Economic Growth

Why universal basic income is a simple, but effective idea

This post first appeared on the World Bank Let's Talk Development blog.
An employee counts Euro notes at the Bank of Taiwan head office in Taipei May 10, 2010. Global policymakers unleashed an emergency rescue package worth about $1 trillion to stabilise world financial markets and prevent the Greek debt crisis from destroying the euro currency. REUTERS/Pichi Chuang (TAIWAN - Tags: BUSINESS) - RTR2DOS9

The job uncertainty that engulfs large swaths of society should be matched by a welfare policy that protects the masses. Image: REUTERS/Pichi Chuang

Ugo Gentilini
Senior Economist, World Bank
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In a world riddled with complexity, the simplicity of universal basic income grants (BIGs) is alluring: just give everyone cash. Excerpts of such radical concepts have been put in practice across the globe, with the launch of a pilot in Kenya, results from India, a coalition in Namibia, an experiment in Finland, a pilot in the Unites States, a referendum in Switzerland, and the redistribution of dividends from natural resources in Alaska and elsewhere.

In high-income countries (HICs), the main rationale for BIGs is related to automation, artificial intelligence, stagnant real wages, and the rise of the ‘precariat’. While the alarm bells that ‘the machines are taking over’ have rung for centuries, advances in robotics may keep slicing labor-capital ratios in large-scale industries and a variety of services. Machines, the argument goes, can take the jobs, but should not take the incomes: the job uncertainty that engulfs large swaths of society should be matched by a welfare policy that protects the masses, not only ‘the poor’. Hence, BIGs emerge as a straightforward option for the digital era – one seemingly backed by Silicon Valley and trade unions alike.

In developing countries, conversations are of a different nature. Most social protection systems in middle-income countries (MICs) are still relatively new, and have yet to undergo the centuries of societal struggles and bargains that cemented welfare regimes in advanced economies. But investments in social protection in MICs seem to occur at comparatively earlier levels of development. For example, mid-19th century poverty levels in the UK and the United States resemble those in India today, sans an equivalent of NREGA or similar rights-based programs – and certainly no biometric Aadhar platforms to help deliver assistance. A BIG in a MIC might still be a long shot, but not that far off from a historical perspective. Iran, for instance, even implemented a variant of BIGs, which rapidly eroded due to inflation and eventually scaled-back for fiscal constraints.

In low-income countries (LICs), social protection systems are truly at their infancy, and have only recently replaced decades of international humanitarian approaches. Here only one-tenth of those living in the poorest quintile is covered by social assistance. Limited finance is no small reason for such performance: pervasive informality and low government revenues (often below 15 percent of GDP) hinder domestic resource mobilization for, among other things, social spending. For example, the budget of a European hospital is almost nine times greater than a LIC’s average spending for the whole social protection sector (i.e., $200 million). A sudden introduction of BIGs in a LIC may be closer to moon-shooting than leap-frogging.

 Basic income
Image: Basic Income

Moreover, there are disputes over the definition and measurement of poverty in contexts where virtually ‘everybody is poor’; targeted approaches have helped reduce the inefficiencies of old-fashioned subsidy programs (which pursued objectives similar to those of a BIG), but there is a lively debate on the trade-offs and methods of targeting (e.g., see here and here); also, the political economy of redistribution has been largely underexplored.

A unifying constraint in countries across the income spectrum is red tape. Social assistance is underpinned by processes of targeting, application, eligibility verification, registration, recertification, and monitoring – with a vast set of programs sometimes having their own individual processes. These are often introduced for good reasons – such as prioritizing the most vulnerable – but at times complexity and opportunity costs may stifle assistance instead of enhancing it. BIGs may not waive some of those functions, especially in the early phases of introduction (e.g., identification, registration, and recertification); but no doubt the bureaucratic burden would be lessened overall, coming as relief for the bandwidth of poor people.

Importantly, BIGs are a melting pot with many variants leading to dramatically different schemes depending on how they are conceived and designed. For example, arguments have been made that less bureaucracy and more predictability may play in favor of increased work efforts, not less. But ultimately, much of the discussion around labor incentives – as well as sustainability – may boil down to the size and objectives of assistance: should BIGs be large enough to meet basic standards of living as the Suisse? Or should they replace most of the current public programs, thus becoming a kind of voucher, to shop for assistance of choice? Or should they provide a more modest amount of cash, which substitutes for some similar transfer program but that is still provided alongside other public interventions?

These questions should not be addressed in isolation, but organically. Because of their foundational nature, BIGs offer a clean slate to revisit system-wide issues: this means, among others, considering BIGs within an optimal composition of social assistance and insurance (e.g., BIGs are similar to social pensions for seniors, although extended to those above 18 years of age); connecting the discussion to the flexibility and formality of labor markets; and anchoring the narrative to the financing and tax discourse (e.g., Friedman’s version of a BIG was indeed a negative income tax).

Over the next two years, we have a great opportunity to unpack the rationale, contexts, and analytical and practical implications of BIGs as an option on a policymakers’ social assistance menu. As the Safety Nets Global Solutions Group in the World Bank, we are excited to contribute to this agenda, and look forward to collaborating and engaging with all those interested in the matter.

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