As the Covid-19 pandemic takes its toll in lives lost and economic hardship, governments in Latin America and the Caribbean have rushed to increase fiscal spending, even as revenues drop. But only some countries will be able to access markets and borrow without sacrificing sustainability in the aftermath of the pandemic. Most will have to identify efficiencies in both revenue and spending. That is where behavioral interventions come in. They could play an essential role in improving the devastated public finances of Latin America and Caribbean countries.
In our policy brief “Behavioral Insights for Foresighted Public Finance,” we looked at evidence from interventions that apply behavioral insights to improve public spending efficiency and increase tax compliance. They can be extremely useful in these difficult times.
Behavioral Insights for Public Finance
One important area is infrastructure. Behavioral insights can improve efficiencies in infrastructure with interventions that encourage people to drive more safely, conserve water and energy, and pay their utility bills. Providing households information and individualized feedback on their water and energy consumption is one example. Norm-based messages, which inform people of the unwritten rules governing behavior within a society, comparisons with peers, and planning devices, among other tools also have been shown to reduce water and energy consumption, thus saving governments money on energy subsidies.
In agriculture, commitment savings accounts, in which people voluntarily restrict their withdrawals, can help nudge farmers to save so they can buy and use fertilizers in a timely way. That can reduce the money governments have to pay towards fertilizer subsidies.
Successful interventions encouraging voluntary savings for retirement and social security mean lower government spending on pensions in the long run. The IDB has used them in the Dominican Republic, Chile, Colombia, Brazil, and Mexico to help people make better savings decisions. In Brazil, for example, brochures sent by mail with reminders to self-employed workers to pay their social security contributions increased compliance.
Behavioral interventions can also improve educational outcomes by increasing the attendance of teachers, principals and students, boosting students’ motivation and reducing waste in spending and instructional time. All these improvements make education more cost-effective.
Behavioral Economics for Better Health
Finally, behavioral insights can help cut public health costs by encouraging preventive healthcare, ranging from the personal hygiene and physical distancing recommendations of the COVID-19 pandemic, to vaccinations and better diets. Commitment devices —self -administered rewards or punishments for specific behaviors —have been used to increase exercise in adults, and timely reminders have been proven effective at increasing adherence to treatments. In an intervention designed by the IDB for Guatemala, for example, community health workers were given monthly lists of children due for vaccinations. This helped the health workers send timely reminders to the children’s families and increased the rate of vaccination completion by between 2.2 and 4.6 percentage points in a cost-effective way. Currently, we are providing information on health recommendations, simplifying that information, appealing to social norms, like the need for reciprocal behavior, among other tools, to help governments throughout the region mitigate the infection curve as mandatory isolation is steadily relaxed.
Boosting Tax Collection
Using behavioral insights to increase tax compliance and hence revenues in the aftermath of COVID-19 could be especially challenging. Nudges are policy tools designed to tackle biases, habits and cognitive boundaries that prevent us from making decisions that are in our best self-interest. In the context of tax compliance, they start from the assumption that people have enough money to pay their taxes, but are prevented from doing so by behavioral biases and cognitive barriers, like a distorted view of social norms and the mistaken view that penalties will not be enforced. Introducing messages and reminders in tax bills that provide, simplify and highlight relevant information and stress deterrence, through details about fines and legal consequences, can reduce these biases and barriers. So can messages that tell people what their peers do or what society approves or disapproves of (descriptive and normative behavior), boosting tax morale and compliance in the process. Yet, behavioral interventions will have little effect if citizens face financial constraints.
There are plenty of other examples in the areas of waste management and recycling, savings, employee incentives, and others that can be used to increase revenues. And let’s not forget that most of these interventions are extremely cost-effective (you can find an economic estimation by sector in our policy brief).
The field of behavioral economics has important contributions to make. Using them when designing policies in Latin America and the Caribbean can lead to better outcomes and improve the lives of citizens. In these challenging circumstances, we need all the help we can get.