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Basic Income to help poor countries
June 25, 2016, 4:32 pm

The old idea of recasting the welfare state by instituting an unconditional universal basic income has lately been capturing imaginations across the political spectrum. On the left, it is regarded as a simple and potentially comprehensive antidote to poverty. On the right, it is viewed as a means to demolish complex welfare bureaucracies while recognizing the need for some social transfer obligations in a way that does not weaken incentives significantly. It also provides some assurance for the dreaded future when robots may replace workers in many sectors. But could it actually work?

So far, the question has been addressed primarily in advanced countries — and the figures do not look promising. Though Canada, Finland, and the Netherlands are reportedly now considering the idea of a basic income, some prominent advanced-country economists warn that it is blatantly unaffordable. In the United States, for example, an annual handout of $10,000 to every adult — less than the official poverty threshold for a single person — would exhaust almost all federal tax revenue, under the current system. Perhaps it was that kind of arithmetic that spurred Swiss voters to reject the idea overwhelmingly in a referendum earlier this month.

But what about low- or middle-income countries? In fact, a basic income may very well be fiscally feasible, not to mention socially desirable, in places where the poverty threshold is low and existing social safety nets are both threadbare and expensive to administer.

Consider India, where about one-fifth of the population lives below the official poverty line, which is itself very low. While citizens with so-called ‘below-poverty-line’ cards are eligible for government relief, surveys show that about half of the poor do not have the card — while about one-third of the non-poor do.

Many other developing countries face similar problems, with benefits intended for the poor accruing to better-off people, while many of the intended recipients miss out, owing to a combination of political and administrative collusion and genuine structural challenges. Means-testing can be very difficult in an environment where jobs are concentrated in the informal sector, primarily in self-employment, without any formal account-keeping or income data. Under those circumstances, identifying the poor can be costly, corrupt, complicated, and controversial.

An unconditional basic income could eliminate much of this mess. The question is whether governments can afford it, without increasing the burden on taxpayers and undermining economic incentives.

In India, the answer could be yes. If each of India’s 1.25 billion citizens received an annual basic income of 10,000 rupees ($149) — about three-quarters of the official poverty line — the total payout would come to about 10 percent of GDP. The National Institute of Public Finance and Policy in Delhi estimates that every year the Indian government doles out significantly more than that in implicit or explicit subsidies to better-off sections of the population, not to mention tax exemptions to the corporate sector. By discontinuing some or all of these subsidies — which, of course, do not include expenditures in areas like health, education, nutrition, rural and urban development programs, and environmental protection — the government could secure the funds to offer everyone, rich and poor, a reasonable basic income.

If the government lacks the political courage to eliminate enough subsidies, two options remain. Either it could take steps to boost tax revenues, such as by improving property-tax collections (currently extremely low), or it could reduce the level of any basic income it introduces.

What governments should not do is fund a basic-income scheme with the money from other key social-welfare programs. While a basic income can replace some egregiously dysfunctional welfare spending, it cannot substitute for, say, public education and health care, preschool nutrition programs, or employment guarantees in public works. After all, the basic income would still be severely limited, and there is no way to ensure that individuals would allocate enough of it to achieve socially desirable education, health, or nutrition levels.

If these limitations are taken into account, there is little reason to think that a basic-income program could not work in developing countries. Indeed, the most frequently heard arguments against such schemes are far from convincing.

The main drawback, according to critics, is that a basic income would weaken the motivation to work, particularly among the poor. Given that the value of work extends beyond income, the logic goes, this could pose a serious problem. European social democrats, for example, worry that a basic income could undermine the worker solidarity that underpins current social-insurance programs.

But, in developing countries, workers in the dominant informal sector are already excluded from social-insurance programs. And no feasible basic income would be large enough, at least for now, to enable people simply to leave work behind.

In fact, among the poorest groups, basic incomes would enhance the dignity- and solidarity-enhancing effects of work, by easing some of the pressure on people – particularly women – who are now vastly overworked. Instead of constantly fearing for their livelihoods, self-employed people, such as small-scale producers and vendors, could engage in more strategic decision-making, taking advantage of their enhanced bargaining power against traders, middlemen, creditors, and landlords.

The final argument against basic income is that the poor will use the money to fund personally or socially detrimental activities, such as gambling and alcohol consumption. But experiences with direct cash transfers in a range of countries, including Ecuador, India, Mexico, and Uganda, have not provided much evidence of such misuse; in general, the cash is spent on worthwhile goods and services.

Proposals for a universal basic income, fancied by utopian socialists and libertarians, may be premature in the advanced countries. But such schemes should not be dismissed in the developing world, where conditions are such that they could offer an affordable alternative to administratively unwieldy and ineffective welfare programs. Basic incomes are no panacea; but for overworked developing-country citizens living in extreme poverty, they would certainly be a relief.

Pranab Bardhan
Professor of the Graduate School at the University of California, Berkeley; his latest two books are Awakening Giants, Feet of Clay: Assessing the Economic Rise of China and India and Globalization, Democracy and Corruption.

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