Universal Basic Income (UBI) is once again in the news as a promising program in the upcoming general election in India after finding its place in India’s 2016-17 economic survey. Proponents say UBI is economically prudent and could make a significant dent on poverty in the country. UBI bypasses India’s weak system of existing welfare schemes which are riddled with misallocation, leakages, and exclusion of the poor. It also makes sense from the perspective of an individual, who is assumed to be economically rational and thus can spend in accordance to his priorities and choices.
Having said there is insufficient empirical evidence to demonstrate how UBI could accomplish social justice and poverty reduction, especially in a country like India which is still held down by a regressive social structure in the form of a caste system. The caste system leads to a lack of mobility, producing a semi-feudal system of land ownership. Land is held by a small fraction of the population with the rest being landless or having little property, especially in rural areas. The fact that most of the poor are also concentrated in India’s rural areas makes the case that UBI could be successful at alleviating poverty.
Moreover, the proposition that UBI will reduce poverty assumes that the market works competitively and allocates resources efficiently. However, markets do fail in providing an efficient and just outcome in the presence of informational asymmetry, externalities, and monopolies. This is especially true in the case of India where the market is disproportionately in the hands of a few big players who can influence it to their advantage. For instance, giving out cash as opposed to goods and services in kind may not help in remote places if the corresponding supply of essential goods are not there (this role is otherwise performed by the public distribution system in India which may be dismantled to make fiscal space for UBI). A monopoly supplier may hike the prices to neutralise the extra income. To the extent the purchasing power of cash transfers in the form of UBI is curtailed by market fluctuations, the efficacy of basic income to alleviate poverty could be limited.
UBI even in the presence of efficient market can capture only poverty in terms of economic deprivation, whereas factors such as poor health, lack of education, discrimination and lack of entitlements cannot be addressed by the market but are crucial from the perspective of eradicating poverty.
John Rawls in his seminal work propounding the concept of distributive justice is guided by the ‘difference principle,’ which stresses that goods and services should be arranged in a manner that serves to benefit the least advantaged and foster growth towards equality of opportunity. To the extent that everyone will receive the same amount of cash transfer irrespective of his or her requirement, the UBI fails to ensure distributional justice, in accordance with the ‘difference principle’. In this case, justice would require maximizing assistance to those who need it most, which at present our welfare schemes (despite its weaknesses) strives to achieve. UBI at best can only work in conjunction with the existing policies. In order to fully eradicate poverty, the welfare state should work towards increasing its capacity to deliver and regulate rather than leaving it to the market.
Rishi Kant
Currently pursuing Master’s in public administration (MPA), LKY school, National University of Singapore. Graduated in Economics from Delhi University and Post Graduated in Economics from Jawaharlal Nehru University. 5year experience of teaching in various colleges of Delhi University and working with the government of India under various capacities. He has worked as a researcher in the field of Labour economics and evaluated major labour market policies in India such as the Mahatma Gandhi National Employment Program. He has also part of capacity development programs organised by IMF in the areas of Macro-Economics, Fiscal and monetary policies, and Financial Programming and policies.
References
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A study published in the National Bureau of Economic Research in the Fall examines cash transfer programs across a range of developing countries and uses household data from Indonesia and Peru to examine the effectiveness of targeted transfer programs in those countries. The study explores the costs and benefits of targeted and universal cash transfer programs, and the different circumstances that developing countries face that affect the performance of different transfer schemes.
One of the key challenges identified for developing countries that affect the viability of a universal basic income (UBI) are the sizes of the informal sector (1) and the resulting revenue sources. Developed countries largely get their revenue from income taxes (2), but given the size of the informal sector in many developing countries, the bulk of government revenue comes from sources like consumption taxes and official development assistance (ODA), with the latter in some low-income countries accounting for more than half of that country’s operating budget.
Effectively targeting the poor for cash transfer means that you must have a way to reliably measure income and means, and therein lies the problem for many developing countries. In Indonesia and Peru, 88% and 79% of the employed populations are reported as below the tax exclusion threshold, and therefore do not pay income taxes. This is not necessarily to say that upwards of 80% of true income is below the income tax threshold, but it shows the problems associated with informality and lack of information. In any case, it complicates the means-testing portion of targeted transfer programs like those in the US.
In lieu of directly measuring income for means-testing, developing country governments can use what’s called a “proxy-means test” by measuring indirect things like assets and consumption. Another complication is that people can easily misrepresent their economic situation, depending on what indicator the proxy-test uses to measure poverty. Therefore, the mechanism for determining who qualifies for the transfers are often a mystery kept by the designers of the proxy-tests, and the data collection method must in some way provide incentives for telling the truth.
Findings from the data
To measure the success of the targeted programs in Indonesia and Peru, the authors used consumption data from 2010-2011 period from the Indonesian National Socioeconomic Survey (SUSENAS) and the Peruvian National Household Survey (ENAHO) to measure the size of the program’s “inclusion errors” and the “exclusion errors”, meaning the amount of people who do receive transfers who shouldn’t and the amount of people who don’t receive transfers who should. They are able to do this because the datasets used provide information on predicted consumption used by the proxy-means tests of each country, and the actual consumption for that period in each country.
In the 2010 period, in both Indonesia and Peru, transfers reached around 80% of intended beneficiaries, meaning those whose economic situation actually qualified them to receive benefits got them 80% of the time, and 20% did not (meaning a 20% exclusion error). There was also a cost of transferring the benefit to 22% and 31% of those whose economic situation did not actually qualify them for the benefits, judging by the actual consumption data (meaning the inclusion error).
The authors then employ a social welfare function, which measures the utility of a dollar between a low-income person and a high-income person, to measure the effectiveness of more narrowly targeted programs in relation to a universal program (UBI). Using this function, they were able to identify a socially optimal targeted transfer amount, which was 19% and 18% of the population for Indonesia and Peru respectively. While utility is lowest at the point of no transfer, the graph shows utility and overall social welfare both decline steadily after the socially optimal point. A UBI, then, has the lowest utility of almost any ratio, and even with the administrative cost savings included, the added benefit is almost imperceptible (these are represented by the little tick mark pointing upwards at the point of “UBI”).
This is nothing too surprising, though, because it essentially confirms that having a system where wealthier individuals also receive the benefit is not as socially efficient as targeting the poorest individuals, because the dollars are worth more to poorer individuals. What is interesting is that savings in administrative costs in this model also do not provide a big boost to social welfare.
Advantages and drawbacks of universal cash transfers
A UBI would address some of the failings of targeted transfer programs by providing what the authors call “horizontal equity”, which essentially measures the degree of errors at different levels of transfer, and also an added benefit of transparency.
If we imagine a family in the exclusion error population goes to apply for benefits and find that they are not eligible, verifying their eligibility would be difficult given the secrecy of the methods used in proxy-means identification. A UBI would be an ideal fix for this problem because it is available to everyone, and though you would be including those who may not necessarily need it, you would not deny anyone who actually does need it.
There is also the issue of labor market distortions that targeted transfers can cause. It is well known that programs in the US and in some European countries result in recipients to avoid finding work because they risk losing their entitlement. Even if the methods used in proxy-means testing are not known, households in developing countries may restrain themselves on activities that they perceive may end up disqualifying them for the benefit, such as reducing consumption or avoiding formal income.
Other issues with a large informal sector that would complicate implementation of a UBI are identification to avoid double counting, getting the money to recipients that may not have bank accounts or formal residences to mail a check to, and accruing taxes from the rise in incomes that will occur through increased consumption. Dependence on consumption taxes also presents a risk to the scheme, because large informal sectors might also affect tax losses from consumption.
Discussion on UBI in developing countries and alternative methods
The primary strength of the argument for UBI in the context of a developing country comes from the fact that targeted transfers currently deny resources to some of the extreme poor, where a UBI would theoretically not be denied to anyone. It would also theoretically be more straightforward and fairer of a system. A crucial strength with targeted transfers comes from the fact that it can use limited resources the most effectively, and even if it misallocates some resources, on the whole, it can effectively allocate resources.
It makes sense on an intuitive level for developing countries with tight budgets to send money where it would be the most effective through targeted transfers, but this results in both inclusion and exclusion errors, which can either be seen as the best outcome possible or simply insufficient. The exclusion error population could be seen as an unacceptable outcome creating a highly underprivileged class, and even the definition of the population that qualifies for transfers might be considered insufficient. In Indonesia, while the impoverished population has been receding, during the Asian financial crisis it rose to as high as 23%, and the population that is “near poor” have been estimated to be as much as 42% (3). This could play into an argument for UBI: by allowing everyone to have the same benefit, there would be no inclusion or exclusion errors, and it would still be much more socially optimal than no transfer at all.
While the authors recognize that targeted and universal programs work well in different circumstances, they seem to imply that, for developing countries, the social welfare achieved by targeted transfers is currently the best game in town. Universal programs like public education and health care are two examples of already widely accepted government programs, yet cash transfer programs remain largely targeted.
The authors also introduce some interesting alternatives that capture some of the strengths of targeted and universal programs. For example, with “community-based targeting”, a village might get a certain number of “beneficiary slots”, and in a completely public setting, the village communally decides where to allocate them. The strength of this program seems to emanate from the fact that local communities have a more intimate knowledge of who needs the assistance the most. In the “differential cost and self-identification” method, benefits would be available to an entire population like UBI, but your relative wealth would affect the ease of which you get the benefits, as determined by a proxy-means test. The key to this program would be the fact that the benefits are worth less the higher up the income ladder you are, and things like long application processes would deter some applicants. The added benefit to this would be that those who are in the exclusion error population would receive some recourse if they are initially denied benefits.
It is clear that having an income tax base with which to measure prosperity and draw taxes from is currently the ideal system to operate with a UBI. Jenson (2019) demonstrates that development accompanies a shift from self-employed to employed populations in the United States with over a century of data, which could be the natural outcome of development in other contexts. If a UBI turns out to be an ideal system for reducing extreme inequality and increasing other indicators of human wellbeing, a question of its appropriateness might also entail identifying the correct level of development. Advancing this issue still requires more pilots in more varied circumstances.
This research adds to the knowledge of basic income in developing countries from pilots in Namibia (2008), Madhya Pradesh (India, 2010), and in other expansions of cash transfer schemes in Zambia (2010) and in Iran (2011).
Notes
1 – The informal sector describes the portion of the population who work but do not contribute to a social security system, are often self-employed, and whose activities and revenue amounts are largely unknown.
2 – By contrast, in the 2017 US Federal Government budget, 83% of revenue came from individual income and payroll taxes.
3 – Figures from the World Bank’s report “Making the New Indonesia Work for the Poor”.
Valerija Korošec, a known sociologist and social policy analyst in Slovenia, as well as ex-presidential candidate for that country, has presented a paper entitled “Unconditional Basic Individual Universal Child Grant for Belgium following the Slovenian approach”, at the International Conference on Universal Child Grants, which took place in Geneva from 6th through 8th of February 2019.
This paper’s abstract reads as follows:
This paper presents some evidence for developed countries suggesting that a universal, unconditional and uniform basic income (UBI) approach is more effective than a means-tested, conditional and targeted benefit system in addressing child poverty.
In accordance with the aim of the International conference (2019) on Universal Child Grants (UCGs) a policy design for Universal Child Benefit for Belgium is outlined. It follows the concept of Universal Basic Income Proposal for Slovenia (KOROŠEC, 2010), for which the simulation already showed that a UBI approach is more effective than means-tested, conditional and targeted benefits. The findings of KOROŠEC (2010) fit well with those of the OECD (2017) study ‘Basic Income as a Policy Option: Can it add up?’ and the IMF (2017) Fiscal Monitor ‘Tackling Inequality.’ Also, the most recent study Universal Basic Income: Debate and Impact Assessment (IMF, 2018) resembles KOROŠEC (2012) up to the point of similar outlining of the necessary steps in designing the UBI policy framework.
Certain consensus starts to emerge on circumstances in which a UBI system is better than the current means-tested system for all.
The affordability study for UBI UCG in Belgium presented here (i.e. SI_UBI UCG_BE) is simulated by MEFISTO, which is a micro-simulation model for Belgium based on EUROMOD. This simulation shows that with the same amount of money (no budget change) child poverty rate drops if the current 27 schemes are replaced with a universal flat-rate child grant (200 €/month) and a 400 €/month single parent supplement. Child poverty rates drop the most in the first and second income deciles. The majority of the population is either unaffected or benefits by the simulated reform, and the Gini is slightly lower, by 0.03.
We confirm, at least for two developed countries that already have quite universal and comprehensive social security systems, Slovenia and Belgium, that within the same fiscal envelope (budget neutral) and with UBI implemented on a level just above the current Guaranteed Minimum Income scheme (GMI) a UBI system is better than the current (means-tested) system.
If Martians did exist, they would know nothing about human endeavours (assuming they had not come to Earth in UFO’s before). They would look at humans from a place of absolute ignorance of what it means to be human, and – let’s assume – with a child-like curiosity for our habits and particularities as a species.
This recording starts with a provocative sentence, “Humans are born here, but without those pieces of paper [money], they seem to not be allowed to live here”. Further on, Santens reaches a conclusion on what money is (according to him): “Money is nothing but book keeping”. He continues to reason on that vein, and infers the corollary that money is trust. That we, as humans, trust in money to give us the opportunity to get what we need, in exchange for giving our contribution to what other people need.
Santens shows that “one of the most alien things of all” is the fact that a lot of the Earth’s vital resources are withheld from many people. But it wasn’t always like that. Once upon a time, the Earth was a free planet, where humans, other animals and plants simply shared the bounty of life and life-supporting conditions of this abundant planet. People gave and received objects and tasks from each other, and felt the social obligation to give back to the community for it. Now, however, and for a long time up to this moment, some people feel entitled to possessions over the Earth’s resources, forcing everybody else to sell their time for the right to live here, in relative comfort.
However, and because humans are animals who adapt and adjust, even to the harshest of environments, most people have gone accustomed to this reality. Poverty has come to be considered normal. Stressful lives have also grown as normal. Competition over resources perceived as scarce has developed into something normal. It seems that this state of things derives from one, and one only, scarce resource, among fellow humans: trust.
According to Santens, this is where the “thinking like a Martian” intersects with the universal basic income (UBI) concept. Because, at a fundamental level, the UBI idea only says: “I trust you”. It says that we, as a community, trust each other to share our life-energy and talents, given the unconditional access to the Earth’s basic resources, necessary for human living. It’s that simple. And it is about so much more than money (a quantified unit of exchange). Scott Santens believes that only free, conscious human beings will actually trust each other to make this happen and, in the process, free millions of other human beings.
Then the question: “how do get from here to there?” (“how do we start trusting each other?”) Santens argues that that is where basic income pilots come to be useful, as experiments in human trust. Data already shows how harmful poverty is, how destabilizing inequality is, and how unproductive our work can be when we’re not choosing to do it (but being forced into it, in order to get an income). “What we lack is will”, he determines. So, experiments can and should be done, as often as it takes, until humans get around to trusting each other on ever increasing scales. Because, at a fundamental level, that is what is at stake. He says: “[basic income is] a civilizing idea”. And it comes along at this moment in human history also as a way to recognize that everything a person gets when he or she is born, is not earned. It is not deserved. It is given to us. From nature and from thousands of human generations before us.
As a make-up Martian, Scott Santens concludes by blowing the question up to the stars: “Are you ever going to trust a species that has never learned to trust itself”?
Bidar has started getting interested in basic income in 2015. As a defender of basic income, Bidar has tried, in the referenced book and in his speaking venues and interviews, to detach his arguments from strictly economic grounds, but to solidify a sound philosophical defence. According to him, the “how much” question amounts to an obsession, since present-day society is obsessed with money and its derived consumption habits. He doesn’t aim to minimize the economic issue, but to amplify the debate to a much larger sphere.
Because in order to mobilize people, to get them to stand up for their rights, time is needed. Most people are just too busy making ends meet, working to feed the children and paying the rent, so a basic income can come as way to provide people with the necessary time to become full-right citizens.
He says the times we live in are the “Kairos” of the age, an historical moment to act, to achieve crucial change. The capitalist system just captures and condenses wealth, leading to unprecedent levels of inequality. Our task now is to redistribute the abundance we are today are able to produce. Since we no longer need to work so much to produce wealth, in the XXI century, due to automation and computerization, we are now, or should be, able to free ourselves from the necessity to “work for a living”, and maybe start working to live…and be happy.
He cites new generations: according to him, young people are much less “docile” regarding impositions from the job market, than previous generations. They want to align their work with their beliefs and aspirations, and not only to work as a way to guarantee survival (in the midst of a hostile society). That may even include, sometimes, to stop completely from working, since everyone needs to breathe, to stop running and reflect at certain moments in their lives.
Bidar looks at basic income also as a tool that allows people to participate in their community and society at large, instead of just hoping that things arrive at their doorstep provided by a handful of politicians. He poses fundamental questions of what to do with our time: what mobilizes us? How do we choose to use our time?
Because, it seems, society is entirely unbalanced, and tilted towards work. That means that the availability of quality time will help people to re-centre their lives in a better balance between work, culture (each person’s place in society and their own choices within their social culture) and political activity (truthful, responsible and active citizens).
He says that “you cannot improvise freedom”, which in this case means that the actual societal freedom a basic income can supply must be a very concrete, planned and conscient step to take. It takes a lot of reflection, discussion and agreement to implement such conditions for freedom. According to him, children and youngsters in general should be supported in their education, so they develop self-confidence and trust in their creative freedom, rather than just being told what to do.
He defends opening up the marketplace, so people have true choice in what to do with their lives, in a sense trusting them to be responsible in living out their freedom. He also understands that suffering in the job market is rampant in today’s society, and that must end. People have little or no choice, which resembles totalitarian systems. To that end, the link between income and work must be broken. There is a social emergence, so basic income should be immediately implemented, even if in a partial form (for the most vulnerable members of society, e.g.: disabled, young people, women in some circumstances). However, he questions if people in general are ready for the level of freedom basic income allows, even though he states that such a policy is crucial to tackle the social and ecological crisis humanity faces nowadays.
To resolve the apparent paradox – that people may not be prepared for the kind of living they need to be living in order to solve the social and ecological crisis – he points to education. He believes in the human being, and that humans are capable of great things, but education and individual conscience are fundamental to evolve and transition to a new way of living.
