Unconditional emergency assistance for the world’s poorest could be funded by temporarily freezing debt repayments
The pandemic has disrupted informal work worldwide, leaving many without any form of income. EPA-EFE
The rapid spread of COVID-19 across developing countries has led to a devastating loss of life and livelihoods. The pandemic is having both immediate economic effects and long-lasting consequences on development. This is because developing economies are less able to handle shocks than advanced ones.
Around 80% of workers in developing countries are engaged in tasks that are unlikely to be performed from home, meaning lockdowns are preventing them from working. And 70% of workers make a living in informal markets, with the majority not being covered by any form of social protection. COVID-19 containment measures are leaving a large number of people without any income.
Global poverty has fallen over the past three decades, but many of those lifted out of it have remained vulnerable. They sit just above the poverty line, but are ineligible for existing anti-poverty cash assistance. In a previous article, my co-authors and I argued that this could lead to an increase in global poverty for the first time since the 1990s, with tens of millions falling back below the poverty line. Such a situation, I believe, calls for drastic action.
In a recent working paper for the United Nations Development Programme, my co-author George Gray Molina and I argue that unconditional emergency assistance – what we call temporary basic income (TBI) – is an urgent, fair and feasible way of stopping people falling into poverty or further impoverishment as a result of the pandemic.
Looking at pre-crisis data that covers 97% of the developing world’s population, we’ve estimated what the cost would be of providing TBI to all people currently either below the poverty line or vulnerable to falling under it. This equates to 2.78 billion people across the world’s 132 developing countries.
People line up to apply for unemployment insurance in Hanoi, Vietnam. Even countries that have controlled the virus well are now feeling the economic hardship of the pandemic. EPA-EFE
We investigated three ways of delivering TBI:
- Top-ups on existing incomes among poor and near-poor people, up to a minimum level that is at least 70% above the poverty line in that region of the world.
- Lump sum transfers equivalent to half the income enjoyed by the typical citizen.
- Lump sum transfers that are uniform regardless of the country where people live. Under this system, the amount we simulated was US$5.50 (£4.30) a day per person, which is the typical level of the poverty line among upper middle-income countries.
Which option is best will depend on the situation. For instance, the first will only work in countries where registry systems have accurate information on what people earn. In countries where such systems are absent or weak, flat amounts according to general living standards (as in option two) or poverty lines (option three) might be better.
The total cost amounts to between US$200 billion and US$465 billion per month, depending on the policy choice. This is equivalent to between 0.27% and 0.63% of developing countries’ combined monthly GDP.
It’s a relatively moderate cost to cover such a profound shock and protect people from poverty. And providing TBI could have other positive effects as well: unconditional cash transfers can lead to people spending more money on their diet and can potentially improve health outcomes and school attendance. They can also protect people’s assets and allow them to diversify their livelihoods.
Will we actually see this happen?
TBI isn’t a radical idea. Forms of basic income are being rolled out under different names and with different funding levels around the world. Tuvalu has a fully fledged temporary universal basic income, and Spain has brought forward a minimum income scheme for low-earning households in response to the pandemic.
But our proposed scheme would be much larger – and would aim to reach as many excluded people as possible within the next six to 12 months. There are at least three obstacles to this.
The first one is administrative. Reaching eligible people who are currently invisible to official records and payment systems will require some work – they will need to be digitally registered before they can receive any assistance. Some people are beyond the traditional reach of the state because they lack formal documentation or live in informal settlements, which are more common in developing countries.
In these cases, alternative solutions – such as partnering with local social networks that have greater proximity to poor and vulnerable people – may be needed to find everyone eligible. The cost of adding each new person is not insignificant, but pales in comparison to the direct and indirect benefits of providing those people with TBI.
The second obstacle is obvious: funding. Given the temporary nature of the challenge, funding TBI by additional taxation could be politically difficult. Other ways of covering the costs are instead worth exploring.
For example, funds could be raised by repurposing nonessential spending, including wasteful expenditures and energy subsidies (which usually tend to benefit the better off). Alternatively, debt repayments could be paused for a period. Developing countries are expected to make debt payments of US$3.1 trillion this year. A comprehensive repayment freeze for 12 months, if possible, would fund 16 months of TBI under the top-up option, 12 months under option two and up to six months under option three. Also, as emergency cash transfers are often steered towards immediate essential consumption, part of the money will be recaptured by indirect taxation such as VAT and sales taxes, thus providing a degree of self-funding.
The third obstacle is trust. Governments will need to be trusted not to redirect whatever they raise towards other purposes, nor to allow temporary measures to last any longer than agreed. They will need broad (possibly cross-party) support to launch these schemes, and they will need to make sure that those that don’t benefit from them still see the schemes as credible. These are all political challenges that need to be addressed on a country-by-country basis.
TBI schemes are not expected to reverse country-wide economic downturns, nor substitute for comprehensive social protection systems. They can, however, mitigate the worst immediate effects of a crisis that has been magnified by deep-rooted structural inequalities and injustices that haven’t been decisively addressed in the past.
PhD Candidate in Development Studies, King’s College London
* Published in print edition on 7 August 2020