“Killing two birds with one stone?” The Cashless COVID Welfare Payments Aimed at Boosting Consumption

In launching its COVID-19 relief payments scheme, the South Korean government had two goals: providing a safety net for its citizens and boosting consumption for the economy. It therefore provided cashless payments, issuing credit card points rather than cash. However, this had serious implications for the vulnerable.

In May 2020, South Korea’s government distributed its COVID-19 emergency relief payments to all households through cashless channels. Recipients predominantly received points on credit cards rather than cash transfers. From the outset, the government stated explicitly that this universal transfer scheme had two goals: it was not only intended to mitigate the devastating impacts of the pandemic on people’s livelihoods, but also explicitly aimed at simultaneously boosting consumption in the South Korean economy. Providing cash would not necessarily boost consumption as it could be placed in savings accounts. Therefore, credit card points were offered instead to require recipients to spend the relief. But in trying to “kill two birds with one stone” by promoting consumption through the relief program, the government jeopardized the welfare aim of this program.

Once the payouts began, the government boasted that the delivery of the relief funds was timely and efficient. The relief program had been launched based on business agreements with credit card companies for “rapid and smooth” payment, and indeed, it was true that the card-based channel enabled distribution which was much faster than in other countries. Although “offline” applications for the relief program could be made in-person at banks, the scheme was designed around the submission of applications through credit-card companies’ websites or apps. The relief funds were then deposited onto recipients’ credit card or debit card in the form of points—which were separated from normal credit card points—within two days after applying. In September 2021, during the second round of universal relief payments known as the “COVID-19 Win-Win National Relief Fund,” 90% of expected recipients received their payments within 12 days.

Restricting spending to boost spending

However, paying recipients in credit card points meant restricting their access to cash. While low-income households received the relief fund in cash during the first round of COVID-19 relief, they had to apply for the payment in the second round and could only choose among cashless methods which included credit cards and debit cards. To make matters worse, the policy placed constraints on where points could be used, in the name of encouraging consumption and growing the local economy. The points could only be used in designated places, and could not be used to pay for utility bills, repay a mortgage, nor for online shopping. They could not be transferred to others’ bank accounts or withdrawn as cash. Therefore, recipients had no choice but to use their relief funds in certain local restaurants, markets, or clothing stores, etc. If the points had not been used approximately 3-4 months after disbursement, then they were returned to the national treasury. All of these conditions were the outcome of the fact that the policy specifically aimed at boosting consumption.

Jeopardizing the welfare aim

These restrictions had significant repercussions on people in poverty, in two key ways. First, the relief fund failed to fulfill the right to social protection of vulnerable people at risk. As utility bills, telecommunication fees, and even health insurance fees could not be paid with the points, many were left unable to pay for the things they needed to pay for, while much-needed funds remained effectively stranded on the card. What use is a card meant only for restaurants and shops when one is in arrears on utility bills, health insurance fees, and at risk of electricity supply and health insurance benefits being cut off? Those who needed cash immediately sometimes handed their credit cards to other people to use, and then requested payment back in cash below the value. It was also reported that a number of people bought products at stores where relief fund points could be used, and then sold the products at a lower price on the second-hand online market to obtain cash. Although the government warned that it would crack down on such “illegal transactions,” the demand for cash could not be controlled.

Second, the right to housing of vulnerable populations was not sufficiently protected through this scheme. Homeless persons, who needed the most help, were severely affected because the cashless relief funds could not function as a payment method for monthly rent. Homeless people and slice-room dwellers were the group which most strongly agreed that “the COVID-19 relief fund should be distributed in cash” in a survey. Further, given that low-income people spent a higher proportion of their income on rent than those from other social classes, the fact that the relief funds could not be used on rent also significantly affected low-income households. A number of temporary or informal workers who lost their jobs due to the pandemic were on the verge of being pushed into poorer conditions because they could not afford their rent. The relief program could not help these groups cover some of their most urgent expenditures—housing costs—at all.

Boosting consumption can be expected as an indirect effect of government relief funds, but it must not be adopted as a specific goal of such programs. Attempting to achieve this consumption-oriented goal through the relief payments resulted in the scheme’s design imposing limitations on the use of funds, thereby undermining the scheme’s ability to help those in the most extreme need. As the government set boosting consumption as one of the aims of the program and seemingly prioritized it over the welfare aim, the delivery of the payments was devised in an inappropriate way that did not take the most vulnerable into account.

Killing two birds with one stone?

The Korea Development Institute (KDI) found that only about 30% of the first emergency relief funds led to an increase in consumption, while the remaining 70% led to household debt repayment or savings. In the end, it seemed that the cashless relief stipend did not successfully increase consumption, all while it caused the weakening of its social security function.
Such schemes aimed at “killing two birds with one stone” were doomed to fail from the beginning because these two goals come into tension with one another in the program’s design. The consumption aim is likely to harm the welfare aim through pushing for cashless, controlled, and restricted use. The sole purpose of emergency relief funds in a crisis should be to provide assistance for the most vulnerable. Such schemes should be delivered in a way that will best fulfill this aim, they should be focused on providing a safety net, and should be designed from the perspective of right-holders, and not of consumers.

April 19, 2022. Bo Eun Kwon, LLM program, NYU School of Law whose interests include international human rights law, economic and social rights, and digital governance. She has worked at the National Human Rights Commission of Korea.