Traditional economics - assuming people are rational actors who respond to prices to maximize their own interests - could use a rethink, World Bank official says
By Chris Arsenault
ROME, Jan 27 (Thomson Reuters Foundation) - Traditional economics - assuming people are rational actors who respond to prices and subsidies to maximize their own interests - could use a rethink, a senior World Bank official said on Wednesday during a discussion on global food policy.
Anne Fruttero, a senior World Bank economist, relayed a story about small farmers in Kenya's highlands, where low fertilizer use has been holding back crop yields.
Some farmers expressed the desire to buy more fertilizer, but had not been doing so after selling their crops at harvest time, despite being able to afford it.
When growers needed the fertilizer later in the year, they had less money immediately available, so many of them did not bother to make the purchase.
Traditional economics had led researchers to believe that farmers would follow their own self-interest, and thus save money from the harvest to buy fertilizers later in the year.
The emerging field of behavioural economics, outlined in the major World Bank report "Mind, Society and Behavior" released last month, shows that individuals do not always behave rationally. Emotions, social norms and taking the path of least resistance play a key part in everyday decision-making.
The solution for Kenyan farmers: organisations offered to sell them fertilizer immediately after the harvest. Uptakes increased.
"This policy of changing the timing was as effective as a 50 percent subsidy (for fertilizer)," Fruttero said. "This is another way of understanding better why people do what they do."
These new trends emerging in economics have major repercussions for international agencies working with farmers, said John McIntire, associate vice-president of the UN's International Fund for Agricultural Development (IFAD).
"How to you get people to spend less on alcohol and more on their farms?" McIntire said. "How do you try to induce people to stop doing things that are not in their interests?"
Behavioural economics can have tangible effects when trying to provide credit to small farmers who don't have assets or collateral for traditional loans.
Group lending, where a cluster of small farmers take turns receiving credit and share the responsibility for repaying loans, could benefit from the new economics. An individual who defaults will lose social capital within his community, McIntire said, potentially reducing defaults.
Environmental services could also benefit from the new research, for example by giving farmers who plant trees to protect an upstream watershed from erosion priority access to hydroelectricity generated by the river they are helping to maintain. (Reporting By Chris Arsenault; Editing by Tim Pearce)
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