UBI Guide

Why China Could Surprise the World by Being the First Country to Adopt Universal Basic Income

Scott Santens

23 JAN 2024 — 7 MIN READ

The concept of universal basic income (or UBI) – a regularly provided cash payment distributed without conditions to all individuals within a defined community – has a long history and an as yet unwritten future. As someone considered to be one of the world’s experts on the topic with over ten years of educating people about it under my belt, one question I’m frequently asked is where I think it will happen first. Despite hundreds of years of discussion, and the state of Alaska being one of the only places to implement a UBI at scale so far, which country will be the one to stop talking about it, and just do it? Well, some countries are certainly closer than others, and the idea certainly is more popular in some countries than others, but one entirely possible answer to this question tends to not even be considered in the running – China.

First, although I’m a huge believer in liberal democracy, and am actively worried about the rise of authoritarianism around the world, the fact remains that democracy tends to require the support of the people to be behind the policies enacted. For a country like the United States to enact UBI, there would need to be a sufficient percentage of voters demanding it, combined with a sufficient amount of support within Congress, and a president willing to sign it into law. For a country like China to enact UBI, the decision need only be made at the top of one party, and where once that decision only needed the agreement of a few men, it now only really needs to be made by one man – Xi Jinping.

In the summer of 2021, Xi Jinping began using the phrase “common prosperity” to describe his policy goals for China. He’s described it as people-centered growth where those with high incomes – both individuals and businesses – are encouraged to return more to society. He seems to believe that China has moved beyond its rapid-growth stage and has entered a new stage that will require a reduction of inequality and an uplifting of those left behind. He has also said he wants to make solid progress in achieving common prosperity by 2035. Key measurements of greater common prosperity, aside from reduced inequality, will include improved health and reduced environmental degradation, but most importantly a wider consumption base with more consumer buying power.

It’s that last one that is perhaps the strongest reason of all that China would want to consider implementing universal basic income. Long story short, China’s chief import is demand. It relies on consumers around the world buying what it produces. What has made possible the rise of China as an economic superpower is the American consumer and consumers in other countries around the world. The challenge for China at this point is to have its own consumption-loving middle class – a wide base of consumers with the disposable income and time to buy and consume what China produces.

China’s current median disposable income is about $7,200 in USD in urban areas and about $3,015 in rural areas, compared to about $45,000 that the median American has to spend after taxes. China needs to find a way of boosting disposable income across the board in a way that meets its many stated objectives.

Weak consumer spending in China post-pandemic has been described as being a case of “economic long-Covid” and is even becoming somewhat reminiscent of the Great Depression. A July 2023 meeting of the Political Bureau of the CPC Central Committee, plus recent statements of China’s central bank, and also the Institute of Economics of the Chinese Academy also all agree on the need to direct state capacity towards increasing domestic demand. So it’s not only the international community saying this, but China itself saying this.

Whereas the American consumer came roaring out of the pandemic with a desire to spend, spend, spend, consumers in China did not. They are preferring to just stash their money in savings accounts. This is not good for economic growth. Chinese consumer confidence has fallen almost 10% from its high and now stands at a lower level than ever, including during the pandemic. China desperately needs to figure out a way to get people to spend on goods and services instead of saving their money.

As Paul Krugman wrote in the New York Times, “what China must do seems straightforward: end financial repression and allow more of the economy’s income to flow through to households, and strengthen the social safety net so that consumers don’t feel the need to hoard cash.” UBI accomplishes both aims.

There’s also another reason that China could consider UBI as the tool that will accomplish its economic objectives, and it’s known as dibao. The dibao program is China’s already existing minimum income guarantee. It’s a top-up program originally created for urban areas to reduce urban poverty where if someone earns below the minimum level, they’re provided the difference between what they earn and what is deemed the minimum they need. The problem with such a design is the strong work disincentive it creates due to a 100% marginal tax rate on income. As long as someone has an income below the dibao level, any additional earnings don’t leave them better off. This is contrary to a UBI design, where all additional earnings always leave people better off.

To illustrate, consider you have a part-time job that pays $500 a month and the dibao is set at $1,200 a month. You’d be boosted to $1,200. If you then doubled your hours worked to get $1,000 a month, you’d still be boosted to the same $1,200. All the extra work wouldn’t matter. You’d be no better off despite that additional work. However, with a UBI set at the same $1,200 a month level, doubling your hours worked would move you from earning $500 on top of $1,200, which would total $1,700, to a new total of $2,200 (before taxes).

This is not to say that China would necessarily convert their dibao into a UBI, but that the precedent already exists for China to look at poverty as a lack-of-money problem that can be solved directly with a monthly distribution of money. The origins of the dibao were also in the concerns of “staving off social instability and turmoil” in a time of massive labor market transformation, and it’s viewed as having achieved those goals. As labor automation advances, UBI could be recognized as a far more powerful tool for maintaining social stability in a way that doesn’t create a work disincentive like dibao-like programs do.

These are the three primary reasons I believe China could surprise everyone by being the first to introduce a universal basic income: Xi Jinping could at any point just decide to do UBI. China’s stated goals of a strong consumer class and the notion of common prosperity would be accomplished by a UBI. And China could recognize UBI as a superior policy to its existing minimum income strategy.

There are plenty who disagree with my take on this, including the UNDP who sees UBI as “not financially feasible” in China, but that’s due to the same error that many discussing UBI commonly make. UBI is not more expensive than a targeted income program designed to achieve an identical post-tax income distribution. Targeting just uses phaseouts that mistakenly aren’t considered to be taxes. It costs the same to give someone $50 after phasing it down from $100 as it does to give someone $100 and then tax away $50. However, the former can involve high administrative overhead and high marginal tax rates where the latter requires neither. In reality, targeting is a more expensive way of distributing income with worse results. UBI can achieve the same reduced amount of inequality as a targeted design, but in a more efficient way that generates more labor supply and many other widely desired outcomes.

I know of at least one person in China though who appears to agree with me, and that’s the chief economist of the Bank of China – Xu Gao. He has proposed something he calls an “Ownership Sharing Scheme of State-Owned Enterprises for All” that would establish multiple public investment funds financed with capital from all state-owned enterprises, the profits of which would be distributed universally to the entire population as an annual dividend. UBI enthusiasts may recognize this plan as basically the Alaska model, but using corporate profits instead of oil. This also happens to be basically the same thing Sam Altman has proposed and what I proposed during the pandemic, except using state-owned enterprises instead of publicly-traded corporations to grow the wealth fund.

The general strategy of such a UBI is to go about it in a way that doesn’t use personal income or consumption taxes, and gets citizens a share of overall productivity growth. If there’s a mechanism in place so that as companies do better, people do better, people will want companies to do better. If companies automate labor and as a result become more profitable, people should see larger UBI as a result. A dividend tied to corporate profits does that.

The prospect of a UBI-equipped China may also lead the U.S. into considering UBI, and it’s also possible that the U.S. may soon realize it needs UBI in order to outcompete China in AI. Fear of AI taking jobs is an obstacle to embrace of AI. UBI removes that obstacle, especially one tied to national productivity growth.

The simple fact of the matter is that China needs consumers, and UBI creates consumers. The only real obstacle is that UBI also means trust in individuals. Its lack of conditions means a giving up of some control. The big question is if China will ever trust its people with the freedom that UBI provides. With the rise of AI and its impact on the labor market and thus consumer spending, it may not really have a choice, which also happens to be true for every other country too. But in China’s case, it’s really only about convincing one man that UBI is the way to go.

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Scott Santens Twitter

Unconditional/Universal Basic Income (UBI) advocate with a crowdfunded basic income; Founder and President of ITSA Foundation, Author of Let There Be Money; Editor of BasicIncomeToday.com