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Universal Basic Income in Developing Countries: Pitfalls and Alternatives

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  • Ferreira, Pedro Cavalcanti
  • Peruffo, Marcel Cortes
  • Cordeiro Valério, André

Abstract

This article studies the short -and long-term effects of Universal Basic Income programs - a uniform transfer to every individual in society - in the context of a developing economy and compares this policy with other schemes that condition the transfer on household characteristics such as income and education. We construct a dynastic heterogeneous-agent model, featuring uninsurable idiosyncratic risk, investment in physical and human capital, and choice of labor effort. We calibrate the model to Brazilian data and introduce a UBI transfer equivalent to roughly 4.5% of average household income. We find that, over the short run, this policy alleviates poverty and increases welfare, especially for the poor. Over time, however, income falls and poverty and inequality increase as fewer people stay in school, labor supply decreases, and savings fall. We then explore the consequences of an equivalent transfer that is both subject to means testing and requires recipients to enroll their children in school. This policy outperforms the UBI in several dimensions, increasing overall income, reducing poverty and inequality, and improving welfare. This result is robust to varying the magnitude of the cash transfer. We then investigate which aspects of the CCT make it so effective, and find that the schooling conditionality is crucial in ensuring its long- and even short- run success.

Suggested Citation

  • Ferreira, Pedro Cavalcanti & Peruffo, Marcel Cortes & Cordeiro Valério, André, 2021. "Universal Basic Income in Developing Countries: Pitfalls and Alternatives," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 821, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
  • Handle: RePEc:fgv:epgewp:821
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    References listed on IDEAS

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    1. Dennis Egger & Johannes Haushofer & Edward Miguel & Paul Niehaus & Michael W. Walker, 2019. "General Equilibrium Effects of Cash Transfers: Experimental Evidence from Kenya," NBER Working Papers 26600, National Bureau of Economic Research, Inc.
    2. Diego Daruich & Raquel Fernández, 2020. "Universal Basic Income: A Dynamic Assessment," NBER Working Papers 27351, National Bureau of Economic Research, Inc.
    3. Sebastian Dyrda & Marcelo Pedroni, 2015. "Optimal Fiscal Policy in a Model with Uninsurable Idiosyncratic Shocks," Working Papers tecipa-550, University of Toronto, Department of Economics.
    4. Marcel Peruffo & Pedro Cavalcanti Ferreira, 2017. "The Long-Term Effects Of Conditional Cash Transfers On Child Labor And School Enrollment," Economic Inquiry, Western Economic Association International, vol. 55(4), pages 2008-2030, October.
    5. Fernando A. Veloso & Sérgio Guimarães Ferreira, 2003. "Mobilidade Intergeracional de Educação no Brasil," Anais do XXXI Encontro Nacional de Economia [Proceedings of the 31st Brazilian Economics Meeting] f25, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    6. Kenneth I. Wolpin & Petra E. Todd, 2006. "Assessing the Impact of a School Subsidy Program in Mexico: Using a Social Experiment to Validate a Dynamic Behavioral Model of Child Schooling and Fertility," American Economic Review, American Economic Association, vol. 96(5), pages 1384-1417, December.
    7. Andre Luduvice, 2021. "The Macroeconomic Effects of Universal Basic Income Programs," Working Papers 21-21, Federal Reserve Bank of Cleveland.
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Universal Basic Income in Developing Countries: Pitfalls and Alternatives
      by Christian Zimmermann in NEP-DGE blog on 2021-03-01 17:46:32

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    1. Andre Luduvice, 2021. "The Macroeconomic Effects of Universal Basic Income Programs," Working Papers 21-21, Federal Reserve Bank of Cleveland.

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