Beyond its benefits, technological development such as job automation creates new issues in the society, one of the examples would be an increase in unemployment. This concern, alongside others such as alleviating poverty, increases the interest in UBI (Universal Basic Income), a social assistance program that would pay every member of society a fixed income. This issue has sparked a debate between its proponents and detractors, with the earlier supporting its universality and the freedom it creates, while the latter are concerned regarding its funding source, the distribution and potential work disincentives.
On the other hand, Islam has its own social assistance program, commonly known as Islamic social finance. Its main instrument is called Zakat, a compulsory charity that functions as a wealth tax. Zakat has its own characteristic in poverty alleviation that differs from existing programs, such as being needs-based, and treated as a right of the poor. This article examines UBI and Zakat as poverty alleviation programs and compares their characteristics. Though it is important to note, that both programs can be used together as they have differing characteristics.
1. Universal Basic Income
According to BIEN (Basic Income Earth Network), Universal Basic Income is a cash payment program which is paid periodically and unconditionally to all on an individual basis, without needing a means-test or work requirement1. According to the World Bank2, UBI has 3 core design choices:
- Universally paid to all members of the society, instead of being targeted to a population or distributed on a needs basis.
- An unconditional transfer, meaning that the transfer does not need any conditions or sanctions, in contrast to a work or service-based transfer.
- Transferred in the form of cash, not as vouchers or in-kind. This allows recipients to use their benefit in any way they choose to.
In addition, a UBI is also paid on an individual basis instead of per household, and is a recurring payment instead of a one-off 3. Outside of the above, other more specific parameters can differ. These include the level and frequency of transfers, age limitations, and citizenship 2. For example, many advocates promote transferring a sufficient value to cover essential living costs, and some propose transferring only an incremental value as the basis for other income sources.
The idea of a guaranteed basic income had been presented since more than 2 centuries ago, but had only started to gain attention in the 60s, backed by economists such as Galbraith and Friedman4. In recent years, there has been a renewed interest in UBI as a response to systemic poverty, inequality, and challenges such as technological change. There is a concern that existing social protection systems are outpaced by structural shifts in the society, creating an appetite for change.
Proponents of UBI has several theoretical justifications in supporting UBI, these include4, 5:
- Freedom: a basic income would alleviate a certain level of material constraint, and therefore improve people’s choices.
- Poverty reduction: depending on the level of transfer, UBI could help alleviate poverty in various degrees, from satisfying basic needs to completely eliminating absolute poverty. Health rationales are also common in advocating UBI.
- Economic efficiency: Using the simplicity of UBI in place of current welfare systems would reduce exclusion mistakes, complexity, and administrative costs.
- Reducing income inequality: As many UBI proposals are financed through income tax or cutting subsidies, it would reduce income inequality.
- Transparency: the universality of UBI makes it less vulnerable to corruption and rent seeking problems; as well as being a more transparent public expenditure.
- Labor market concerns: automation and other changes in the modern labor market create a need for a more fitting social protection model.
On the other hand, there are also factors that contribute to the disapproval of UBI, these include4:
- Financial pressure: opponents argue that the cost of providing an effective UBI is too heavy, while smaller mounts would be ineffective.
- Administrative challenges: Application of UBI using taxation needs a strong taxation system and detailed and updated data on income and wealth.
- Create negative incentives: UBI is argued to discourage work, create a lack of reciprocity, and other undesirable effects.
- Leakage to the non-poor: Non-poor who do not need UBI would also benefit from it, and this can create cuts in critical public expenditure.
In comparison to other cash-based social assistance programs, UBI is more flat, but more extensive, as it gives each member of the society the same amount2. Child allowances and social pensions are similar to UBI but are limited for people not expected to work. Other programs include GMI (Guaranteed Minimum Income), which creates a minimum income for every family, and brings them to it if they fall below the minimum. This program has better efficiency than UBI, but may also disincentivize work.
Most developing countries lack the capacity to run GMI2. Therefore many of them use several proxy combinations for income and focus benefits to the bottom end of distribution, creating conditional or poverty-targeted unconditional cash transfers. These programmes are more cost-effective than UBI, but these proxies can be difficult to collect and might be unavailable. Furthermore, these programs can also exclude vulnerable non-poor households.
Practically, implementing a fully universal and unconditional basic income has never been done at scale and a large amount of time3. Thus far, only Iran and Mongolia have implemented a full UBI initiative on a national scale2. However, there has been an increase of social interventions that meet several features of UBI. Furthermore, several countries have designed or implemented UBI projects for purposes such as eradicating extreme poverty and improving social welfare.
A review of existing evidence by Stanford Basic Income Lab3 shows that UBI has had a positive impact in multiple categories. Unconditional cash transfer in low and middle income countries is shown to reduce poverty. The labor market, representing working incentives, are shown to be minimally impacted by these programs, and some studies actually report an increase. There is also an increase of educational attainment, with a significant short term impact, but diminishes over time. Health outcomes, including mental health, have also shown to improve.
The World Bank2 had also analyzed UBI by simulating its impact if it replaced existing cash transfer or subsidy programs. A budget neutral UBI is shown to be less effective in reducing poverty than existing programs, but has better distributional impacts. UBI is indicated to have a larger effect if the existing programs that it replaces are less poverty targeted. This study also indicates that a larger generosity level, through increase in tax or subsidy cuts, is needed to have a meaningful effect on poverty.
Zakat is one of the pillars of Islam in the form of an obligatory charity. Zakat can be defined as ”a rightful obligation on a special property of a particular group of people to be paid at a particular time”6. It is obligatory on every Muslim that has wealth above a certain threshold, therefore serving as a wealth tax. Zakat is levied on wealth that provides sustenance, multiply and create profit, and the rate differs depending on the category of wealth.
The distribution of zakah is limited to 8 categories which is directly specified in the Quran:
اِنَّمَا الصَّدَقٰتُ لِلْفُقَرَاۤءِ وَالْمَسٰكِيْنِ وَالْعَامِلِيْنَ عَلَيْهَا وَالْمُؤَلَّفَةِ قُلُوْبُهُمْ وَفِى الرِّقَابِ وَالْغَارِمِيْنَ وَفِيْ سَبِيْلِ اللّٰهِ وَابْنِ السَّبِيْلِۗ فَرِيْضَةً مِّنَ اللّٰهِ ۗوَاللّٰهُ عَلِيْمٌ حَكِيْمٌ
Zakāh expenditures are only for the poor and for the needy and for those employed for it1 and for bringing hearts together [for Islām] and for freeing captives [or slaves] and for those in debt and for the cause of Allāh and for the [stranded] traveler - an obligation [imposed] by Allāh. And Allāh is Knowing and Wise. (Quran 9:60)
Among the 8 categories above, the primary priority of zakah is alleviating poverty through giving to the poor and the needy7. The poor are defined as those who do not have enough for their living and are unable to earn them, or only have some of their needs. While the needy are those who already have most or half of their needs6. These categories are given zakah to suffice their needs for a whole year. It should also be noted that giving to other categories, such as stranded travelers and people in debt, would also indirectly help in alleviating poverty.
From the criterias above, we can see that one of the conditions needed to receive zakat is based on individual needs. This means that each person would have a different minimum income limit to be a zakat recipient, which changes based on his condition, such as the number of dependents. The NZF (National Zakat Fund) standards limit giving zakat only for essential and everyday expenses with an average quality13. It is also disliked to give excess funds after needs and debts if there is surplus equalling the nisab.
The distribution of zakat is primarily given directly toward fulfilling the needs of the 8 categories and is forbidden to be given to any other category6. However, there are differing interpretations within them, such as whether ”the cause of Allah” category is limited to military endeavors or can it be interpreted more generally8. Zakah distribution is also forbidden to be given to the rich and people who are strong and able to earn a living enough for him and people under his care9:
”The Messenger of Allah said: ’It is not permissible to give charity to a rich man (or one who is independent of means) or to one who is strong and healthy.” (HR. An-Nasa’i)
With a potential yearly collection estimated to reach US$200 million to US$1 trillion, zakat can create a large socio-economic impact10. As a direct wealth transfer, zakat directly reduces inequality and serves as social security7, 11. Zakat would also create economic incentives, both for the poor to spend and the wealthy to invest. With good management, zakat would also lower the economic burden of the state in poverty alleviation12.
3. Universal Basic Income And Zakat Comparison
Both UBI and Zakat have a potentially significant role in poverty alleviation, each with their own characteristics. This section would compare the features between UBI and zakat, and how they would impact poverty alleviation. The comparison would be based on UBI’s main features, which are Universality, unconditionality, and cash transfer. GMI would also be added as a further point of reference.
Firstly, UBI is paid universally to all members of the society, while zakat is strictly limited to be paid to certain categories mentioned in the Quran. UBI would also be partly given to people who do not need economic assistance, while zakat would be limited to people who actually need it. This also means that zakat needs more data regarding its recipients to evaluate whether they are eligible to receive zakat.
Secondly, UBI is unconditional, as there is no condition at all for someone to be a recipient of a fixed income. While zakat, especially for the poor and needy categories, has the condition of income less than their need, and they would receive the amount gap between their need and income. From this point of view, zakat is similar to GMI, but instead of a fixed minimal income, zakat bases the amount on the recipient’s needs. This would mean that zakat would need even more data than GMI, as beyond current income data, each recipient would need to have an updated essential and everyday needs data, especially for giving amounts above nisab. Furthermore, zakat is not eligible for strong, healthy people who can work but chose not to9, creating another layer of condition.
Thirdly, UBI is transferred in the form of cash, to create flexibility for the recipients to fulfill their needs. While zakat can be given in other forms than cash, such as grains or livestock for their respective zakat categories. This means that zakat can not only be used to alleviate economic poverty, but also directly alleviate multidimensional poverty, such as providing food, freeing people from debt and abolishing slavery.
|Universatility||Given universally to all members of the society||Given to people under a certain income level||Given to a fixed 8 category|
|Unconditionality||Given unconditionally||Given with an income level condition, without condition to work||Given with a condition of income and need, and is obliged to work|
|Transfer method||Given in the form of cash transfer||Given in the form of cash transfer||Given in the form of cash or goods|
However, zakat and UBI does not have to be an either or proposition, as both can be used together since each has their own features. One example is that UBI, GMI, or other cash-based welfare programs, can be used to alleviate extreme poverty, while zakat would be used to cover for their remaining needs. This way, there would be less of a burden in funding the UBI, while its universal aspect would create a safety net for the whole society. People who are still under the poverty line would then receive zakat based on their needs, which would empower them to fully escape poverty.
An example of a country which uses both zakat and cash-based welfare programs is Indonesia. Indonesia has several cash-based welfare programs financed by taxes with differing proxies, such as for workers under a certain wage14. On the other hand, zakat also continues to function independently to taxes as a voluntary (in positive law) charity, with the form of the program varying between institutions, whether as cash transfer, in-kind, and conditional work-based programs15. Practically, this still applies to many countries as the majority of zakat is being paid between person to person16.
In conclusion, zakat and UBI are two poverty alleviation instruments with differing characteristics and implementation challenges. UBI is a universal cash support that would create a safety net for the entire society, but it would be expensive to create a significant impact from UBI. Meanwhile, zakat is based on needs, only giving the poor and needy the amount between their needs and income, meaning that it is efficient, but also needs a significant amount of data that reflects the dynamism of people’s needs and income. It is also important that these programs are not an either or proposition, both can be utilized together to create universal safety net and effective poverty alleviation.