Universal Basic Income for Developing Countries?

By Jurin Katayama Flores

Over the past decade, nations have observed that their increase in income inequality, as well as technologies replacing elementary occupations, have had negative effects on job security. In order to alleviate this issue, governments present benefits to vulnerable and eligible individuals, provided that these recipients meet the welfare conditionalities, such as being employed or attaining education.  However, the limitations of a conditional form of redistribution include that not all vulnerable individuals are eligible, propelling the argument for implementing a Universal Basic Income (UBI) – an unconditional and uniform transfer for every individual on a recurring basis – as some, including Elon Musk and Andrew Yang, believe that the latter will reduce administrative costs in welfare schemes and eliminate poverty.

Changing from a conditional form of redistribution to UBI, nevertheless, is met with concerns. First, the feasibility of including all individuals as recipients means higher costs for the government. Second, the government fears that UBI will result in reduced work incentives and people to become “more idle”. Thus, the question arises: is UBI feasible for developing countries? Is it even desirable in the first place?

Could developing nations afford a switch to UBI?

In order for everyone to receive a UBI, we must first decide on the amount of this transfer. If UBI is used to relieve poverty, we must set the minimum income to the estimated international poverty line – the minimum income that is enough to provide basic needs for an individual – is US$57 a month.

Let us choose the Philippines as an example of a developing country. Considering that the Philippine population in April 2020 is 100.98 million people, UBI would cost a whopping US$69 billion per annum if UBI is set to the estimated international poverty line. Even supposing that current social schemes were to be abolished and that total tax revenue were to be redirected towards UBI, the 2017 annual tax revenue of US$54.92 billion, raised through the progressive income tax system, would not be sufficient to fund this switch. Therefore, the only way to afford UBI would be to increase the marginal tax rate.

The feasibility of implementing UBI would therefore depend upon how agreeable the tax-paying individuals are to an increase in marginal tax rate. Considering that only certain individuals in developing countries contribute to tax revenue, the amount of increase in marginal tax rate needed to cover UBI may be too high to be politically feasible. As a result, welfare state may settle for a lower marginal tax rate that will not be enough.

Would developing countries even want a UBI?

A developed country, such as the UK, where technologies are advancing yet job insecurity is rising, would desire a welfare scheme that will maintain enough income during uncertain job conditions while maintaining incentives to work. However, a developing country, such as the Philippines, with a majority of the population in elementary occupations, would prioritize a welfare scheme that will promote education for future labor productivity.

Implementing a UBI affects people differently where some will experience an increase in net income, whereas those who experience an increased marginal tax rate will experience a decrease in net income. Those who experience an increase in their net income will of course, welcome the idea of UBI as they would be better off. There will be an income effect causing them to increase their hours of leisure and decrease work incentives, which will not be desired by the government. In contrast, the effects of those who experience a decrease in their net income will be ambiguous. On one hand, the decreased income will decrease demand for leisure, demonstrating an income effect. On the other hand, when wage rate decreases, leisure becomes cheaper and more attractive, demonstrating a substitution effect. Therefore, the change in hours of leisure for the rich would depend on whether the income or substitution effect will dominate. It is normally considered that tax rate increase results in substitution effect dominating, and thus overall, we could assume that this group of people will also increase their hours of leisure, which will not be desired by the government.

Closing thoughts

Is UBI feasible and desirable for developing countries? The short answer is no, but it is definitely more complicated than that. Regarding feasibility, a UBI set to the poverty line would only be achieved if there was an increase in marginal tax rate. Although not impossible, it is unrealistic to assume that rich individuals would accept a large increase in marginal tax rate considering the political climate of many developing nations. The desirability of UBI is more complicated. This article has declared that the government will oppose UBI as it will cause an increase in hours of leisure. However, some may argue that an increase of leisure is good for the country as it will provide time for individuals to invest in their education, improving the workforce of the country in the long run. Although that may be true for some individuals, the investment into education is not guaranteed by the UBI. Instead, a conditional form of redistribution (where its conditions include attaining education) will incentivize and guarantee individuals to make the government’s desired choice. Consequently, these concerns establish the UBI may not yet be appropriate for developing countries.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s