The case for a basic income grant in Lesotho

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SEVERE poverty and high unemployment in Lesotho threaten social stability and long-term growth prospects, underscoring the compelling need for social security reform.

Recent research in many developing countries raises the question of whether a basic income grant could serve as an instrumental tool for raising living standards and improving the efficiency of social delivery.

A while back in school I was asked to write a paper on this subject.

Even though the argument was for the South African context, I believe that much of the logic I applied there can be useful in the case of Lesotho.

More specifically in this week’s post I would like to propose social security reform in Lesotho, with an emphasis on the pitch for a basic income grant.

Much like South Africa, Lesotho has a polarised society although the reasons are different.

Because of this Lesotho has suffered a legacy of ineffective social capital and blocked pathways of upward mobility that leave large numbers of people trapped in poverty.

Studies of asset dynamics identify a dynamic asset poverty threshold that signals that large numbers of Basotho are indeed trapped without a pathway out of poverty. Low incomes compound poor access to health care, education, housing, and social infrastructure.

The severity of Lesotho’s poverty persists in spite of existing social security programmes — most of the poor live in households that receive no social security benefits at all, and the rest remain poor in spite of the benefits they receive.

If it wasn’t for some of the available social safety nets an even greater majority of our people would be beneath the poverty line.

The State Old Age Pension reduces the poverty gap for pensioners considerably.

Poor households that include pensioners are on average significantly less poor than poor households without pensioners.

For the average poor household without a pension-eligible member, however, the social security’s impact is almost negligible.

The nature of structural unemployment in the face of a changing global economy that marginalises unskilled workers expands the necessary scope of a social safety net.

Not only do children, retirees and the disabled need social protection — millions of potential workers are vulnerable to unemployment and the resulting impoverishment.

The nature of an income transfer has important implications for its socioe-conomic benefits.

A universal grant, provided as an entitlement and without a means test, will more readily reach the poorest population.

Also, by removing the stigma that labels the recipient as “poor”, the grant bolsters economic support without draining psychological resources.

On the other hand, when poor households can borrow against future earnings to capitalise investment projects, and enjoy insurance that permits them to ride out economic downturns without sacrificing past
gains, then income distribution will tend to be characterised by a convergent process in which the initially poor tend to catch up economically with the rest of their society.

If the economic theory of poverty traps is correct, then the ability of the poor to access capital and insurance becomes a key determinant of longer term poverty dynamics.

Unfortunately, the ability of markets themselves to deliver financial services to poor people is suspect.

The basic income grant potentially supports economic growth and job creation through at least three transmission mechanisms.

First, the income transfers may promote the accumulation of human and social capital.

The interactions are mutually re-enforcing.

Both nutrition and education support health, and health raise not only the absorption of learning but also the total returns to education by extending lifespan.

The expectation alone of imminent improvements in these social spheres may improve social stability.

Second, theoretical and empirical evidence indicates that the basic income grant may positively influence both the supply and demand sides of the labour market.

Closely linked to the optimal management of social risk, the labour supply transmission mechanism operates through the effect that higher living standards exert on the capacity of unemployed job seekers to find
work.

Likewise, a basic income grant has the potential to increase the demand by employers for workers through its direct and indirect effects on productivity.

Directly, a basic income grant supports the accumulation of human capital by a worker, and it supports the worker’s productivity-bolstering consumption.

Better nutrition, health care, housing and transportation all support the increased productivity of the worker.

Indirectly, the basic income grant supports higher worker productivity by reducing the informal “tax” on workers that results from the combination of severe poverty and a remittance-oriented private social safety net.

While the implementation of a basic income grant will partially reduce the need for the private social support network, it will release significant resources to wage earners to bolster their own productivity-improving consumption.

The interaction of this effect and the tax effect discussed above creates a type of effective wage subsidy: as employers increase the wages of workers, more of the wage increase goes to the employee’s own
consumption. This magnifies the increase in labour productivity, increasing the profits of the business enterprise and potentially increasing employment.

Third, two macro-economic transmission mechanisms exist by which the basic income grant may stimulate economic growth.

First, the basic income grant will bolster the overall level of aggregate demand in the economy.

Second, the grant has the potential to shift the composition of spending towards labour absorbing sectors of the economy.

Any society that wishes to flourish and enhance social cohesion cannot do so while the vast majority is excluded from the socio-economic framework.

Exclusion has both economic and social dimensions.

The economic dimension refers to exclusion from the opportunities to earn income, the labour market and the access to assets.

The social dimension refers to exclusion from decision-making, social services and community and family support.

Ultimately the elimination of the polarised economic landscape will require more proactive efforts to ensure that households have access to a minimum bundle of assets and to the markets needed to effectively
build on those assets over time.

Matela Lechesa is a freelance writer based in Pretoria, South Africa

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