Suddenly, the IMF is considering basic income

The idea of basic income is finally becoming respectable, although less than ten years ago its proponents were considered ‘stoned hippies’, while ‘serious’ people mocked the very mention of the idea. However, today there is an increasing number of top economists, entrepreneurs, and financiers among the advocates of the concept. Authorities around the world are considering the effects of basic income, and some countries have begun implementing pilot projects, writes Forbes.

The IMF is one of the organizations that has become an advocate for the introduction of basic income. In its latest report, they stated that basic income could reduce income inequality and protect those individuals affected by technological changes and globalization. Income inequality between countries has significantly decreased, especially in the last 10 years; however, income growth inequality within countries has increased.

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Why is it even necessary to reduce income inequality, because if everyone’s income is rising, why does it matter that some people’s income is growing faster than others? Moreover, the wealthier population invests their surplus funds for the benefit of the poorer, providing them with better-paying jobs. However, the program of transferring funds from the richer to the poorer can, over time, harm the poor instead of helping them.

Reaganomics

In many countries, starting from 1980, fiscal reforms have been aimed at reducing the tax burden on the wealthier, encouraging them to invest their funds for the benefit of the poorer. This policy was popularized by American President Reagan.

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Prosperity in much of the world has significantly improved since Reagan’s term. However, in recent years, middle-class incomes in developed countries have stagnated, while the incomes of the top 1% have grown. Today, there are deep political crises on both sides of the Atlantic that threaten global growth and prosperity, so it is not surprising that the IMF is concerned about the rise in inequality.

Framework for Income Redistribution

In the first chapter of the IMF’s report, a method for reducing income inequality within countries is clarified, and taxes and transfers should together serve as a framework for redistribution. It is crucial that taxes and transfers aimed at reducing inequality do not hinder growth, as what redistribution does is increase the income of those at the bottom of the ladder. Additionally, the report mentions that people at the bottom of the pyramid tend to spend a larger portion of their income than those at the top, which means that raising their incomes can increase aggregate demand and stimulate growth. Therefore, carefully executed transfers can benefit everyone by increasing economic growth.

Basic income is one such policy that can reduce inequality. However, the costs and benefits of this policy are not yet fully known, and some countries strongly oppose the idea. Therefore, the IMF has created an economic model to assess its potential.

Key Questions for Countries Considering Basic Income

The IMF has divided countries into three groups: (1) Countries with minimal or no transfer system (e.g., Egypt and Bolivia), (2) Countries with comprehensive and progressive systems (e.g., France and the UK), and (3) Countries with unequal or ineffective systems (e.g., Brazil and the USA). For each group, the IMF seeks answers to key questions such as whether basic income needs to be introduced in that country, under what circumstances, and how it would be financed.

The IMF provides expert support for the introduction of basic income to countries in the first group, many of which have high levels of poverty. However, the report also states that basic income should be introduced in combination with other reforms, such as the introduction of progressive taxation and the removal of ‘distortionary subsidies’.

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On the other hand, for countries in group 2, the IMF believes that replacing existing transfer systems with basic income could mean significant losses for some groups, resulting in a higher poverty rate, which is precisely the opposite effect that basic income should have.

For countries in the third group, the introduction of basic income is somewhat of a challenge because replacing an ineffective and inadequate transfer system with basic income would benefit many people; however, some existing beneficiaries would lose their benefits. For the USA, for example, the IMF’s model shows that people at the bottom of the ladder would benefit more from improving existing programs than from introducing basic income. On the other hand, in India, basic income would significantly improve the position of low-income groups compared to the existing public distribution system.

However, in India, the program has recently been significantly renewed, and officials are upset about the IMF experts recommending replacing the program with basic income. The IMF assures that in the report, basic income is used as an illustration of how existing large and macroeconomically significant programs that are ineffective and unfair could be replaced.

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The IMF’s recommendation that for group 2 and some countries in group 3 it would be more efficient to improve existing systems than to replace them with basic income is not surprising. Universal flat transfers cannot function as effectively as targeted transfers.

– In economic environments where job insecurity is rising (for example, due to labor market disruptions caused by technological advancement), expanding the available mechanism can become an important policy goal. Basic income could provide a stable source of income for individuals and households and limit the impact of unemployment shocks, concludes the IMF’s report.