Poverty and the Problem of Scale

At Crooked Timber, Ingrid Robeyns reports on an experiment with Basic Income Grants in Namibia that seems to have been extremely successful:

The BIG Coalition raised money which allows them to give a BIG of 100 Namibian Dollars to each individual which was registered in July 2007 as living in the Otjivero-Omitara area, about 100 kilometres east of Windhoek (pensioners were excluded as they get an unconditional state pension). The amount is small, since the food poverty line stands at 152 Namibian dollars per capita, whereas the poverty line counting "the severely poor" stands at 220, and the official poor are all those living on less than 316 Namibian dollars per month.

As the study of the effects of the BIG after one year clearly demonstrate, the effects are strikingly positive. The percentage of those falling below the food poverty line has dropped from 76% to 37%. The percentage of those being able to get a job or become successfully self-employed has increased from 44 to 55%, and the amount of non-BIG income per capita rose from N$ 118 to N$ 152 (indicating a virtuous economic growth cycle). The number of underweight children has dropped from 42 to 10%. School attendance has gone up, and teachers report that the children are better able to concentrate. The health clinic receives many more patients (for illnesses that would otherwise not have been treated). Average household debt fell from N$ 1,215 to N$ 772. Crime rates fell by 42%, and there is no evidence that alcohol-abuse (which is a serious problem in many poor areas) has worsened. (Further details are in the report, together with interviews documenting the experiences of the people who have been given the BIG).

Like Robeyns, this is the sort of poverty policy I favor, although perhaps for different reasons:  I resent the paternalism of in-kind grants, and the central planning failures of so many massive government development projects.  So I'm heartened to hear that something so simple works so well.

On the other hand, like Robeyns, I'm worried that I'm missing something.  A commenter suggests what that might be:

a Georgist analysis suggests that if this was implemented on a larger scale, it would tend to drive up rents. This would in turn suck the BIG out of the pockets of the poor and into those of landowners.

This doesn't happen in the small scale experiment because the poor individuals in the rest of Namibia not receiving the BIG don't have any more money for the landlords, so the general market can't rise. As a first approximation, the Otjivero-Omitara area prices won't rise because (a) to get the BIG you had to register in July 2007, so nobody can start getting the BIG just by moving into the area; and (b) if you are getting the BIG, you keep it even if you move away, so nobody loses the BIG by moving out. Therefore the extra income is not creating extra demand for local land.

(More accurately, there will be some extra demand arising from the economic growth in the area, probably enough to soak up a reasonable fraction of the N$34 non-BIG per capita income.)

Distribute the BIG to the whole country, and general market rents will soak up essentially all of it. Non-BIG income per capita will not change much at all - no virtuous cycle effects expected.

The Georgist analysis is too simplistic, but applied more broadly, it's worrying.  A basic income grant doesn't actually increase the productive capacity of the citizens.  There are real resource constraints--the amount of land, housing, doctors, teachers, etc.  On a small scale, there's enough slack that individuals really are simply better off by being handed money (although we should be aware that this experiment may have shifted fixed resources like doctors towards the BIG area, and away from other areas that consequently suffered shortages).  On a larger scale, though, what you get is general price inflation.  Think of it this way:  if Timothy Geithner ordered the Treasury to print $500,000 and hand it to a randomly selected poor person, that poor person would be lifted out of poverty with no noticeable impact on anyone else.  But if Timothy Geithner printed $150,000,000,000,000 so that each of us could have half a million dollars, we wouldn't be any better off, because we wouldn't have $150 trillion worth of new stuff.  So the prices of the old stuff would just rise until inflation had eaten up all the new money.

But while I think this would eat some of the gains from a BIG in a developing country, I doubt it would absorb all of them.  Namibia would, after all, be getting a real resource:  foreign currency, which represents a claim on American or European production.  The real productivity of their economy would rise, just as trade expands the real productivity of our country.  There are countervailing factors, of course, like the loathesome effect foreign aid can exert on the domestic government. But it's not obvious to me that it wouldn't work.

At any rate, it's an experiment that could be done pretty cheaply.  Namibia's population is less than two million, and $100 Namibian dollars is about $12.50 US.  So for less than $25 million (a month? a year?  I'm guessing a month), we could run a controlled development experiment.  For $1 per American per year--the price of just one Buffalo Life Sciences Complex or other similar dismally failed local development projects--we could find out whether or not this works.  Give everyone in Namibia a $12.50 basic income for 5-10 years, and see what happens.  Does Namibia shoot up the economic and human development tables, or does the money get claimed by local power-brokers?

It's politically tricky, of course.  But if we can just get Namibia to change its name to something like "Oakton", I'm pretty sure we can slip it into the next highway bill.