A silver bullet missing the target

The immanence of Industry 4.0, a new economic paradigm, in which machines with artificial intelligence will be able to do almost everything that humans can, is ringing alarm-bells. Socialists are concerned about how human beings will support themselves if they do not have jobs. Capitalists are equally concerned about who will buy all the stuff and services their machines will produce if people do not have adequate incomes.

The concept of a Universal Basic Income (UBI) provided to everyone, whether they work or not, appears an attractive solution.

The inadequacy of incomes and jobs is already creating consternation in India even before Industry 4.0 transforms its economy. Social security systems are very weak. The Economic Survey in 2018 proposed UBI as a solution for India. It is likely to come up again in some form in 2019. It behooves us to understand whether UBI can be an appropriate solution.

Three tests must be applied: about the efficiency, the financial feasibility, and the equity of the solution. The Institute of Human Development and ILO organised a seminar of eminent economists, including Pranab Bardhan and Vijay Joshi who are amongst the earliest advocates of UBI, in Delhi in July 2018, to evaluate UBI’s ability to meet the great expectations of it.

In its most elegant, ‘silver bullet’ form, UBI proposes that the same amount of top-up income should be provided to everyone, regardless of their incomes or special needs. By making the payment universal, difficult political questions about who deserves assistance are circumvented. This universal approach is equitable, it is argued, because the same amount will provide a much larger percentage increase to those who have less incomes than those who have more. Since the poor are mathematically helped more than the rich, equity has been enhanced, it is claimed.

The blanket example

Others counter that this mathematical approach seems blind to the root causes of inequity. Their argument can be explained with the example of distribution of blankets. When it is very cold, those who do not have adequate cover (blankets) suffer and can freeze to death. In an attempt to solve this problem, one may hand out one free blanket to everyone regardless of how many they have. Those who have none will be infinitely better off. Whereas those who have five, will be much less benefited.

However, if one blanket is not enough to ward off the cold, then the problem of those who do not have enough is not solved.

And what will people with even more blankets than they need do with the additional blankets they now have? It may have been better to give them none and give two to those who have none, and one more to those who have only one. That way more lives will be saved, and with fewer people getting ill the cost to society will be less too.

Some advocates of UBI argue that the bottom 5 per cent in India — the poorest of the poor — should be left out to make UBI financially feasible. Others have suggested that the top 30 per cent may be dropped.

Either way the UBI is no longer universal. It is a ‘quasi-UBI’, which would be better than a simple UBI, the economists agreed.

Apart from ‘universality’ the other feature of UBI is a ‘direct cash transfer’. The idea of direct cash transfer to selected beneficiaries (which is what a quasi-UBI would be) has been around much longer than UBI. Direct cash transfer has many benefits. It is easy to administer — provided people have bank accounts they can easily access. Incidentally, this would be required for UBI too.

If people can have cash instead of benefits in kind, they have a choice of what they will do with the money to meet their most urgent needs.

This is the moral case in favour of direct cash transfers. The opposing moral argument is that the money may be spent on liquor rather than education of children. However, experiments in India and elsewhere have shown that the good moral case outweighs bad moral behaviour. Therefore, cash transfer is a good idea.

What people need, however, is not the cash but what the cash will buy for them. If they need blankets, then blankets must be available for them to buy — affordable, acceptable (quality), and accessible. So, the ‘market’ must provide them access to affordable and acceptable blankets.

If there are too few being produced in the market, blanket prices will be too high for the poor to afford. And so their basic needs will not be met.

Some stuff and services must be available to all, even the poorest, such as education, health, and basic utilities. Otherwise cash transfers will not resolve the root causes of poverty and inequity. This has been learned from the operations of cash transfer and ‘conditional cash transfer’ schemes in many countries.

Conditional cash transfer schemes can be better than simple cash transfers because they can induce changes in social behaviours, such as families giving more priority to children’s education and to sanitation and public health requirements.

Therefore, they can give more bang for the buck than simple cash transfers. However, here too, the facilities required must be available, such as schools and public health centres.

UBI and cash transfers cannot circumvent messy politics. Politics is necessary to determine who must be taxed to raise resources, and who must be provided for, to create an equitable society.

Nor can UBI avoid the need to build the state’s capability to provide essential public services.

Handing over these services to the private sector, from whom citizens must buy them, will not solve the equity problem. For example, healthcare in the US is the most expensive in the world, many citizens cannot afford it, and overall the US has poorer health outcomes than countries with more public provision.

Therefore, state capacity to regulate private providers must be strengthened too. UBI is too simplistic. It cannot be a short cut to good governance.

The writer is a former member of the Planning Commission and author (Through The Billion Press)

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