What are the effects of Universal Basic Income on Income Inequality in China?

The background knowledge and my research framework


DEFINITION AND INTRODUCTION

According to Philippe Van Parjis (Van Parjis, 2004) and the Basic Income European Network (BIEN), Universal Basic Income refers to a periodic cash payment paid by a political community to all its members and unconditionally delivered to all on an individual basis. This concept originated from the idea of a minimum income in the 16th century and an unconditional one-off grant in the 18th century.


Advocators of this policy include notable historical figures such as Thomas Paine, Martin Luther King, Milton Friedman and Friedrich August von Hayek. While influential people in the world today like Mark Zuckerberg and Elon Musk, as well as organisations like the Green Party, endorse a UBI, some argue against it. Whether to advocate for or against a UBI is one of the most popular social issues of the 21st century.



Figure 0: UBI pilot programmes around the world (Last updated at January 11, 2017) (Shukla, 2018)

While western countries can be regarded as the pioneers of UBI (Shukla, 2018), the research and development of basic income schemes is catching up in the east. A short-term UBI project was carried out in India and Taipei has just held the second annual UBI Asia Pacific conference, in 2018. In China, although there have been no experiments directly looking at UBI, a Minimum Livelihood Guarantee scheme called dibao - which closely resembles a UBI - was launched back in the 1990s. Moreover, a conference about UBI and its potential in China was hosted by the United Nations Development Programme in Beijing, China (UNDP China) on 19th October last year.


UBI MODELS


There exist different models of UBI. When applying economic models and arguments to a specific type of UBI, classifying UBI becomes essential.


The first criterion for classifying UBI is the amount of cash delivered under this scheme. UBI appears in the forms of a full basic income or a partial basic income scheme. The former offers an amount above the poverty line while the latter is an amount below the poverty threshold.


The second criterion is related to the question ‘for whom to offer?’ As per this criterion, UBI can be classified as a Negative Income Tax Model (NIT) and The Universal Demogrant Model (UD) (Pasma and Mulvale, 2009). Under the NIT scheme, people who earn below a certain income level are exempt from taxes and receive subsidies proportional to the amount that falls short of that income level. In a UD system, every person receives a certain amount of tax-free benefits, while any other income source may be taxed.


This paper will be focusing on the arguments related to taxation, specifically personal income tax, progressive and flat tax. More attention will be drawn to NIT and a full basic income scheme in this work.


INCOME INEQUALITY AND TACKLING IT WITH UBI IN CHINA


China is one of the most unequal countries in the world in terms of income distribution. At 50 points in 2013, the Gini coefficient for China was higher than the average in Asia, as is shown by Figure 1 (Jain-Chandra et al., 2018), (Fsolt.org, 2018). Furthermore, the Gini coefficient has rapidly increased over the last two decades, by a total of about 15 Gini points since 1990 (see Figure 2), (Cia.gov, 2018), (Jain-Chandra et al., 2018).


The most recent official estimate suggests that the income distribution has become slightly more equal since the Gini coefficient dropped to 0.465 according to the CIA in 2016 (Cia.gov, 2018) but it is still in a relatively high position (see Figure 4).


Figure 4: Gini coefficient of income inequality in China, 1981-2014

Furthermore, serious concerns about the inequality in opportunities in China were expressed in the above-mentioned IMF working and can be seen in areas such as completion of higher tertiary education and access to certain financial services. For instance, tertiary education was more unequally distributed in China than in other emerging and advanced economies. These factors are important in order to understand income inequality in the future as well, since these are leading causes of the same.


Speaking of the future, the 4th Industrial Revolution is coming with fast-paced technological advancements in artificial intelligence, accompanied by the fear of robots destroying our jobs. In 2016, the President of the World Bank, Jim Yong Kim, said that the proportion of jobs which were being threatened by automation is 77 percent in China (The Guardian, 2018).


Under these circumstances, experimenting with UBI as an alternative way of issuing welfare benefits in China is valuable as it might appear to be a better solution to combatting income inequality or the inequality of opportunity than current welfare schemes such as dibao. For instance, the problem of dibao being means-tested, which could neglect those who need it – which does not meet the standard required – will likely disappear in a UBI scheme. While facing a future of possible mass-unemployment, UBI might be considered as the best answer to automation. In the words of Sam Dumitriu, Head of Research at the Adam Smith Institute, attempts to protect jobs through luddite regulation will backfire and mass retraining schemes have a shaky track record.


REMARKS


Additional information, which is closely related to my research content, deserves a mention here. The assumption of UBI being feasible might not be always true, but is to a certain extent valid and arguable. For instance, new evidence suggests that it could be made progressive and affordable and UBI-related experiments are mostly feasible at the local level. Even if a full scheme (that replaces most means-tested benefits) in China is questionable, a modified scheme (that leaves existing means-tested benefits in place, at least initially) seems conceivable. Even if immediately practising UBI is impossible, studying it now is still worthwhile, which paves the path for its implementation later.


In this research, I might sometimes explore the effects of UBI on other social, political or economic aspects besides income inequality. This might seem off-topic. Since all social, political or economic issues are intertwined, the discussions of the influence of UBI upon certain social phenomenon such as gender inequality - which superficially speaking is not related to income inequality - might be relevant to the effect of UBI on income inequality.

The ramifications of this scheme depend on the amount of basic income given to everyone. One possible way of defining that amount is relating it to the subsistence minimum which only satisfies the minimum standards of physical and social well-being. Since different regions of China have dissimilar or even contrasting subsistence minimums, the budget for UBI will vary geographically.


MY APPROACH


I plan to structure my research in the below mentioned ways. While attempting to look at the short and long-term consequences of UBI on Income Inequality, my first task is analysing the direct impacts. For example, doing a simple investigation on the immediate effects of UBI funded by flat tax on the Lorenz curve of China. The indirect impacts are also crucial, as UBI could be a proximate but not a direct cause of income inequality in certain cases. A salient example might be a possible increase in gender equality by offering citizens UBI, which leads to a possible improvement in income equality. This argument will be explained and extended in my following articles.


As a brief explanation of the methodologies I plan to use on this research, I will be doing literature reviews on the qualitative side. Besides reviewing working papers which evaluate the effectiveness of dibao and demonstrate on a large-scale how basic income operates when it is not universal, I plan to review other welfare programs or reports about the future of UBI in China published by government officials. This shall provide insight about how past UBI pilot programmes worked out, especially those conducted in Asia or emerging economies which are regions sharing common economic or social idiosyncrasies with China.


The quantitative aspect of the research will be mostly related to the implications of practising UBI on the Lorenz curve and the Gini coefficient. I shall be using the microsimulation approach which researchers in the University of Bath have utilised to publish a working paper. This approach could possibly predict the changes in Gini coefficient induced by citizens receiving different forms of basic income in China. Methodological details will be brought up in the next publication.


Tiansui Tu

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