What accounts for our penchant for making complicated policies?

Life is pretty complicated, right? It certainly is, but policy makers tend to make it more complicated than needed.  

A very recent example is the Bangladesh Bank (BB) circular on the delivery of one percent cash subsidy to the garment exporters. All garment exporters are eligible, except those owned fully or partially by foreigners, and provided domestic value addition is 30 percent or more.  The subsidy will be applied on export shipments valued at net Free-on-Board (FOB) price.  The exporters will have to provide detailed information on export letter of credit/agreement, inputs prices (domestic and imported) and utilization, and export shipment details by filling out Form Ka and submitting it to the authorized dealer bank in addition to certification from BGMEA/BKMEA (Form Kha) and demand for payment of cash subsidy (Form Ga).

The dealing bank must do all due diligence to ensure the veracity of the information provided. And they have to maintain the records for at least 3 years. The bank will pay cash to the exporters and get reimbursed from BB who in turn will get the money from the government.  There is clearly a transaction cost to the banks against which they earn no direct benefit. Depending on how expediently the cash is reimbursed, they also risk, albeit temporarily, losing liquidity. Let us give the authorities the benefit of doubt that they have thought all these administrative details through since export cash subsidy management is nothing new in Bangladesh.

Yet one cannot help but wonder why do we not opt for simpler alternatives?  Have they taken these actions with forethought about the consequences they are going to have on the economy overall?

In one of the leading Bangla newspaper today (October 13, 2019), there is a lead story suggesting large and growing discrepancies between the shipment value of exports and the repatriation of export earnings as received through the banking system. Even the industry leaders find the average 14 percent discrepancy between shipments and payments unexplainable by discounts, short shipments, accidents etc. 

A logical question that follows is why not link the subsidy to export receipts rather than shipments. This will increase the incentive for repatriation and induce exporters to care more about avoiding discounts and short shipments. Surely, the administrative burden of determining which foreign exchange inflow is an export receipt and which is not cannot be heavier than verifying the value of export shipment. 

Since now we have also introduced a 2 percent cash subsidy on remittances, another question to ask is why not unify the two subsidy regimes under one rate to eliminate the incentive to misclassify foreign exchange receipts to take advantage of the differences in the subsidy rate?

Yet another question is why bother at all with cash subsidy to exports and remittances?  Why not let exchange rate adjustments to do the job?  This will eliminate the need for filling all the required forms, auditing the information provided and the internal transactions relating to managing the cashflows between the dealing banks, BB and the Finance Ministry. 

There appears to be a complexity bias in our policy making. Most of us recognize complexity when we see it. Complexity bias is to give undue credence to complex ideas when simpler alternatives exist. Faced with two competing alternatives, we are likely to choose the most complex one. As a result, when we need to solve a problem, we ignore simple solutions thinking "that will never work" because it is too simple to work.

Policies don't have to be as complicated as we make it to be.  All it really takes to keep it simple is a change of mind.  The only question is, why aren't policy makers willing to do so?

Finding simple and straightforward answer to this question is not easy. It's not as if the government doesn't know its policies are complicated. Should we blame civil servants for complex policies?  May be, since the civil service is not necessarily clean and honest enough to correct problems. Complexity may be the capital they use to make the beneficiary come to them to wheel and deal with what is really available. But in many instances, they are probably following the tune set by their masters. Even some of the intended beneficiaries may prefer complexity to simplicity if it helps them keep it all to themselves. You can try to find deeper answers from various angles: techno-economic analysis, political economy, rent seeking, bureaucratic control freakiness, chaotic systems, among others.

Now, I can be accused of edging towards complexity in trying to answer the question posed in the title. Guilty as charged!

Confucius is often quoted as saying "Life is really simple, but we insist on making it complicated."  I wish he also told us why we so insist! 

 The author is an economist.