Traditional finance is in a state of flux. New tools are moving to the forefront. The situation is dire. How are we going to leverage technology and interact with emerging markets in a more efficient, ethical and equitable way?
In this new knowledge economy, policymakers and economists must look beyond financial markets and experiment with new global approaches to facilitate cooperation between public and private institutions and bring the benefits of digital connectivity to the developing world. All the while, digital technologies are increasingly challenging the primacy of the so-called “command and control” economies and the monopoly of the financial industry.
This turbulent environment calls for new ways of thinking and considering the problems facing global development. It also demands a fresh approach to securing financing for development, including innovative mechanisms for crowd-sourcing capital from digital and social networks. And it demands that international actors shift their focus from states and local authorities to governments and citizens. With much easier access to digital tools, people can now shape and influence public policy. As technology advances, so must the effectiveness of global political and economic initiatives.
In this spirit, the second Finance and Development Series hosted by the Center for Global Development (CGD) this month brings together leading economists, policymakers and academics to explore the global implications of digitalizing finance and the economy.
One of the key conclusions is that new tools and technologies — such as blockchain, which enables secure transactions of digital currencies such as Bitcoin — have the potential to transform human interaction and society. However, these technologies also have the potential to make traditional financial systems more fragile. And if governments and citizens fail to apply sound policy approaches, the consequences could be disastrous.
Although the scaling up of digital technologies is crucial for public policy, the threat of financial market collapse should be considered a threat to global development. Meanwhile, cash poor countries will be affected in a variety of ways, including through taxation, public debt management and financial literacy. These types of international cooperation and action are, however, still largely lacking.
As Charles Lichtenstein of NYU and London School of Economics observes, digital is not just another tool but a transformative asset that the more effective and knowledgeable users of such technology find more compelling. Lichtenstein also writes, “Today’s digital technologies are capable of directing societies towards more inclusive and equitable outcomes and, simultaneously, that are unifying social movements and generating large-scale political engagement.”
But beyond the question of how to use new technology effectively, policymakers must also ponder how to protect the financial services sector from malicious actions and misuse. Accidents of digitalization happen all the time, but only when the assumptions and paradigms of the financial system are broken, the rules of the system aren’t followed, or governments are weak.
In our previous Finance and Development Series in 2010, we discussed the emergence of a new morality writ large by questioning the power relationships at the very heart of economic development. For much of the literature that has emerged since, this debate has only diminished into a culture war, most evident in a conflict between those who see financial services firms as predatory and those who believe this view is a problematic oversimplification. But the extremes of either view have a hollow ring since merely changing rules and regulations seems to have little impact on the flow of capital in our fast evolving financial and digital markets.
And despite more information, more regulation and more government input into the management of financial risk, the concept of an “exploding global debt bubble” still resonates in some corners of the field, leading some financial experts to warn of a new Great Depression.
Despite our differences, digital services and platforms offer a vehicle for finding common ground and breaking through the financial logjam. But society, not individual policymakers, must be at the heart of this new dialogue and action on digital finance. If policymakers and technologists are moving too fast and aren’t “listening,” anyone using any of the new tools will suffer. The financial sector is thriving on good intentions and badly damaging ideas, including those that claim this new technology is intrinsically “bad”.
Decisions and strategies made in the financial sector in the next few years will directly affect the global economy, and above all the least developed world. Each type of technology requires public-private partnerships and partnerships with the private sector — of people and institutions across the globe.
The question for policymakers and technologists is not how to bring together the global financial sector but how to have the same kind of conversation with people, their aspirations and the aspirations of the poor.
• Tiago Costa Rocha is a Program Director at CGD and co-author of Going Digital: Digital Markets and Infrastructure for Global Development in 2016.
This post was produced in partnership with the Center for Global Development. The Center for Global Development writes on sustainability, markets and finance. Follow it on Twitter @CGDev