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Wednesday, 23 May 2012

Society, entitlement and preferences

A recent paper explores the influence of society on individual preferences. Standard economic literature more or less takes preferences as given (exogenous), new evidence however is poking some important holes in this area :
The recent work in psychology and economics has implications that are only beginning to be explored for the examination of the question how different aspects of society affect preferences, but which promise to undermine long-held standard assumptions in economics. If historical institutions shape preferences, which shape the choice of public policies and their effects, then societies almost surely have different optimal paths of development. If individuals understood these processes, they could design policies to nurture desirable preferences and in turn shape the paths of economic change. At a minimum, these findings should give pause to those who accept WTAs, WTPs, and market prices as stalwart guides to welfare.
The issue has many important policy implications, but two come immediately to mind in our Zambian context. The first is that it reinforces the need to look at our cultural context positively. Culture is usually seen as a constraint to "development". But this appears to again emphasise that a more positive approach to it could lead to much more harmonious outcomes. For example, we have previously noted the need for greater attention to be paid to "local ideas" in generating policies, rather looking to import "western models" alien to our land. The current constitution draft is an example of a foreign important with many non-Zambian ideas.

What the papers appears to point out is that "economic" outcomes are not neutral to "cultural" traditions.It suggests a strong interplay between culture and economic outcomes - as we have previously made the case for the "tripod". We have long argued that a vibrant society is built on strong markets; strong democracy; and, religious and culture foundation.  If indeed religion and culture can shape preferences then we need to be more upfront in strengthening these institutions. Religion and culture are forces that are relevant to underpinning viable markets rather than bystanders. 

The second point is that it points to the need for more careful scrutiny of policy ideas that have been previously discarded without sufficient consideration of the "entitlement" effect. It might be that policies are have previously been discarded on static efficiency grounds may be dynamically efficient. Good examples are mineral resource revenue redistribution policies. There's debate on whether money from copper revenues should be given as cash to individuals - directly, rather collected in central pot and spent on public goods (e.g. as practised in Alaska and Mongolia). A key argument against such approaches is that it is misses out on "economies of scale" advantages and "free rider" resolutions. One of the reason we all give money to government is that it achieves greater efficiency in some areas than if we kept all the money. This is the basic rationale for public provision (and why government exists). Money in your pockets won't translate in a road we all need.

If the evidence on entitlement effects suggested in the paper is correct, then there may be a powerful case for giving people money.  It would increase your feeling of entitlement and make you care more about monitoring how copper resources are managed in our country. If you know the government would give us ten percent of its new copper revenue, you are likely to be more interested in what it does with the other ninety percent. You will also want the company that explores, exploits and exports our mineral resources to be managed competently - if it fails to find, extract and sell, you lose money. You will be less patient with the GRZ when it fails to control mineral extraction and behave as self-serving and unaccountable. 

This entitlement feeling may even have significant spillover effects in other areas. All of sudden, the idea that you are owners of state property like the public media won't seem so alien.

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