This paper explores how behavioural change (and thus institutional change) might be better motivated in the public sector. The study is based on an ‘accidental experiment’ – two projects in Cameroon, supported by the World Bank, of different scale, scope and design in the same governance environment. The paper argues for the value of using ideas from behavioural economics to design institutional reforms and to assess the approach to institutional reform taken by development agencies.
In 2008, World Bank staff successfully concluded preparation on a project to support the Government of Cameroon to improve the transparency, efficiency, and accountability of public finance management. The US$15 million project supported a number of ministries to strengthen a broad range of management systems and capacities. Independently and concurrently, other Bank staff initiated a low-profile, technical assistance project to improve performance in Cameroon’s Customs, supported by a grant of US$300,000. The smaller scale, flexible approach that focused on a specific agency was more effective than the broad conventional approach.
Behavioural economics focuses on how individuals respond to information and incentives, and challenges the notion that individuals are always rational and always maximising utility. It includes ideas such as the following:
- Loss aversion – individuals strongly preferring to avoid a loss over the prospect of making a gain
- The planning fallacy – the tendency to underestimate the time it will take to achieve an objective, despite experience that suggests more time will be required.
- The ‘authorisation imperative’ – a tendency to deliberately underestimate project requirements, to ease approval
- Optimism bias – the belief that the current project is exempt from the risks that affected previous attempts.
The large–scale project suggests the difficulty of cross-government coordination of reforms where the authorising/governance environment is not supportive. Understanding the political economy and the authorising environment is critical to ensure that project design suits the political context. The smaller Cameroon customs reform was scaled to better fit the context; allowed the Director General of Customs to select a set of pilots to manage the risks of reform; and enabled a stronger process of learning and building a trusting relationship with the staff of the World Bank and World Customs organisation. This reduced the problem of loss aversion.
A key lesson is that public sector reform is about behavioural change. This requires internal leadership, which needs to be carefully identified and supported and encouraged to proceed at a self-defined pace. External support will need to be flexible and paced to the process of change that is internally acceptable. Other lessons include the following:
- Within development agencies, the authorisation imperative creates strong incentives for behaviours which reinforce problems of the fallacy of planning and the optimism bias. Where the focus is on ensuring that resources are committed to projects, the authorisation imperative hinders learning from experience.
- Regarding inertia in public sector institutions, loss aversion could help to explain why governments that commit to reform often are unable to follow through in implementation. Pilot reforms could help governments to manage perceptions of risk, enabling implementers to control the risks while developing the capacity to handle change.
- Too often the Bank’s conventional project preparation approach involves large-scale reform with a budget too large for the management capacity of the government counterparts. Complex project management requirements distract from problem solving, and the project design is inflexible. More modest projects could help to spur reform.