Recently, the Universal Basic Income (UBI) has hit the news headlines around the world;either because few politicians included it in their political programs (France, Finland, India) or a number of influential people said that they support the idea (Tesla's Musk, Facebook's Zuckerberg or Virgin's Branson, Bill Gates to name a few). This has not left the economists aside, instead many economists from different economics schools delivered studies or views about the introduction of the Universal Basic Income in a country and its impact on labor, productivity, employment, poverty, etc...
Many known economist are backing the idea of UBI, among them Thomas Piketty and Nobel prize in Economics laureate Joseph Stieglitz. And not to forget one of the leading advocate of UBI Professor Philippe Van Parijs from the university of Louvain, Belgium, read his influential paper on the topic here.
So what is the Universal basic Income? here the official definition from basicincome.org:
"A basic income is a periodic cash payment unconditionally delivered to all, on an individual basis, without means-test or work requirement. That is, basic income has the following five characteristics:
- Periodic: it is paid at regular intervals (for example every month), not as a one-off grant.
- Cash payment: it is paid in an appropriate medium of exchange, allowing those who receive it to decide what they spend it on. It is not, therefore, paid either in kind (such as food or services) or in vouchers dedicated to a specific use.
- Individual: it is paid on an individual basis—and not, for instance, to households.
- Universal: it is paid to all, without means test.
- Unconditional: it is paid without a requirement to work or to demonstrate willingness-to-work."
The notion of a Negative Income Tax (NIT) first appears in the writings of the French economist Augustin Cournot (1838). It was briefly proposed by Milton Friedman (1962) as a way of trimming down the welfare state. But the UBI is fundamentally different than the NIT in its nature, because UBI has no means-tested scheme, and is paid to all.
Various pilots have already been rolled out in Kenya, India, the United States, Finland and France, among other countries. In developed countries the debate has been motivated by the prospective threat of technology replacing jobs, in developing countries this debate has more to do with finding a better way to tackle poverty.
I have selected below two totally different pilot purposes, in order to show how diverse an implementation of the UBI can be.
In January 2017, 2000 Finnish unemployed people received their first cash transfer of 560 euros, which they will continue to receive each month, until 31 December 2018. They were randomly selected from 25 to 58 years to participate in a study to assess the impact of universal basic income on employment. If it is proved conclusive, the experiment could be extended to other categories of the population of that country of 5.5 million inhabitants.
After 3 years of recession with the fall of its flagship brand Nokia, Finland wanted to test new ideas that could provide a solution to decrease "poverty", social exclusion and provide incentives to support employment.
Looking forward to the results of the Finnish pilot...
Meanwhile, in a recent note (July 2017) entitled "Basic Income, what would it change? " The OECD has studied 4 countries ( France , Finland , Italy and the UK ) a universal income would be paid without means testing, to all working age individuals as well as minors.
According to the OECD, the introduction of a universal income in these 4 countries would lead to lower resources for early retirees and the unemployed as a result of a general increase in taxation."A basic income, which would be granted unconditionally to all working-age individuals and children and would be neutral to public finances , would not be an effective tool to reduce poverty", the Organization for Economic Cooperation and Development Economic statistics (OECD).
According to the scenario of the study, many low-income households, currently receiving aid, would be less well off. The poverty rate would increase in Finland, France and the United Kingdom, and would remain unchanged in Italy.
GiveDirectly, a New York-based nonprofit has initiated a pilot program in a rural village in Western Kenya, this past October.
The cash transfers are made via mobile phone to the village residents. Each of the 95 participants received 2,280 shillings (about US$22) every month to save or spend however they see fit. Participants are all guaranteed this income for the next 12 years. Before GiveDirectly began the payments, many people in the village were living on less than US$0.75 a day; afterwards, no one was.
GiveDirectly’s analysis claimed that “for 45% of the village’s residents, the first month’s basic income payment was the largest amount of money they’d ever had.” The organization recently published an internal analysis of the pilot program, in a first attempt to process the results of the pilot. The results will set the tone for future programs and influence basic income policy making moving forward.
Some of their answers are below:
- “I will be getting transfers that will enable me to pay medical bills for my condition and also buy other things. Since I went for checkup after receiving the transfer, my health situation has improved and I am able to go about my business without much stress.” Grace, 68.
- “Since I have been able to improve on my business, I have gotten income to help me meet my daily expenses and also buy enough food for my children.” Diana, 33.
- “The biggest difference in my daily life is that I can have 3 meals in a day.” Dorcus, 87.
- “I spent the entire transfer received from GiveDirectly to purchase a fishing net and a floater.” Erick, 40.
- “I spent the money received from GiveDirectly to buy clean water, food, soap, and used most of the amount to pay school fees.” Fredrick, 70.
- “I spent most of the money I received from GiveDirectly on buying a goat since I want to buy livestock. I also bought food for my household.” Patrick, 38.
- “I spent the money received from GiveDirectly to purchase food and kept most of the transfer as savings.” Milka, 44.
- “I feel I need to work harder and engage in other income-generating activities to get more money.” Samson, 70.
- Yes, receiving the payments has changed my feeling towards work since I really want to finish my driving course and immediately look for employment.” Fredrick Odhiambo Awino, 28.
- “I will not be working since I am old and sickly. I will just wait for the transfers.” Jael, 73.
- “I will still continue with my small business and charcoal burning since the family needs the extra income to enable us to meet all our expenses without borrowing from relatives each time.” Norah, 30
So where the poverty starts?
Poverty is defined globally as those below a daily consumption level of $1.90 in 2015 purchasing power parity terms (**). About 11 percent of the global population, or 750 million people, live below this consumption level. Many Economists have argued that this definition tends to be narrow (Deeming and Gubhaju 2014, UNSD 2005, Pritchett 2003). This is an important point in the sense that this definition could blindside policymakers to potentially serious problems. Why?
Several studies of economists prove that poverty is transient in nature, i.e., individuals move in and out of poverty (Dercon and Shapiro 2007). Recent analysis on poverty in Africa by Beegle et al (2016) shows that in 20 out of 26 studies transient or temporary poverty is higher than chronic poverty (always poor).
Increased climate risks such as droughts and floods only increase the risk of individuals falling into poverty. How many people became -literally overnight- poor and fulfill the definition above after the recent hurricanes in the Caribbean?.
A large part of individuals in low-income-countries (LICs) is poor. For example, they are 87% in Democratic Republic of Congo or 74% in Zambia.
Therefore, the idea of a UBI is interesting to get the poor from their poverty and, given the transient nature of poverty, a UBI could provide insurance against economic shocks in many poorer countries.
Policymakers should not be blindsided following exactly the consumption level of $1.90 in PPP as defined by the world Bank. They should take into account the transient nature of poverty with including a much larger share of the population.
The UBI discussion is still new, hot, exciting and everyone has arguments depending on whether they are pros or cons. There are still way too many poor in the world!
**WorldBank increase the Poverty line in 2015 to $1.90 instead of $1.25