Universal basic income ‘offers public finance efficiency gains’

8 May 17

A universal basic income can increase efficiency and accountability in the public finances of developing countries, experts have argued at a debate held at a UK-based think-tank.


Shanta Devarajan, chief economist for the Middle East and North Africa at the World Bank, and Shamika Ravi, senior fellow of governance studies at Brookings India, stressed that countries that face challenges with administering a benefit system can achieve significant efficiency gains by shifting to one that is universal.

Speaking about  the experience of India, where the idea of a UBI has been trialled and endorsed by the government, at the UK's Overseas Development Institute today, Ravi said the “overriding factor is efficiency”.

India has a population of over 1.3 billion, a multitude of different subsidy programmes and an unreliable bureaucracy to administer them, she said. The current system generates a “tremendous amount of leakage”.

Highlighting India’s food subsidy in the programme, which is one of the largest in the world, Ravi said 36% can be attributed to “pure leakage”, while another 36% goes to the non-poor. Only 28% can be considered well targeted, supporting those on low incomes.

Devarajan agreed, stressing that the current system is “missing the boat” and is “grossly inefficient”.

“You can improve efficiency, paradoxically, by giving the same amount to everyone because that makes it hard for it to be manipulated,” he said.

Accountability, and the poverty-reduction potential, of funds would also increase under a UBI, he continued.

On the experience of oil-rich countries in Africa, he said: “They’ve done a terrible job of using revenues to reduce poverty, and the main reason for that is that the oil revenue comes directly to the government with little accountability on how they use it.

“So we’ve done some experiments looking at what would happen if you take the same amount of oil revenue and distribute it to the population in an equal basis. And what we find is that in countries like Equatorial Guinea, or Gabon or Angola, if you just take 20% of those oil revenues and distribute it equally to the entire population, you can eliminate poverty in all three.”

However, ideas for a UBI have been floated in advanced as well as developing economies, with trials or pilots planned, underway or completed in Ontario, Oakland, Scotland and Finland.

Ilkka Kaukoranta, chief economist at Sak, a coalition of trade unions in Finland, said that while UBI might be the answer elsewhere, in Finland and other rich economies, it’s the answer to the wrong question.

“[UBI] is an efficient way of distributing money, but that is not the problem Finland is facing,” he said, explaining that the country’s current system has very little leakage (3%) and provides a decent standard of living, rather than just ability to get by, to those it targets.

The biggest challenge for Finland, according to Kaukoranta, is instead one of gathering the money to distribute. UBI exacerbates that problem, because giving money to everyone requires an even larger amount of tax to fund the scheme while at the same time promoting an erosion of the tax base, he said.

He pointed out that in a globalised world, where the richest taxpayers are highly mobile and not necessarily subject to the tax rates of the country trying to fund a UBI, taxing income, rather than employment, is not a solution.

Another issue highlighted by the panellists was that a simple UBI would increase economic inequality. Deverajan said using higher taxes for the rich can make the UBI system virtually revenue neutral for them, while the poor receive a more significant share.

Kauoranta countered: “If you find new revenue to fund a larger amount of benefits then you can reduce inequality, but it’s not the UBI that’s doing it, it’s that you are taxing the rich more.

“If that is something you want to do, you can do that regardless of a UBI.”

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