How should the government help the poor? : Fixed minimum wage or targeted money transfer?

Poverty is a major problem in developing countries and the world because poverty is an obstacle to human and national development. The United Nations therefore aims to eradicate severe poverty by 2030, which is one of the Sustainable Development Goals (SDGs).

From the experience of economic development around the world, it has been found that the decline in severe poverty is mainly due to economic growth. But rapid and continuous economic expansion for many years, as in the case of the Chinese economy, is not a normal phenomenon.

Governments of various countries therefore arrange money transfer programs for the poor, however even China, which has had a high level of growth for a long time, still cannot get rid of poverty. Thus the Chinese government has to guarantee a minimum wage for 75 million people.

Money transfer programs for solving poverty can be classified into two major systems, namely Universal Basic Income, which is a universal transfer of money to everyone and Targeted Transfers, which consists of transferring funds to the target group.  Both systems have different advantages and disadvantages.

The Universal Basic Income has the advantages of guaranteeing that everyone in the country will have a sufficient wage according to the minimum living standard and having low management costs for implementation of the project.  But the big disadvantage is that there is unnecessary waste of budget because people who are not really poor will also receive government subsidies (“inclusion error”).

While Targeted Transfers tend to use less budget because the money is transferred only to poor people, this system has a weakness in identifying the poor. Because most people in developing countries are self-employed workers, it is difficult or costly to identify the real income of the person. This means there may be people who are not really poor but receive government support while some people who are really poor do not (“exclusion error”).

An interesting question is which alternative will be of more benefit to the country?

In answering this question, Rema Hanna from Harvard University and Benjamin Olken from the Massachusetts Institute of Technology have studied the issue of “Universal Basic Income vs. Targeted Transfers: Anti-Poverty Programs in Developing Countries”, which is a study of government transfer programs to help the poor in developing countries (Indonesia and Peru) by comparing Universal Basic Income and Targeted Transfers.

Comparing these two systems raises issues like “Trade-off”, whereby policy makers need to find a balance that creates the most benefit, especially the balance between exclusion error, inclusion error and the amount of money that each person will receive.

That is to say, if you try to separate people who are not poor from poor people, this will increase the management cost which will reduce the total budget that can be used to distribute to the poor. However, the number of people who will receive money from the program is also less.

On the other hand, if you try to reduce the cost of management, you will have more budget available to be transferred to the public. However, the number of people entering the program also increases and there will be people who will not actually benefit from the program.

Compared to Universal Basic Incomes, the study indicated that programs that define narrow target groups and aim to transfer money to the poorest groups of community will make countries’ expenditure on social welfare significantly higher. This is due to the fact that more budget can be distributed to the poor, even though there are some poor people who are excluded from the program and others who are not really poor are included.

Both researchers have also suggested that the development of the Targeted Transfer Program for the poor should include 1) community-targeting (to determine the number of people that will receive fixed money transfers for each community and then let the community do the screening for the poor in their community) 2) self-targeting (to let the poor identify themselves to reduce the cost of screening) 3) setting conditions for transfers and 4) increasing the opportunity cost of entering the program for people who are not poor so that they don’t want to join.

The research confirms ideas that I have proposed for a long time. The government should not use the budget disorderedly, but help the poor in targeted ways. Moreover, conditions that motivate the poor to work more should be created, so that they will not just wait for government support.

One of the Targeted Transfer Programs that I was the first person to propose in Thailand is the negative tax. It is a system that transfers public budget specifically to help only people in low-income groups. By increasing subsidies gradually, step by step, until their income level rises to a level that is sufficient for them to take care of themselves, the amount of subsidies will be reduced. Subsidies can then be aborted when income levels are higher than the specified income threshold. This mechanism will motivate them to work more in order to earn more subsidies.

For the state welfare card program of this government, I think that it is worthwhile to identify the poor and reduce the cost of identification by allowing poor people to register by themselves. However, this project still lacks measures to motivate the poor to work more, which will enhance the quality of their lives in a sustainable way.

Moreover, the guaranteed minimum wage is a very well-known concept, especially in situations where technology is going to take over human labor, making it possible for many workers to become unemployed in the future.

But I think in the information society and cashless society of the future, access to information related to income and property of individuals will be easier. This will enable the government to identify poor people more easily and will allow the money transfer system to be more targeted, more efficient and more effective. Therefore, I do not think that there is sufficient reason to use a guaranteed minimum wage system to help the poor.

 

 

Source :amthaipaper
ISSUE 0136 (April – May 19)

Kriengsak Chareonwongsak
Senior Fellow at Harvard University’s Center of Business and Government.
kriengsak@kriengsak.com, http://www.kriengsak.com

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