Moral suasion

In the temperance movement of the 18th and early 19th centuries in Britain and North America, moral suasion was initially a key part of the strategy for reducing the prevalence of alcohol in society.[8] As the movement began to face the limitations of this strategy in the late 19th century, its members turned to legal coercion, leading to the rise of prohibitionism.[8]

In the American Civil Rights Movement of the twentieth century, moral suasion was one of three major prongs of the movement, the others being legal action and collective nonviolent protest.[9] After initial victories, this nonviolent strategy began to struggle in the 1960s, and largely ended with the assassination of Martin Luther King, Jr..[10]

Moral suasion has sometimes been effective in resolving religious disharmony, especially if the Government is actively involved as a mediator. Moral suasion has 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.[11]

Usage of moral suasion in environment regulation consists in making polluters feel responsible for the negative externalities that they cause.[12] 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.[12]

A study of marine debris regulations in the United States from 1989 to 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.[13] The evidence on the effectiveness of moral suasion methods to induce environmentally desirable behaviour, however, is not strong[13] unless it is coupled with other instruments. For example, Canadian policymakers 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.[14]

Moral suasion will be "an effective economic policy whenever the expected costs of noncompliance is made to exceed the cost of compliance".[16]

There are 2 necessary conditions for this to happen.

• First, citizens must support the Government's policy,[16] 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.[13] 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.[13]
• Second, the population of economic agent to be persuaded must be small.[2] Fewness entails the easy identification of economic agents to persuade, and increase the perceived likelihood that non-compliers will be identified and punished.[2]

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.[2]

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.[17]

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".[18] 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".[19]

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".[18] Informal moral suasion is more difficult to define and is carried through various conversations and interactions between the central bank and the commercial financial 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.[18] 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.[2]

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.[20] 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 extent is the management of expectations,[21] 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.[22]

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.[23] Wage and price increases were agreed upon by the Government, Labour and businesses. The public ownership of the whole exercise enhanced compliance.[23]

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 a 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.[2]

Moral suasion is rarely used in isolation.[2] Governments can use moral suasion in conjunction with a variety of other policy instruments to reach its objectives.

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.[24]

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,[24] 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.[25]

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.[26] The threat of additional, specific taxes[27] was later used in conjunction with moral suasion to make compliance more likely.

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.[28] Central banks can buy or sell various securities if the currency value falls outside its desired range.

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.[28] 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.[29]

The threat of a public option, i.e. 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.

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.