Universal Basic Income: How the experience in developing countries can inform the discussion in South Africa

30 August 2022
Publication Type: Discussion Document
Economic Theme: Public Finance
JEL Code: D69, E62, I38

This paper considers how the COVID-19 pandemic gave new traction to the discussion about Universal Basic Income (UBI), particularly in South Africa, where members of government and civil society have been advocating for transforming the special COVID-19 social relief of distress grant into a UBI scheme. The present report aims at contributing to the UBI discussion in South Africa by revising UBI experiences and the impacts of cash transfers in developing countries. It begins by highlighting how there are very few instances of government implemented UBI schemes. Most of the experience so far comes from pilot programs, where budgetary concerns are less of an issue. Notably, Iran and Mongolia are the only developing countries that implemented countrywide UBI policies. Secondly, it considers an extensive body of research on the impacts of cash transfers, mostly coming from target cash transfers but also stemming from the evidence on UBI produced so far. Cash transfers lead to significant poverty reduction and increased well-being, measured by different measures. Interestingly, there is no evidence that they lead to declines in labour force participation or increased consumption of alcohol or tobacco. Thirdly, the paper reveals that when comparing target cash transfers with UBI, one must consider an important trade-off. On the one hand, for any given budget, a UBI scheme will represent a smaller share of money going to the poor. On the other hand, target cash transfers suffer from exclusion errors where individuals who should receive cash transfers are excluded from the system, increasing poverty. Perhaps the most efficient design would be a policy in the middle of the target and universal basic income. The paper then closes with in depth discussion on policy recommendations and emphasises the importance of evidence-based policy setting by government.

Discussion Document 01