Is This a Good Idea for the Developing World? Essay

One of the central goals of development economics has been to understand how to raise the quality of life of the people. As Adam Smith (1776) made an emphasis on his book, Wealth of Nations, “No society can be surely flourishing and happy, of which by far the greater part of the numbers are poor and miserable”. In developing countries – where people are socially excluded, deprived from exercising their political rights, dwell on dilapidated areas, have little to no literacy, experience undernutrition, and live on less than 1$ per day at purchasing power parity – poverty is an understatement. It is almost ubiquitous and extreme that no one can ever imagine, but it exists. Prominent thinkers of economic development from around the world have proposed several social development measures to end the vicious circle of poverty. However, until the 21st century, poverty is still considered an unfinished business. Thus, recognizing the universality of the issue, Universal Basic Income has become a hot topic in public debates.

Milton Friedman, in his book “Capitalism and Freedom”, supported the idea of giving everybody free money: According to him:

“We should replace the ragbag of specific welfare programs with a single comprehensive program of income supplements in cash — a negative income tax. It would provide an assured minimum to all persons in need, regardless of the reasons for their need…A negative income tax provides comprehensive reform which would do more efficiently and humanely what our present welfare system does so inefficiently and inhumanely. The proposal for a negative income tax is a proposal to help poor people by giving them money, which is what they need, rather than as now, by requiring them to come before a government official to tally all their assets and liabilities. The number of people on welfare has been skyrocketing. Why? Because once they get on welfare, we make it almost impossible for them to get off. In order for somebody who gets on to get off, he or she has to be able to have a really good job, because to get off gradually, to earn a little bit, now doesn’t pay. The virtue of [a negative income tax] is precisely that it treats everyone the same way…there’s none of this unfortunate discrimination among people.”

The Universal Basic Income (UBI) is a revolutionary concept which suggests the idea of handing out money to everyone regardless of their income, wealth, and employment status. As long as the individual is a legal resident of the country, he/she is entitled to a monthly stipend sufficient for him/her to live above the poverty line. In other words, this “basic income” is given to the people, not as a favor, but as a right to keep each individual from falling into poverty.

The good thing about basic income given to every individual is that it gives the people the venue to voice their demand in the market. That is, the people can use the money to buy the things that they think they need instead of experts providing the things they think are essential to human existence. This leads to production efficiency because it allows for the true demand for goods and services to be reflected in the market. Businesses produce according to their perceived demand for their product. However, because of the market price, there are portions of the market left unserved. But because of basic income, businesses would willingly produce more to accommodate those who have zero means for basic goods and services but are now empowered to provide for themselves. In other words, UBI allows for the goods and services to be produced in the most efficient way.

Moreover, this scheme empowers the most vulnerable sector of the society, especially the women. As child rearing is usually attributed women’s responsibility, the central role of women in preventing the poverty being transferred from generation to generation is crucial since the economic status of the mother is a strong indicator of the welfare of their children. Mothers tend to spend most of their income for the welfare of their children. Thus, if mothers are given cash on hand, the money is directly spent on food and education of their children. This, in effect, will decrease the instances of children being illiterate as they are being sent to school and being undernourished as they are being served with nutritious food. In addition, since the money is given regardless of employment status, there is an incentive for mothers to reserve some of their time to take good care of their children. Thus, morbidity within the household is less likely to happen.

Another positive note about UBI is that it can encourage people to take extra risk to own a business. Not only will the multiplier effect would do an amazing job of accelerating growth, but also create demand in the labor market and goods and services market as the immediate consequence of the increase in the purchasing power of the people. This suggest that increases in economic activity is more likely to take place in the future.

Looking at the positive consequences which the UBI may bring about, it seems like it can solve the widespread poverty, even its worst forms. But is it the solution which we all have searching for, particularly in the developing world?

Skeptics of UBI argue that UBI may not be sustainable as it may cost the government too much to provide the same amount of money to its residents on a periodic basis. However, poverty is far more expensive than providing each individual free money. In terms of malnutrition alone, the Philippine government costs PHP220 billion each year due to the effects of undernutrition, such as child stunting, anemia, and iodine deficiency. This is equivalent to 1.5 percent of the Philippine GDP in 2015. But investing in interventions to combat malnutrition will cost the government only around PhP5.7 billion per year. This means that for every Php50 investment in these interventions the government can save around Php624 caused by forgone earnings or in health expenditures because of undernutrition.

In an influential analysis made by University of Manitoba economist Evelyn Forget almost 30 years after the experiment in Dauphin, Canada, she found that hospitalizations dropped significantly while the MINCOME program was in effect, especially for mental health problems, accidents, and injuries (Glazer, 2017). This would imply that UBI will, of course, cost the government. However, if we are to quantify the long-term benefits of the basic income, developing countries will surely reap its positive results though improvements in the quality of life.

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Disincentives, such as dependency on the transfers, were also proven wrong in most empirical studies conducted. Forget, Calnitsky, Widerquist, Hum, and Simpson suggest a “UBI allows people to participate in social welfare without shame and does not lead to a decrease in labor productivity”. Minor reductions in the labor supply might happen but as UBI makes workers more flexible, these are more than offset and complemented by other much more significant increases in quality of life of the people.

Contentions that inflation rate might be out of control due to the increase in private spending is also far from being probable. In UBI, there is no actually new money created. People spend the money transferred to them. In fact, instead of an inflationary pressure, the GDP per capita will increase as a result of the multiplier effect.

Assertions on UBI being less effective than means-tested programs were also less substantiated by empirical studies. Effectiveness of means-tested programs in reducing poverty can be weakened by several structural factors. Francese & Prady (2018) cites the following:

“high information and administrative costs requiring high and reliable capacity to target eligible households and monitor complex programs (Sala-i-Martin and Subramanian 2013); multiple obstacles (high compliance costs, bad information, social stigma…) that affect take-up by eligible households (Atkinson 2015); the need to keep fiscal costs under control that often results in high marginal withdrawal rates that, in turn, tend to discourage labor market participation (Friedman 1968; Brewer, Saez, and Shephard 2010)”

Going back to the question above, is this the universal program which the developing world should pursue? Well it depends on the following basic features of UBI (Francese & Prady, 2018):

1. Why? What goals? A UBI could be used as a tool to achieve redistributive objectives, i.e., to tackle poverty and inequality, and to broaden the coverage of income-support programs (allowing social protection systems to reach parts of the population currently left out). If designed as a one-time endowment, it may be regarded as serving the purpose of improving equality of opportunity at an early stage of life.

2. Who? The “universality” in the name of the tool suggests at the same time a broad pool of benefit recipients, and a condition-free benefit. However, how broad the boundaries should be is not exempt from passionate discussion. For example, should participation be limited to the country citizens or to residents? What does “participating” or “belonging” to a group mean and how is it checked?

3. What? How much? The appropriate level of transfers also needs to be defined and is linked with the policy objectives. In general, the magnitude of the transfer can be related to the needs that the program is supposed to cover; and it is also affected (and most likely constrained) by the amount of resources that can be raised to finance the program. As benchmarking each individual’s many needs is impracticable, common benchmarking methods calibrate the transfer as a fraction of a country poverty line or median income. This type of benchmarking further raises the question of whether to modulate the transfer value across different types of individuals (e.g., a lower value for children than for adults or a lower value for active individuals than for children and elderly). Finally, the nature of the transfer is also subject to interpretation as in-kind transfers could be chosen over cash transfers, and vice versa.

4. When? This dimension looks at the timing of disbursement but is also linked to the nature of the program that considers, in particular, whether transfers should be made on a regular basis (monthly/yearly) or as a one-off.

The success of any UBI depends on what combinations of these features will policy makers will implement. Empirical evidence from the success of UBI in Namibia, Brazil, Canada, Iran, and Finland supports the idea that free money indeed decreased the incidence of poverty. That is, the evidence from these studies has been very positive, with little evidence of the negative outcomes as contended by the non- supporters of UBI. These positive effects come on a very wide range of outcomes, from education and health to entrepreneurship and so on. Other developing countries are in the transition of doing the same. These large sums of money could have otherwise used to implement projects designed to achieve narrower goals for health, education, infrastructure, nutrition, and so on. But the moral is that, if there is something which any country cannot afford to give to its people, it should be poverty, not cash.

References

1. Glazer, S. (2017). Universal basic income. CQ researcher, 27, 725-748. Retrieved from http://library.cqpress.com/
2. Legarda, L. (2018). The Economic Cost of
3. Undernutrition in the Philippines: Privilege Speech of Senator Loren Legarda. Senate Session Hall. Retrieved from http://lorenlegarda.com.ph/privilege-speech-the-economic-cost-of-undernutrition-in-the-philippines/
4. Hum, Derek, Simpson, Wayne. “Economic Response to a Guaranteed Annual Income: Experience from Canada and the United States.” Journal of Labour Economics, vol. 11, no. 1, 1993, pp. 263-294.
5. Francese M & Prady D. (2018). Universal Basic Income: Debate and Impact Assessment: IMF Working Paper.
6. Orfalea, M. (2015). Why Milton Friedman Supported a Guaranteed Income (5 Reasons). Retrieved from https://medium.com/basic-income/why-milton-friedman-supported-a-guaranteed-income-5-reasons-da6e628f6070