How a Universal Basic Income Can Disrupt the Cycle of Poverty

Talk of a universal basic income (UBI) has accelerated in recent months as analysts agree society needs a complete rethink when it comes to countering economic trends such as offshoring and automation. From a minor gubernatorial candidate in California floating an ambitious UBI proposal to a test pilot in Canada, momentum for UBI programs is building – but there is still much to learn.

The stress of wondering how the next meal, supply of diapers or medical emergency will be paid is endemic in both developed and developing nations alike. A pilot UBI program in Finland recently made headlines for a conclusion that almost never crosses economists’ minds: People are feeling less stress in their daily lives due to the €560 ($608) payments given to them with no strings attached.

Meanwhile, a program launched last year in Kenya found similar results. And the NGO behind the project, GiveDirectly, says its pilot further counters a longstanding argument against a UBI: Monthly supplement encouraged behaviors such as entrepreneurship and savings – not laziness and a rush to buy that bottle of booze.

To learn more, TriplePundit recently spoke by telephone with GiveDirectly’s Chief Financial Officer Joe Huston.

At a fundamental level, GiveDirectly is disrupting the norms of charitable giving and international aid. The traditional aid model has been for foundations or individual donors to give money to NGOs, who over the years have worked on a bevy of solutions: dig wells, distribute medicines, teach new farming methods or fund scholarships.

But one problem is that not all of these organizations are transparent about how that money is spent. For example, witness the Red Cross scandal after Hurricane Sandy, part of the reason why homeowners felt as if they got the shaft while insurance companies made millions. One could also point out accusations recently lobbed at Tom Brady for funding his pet causes with other’s people money. Naturally, the question donors have is: how much of my money is actually being used to do good?

GiveDirectly has a direct answer that question. Its funds are funneled to poor citizens in Kenya, Rwanda and Uganda, and they can use that money however they wish. “When you’re exclusively distributing cash, the donor-recipient relationship is very clear,” explained Huston.

But questions still fester over whether distributing cash with no restrictions is a good idea – even though hundreds of studies, including one by the World Bank, overwhelmingly have made the case that they succeed in lifting people out of poverty and, in fact, do not contribute to what is assumedly “lazy welfare recipient” behavior.

With that research in mind, GiveDirectly has tested various payout approaches. The NGO’s general practice is to give three payments that amount to about $1,000 over a year, which the organization says is roughly the equivalent of the basic income necessary for a family of four in the region in which it currently operates. Electronic payments via SMS messages are sent to individuals after they are vetted and confirmed as participants; they can then collect as much money as they need from a mobile money agent in their village or nearest town.

The vetting process undertaken by GiveDirectly is time-consuming. The organization’s staff parses through publicly available data to assess some of the poorest communities in these countries. Field staff knock on doors, collecting even more individual data. Additional checks are completed to ensure potential recipients have not received bribes. The results, say Huston, have been telling.

“The outcomes are consistent, as we saw large increases in assets like livestock, or people have invested for the long term, such as improvements to their homes like a tin roof,” said Huston, “and we’ve also seen more entrepreneurship, with incomes increasing after a year, often as much as 30 percent higher.”

At a macroeconomic level, the needs in countries as different as Kenya and Finland may be different, but the day-to-day experiences of the poor and unemployed in both countries are similar. For example, having a steady income supplement has reduced stress levels in communities in which GiveDirectly operates. Huston mentioned how one survey involved measuring levels of cortisol, the hormone that is excreted during times of stress. “Let’s face it: being poor is stressful,” explained Huston.

With several years of experience behind it, not to mention all of the data it has gathered over time, GiveDirectly decided to launch a project last fall to test the concept of a UBI. Since last October, 95 people in a western Kenya village have received about $23 a month – and will do for a total of 12 years. This community will serve as a test laboratory for GiveDirectly before it embarks upon a plan to send cash transfers to 200 villages across the country. The length of the trial could provide more answers about the long-term impacts of a universal basic income.

“If you give people more money up front, we know that they tend to buy bigger things, but on the flip side, if you receive cash for 12 years, we need to know if that will enable different types of investment,” Huston said. “That is something that deserves more study.”

While Huston and GiveDirectly are understandably reticent to make any broad conclusions based on a 12-year program that has only gone on for seven months, he said the results, including comments from over 100 recipients so far, are encouraging.

“That basic floor of $23 a month is meaningful to them,” he explained, “as 45 percent of them have never had that amount of money at once; 60 percent had never had the equivalent of two months of these payments.”

From Huston’s point of view, this program highlights the most direct way that basic income confronts poverty. “You can change that problem overnight by starting to provide it now,” he said, “because cash enables a pretty wide diversity of choices, as 100 people in a village can spend it on different things.” In sum, this small UBI pilot has become a local economic stimulus in its own right. More cash changes hands; then more wealth is generated.

One resident, a fisherman his whole life, outlined his plan: to save up three months’ worth of payments to buy one large net in order to revive his business. The example of this man, “Eric,” turned the timeless lesson of “Give a man a fish, and you feed him for a day - teach a man to fish, and you feed him for a lifetime” on its head.

“He certainly didn’t need lessons from us,” added Huston as he concluded his talk with 3p. “He needed capital.”

Image credit: GiveDirectly/Facebook