China’s minimum income guarantee you’ve never heard of

Back in the 1990s, China started experimenting with a minimum income guarantee that topped off incomes to a minimum level set by local governments. China called the program dibao, meaning minimum livelihood guarantee, expanding the program nationwide in 2007.

In Beijing the urban monthly dibao standard is 1050 RMB ($161.50 USD) and the rural standard is 800 RMB ($123.04 USD). For urban residents, this is about five dollars USD a day.

However, even this paltry amount often does not make it to those in poverty.

A report by the World Bank found that for every 10 RMB spent on the dibao, only 1 to 2.4 RMB reached individuals in poverty (cited by the Economist). The World Bank also found the dibao program only lowered the poverty gap by 6.5 percent.

Corruption and inability to determine households’ poverty status have plagued the program. According to Lu Yang in the Indian Journal of Labour Economics, based on 2010 survey data only 21 percent of poor households were able to receive the dibao, while more than half of dibao recipients were above the poverty line.

Many local governments go to great lengths to investigate whether dibao households are secretly hoarding wealth, visiting recipients’ homes and observing whether the household has too many “high quality” products to qualify.

Others are concerned with the dibao’s effect on the poor’s effective marginal tax rate. Higher effective marginal tax rates lower the likelihood that a household member will seek work.

If a household’s average income per person goes above the dibao standard, they could sacrifice the entirety of the benefit. Each household member raises the household’s dibao standard by 100 percent. For example, in Beijing where the standard is 1050 RMB per month, a two-person household would face a 2100 RMB dibao standard. In turn, larger households are more susceptible to the problem of high effective marginal tax rates.

In some instances, it is possible that a household will have a 100 percent effective tax rate due to the dibao benefit. In these cases, the household will have the same income regardless of whether a household member chooses to work or not. Based on data from an essay in Population and Development a family of three in Tianjin with one household member employed would have the same income as an identical family that does not work at all. Clearly this has the potential to undermine labor participation if the drop off is this steep in reality.

China plans to lift 70 million people out of poverty by 2020. Such a massive undertaking requires a robust social welfare system. As it stands, the dibao program is not equipped to do this heavy lifting.

However, the dibao does provide a starting point for China to experiment with universal coverage.

The 2014 World Bank report conducted economic simulations that demonstrated expanding dibao coverage was more effective than increasing the benefit size at lowering the poverty gap.

Like the dibao, the central government of China could initiate pilot programs that universalize the dibao cash transfer, eliminating the income and wealth requirements to qualify for the dibao benefit.

Universalizing the program would potentially address many of the issues plaguing dibao, such as the high effective marginal tax rates and low rate of impoverished individuals that receive the dibao.

China’s economic miracle successfully lifted the most individuals out of poverty in world history. To do so, China undertook some dramatic reforms that completely reshaped Chinese society. Now in order to completely eradicate poverty, China may want to take yet another drastic step with a universal basic income guarantee.