impressions from speaking with some Bhutanese and observing some of the political life around Thimphu. Political debates sometimes seem made in haste, consequences of regulation are not always fully thought out and alternative policy measures do not always make it to the table.
   
   One consequences is the heavy handed Tobacco law that the recently passed the parliament making Bhutan the first country to effectively outlaw tobacco. As luck would have it, the first one caught was a monk carrying 90g of chewing tobacco and sentenced to 3 years in jail.[1] The case has become a rallying call for the opposition and has forced the government to backstep, albeit in a somewhat dubious manner. In short, I’m sure the majority party is regretting that they ever passed this law in the first place.

My naïve hope is that libertarian paternalism may substitute for some of the heavy handedness of the current policymaking apparatus. I want to be clear that nudges are certainly no panacea to all (or even most) of the challenges facing Bhutan. In the tobacco case, for example, more interventionist approaches—such as Pigouvian/externality taxes (which don’t technically qualify as nudges) and limited prohibitions at workplace—may be necessary. Nevertheless, nudges have a key role to play in making salient the long term costs of tobacco use and its effect on others.

To conclude, I’m hopeful that a careful integration of libertarian paternalism into policymaking (as other governments have done) will make Bhutan a better, brighter place where government reinforces the power of the free choice and competitive markets in achieving its aim of gross national happiness.

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[1] No, I didn’t know that monks used tobacco, but I’m also learning that monks use iPhones and facebook as well.