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In the late 1800s, Paul Doumer, Governor-General of the French colony of Indochina (present-day Vietnam), set out on the considerable task of making Hanoi a modern city worthy of its ties to France and the French crown.
The first thing he realized was that the architecture of Hanoi had to change fundamentally to make it more habitable for the colonial government personnel. To this end, his government constructed living quarters with toilets supported by a central sewage system.
At first, all was well and good, but rats then started gaining access to French quarters through the sewage system. This was an alarming development since it coincided with the bubonic plague pandemic and rats were known carriers of the plague. Alarmed by this development, the government introduced policies to combat the situation.
In 1894, the government enacted a new scheme. Locals were offered payment to go into sewers and kill the rats. At first, the scheme failed because this wasn’t a job anyone wanted, so in 1902 payment was doubled from 1 cent to 2 cents per rat. In 1904, this figure was doubled again to 4 cents per rat. Incidentally, since the government didn’t want to deal with potentially hundreds of thousands of rat carcases, rat hunters only had to provide proof of kill by presenting tails of rats to claim the reward.
What happened next? Rats without tails started cruising the streets of Hanoi.
The incentive program did not result in a decrease in the rat population as expected, it rather led to the proliferation of tailless rats. The Hanoi rat hunters figured, why kill the rats? Why not just chop the tails off them since that was all they needed to claim the bounty? Then, set the rats free to continue to procreate. This will lead to even more rats which equal higher revenue from the rat bounty scheme. They also stopped going into the sewers -because who wants to go into the sewers- and decided to farm the rats at home instead. This provided a more comfortable means of supply for rat tails, ergo more revenue.
When the colonial government got wind of this, compounded by the fact that the rat population hadn’t plummeted as expected, it cancelled the program. Since the hundreds of thousands of rats in these rats farms no longer possessed any economic value, the rat breeders set them free -because what else were they supposed to do- into the streets and sewers. In the end, the policy not only resulted in wastage of resources, time, welfare cost and opportunity cost — it also inadvertently led to an increase in the rat population in Hanoi. An unintended consequence of the scheme.
“The cobra effect,” a term coined by German economist Horst Siebert is predicated on a similar event to that in Hanoi, this time in colonial India. And since then, it has become a term used to describe when government interventions or policies result in bigger problems than they set out to solve.
The English in colonial India, troubled by the population of poisonous cobras living in Delhi, came up with what seemed like a simple solution — pay the indigenous people to kill the snakes. This also didn’t alleviate the problem. Like Hanoi, the scheme was frustrated and only exacerbated the same problem it was created to mitigate.
The Indians locals started breeding Cobras to trade the skin in for cash. They also figured that since the bounty paid was higher than the cost of breeding Cobras to maturity, it made more economic sense to farm Cobras instead; thereby turning them into a sort of cash crop. When the government discovered the existence of these snake farms, it stopped paying the reward. The locals conducted a commonsensical cost-benefit analysis. Since there was no longer any benefit to justify the cost incurred by these farmers, they chose the next best option — let the snakes go back into the streets of Delhi.
In the end, not only had scarce resources been wasted, but there were also more snakes roaming Dehli than at the beginning of the program.
This story also illustrates how well-intentioned interventions can have unintended adverse consequences, especially if human nature isn’t considered in making these decisions.
Another case of perverse incentive occurred between the years 2014–2016. The Akwa-Ibom State Government embarked on some road and pipeline construction in some local governments in the state. As a termfor the loan, the government included compensation for shrines -“cash compensation will be paid to the families and priests are (sic) to conduct required ceremonies to relocate the shrines, in addition to government compensation rates.” This was one of the costs associated with the project to facilitate the cooperation of the local priests, as they presciently adjudged that the local priests who held a lot of sway in their communities might become obstacles in the way of the project.
The shrines in the path of the project were deemed sacred sites which could neither be moved by force or intimidation. Additionally, the local priests were also revered — even feared — which informed the decision of the government to provide incentives for them to demolish these shrines on their own and move to new sites with the compensation packages that will be provided. Word got out that the priests will be compensated to relocate the shrines. By the time stipulated for the start of the project, more shrines, tombs and miracle houses had been hastily built on the site of the project to qualify for the double compensation. This again ended up presenting an even bigger stumbling block for the project’s contractors and the project.
Again, we see how incentives can lead to more problems than initiated to mitigate.
Theory of “psychological egoism.”
“Psychological egoism” suggests that all behaviours are motivated by self-interest. In other words, it suggests that every action, behaviour or decision of every person is motivated self-interest. It also suggests that every action must be motivated by self-interest. The doctrine of selfish motivation is simply a natural law of psychology. “Just as it is a natural law of physics that bodies tend to move toward one another in proportion to their masses and at velocities inversely proportionate to their distances from one another, it is a natural law that all motivations are, ultimately, selfish.” — The Truth in Psychological Egoism by Hugh LaFollette.
It doesn’t matter whether you agree with the above theory or to what extent. It remains an undeniable truth that humans are inherently self-interested. Self-interest refers to actions that obtain personal benefits. If humans are self-interested animals, then, the idea that people take self-interested actions based on what benefits them cannot be discounted in the conversation on terrorism, kidnapping and crime. It remains a constant juxtaposition of the cost associated with any given action versus the benefit attached to such an action.
Costs> Benefits= No.
This is how the average person will measure a decision. So why not governments?
Regulations and programs impose a cost on society: opportunity cost and the actual cost of funding a program. If benefits accruing to the society outweighs such cost, then we are left in a better position. Perverse incentives work in reverse of this, whereby the cost of such programs outweighs the benefits accruing to the society. This is even more pernicious where these programs lead to an increase in the ills they set out to solve or alleviate.
Now that we have established how perverse incentives work, we’ll now attempt to draw parallels between the actions of the Nigerian government and historical instances of government schemes which have not only be ineffective in dealing with problems -of terrorism and kidnapping- which they set out to allay but have instead increased propagation of such problems.
Kidnapping: then and now.
Between 2011 and 2020, research by Lagos based geopolitical risk consultancy SB Morgen concludes that over $18 million had been paid in ransom. “The amount of ransom accelerated in the latter portion of that period: between 2016 and 2020, around $11 million was paid out.”
Note: 2016 is after the current government came into power and decided to take a soft stance on captured or surrendered terrorists through programmes aimed at rehabilitation and consequent reintroduction back into society. Further analysis of the same report shows that kidnap for ransom has charted a new course from the days when mostly high net worth individuals working in oil-rich south-south states were targeted for abduction, to now when groups of people- children in Chibok and Kankara got example -are summarily rounded up and kidnapped. This has led to a higher number of fatal kidnap incidents since kidnappers no longer have the same strong incentive to keep their victims alive as in the kidnapping of high net worth individuals.
About 112 Chibok girls are still missing with some of them reported to be dead even after the government paid a ransom to secure their release. Aljazeera also reports that more than 300 Kankara boys are still missingafter their school was attacked by terrorists who now seem to be expanding their operations into Northwestern Nigeria away from their Northeastern turf. The problem of kidnap for ransom is also exacerbated by the insurgency problem which the country faces. Nigeria now sits on 3rd place in the global terrorism index.
This has created an atmosphere where terrorists in search of funds to finance their jihadist campaign have turned to kidnap for ransom as a low hanging fruit. The government’s perceived soft stance on terrorism following reports of negotiating with terrorist organizations and terrorist rehabilitation programs carried out on the taxpayer’s tab also contributes to this problem.
Many believe that any form of negotiation with terrorists, while a specious idea -since we care about the lives that are at stake in each case- often lead to frustrated, self-defeating results. The juxtaposition of cost versus benefit of conducting wide-scale kidnappings by these elements continues to yield a net positive on the side of benefits for these kidnap squads, bandits and terrorists. And when the benefits outweigh the costs as we have seen in the places like Hanoi, Delhi and Akwa Ibom, what results are unintended negative consequences of good intentions as illustrated by the cobra effect.
Terrorists continue to be provided with at least two good options. One: to conduct large scale kidnappings successfully and get paid. The second option is to surrender or get captured and get into the government’s rehabilitation program that introduces them back into society without the inconvenience of having to provide useful information that leads to the capture of more active terrorists to the government. Truly perverse incentives.
The theory of perverse incentives already gives an insight into the resultant effect of these dynamics. In this case, it equals more kidnapping incidents and more money paid in ransom as supported by the available data. Until the cost of kidnap for ransom outweighs its benefit to kidnap for ransom agents, we will continue to deal with an increasing problem of kidnap for ransom. It is basic human nature and psychological egoism on the part of these bad actors.
“The argument against negotiating with terrorists is simple: Democracies must never give in to violence, and terrorists must never be rewarded for using it. Negotiations give legitimacy to terrorists and their methods and undermine actors who have pursued political change through peaceful means. Talks can destabilize the negotiating governments’ political systems, undercut international efforts to outlaw terrorism, and set a dangerous precedent.” — Peter R. Newman postulated in his 2007 article title Negotiating with terrorists. Away from this argument, providing a cash reward and a soft landing for terrorists provides perverse incentives which not only represents a deadweight loss to the society and leaves it worse than it was but also self-defeating against combating the problem of terrorism and kidnapping in that; like in Hanoi, Dehli and Akwa Ibom, it actually exacerbates the problem it set out to solve.
This has proven true so far. One only needs to “follow the money.”
“The amount of ransom accelerated in the latter portion of that period: between 2016 and 2020, around $11 million was paid out.” ($18 million between 2011 and 2020) Not only that, fatality from kidnap incidents and terrorist attacks have also increased. — SB Morgen.
Clearly, another approach is needed.
Article written by Mofeoluwa Oloye….
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