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Could China Adopt a Universal Basic Income as a Social-Protection Policy?

Wednesday, December 30, 2020

Pilot projects indicate that the implementation of a universal basic income can lead to a reduction of extreme poverty in developing economies and mitigate job losses in developed ones. Yet the concept remains highly controversial and no government has adopted it as a principal tool for social protection. Joe Leung of The University of Hong Kong explores the possibility of China adopting a basic-income guarantee and considers the pros and cons against the backdrop of the country’s successful programs for poverty alleviation.

Could China Adopt a Universal Basic Income as a Social-Protection Policy?

While the idea of a universal basic income has been around for a long time, the global financial crisis, the Covid-19 economic shutdowns, and the loss of jobs from automation have stirred interest in the concept (Credit: Bakhtiar Zein / Shutterstock.com)

A universal basic income (UBI) is an unconditional and flat-rate benefit income transfer paid to everyone of working age. In an ideal design, it is all cash with no conditions and no targeting. UBI is described by its proponents as a simple, reliable and accessible form of income support. Universality means less administrative costs, broad coverage, and no stigma is attached. UBI can include a number of different and modified formats, such as child and family benefits, negative income tax, guaranteed minimum incomes, and tax credits. The idea has become popular because of the growing dissatisfaction with the incomplete coverage and accessibility of traditional targeted and means-tested conditional social-protection programs.

A universal unconditional program can be inclusive, leading to extreme poverty reduction in developing countries and mitigating the growing threat of job losses and unstable and intermittent employment due to digital technology. It also offers the opportunity to address work-life imbalances in developed economies and among the growing middle class in developing countries. More importantly, UBI can offer recipients autonomous control over their own financial budgets. In essence, UBI offers an attractive alternative to traditional social protection models based on employment-oriented social insurance and means-tested conditional social assistance.

While the idea has been around for some time, the UBI gained currency as a possible policy option after the global financial crisis a dozen years ago. It has become a topic of much debate more recently with Covid-19-triggered economic shutdowns and slowdowns around the world, which have sharply increased unemployment and underemployment and spurred governments to dole out direct stimulus payments to citizens. During the 2020 US presidential campaign, even before the coronavirus outbreak, Democratic Party candidate Andrew Yang attracted some popularity and media interest for his proposal of what he called a “Freedom Dividend”, a no-questions-asked payment of US$1,000 a month to every American citizen over the age of 18.

US Democratic Party presidential candidate Andrew Yang explains his signature policy proposal (Credit: CBS News on YouTube)

There has been no lack of attempts to turn the concept into reality through pilot projects. Small in scale, often at a sub-national level, and targeted in varied ways, trials have run in the US, Canada, Finland, Kenya, Mongolia, Iran and India. So far, no country has adopted UBI as a principal social-protection program supporting its working-age population. Indeed, UBI is still controversial and contested as a concept and as a practical solution. So far, findings from studies have been inconclusive.

Introducing a UBI would require answering these questions:

  • What would be the purpose?
  • Why would it be necessary to raise the income of all the people or ensure a minimum living standard?
  • What are the shortcomings of existing social protection programs?
  • How would the poor and unemployed benefit from a UBI in both the short and long term? 
  • What kind of UBI would be appropriate in terms of targeting or conditionality?
  • What would be the financially affordable, politically feasible, and socially meaningful level of income?
  • With additional money, what would be the spending priorities of recipients?
  • How can the program be financed and be sustainable in the long term?
  • How can a UBI be integrated with and complemented by existing social protection programs?
  • Can it replace existing social benefits such as allowances and subsidies in kind and cash?
  • Are there better cost-effective alternatives to help the poor such as direct investment in education, infrastructure and healthcare?

On the one hand, if UBI is to cover everybody including the rich to a basic level, governments may have to raise additional taxes to cover the burden on the fiscal budget. On the other hand, if the UBI level is set too low – well below the poverty line – it would fail to lessen the number of poor or prevent people from falling into penury. A UBI may not even be able to address the impact of all kinds of shocks on households. While the concept seems simple and appealing, it is loaded with many practical implementation challenges. As a result, the idea is likely to remain a matter of debate for some time.

What would you do with an extra $1000?: On the march in Berlin, Germany, for a basic income, October 2019 (Credit: Patrick Maynard)

What would you do with an extra $1000?: On the march in Berlin, Germany, for a basic income, October 2019 (Credit: Patrick Maynard)

A policy option for China?

By 2020, China attained a critical stage of development by becoming a xiaokang or “moderately prosperous” economy, by official reckoning, eliminating extreme poverty and achieving complete coverage by social insurance programs. To achieve socialist modernization, China is now preparing its 14th Five-Year Plan (2021-2025) and the Long-Range Objectives through the Year 2035, pledging to avoid the middle-income trap and become a high-income economy. The “new normal” in its development will be marked by the slowdown of economic growth, a vanishing demographic dividend (ageing population and declining workforce), global political and trade tensions, and imbalanced regional development.

The leadership’s proposed strategy focuses on technological innovation and self-reliance, with emphasis on parallel internal and international market circulation (“dual-circulation”) and increased social spending through fiscal stimulus with new social-policy initiatives. Facing a new era of development, the general secretary of the Chinese Communist Party, Xi Jinping, remarked in a report to the 19th National Congress of the Communist Party of China in 2017 that inclusion and quality of growth are pivotal to tackling the “principal contradiction between unbalanced and inadequate development and the people’s ever-growing needs for a better life”.

Since the implementation of market-oriented reform in the 1980s, the traditional socialist work unit and non-contributory “iron rice bowl” social-protection system has been dismantled. For decades, China has gradually built up its social-protection framework, relying largely on a two-pronged approach based on contributory employment-based social insurance and means-tested assistance. The incorporation of asset-building and defined contribution individual accounts in the social-insurance programs, notably in pension and healthcare, is considered unprecedented and innovative policy.

Through heavy government subsidies linked to a flat defined benefit, the introduction of pension programs for urban and rural residents (those without formal employment contracts) in recent years has extended social-insurance coverage significantly.  Through “family-binding” provisions, retirees can immediately receive benefits if their adult children enroll in the programs. “China’s introduction of the National Rural Pension Scheme and Urban Resident Pension Scheme has arguably been one of the world’s most ambitious voluntary pension saving and minimum elderly assistance schemes in a low- or middle-income country,” World Bank economists commented in 2012. “The sheer scale and speed of coverage expansion has already exceeded the initial targets of the Chinese authorities”. The two schemes have been integrated since 2015.

Critics of this social-protection framework point to the need for integration of different schemes, lack of portability, inadequate benefits, and poor financial sustainability as the shortcomings. Noteworthy is the fact that the unemployment insurance program has relatively low coverage. The official unemployment rate in China has been moderate. In 2019, the registered unemployment rate in urban areas was only 3.62 percent, but surveys put the rate at 5.2 percent.

As for poverty relief, the extensive and targeted alleviation programs in poor regions and the means-tested social-assistance program (Dibao) have achieved impressive results that have been recognized worldwide. The number of rural residents living in extreme poverty (below per capita annual income of RMB2,300 or US$352) declined from almost 100 million people in 2012 to only 5.5 million, or 0.3 percent of the rural population in 2019. The residual Dibao program, which has stringent criteria, covered a total of 43.6 million people in 2019, with expenditures accounting for only 0.27 percent of GDP.

The 2015 “Decision on Winning the Fight Against Poverty” issued by the State Council pledged to eliminate absolute poverty in China by 2020. The core strategy is a multifaceted approach based on industrial development, relocation, compensation, education, and social security. Over the years, China has tried to establish an information system to register every poverty-stricken household and individual and keep track of their improvements. The “six targets” of the poverty-alleviation strategy include objects, projects, use of funds, measures for each household, village-based poverty relief cadres, and poverty-alleviation results. The emphasis on precise targeting has been recognized as the key factor contributing to the success in poverty reduction.

As a result of these efforts, China is likely to be the first country to achieve the poverty alleviation goal set in the United Nations 2030 Agenda for Sustainable Development. China’s strategy has become a showpiece or learning model for other developing countries. The pertinent question is: If China is so satisfied and proud of its existing integrated and targeted approach to poverty alleviation, would it pursue a new policy such as a UBI which might represent a significant shift away from its existing poverty- alleviation principles and methods?

To be sure, all innovative approaches might have to be integrated with or introduced as a supplement to the existing framework. Culturally, the Confucian work ethic cherishes individual hard work and family responsibility. The general public would likely not support a cash-transfer program that benefits everyone including people not in need. Apart from the financial implications, the Chinese government would have reservations about an unconditional and right-based program, as Chinese society is so diversified and segmented with profound differences in socio-economic development between regions, rural-urban areas, and occupations. Because of this diversity and the existing inequalities, the government would find the concept of UBI unappealing.

A laboratory for a UBI experiment?

China’s economic and social reform strategy has been incremental and cautious. Rapid social reforms may trigger instability. In the policymaking process, Beijing typically comes up with an idea of a reform policy and would then issue “opinions” to encourage local governments to put the concept into practice. Only after learning from the best practices identified through numerous pilot projects and trials would the government issue policy directives for local governments to follow.

As a rule, for those local governments lacking financial capacity, Beijing would offer subsidies. The central-local government dynamics may take decades of adjustment and adaptation before a new social policy or program could take shape nationally. In most cases, these policy directives are often not compulsory and are to be implemented at the discretion of the local governments according to the local context. Without Beijing’s encouragement and financial support, local governments in poverty-stricken areas would find it difficult to adopt a UBI.

China, however, might agree to launch pilot projects for social programs in collaboration with international organizations. Since the 1980s, the World Bank has played a catalytic role in China’s technical, institutional and conceptual innovation for development. One shining example of such cooperation is the assistance that the World Bank provided in the formulation of the hybrid pension system. In supporting pilot projects on pension reform in China, the World Bank offered financial loans, technical advice, staff training and information management technology.

Having recently published a report that explored implementation frameworks for a UBI, the World Bank might well seek to convince the Chinese government to initiate a pilot project to find out how the concept can be adapted to the domestic situation in complement to existing poverty-alleviation and social-assistance programs. China – or at least parts of the country – could become a groundbreaking laboratory for discovering how a UBI scheme might work in practice on a large scale.

Opinions expressed in articles published by AsiaGlobal Online reflect only those of the authors and do not necessarily represent the views of AsiaGlobal Online or the Asia Global Institute

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