Universal basic income could save the small business sector

The recent violence has prompted the government and ANC to give greater attention to a basic income grant (BIG) for South Africans. Apart from the obvious moral imperative to treat extreme poverty, a BIG would also be just the thing to help devastated small businesses recover from the double whammy of rioting and Covid. And what a boost it would provide to South Africa’s morale! Can you imagine the relief?

There are several arguments why BIG could produce an explosion of entrepreneurial energy. Firstly, it would remove some of the anxiety about failing. People are more willing to risk beginning a business if they have a safety net.

Secondly, it would increase the market, particularly for businesses offering products and services to poorer people. Most of those billions would be spent within weeks, and mostly on local businesses. Some calculate that this money would circulate so quickly through the economy (the multiplier effect) that the return to the fiscus (through VAT, for example) could pay for the whole grant.

Thirdly it could provide seed capital for microenterprises to emerge. Apart from friends and family, the only current source of working capital for microenterprises is short term loans, usually at very high-interest rates. That is discouraging. But if I can buy my first raw materials from my own resources, I won’t need to see my small margins disappear to the lender.

The true universal basic income (UBI) is a monthly cash amount given unconditionally to everyone regardless of whether or not they have a job. Unlike the Temporary Economic Relief Scheme (TERS) it would be a permanent feature that everyone could depend on into the future.

What is more likely to be offered in South Africa is a conditional basic grant to the unemployed. That would certainly help and is of course much less expensive, but it is more complicated to administer and fails to provide some of the benefits of the universal grant.

The arguments for the grant being universal and unconditional include avoiding the complications of a means test and thus being cheaper to administer and less open to corruption than conditional grants. Recipients retain dignity because everyone is eligible. It enables family members to stop work temporarily to care for children or elderly or ill relatives. Apart from that, evidence shows a UBI does not discourage people from working. It gives independence, allowing victims of domestic violence to escape.

But even a conditional grant would boost the economy. I wonder if it would reduce crime.

Does it work? Some serious economists are currently conducting the largest, long-term (12-year), randomized evaluation of a universal basic income in 295 villages in Kenya. It is too early to evaluate, especially as Covid has introduced unusual conditions. But an interim study from September last year suggests the payments modestly but significantly reduced hunger, sickness and depression in spite of the pandemic. They reduced hospital visits. Initially, recipients increased their income through starting new enterprises, but this was lost during the pandemic, aggravated by a lean agricultural season. Still, recipients suffered smaller increases in hunger.

Arguments against are surprisingly few. Some have argued it would be inflationary. The biggest problem is clearly the cost. At R500 per month, the annual cost of a universal grant would be about R200 billion more than is spent on other grants. A conditional grant would cost less. But even that is not quite as scary as it sounds, given the economic boost it would bring, plus the accompanying increase in taxes. South Africa has already mobilized at least R30 billion for Covid vaccinations alone. Isn’t hunger an even worse chronic condition, with an easier antidote?

Jonathan Cook is a counselling psychologist and chairman of the African Management Institute. He is also the host of AMI’s weekly Rise reflection series focused on supporting you in your business and your personal wellness.

This article was originally published on  BusinessLive on 19 July 2021 and is republished with permission.