InTheKnow: What is basic income?

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on September 14, 2020 - September 20, 2020.
InTheKnow: What is basic income?
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Free cash for all?

Basic income (BI), also widely known as universal basic income (UBI), is a governmental public programme whereby a periodic cash payment is unconditionally delivered to all individuals without needing to assess their means or requiring work, according to The Basic Income Earth Network (BIEN), one of the world’s leading networks of academics and activists on this subject matter.

The purpose of BI is to allow all individuals to have a fair chance at an adequate quality of life. It also serves as a way to combat income inequality and ensure that each citizen has the necessary resources to continue living.

Proponents believe that BI will break the cycle of dependence among the disadvantaged, giving them time and money at last to seek the training and higher education they need to climb the economic ladder.

To differentiate BI from other similar government welfare systems, such as wage subsidies, BIEN states that such a programme has to distribute cash payments to individuals, universally and unconditionally, periodically in regular intervals.

Why is BI important?

According to analytics provided by Google Trends, global search queries for BI spiked after the Covid-19 outbreak. This was driven mainly by the reports of international agencies exploring the possibilities of BI as an instrument to combat the economic effects of the pandemic.

For example, the United Nations Development Programme (UNDP) released a report on July 23, stating that a temporary BI programme could mitigate the worst immediate effects of the Covid-19 crisis on poor and near-poor households that do not currently have access to social assistance or insurance protection.

The report estimated that it would cost US$199 billion (RM828.8 billion) a month to provide a temporary BI programme to 2.7 billion people living below or at the poverty line in 132 developing countries, and that it was sufficient to provide them with the means to buy food and pay for healthcare and education expenses.

The report also highlighted that it would be financially feasible, as a six-month temporary BI programme would require only 12% of the total global financial response to Covid-19 expected in 2020, or one-third of what developing countries owe in external debt payments this year.

Interest in BI has been gaining traction since Andrew Yang’s 2020 presidential campaign. One of his signature policies was the “Freedom Dividend”, which would be a BI programme of US$1,000 a month for every American adult as a response to the significant job loss and displacement caused by the rise of work automation.

Case studies

According to BIEN, Iran is the first country in the world to establish a nationwide BI scheme. Operational since December 2010, every Iranian citizen is entitled to a monthly cash transfer of 455,000 rials each, or about US$40 a month at the time.

A 2018 study by the Seven Pillars Institute concluded that the programme had a substantial impact on poverty in Iran, reducing the percentage of individuals living below the poverty line from 10.2% in 2009 to 5.1% in 2012. Income inequality also declined, with a drop in the Gini coefficient (a measure of wealth inequality) from 0.4191 to 0.3367 between 2010 and 2014.

The BI programme aims to replace and phase out the incumbent Iranian subsidies programme for food, energy and other daily necessities. In 2019, however, the Iranian government announced that it would be downsizing the list of recipients by 24 million people, or about 30% of the Iranian population, owing to their higher-income-tier status.

Elsewhere, the concept has been widely discussed and advocated in many Western countries, with several of them currently undertaking pilot projects, including France, Canada and the US.

On Aug 20, Germany launched a three-year study on how BI will affect the local economy and the recipients’ well-being. As part of the study, 120 people will receive an additional €1,200 (RM5,905) monthly for three years, an amount just above Germany’s poverty line, and researchers will compare the results with a control group, who will not receive payments and have to survive on their regular income.

Current BI initiatives include Macau’s Wealth Partaking Scheme, implemented in 2008, where its permanent residents and non-permanent residents were initially entitled to receive a small annual unconditional basic income of 5,000 patacas and 3,000 patacas respectively. The amount of cash distributed has steadily increased over the years, with the latest figure being an annual cash payment of 10,000 patacas (RM5,215) for permanent residents and 6,000 patacas (RM3,129) for non-permanent residents.

The purpose of the scheme is to share the results of Macau’s economic development with its people and help mitigate the effects of inflation, which reached an annual rate of 9.49% in 2008.

A 2017 article by BIEN argued that the amount paid via the scheme was not high enough to fulfil the basic levels of sustenance, thus blurring its qualification as a BI scheme based on the definition. It stated that the average monthly rent for a one-bedroom apartment in Macau was well over 7,000 patacas in the city centre and about 6,000 patacas near the city fringe. For comparison, Macau’s minimum wage legislation establishes a minimum salary of only 6,240 patacas a month.

Arguments against BI

BI is a hotly debated topic among economists and politicians, even gaining support from prominent backers such as Tesla CEO Elon Musk, Silicon Valley’s Y Combinator president Sam Altman and eBay founder Pierre Omidyar.

It has its fair share of sceptics, however, such as Dr Stephen Davies, head of education at the Institute of Economic Affairs, who believes a guaranteed paycheque would channel incentives to those who do not need it, reduce the incentive to work and may even crowd out other existing welfare programmes.

According to a 2017 study by the Foundation For European Progressive Studies, a BI proposal would have to go through a series of serious political and public debate, owing to the significant cost associated with implementation and the government’s ability to persuade its citizens to adopt higher taxes. The study cited an example of the UK, that even after abolishing most existing benefits, an extra £34 billion would need to be raised each year to fund such a policy, and that it would require a significantly different tax settlement from the currents one.

There is also widespread belief that unemployment benefits will discourage work among the unemployed, said the study. Since the early 2000s, more than half of the respondents of the British Social Attitudes survey series have stated that unemployment benefits are too high and have discouraged work and employment.

A 2019 report by Public Services International stated that UBI would require all existing public welfare budgets to be used up, which would lead to an end of all targeted programmes such as public housing, public subsidies for childcare, public transport and public healthcare. The report argued that there would be ideological implications for BI, stating that a guaranteed structure would only help people gain more access to consumption without altering anything about how production was organised.

At the time of writing, the Malaysian government had yet to consider implementing a national BI policy. The concept has been discussed, however, under the 2050 National Transformation initiative, aimed at addressing problems such as poverty and inequality in the country.