Moral suasion

Moral suasion (a phrase from the Latin words “moral” and “suasio” which denote respectively “conduct or character that is right and virtuous”^[1] and “to present in a pleasing manner”^[2] - sometimes known as Jawboning^[3]), is defined in the economic sphere as “the attempt to coerce private economic activity via governmental exhortation in directions not already defined or dictated by existing statute law.”^[4] The 'moral' aspect comes from the pressure for 'moral responsibility' to operate in a way that is consistent with furthering the good of the economy^[5].

There are two types of moral suasion:

• “Pure" moral suasion refers to an appeal for altruistic behaviour^[6] and is rarely used in economic policy
• “Impure" moral suasion, or simply “moral suasion”, is backed by explicit or implicit threats by authorities in order to provide incentives to comply with their wishes^[7]

Moral suasion differs from direct suasion using laws and regulations in that penalties for non-compliance are not systematically assessed on non-compliers^[8] . This has led some authors to criticise moral suasion as immoral, since compliers get penalised for cooperating with the stated government agenda (thus incurring extra costs) while non-compliers are not punished^[9] . Other objections to the use of moral suasion include the fact that it constitutes extra-legal coercion by the government, that it adds uncertainty to the regulatory process, and that it can undermine or delay the implementation of effective legislation^[10] .

Although the present article focuses mainly on the usage of moral suasion by governments to induce behaviour from their citizens and companies, this policy tool has been used in the past by other actors for other purposes. The most famous case is the attempt to end slavery in the United States in the 1830s by using moral suasion. This tactic was attempted by William Lloyd Garrison and his New England Anti-Slavery Society^[11] .

Effectiveness of Moral Suasion

Moral suasion will be “an effective economic policy whenever the expected costs of noncompliance is made to exceed the cost of compliance” ^[12] .

There are 2 necessary conditions for this to happen.

• First, citizens must support the Government’s policy^[13] , thus entailing objective congruence between the promoter of moral suasion and the target whose behaviour should be changed. That support emanates from such factors that determine compliance as; potential illegal gain; severity and certainty of sanctions; individual’s moral development and their standards of personal morality; individual’s perceptions of how just and moral are rules being enforced; and social environmental influences^[14] . For example during the hyper-inflation in Zimbabwe, most business people were accepting foreign currency as a medium of exchange in violation of the country’s Exchange Control rules and regulations despite calls by the Central Bank to persuade stakeholders to accept only the local currency as medium of exchange. The business community felt that the rules being enforced through moral suasion were not just and moral. Thus in cases where factors that determine compliance are in line with Government’s objectives, the cost of non-compliance increases as behaviours which are contrary to social moral values suffer social reputation if members know about the non compliance^[15].

• Second, the population of economic agent to be persuaded must be small^[16] . Fewness entails the easy identification of economic agents to persuade, and increase the perceived likelihood that non-compliers will be identified and punished^[17].

Even when those two necessary conditions are not fully met, moral suasion, if only partially effective, can be a valid choice of policy instruments if the alternatives are doing nothing or taking actions with high opportunity or administrative costs^[18].

Although neither a necessary nor a sufficient condition, a low level of competition amongst suppliers in the economy contributes to increased effectiveness of moral suasion. Indeed, companies that have been “persuaded” to adopt morally superior but more costly behaviour, will be less competitive and could be driven out of the market by competitors who are not fettered by such constraints if competition is too fierce^[19].

Examples of Moral Suasion

Regulating the financial sector

The Bank of Canada defines moral suasion in central banking as “a wide range of possible initiatives by the central bank designed to enlist the co-operation of commercial banks or of other financial organisations in pursuit of some objective of financial policy”^[20] . It could also be defined more generally as “a process whereby commercial banks co-operate with the central bank either for altruistic reasons or out of fear of administrative or legislative sanctions”^[21] . Formal moral suasion is characterised by explicit (though non-contractual) commitments to “refrain from activities judged to be in conflict with policies of the central bank”^[22]. Informal moral suasion is more difficult to define and is carried though various conversations and interactions between the central bank and the commercial finance institutions, during which commercial institutions can be made to understand the central bank’s policy objectives on various matters.

The oligopolistic competition in the British banking sector has witnessed the success of moral suasion as a monetary policy instrument, allowing the central bank to control by persuasion and directive^[23]. Given that only five major banks need to be persuaded in England, a moral suasion policy instrument is very effective because non-compliers can be immediately identified and held up for censure, while in the United states where there are many commercial banks, the Federal Reserve needs to use legalistic controls to pursue the same ends^[24] .

Curbing inflation

Moral suasion has been effectively used in the management of inflation in a number of countries and is also referred to as “open mouth operations” in the financial sector^[25]. The common factor for the success of moral suasion is the trust that stakeholders have on the Central Bank. For example, New Zealand has experienced high inflation in the early and mid eighties which however drastically reduced as the bank managed to anchor stakeholder inflation expectation through moral suasion. Monetary policy to a great extend is the management of expectations^[26] , influencing inflation expectations of business and labour. Researchers have found that inflation expectations greatly influence future inflation, hence the use of moral suasion to anchor inflation expectations has been an important instrument in reducing New Zealand’s inflation rate^[27].

Moral suasion has also been widely and successfully used to curb moderate price increases in countries as Great Britain and Sweden where a principle of “democratic socialism” has been in place for some time^[28] . Wage and price increases were agreed upon by the Government, Labour and businesses. The public ownership of the whole exercise enhanced compliance^[29].

Promoting religious tolerance

Moral suasion has also been effective in Singapore in the creation of religious harmony among different religious groups. When conflicts do arise, the Government of Singapore’s approach is to mediate or resolve the issue through common sense, and moral suasion using the collective efforts of the community, grassroots and religious leaders^[30]. Thus moral suasion is effective in resolving religious disharmony especially if the Government is actively involved as a mediator.

Protecting the environment

Usage of moral suasion in environment regulation consists in making polluters feel responsible for the negative externalities that they cause^[31] . Moral suasion can be very efficient from an economic standpoint since economic agents are free to use any cost-minimising solution deal with their negative externalities instead of having to rely on a government-prescribed regulation or tax. Furthermore, the administrative costs of using moral suasion to deal with environmental problems is very low^[32] . Marine debris regulations in the United States (1989–1993) revealed that moral suasion can be an effective tool to limit the discharge of trash into water in spite the offenders’ low probability of being detected^[33] . The evidence on the effectiveness of moral suasion methods to induce environmentally desirable behaviour however is not strong^[34] unless it is coupled with other instruments. For example, Canadian policy makers advocates for moral suasion in their endeavour to achieve environmental and wildlife policy objectives, a course of action likely to fail if little regard is placed on the accompanying incentives^[35] .

Moral suasion in different political regimes

Although moral suasion can theoretically be used in any political regime, it has a higher chance of being effective in cases where the political authority is centralised and effective.

Centralisation of authority contributes to the effectiveness of moral suasion as a policy tool since it makes the government’s positions clearer and more consistent. Attempts by governments to influence the behaviour of companies and citizens can therefore be understood more clearly.

Effectiveness of authority refers to the ease in which the intentions of the political executive can be transformed into legislative or regulatory action. This is important because the governments and agencies can use implied threats of price controls, additional regulation or taxation to induce certain behaviours from companies. Such threats will only have credibility if companies think that these threats will be carried out if they do not comply.

As fewness of economic agents to be persuaded is a necessary condition for moral suasion to be effective, this policy instrument is more adapted to countries with higher concentration of suppliers, both in terms of number and of geography .

Studies suggest that moral suasion is usually not effective in environmental matters in advanced economies. It can, however, still be used for developing countries since there are still easy environmental gains that could be made without heavy-handed regulation^[36].

Interaction of moral suasion with other policy instruments

Moral suasion is rarely used in isolation^[37]. Governments can use moral suasion in conjunction with a variety of other policy instruments to reach its objectives.

Regulation

Firms may alter their behaviour in order to reduce the probability that they will be subject to additional regulations. In fact, they may respond more to the threat of being regulated than to the actual imposition of regulations, as illustrated by the fact that US oil companies froze wholesale petrol prices when the 1991 Iraq war started, even without being prompted to do so.^[38]

Price cap

Governments can also implicitly or explicitly threaten to establish price caps to make moral suasion more likely to succeed. This was illustrated in 1979 when the Chairman of the US Federal Reserve System, Paul Volcker, warned banks against raising prime rates above a certain level,^[39] and in the 1960s when US President John F. Kennedy caused U.S. Steel to reverse its decision to increase prices by sharply criticizing the company.^[40]

Additional taxation

Moral suasion, in the form of public exhortation, was used to curb the bonuses paid to certain employees in the financial sector, without much success^[41]. The threat of additional, specific taxes^[42] was later used in conjunction with moral suasion to make compliance more likely.

Open market transactions and other interventions by central banks

Central banks and governments who let markets know what they consider ranges of “appropriate” values for its currency has impacts on the trading of the currency, even if intervention never occurs^[43]. Central banks can buy or sell various securities if the currency value falls outside its desired range.

Information provision

Governments can choose to publish information in order to “shame” certain market participants into altering their behaviour. The threat of information provision, and of shaming drug companies that were charging “excessive” prices in the eyes of the US government, was used by the Clinton administration to curb increases in drug prices^[44]. The government of Singapore’s decision to publish comparative cost data from different hospital to encourage them to be more efficient is also an example of where moral suasion was used in conjunction with information provision^[45].

Service provision

The threat of direct government provision of goods and services in a sector that is deemed under-serviced can be a powerful motivator for private companies to modify their behaviour in order to prevent the government from entering their market.

Privatisation and deregulation

Large monopolies, sometimes deemed unresponsive to citizens or consumer wishes, can be threatened with privatisation or with deregulation depending on whether the monopoly is government-owned or not.

Enhancing the effectiveness of moral suasion as a policy instrument

Moral suasion is used when economically rational individual behaviours of economic agents do not maximise collective welfare^[46]. Moral suasion will therefore be a more effective policy tool if these rational economic agents can be persuaded that it is in their long-term interest to comply with the intended government policies^[47], even when they are not profit-maximising in the short run.

This can be done in two ways. First, governments can build a high level of trust between themselves and market participants. This can be achieved through good governance, clear communication, and a delivering on their promises. Second, governments can ensure that their threats are seen as credible by acting on them and publicising their actions, so that future non-compliance will be deterred.

Gaining the support of the population is also increases the effectiveness of moral suasion. This can be done through active citizen participation in the government decisionning process as well as information and publicity campaigns.

References

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47. ^ J.T. Romans, "Moral Suasion as an Instrument of Economic Policy," The American Economic Review (American Economic Association) 56, no. 5 (December 1996): 1220-1226