Behavioral Solutions for Successful Subsidy Reform Research Note July 2024 1 Contents Acknowledgments .................................................................................................................................. 3 Executive Summary ................................................................................................................................ 4 I. | The intricacy of subsidy reform: Balancing reform and the social contract ................................... 7 I.i. | Definition, rationale, and functions of subsidies......................................................................... 7 I.ii. | Drawbacks and pitfalls of subsidies............................................................................................ 7 I.iii. | Toward a general framework of subsidy reform ....................................................................... 9 II. | Behavioral diagnostic: Putting real people at the center of subsidy reform................................... 10 II.i. | Behavioral public policy process: Don’t suppose; diagnose .................................................... 10 II.ii. | Defining the problem and target audience diagnosing barriers ............................................ 13 An artful analysis of key stakeholders of subsidy reform ............................................................. 13 A behavioral journey map to build subsidy reform acceptance ................................................... 14 II.iii. | Diagnosing barriers to and levers for support for subsidy reform ........................................ 16 The COM-B model: A behavioral framework for subsidy reform ................................................. 16 III. | Behavioral design: Conquering the complex conundrum of subsidy reform............................. 20 III.i. | Capability: Awareness, knowledge, and self-efficacy ............................................................. 20 III.ii. | Motivation: Perceived benefits, legitimacy, and fairness ...................................................... 28 III.iii. | Opportunity: Social norms and opportunities to enact beliefs and perceptions .................. 41 IV. | Practical Recommendations ........................................................................................................ 48 IV.i. | Designing subsidy reforms for sustainable success ................................................................ 50 IV.ii. | Communicating savvily about subsidy reforms ..................................................................... 51 2 Acknowledgments This document was prepared by Laurenz Scheunemann (Consultant, EPVGE), Zain Chaudhry (Economist, EPVGE), Michelle Dugas (Social Scientist, EPVGE), Zeina Afif (Senior Social Scientist, EPVGE), Ana Maria Muñoz Boudet (Lead Economist, HGNDR), and Renos Vakis (Lead Economist, DECGI). The project benefitted from guidance from the Mind, Behavior, and Development Unit (eMBeD) team in the Poverty & Equity Global Practice of the World Bank (WB). We thank Jonathan Karver (Economist, EPVGE) and Ana Maria Rojas Mendez (Economist, EPVGE) for their feedback and guidance. The team is grateful to Mathieu Cloutier (Senior Economist, EPVPA) and Yeon Soo Kim (Senior Economist, EPVGE) for their valuable comments as peer reviewers. The opinions, interpretations, and conclusions expressed herein do not reflect the views of the WB, its board of executive directors, or the governments they represent. 3 Executive Summary Subsidies, or deliberate policy interventions to lower the net price of a product or service, can help governments address economic pains and public needs, particularly if they are targeted efficiently to address policy problems and support the most vulnerable. Yet governments need to spend their resources prudently to operate effectively, uphold the social contract with citizens, and provide public goods to foster well-being and development. Subsidies for energy, food, and other goods represent substantial and often inefficient public expenditures that tend to benefit comparably richer populations disproportionately, and that can have negative second-order social, economic, and environmental effects. Reforming subsidies can help ameliorate regressive economic policies and free revenues for more targeted spending, but strong public backlash often leads such reforms to fail. In regions as diverse as Nigeria, Indonesia, and Jordan, policies were introduced to reform energy subsidies, only to be met with substantial pushback that ultimately resulted in reforms being rolled back or never implemented. Accordingly, this research note seeks to provide a framework, enriched by behavioral insights, that can guide the implementation of successful subsidy reforms that the public will accept. It is thus addressed to policymakers and practitioners aiming to design and implement subsidy reform policy. The note considers questions of compensatory policies, the local context and political economy, and effective communications to create broader public support and actions (target behavior) conducive to reforms among the general public (target audience). The dimensions of capability, opportunity, and motivation, offer a useful behavioral lens for identifying barriers and enablers of public acceptance of subsidy reforms. Capability refers to individuals' knowledge about the reform and their ability to understand and respond to it. Opportunity considers the structural and political context, including the accessibility of resources and societal support for the reform. Motivation encompasses both conscious decision-making and emotional responses to the reform, influenced by factors such as trust in government. Public acceptance of reforms will be greatest when policy initiatives are designed to account for capability, opportunity, and motivation. For the public to support subsidy reforms, it must be aware of policies, have the knowledge and skills to understand these policies, and have the self-efficacy to adjust to change. Public awareness of subsidy and compensatory schemes is influenced by factors like salience and availability biases, which lead information that is very prominent or easily remembered to disproportionately affect perception and decision-making. The use of diverse communication channels is crucial for reaching the target audience effectively to improve awareness. Understanding and accepting policies like subsidy reforms relies on factors such as mental bandwidth and messenger characteristics. Simplifying choices to minimize cognitive load, tailoring communications to specific communities, and aligning reforms with widely held values can improve acceptance. Finally, high levels of self-efficacy and the agency to adjust to new prices are needed to promote acceptance of reforms. To foster efficacy and agency, measures should focus on building the public’s confidence that they can manage changes in product cost, citizen engagement, and participation, through initiatives like participatory budgeting. The motivation to accept reforms is shaped by perceptions of their perceived benefits and harms, including compensatory schemes; perceptions of legitimacy; and perceptions of fairness. Targeted transfers and gradual implementation strategies, as well as non-monetary incentives, such as social recognition and group affiliation, can motivate support for reform efforts. Inclusive decision-making and transparent governance, achieved through citizen engagement and participation, affect input and 4 process legitimacy. Fairness norms emphasize the importance of ensuring that reforms are perceived as enhancing equity and justice. To achieve this, it's essential to design compensation schemes that benefit broad segments of society and are easy to access. Finally, the public’s opportunity to support subsidy reforms is shaped by social norms and their environmental context. Expectations about whether others are supportive of reforms, as well as how others might perceive one’s own support, will shape acceptance of reforms. Showcasing role models who endorse the reforms, or demonstrating attitude shifts toward the reforms in media campaigns and community-based interventions, can help shape perceptions of positive social norms. The timing of reform efforts can also help or hinder public acceptance: identifying opportune moments, such as when economic conditions are positive or when moments of crises lead to shifts in political alliances and changes in the status quo which can in turn help minimize resistance against policy change. Policymakers should strategically time their messaging and actions to reduce opposition and maximize acceptance. We synthesize both the behavioral and non-behavioral evidence and solutions into several key recommendations that policymakers can follow to increase the likelihood that subsidy reform will be sustainable and successful. We cluster these recommendations into two different groups: the design of and communication regarding subsidy reforms. Within them, we recommend four ways policymakers can design more effective subsidy reforms: 1. Implement compensatory programs to overcome loss and risk aversion. Because the removal of subsidies can be painful, this policy change should not happen in isolation. Substitutes for the subsidies, such as social policies and transfer schemes, should be considered. 2. Implement compensatory programs before or concurrent with subsidy reforms to mitigate present bias, discounting, and anchoring effects. Because many citizens may not expect compensatory programs to be implemented, and the public is especially attuned to the immediate costs of subsidy reduction, compensatory programs must be put in place at precisely the same time as subsidy removal, if not before. 3. Get the timing right. Implement the program at a time when acceptance is high—generally, soon after elections, when economic conditions are positive, or when government support is high. 4. Reach out to citizens and journalists to increase trust and legitimacy . Reduce the distance between citizens and policymakers by directly engaging with citizens and journalists to address their concerns. Moreover, we have six recommendations, on how policymakers can communicate more effectively about the reforms: 5. Run a wide-ranging communications campaign. Build a coalition for change with a communications campaign that aims to reach all segments of society. Resistance can be highly impactful even without the support of the majority. 6. Ground messages in comprehensive analysis and research. Let professionals plan and implement the campaign throughout the reform process to shape the narrative and lay the groundwork for implementation. Reach out early before reforms are introduced. Ground the communication strategy in comprehensive, multi-method evidence, e.g. surveys and focus groups. 7. Ensure that messages are “SUCCESsful”: Simple, Unexpected, Concrete, Credible, Emotional, and Story-driven. 8. Build trust. Provide correct, verifiable information and implement promised programs to build trust early on. Use trusted messengers to increase trust and accountability. Recruit 5 messengers who are trusted by citizens to provide information about reforms, including influencers from sports and arts, and political and religious leaders. 9. Add perspective by setting the right anchors. To set the right comparison for your reforms, run communication campaigns that share information about similar reforms in other countries or fossil fuel prices around the world, particularly those in neighboring countries. 10. Frame losses and gains differently. Ensure that discussions of reforms center on the provision of different advantages rather than on losses. 11. Create direct linkages between subsidy reform and compensatory programs to alleviate loss and risk aversion and increase salience and availability . Linking subsidy removal, revenue mobilization, and compensatory programs can increase the acceptance of the reform. To connect losses and gains, and clarify trade-offs, show people how one policy is needed for another to be implemented. The path toward successful subsidy reform demands a strategic fusion of behavioral insights and traditional policy mechanisms. Recognizing the interplay of the public’s capability, opportunity, and motivation to support reforms, policymakers can better navigate a landscape where public support is paramount to success. By designing reforms and compensatory programs to overcome behavioral barriers related to these factors and engaging in behaviorally informed communication, policymakers can design reforms more likely to gain acceptance from the general public that, in turn, yield sustainable results. 6 I. | The intricacy of subsidy reform: Balancing reform and the social contract Governments need sustainable funding to operate effectively, uphold their social contract with citizens, and provide public goods to foster citizens’ well-being and development. When tailored effectively, subsidies for energy, food, and other goods can have beneficial effects, such as promoting positive behaviors by citizens or supporting strategic policy shifts, like pivots to green technologies. On the other hand, subsidies often are costly and inefficient. As a result, they can have net-negative social, environmental, and economic effects, and undermine broader governmental objectives. This policy note, a practical guide for policymakers and practitioners charged with subsidy reform, analyzes why reforming net-harmful subsidy schemes faces steep resistance among the general public and explores solutions to these challenges. The note draws on research and relevant case studies to distill factors associated with the success or failure of reform efforts. Drawing on this evidence and the World Bank’s Energy Sector Reform Assessment Framework (ESRAF), we apply a behavioral lens to identify barriers to public support of subsidy reform and potential levers to overcome resistance. Finally, we synthesize key lessons from existing behavioral evidence to propose a set of practical solutions policymakers can adopt to implement subsidy reforms with stronger public support while upholding societal and political legitimacy. I.i. | Definition, rationale, and functions of subsidies For this policy brief, we define subsidies as any deliberate policy action or intervention aimed at lowering the net price of a product or service.1 This definition encompasses explicit transfers to the producer or seller, tax reductions at any stage in the value chain, and sales of a government-owned product (e.g., oil or gas) at a below-world-market price.2 Subsidies effectively obscure the real price of fundamental goods such as food, water, energy, public transport, and fuel, thus enabling poorer population segments to better afford their explicit costs.3 Subsidies allow governments to address real economic pains and public needs, and thus mitigate discontent across a population. Accordingly, governments adopt subsidies for a diverse set of both socioeconomic, explicit (i-iii) and more political, implicit (iv-v) reasons and motives,4 including: (i) improve households’ access to basic commodities; (ii) lower the cost of living and thereby reduce poverty and income inequality; (iii) enable local industries to compete in world markets (e.g., via access to cheap energy); (iv) create rents for cronies who own particularly energy-intensive industries (e.g., steel); and (v) buy legitimacy (e.g., social benefits in exchange for low political participation). Subsidies have often served an important role in shaping countries’ social contracts, especially in developing countries. Social contracts are agreements between the government and the public or societal groups on their rights and obligations to each other. Typically, social contracts stipulate that the government will maintain protection against threats (state authority), provision of basic services (state capacity), or political participation (state legitimacy) – or a combination of these – in exchange for citizens accepting its rule and complying with their obligations (e.g., paying taxes) and recognizing its legitimacy.5 In developing6 countries, subsidies formed the bedrock of many social contracts that were established to enable autonomy from Europe, socio-economic transformation, and the stability of governments.7 I.ii. | Drawbacks and pitfalls of subsidies The political utility and popularity of subsidies are often counterbalanced by the heavy budgetary burden they impose on many low- and middle-income countries,8 which makes it difficult for them to fund other social programs or productive investments.9 While the income many developing 7 countries generate from rents and natural resources has decreased considerably in recent decades, their populations have continued to grow, resulting in substantial budgetary pressures from funding subsidies.10 For decades, countries in the Middle East and North Africa, including in low- and middle- income countries, have channeled much of their social welfare efforts through subsidies (6% of GDP, on average)and significantly less on direct social transfers (just 0.7% of GDP).11,12 In Latin America and the Caribbean (LAC), energy subsidies alone amounted to about 1.8% of GDP, a figure that more than doubles to 3.8% of GDP when negative externalities are considered.13 Beyond constraining the fiscal space, poorly designed subsidies have a number of weaknesses and unintended consequences. First, their effects on poverty and inequality are usually more limited than those of direct cash and in-kind transfers.14 This is true in part because subsidies tend to primarily benefit middle- and higher-income groups, who consume more, rather than the poor and most vulnerable, who consume less.15 In addition, many subsidy schemes suffer from deficiencies in their transfer efficiency due to leakages and losses in the delivery process and apparatus.16 Moreover, because they encourage investments in energy-intensive rather than efficient modes of production, labor, or renewable energy, subsidy regimes often constitute adverse incentives for consumption, production, and investment.17 Indeed, energy subsidies for fossil fuels have risen up the international political agenda because of their counterproductive climate imperatives.18 Cutting inefficient subsidies and using the resulting resources to build basic infrastructure and serve the most vulnerable populations can have profound effects on fighting poverty. Economically, fossil- fuel subsidy reform would result in significant increases in gross domestic product (GDP) in both Organisation for Economic Co-operation and Development (OECD) and non-OECD countries. Socially, negative impacts could be offset by redistributing some of the costs saved toward social programs.19 For most countries, getting rid of fossil fuel subsidies would generate sufficient revenues to fund universal access to water, sanitation, and electricity.20 By one estimate, global fossil fuel subsidies in 2015 totaled US$322 billion – almost twice the global subsidies for renewable energy that year.21 One study suggested that removing fossil fuel subsidies and pricing carbon would fully finance India and Egypt’s sustainable development goals.22 Given the positive impacts of reforming net-harmful subsidies,23 such reforms have become part of mainstream policy dialogues. Catalyzed by broader consequences of economic globalization, such as the rapidly growing energy demand, rising oil prices, and the emerging agenda of universal welfare provision,24 this trend gained momentum amid the global economic crisis of 2008, which put pressure on governments across the globe to spend scarce revenues more carefully.25, 26 In 2009, the G20 pledged to “phase out and rationalize over the medium term inefficient fossil fuel subsidies while providing targeted support for the poorest”.27 Moreover, a minimum of 11 countries28 have committed to reforming their fossil fuel subsidy schemes in their intended nationally determined contributions in the Paris agreement.29 The need for reform was heightened by the economic fallout of the Covid-19 pandemic, particularly in the Global South, such as the Middle East and North Africa (MENA) region. But in this crisis, there rests an opportunity: Historically, across the globe, crises are often followed by ambitious economic reforms.30 However, the fact that subsidy reforms have proven politically difficult time and again, despite having an apparently strong rationale, highlights a lack of understanding among policymakers. Indeed, reforms often are adapted or reversed over time31 because of institutional or political barriers, popular backlash, concerns for vulnerable groups, and fierce lobbying by subsidy beneficiaries.32 In a telling showcase of the complexity of subsidy reform, Nigeria, backed by the International Monetary Fund (IMF), removed fuel subsidies at the beginning of 2012 – and swiftly felt compelled 8 to reverse course.33 The government deregulated prices to eliminate a thriving black market, erode smuggling to neighboring countries, and cut costs that had ballooned to $8 billion a year. Retail prices doubled overnight, drawing immediate protests across Nigeria’s major cities that quickly escalated into violence. The umbrella association of national labor unions called an indefinite strike.34 A mere two weeks after the reforms were implemented, Nigeria’s government reversed many of them, reducing prices by 60% and keeping fuel subsidies in place. This public backlash was by no means an isolated case: In 2012 alone, often-violent protests against reductions in fuel subsidies flared up in Indonesia, Sudan, India, and Jordan. Thus, a more comprehensive analysis is needed to understand why such subsidies exist – and persist.35 Focusing exclusively on the short-term economic costs of subsidies ignores their political, economic, and social utility: Economically inefficient subsidies might facilitate political (regime) stability that enables long-term economic growth.36 Yet it is particularly countries incapable of achieving this economic growth that are most likely to rely on subsidies and to struggle most with enforcing reforms, as they tend to depend more heavily on the political support of groups benefitting from existing subsidies. I.iii. | Toward a general framework of subsidy reform The Energy Sector Reform Assessment Framework (ESRAF) developed by the World Bank’s Energy Sector Management Assistance Program (ESMAP) offers a comprehensive framework for examining the various factors that contribute to the success of subsidy reforms.37 ESRAF provides a guide to analyzing existing energy subsidies in developing countries and assessing the impacts of subsidy reforms on the government budget, households, and industries, as well as the economy and the environment. Crucially, it also highlights the importance of the local context, specifically how the existing political economy and communication campaigns after the success of subsidy reforms.38 Yet, to achieve a more comprehensive picture, policymakers must investigate the factors that influence the opinions and actions of those who feel the effects of subsidy reforms. In addition to the objective, material effects of reforms, people’s subjective, felt sense of the reality of reforms will shape their opinions and behavior. A behavioral lens helps to sharpen the analysis beyond the theories and tools discussed by ESRAF, accounting for the structural, psychological, and social factors shaping the behaviors of policymakers as well as the public impacted by reform. Understanding how these factors shape capabilities (financial and otherwise), opportunities, and motivation to support subsidy reform is paramount to designing policy that will prevail despite the challenges described above. 9 II. | Behavioral diagnostic: Putting real people at the center of subsidy reform II.i. | Behavioral public policy process: Don’t suppose; diagnose A behavioral approach to public policy examines the social, psychological, and structural factors that affect what people think and do – for instance, how citizens react and change their behavior in response to a subsidy reform. Behaviorally informed policymaking is inherently human-centered and constructed around three core characteristics of human behavior: that behavior is dominated by automatic processes, shaped by internalized mental models, and rooted in social considerations. By analyzing citizens’ preferences and behavior – as well as how both are shaped by and interact with policies – we find creative and cost-effective solutions to the varied challenges facing policymakers during subsidy reforms.39 What barriers may keep people from accepting subsidy reforms? What levers can policymakers pull to increase citizens’ trust, understanding, and legitimacy amid such reforms? Designing policies with a behavioral lens can enable individuals to better process information, make decisions, and react to changes in the subsidy structure in ways that are conducive to their own well-being while allowing these necessary reforms to happen. Moreover, a behavioral approach enables policymakers to avoid decision traps, alleviate biases, and use innovative, low-cost solutions that address details in decision-making structures, service deliveries, and technologies. Such behavioral levers are often overlooked in standard policy design but can increase the effectiveness of programs substantially. Behavioral insights can help governments and administrations improve the way they analyze, design, and communicate subsidy reforms to sustain trust and ensure legitimacy. The evidence presented in this policy note confirms that a thorough understanding of the respective context is key to communicating such reforms effectively. The World Bank’s eMBeD team has proposed a behavioral public-policy process that outlines key steps to policy challenges. This process (see Figure 1) ensures rigor, impactful results, and continuous learning and adaptation. This process is structured in five steps that build upon each other in an iterative manner. Figure 1. Process for implementing a behavioral approach. 1. Identify Problems: Identify a behavior to be modified for a precisely defined population segment in a given setting. In the case of subsidy reform, what opinions and behaviors do you want to achieve? This involves deeply understanding the problem at hand: o What is the policy challenge we face (e.g., the necessity of subsidy reform despite current/anticipated public opposition)? How did it come about, and what sustains it? What functions do current subsidies fulfill? 10 o What is the outcome we aim to achieve (widespread support for reform, lack of public opposition, etc.)? Be specific! o Which groups and people are affected? Who are the potential winners and losers? Which groups hold political sway? Which groups are particularly vulnerable? o What behavior could help solve the policy challenge we face or achieve the target outcome (i.e., which target group should end up believing/doing what)? 2. Diagnose Bottlenecks: Next, develop hypotheses about the key factors that prevent or enable the desired decisions and behaviors. Combine quantitative and qualitative methods to gather, analyze, and interpret relevant data; identify barriers and levers of the target behavior empirically; and use deductive and inductive approaches to iteratively weave together opposing directions of analysis. In particular: o Zoom out to examine the social context in which decisions and behaviors are taking place: How do (shared) norms, narratives, beliefs, and identities that societies set for different groups shape people’s thoughts and behaviors regarding current subsidies and subsidy reform? o Zoom in to identify which specific thoughts, choices, and behaviors need to align to achieve the objective of the intervention: Which psycho-social bottlenecks (biases, norms, beliefs, etc.) may undermine individuals’ ability to engage in the intended behavior (e.g., supporting the reform)? o Which of the identified barriers and levers are hindering and enabling the target behavior the most? 3. Design and Experiment Solutions: Armed with a narrowed set of empirically validated hypotheses about barriers and levers, conceptualize and design a strategy, policy, or intervention to overcome the identified factors. The solutions should be designed in an iterative approach to find the most promising solutions. o What evidence and insights from behavioral sciences can inform the design of subsidy reform? How can we use the insights drawn from the behavioral diagnostic to design a subsidy-reform process that is likely to achieve the target behavior effectively and sustainably? o What are our best assumptions regarding the critical barriers that prevent the desired behavior pertaining to subsidy reforms? Accordingly, what are possible entry points for the intervention, such as before, during, or after the reform process? What existing programming (current economic and welfare policies) can the parts of the reforms, such as compensation schemes, be embedded in? o What risks and potential negative social, economic, or environmental second-order effects might this intervention have for the target population? What about the wider population? What can I change about the subsidy reform design to mitigate these risks? o What is a realistic timeline for the reform process? How can the reform be adapted to ensure its sustainability? 11 4. Assess Findings: Assess the effectiveness of the designed solutions in changing the target decision or behavior and overcoming identified barriers. Ideally, use experiments on a sample of the target population. Evaluate the results following valid and robust statistical techniques. o Which target group should I evaluate for effects—the broader public, powerful groups, or vulnerable ones? At what point in time should I expect to see the effects of reform? o Is it more appropriate/feasible to use qualitative, quantitative, or mixed-methods approaches? What are valid, reliable, and robust metrics for outcomes and impact? o Which qualitative methods from varying disciplines (focus-group testing, semi- structured interviews, etc.) are best suited to evaluating the effect of the subsidy reform? o Which quantitative methods (experimental and/or quasi-experimental) can complement the representativeness, complexity, and relevance of qualitative findings? How can I time these evaluations to get the best data on the effects of different components/policies that form part of the subsidy reform? 5. Learn and Adapt: Assess predefined and diagnosed hypotheses and adapt them, as well as the subsidy reform whose design they informed, according to the knowledge you gained. Restart the behavioral diagnostic pipeline reiteratively. o Does the evidence back up my hypotheses regarding successful subsidy reform? How should I adapt my hypotheses based on the evidence I generated? o How can I adapt the subsidy-reform design to be even more effective based on this additional evidence? Which policies need to be cut, adopted, or boosted? o Do you hold the additional goal of modifying other existing programs and policies? How can the tested, effective subsidy-reform policies be scaled-up to benefit the broader public or replicated in another context, either for other subsidies or in other countries? 6. Redefine & Re-Diagnose: Based on what you learned during the implementation, evaluation, and adaptation of your intervention, readjust your definitions of the target behavior and target population. o What have I learned about the policy challenge of subsidy reform, how it came about, and what successful and sustainable subsidy reform would look like? o Does this change the outcome I aim to achieve, the people I want to affect, or target behaviors I want to address? What have you learned about your hypotheses regarding barriers and levers of the target behavior? Use the quantitative and qualitative data, as well as other insights you gained to sharpen your hypotheses around these barriers and levers: o Zoom out again to reexamine the social context in which decisions and behaviors regarding existing subsidies and the reform are taking place, including (shared) norms, narratives, beliefs, and identities. o Zoom in again to redefine which specific thoughts, choices, and behaviors need to align to achieve the objective of the subsidy reform. 12 o Based on what you learned, which are the most important barriers and levers in hindering and enabling the target behaviors conducive to a successful subsidy reform? Drawing on behavioral insights and experts is beneficial throughout the whole process of subsidy reform.40 During the initial phase of policy discussions and project identification, it’s crucial to broaden the focus from technical measures to include broader factors that are essential to shaping decision making and behavior. Wide consultations with experts and stakeholders, including behavioral science specialists, can help to identify key behavioral barriers and levers throughout the reform process. Current conditions, attitudes, and subsidy-related behaviors can be assessed with surveys or other data collection activities, ideally disaggregating data by relevant sociodemographic segments (income, education, etc.) to shape targets and improve project design. Communication campaigns to raise public awareness of reform benefits present prime opportunities to apply behavior change strategies. Finally, the design of the implementation and communication strategy needs to incorporate both identified behavior-change opportunities and other relevant, more structural components. II.ii. | Defining the Problem and Target Audience An artful analysis of key stakeholders of subsidy reform As a first step in the behavioral diagnostic, policymakers should identify which decision or behavior they want to promote among a specific section of the population. Often, one key objective of the subsidy-reform process will be to ensure broader support of the reform by the general public. However, it might sometimes be more desirable and effective to focus efforts on a certain segment of the population, such as particularly vulnerable or powerful groups. This section discusses considerations regarding the target group. The extensive body of research on the optimal design of subsidy policies contrasts with the scarcity of systematic research on the political economy of subsidy reform, which is essential to effective policy design and implementation.41 The potential scope of reform is influenced by the interplay between incentives for policymakers and the government to reform subsidy schemes at potentially large political costs and the often-divergent incentives of distinct interest groups.42 Thus, it is advisable to focus on functional policy or regulatory changes that solve specific commitment, coordination, and cooperation issues and power asymmetries in the policy arena that hinder reform.43 If an in-depth stakeholder analysis is not feasible, a rapid assessment can map out key actors and their core interests and capabilities, how subsidies are delivered, and who is paying for or benefiting from them (including indirectly or illegally).44 The reform strategy should be adapted according to the analysis of who profits from current subsidies and to what degree (citizens, special interests), how powerful they are,45 and how likely they are to become an active opposition.46 To get a practicable grasp of the political, social, and economic context in which the subsidy reform is set to be undertaken, the analysis should focus on three levels: 1. The decision-making structure, institutional setup, (de facto) control over subsidies, and influence of interest groups – enhanced, if feasible, by a historical perspective on how these structures evolved; 2. stakeholder interests and dynamics to map groups’ ability to organize for or against reform and their relative losses or benefits due to subsidies, aided by a simple framework to infer conditions affecting the likelihood of successful reform; and 13 3. retracing the national track record with reform processes, mapping out historical factors influencing their success.47 One key success factor for subsidy change is a stable and strong stakeholder coalition to back up the reform. Governments should thoroughly analyze and work with the existing political economy, identifying and collaborating with key interest groups in favor of reform, and generating more support by tailoring policies to change the incentive structures of opposed or undetermined stakeholders — e.g., by creating popular alternative policies.48 Within this stakeholder coalition, it is crucial to ensure the complementary coordination of actions, strengthen cooperative behaviors, and prevent free- riding by building sustainable commitment.49 This can be done by changing incentives, reshaping preferences and beliefs, enhancing contestability, or organizing political pressure for reforms— whether top-down (elite bargaining), bottom-up (citizen engagement), or both. A behavioral journey map to build subsidy reform acceptance The next step in a behavioral diagnostic entails looking more closely into the specific decisions and behaviors that the target group needs to take along the way to achieving the desired outcome. Outlining key stages or moments on this journey sheds light on the thoughts, beliefs, emotional responses, and interactions within the environment that shape a person’s decisions and behavior at different times. The map also identifies barriers and levers that might either hinder or support the desired behavioral outcomes. It provides valuable insights into how policy changes can be designed and managed effectively to foster desired behaviors like positive engagement and minimize detrimental ones, such as resistance or non-compliance. Understanding the potential behavioral journey of citizens in response to a significant subsidy reform requires comprehensive mapping of decisions and behaviors before, during, and after implementation. Well-implemented reform that considers citizens’ behavioral journey is more likely to succeed and be accepted, reducing potential conflict and ensuring the best outcomes for all involved. Target outcome Citizens decide to support the reforms, understanding and appreciating the costs and drawbacks of the current subsidy scheme as well as the rationale for subsidy reform, and do not oppose, obstruct, or protest the reform process while adapting their behavior to the new compensation scheme. Before Implementation 1. Developing awareness of policies • The public becomes aware of discussions or announcements regarding subsidy reform, as well as the reasons for changing the current subsidy scheme. • Citizens may have a limited understanding of the details and implications of the reform but are aware that policy changes are being planned. 2. Seeking more information • Citizens seek out more information about the subsidy reform through formal or informal channels such as governmental information, press coverage or discussions with peers, neighbors, or family members to better understand the reasons behind the reform and its potential impact on their daily lives. 14 • Citizens gain a better understanding of the implications of the potential reforms, ways negative impacts may be mitigated, and the broader societal benefits of the reform, such as promoting fairness, reducing waste, or redirecting resources to more pressing needs. 3. Participating in or observing citizen engagement initiatives • Citizens may consider how they can participate in the decision-making process or advocate for their needs within the framework of the reform. • Governmental initiatives to meaningfully engage citizens in the process of changing existing subsidy schemes, designing compensatory policies and their implementation as well as communicating these changes can contribute to greater legitimacy and credibility in the process as well as better policies. • Support for subsidy reforms and adapting one’s behavior to the new status quo will partially be shaped by citizens’ perceptions of their ability to adapt to different changes (i.e., self-efficacy) and potential losses as a result of the reforms, both of which can be ameliorated by citizen engagement processes. During Implementation 4. Initial support for reform • Over time, citizens internalize the values underlying the reform, such as fairness, efficiency, or sustainability. • They come to see the reform as aligned with these values and as a necessary step toward achieving broader societal goals. • Observing the opinions and behavior of their fellow citizens, their norms regarding fair and appropriate subsidy policies as well as their own related behavior changes. • Citizens appreciate the legitimacy of the reform due to an increasing understanding of the rationale behind it and acknowledge the transparency and legitimacy of the process. • Citizens may begin to actively support the reform by participating in offline and online community discussions, signing petitions, or contacting their government representatives. 5. Adjusting behavior to accommodate increased prices • As the reform is implemented, citizens adapt to the changes in subsidy programs or services in ways conducive to their own and broader societal benefits. • Governmental policies, regulations and communications are set up in ways to ease and facilitate the adaptation to the new subsidy and compensatory policies. • This may involve reducing resource consumption or taking up programs designed to mitigate the impact of higher prices on poor and vulnerable households (e.g., cash transfers). After Implementation 6. Sustained support for reform • Even after the initial stages of the reform process, citizens remain engaged and support the reform’s continued and increasingly visible success. • They further internalize changes in subsidy-related norms, values and behavior, further aligning with the new status quo. 15 • This could include participating in community dialogue initiatives, staying informed about policy developments, and advocating for the ongoing improvement of subsidy programs and services. II.iii. | Diagnosing barriers to and levers for support for subsidy reform A behavioral framework for diagnosing barriers to subsidy reform With the public’s journey to acceptance of reforms mapped out, the next step in the behavioral process is to diagnose the structural and behavioral barriers that can impede a citizen’s journey. To this end, it is helpful to draw on a framework for conceptualizing different factors that contribute to decision-making and behavior when diagnosing barriers to support for subsidy reform and identifying potential levers to promote greater support for beneficial reforms. Figure 2. Conceptual representation of the relationship between the three dimensions of the COM-B model. The COM-B model, a comprehensive system for understanding behavior that has been applied to a wide range of policy challenges, offers a useful framework for this endeavor50 The COM-B model (Figure 351 posits that behavior and decision making (B) is a product of the interaction between three necessary conditions: capability (C), opportunity (O), and motivation (M)52Capability refers to an individual’s physical and psychological ability to engage in the activity concerned.53 Opportunity encompasses the external factors that make the behavior possible, including the social and physical environment. Motivation includes the processes that energize and54direct behavior, including habitual and emotional responses, as well as analytical decision-making. This model posits that “at any given moment, a particular behavior (such as demonstrating support for subsidy reforms) will occur only when the person concerned has the capability and opportunity to engage in the behavior and is more motivated to enact that behavior.”55 The COM-B model provides a flexible framework for understanding the factors that influence behaviors related to controversial policies, such as subsidy reform. By considering citizens’ capability, opportunity, and motivation, policymakers can better anticipate the potential effects of subsidy reform. The model can help guide a more comprehensive understanding of how individuals will respond to policy changes and, in turn, helps design more resilient and acceptable reforms. This will increase the odds of achieving the intended objectives while reducing controversy surrounding the 16 reform and thus avoiding a severe political backlash. Table 1 provides an overview of sub-components and relevant behavioral constructs for each of these three COM-B components. 17 Table 1. COM-B components and key bottlenecks and levers. COM-B Component Sub-components Behavioral Construct Capability Awareness of subsidy / Salience & availability bias compensatory scheme Access to communication channels Knowledge & skills to Mental bandwidth & choice understand and weigh policies overload / proposals Knowledge & beliefs Motivated reasoning Messenger effects Susceptibility to misinformation Self-efficacy to take Self-beliefs & agency advantage of policies Motivation Perceived benefit / harm of Monetary incentives subsidy reform & (compensation, net income compensatory scheme (to self effect of reform) and others) Non-monetary incentives Mental models, defaults & status quo bias Anchoring Present bias & hyperbolic discounting Risk & loss aversion Framing & negativity bias Perceived legitimacy of Input / process legitimacy subsidy / compensatory (citizen engagement, scheme participation, etc.) Output legitimacy (perceived effectiveness of policies) Perceived accountability of government Perceived fairness of subsidy / Fairness norms compensatory scheme Opportunity Social norms for support of Empirical expectations (belief subsidy / compensatory that others support / oppose scheme subsidy reform) Normative expectations (belief that others think they should support / oppose subsidy reform) Opportunity to act upon one’s Timing of subsidy changes and beliefs & perceptions compensatory policies Intention-to-action gap Capability is shaped by the knowledge people hold both about the current subsidy scheme and the subsidy reform, its rationale, and its consequences. Capability offers a useful lens for considering whether individuals possess the knowledge needed to understand and respond to the reform as 18 intended. Policymakers might consider recipients’ cognitive capability to understand the subsidy changes, or the physical capability to adapt to the alterations (for example, applying for substitute transfers). People’s cognitive bandwidth can curtail the extent to which they can acquire new information, understand the issue at hand, and clearly think about their own preferences or how to respond. Moreover, a plethora of heuristics and biases shape how people automatically think about these issues. Motivation and people’s acceptance of the reform are pivotal factors in determining whether they will act in ways intended by the subsidy reform. This requires evaluating both their reflective (conscious decision-making and evaluations) and automatic (emotions and impulses, grounded in associative learning) motivation. It might involve gauging the intrinsic motivation of stakeholders to adapt to the reform, whether they see the reform as beneficial to them or not, and how their emotions and habits might influence their behavior. Thus, the way government communicates about the rationale for reforms as well as reasons for its structure will shape people’s opinions about it. Moreover, trust in government plays a crucial role in whether people trust what the government says and does regarding the reforms. Input legitimacy, or how much people agree with the way decisions about the reform were made, is another factor shaping people’s opinion about it. Output legitimacy, or how much people agree with the final shape of the reform and its policies, is equally important. Finally, social norms around fairness, equality, and political action also shape motivation to accept reforms. Opportunity is shaped by the structural and political forces that determine how people can respond to policy changes resulting from subsidy reform. Opportunity depends on whether physical (accessibility, availability, and affordability) and social (including social cues and cultural norms) opportunities are conducive to recipients adapting to the reform. The timing of both the reform and compensatory schemes also helps shape public opinion and actions. Finally, social norms – what people perceive others think, believe, and are likely to do – play a huge role in shaping their own opinions and actions. In the next section, we elaborate on these behavioral bottlenecks for acceptance of subsidy reform and review evidence of solutions to mitigate their impact. 19 III. | Behavioral design: Conquering the complex conundrum of subsidy reform Following diagnosis of barriers, the next step in the behavioral approach is to design solutions tailored to the identified barriers. Here, we summarize behavioral insights that can inform the design and implementation of subsidy reform policies to improve their acceptance by the general public. We follow the same theoretical model from Section II, wherein we categorize all behavioral components into three dimensions of the COM-B model. We then focus on the respective sub-components of each, discussing their definition, relevant case studies, and evidence of how they shape people’s responses to subsidy reform. III.i. | Designing Solutions to Boost Capability People’s capability to respond to the subsidy reform is influenced by their understanding of both the existing subsidy scheme and the proposed reform, as well as their respective rationale and consequences. Subsequently, considering capability involves assessing if citizens have the necessary knowledge to comprehend and react appropriately to the reform, as well as the cognitive bandwidth to do so, which limits how much new information people can process to determine their responses or preferences. These are in turn shaped both by psychological factors and government communication. Policymakers should evaluate both recipients’ cognitive ability to grasp the subsidy changes and their physical ability to adapt, such as applying for alternative transfers. Various heuristics and biases automatically influence how people perceive and think about these reforms. Citizens’ awareness of the subsidy and/or compensatory scheme are shaped by salience and availability bias and citizen’s access to communication channels. Their knowledge and skills needed to understand and weigh policies or proposals is shaped by mental bandwidth and choice overload, their knowledge and subsidy-related beliefs, motivated reasoning, the information received by trusted messengers, and their susceptibility to misinformation. Finally, people’s self-efficacy to take advantage of policies is determined by their self-beliefs and agency. Awareness of Subsidy and Compensatory Schemes Salience and availability biases Barrier 1: Availability bias – People overestimate the importance and frequency of opinions or information that is easy to recall Lever 1: Salience – The right information stands out, is tangible and prominent Lever 2: Availability – The right information easy to remember and recall Barrier: A piece of information which is prominent or conspicuous directs people’s focus, perception, and decision-making to that information.56 Relatedly, the availability bias leads us to overestimate the importance of readily available or easily recalled information, significantly shaping our decision- making and perceptions.57 By changing the salience of particular aspects of reforms, we can change how citizens view them. 20 Policy Recommendation 1: Make gains, not losses, of subsidy reforms salient to citizens. Policy Recommendation 2: Ensure that citizens recall reasons for and beneficial effects of the subsidy reform, rather than reasons against it or its’ negative effects, e.g. by priming people by focusing debate on costs of current system, fairness norms and/or compensatory policies. Policy Recommendation 3: Design compensatory policies in ways that make the positive effects of the reform salient, e.g. providing each citizen a yearly transfer clearly linked to the reform. Solution: The salience and availability of certain aspects of subsidy reform – say, the immediate losses due to subsidy cuts or benefits from targeted social transfers – can significantly affect public perception and acceptance of the reform. Policymakers can influence public perceptions using communication strategies that are designed to make gains more salient than losses, focusing on the reform's advantages. In India and Iran, successful fossil fuel subsidy reforms were enabled by highlighting the salience of the reforms’ benefits through transparent and abundant information about them.58 Reinvesting revenues in programs that the population can see and experience will increase support; by contrast, economically sound targets, such as net gain by a general equilibrium effect, are too abstract.59 An example of concrete benefits is the case of Switzerland where tax proceeds from a CO2 levy were directly paid to households as uniform dividends. If the revenue from subsidy reforms is publicly earmarked to popular projects, this can further increase the salience of their positive effects and bolster support.60 A related phenomenon that can change people’s perception of an administration’s performance or a subsidy reform pertains to priming or using stimuli to influence individuals’ subsequent judgments or decisions. For instance, priming can selectively activate certain beliefs, values, or frames that influence individuals’ attitudes toward a (subsidy) reform, potentially shaping their support or opposition to it. One survey study in the United States showed that participants who were primed on the corruption or underperformance of bureaucracy tended to evaluate the performance of their administration less positively.61 Access to communication channels Barrier 1: Not reaching the right people – If messages are not shared via the right communication channels used by relevant stakeholders and societal groups, those won’t receive the messages Lever 1: Diverse communication channels – Using a set of different channels to communicate can help reach different sub-sections of society 21 Barrier: One crucial challenge for governments communicating about a subsidy reform is to reach people – particularly those most affected, as well as those who could become pivotal supporters or opponents of the reform. Yet it is also crucial to reach a broad and diverse subset of the population. The use of varied communication and media can help to reach the identified target audience(s).62 A 2013 International Monetary Fund study, for example, shows that a well-planned and executed communication campaign was an important factor in the successful implementation of energy subsidy reforms among 22 countries to ensure consensus, support, and changes in behavior.63 Policy Recommendation 1: Use a varied set of easily accessible and broadly visible communication mediums and channels and carefully target communications to the users of the respective channel. Policy Recommendation 2: Involving the relevant stakeholders in the design of communications via citizen engagement formats such as focus groups can help tailor effective and impactful messages. Solution: Accordingly, policymakers should strive to make use of a host of different channels (official communications, news, ads) and media (TV, social media, radio, print) to reach the identified target audience(s).64 A behavioral communications campaign around a natural gas subsidy reform in Ukraine by the World Bank highlights the advantages of accessible and diverse communication channels.65 It used citizen engagement to increase trust and legitimacy and to design more effective messages. Crucially, it distributed these tailored messages to the right audiences via a range of media channels. Similarly, in the case of Iran’s ambitious and successful subsidy reform, broad visibility, and information regarding the necessity of reform and compensatory measures was key. To regain economic competitiveness, Iran let the price of petroleum products increase drastically, by roughly four times.66 The resulting economic pains were mitigated by a structured cash transfer scheme67 and accompanied by careful government communications with various groups via a set of channels, including websites and hotlines set up to answer questions about the reform.68 The government emphasized the benefits to the country and its citizens, including increasing Iran’s economic competitiveness and thus creating jobs, as well as using its oil riches to more efficiently reach people’s purses.69 The high visibility of the reforms and channels to answer citizens’ questions about reforms that complemented the compensation schemes ensured widespread public backing.70 Knowledge and Skills to Understand Policies Mental bandwidth and choice overload Barrier 1: Mental bandwidth – Limited ability to process too much information at any given moment Barrier 2: Choice overload – Too many options make it hard to come to a decision Barrier: Mental bandwidth refers to the cognitive resources an individual has available to make decisions. If individuals are overwhelmed by other concerns or choices, they might have limited 22 cognitive resources to understand or adapt to subsidy reforms.71 The related phenomenon of choice overload occurs when an individual is presented with too many options, leading to indecision or poor choices created by the complexity.72 In the context of subsidy reform, if the new system requires individuals to make complex choices about which social transfers to apply for, they may experience choice overload, which in turn might constrain their mental bandwidth. This could result in sub- optimal decisions or resistance to the reform. Therefore, it's important to design and communicate subsidy reforms in ways that minimize cognitive load and simplify choices for those affected.73 Policy Recommendation 1: Focus on emphasizing a few important details of the subsidy reform, instead of providing too much information to citizens, both regarding the reasons for the reform and what citizens should do about it. Policy Recommendation 2: In designing compensatory schemes limit options for citizens to a set of few but easily understandable options. Policy Recommendation 3: Design the new policies in a pragmatic, iterative, and adaptable manner in view of people’s limited cognitive resources to be able to respond to inevitable difficulties as well as adapt the policies to increase and demonstrate their effectiveness, and in turn citizens’ support. Solution: The reform process should account for limits to the mental bandwidth of the general populace, administrators, and politicians who are planning, implementing, and responding to the reform. People often have a significant lack of knowledge about energy subsidies, especially those applied to fuels, as shown in an experimental study that tested several interventions aimed at increasing acceptance of energy subsidy reform across 11 Latin American and Caribbean (LAC) countries.74 About 44% of participants did not know if they had electricity or fuel subsidies in their country, and 64% reported not having them, though all the countries did. Here, it is important to strike a balance between not overloading citizens with information while providing enough knowledge to increase awareness. Across countries and kinds of subsidies, a broader, more comprehensive explanation of the negative impact of subsidies and possible future benefits of the reform led to more positive attitudes toward the reform than summaries of the same information. Another example highlights the need for smart implementation. India aimed to enhance the roll-out of its ambitious cooking gas subsidy reform by integrating processes, people, and technology, and thus demonstrating positive effects to different stakeholders. Since it was impossible to fully anticipate or prevent the inevitable difficulties of such a broad reform, it was built around pragmatic, iterative steps in line with a broader vision: reducing the fiscal burden of subsidies, targeting them more effectively, and expanding access to clean cooking fuel, especially among the poor. Knowledge and beliefs Barrier 1: Lack of knowledge – If people lack the relevant information and knowledge, they won’t change their beliefs or behavior 23 Barrier 2: Wrong beliefs – If people don’t hold beliefs in line with the subsidy reform, they won’t support it Barrier: To accept the need for reform and respond to policy changes according to the intentions of policymakers, people need to hold correct beliefs and knowledge about planned reforms. Yet citizens often lack information about the positive effects of reforms, such as the environmental effects of pricing pollution75 or the incidence of subsidies.76 For people who know less about the current subsidy regime, it is easier to imagine negative consequences of a reform.77 Increasing people’s knowledge or awareness of a situation can thus help them behave in ways more conducive to the goals of policy reforms.78 Policy Recommendation 1: Build a broad and comprehensive campaign to raise awareness about and knowledge of key points of information regarding the subsidy reform, how people might be affected and what they can do to respond well to them. Policy Recommendation 2: Ensure broad press coverage in a diverse and varied set of mediums too reach different people. Solution: A concerted, comprehensive communication strategy is key to raising awareness and building acceptance. It can be particularly effective to tailor information interventions and training to specific communities, such as low-income ones.79 One such example is the natural gas subsidy reform in Ukraine, where the World Bank provided technical assistance in creating a behavioral communications campaign.80 Its measures were pivotal in boosting public understanding of the subsidy reform, how people could mitigate its impacts (e.g., by saving energy), and how low-income households could access compensatory social assistance mechanisms. The campaign included an assessment of public attitudes toward the reform, workshops to tailor key campaign messages, training sessions for journalists, the extensive monitoring of media channels to ensure good press coverage, and animated print, internet, and TV ads.81 Motivated reasoning Barrier 1: Motivated reasoning – Decisions and beliefs are influenced more by prevalent emotions, desires and opinions than by rational or objective analysis which makes it hard to change them Barrier: People’s desires and emotions influence their beliefs and decisions much more than the other way around. This phenomenon, called motivated reasoning, leads people to process information in a biased manner that supports their pre-existing views or desired outcomes.82 Rather than seeking truth in an objective fashion, people tend to arrive at conclusions that they wish to be true. Emotions can significantly influence people’s responses to events, including policy changes, as affective events theory posits.83 Moral judgments, for instance, are often driven by intuition rather than rational deliberation, and motivated reasoning appears to drive our moral and ethical judgements, too.84 In 24 the political realm, motivated reasoning leads to confirmation bias in political belief systems, as individuals tend to seek and interpret evidence in ways that confirms their pre-existing beliefs.85 Relatedly, people sometimes change their views about a problem if the suggested policy solution contradicts their ideological predispositions, a phenomenon known as solution aversion.86 Policy Recommendation 1: Leverage motivated reasoning by aligning reforms with individuals’ desires and values, e.g. by emphasizing how subsidy reforms support widely held values, such as fairness, environmental sustainability, or economic development. Policy Recommendation 2: Use messages and stories that evoke the benefits of and positive emotions towards the subsidy reform, such as optimism regarding economic progress, support for equity and fairness, or pride in national leadership on environmental issues. Solution: Moral foundations theory suggests that appealing to moral values can be a powerful motivator for changing opinions and behaviors.87 More specifically, emphasizing how subsidy reforms support widely held values, such as fairness, environmental sustainability, or economic development, can leverage motivated reasoning by aligning reforms with individuals’ desires and values. Using messaging that evokes positive emotions associated with the effects of subsidy reform, such as optimism for economic improvement or pride in national leadership on environmental issues, can further boost support.88 Indonesia’s successful fuel subsidy reform relied on communicating the benefits of reallocating subsidy funds to more critical sectors, like healthcare and infrastructure. The government used a narrative approach, highlighting stories of individuals who would benefit from improved services, thereby generating positive emotions and support for the reform.89 Similarly, in implementing its far-reaching subsidy reform program that replaced subsidies with cash transfers, the government of Iran emphasized the equity and fairness of the new system. This emotional and value- based framing, which appealed to the public's desire for social justice and equality, helped garner public support for the reforms despite initial skepticism.90 Messenger effects Lever 1: Trusted messengers – If people learn new information from people they trust, this can increase trust in and support for the subsidy reform process among different subsections of the population. Barrier: Trust is the glue that holds societies together.91 When people say they trust someone, this implies they believe the other person will likely behave benevolently toward them. The established credibility and community rapport of trusted messengers – such as experts, celebrities, sport stars, politicians, religious authorities, or influencers – can increase trust in government if they communicate governmental messages, particularly during significant policy changes, like subsidy reforms.92 Compared to faceless government announcements, their endorsements are more likely to be believed and accepted by the public. They thus act as vital conduits for disseminating information and shaping the public discourse to ensure the rationale, benefits, and mechanisms of the subsidy reform are accurately communicated and understood. 25 Policy Recommendation 1: Recruit credible, likable, and trusted messengers that speak to a wide range of society, including local leaders, sportspeople, media personalities, and actors. Where feasible strengthen their public speaking skills and abilities to draft captivating narratives. Solution: To lead the charge in shifting norms around responses to the subsidy reform, policymakers should recruit sources and messengers that are highly credible, likable, and trusted across society or among target groups, such as prominent local leaders, sportsmen, broadcasters, and actors.93 These public influencers should have strong public speaking skills and the ability to address emotions and tell persuasive stories.94 Messaging around the benefits of vaccination in India, for example, was bolstered by the support of India’s prime minister, Narendra Modi. Another study of a vaccination campaign found that various messengers—including experts, celebrities, and religious authorities—had positive effects, while a combination of experts and religious leaders proved most effective, inducing a 61% increase in vaccination intention. Credibility, defined as a combination of perceived trustworthiness and expertise, also shapes people’s evaluations of information campaigns and appeals about energy conservation.95 If messages were perceived to come from a high- rather than a low-credibility source (e.g., a public service commission versus a local electricity utility), they were more effective in inducing people to ask for further information about or actually increase their energy conservation.96 Susceptibility to misinformation Lever 1: Misinformation – The prevalence of wrong information and fake news distorts peoples’ knowledge, opinions and beliefs regarding the reforms Barrier: The spread of mis- and disinformation about the impacts of subsidy reforms poses a serious threat to reform success. Misinformation can distort citizens' perceptions of the reform's rationale and objectives. When individuals are exposed to inaccurate information about the reasons behind subsidy reform or the necessity of change, they may form misguided beliefs or misconceptions that impede their ability to understand and support the reform's goals. Policy Recommendation 1: Familiarize citizens with prevalent yet misleading arguments against subsidy reform by preemptively exposing them to a version of the inaccurate narratives, then provide them with strong counter- arguments rebuttals to those arguments (pre-bunking). Solution: Pre-bunking is a psychological strategy which equips individuals to resist persuasion or influence by preemptively exposing them to a weakened form of an argument that opposes their beliefs or understanding and then providing rebuttals to those arguments.97 Pre-bunking is also referred to as information inoculation, drawing on the metaphor of a medical inoculation, where a weakened form of a virus is used to build immunity. Like its medical parallel, pre-bunking aims to 26 strengthen an individual’s beliefs to resist future persuasion attempts by familiarizing them with the tactics and strategies that might be used to challenge their views. One example pertains to a prevailing gap between what the public believes to be a scientific debate around climate change and the broad scientific consensus on the topic.98 The study demonstrated that people who were exposed to a message around the scientific consensus adapted their beliefs in that direction. This adaptation was more pronounced if the message was combined with light inoculation (a weaker, less comprehensive, and detailed counterargument) – and even more so if combined with strong inoculation (a more robust and compelling counterargument). Moreover, another study by the same authors showed that exposure to scientific consensus did not cause psychological reactance, as is often theorized in the literature.99 Self-Efficacy to Take Advantage of Policies Self-beliefs and agency Barrier 1: Self-beliefs – Limiting self-beliefs make people more likely to feel overwhelmed by policy changes and can increase their resistance towards them Lever 2: Lack of agency – People who lack a (perceived) sense of agency will be less likely to think that they can effectively change their behavior in line with changes in the status quo or existing policies Barrier: Self-beliefs and agency play critical roles in shaping individual responses to policy changes, including subsidy reform. Self-beliefs refer to an individual's perceptions of their capabilities and worth,100 including their self-efficacy, or ability to conduct certain actions to achieve their objectives.101 Agency refers to people’s capacity to make their own choices, act independently, and shape their lives. A person's self-beliefs and agency can significantly influence their response to subsidy reform, since people with high levels of perceived agency feel they have control over how changes affect them, which can lead to greater acceptance of reforms.102 If they believe they have the freedom and ability to successfully navigate changes and adapt to the new policy, they are more likely to embrace the reform. Policy Recommendation 1: Provide citizens with stories about how people like them successfully adapted to the subsidy reform. Focus on vulnerable and minority groups who might be strongly affected by the reform or hold a particularly low self-esteem and sense of agency. Policy Recommendation 2: Engage citizens in the design, roll-out and evaluation of the subsidy reform, e.g. in inclusive processes such as participatory budgeting, increasing their sense of agency and self-esteem as well as making the policies more user-friendly and effective. Solution: Measures are needed to mitigate citizens’ insecurities and build their confidence. Women and people from disadvantaged backgrounds are particularly prone to low self-efficacy. Exposing them 27 in outreach and communications campaigns to people who have navigated these changes successfully, including empowered role models or people they know, can mitigate their doubts.103 The effects of compensatory policies, for instance, can be increased, and their costs lowered, if information and social media campaigns encourage more eligible people to access them while nudging non-targeted, wealthy groups to opt out.104 In addition, involving people in the budget-allocation process can strengthen their self-efficacy and sense of agency, and, in turn, their support for subsidy reform. A celebrated example of participatory budgeting comes from Porto Alegre, Brazil, where citizens are directly involved in deciding how a portion of the city budget is spent. This process includes regular public meetings where citizens can propose and vote on projects, ranging from infrastructure improvements to social programs. The direct involvement of ordinary citizens in budgetary decisions has led to a heightened sense of self-efficacy: seeing tangible outcomes from their participation reinforcing citizens’ belief in their ability to effect change.105 III.ii. | Motivation – Perceived benefits, legitimacy, and fairness People’s motivation shapes how they respond to subsidy reform. Motivation encompasses both their reflective motivation (conscious decision-making) and automatic motivation (emotions and impulses from associative learning). To anticipate citizens’ response to reform, one should assess their intrinsic motivation to adapt, their perceptions of the reform’s benefits, and the likely effect of their emotions and habits on their actions. Government communication about the reform’s rationale and structure will also significantly influence public opinion. Trust in government is essential for people to believe in the reform efforts. Input legitimacy, or public approval of the decision-making process, and output legitimacy, or approval of the reform's outcomes, are key to shaping the response to reforms. Additionally, social norms around fairness, equality, and political action play a significant role in whether people will accept the reform. A range of behavioral factors affect people’s motivation. How people perceive the benefit or harm of subsidy reform and compensatory scheme, both to themselves and others, depends on monetary incentives (i.e., compensation), non-monetary incentives, their mental models, defaults and the status quo bias, anchoring, present bias and hyperbolic discounting, risk and loss aversion, as well as framing and negativity bias. The perceived legitimacy of the subsidy reform and compensatory scheme is shaped by input or process legitimacy (citizen engagement, participation, etc.), output legitimacy (perceived effectiveness of policies), as well as perceived accountability of the government. Whether citizens perceive the subsidy reform and compensatory schemes as fair is determined by the fairness norms they hold. Perceived Benefit / Harm of Subsidy Reform and Compensatory Schemes Monetary incentives Lever 1: Financial incentives – Money or similar monetary rewards for certain behaviors increase the likelihood that people act accordingly Barrier: It often is neither feasible nor desirable to remove subsidies entirely. Compensation for negative welfare effects of subsidy reforms is a key factor whether efficient policies are accepted.106 If such policies are perceived as an expression of the social contract that gives equal rights to all 28 citizens and ensures its provision duty, they can strengthen citizens’ perceived trust, reliability, and legitimacy of the government.107 Who pays for the subsidies – and who would be affected by the reforms – is another important driver of how likely they are to be retained or reformed.108 If, for instance, crucial stakeholders profit from the status quo and would lose from the reform, their opposition can undermine reform efforts. Policy Recommendation 1: Offer some compensatory policies and programs to ensure subsidy reforms lead to a fair economic and social outcome, e.g. in the form of effective, efficient, and easily implementable cash transfers. Policy Recommendation 2: Focus these compensatory programs to support societal groups that are most vulnerable, detrimentally effected by the reform or most relevant for its sustained success yet ensure that every citizen receives some money to ensure broad support. Solution: Carefully designed and generous compensation schemes focused on the most vulnerable segments of society can mitigate negative effects for these people109 and thus avoid a vicious cycle of deprivation.110 Such schemes can mitigate opposition to subsidy reforms.111 Household (expenditure) surveys can help to tailor the reform to the actual needs.112 Such targeted transfers can also strengthen equity.113 Progressive carbon taxes, which can hurt vulnerable households, are a good example: If some of the money saved is distributed via lump-sum payments, the bottom 80% of households would be better off, and the lowest 20% by a significant margin.114 On the other hand, “pareto improvements” that make all economic actors better off are often illusive due to their (unobserved) heterogeneities.115 Second-best options, such as universal cash transfers116, can be more feasible politically and administratively.117 Indeed, it might be necessary to settle for second-best and hybrid reform strategies (such as universal cash credits). Indeed, these appear to be commonly used, as they are more feasible politically and administratively.118 Building programs on existing social safety nets can help distribute revenues effectively and efficiently.119 Such lump-sum cash transfers are progressive, boosting equity, albeit less so than targeted transfers.120 They are often more reliable (no targeting costs, manipulation, or corruption) and more effective in terms of poverty reduction (no error of exclusion), social inclusion, and cohesion.121 Moreover, social policies that are spread across wider sets of the population are often more popular with the broader public.122 Most people (and particularly the less well-off) prefer cash-based transfers to in-kind benefits.123 Finally, it’s equally crucial to strike a balance between targeting accuracy, short- term effectiveness, and sustainability. Hybrid solutions124 that focus on local conditions and building automatic or deliberative adaptive capacity are needed.125 Comparing subsidy reforms in Morocco, Egypt, and Iran between 2010 and 2017 shows how different approaches to reform led to different perceptions of their benefits.126 While all three countries had a similar subsidy structure and substantially reduced their subsidy spending, each followed distinct strategies to minimize opposition to reforms. Both Morocco and Iran tried to preserve their social contract as much as possible, explaining the need for reforms to raise awareness and acceptance, and implementing compensatory measures, such as a conditional cash transfer scheme. Egypt, by contrast, radically dismantled its subsidy schemes with only limited compensation via conditional, less- 29 generous cash transfers. It relied on repression and a narrative of collective security to quell opposition, transforming the social contract from a provision to a protection pact. The case of Indonesia emphasizes how the perceived (net) benefit of subsidy reform and compensatory schemes, particularly among pivotal interest groups, can shape the public response to reforms. As one of the top fossil fuel subsidizers,127 Indonesia repeatedly tried to reform its subsidy schemes. However, fuel price hikes played a key role in bringing down the Suharto government in 1998.128 Later subsidy reforms aimed at ameliorating the political risk with alternative forms of redistribution.129 Compensatory schemes often focused on the poor, a group that rarely has played a crucial political role in the country. In contrast, protests against fuel subsidy reform often have been led by groups that organize through existing networks, such as students, trade union members, and transport companies. Conscious of political forces that could determine their success, when Indonesia introduced subsidy reforms in 2005 and 2008, it raised prices but did not eliminate subsidies entirely. It also introduced direct cash transfers (to those below and just above the poverty line), as well as increasing funding for schools, village infrastructure, and health insurance. Changing people’s perception of their net benefit, combined with the popularity of the compensatory programs, likely helped to prevent protests. Non-monetary incentives Lever 1: Non-monetary incentives – Incentives beyond money such as public recognition and praise can change people’s opinions and behavior Barrier: Non-monetary rewards refer to incentives and benefits provided to individuals that do not involve direct financial compensation. These rewards can include recognition (e.g., in the form of praise), access to certain services, opportunities for personal growth, social benefits, improved living conditions, or the promise of improved societal outcomes.130 Such benefits have value for citizens and influence behavior.131 Some research even suggests they often are more effective than monetary incentives at producing durable behavior change over the longer term.132 A large part of people’s perceived identity is rooted in their social identity, or their individual self- concept derived from belonging to social groups.133 People’s yearning to belong to a group (such as family, friends, sport teams, or religion) is a core psychological need that functions as a powerful driver of behavior: People long for strong, stable relationships, to give and receive affection, and to be part of something beyond themselves.134 The need to belong is so great that we direct much of our behavior to satisfying it, which manifests in our needs for power, intimacy, approval, achievement, and affiliation.135 Thus, what people think and do is shaped by the norms, goals, and needs of their in- group. In this process of self-stereotyping, individuals increasingly adopt features of salient groups.136 Accordingly, by emphasizing relevant groups’ support for subsidy change, policymakers can increase public support. Moreover, when making decisions, people often rely on mental shortcuts related to emotional responses. The affect heuristic is part of people’s fast, effortless, automatic, and emotional thinking.137 Indeed, since emotions help people make decisions quicker, more efficiently, and with less cognitive effort, they tend to fall back on the affect heuristic when they have fewer resources or time to think 30 through a problem—for instance, when relying on positive or negative feelings about different options.138 Policy Recommendation 1: Publicly recognize the citizens and groups of citizens that adapt to and are supportive of reforms. Solution: If considerations indicate that cash-based social safety nets are an inadequate option, other compensation mechanisms may be used, such as energy subsidies targeted to the poor (e.g., electricity lifeline rates, low prices for the poor only).139 Non-monetary incentives can also increase acceptance and adaptation of the reform, such as publicly recognizing the contributions of certain citizens to society, such as improved economic stability or fairness.140 Public recognition for individuals and businesses that successfully adapt to subsidy reforms—for example, with certificates of recognition, acknowledgment in the media, or inclusion in a “green” or “sustainable” registry—could increase people’s compliance. Mental models, defaults, and the status quo bias Barrier 1: Mental models – Pre-existing ways of thinking about what is right or wrong Barrier 2: Status quo bias – People tend to favor keeping things as they are over changing them, perceiving changes primarily as risks or losses Lever 1: Defaults – People tend to act consistently in predictable patterns and habits, for instance in response to certain policies Barrier: Mental models are internal representations that individuals use to understand and interact with the world around them. Mental models include deeply ingrained assumptions and images, grounded in past experiences, beliefs, and knowledge, that guide our actions and decisions.141 In the context of subsidy reform, mental models determine how individuals perceive the necessity, effectiveness, and fairness of the reform process. People are more likely to accept changes that align with their existing mental models.142 Default assumptions, which are often part of our mental models, are the unchallenged beliefs and automatic thought patterns we fall back on when faced with uncertainty.143, 144 These assumptions can act as a baseline against which we judge new information. Ease and inertia tend to promote the selection of default options; thus, default assumptions tend to guide behavior without restricting choices.145 In subsidy reform, default assumptions might include beliefs about one’s entitlement to subsidies or the role of government in providing economic support.146 Relatedly, the status quo bias describes the common tendency to resist change and prefer the current situation over alternatives. Due to the perceived risks or uncertainties associated with change, people tend to do nothing or choose the default option.147 The current political equilibrium can be sticky and hard to overcome due to historical path dependencies, the structure of the political economy, and the 31 incentive structures of key stakeholders and powerful interest groups that resist reform.148 Due to the political risks of changing the status quo, even a successful reform would have limited political gain – thus giving policymakers incentives to avoid reform. The status quo bias helps to explain why efficiency-enhancing economic (subsidy) reforms are often unpopular and hard to achieve, particularly if it isn’t clear beforehand whom the reform will benefit or harm.149 Policy Recommendation 1: Run campaigns which place potential reforms within a broader context of fiscal sustainability and social equity in line with the status quo and people’s existing beliefs and opinions. Policy Recommendation 2: Design subsidies and communications according to or gently adjusting people’s mental models, e.g. by framing reforms in line with familiar contexts or gradually introducing concepts that reshape existing models toward more sustainable and equitable subsidy systems. Policy Recommendation 3: Make enrolment in compensatory programs automatic to ensure equity and lower information and search barriers. Solution: In countries with limited trust in institutions, automatic thinking will often prompt negative assumptions that undermine public support for reform.150 For example, across various survey studies in LAC countries, people expressed opinions and preferences about gas subsidy reform regardless of the level of information available to them.151 One solution is to design subsidy reforms in ways that align with or gently adjust people’s mental models. This might mean framing reforms within familiar contexts or gradually introducing concepts that reshape existing models toward more sustainable and equitable subsidy systems. In Morocco, the government’s approach to phasing out fuel subsidies in 2013 involved a comprehensive communication strategy that framed the reform within the broader context of fiscal sustainability and social equity. By linking subsidy reform to widely understood and accepted concepts, such as economic health and fairness, the government aligned the reform with existing mental models, facilitating public acceptance.152 One way of leveraging defaults is to automatically enroll people in compensatory schemes, so that a greater share of them will benefit from the upsides of reform. The principle has been effectively used in green energy programs, as in Germany, where setting the default choice to more expensive “green” energy increased its purchase nearly tenfold.153 Framing subsidy reforms in a way that makes the reformed state appear as the new status quo can help overcome resistance. This can involve phased implementation, where gradual changes slowly shift perceptions of what is considered the status quo. In the removal of fuel subsidies in Indonesia, the government employed a gradual approach to increase fuel prices. In doing so, it leveraged the status quo bias by making each phase of the reform seem less drastic and more acceptable as the new norm.154 Anchoring bias Lever 1: 32 Anchoring bias – People rely heavily on certain references in building opinions or making decisions, often the first piece of information they are given about a topic Barrier: People tend to rely disproportionately on initial pieces of information, known as “anchors,” when making decisions. Once set, an anchor bends subsequent judgments and estimates in its direction, significantly shaping subsequent decisions.155 In the context of subsidy reform, anchoring can impact how the public perceives the necessity, fairness, and impact of policy changes. For example, if initial discussions about subsidy cuts focus on potential negative impacts, such as increased costs to consumers, this information may become an anchor, shaping subsequent attitudes and opinions about the reform, even if compensatory measures or long-term benefits are introduced later. Moreover, if citizens are accustomed to a certain level of subsidies, that value will serve as their anchor, and they will evaluate any proposed changes in relation to it, irrespective of potential long- term benefits.156 Policy Recommendation 1: When running communications, establish advantageous reference points by comparing new prices to the real, unsubsidized prices in neighboring countries or comparing the costs of abolished subsidies to other, desirable public expenses such as education. Solution: It is important for policymakers to be aware of the power of anchors and carefully frame communication and implementation strategies. For example, they might establish new reference points to serve as more favorable anchors, such as examples of lower, more targeted subsidies that had positive outcomes. In Iran, for instance, showing the true costs of energy for several months prior to the reform served as a helpful anchor.157 A focus on long-term benefits, such as environmental sustainability, improved government fiscal health, or the reallocation of funds to social programs can also serve as a helpful anchor. Present bias and hyperbolic discounting Barrier 1: Present bias and hyperbolic discounting – People tend to prefer immediate, smaller benefits to larger future benefits Barrier: People prefer smaller, immediate rewards over bigger ones in the future, a cognitive bias commonly known as present bias or hyperbolic discounting.158 This bias can undermine long-term planning and decision-making, including support for policy reforms that require short-term sacrifices for long-term gains. The bias leads citizens to oppose subsidy reform if the benefits of reform (e.g., more targeted social transfers, improved fiscal health) are perceived as distant or uncertain compared to the immediate perceived loss of subsidies.159 Policy Recommendation 1: Implement compensatory policies at the same time, if not earlier, than the subsidy reforms, to ensure the benefits are felt earlier than or as early as the drawbacks. 33 Policy Recommendation 2: In communications, emphasize the immediate benefits of the program. Policy Recommendation 3: Slowly phase in subsidy cuts in a manner that minimizes people’s sense of immediate losses. Solution: To craft reform strategies that account for these biases, policymakers can emphasize immediate benefits of the reform (disposable income, investment in other priorities) or phase in changes in a manner that minimizes immediate perceived losses.160 Even better, they can introduce compensatory schemes, tax incentives, or immediate access to services. Iran took this approach with cash transfers designed to alleviate burden on the poor from increased energy prices during 2010 reforms. And in December 2010, the Iranian government transferred money into households’ bank accounts to minimize upcoming increases in energy prices, though the money could not be withdrawn before the reforms took effect. Risk and loss aversion Lever 1: Risk aversion – People tend to shy away from risks and prefer certain over uncertain outcomes, even if these are more beneficial on average Lever 2: Loss aversion – People weigh losses more than gains of a similar size Barrier: People tend to prefer a certain option to an uncertain one, even if the uncertain option is expected to lead to better outcomes, on average.161 This risk aversion often results in opposition to changes in existing subsidies, as citizens prefer the certainty of the current scheme over the uncertainty of reforms designed to provide long-term benefits or address inefficiencies.162 Risk aversion partly explains why framing that focuses on the negative effects of current subsidies might be more effective than framing focused on future gains, as the former doesn’t trigger people’s aversion to risks.163 Similarly, loss aversion – people’s tendency to prefer avoiding losses to acquiring equivalent gains – can increase opposition to reform.164 People generally demand more to give up a certain entitlement than they are willing to pay for it.165 If cuts to general subsidies are compensated by more targeted and limited social transfers, citizens may perceive this as a loss, even if the new system is designed to be more efficient or equitable.166 The costs of the reform should be as diffuse and distributed as possible, while the benefits should be tangible and concentrated.167 Policy Recommendation 1: In communications, emphasize the certainty of compensatory programs and benefits of reforms to change citizens’ risk assessments as well as the uncertainty of sticking to existing subsidies. 34 Policy Recommendation 2: Implement subsidy reforms gradually or through pilot programs to reduce their perceived risks among citizens, allowing them to warm to the changes incrementally by demonstrating limited risks and providing tangible evidence of the reform’s benefits. Policy Recommendation 3: In communicating and implementing subsidy reforms, highlight immediate and tangible benefits, distribute compensation before losses are felt, and make the true costs of goods salient, framing reform around monetary wins for the public. Solutions: Risk aversion emphasizes the importance of effective communication and transitional support in managing risk perceptions during such reforms by highlighting the negatives of current subsidy schemes and avoiding messages that highlight the risks of reforms.168 For example, an energy-saving intervention in Denmark combined smart meters with salient information framed around losing money through energy use reduced energy demand by 7–11% percent compared to unframed information.169 It can also help to implement subsidy reforms gradually or through pilot programs to reduce perceived risk. This approach allows the public to become accustomed to changes incrementally and provides tangible evidence of the reform’s benefits. In 2013, Iran began reforming its widespread subsidies of fuel and bread by introducing a targeted subsidy program aimed at mitigating the impact on the poor while reducing the government’s fiscal burden. The government employed a phased approach, initially launching pilot programs in select regions to demonstrate the feasibility and benefits of the reform.170 Policymakers must carefully communicate and implement subsidy reforms, highlighting immediate and tangible benefits, distributing compensation before the loss is felt, making the true costs of goods salient, and framing reform around monetary wins for the public. In Iran, various steps were taken to ameliorate the effects of loss aversion. When implementing universal, easy-to-access compensation (70 million Iranians, or >90% of the population, applied), the government gave citizens their first payment one month before the reform increased prices so that gains would loom larger than losses. It helped that these transfers added up to 28% of median per-capita expenditures of a household of four and helped lift millions out of poverty.171 Framing and negativity bias Barrier 1: Negativity bias – People tend to weigh negative experiences, information, or perceptions stronger than positive ones Lever 1: Framing – How people perceive, interpret and react upon information depends on how it is presented Barrier: People react differently to the same information depending on how it is presented, or “framed,” evidence of the considerable influence of context and delivery on perception and decision- making.172 The negativity bias describes the common tendency to give more weight to negative 35 experiences, information, or perceptions than positive ones.173 It can lead individuals to focus more on potential losses or drawbacks associated with subsidy reform than on potential benefits, like increased efficiency or fairness. The case of a gas subsidy reform in El Salvador highlights the power of the negativity bias. The population had an overall negative perception of the reform before changes were implemented, despite compensation payments via rebates on electricity bills that outweighed the additional gas costs for most households. Negative perceptions were likely due to mental accounting: people earmark certain savings and expenses into separate mental “accounts,” which are often weighed differently.174 Policy Recommendation 1: Ensure that messages regarding the reform are framed according to people’s preferences, such es economic progress, fairness, and environmental protection. A thorough analysis, such as a behavioral diagnostic, can help to gain the necessary understanding. Policy Recommendation 2: Use language and terms that are less controversial and have a positive connotation, e.g. talking of “levy” rather than “tax”. Policy Recommendation 3: Emphasize the negative effects of the current subsidy regime, not only focusing on the benefits of the reform. Solution: To maximize acceptance, subsidy reforms need to be framed savvily, based on a thorough behavioral diagnostic and analysis of the beliefs and preferences of stakeholders and citizens.175 A depoliticized, externally driven framing of the need for reform should be complemented with a dominant narrative stressing the benefits of the reallocation for the public (economic, efficiency, fairness, environmental) and individual citizens (tangible cash transfers).176 It is generally effective to frame subsidy reform not as end in itself but as a means of achieving lasting economic and social progress.177 Popular terms can significantly change views of the very same policy: for example, a carbon price could be called a “CO2 levy” or “fee and dividend”178 instead of the unpopular “tax.”179 In addition, highlight how the social contract is upheld or even improved by the reform by investing money in more important, sustainable, and popular areas. Underscoring the importance of communication, a 2013 IMF study, for example, found that a well- planned and executed communication campaign was an important factor in the successful implementation of energy subsidy reforms among 22 countries.180 And an experimental study on subsidy reform in 11 LAC countries showed that strategic communication significantly increased people’s support for reform, while a control condition with no communication surfaced a deep aversion to removing subsidies.181 Using similar methodology across 12 countries around the globe, message framing experiments highlighted the effectiveness of messages about efficiency, equity, and environmental impact of subsidies to increase support for reforms.182 Framing a subsidy reform around the social contract increased acceptance of a fuel subsidy reform in Egypt. Government communications highlighted that fuel subsidies were being eliminated to support those people most in need (“The poor need the money more than the average recipient”) and invest 36 in education and infrastructure (“78% of Egyptians don’t have proper sanitation, we should prioritize this and oppose wasteful subsidies”). Similarly, in Cape Town, South Africa, water-conversation messages were tailored by creating effective frames for different personas.183 This resulted in water savings of 600 l/month for the poorest and 900 l/month for the wealthiest households. This effect, which persisted for more than two years, was equivalent to the impact of a 15% price increase, at negligible cost. Because lack of knowledge about current policies exacerbates negativity bias, providing information can ameliorate it.184 Beyond positive framing strategies, it can help to present successful real-life examples or case studies of subsidy reforms that are relatable and resonate with citizens’ context and concerns.185 This can dispel fears and shift the focus from potential losses to proven gains. Perceived Legitimacy of Subsidy Reform Input/process legitimacy (citizen engagement, participation, etc.) Barrier 1: Lack of legitimacy of the process – If processes are not perceived as transparent, fair and inclusive, this can undermine their legitimacy as well as that of their outcomes in citizens’ eyes Barrier: Input legitimacy refers to the degree to which the processes involved in policymaking are perceived as inclusive and representative of stakeholders’ interests and concerns. It emphasizes the importance of participatory mechanisms and the involvement of affected parties in the decision- making process.186 Process legitimacy refers to the perceived fairness, transparency, and accountability of the procedures through which decisions are made and implemented. It emphasizes the quality of governance and the extent to which decision-making processes adhere to principles of fairness and justice, ensuring that all stakeholders can be heard and that decisions are made in an open and accountable manner.187 In the context of public policy and subsidy reform, input legitimacy can significantly influence public support by ensuring that reforms are not only top-down decisions but reflect a broad consensus, or at least consider the diverse perspectives of those impacted.188 Citizen engagement and participation strengthen process legitimacy by involving individuals in policy formulation, decision-making, and implementation to ensure that policies reflect the public's needs and preferences.189 Participation mechanisms vary on three main factors: who participates, how participants communicate and make decisions, and how these deliberations are linked to governmental action and policymaking.190 Engagement and participation can take various forms, from public consultations and town hall meetings to participatory budgeting and online forums. Citizen engagement and participation are crucial to building public support for subsidy reform. Citizen participation increases input legitimacy,191 accountability, and trust in government.192 It can also lead to better solutions by tapping into local expertise and knowledge, and increasing understanding of the problem, which in turn improves output legitimacy.193 Public engagement and participation in political decision-making is also a key factor in social contracts.194 Subsidies often bolster social contracts when meaningful political participation doesn’t exist. Hence, when these subsidy schemes need to be curtailed, deepening citizen participation is critical to sustaining the social contract between governments and their citizens.195 Policy Recommendation 1: 37 Engage citizens in the design, implementation, and evaluation of the subsidy reforms in meaningful ways, e.g. via citizen assemblies, focus groups or other participatory measures, both online and offline. This will lead to better, more citizen-focused policies and greater legitimacy and thus support of these policies. Policy Recommendation 2: Integrate the participation and input of crucial stakeholders in the process of subsidy reform, to ensure the reform is acceptable to them and increase their ownership and support for the reform. Solution: As noted above, a recent study compared how three different facets of social contracts – protection, provision, participation – shaped subsidy reform in Morocco, Egypt, and Iran.196 Morocco tried to preserve its social contract as much as possible. It removed most subsidies, explained the need for reforms to raise awareness and acceptance, and engaged in societal dialogue (participation). On top of compensatory measures (conditional cash transfer—provision), Morocco was able to uphold its prevailing social contract and avoid protests. Governments should engage public stakeholders throughout the subsidy-reform process to gather input, address concerns, and build support for the proposed changes. As noted earlier, Brazil’s experience with participatory budgeting demonstrates that engaging citizens in decision-making can enhance input legitimacy and support for public policies. While not a subsidy reform, per se, participatory budgeting in cities like Porto Alegre has shown how stakeholder engagement can lead to more equitable and accepted budget allocations.197 In addition to providing technical assistance to a behavioral communications campaign for the reform of natural gas subsidies in Ukraine, the World Bank contributed to a citizen engagement and public awareness campaign to ensure the reform was undertaken in economically feasible and socially acceptable ways.198 In Morocco, the government sustained the social contract while removing most subsidies not only through compensatory measures and explanations of the need for reform, but also through public dialogue and participation.199 To boost water conversation in Belén, Costa Rica, the World Bank conducted participatory focus groups among citizens to learn about actual barriers to and facilitators of reform.200 Through this process, policymakers learned that many residents not only understood the importance of conserving water but also were predisposed to act accordingly. At the same time, they were unaware of how constrained the water supply really was, how much water they consumed, and how they could significantly reduce their water consumption. Finally, the World Bank designed an online civic engagement platform in Cyprus that empowered citizens and decision makers in Cyprus to interact (via automatic translation), ideate, and decide jointly how to solve societal problems at local, village, city, and island-wide levels.i The first campaign reached more than 200,000 people, and an online community of 7,000 was created within three months (Feb- May 2020), where ideas were discussed in 28,000 online sessions. The idea that gained the most support in a transparent vote is currently being implemented. Moreover, an impact evaluation found the process led to increases in intercommunal trust. i More Details about this project can be found in this project brief on eMBeD’s website: https://documents1.worldbank.org/curated/en/099740306282220372/pdf/P17348301e735304109790011b6 1a59ca86.pdf. 38 Output legitimacy (perceived effectiveness of policies) Barrier 1: Lack of legitimacy of the policies – If the resulting policies and decisions are not perceived as effective, fair and good this undermines the output legitimacy of the process Barrier: Output legitimacy is derived from the outcomes or results of policies and political processes, particularly their effectiveness, efficiency, and ability to address the public’s needs and expectations.201 This concept suggests that acceptance and support for policies and reforms can be significantly influenced by their perceived benefits to society.202 Output legitimacy plays a crucial role in garnering public support for subsidy reform. The public tends to support reforms that are perceived to effectively address issues such as economic inefficiency, environmental degradation, or social inequality. Demonstrating tangible improvements that result from the reform can help overcome resistance to change.203 Policy Recommendation 1: Build legitimacy by providing high quality public services perceived as fair and effective, e.g. by implementing a substantial compensatory program before the start of reforms or investing the saved money in popular yet beneficial alternative policies such as education or infrastructure investments. Policy Recommendation 2: Consistently and repeatedly emphasize and communicate the benefits and success stories regarding the subsidy reform, to increase people’s understanding of them. Solution: The study of three MENA countries that took different approaches to upholding aspects of social contracts (protection, provision, participation) during subsidy reforms from 2010 to 2017 also highlights the relevance of output legitimacy.204 While all three countries (Egypt, Iran, and Morocco) had a similar subsidy structure and substantially reduced their subsidy spending, they followed distinct strategies to minimize social unrest and opposition to reforms, resulting in diverging social contracts. In contrast to Morocco, Egypt dismantled its subsidy schemes more radically, through repression and a narrative of collective security, transforming the social contract from a provision to a protection pact. The Iranian case is a particularly interesting example of how a painful, yet unavoidable subsidy reform can gain the necessary output legitimacy.205 Maintaining price controls had become politically and economically unsustainable (with domestic prices set at US$10 cents/liter, compared to US$2/liter in free markets). Crucially, the need for reform was widely acknowledged in the political and public discourse. Policymakers used the impending crises to justify the decision to phase out energy subsidies in 2010, which led the price of petroleum products to increase fourfold.206 The resulting economic pains were mitigated by a structured cash transfer scheme, implemented in an efficient and timely manner.207 The government emphasized benefits to the country and its citizens, including increasing Iran’s economic competitiveness and thus creating jobs.208 Various other factors smoothed the reform process, including a corresponding monetary policy to stabilize inflation; widespread acknowledgment that price controls and resulting social inequality were unsustainable (economically, environmentally, fiscally); and targeted assistance programs that ensured the backing of businesses.209 39 Perceived accountability of government Lever 1: Lack of governmental accountability – If people don’t trust the government, public institutions or decision processes and perceive them as untransparent, corrupt or unfair this undermines governmental accountability Barrier: Trust functions as a decision-making tool for reducing (cognitive) complexity that shapes how people react to information, incentives, and risks, and thus their behavior.210 Trust gives governments the political legroom needed to implement policy reforms, particularly unpopular ones. For example, effective carbon pricing correlates with high political trust and low corruption levels.211 In addition, perceived corruption or trust seem to be the major determinants of successful environmental policy, relative to other structural and political variables.212 At the same time, if the rules, criteria, and process for targeting transfers or other compensatory schemes are fair, transparent, and communicated clearly, such policies are generally popular with citizens.213 Policy Recommendation 1: Build trust through a transparent implementation of the reforms implementation by sharing publicly its timeline of reforms, budgetary concerns, and the selection criteria of beneficiaries of the compensatory programs. Solution: Governments should strive to build trust in their citizens and counteract (perceptions of) corruption,214 for instance, by using revenues in a transparent manner that increases trust and support. Even in more trusting contexts, returning the revenue to citizens in advance of subsidy reform can alleviate their doubts about promised pay-outs, as in the case of Iran.215 When citizens have high trust in their state, it is easier to manage the often-divergent incentives of distinct interest groups216 and focus on policy or regulatory changes that solve specific functional commitment, coordination, and cooperation issues and power asymmetries in the policy arena that hinder reform.217 In 2011, estimates suggested that the Indonesian government spent over $18 billion on fuel subsidies, despite reforms implemented in 2005 and 2008.218 It faced two particular challenges to their elimination.219 First, since energy subsidies are easy to monitor and thus less susceptible to corruption, they are popular in decentralized states like Indonesia where discretionary targeted funds have a record of corruption and leakage. Second, alternative programs to counterbalance higher energy prices often focus on the poor, though they rarely represent a crucial political factor. More commonly, student groups, trade union members, and transport companies protest such reforms through existing networks. Perceived Fairness of Subsidy / Compensatory Schemes Fairness norms Lever 1: Fairness norms – People broadly agree that everyone should be treated fairly and equitably 40 Barrier: Ensuring that people perceive the subsidy reform and compensatory policies as fair is key to securing their support. The legitimacy of both the reform and the government will be stronger if the public is aware of the unavoidable distributional conflicts and perceives the reform as enhancing equality and justice.220 This is particularly true when citizens don’t trust the government and perceive its policies as unfair.221 If, however, compensation schemes are perceived to be fair, they generally enjoy broad societal support.222 Policy Recommendation 1: Implement a compensatory program that is transparent in how it is designed to support particularly vulnerable groups while at the same time being distributed across society in a fair manner, e.g. combining tailored support with universal lump sum payments. Policy Recommendation 2: Implement information and social media campaigns to encourage more eligible people to apply and access compensatory policies and non-targeted, wealthy groups to opt out deliberatively, thus increasing the policies effectiveness while lowering their costs. Solution: For a reform to be perceived as fair, new social transfers must benefit broad sections of society and be easy to access.223 While universal transfers are popular, tailoring substitutional or remaining social transfers to the socio-political environment is crucial to ensure public support for the reforms and safeguard legitimate social goals.224 On the other hand, people prefer compensation schemes that support those people most in need,225 while wasteful or unjust discretionary spending by the ruling elite is likely to face increased scrutiny.139 Generous and carefully designed compensation schemes for social groups affected most negatively by the reform are particularly popular.226 Crucially, those schemes should be tailored according to the underlying reasons subsidies existed and were popular in the first place.227 Moreover, the effects of compensatory policies can be increased, and their costs lowered, through information and social media campaigns that encourage more eligible people to apply and access them and non-targeted, wealthy groups to opt out deliberatively.228 A subsidy reform that is perceived as fair is more likely to be accepted. In Iran, replacing subsidies with a more cost-efficient and egalitarian quasi-universal cash transfer scheme helped uphold the social contract and guaranteed broad societal support for the reforms. 229 III.iii. | Opportunity: Social norms and opportunities to enact beliefs and perceptions One crucial factor that affects people’s response to subsidy reform pertains to opportunity, which in turn is shaped by the respective structural and political context and by choice architecture. Opportunity encompasses both the physical and structural attributes (accessibility, availability, affordability) and social opportunities (social cues, cultural norms) that facilitate or impede citizens’ adaptation to the reform. Key considerations include the availability and accessibility of information and resources needed to adapt to reform, and whether societal support is adequate or if social norms could impede adaptation. Government policies, such as compensatory measures, can soften the impact of the reform. The timing of the reform and compensatory measures also affects public opinion and behavior. Social norms—perceptions of others’ beliefs and likely actions—significantly influence individuals’ opinions and actions regarding the reform. Repressive responses may limit citizens’ 41 willingness to protest, potentially either quelling or radicalizing opposition. In contrast, allowing citizen engagement and participation can increase the legitimacy of reforms. Specifically, social norms surrounding a subsidy reform and compensatory scheme depend on people’s beliefs regarding others’ support for or opposition to the policy (empirical expectations) as well as people’s beliefs regarding others’ thoughts on whether they should support or oppose the reform (normative expectations). The opportunity to act on their beliefs and perceptions is affected by the timing of subsidy changes and compensatory policies as well as by the intention-to-action gap. Social Norms for the Support of Subsidy / Compensatory Schemes Empirical expectations (the belief that others support/oppose subsidy reform) Barrier 1: Wrong perception of other’s negative beliefs & behavior – People often think that people thoughts and actions towards policy change are more negative than they really are, hindering them from changing their own opinions and behavior Lever 1: Increasing knowledge about supportive beliefs & actions – If people are aware of beliefs and behavior in support of policy reform among groups relevant to them, they are more likely to take on similar beliefs and behavior Barrier: Social norms are the shared expectations and rules that guide behavior in a group or society.230 They are supported by our expectations of how others will behave in specific situations; we expect them to follow certain behavioral regularities.231 Hence, social norms have a profound effect on our attitudes and behaviors, including our response to policy changes such as subsidy reform. If prevailing social norms support the existing subsidy system, resistance to reform could be high. Social norms can be factual (how the world is and how other people are), empirical (beliefs about people’s beliefs and situational behavior), or normative (including an evaluation, as described above). These expectations are usually rooted in experience, such as hearing from a trusted source how people behave in a given situation. We often form empirical expectations about people’s future behavior based on their past behavior. Simply telling people that their beliefs are wrong is unlikely to change them but observing “deviant” yet successful behavior may do so. Informing people about the efficacy of a behavior is not nearly as convincing as showing them examples of successful individuals who practice it.232 Hence, empirical expectations change if we observe a change in behavior compared to our expectations or otherwise can deduce that people’s norms (and future behavior) have changed.233 Policy Recommendation 1: Show people how other people have changed their beliefs and behavior in line with the new subsidy reform, as well as why and how they change their thoughts and actions. Policy Recommendation 2: 42 Focus on communicating about beliefs and behavior among groups relevant to the most crucial sections of society for the reform process. This could include popular media programs and role models, as well as people’s neighbours. Policy Recommendation 3: Boost the internalization of norms by starting competitions or other ways to compare how much people act in line with the new subsidy reform, e.g. in comparison to their neighbors or other people similar to them. Solution: To facilitate policy implementation, a successful reform strategy needs to address and change social norms—for instance, by emphasizing conducive behaviors and beliefs in others or comparing different behaviors. This can often be achieved through community-based interventions or activities, such as competitions to see which neighborhood or school saved the most energy.234 A study of behavior changes among patients and service providers in a clinical setting showed that the normalization of a new, conducive behavior reinforced that very behavior, creating a norms-driven virtuous cycle.235 Changing social norms tends to be sustainable, shaping behaviors for years to come, and might also positively affect related behaviors.236 Particular social norms might also be messaged or modeled in the media (e.g., soap operas, radio shows) or in local community centers and theatres.237 Simply by informing people about what their neighbors are doing, media campaigns can have remarkable effects on behavior. In one seminal behavioral experiment, homeowners were informed about their electricity usage compared to that of their neighbors. The behavior of homeowners who were both above and below the average subsequently moved toward the average – that is, their updated empirical expectations. However, when normative information was provided as well (by adding a smiling or frowning emoticon next to electricity usage), people who were above average continued to reduce their consumption, while those below average continued to use less energy.238 A well-planned, evidence-based conversation campaign in Bogota, Colombia, reduced water consumption by nearly 14 percent, partially due to the city government publicizing which neighborhoods were achieving the greatest cuts in water use and which were lagging; awards were announced in the media.239 In another study on reducing water consumption in Belén, Costa Rica (described earlier), peer comparison (to neighborhood average water consumption, with smiling or frowning emoticons depending on if they used less or more) helped promote water conservation. After receiving a sad smiley face, one resident even called the municipality to say that they knew their next-door neighbors used more water than they did. When they were told their consumption was being compared to that of the whole neighborhood, they stated they would try to save more water in the future.240 In rural Tanzania, a community-based social norms change intervention was implemented in two villages to increase female participation in decision making regarding water management. Initially, women who spoke in village meetings were sanctioned for disrespect and outspokenness, and their husbands were teased. Yet after the intervention, women who participated in meetings were ridiculed less and reported a greater sense of solidarity with each other, while men showed greater respect for men whose wives participated.241 Finally, positive behavior can be contagious. When poor Vietnamese communities were shown that children from some villagers who fed them non-traditional foods (sweet potato greens, shrimp, and 43 crabs) several times a day were well-nourished and healthy, they progressively changed their children’s diets from a more traditional one.242 Normative expectations (the belief that others think they should support or oppose subsidy reform) Barrier 1: Wrong perception of other’s negative norms – People often think that norms and beliefs towards policy change are more negative than they really are, hindering them from changing their own beliefs Lever 1: Increasing knowledge about new, positive norms – If people are aware of beliefs and norms in support of policy reform among groups relevant to them, they are more likely to voice their own support Barrier: Much of what we think and do is influenced by our expectations about what others think we should do.243 Humans are social animals, and the evolutionary need to work together is deeply ingrained into how we feel, think, and behave. Hence, people are prone to cooperate, reciprocate, and comply with group norms – second-order beliefs about the beliefs of others.244 People act upon these normative expectations either because they fear being punished by those upholding the norm (negative sanctions), want something from those holding the norm in return (positive sanctions), or consider others’ beliefs to be well-founded and correct.245 People’s normative expectations and behavior can diverge widely – and often do. Changing our normative expectations is hard, and often requires an earlier change in empirical expectations, as people only abandon behavioral norms once they are sure the normative beliefs of those who matter to them have also changed.246 The widely acknowledged norm of self-interest is a remarkable case in point: People often expect others to act selfishly, even when they themselves act (or are willing to act) altruistically in the same situation.247 Importantly, invoking social norms to change people’s behavior can backfire. If people receive information that others don’t often behave according to a positive social norm, they may conform to it less. Vice versa, information about negative behavior that is too common signals a broadly shared norm and can increase that behavior—for example, public billboards depicting littering actually increased the behavior in one study.248 Policy Recommendation 1: Design media campaigns to inform people about other people’s (newly developed) support for the new subsidy reform and new norms regarding behavior in line with it, if enough people hold these norms. Policy Recommendation 2: Focus on communicating about norms among groups relevant to the most crucial sections of society for the reform process. Solution: Media campaigns can shape behavior by informing people about how other others act, thus changing empirical as well as normative expectations.249 Distorted beliefs about other people’s beliefs can hinder them from supporting subsidy reforms, even if they themselves might support them. Indeed, people’s beliefs about the behavior and norms held by relevant others can improve their 44 adaptation to policy changes. In a nature reserve program in China, for example, farmers given information about their neighbors’ conversion of land were more likely to re-enroll in the same program.250 Indeed, several studies have found that while people’s willingness to donate blood is not altered by monetary incentives, people who themselves are willing to donate blood for free typically expect others to do so only in return for sufficient monetary rewards.251 Opportunity to Act upon one’s Beliefs and Perceptions Timing of subsidy changes and compensatory policies Lever 1: Timing – If the timing of reforms is aligned with high mental receptiveness it is more likely to change people’s thoughts and behavior Barrier: Behavioral interventions are most effective if they are strategically timed and delivered to align with key decision-making moments and receptive mental states.252 A successful subsidy reform process, like any policy change, depends on identifying and leveraging key drivers and catalysts, as well as policy champions, who organize the political will and backing to push thorough reform against the inevitable opposition.253 It is crucial to take advantage of opportunity windows once the political and economic stars align. Windows for political change are often shaped by external factors that provide opportunities or act as catalysts for change. Accordingly, the International Institute for Sustainable Development (IISD) has identified “being prepared” as one of the single most important things a government should do in the run-up to subsidy reform.254 It can be surprisingly conducive to a reform’s success if it starts during an economic or fiscal crisis, when political alliances shift. Such crises tend to draw attention away from reforms and create sufficient urgency to drive through unpopular measures.255 Finally, timely, stepwise implementation of subsidy reforms according to actors’ current needs, flanked by public funding to cushion temporal adaptation pains, clear communication, and follow-through on relevant legislation, can help businesses and sectors adapt.256 45 Policy Recommendation 1: Implement reforms at times of relative economic prosperity and high political capital and trust. Policy Recommendation 2: Implement reforms when the resistance to policy change is low due to crises or other changes of the status quo and existing policy coalitions. Policy Recommendation 3: Hand out compensatory transfers before the pains of the reforms are felt, and/or briefly before key stages in the implementation of the reforms which might require people’s support. Policy Recommendation 4: Remind people of the desired behavior or provide them helpful cues at the right moments, for instance just before they make a decision or act in regard to the new policies. Solution: In the context of subsidy reform, understanding when resistance will be most likely or when opinions are easiest to influence allows policymakers to preemptively address concerns and time their messaging to reduce opposition (such as enacting reforms when energy prices fall).257 For instance, it can make a big difference when compensatory social transfers are sent to citizens in a clear, tangible, and widely publicized manner before subsidies are cut.258 Further, aligning positive reinforcement of the benefits of reform with key stages in its implementation, such as when individuals first experience the new targeted social transfers, can aid acceptance and adaptability. In the successful water conversation intervention in Bogota mentioned above, the Colombian government devised a strategy to remind people to conserve water right when they were likely to overuse it.259 It produced and distributed BI-savvy stickers and asked people to place them by frequently used faucets. It also widely shared daily reports of the city’s water consumption to reinforce behaviors. Ideally, governments should have a variety of policies to “take out of the drawer” when a window of opportunity – such as a crises or a new, pro-reform government – presents itself.260 Since anticipating all potential challenges is impossible, governments should instead build the administrative capability and political leverage to be able to respond to problems as they arise, and to pragmatically and iteratively adapt the reform as needed, while keeping their ultimate objectives in mind.261 A related approach to ensure a well-timed reform process is to follow an incremental roll-out. To facilitate iterative adaptation, it is useful to implement and, when necessary, scale reforms and substitute policies step by step. Pilots can help test ideas and avoid mistakes, while building in inflection points helps correct course when needed.262 Moreover, reforms should encompass substantial capacity for effective adaptation—for example, through flexible design choices, automatic and built-in evaluations and adaptations, ongoing deliberation, decentralization, or hybrid decision structures.263 Following a strategy inspired by product life cycles, governments can design the reform process in a timely, stepwise approach according to the changing needs and adaptation of actors. In the introductory stage, when adaptation to the new economic and political conditions starts to manifest, economic support and clear regulations are key. In the growth stage, viable and interesting alternative solutions and innovations are adopted. During the final stage, once society and economy have adapted, opportunities for further reforms and other priorities might open up.264 46 A successful example how timing can aid a successful subsidy reform at grand scale is India, which reformed the largest cash transfer program in the world: household subsidies for cooking gas.265 To successfully realize such an ambitious and transformative reform, it was crucial to integrate and calibrate processes, people, and technology to drive implementation and demonstrate positive change to the various constituents and beneficiaries. At this scale, it was simply impossible to anticipate (let alone prevent) the inevitable difficulties and setbacks. Rather, a set of pragmatic, iterative steps were implemented in line with a broader vision: to reduce the fiscal burden of subsidies, target them more effectively, and expand access to clean cooking fuel, especially among the poor. Beyond this convincing vision and rationale, the iterative uptake helped establish trust in government and enabled people to experience its advantages while witnessing orderly and successful program implementation. The result was a high degree of buy-in from key political players, the bureaucracy, and the public. Intention-to-action gap Barrier 1: Intention-to-action gap – People are more likely to change their beliefs and intentions, than to act on these intentions, often creating a disconnect Barrier: Sometimes, it is not knowledge or motivation that keeps citizens from changing their behavior but instead their ability and skills to do so. The intention-action gap is the disconnect that can occur between a person’s intent to perform a certain behavior and their actual behavior.266 Boosting citizens’ ability to understand reform changes, know how to save resources, and access and invest in compensatory social transfers can empower them to embrace and adapt to reforms. Policy Recommendation 1: Provide people with practical, useful information on how they should and can best change their behavior according to their (newly developed) intentions and beliefs. Policy Recommendation 2: Enroll citizens into compensatory policies or programs by default, to help them act in line with their preferences and the subsidy reform. Solution: There are many ways to increase people’s skills and knowledge. The water conservation intervention in Bogota initially failed because it assumed that simply communicating information about the need to save water would change people’s behavior. In subsequent adaptations, citizens were trained on the most effective water conservation techniques, smart slogans were adopted, and youth volunteers informed people about the emergency; water consumption subsequently fell by nearly 14%.267 Defaults offer another powerful way to bridge the intention-to-action gap. As a host of case studies across the United States,268 Chile, Mexico, Denmark, Sweden, and the United Kingdom269 demonstrate, automatically enrolling individuals in social programs such as retirement plans with an opt-out option (rather than expecting them to opt in deliberately) is both a popular and highly effective means of increasing sign-ups – and thus pension savings.270 47 IV. | Practical Recommendations Drawing on our in-depth discussion of a behaviorally savvy approach to subsidy reform, we provide succinct practical recommendations in this section for successfully designing and communicating a subsidy reform that minimizes the risk of public backlash. In light of diverse contexts and histories, the reform design needs to be grounded in an apt analysis of each country’s current political, social, and economic environment.271 There is no such thing as a one-size-fits-all model for subsidy reform.272 Thus, the recommendations need to be adapted to the idiosyncrasies of each country, including its past, the rationale for and extent of current subsidies, its political economy and path dependencies, the costs and potential side effects of reform, alternative programs, and trust in government. Below, we first revisit the citizens’ behavioral journey, and then offer practical recommendations for policymakers at each step of this process. The practical steps address all the challenges a policymaker may face as seen in the behavioral journey map. IV.i. | Designing subsidy reforms with citizens’ behavioral journey in mind Target behavior Citizens understand and appreciate the costs and drawbacks of the current subsidy scheme as well as the rationale for subsidy reform, and won’t oppose, obstruct, or protest the reform process while adapting their behavior to the new compensation scheme. Before Implementation 1. Developing awareness of policies • The public becomes aware of discussions or announcements regarding subsidy reform, as well as the reasons for changing the current subsidy scheme. o Salience & availability bias o Access to communication channels • Citizens may have limited understanding of the details and implications of the reform but are aware that policy changes are being planned. o Mental bandwidth & choice overload o Knowledge & beliefs 2. Seeking more information • Citizens seek out more information about the subsidy reform through formal or informal channels such as governmental information, press coverage or discussions with peers, neighbors, or family members to better understand the reasons behind the reform and its potential impact on their daily lives. o Motivated reasoning o Messenger effects o Knowledge & beliefs • Citizens gain a better understanding of the implications of the potential reforms, ways negative impacts may be mitigated, and the broader societal benefits of the reform, such as promoting fairness, reducing waste, or redirecting resources to more pressing needs. o Susceptibility to misinformation o Risk & loss aversion o Framing & negativity bias 3. Participating in or observing citizen engagement initiatives 48 • Citizens may consider how they can participate in the decision-making process or advocate for their needs within the framework of the reform. o Self-beliefs & agency o Intention-to-action gap • Governmental initiatives to meaningfully engage citizens in the process of changing existing subsidy schemes, designing compensatory policies and their implementation as well as communicating these changes can contribute to greater legitimacy and credibility in the process as well as better policies. o Perceived accountability of government • Support for subsidy reforms and adapting one’s behavior to the new status quo will partially be shaped by citizens’ perceptions of their ability to adapt to different changes (i.e., self-efficacy) and potential losses as a result of the reforms, both of which can be ameliorated by citizen engagement processes. o Self-beliefs & agency Input / process legitimacy (citizen engagement, participation, etc.) During Implementation 4. Initial support for reform • Over time, citizens internalize the values underlying the reform, such as fairness, efficiency, or sustainability. o Mental models, defaults & status quo bias o Anchoring o Present bias & hyperbolic discounting • They come to see the reform as aligned with these values and as a necessary step toward achieving broader societal goals. o Fairness norms o Framing & negativity bias • Observing the opinions and behavior of their fellow citizens, their norms regarding fair and appropriate subsidy policies as well as their own related behavior changes. o Empirical expectations (belief that others support / oppose subsidy reform) o Normative expectations (belief that others think they should support / oppose subsidy reform) • Citizens appreciate the legitimacy of the reform due to an increasing understanding of the rationale behind it and acknowledge the transparency and legitimacy of the process. o Input / process legitimacy (citizen engagement, participation, etc.) o Perceived accountability of government • Citizens may begin to actively support the reform by participating in offline and online community discussions, signing petitions, or contacting their government representatives. o Timing of subsidy changes and compensatory policies o Intention-to-action gap 5. Adjusting behavior to accommodate increased prices • As the reform is implemented, citizens adapt to the changes in subsidy programs or services in ways conducive to their own and broader societal benefits. • Governmental policies, regulations and communications are set up in ways to ease and facilitate the adaptation to the new subsidy and compensatory policies. 49 o Timing of subsidy changes and compensatory policies o Intention-to-action gap • This may involve reducing resource consumption or taking up programs designed to mitigate the impact of higher prices on poor and vulnerable households (e.g., cash transfers). o Monetary incentives (compensation, net income effect of reform) o Non-monetary incentives o Fairness norms o Risk & loss aversion After Implementation 6. Sustained support for reform • Even after the initial stages of the reform process, citizens remain engaged and support the reform’s continued and increasingly visible success. o Output legitimacy (perceived effectiveness of policies) • They further internalize changes in subsidy-related norms, values and behavior, further aligning with the new status quo. o Empirical expectations (belief that others support / oppose subsidy reform) o Normative expectations (belief that others think they should support / oppose subsidy reform) o Present bias & hyperbolic discounting • This could include participating in community dialogue initiatives, staying informed about policy developments, and advocating for the ongoing improvement of subsidy programs and services o Intention-to-action gap o Input / process legitimacy (citizen engagement, participation, etc.) o Perceived accountability of government IV.ii. | Designing subsidy reforms for sustainable success 1. Implement compensatory programs to overcome loss and risk aversion. Because the removal of subsidies can be painful, policy change should not happen in isolation. Substitutes for subsidies, such as social policies and transfer schemes, can be key. As the World Bank summarized in one report, “well-designed subsidy removal and pricing policies also include accurate targeting of price changes . . . and public campaigns explaining the reason for pricing changes and the availability of compensatory mechanisms.”273 The prime objectives of compensational social policies and transfers are to mitigate the pains reforms might cause to vulnerable and/or politically important populations and to keep the reform process from undermining other objectives, such as reduction of poverty and social inequality. Thus, it is advisable to implement the subsidy removal policy with a larger set of compensatory programs, such as conditional or unconditional cash transfers based on poverty criteria or higher targeted spending on education and health. Using information technology (e.g., digital IDs, automatic registries) helps boost efficiency, improve access, save money, and increase transparency by increasing process speed and accuracy.274 50 2. Implement compensatory programs before subsidy reforms to mitigate present bias, discounting, and anchoring effects. Lack of trust in the state is common in developing countries. As a result, citizens may not believe that subsidy removal will be combined with promised compensatory programs. This necessitates the implementation of compensatory programs at exactly the same time, if not before, subsidy removal. Policymakers should (1) identify the most appropriate social (safety net) interventions that are scalable or at-scale to mitigate adverse effects on the poor, and (2) assess the implementation and delivery chain, institutions, and administration to ensure an apt response.275 3. Get the timing right. The economic and political context shapes how new information is perceived. Implementing the program at a time when acceptance is high – generally, soon after elections are held, when economic conditions are positive, or when government support is high. Moreover, ensure the benefits of compensatory schemes are visible, tangible, and significant before the potential pains of the subsidy reform are felt. When possible, combine compensation into one or few clearly labelled payments attributable to the subsidy reform, but incrementally introduce the subsidy cuts. 4. Reach out to citizens and journalists to increase trust and legitimacy. Reduce the distance between citizens and policymakers by directly engaging with citizens and journalists. Listen to their worries and provide evidence-based information, including in local meetings and through targeted communications. IV.iii. | Communicating savvily about subsidy reforms Communications should be treated as an investment, not a cost, and planned and implemented by professionals before, during and after reform.276 Key phases include (a) using outreach and two-way dialogue with citizens to indicate the need for and benefits of reforms, as well as substitutional social policies that will help alleviate their impacts; (b) listening to stakeholders’ and citizens’ concerns and perceptions; (c) internally coordinating government communications to ensure broad buy-in and a consistent approach to communication across ministries and actors; and (d) communicating evidence- based messages to support reforms and minimize negative perceptions.277 An overview of how to plan, structure and conduct a comprehensive and effective communications campaign, including a potential timeline, can be found in the ESRAF’s note on designing effective communication campaigns.278 Complementing these guidelines, we provide recommendations for behaviorally informed communications to improve acceptance of the reforms. 5. Run a wide-ranging communications campaign that focuses on all segments of society, with messages tailored accordingly. Build a coalition by reaching out to urban and rural areas, and to the young and old. Use both traditional and social media for messaging. To do this effectively, a map of key stakeholders, considering their level of interest, influence, and unique concerns is essential. 6. Ground messages in comprehensive analysis and research. Communications should be planned and implemented by professionals throughout the reform process. Ideally, combine in-depth household interviews, semi-structured and qualitative focus-group discussions, representative public opinions surveys, and public gatherings (at the local, regional, or national level).279 Ideally, to prevent a backlash, shape the narrative, and lay the groundwork 51 for implementation, the communication strategy should include early outreach before reforms are introduced.280 7. Ensure that messages are “SUCCESsful”: Simple, Unexpected, Concrete, Credible, Emotive, and Story-driven.281 Simplicity: Amplify the core idea and discard less important ones. Unexpected: Remember that people respond to messages that grab their attention. Concrete: Asking citizens/stakeholders directly to undertake a behavior and tailoring advice to that request will be more effective than vague calls for action. Credibility: Ensure messaging is trustworthy, evidence-based, and framed in an easy-to-believe way. Leveraging trusted messengers can be particularly effective for this. Emotion: When subsidy reform fails, it is usually because the government used trite, technical, and process-focused language rather than trying to relate to people on an emotional level. Story: Messages that tell a story that highlights the benefits of reform are easier to remember and thus more influential.282 8. Build trust. Trust is the glue that holds societies together.283 Provide correct, verifiable information and implement promised programs to build trust early on websites and through chatbots on text messages and social media. Provide information in all important languages. Use trusted messengers across society to provide information about reforms, including influencers from sports, the arts, politics, and religion. Local marketing professionals and communication firms can also provide invaluable input, thanks to their knowledge of the local context and insight into potentially impactful messaging. 9. Put things into perspective by setting the right anchors. Citizens may have little information about the global context. To set the right comparison for your reforms, include in your campaign information about similar reforms in other countries, such as fossil fuel prices in other neighboring countries. 10. Frame losses and gains differently. Do not make losses salient; instead, ensure that discussions about reforms concern the provision of different advantages. For example, talk about the years of lives to be gained from lower pollution, the amount in subsidies the rich will lose, and the value of compensatory programs to the lower and middle classes. 11. Create direct linkages between subsidy reform and compensatory programs. Create a direct linkage between subsidy removal, revenue mobilization, and compensatory programs. Connect the loss and gain by showing that one policy is needed for another to be implemented. Without this direct linkage and an understanding of the need for budgetary balancing, citizens may demand both subsidy reinstatement and the compensatory policy. The path toward successful subsidy reform demands a strategic fusion of behavioral insights and traditional policy mechanisms. Recognizing the interplay of the public’s capability, opportunity, and motivation to support reforms, policymakers can better navigate a landscape where public support is paramount to success. By designing reforms and compensatory programs to overcome behavioral barriers related to these COM-B factors and engaging in behaviorally informed communication, policymakers can design reforms more likely to gain acceptance from the general public that, in turn, yield sustainable results. 52 1 Vidican Auktor, G., & Loewe, M. (2022). Subsidy Reform and the Transformation of Social Contracts: The Cases of Egypt, Iran and Morocco. Social Sciences, 11(2), 85. 2 Even though the latter would not show in the governmental budget, as it represents opportunity costs/foregone revenues. 3 Vagliasindi, M. (2012). Implementing energy subsidy reforms: An overview of the key issues. World Bank policy research working paper, (6122). 4 Rougier, Eric. 2016. 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The Quest for Subsidies Reforms in the Middle East and North Africa Region: A Microsimulation Approach to Policy Making. Cham: Springer. Available online: http://hdl.handle.net/10986/25783 (accessed on 1 March 2021). 9 Sdralevich, Carlo, Randa Sab, Younes Zouhar, and Giorgia Albertin. 2014. Subsidy Reform in the Middle East and North Africa: Recent Progress and Challenges Ahead. IMF Departmental Papers 14. Washington: International Monetary Fund. Available online: https://www.imf.org/-/media/Websites/IMF/imported-full- text-pdf/external/pubs/ft/dp/2014/_1403mcd.ashx (accessed on 1 March 2021). 10 Vidican Auktor, G., & Loewe, M. (2022). Subsidy Reform and the Transformation of Social Contracts: The Cases of Egypt, Iran and Morocco. Social Sciences, 11(2), 85. 11 In contrast to subsidies, who render specific goods cheaper, social transfers are directly paid to households, such as in the form of social assistance. 12 Vidican Auktor, G., & Loewe, M. (2022). 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Nature Sustainability, 1(7), 350-357. 23 Ellis, J. (2010). The Effects of Fossil-Fuel Subsidy Reform: A review of modelling and empirical studies. Available at SSRN 1572397. 53 24 At the 2009 G20 summit in Pittsburgh, for instance, it was agreed to phase out ‘inefficient’ fossil fuel subsidies and in the same year, Asia-Pacific Economic Cooperation (APEC) member countries signed a similar declaration, while emphasising the essential importance to provide energy to those in need. 25 Cottrell, J. (2014). The political economy of subsidy reform: which factors are game-changers?. In Environmental Taxation and Green Fiscal Reform (pp. 147-165). Edward Elgar Publishing. 26 Lockwood, M. (2015). Fossil fuel subsidy reform, rent management and political fragmentation in developing countries. New Political Economy, 20(4), 475-494. 27 G20. (2009), Leaders Statement: The Pitisburgh Summit. Available from: http://www.canadainternational.gc.ca/ g20/summit-sommet/g20/declaration_092509.aspx [accessed 13 May 2013]. 28 Egypt, Ethiopia, Ghana, India, Iran, Kuwait, Morocco, Rwanda, Togo, United Arab Emirates, and Vietnam. 29 Flochel, T., & Gooptu, S. (2017). The Energy Subsidy Reform Assessment Framework. Open Knowledge Repository. The World Bank. 30 Belhaj, F., & Gatti, R. (2021). The Political Economy of Reform in Post-Covid MENA. Thinking MENA Futures: The Next Five Years and Beyond. 31 Lockwood, M. (2015). Fossil fuel subsidy reform, rent management and political fragmentation in developing countries. New Political Economy, 20(4), 475-494. 32 Cottrell, J. (2014). The political economy of subsidy reform: which factors are game-changers?. In Environmental Taxation and Green Fiscal Reform (pp. 147-165). Edward Elgar Publishing. 33 Lockwood, M. (2015). Fossil fuel subsidy reform, rent management and political fragmentation in developing countries. New Political Economy, 20(4), 475-494. 34 Cottrell, J. (2014). The political economy of subsidy reform: which factors are game-changers?. In Environmental Taxation and Green Fiscal Reform (pp. 147-165). Edward Elgar Publishing. 35 Victor, D. (2009), The Politics of Fossil Fuel Subsidies (Winnipeg, MB: International Institute for Sustainable Development). 36 Khan, M. (2000), ‘Rent-Seeking as Process’, in M. Khan and K.S. Jomo (eds), Rent, Rent -Seeking and Economic Development: Theory and Evidence in Asia (Cambridge: Cambridge University Press), pp. 70 –144. 37 Flochel, T., & Gooptu, S. (2017). The Energy Subsidy Reform Assessment Framework. Open Knowledge Repository. The World Bank. 38 A brief breakdown of the 10 steps in applying the ESRAF framework is found in Annex i.i.. ESRAF consists of 10 ‘good practice notes’ (which can be accessed under https://www.esmap.org/esraf), each of which focus on a different aspect of the framework. 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