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Universal Basic Incomes vs. Targeted Transfers: Anti-Poverty Programs in Developing Countries

Rema Hanna and Benjamin A. Olken
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Rema Hanna: Harvard Kennedy School
Benjamin A. Olken: Massachusetts Institute of Technology

Working Paper Series from Harvard University, John F. Kennedy School of Government

Abstract: Developing country governments are increasingly implementing cash assistance programs to combat poverty and inequality. This paper examines the potential tradeoffs between targeting these transfers towards low income households versus providing universal cash transfers, also known as a Universal Basic Income. We start by discussing how the fact that most households in poor countries do not pay income taxes changes how we conceptually think about Universal Basic Incomes. We then analyze data from two countries, Indonesia and Peru, to document the tradeoffs involved. The results suggest that, despite the imperfections in targeting using proxy-means tests, targeted transfers may result in substantially higher welfare gains than universal programs, because for a given total budget they deliver much higher transfers to the poor. On the other hand, targeted transfers do lead to more horizontal equity violations, and do create an implied tax on consumption in the region where benefits are phased out. We discuss how alternative targeting approaches, such as community-targeting and self-targeting, can be used to further improve targeting in some situations.

New Economics Papers: this item is included in nep-dev and nep-sea
Date: 2018-08
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