Illicit economies, shadowy realms, and survival at the margins

May 17, 2018

Book Review: How to Rig an Election, by Nic Cheeseman and Brian Klaas

May 17, 2018

Which is better: a guaranteed job or a guaranteed income?

May 17, 2018
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Guest post from Eleanor Chowns of Bath UniversityEllie Chowns headshot

Martin Ravallion (former Chief Economist of the World Bank, now at CGD) published a useful paper this week asking exactly this question.  As he says, there’s no simple answer – which is why the question is so interesting.

Both ‘the right to work’ and ‘the right to income’ aim to secure a more fundamental right: freedom from poverty.  Workfare has a long history, notably in India, where the National Rural Employment Guarantee Act (NREGA) guarantees (in theory) up to 100 days work per year, paid at a minimum wage, to anyone who requests it.

Cash transfers (often with conditions) have expanded enormously in recent years, while the hot topic of Universal Basic Income (UBI) has advocates across the political spectrum. Which of these approaches is most cost-effective?  Ravallion sets out the arguments clearly.

Proponents of workfare argue that it solves unemployment, and helps push up the minimum wage.  Workfare is self-targeting: richer people simply won’t bother to do it, so it’s good at reaching the very poor.  And in theory these schemes can build productive assets (roads, drainage, irrigation) that help communities in the long term.

NREGA in action

NREGA in action

But workfare has costs, too, including supervision of worksites and provision of materials.  Participants face opportunity costs, so the workfare income isn’t fully additional.  Monotonous manual labour is not much fun for anyone, and not much use for those with illness or disability.  And Ravallion gives pages of detail on the problems with implementation, including work rationing and corruption.

So, does it work?  Not nearly as well as it should.  NREGA reduced poverty by only 1 percentage point in Bihar, not the 14-point reduction predicted in theory.  Why?  Because NREGA failed to give work to everyone who needed it, failed to pay them on time, and was costly to implement.  A UBI would have been equally cost-effective in reducing poverty, without imposing a work requirement.

What about cash transfers, then?  Ravallion explains the two approaches to guaranteeing a minimum income: ‘perfect targeting’, and UBI.  Perfect targeting gives anyone below the poverty line a ‘top-up’ of exactly the amount needed to bring them out of poverty.   UBI, in contrast, gives everyone the same regardless of their income.

On the face of it, the ‘top-up’ approach would be far less costly.  One estimate suggests it would cost only $80bn per year to eliminate poverty in this way – about half the global aid budget.  So what are we waiting for?

Ravallion explains four reasons why perfect targeting doesn’t work: 1) information constraints mean that in practice

Pension day in Tanzania

Pension day in Tanzania

it’s impossible to identify who should get what: one study showed that even using the best available data, 75% of the poor would stay poor; 2) targeting may undermine wider public support for transfers, leaving the poor with ‘a larger share of a smaller pie’; 3) perfect targeting implies that poor recipients would be taxed at 100% on any additional income they earned; and 4) targeted transfers can create stigma.

In contrast, UBI would be administratively simple and cheap, though usually much more expensive overall.  However, in places where a large proportion of people are poor, the costs of a universal approach might still be less than the costs of targeting.

A mid-way approach is what Ravallion calls ‘state-contingent transfers’ (aka ‘categorical targeting’) i.e. universal transfers to particular categories of people, such as ‘children’ or ‘over-60s’.  This is where the paper ends – and where I think the advocacy needs to begin.

Because, in the end, evidence doesn’t drive policy.  It’s all about the politics.

There’s clearly plenty of scope to improve the effectiveness of workfare schemes like NREGA.  But there’s even more scope to expand universal categorical income guarantees, like pensions and child benefit.  Who could really object to ensuring every child and every senior has a dollar a day to ensure a decent basic quality of life?

Of course, guaranteeing income (or employment) won’t solve all development challenges.  Building good health and education systems requires collective public investment.  But while it might be both impractical and relatively ineffective to ‘just give’ half the global aid budget to the poor, there’s surely scope to give more than we do at the moment.  Maybe we need another ODI High Level Panel to look at the role of cash in development aid?

I do wonder sometimes why we don’t hear more about ‘the right to income’ from NGOs.  A cynic might make the ‘turkeys and Christmas’ point: if more aid went directly to the poor, there’d be less to fund NGO projects.  Or maybe we’re all just a little too hesitant in these aid-hostile times?  But ‘more cash for the poorest’ could be a Goldilocks policy, appealing to both left and right of the political spectrum, albeit on different grounds.

So here’s the challenge: how can we ‘think and work politically’ to increase the adoption and expansion of cash transfer programmes – particularly more universalist ones?  Time for a bit of action research, Oxfam?

4 comments

  1. Thank you for this great summary of the issues. Something that I feel is often overlooked in the debate about UBI and cash transfers, is that there is a solid international framework in place that can form the basis for advocacy to expand access to universal social protection – in particular The ILO Social Protection Floors Recommendation, 2012 (No. 202): http://www.ilo.org/secsoc/areas-of-work/legal-advice/WCMS_205341/lang–en/index.htm, but also other ILO and human rights instruments.

    Another thing is, that coming from a social protection angle and looking at all the work that Oxfam and others are doing on tax-issues, I also think that there is much more potential for bringing issues of resource mobilisation and social protection together. After all, the effect of taxes and transfers on poverty and inequality have to be considered together. The importance of taxes and transfers for reducing inequality and poverty is apparent when looking at the experience of OECD countries (e.g. https://ourworldindata.org/wp-content/uploads/2013/12/inequality-of-incomes-before-and-after-taxes-and-transfers.png) – but unfortunately, in many African countries, the combined effect of taxes and transfers is regressive: https://www.cgdev.org/blog/chart-week-taxing-poor-to-give-to-bureaucrat. This is for me a very strong point of departure for advocacy for expansion of social protection transfers.

  2. Thanks for a very interesting article. I very much agree with where the conclusion you reach, and questions you raise. In answer to those questions, you might want to look at some of the work of HelpAge International (my old employer) and its network over the last decade or so, which has has a strong focus on the expansion of universal old pensions. There are a number of countries where there has been real traction including Malawi, Tanzania, Philippines, Myanmar, Peru. One of the conclusions we came to over the years was that effective advocacy was precisely about thinking politically. Some analysis exists of those advocacy processes, but they could certainly be explored in more depth.

  3. Like the two previous comments, I agree with the gist of this article, but in the UK context I wish more attention was paid to ‘Dynamic Benefits: towards Welfare that works’
    https://www.centreforsocialjustice.org.uk/library/dynamic-benefits-towards-welfare-works
    This was the report which proposed the Universal Credit. It was published in September 2009 for Iain Duncan Smith. It showed, with a series of graphs, that the withdrawal of means tested benefits had the effect of a proportionately massive tax on low incomes. It would have read much better as the case for a universal basic income (UBI), but that was not Duncan Smith’s agenda.
    Briefly, ‘Dynamic Benefits’ could be used to show how everyone could be put on the same starting line, clearly showing the UBI as superior to all the other alternatives listed.
    But my bigger worry is that in all the publicity about the UBI these days, I appear to be worryingly unique. My reason for it is to allow everyone,everywhere to feel secure in an economy without economic growth, to save the ecosphere, the only place where life is possible.
    http://www.clivelord.wordpress.com

  4. Thank you for very valuable article. “How can we ‘think and work politically’ to increase the adoption and expansion of cash transfer programmes – particularly more universalist ones? Time for a bit of action research, Oxfam?” This statement is very important to me. In view of this, wishing a more advanced concept and help in planning against delinquency too. Thanks, Ananga

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