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To Nudge the Poor Out from Poverty: The Mindset Matters

rised-poverty

Photo: Fikri Rasyid/ Unsplash.

Lately, the government celebrate the single digit poverty rate. In the last 10 years, the poverty rate has been declining with an average loss about 5%. It finally reached the exact number 9.66% in 2018 (BPS, 2019). However, BAPPENAS stated that there are still 69 million people who are vulnerable. They are a group of people who just above the poverty line and might easily fall into financial distress due to some economic shocks. These means that to execute the poverty eradication, the government should not just cover the poor but also notice about the vulnerable group. This will make the journey even harder. Nevertheless, it is not impossible since the rising of behavioural economics concept.

Poverty is commonly defined as the gap between the poverty line and income per capita. Hence, a family assort as poor if their income per capita is below the poverty line. Somehow, this definition could be less decisive in terms of the cause of poverty. For instance, most of the poverty eradication programs’ goal is to improve the income per capita- therefore, the programs are more likely to be exact action to give a solid aid such as conditional cast transfers and rice subsidy (RASKIN). Those are not entirely wrong, but actually the poverty problem is beyond that. It is not only due to the lack of income, but some studies found out that poverty might be caused by the the people’s mind itself.

The people’s mindset or human behaviour have not been taken into serious consideration by the policy-makers. The way people think or decide, could make them trapped into something bad, like poverty. An economist, Sendhil Mullainathan, and a Psychologist, Eldar Shafir, found out on how people’s mindset has something called “mental bandwidth” which can lead to self-defeating actions. This means, poor people are incapable to planning their life and doing problem-solving.

Fortunately, people’s mindset could be shaped by the surrondings. According to Joseph Stiglitz, a Nobel laureate in economics in 2001, human is an actor that formed by their environment. They have their own beliefs, perceptions, and preferences which unconciously shaped by concepts and values around them. Stiglitz argues that a value rooted in certain society could shape individual’s mindset. Also, Samuel Huntington prior showed evidence on how the mental model affect the success of a country’s development. He captured the economic conditions of South Korea and Ghana. Both countries were relatively similar in the 1960s but they could be so far different nowadays. The point is that South Koreans have a culture that shapes their society to be an education-oriented and hard-working individuals. By the facts, people’s mindset matters.

Richard H. Thaler, a behavioural economist, emphasized that human is not always behave rationally. They might be irrational because of the circumstances. Further, he brought a concept of choice architecture, which explains that human’s mind might be manipulated through a nudge. In this case, the government could shape the policy’s outcomes only by framing the right approach for the implementation. Therefore, a lot of economists and policy-makers worldwide are starting to pay attention to the importance of behavioural aspect. In Singapore, United Kingdom, Australia and United States, the government already has a special team that explore behavioural economics. It called the BIT (Behavioural Insight Team) which helps the government to formulate a fit policy and people-friendly approach.

For example, considering the importance of the environment that shapes mindset, the United States offered poor people vouchers to move to the wealthier neighbourhood. Years later, the young children experienced an improvement in annual earnings by an average of USD 3,477 (Chetty et al., 2015). By this scheme, the government are able to nudging and reforming the poor’s mindset along with distributing the aid. Thus, the poverty eradication program not only help them to meet their current needs but also may change their future life.

By that, the program is more likely to be sustainable to relief the poor from falling back to poverty. These finding give an insight how behavioural economics may help the policy-makers to produce effective policies. Therefore, Indonesia government should begin to consider the behavioural aspects in the formulation of poverty eradication program.


Article written By Faradilla Rahma Sari

Director of RISED 

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