The Alternative to the Minimum Wage Rocket Ship
Free cash is a good idea? Really?!
Every month, thousands of poor people in Kenya and Uganda receive a text message in their cell phones telling them they have been given around $45 dollars, and they have done nothing to earn them. They then go to a paying agent and get the money.
It’s not a lottery, nor a scam. It’s GiveDirectly, a charity that simply gives money away. It takes millions of dollars in donations, spends around 10% on administrative expenses, and gives the rest to poor people. As wasteful as it might sound, every year they are ranked as one the most cost-effective charities in the world, and their work and that of hundreds of similar programs has proven to be one the most effective and efficient strategies to fight poverty.
While most of the developing world adopted these types of programs long ago – programs that were first implemented in Latin America – today’s Venezuela is lagging way behind in their implementation, and in their discussion in the political debate.
Instead, we’re still stuck arguing about the government’s dumbest social policy: increasing the minimum wage. Anytime the government raises it, opposition politicians react in different ways. Some get it right: it’ll simply cause more inflation.
That’s what happens when wages increase faster than productivity. And it’s bad for companies, especially small and medium ones, which have to downsize or close, depressing supply even more. Furthermore, it only “benefits” those in the formal sector.
we’re still stuck arguing about the government’s dumbest social policy: increasing the minimum wage.
Most people understand this, even some of the politicians that complain that the increase should have been ten times larger. Some reactions are rooted on very understandable worries: “I get it. More inflation. So what? Look around you, heartless economist, people are starving! We have to do something!”.
It’s true. The government, this or the next one, needs to do something about the millions of people who can’t find or afford enough food. But that something is not raising the minimum wage ad infinitum.
There’s an alternative. If you want to help the poor, give them money. A little cash, every month, like they do in GiveDirectly. It’s what economists unimaginatively call “cash transfer programs”.
What’s most frustrating about the lack of opposition politicians talking about cash transfers (CT), is that there’s a wide consensus among Venezuelan economists and advisors, on every side of the debate.
A CT program is included in every serious adjustment proposal for Venezuela. It’s in UNASUR’s plan, in the recent proposal by the National Academy of Economic Sciences, and a team of Venezuelan researchers at Harvard working on a reform plan published a paper about the size and cost of a social protection program. It even has the seal of approval of the unlikeliest of pairs: Aristóbulo, and Maria Corina’s economic advisor.
In a CT program, the government gives money to people who fit some criteria, which can be based on income, health, gender, age, or other vulnerabilities. They come in two varieties: unconditional and conditional. In unconditional cash transfers (UCT), beneficiaries receive money and that’s it; money for nothing. Conditional cash transfers (CCT) beneficiaries have to comply with conditions: it can be sending their kids to school, completing job training courses, or taking their children regularly to medical checkups.
The government needs to do something about the millions of people who can’t find or afford enough food. But that something is not raising the minimum wage ad infinitum.
The idea of giving money to people might not seat well with the Anti-Populism Police, but helping the poor get out of poverty is not populism. And consider this: the World Bank and the IMF, two of the institutions most allergic to populism, love cash transfers. The World Bank loves them enough to lend billions to finance them, and CTs are one the IMF’s research staff main policy recommendations for developing countries.
They love them because the evidence –of hundreds of programs and evaluations going back decades– show they work. Their benefits are too long to list here, but their main positive results are very relevant to Venezuela. There is strong evidence that they reduce poverty, hunger and inequality, by allowing households to maintain minimum levels of spending on food and medicines. Beneficiaries typically increase their use of health and educations services. Households can avoid having to sell their assets, or take on debt.
They work in two ways: protecting living standards, and promoting wealth creation so people can transition to better livelihoods. They thus can help both those in transitory poverty (with lower incomes due to a crisis, for example), and the chronically, or structural, poor.
After watching chavismo tinker with the whole economy for 17 years with the finesse of a medieval surgeon, there’s another reason we – and the World Bank and IMF – like cash transfers: they don’t mess with the market and price mechanism.
When chavismo sees a price that’s too high for the poor to afford, they want to bring it down by decree. The price controls then distort everything on the distribution and supply side, and then they want to control that as well. It’s a slippery slope that leads to everyone fighting for a CLAP bag.
Cash transfers are the smart alternative: if there’s people that can’t afford food, give them money so they can go to the market and pay market prices. Increase their income, and work within the market mechanism, not against it.
Raising the minimum wage is a reaction that comes from the same impulse: give people money. But wages are a price like all others – the price of labor – and messing with it constantly is liable to cause distortions. And it forces the private sector to pay for your dumb social policy, with the cost passed on to consumers in the form of inflation.
Instead of trying to bridge the gap between populism and common sense when talking about the minimum wage, opposition politicians should start talking about and pushing for cash transfers
Another thing to like about CTs is that there are a form of direct subsidies. In Venezuela we’ve grown accustomed to large, indirect subsidies that are not focused on the poor: subsidies for gasoline, gas, electricity and imports (CADIVI). Their main beneficiaries are those who consume more. Energy subsidies are great for the guy with two SUVs and six air conditioners running 24/7 in his home, but do little for the poorest. CTs, and direct subsidies in general, are the more efficient alternative, go straight to those in need, and they don’t tinker with prices.
Prices can be a great conduit of information: they tell people what’s profitable and worthwhile, what’s a good use of their time. The indirect subsidies and price controls change the information, nudging people towards unwanted behaviour. The CADIVI subsidy told everyone it was better to import than produce locally. The price controls told companies to reduce their output, or to shut down. They also told consumers and gangs it was worthwhile to buy food at controlled prices and sell it in the black market, or take it to Colombia.
As for the bad news: yes, CT programs can be expensive. Two of the largest and most successful CCT programs are Oportunidades in Mexico, and Bolsa Familia in Brazil, and both cost about 0.6% of GDP. Other programs take up to 2% of GDP. But the depth of the Venezuelan crisis is likely to make the initial cost higher than that.
The Venezuelan researchers in Harvard estimate that there are currently 9.4 million people in Venezuela that are structurally (long term) poor, and another 9.9 million are poor by income (recently poor). The first group might need transfers for a long time, while the second group could “graduate” in short order once their income rises along with a refloated economy. The government is already running a UCT, but it’s too small to have a real impact (declared target: 500,000 people).
A transfer of $1.25 per day (until 2015, the international poverty line) for both the structurally and temporarily poor would cost $8.9bn in the first year, assuming (unrealistically) no one graduates that year. That’s around 4-5% of GDP for year one, and it will decrease going forward. Covering only the structurally poor would cost $4.3bn per year. Those are big numbers, but we could get a large part by cutting energy subsidies, which cost at least around 8% of GDP. And who knows how much we waste on the CADIVI subsidy and related corruption. Here’s where their efficiency is shown: the cost will undoubtedly be a lot less than that of indirect subsidies, and it’ll be focused directly on the poor.
We could start with an UCT, and as the number of poor by income drops, it can morph into a CCT with conditions that invest on human capital. CCTs are more expensive, and more complex to manage and monitor. And if you are going to require millions of people to make regular use of the health, education, and job training services, you better have those services ready to cover that demand, and have the administrative capabilities to manage and monitor. Needless to say, that’s not the case today in Venezuela.
The usual knee-jerk critique to these programs is that people will squander the money in booze and cigarettes. But evaluations of several programs in Latin America, Africa and Asia found zero evidence of even a small increase in spending on “temptation goods”. People don’t like to be hungry, even those who love to party. As for creating dependency, the transfer should be set at, or just above, the poverty line, and below the minimum wage, so that working is always a worthwhile proposition. The goal is to avoid people starving, not to cover all of their wants and needs.
Instead of trying to bridge the gap between populism and common sense when talking about the minimum wage, opposition politicians should start talking about and pushing for CTs, the alternative they either already know about, or at least their advisors do. It’s time to start talking about they would do to save and improve lives. Maybe they fear being called chavistas or populists, or they don’t want to be seen as approving of past and current chavista programs because the CT programs do sound, at least on paper, like the misiones. They are actually what the misiones could have been, but never were.
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