A recently released National Bureau of Economic Research study helps to clarify the different costs and benefits of implementing targeted transfers or basic income schemes in developing countries. The most salient argument proposed in favor of UBI was that means-tested welfare is just about impossible in the developing world. The authors write:
“In less developed countries, substantial activity occurs in the “informal sector” that includes casual labor, undocumented firms, and small farms. Thus, most individuals are outside the tax net”
If a program is to be funded through taxes, have a small tax base makes redistribution difficult. Furthermore, because many citizens in the developing world work in the informal sector, their tax contributions are hard to measure.
“In most poor countries, the government just does not observe any information about income for most people, and in particular, for the poor,” said NBER, alluding to the additional difficulty of determining who ought to receive government aid.
For any form of social assistance there will be inclusion errors and exclusion errors, or people who receive transfers who shouldn’t and people who don’t receive transfers who should.
NBER’s strategy, in collaboration with the governments of Indonesia and Peru was to ask about household wealth, as a proxy for income.
“Government census enumerators typically ask about assets, all of which are easy to observe directly. Examples might include ownership of items such as televisions and refrigerators, the type of material used in one’s roof, floor, and walls, the number of rooms in one’s house, and so on. The government uses these assets to predict incomes (or per-capita consumption, which can be easier to measure in survey data). Thus, eligibility for benefits is based on predicted, rather than actual, income.”
This predictive system is not without fault, and also leads to inclusion and exclusion errors.
It is for this reason that universal basic income is looked to, when thinking about poverty reduction. As a horizontal program, basic income guarantees eliminate the risks associated with targeted aid. What’s more, because these cash transfers have a negligible effect on unemployment, they can be thought of as an efficient means of poverty reduction. This is because, in means tested aid, families and individuals become incentivized not to work more than the level at which aid is supplied.