[ NextBillion] Does Universal Basic Income Really Work?

In recent years, the idea of Universal Basic Income (UBI) has gained traction as a potential solution to the growing income inequality and poverty rates around the world. While the concept of providing basic cash transfers to citizens to improve their financial well-being has been debated for hundreds of years, there has been limited empirical proof of its effectiveness.

Originally posted on NextBillion.net

However, that’s beginning to change. Through a partnership between GiveDirectly, Innovations for Poverty Action and many financial backers — including Flourish Ventures — researchers are testing three UBI designs across 23,000 people in 195 villages in rural Kenya, comparing these to a separate set of control villages. Launched in 2017, this randomized control trial aims to understand the long-term impact of UBI on the financial lives and behaviors of people in these communities. A few years into this 12-year longitudinal study — the largest and longest UBI experiment to-date — the latest data shows compelling evidence that UBI can have a positive impact on financial resilience.

About the research

This research tests three UBI designs, each of which provided every adult living in these villages with an amount that covered their very basic needs and that is close to the daily income level necessary to reach the World Bank’s extreme poverty line. These UBI designs included:

1. A long-term, 12-year UBI with monthly payments of $1.88 PPP per adult, per day
2. A short-term, two-year UBI with monthly payments of $1.88 PPP per adult, per day
3. A lump sum payment equivalent to the net present value of the two-year UBI, all paid upfront

Most of the recipients were employed, almost all households had a farm enterprise, and about a fifth had a non-farm enterprise at baseline (i.e., before the UBI payments started). About 60% of households had at least one wage worker in the household. So the UBI these households received supplemented their existing income, amounting to a roughly 15-20% increase in consumption — though their consumption and incomes varied substantially.

The study evaluates a robust set of outcomes, including measurement of resilience and well-being, entrepreneurship, and financial decision-making. Its initial findings were evaluated earlier this year: We’ve released them well in advance of the end of the study, as they already reveal differences in the impacts of these three approaches that can help inform the design of other UBI programs and existing cash transfer programs.

UBI’s impact on overall resilience and well-being

Among its most interesting findings, the study found that UBI improves overall household resilience, reducing food insecurity and improving mental health. (The full list of outcomes can be found here. We’re sharing outcomes specifically from the long-term UBI design in this article.)

Recipients of the UBI were much less likely to experience hunger, and they consumed more food, including more protein. Those receiving the long-term UBI payments saw food consumption increase by 10.1% and protein consumption increase by 7.4%. These individuals also saw a 17% decrease in the probability of being depressed. These findings support the concept of UBI as providing a guaranteed “floor” for a household’s income, boosting people’s well-being and reducing their worry about financial security. This is particularly important for African farmers, who often face unexpected events that can have devastating impacts on their incomes.

Boosting small business entrepreneurship 

The study found a strong causal link between UBI and entrepreneurship. By providing a safety net that covered basic household expenditures, UBI allowed households to seek out higher-risk, higher-return business opportunities.

Among those who received long-term UBI payments, the number of enterprises increased by 34.5%, enterprises’ gross revenues increased by 59.6%, and their net revenues increased by 98.7%. Over time we expect to see increased productivity as well, contributing to a more vibrant and dynamic local economy.

Driving informal financial intermediation

Financial tools that allow people to change their cash flow stream have the potential to improve individuals’ well-being and allow for greater investment in local economies. In many developing countries, access to formal credit and savings is limited or non-existent. With the introduction of UBI cash transfers, we saw more participants turning to informal financial intermediaries — i.e., rotating savings and credit associations (ROSCAs) — to better manage their cash needs. Study participants receiving long-term UBI payments increased their ROSCA participation by 11.3%, contributing 69.9% more money, enabling them to convert these UBI cash flows into larger lump sums for savings and entrepreneurial endeavors. While this indicates that some are better off with lump sum payments, others may prefer steady long-term cash streams.

While the use of ROSCAs underscores the limited access to broader formal financial services in these communities, mobile banking innovations of the past ~15 years have been highly impactful for households with access to mobile money, while also spurring further innovation and research — including this UBI study. Without mobile banking to distribute cash transfers, the costs for the Kenya UBI implementation in this study would have likely been an order of magnitude larger. With distribution costs that high, this is probably not something the researchers would have considered testing, as it would likely not make sense as a policy.

Key takeaways for other UBI programs

As mentioned above, we’re releasing these early results because they already have implications for other UBI programs. For instance, we’ve found that the impacts of the short-term, two-year UBI with monthly payments are smaller than the impacts of both the long-term and the lump sum payment UBIs. Since the cost of this short-term UBI approach is equivalent to that of the lump sum approach, program designers and policymakers may want to reconsider how they structure their existing cash transfer programs. The short-term design mimics a lot of existing cash transfer programs in the developing world.

We’ve also found that access to financial tools that allow people to change the stream of their cash flows may be important to their wellbeing, as well as to their local economies — as highlighted by the increased use of ROSCAs among long-term UBI recipients. This suggests that access to financial tools is a vital component for optimizing a UBI, and may be worth incorporating into these programs.

These early findings were presented at the Abdul Latif Jameel Poverty Action Lab (J-PAL) 20th Anniversary Conference in June 2023, and the authors plan to publish the full set of findings in the coming weeks. The study’s researchers include Abhijit Banerjee, Michael Faye, Alan Krueger, Paul Niehaus and Tavneet Suri.

Tavneet Suri is a leading researcher at MIT, and Stella Klemperer is Director of Strategy and Insights at Flourish Ventures.

Photo courtesy of Dominic Chavez/World Bank.