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April 12, 2015

Responding To: Week 11: Beyond Economics

Behavioral Economics & Development: The Non-Economic Dimension

O. Felix Obi

The World Bank's Vice President and Chief Economist Dr. Kaushik Basu’s lecture this week was the last in a semester-long series of lectures by World Bank Group (WBG) leaders at Georgetown University. His lecture covered two big non-economic dimensions of development: the role of social norms and mindsets (sociology & psychology), and governance and law—the former the topic of the 2015 World Development Report.

Behavioral economics has a marked impact on the success rate of development programs. And that is a big deal. It is all too easy for the Economist Magazine and others to criticize development programs. Development projects often rest on questionable assumptions and ambitious projected outcomes, but poorly conceived objectives.

Development practitioners are all too aware of these criticisms and want better outcomes. But practitioners must respond to diverse constituencies, who hold decision-making power within their organization, and reconcile their competing objectives. Externally, there's the challenge of securing cooperation of governments who often lack the capacity, and perhaps even the interest in tackling poverty and other social ills. Behavioral economics can influence transaction costs and social norms in positive directions. 

The best minds in US universities can play a catalytic role through transfer of scholarly advances in governance and economics to development practitioners. This should lead to inclusion of behavioral economics theories and methods in development assistance programs. And many of the best behavioral economists are in US universities, including Georgetown University McCourt School of Public Policy's Nobel Prize-winner in Economics, Dr. George Akerlof

Development organizations are keen to leverage behavioral economics to better understand social norms in societies where they work. Dr. Basu explains that human beings have systematic irrationalities and social norms that drive behavior. For instance, three assumptions explain trade and exchange. The first is that people prefer more to less; the second is diminishing marginal utility—decline in marginal utility derived from consuming each additional unit of a product—and the third is asymmetric initial distribution of endowments. Because human beings think socially and collectively, social norms can become self-fulfilling. 

Thus corruption can become self-enforcing when everyone is considered corrupt. Successful intervention will require government action on several non-economic fronts. The first is a determined government that is able to make and enforce tough anti-corruption laws. The second is smarter laws that sanctions only bribe-recipients, rather than both giver and recipient. The third is re-orienting human psychology away from corruption. Smarter laws that position the interest of bribe-giver against bribe-recipients, and stiff legal sanctions will help re-orient mindsets away from corruption, and increase the success rate of development assistance. 

O. Felix Obi is an Alumni Board Member at Georgetown’s McCourt School of Public Policy. His professional background is in economic and international trade development in Africa, especially innovation and entrepreneurship.

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