Universal Basic Income in Post-Pandemic Poor Countries

by Pranab Bardhan

In coping with the dire economic crisis in the wake of the pandemic many developing countries have resorted to cash assistance to the poor for immediate relief. Beyond the relief aspect, many macro-economists have also pointed to the need for such programs to boost mass consumer demand in a period of one of the deepest slumps of general economic activity in many decades. As I have been an advocate for universal basic income (UBI) in poor countries for more than a decade now—my first published paper on the subject came out in India in March 2011 in the Economic and Political Weekly— I have often been asked if the widespread adoption of such cash assistance programs indicates that it is now a propitious time for UBI. While I have supported the cash relief programs in the context of the crisis (most of these programs have not been universal, mainly targeted to the poor) and consider the experience gained in this as generally useful, I think those who like me have supported UBI have usually thought about it in a longer-time framework and in the context of a more ‘normal’ state of the economy with appropriate institutions, political support base, and administrative structures in place. Of course, I’ll not object if in a post-pandemic world attempts are made to help the temporary crisis programs ultimately extend or evolve into a more general UBI program in poor countries.

A Bit of History

By now it is well-known that the idea of UBI or that of a guaranteed minimum income enabled by a public assistance program has a long history in western thought, going back about 500 years to Thomas More and his friend, Johannes Vives, or that over the years the idea has been supported (and also attacked) by people in the whole range of the political spectrum, by libertarians and socialists alike. On a practical level it has been tried on a large enough scale briefly in the beginning of the last decade in two countries, Iran and Mongolia, and for the last 4 decades in one US state, Alaska. In all these 3 cases the funding source has been the bounty from some natural resource (oil for Iran and Alaska, copper for Mongolia). For rich countries in general, many economists, even in cases when they are otherwise supportive, think that it is much too expensive for the Government to fund a UBI at a decent level. In recent years, however, additional support has come from people (including some from the techno-utopian entrepreneurs of Silicon Valley) who are worried about the work-displacement effects of automation and artificial intelligence in the near future. Inducements for automation may be reinforced if we have to live with the virus for quite some time, as there will then be attempts to avoid production conditions where lots of workers have to congregate.

In this essay I shall primarily talk about developing countries, where more than looming automation there may be some other special factors why UBI may be imperative, and also show that finding resources for a reasonable UBI supplement may be within the realm of fiscal feasibility.

My friend, Philippe van Parijs, a political philosopher, who has been one of the leading intellectual proponents of UBI over many decades, and who has been a source of inspiration for me to think on these lines, once told me that just as Marx had originally thought the communist revolution would first come to an industrially developed country, while it actually came to relatively poor countries, maybe UBI, even though originally thought up for rich countries, may end up coming first in a poor country.

UBI Not Necessarily Viewed as an Anti-Poverty Program

Let me start by pointing out that I have noticed an important difference in emphasis between my position on UBI and that of many of my fellow development economists. The latter look upon a UBI or UBI supplement as part of an anti-poverty program—some think of it as an administratively simpler substitute for other anti-poverty programs while others think of it as supplementary to those programs. Then they have to contend with other development economists who try to show that UBI is less cost-effective in reaching the poor than a more targeted anti-poverty program. In the implementation of anti-poverty programs there are usually exclusion errors (that of excluding some of the poor people) and inclusion errors (that of including some not-so-poor people). These errors in implementation of anti-poverty programs can be quite large, particularly when means-testing is difficult to implement. For example, in India (where targeted programs use a BPL or Below the Poverty Line card to mark the eligibility of the poor) some survey data have shown that, through administrative lapses and malfeasance, about half the poor people do not have the BPL card, while about one-third of the non-poor have the card.

By design UBI includes all people and excludes none. To those who look to UBI as mainly an anti-poverty device, minimizing the exclusion error so that hardly any of the poor people are left out is worth the cost of the inclusion error of paying the rich as well. (They sometimes suggest some easily enforceable ways of reducing that inclusion error, say by denying the UBI to the small fraction people in a poor country who own a car or pay income tax. In any case it is easier to weed out the few rich than to search for the really poor among the vast numbers who are almost-poor). To the targeted policy supporters, however, the inclusion error is too large and it tends to make UBI too costly in trying to reach the poor. Of course, the magnitude of these errors will vary from context to context, and so it may be difficult to generalize for or against these two different positions among the poverty-fighters. It has, however, been pointed out in favor of anti-poverty UBI that the latter by enlisting the political support of the influential middle classes may sustain anti-poverty programs in a way not attainable for purely targeted programs that leave out the middle classes. Also, poverty is not a static demographic category. People, sometimes the same people, transit in and out of poverty all the time, which is difficult to track for official targeted programs that usually work with pre-fixed poverty lines and BPL cards, a problem avoided by UBI. In any case many people who are just above the poverty line also require a great deal of economic support.

In my own approach to UBI I look upon it as part of a basic human right of every citizen to minimum economic security. One should remember that Right to Social Security was part of the Universal Declaration of Human Rights of 1948. In recent years even in rich countries globalization, automation, decline in labor institutions, and cuts in public services under macro-economic austerity policies have made the life of ordinary workers more precarious. Now the pandemic has heightened the sense of social insecurity, particularly in countries (like the US or India) without a robust public health infrastructure.

Minimum Economic Security as the Main Rationale for UBI

In developing countries the social safety net is usually even patchier than in the US. For a long time the policy preoccupation in these countries has been with poverty reduction, and most developing countries have made considerable progress in this respect over the last few decades (now the pandemic-related economic crisis has pushed back that progress somewhat). But large fractions of the population, who may be technically above the poverty line (which in poor countries is usually a line of extreme destitution), suffer from all kinds of brutal risks in their daily life and livelihood, due to weather fluctuations for agriculture (now likely to be increasing in severity with climate change), job losses, illness episodes (for family members or for animals used in production) or pest infestation. A floor basic income is  part insurance against such risks, without the administrative costs of checking for the usual problems of moral hazard and adverse selection that commercial insurance projects involve. In trying to expand the domain of UBI much beyond the poor I am more concerned about these highly insecure sections of the population and less bothered about the inclusion error that people with the targeted anti-poverty approach worry about.

When I am asked to justify why UBI should be given even to the plutocrats, my answer is that the plutocrat is entitled to it as part of their citizen rights. Just as we recognize the right of plutocrats for police protection against crime—a matter of physical security– as a basic right, even though they can very much afford their own private protection services, we should not deny them the right to minimum economic security in the form of a basic income. (If they decide to waive it, or if some asset threshold—car ownership, a threshold in income tax return, etc.– can be transparently implemented to exclude them, I’ll not object on pragmatic or political expediency, rather than normative, grounds. Also, some of the UBI paid to them will come back to the Government in the form of taxes.) This also means I am looking at UBI primarily as a means of relieving economic insecurity, not economic inequality. (Although, as I am later going to suggest a UBI in poor countries largely funded by reducing currently regressive subsidies and taxing the rich, its introduction will have some egalitarian consequences. Just as the Social Security program in the US is a universal program to relieve economic insecurity for the old, the way it is funded and implemented makes its net impact progressive.)

Looking at UBI from the economic security point of view has also important implications for the labor market. In India, as in some Latin American and European countries, there exist some protective labor laws which make labor lay-off in large factories difficult even when market conditions warrant a drop in labor demand. Many business leaders and pro-business economists say this makes employers think twice before hiring, and thus ultimately hurts employment of workers. Most trade unions are avid supporters of such labor laws for ensuring job security for workers, particularly in developing countries where unemployment benefits are non-existent or highly inadequate. This has been a source of political tension between capital and labor. UBI can relieve some of that tension, by disentangling the issue of security of a particular job from that of ensuring general economic security for workers. If everybody is entitled to a decent UBI, then losing a particular job is less traumatic for the worker.

Special Factors in Developing Countries Justifying UBI

Apart from minimum economic security being the main rationale for UBI in developing countries, there are some special factors which reinforce the rationale for these countries.

  1. In some developing countries (particularly in south and west Asia and north Africa) the majority of women do not participate in the income-earning labor force (in India the proportion of such adult women is as high as three-quarters), as they are mostly in unpaid domestic and care-giving work. A UBI deposited in their account every month can go a long way in boosting their existing low autonomy and status within the family and activating their agency.
  2. In developing countries some occupations are often particularly stigmatized (manual scavenging, garbage collecting, sewage cleaning, sex work, etc.). People usually work in these occupations because they have no other alternatives. UBI can provide them an escape ladder, so that they have more choice in the labor market (and induce society to mechanize some unwanted cleaning jobs). Even beyond socially stigmatized work, UBI can be a great relief for the stark livelihood uncertainties faced daily by the vast numbers of the self-employed and the marginalized casual and migrant workers, and will help them in seeking better jobs and more profitable investment. It will also enhance their bargaining power against the traders, middlemen, contractors, employers, creditors and landlords they encounter.
  3. UBI can play a role in mitigating the incidence of clientelism in poor countries. The politics of redistribution is often centered around group-specific or individual-specific patronage—like job reservation, ‘jobs for the boys’ (what the Italians call lottizzazione), and disbursement of subsidized private goods (food, fuel, fertilizers, credit, etc.). This distorts the nature of democracy and diverts policy emphasis away from public goods which can improve productivity and benefit everybody. In this context a universal policy like UBI can have a special social-transformative appeal, particularly if normatively one thinks of it as part of minimum citizenship rights, replacing clientelistic favors dispensed by politicians.
  4. Unlike in rich countries a large fraction of workers in poor countries, sometimes a majority of them, work in the informal sector. One reason the labor movement is weak in those countries, and thus their bargaining power is low, is because the movement is fragmented by this formal-informal division. Trade unions give leadership to workers in the formal sector and agitate or lobby for wage demands and labor laws that largely protect only the formal sector workers. The informal workers do not enjoy the pensions and benefits of formal workers, and so they’d benefit a great deal from UBI. To unite the labor movement one needs platforms which will benefit both types of workers. A collective demand for UBI, as with other universal benefits like universal health care, can serve as a bridge between the two types of workers and strengthen the labor movement.

Arguments against UBI

The idea of UBI often faces four general kinds of opposition:

  1. opposition from many common people, particularly those with strong work ethics, as well as some paternalistic leaders that UBI will encourage laziness, an attitude of taking from society but giving nothing in return, and a possible inclination of some recipients to blow it up all in drugs and alcohol;
  2. opposition from fiscal bureaucrats and conservative economists, as it may break the budget;
  3. opposition from social activists who regard this as a ploy to undermine existing welfare programs, particularly when they are working reasonably well;
  4. opposition from many that any extra money should better be spent on education, health and infrastructure which are seriously deficient in poor countries.

Let us discuss these four issues one by one.

1. To start with, the incentive to indolence argument may be used against any income improvement for the poor. In recent years there have been quite a few experimental studies on the effects of cash transfers to people in developing countries (the largest and the longest-lasting one has been the on-going study in 40 villages in Kenya by the Give Directly Program). There is no systematic evidence that cash transfers discourage work or encourage use of drugs or alcohol. In addition, my own view on the possible work disincentive effect is that if anything, the poor are often overworked in back-breaking oppressive work, and it will be better if they, particularly women, can work a little less. As for taking something from society, not giving back, if this is a major concern, it has been suggested that even though UBI is technically unconditional, one may try to develop a social norm of every recipient expected to give something back to society to the best of their ability (say in terms of some social service).

2. The financial viability of a UBI is surely a major, and sometimes a decisive issue. Much, of course, depends on how generous the amount of UBI envisaged is. In rich countries most decent sums proposed for UBI have been thought to be unaffordable or infeasible in view of what the taxpayers are prepared to bear. It is our intention to show here that for poor countries a decent UBI, by the standards of those countries, may not be out of bounds of fiscal feasibility.

In 2017 a Report of the International Monetary Fund estimated the gross fiscal cost of a UBI (as percentage of GDP) for 6 countries calibrated at a quarter of the median income per capita of each country. In general the percentage was higher for the US (6.4%), Poland (4.9%) and Brazil (4.6%), than for Mexico (3.7%), Egypt (3.5%) or South Africa (2.3%). But this study did not go into the question of how the UBI will be financed and how the form of financing may affect the fiscal cost itself.

Fiscal Arithmetic for an Illustrative UBI Supplement in India

I shall now present, as an example, some rough estimates that I myself have made over the years for a low middle-income country, India. I first look at the mobilizable fiscal resources in India, and then discuss how much of these can go toward funding a UBI supplement.

For many decades both central and state governments in India have been providing substantial subsidies to different sections of the population. Some of these subsidies like those for food, education, health, water supply, sanitation, housing and urban development serve essential needs, often (though not always) for the common people, and so are deemed as ‘merit subsidies’. But a majority of the subsidies happen to be for other purposes, primarily going to the better-off sections of the population, and have been called ‘non-merit subsidies’. It has been estimated that the total ‘non-merit’ subsidies (both explicit and implicit) of the central and state governments together came to about 5.7% of GDP in 2015-16.

On top of this in the central budget alone what are called Revenues Foregone (tax exemptions and concessions mainly to business) come to about 5% of GDP. Some of these concessions may be indispensable (for example, in the case of customs duty exemptions for re-exports), some others may be less so (for example, tax exemptions for encouraging investment in Special Economic Zones are on the sometimes dubious presumption that without these exemptions this investment would not have taken place elsewhere anyway). It is probably not too unreasonable to take one-half of this total (i.e. 2.5% of GDP) as potentially available for more worthwhile purposes. Also, this does not count the Revenues Foregone in state government budgets, for which we do not have good estimates.

There is also considerable scope for fresh taxes. The tax-GDP ratio in India is substantially lower than in China, Brazil and some other developing countries. India’s real estate and property tax assessments are absurdly low compared to their market value. India has also zero taxation of wealth and inheritance, and of agricultural income. This is at a time when household survey data (which usually underestimate inequality) suggest that India’s wealth inequality is mounting, and now in the Latin American range. We are roughly estimating 1.8% of GDP in the form of additional taxation.

All combined, there is thus a potential for mobilizing about 10% of GDP. Of course there are several important claims on any extra resources mobilized.  In particular, the needs for additional spending on health, education, and infrastructure are urgent. (Even with the most generous basic income supplement, people will not by themselves spend enough on their health and education needs, and there are public welfare reasons why the state needs to invest in all these three items.)  Even keeping this in mind and allowing for an equal division of the extra 10% of GDP thus mobilized on these 3 items plus UBI, it is possible to get resources for UBI to about 2.5% of GDP. This very roughly implies a UBI of about Rs. 20,000 per family (or Rs. 4,000 per individual), which is a decent UBI supplement in the Indian context—it comes to about 15% of the average consumer expenditure in the household. (One could add to the mobilizable potential if in the post-pandemic context it is possible to raise a ‘corona levy’ that may go toward an overhaul of the public health system which has been found to be seriously deficient in the crisis).

3. and 4. The above fiscal scheme keeps untouched the existing welfare programs. (Some of these programs may be wasteful, and if they are pruned or replaced, the resource potential can even exceed 10% of GDP). So the opposition (3) then becomes largely irrelevant. Similarly, in the above scheme, the total 10% of GDP gets equally allocated among health, education, infrastructure and UBI, so that should go some way in meeting opposition (4). If the social consensus is in favor of spending somewhat more in effective investment for health, education or infrastructure, and somewhat less for UBI, I’ll not seriously object.

Some implementation Issues

Politically savvy people will immediately point out that elimination of long-standing subsidies and imposition of new taxes will meet a lot of resistance from many quarters, and will be politically difficult to carry out. While that is true, a crisis situation sometimes may soften up the resistance somewhat, and may thus be an opportune time to try big changes. If for some time the whole of the 10% of GDP is difficult to mobilize, even with half the amount one can start a UBI supplement only for the women.

There are, of course, many other objections raised to the UBI proposal—about the level of UBI supplement (too low for some, too high for others), if it should be indexed to the cost of living so that it does not get eroded as prices rise, that many people do not have ready access to a bank account where the UBI supplement can be easily deposited, etc. These are mostly problems at the implementation stage; once the idea of UBI is accepted at the conceptual and at the broad policy direction level, there can be pragmatic and flexible ways of handling the implementation problems. For example, some have suggested that the UBI should be a share of the GDP, rather than an absolute amount. Then even starting with a low absolute amount, with sufficient GDP growth one can soon reach a decent amount of UBI. This also gets around the indexation issue, as the absolute amount of UBI will rise with price rises raising the nominal GDP. One practical problem is that it becomes a bit murky at the political level: most common people will not have a clear idea of what the GDP is and will not know what to expect as UBI, and even economists will dispute particular measures of GDP (as they have done with the official GDP measures in India in recent years). People not having bank accounts is a serious problem in many countries. The general estimate is that two-thirds of people in low-income countries, and 42% in lower middle-income countries, do not have access to a bank account. One has to make do with other alternative ways of cash payments in unbanked and remote-access areas—roving banking agents or mobile phone banking have been used in some countries. Many people in some countries (for example, in Nigeria more than 70% of people) do not have any government-registered identification card (this is much less of a problem in Indonesia or India). So clearly at the implementation level different developing countries will be at different stages of preparation for the implementation of an UBI.

Over the last decade and a half the world has been subject to many traumatic events—the financial crisis, stringent austerity policies, deep slump in many economies, large-scale job losses, technological disruptions, creeping authoritarianism and ethno-nationalist excesses, increasing incidence of natural disasters (probably attributable to the on-going climate change), agro-ecological distress, mass dislocations, and a whole sequence of epidemics, the coronavirus being the latest. All of this has dangerously exposed the fragility and insecurity of the lives and livelihoods of billions of ordinary people. This has been particularly acute in developing countries, where numerous people live a hand-to-mouth existence even in the best of times, with very little in the form of social insurance. A universal basic income supplement can provide some minimum economic security in those countries, which even under the pressing fiscal constraints may not be unaffordable.