Adopting a Universal Basic Income to Safeguard society’s basic needs and achieving inclusive growth in Rwanda

Rwanda’s economic growth and anti-poverty experience in the past two decades have been incredible. Between 2001 and 2017, the countries’ economies surpassed more than 20 others in Sub-Saharan Africa, and its poverty rate fell from 77.2% to 55.5%. (NISR, 2017; World Bank, 2019) Despite the rapid growth, Rwanda’s economy is characterized by the relatively high poverty rate and the low growth elasticity of poverty (-0.82%). (World Bank, 2019) In other words, the nation-wide growth helps reduce poverty at a margin, signally that the government must consider a more inclusive growth strategy.

Universal Basic Income, or UBI, is a pro-poor growth strategy. It is a guaranteed, non-string-attached, recurring cash transfer program covering every member of a given society to meet their basic needs. Multiple studies have shown that UBI has a considerable redistribution effect. The rich pay more progressive tax and a segment of the poor could enjoy a necessary, dignified living condition. Though the concept’s adoption is at an early stage, many countries, including Kenya, India, Iran, Canada, and Finland, have experimented with UBI at various scales. (Lacey, 2017; Hanna, 2018; World Bank, 2019)

Applicabilities of UBI

Mitigate the risk of policy error

The measurement of poverty is artificial, and the targeting process can be skewed. In Rwanda, the social protection program — Vision 2020 Umurenge Programme (VUP) — aims to provide a safety net with three components: public work creation, direct cash transfer, and affordable loans. While direct support focuses on the unemployed and those unable to work, it excludes a large percentage of the working poor. (Chronic Poverty Advisory Network, 2020) Moreover, direct transfer and loan services are accused of being “poorly targeted” (World Bank, 2019). UBI is an effective alternative to mitigate the risk when the targeted transfer policies “miss the mark.”

Ensure a minimal standard of living during the pandemic

In 2019, the pandemic significantly struck the economy hard due to the suspended flow of goods and services. The unemployment rate hit the record high of 22% in May 2019, leaving a large population vulnerable (World Bank, 2020; UNDP, 2020). While ensuring that everyone’s basic needs are met, UBI can also provide stability to those in a state of shock regardless of their initial economic conditions.

The cost of targeting

Studies have shown that targeting can cost countries like Indonesia and Peru around $10–15 million every year (Hanna, 2018; Banerjee, 2019). The poor population in Western and Southern Provinces of Rwanda has limited access to digital financial services and a high cost also occurs at distributing the benefit. (Chronic Poverty Advisory Network, 2020) During a pandemic where the capacity of front-line bureaucrats and workers is limited, a non-targeted transfer is likely to be a cost-effective social program.

Expected outcome

Recently, the pilot program in Kenya shows that the fixed transfer improved individuals’ well-being by reducing hunger, sickness, and depression during COVID-19. (GiveDirectly, 2020)

For a longer-term analysis, although there is limited empirical data of UBI’s evaluation, most evaluations generally (1) found no negative impact associated with what was feared, such as reducing work incentive. Instead, (2) there is a range of positive effects, including increased investment in skill training, savings, health-related expenditures, cognitive development, and women empowerment. (Gentilini, 2019; Banerjee, 2019). Moreover, Roosevelt Institute (2017) deployed Levy Institute macroeconometric model found that an unconditional nation-wide cash transfer of US$1,000 will likely to grow the economy by 12.56% over the baseline, given eight years. It will primarily increase labor force participation, wages and prices, which contribute to the economic output. Finally, studies found that social policy with broader coverage and higher progressivity can enhance the population’s resilience to aggregate shock. (Banerjee, 2019; GiveDirectly, 2020)

Disadvantages of UBI and how to address them

A UBI program adds a tax burden to the rich and the middle class. The new program will leverage multiple funding sources to alleviate the direct burden on society members. However, if the individual tax is to be raised, the decision-making process must be consultative to ensure the new tax policy is politically prohibitive. For example, the government could consider giving wealthy individuals more tax breaks for contributing to social welfare and make philanthropy consulting services more accessible.

Handing out the same amount to the poorest and the billionaires is another shortcoming of UBI. To address this concern, the government could consider adding small disincentives for the wealthy to claim the benefit, such as filling out the application forms. It is also worth setting up a funding pool for those willing to waive the benefit and let the small amount be transferred to the NGOs of their choosing.

Funding sources and implementation

To mitigate risks, UBI can be implemented following three phases:

• Phase 1 (2021–2023): conduct a UBI pilot in the Western province
• Phase 2 (2023–2025): inclusion of Southern and Northern province in the UBI program
• Phase 3 (2025 onwards): roll out UBI nation-wide

Source: NISR, 2018, World Bank, 2019

The selection of the provinces is based on the geographic distribution of the poverty incidence using the current measurement.

To cover the 2.5 million population in the Western province for UD$ 2 per day will cost the government US$ 1.8 billion per year. Each time the program’s scope expands, the government can roll back the current targeted financial services in the targeted region while keeping the public work program in place to enable more employment among the poor. Moreover, the government is likely to save up to $100 million to switch from targeted social protection programs to the UBI. Piloting UBI in the first stage is expected to create a $500 million — $ 1 billion funding gap.

The new funding can be drawn from the three primary sources:

1. International Development Association (IDA). IDA was the main financial contributor to the total funding of US$ 500 million for the VUP program to operate until the end of 2017. (World Bank, 2019) The government could convince the IDA, or the World Bank, to invest in UBI as a pro-growth policy.
2. Appeal to international NGOs. GiveDirectly funded the operation of Kenya’s UBI pilot and freed the Kenyan government from financial constraints. Considering the opportunity to collaborate with donors and researchers, Rwanda should apply to become a pilot partner.
3. Increase VAT or individual income tax. According to PWC (2015), Rwanda’s current company tax (30%) is higher than the average (28%) in African countries. Taxing companies might compromise Rwanda’s business attractiveness. However, Rwanda’s VAT (18%) can be raised to near the African average (29.4%). Also, it is worth creating a new tier for the income tax larger than US$ 2500 per year. Currently, the progressive income tax is at 30% for individuals whose income is higher than US$ 1226 per year.

The funding is expected to fill in the gap for the initial pilot, with the remaining amount saved for Phase 2. To make UBI sustainable entering the later stages, a gradual shift from foreign aid to domestic tax will help with the transition as the economy recovers and thrives.

A call to action

During the pandemic, a basic income could guard thousands and millions of Rwandans against hunger, sickness, and mental stress. Although a new UBI pilot might be expensive at first, it reduces cumbersome administration, stimulates the demand, and promotes more inclusive growth in the mid-to long-run.

In May 2020, Rwanda’s government announced a USD 800 million economic stimulus package to aid the country’s recovery. Another package is expected to be released at the end of the year to increase demand further. Given UBI’s immediate effect during the pandemic and the long-term cost-effectiveness, the timing is now for the government to consider adopting UBI pilots.

References

Banerjee, A., Niehaus, P., & Suri, T. (2019). Universal Basic Income in the Developing World (No. w25598). National Bureau of Economic Research. https://doi.org/10.3386/w25598

Banerjee, A., Faye, M., Krueger, A., Niehaus, P., & Suri, T. (n.d.). (2020). Effects of a Universal Basic Income during the pandemic. 41.

Center For Global Development. Disintermediating the State: Would a “Universal Basic Income” Reduce Poverty More Than Targeted Programs? (n.d.). Retrieved October 24, 2020, from https://www.cgdev.org/blog/disintermediating-state-would-universal-basic-income-reduce-poverty-more-targeted-programs

Chronic Poverty Advisory Network. (2020). Understanding poverty trends and poverty dynamics in Rwanda. (n.d.). Chronic Poverty Advisory Network. Retrieved October 23, 2020, from http://www.chronicpovertynetwork.org/resources/2020/6/3/understanding-poverty-trends-and-poverty-dynamics-in-rwanda-UNDP-rba-COVID-assessment-Rwanda.pdf. (n.d.).

Gentilini, U. (2019) (n.d.). Exploring Universal Basic Income: A Guide to Navigating Concepts, Evidence, and Practices. 337.

GiveDirectly. UBI (Universal Basic Income): An Overview. (n.d.). Retrieved October 21, 2020, from https://www.givedirectly.org/basic-income/

Hanna Rema, & Olken Benjamin A. (2018). Universal Basic Incomes versus Targeted Transfers: Anti-Poverty Programs in Developing Countries. The Journal of Economic Perspectives, 32(4), 201.

Lacey, A. (2017). Universal basic income as development solution? Global Social Policy, 17(1), 93–97. https://doi.org/10.1177/1468018116684269

PWC. (2015) Taxguide2015-rwanda.pdf. (n.d.). Retrieved October 24, 2020, from https://www.pwc.com/rw/en/assets/pdf/taxguide2015-rwanda.pdfReducing Vulnerability and Strengthening Inclusion in Rwanda Through Rural Development and Enhancing Social Protection. (n.d.). World Bank. Retrieved October 24, 2020, fromhttps://www.worldbank.org/en/results/2019/10/29/reducing-vulnerability-and-strengthening-inclusion-in-rwanda-through-rural-development-and-enhancing-social-protection

PWC. Taxguide2015-rwanda.pdf. (n.d.). Retrieved October 24, 2020, from https://www.pwc.com/rw/en/assets/pdf/taxguide2015-rwanda.pdf

Roosevelt Institute. (2017). Starting the Conversation: The Economics of a Universal Basic Income. http://rooseveltwec.wpengine.com/2017/08/31/starting-the-conversation-the-economics-of-a-universal-basic-income/

Vision 2020 Umurenge Programme Transforming Lives of Communities in Rwanda: Case of Huye Sector of Huye District. (2018). International Journal of Research in Sociology and Anthropology, 4(2). https://doi.org/10.20431/2454-8677.0402002

World Bank. (2019). Overview. (n.d.). [Text/HTML]. Retrieved October 23, 2020, from https://www.worldbank.org/en/country/rwanda/overview

World Bank. Rwanda-Systematic-Country-Diagnostic.pdf. (n.d.). Retrieved October 24, 2020, from http://documents1.worldbank.org/curated/en/219651563298568286/pdf/Rwanda-Systematic-Country-Diagnostic.pdf