Policy Impact: Can it be Better Predicted?

The evidence in economic literature shows that different political institutions partly account for differences in economic outcomes1, particularly their degree of involvement in the policy-setting process. This literature does not, however, explain how to predict impacts of policy change triggered by political institutions and subsequent issues involved. In general, policy impacts are hard to predict for all parties involved, specifically:

·       Policy-makers that initiate a policy;

·       Businesses affected by policy change;

·       Citizens as the end-users of economic outcomes from a policy.

Furthermore, in the turbulent conditions of a crisis, predictive performance gets even worse than usual.

Policy-makers and businesses would ideally like to understand likely impacts before a policy is implemented. Recent policy changes get much attention from the broader public due to the tax- payers’ support provided in the financial meltdown and the ongoing tax rises and cuts in government services. Further examples of policy change come from the field of banking, insurance, insolvency and risk management, and telecoms. New regulations and standards have been introduced across the EU. New supervisory bodies have been established on national and European levels.

One particular illustration is “Solvency II”, a perfect example of a design of regulatory policy change for the insurance industry in Europe2. The purpose of this Directive, which has been already agreed, is to reduce the probability of firm failures and improve customer protection. According to the FSA, the specific benefits are:

  • encourage firms to better understand their risks;
  • change capital requirements to accurately reflect up-to-date market conditions;
  • improve supervision of groups and interconnectedness;
  • require data disclosures by insurers;
  • introduce common EU intervention tools;
  • and harmonise insurance regulation across Europe.

In order to comply with this policy change, the insurance business has to interpret and translate the new regulatory requirements into internal policies. To fully comply with the new policy requires that all business practices in the firms are compliant. Necessary business processes for handling this policy change will be developed, written reports produced and assessments done. Proper actions will be taken to mitigate risks and prevent future failures. However, overall it will be difficult to evaluate the real impacts on the insurance business and the economy from such policy change before the actual implementation.

Interestingly, the policy-setting process in knowledge-driven economies is largely based on the cost-benefit analysis of different scenarios. Policy-modelling, simulation and visualisation beforehand is gradually emerging in public services across Europe, but there are challenges ahead3. Unlike Bank of England’s or Treasury’s policies based on forecasts and modelling, (for instance, monetary policy relies on forecasts of inflation rates, economic growth and surveys of inflation expectations4), the general policy-making measures benefits and costs afterwards. Thus thorough impact analysis and adjusting systems on the fly seems impossible in the current practices.

To achieve improved policy-making that accurately reflects market conditions, further research is needed on policy-modelling, predictions of policy impacts and development of new governance models. The existing research focuses primarily on the software development methodologies that enhance policy-modelling. Furthermore, I suggest that actions should involve various stakeholders not only through consultation papers but through more interactive social platforms which will allow policies to be quickly adjusted. Using techniques and technologies already used in social networking and gaming could help policy-makers and improve outcomes.

The application of IT solutions should enable the following:

  • Modelling new policy initiatives;
  • Performing simulations to forecast potential impacts;
  • And detecting new trends as a result of a changing economic environment.

Such actions in the field of policy-making will make it more interactive and more thorough. The benefits will be enormous not only to businesses but also to the broader public. The transparency of the policy formulation process achieved via applications of IT tools and practices will contribute to the opening of the policy-making to the wider audience. The policy-making will be driven by innovative solutions and will help to identify new societal trends.

Recently, a number of European funded projects have been conducted in the area of policy- modelling and e-government5. Many of these projects study the use of social networking technology to engage citizens, policy-makers and businesses in the policy formulation process. Some others deliver research on IT techniques for governance and policy-modelling.

In this context, GPI plans to organise a roundtable debate of the issues of the policy-setting process. The output will be findings and recommendation on practical next steps. To make it interactive, various interested groups will be invited to participate. Our hope is to influence policy decision-making at the national and European levels, to connect policy makers with international businesses, expertise and research in order to aid and improve policy formation nationally and at EU level.

1 Besley T., M. Kudamatsu, “Making Autocracy Work” in Elhanan Helpman, Institutions and Economic Performance, Harvard University Press, 2008

2 FSA: The future of insurance industry, speech by Hector Sants, Chief Executive, February 2011

3 Butka P., Furdik K., Sabol T., M. Mach, ”Use of E-participation tools for support of policy modelling at regional level”, Conference on Information Systems, January 2010

4 Read more in: “Inflation expectations in the Euro Area: a review of recent developments”, ECB Monthly Bulletin, February 2011

5 European Commission: ICT for Government and Public Services. ec.europa.eu/egovernance

About the GPI

The Global Policy Institute is a research institute on international affairs. It is based in the City of London, and draws on both a rich pool of international thinkers, academics as well as policy and business professionals. The Institute gives non-partisan guidance to policymakers and decision takers in business, government, and NGOs.