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CGD’s work in technology and development focuses on the macroeconomic implications of technology change as well as technological applications for specific development challenges.
Technological advances are a driving force for development. But policy choices determine who benefits. CGD focuses on three key questions around innovation, growth, and inequality: How can governments use existing technologies to deliver services more effectively to citizens? How can international institutions help create and spread new technologies to tackle shared problems like climate change and pandemics? And how can policymakers ensure advances in artificial intelligence, automation, and communications bring shared benefits and not greater global inequality?
Policies put in place to counter financial crimes have unfortunately had a chilling effect on banks’ willingness to do business in markets perceived to be risky—due in part to the high price of compliance. This has had costly consequences for people in developing countries, and in particular, has hurt migrant workers, small businesses that need to access capital, and recipients of lifesaving aid in conflict, post-conflict, or post-disaster situations the most. But what we’re seeing is that even as changes are being made to address this problem, financial institutions are developing solutions in the form of new cutting-edge technologies to help them comply better and faster with anti-money laundering regulations.
This week, we published a new study—the first comprehensive effort to assess six new key technologies and their potential to solve the de-risking problem. Financial institutions have turned to new technologies to address de-risking and increase the effectiveness and efficiency of their AML/CFT compliance. These new technologies may enhance transparency and information-sharing capabilities, facilitate automation and interoperability between institutions, and improve banks’ ability to accurately identify illicit activity. In doing so, they may offer a partial solution to de-risking by lowering compliance costs and improving risk management capabilities.
These technologies include:
Machine learning – a type of artificial intelligence that allows computers to improve their performance at a task through repeated iterations. Machine learning may be used to augment or transform a number of compliance functions, including those for developing more sophisticated customer typologies and for more accurately monitoring transactions. These uses could simultaneously cut down on false alerts and identify undetected illicit finance techniques.
Biometrics – use distinctive physiological or behavioral characteristics to authenticate a person’s identity and control his or her access to a system, and are more robust than other authentication factors, such as passwords and tokens, as they are generally more secure and easier to use. Biometrics are being used to address the “identification gap” that exists in many developing countries. This use, in turn, could make it easier for banks to conduct customer identification, verification, and due diligence, which may bolster the confidence of their correspondent banks. However, most biometric identification systems are being developed at the national level, meaning that work is required to develop an internationally recognized and interoperable identification system.
Big data – refers to datasets that are high in volume, velocity, and variety, and therefore require systems and analytical techniques that differ from those used for traditional datasets. Compared with relational databases, big data applications offer more scalable storage capacity and processing. They also allow many different types of data to be stored in one place, so compliance staff spend less time gathering information from disparate sources. Most important, they can greatly expand the range and scope of information available for Know Your Customer (KYC) and suspicious transaction investigations.
Know Your Customer (KYC) utilities – central repositories for customer due diligence (CDD) information. By centralizing information collection and verification, KYC utilities can reduce the amount of information that has to be exchanged bilaterally between correspondent banks and their respondents, thereby reducing the time banks spend conducting CDD investigations.
Distributed Ledger Technology (DLT)/Blockchain– a way of securely organizing data on a peer-to-peer network of computers. In a blockchain, which is a type of DLT, data modifications, such as transactions, are recorded in time-stamped blocks. Each block is connected to previous blocks, forming a chain. Modifications are confirmed and stored by all users on the network, which makes the ledger difficult to tamper with. Although blockchain technology is most commonly associated with virtual currencies, such as Bitcoin, the basic technology has a number of other potential use cases, including uses in regulatory compliance. In particular, DLT may be used for securely storing and sharing KYC information, as well as for cheaper and more secure international payments.
Legal Entity Identifiers (LEI) – unique alphanumeric identifiers, like barcodes, that connect to reference datasets held in a public database. Any legal entity that makes financial transactions or enters into contracts may request an LEI. In many countries, especially developed ones, LEIs are increasingly mandated by regulation. To date, more than one million LEIs have been issued worldwide. By serving as common identifiers, LEIs can enable different platforms, organizational units, and institutions to refer to entities clearly and without any ambiguity. This interoperability can, in turn, facilitate greater automation and information sharing. A further extension of the LEI would be to include it in payment messages to identify originators and beneficiaries, which would further enhance the transparency of international payments.
Scroll through the infographics above
In the face of de-risking, both the public and private sector have tried to find ways to lower the compliance burden without lowering standards. RegTech (regulatory technology) may be the solution to some de-risking woes. But for this to work, policymakers need to invest time in understanding how these technologies work, and what their benefits and limitations may be. This is the first step in coming up with a regulatory framework that maximizes the advantages of RegTech.
You can find the full study here. We welcome your comments!
In the push for electricity access in the developing world, many policymakers are trying to figure out where on-grid or off-grid solutions make the most sense. My new CGD paper with colleagues Ben Leo and Jared Kalow asks 39,000 consumers in 12 African countries about their energy use and demand. The big takeaway: African consumers don’t view grid versus off-grid as a binary question.
Among our findings:
Off-grid (non-generator) electricity is largely inadequate. A significant proportion of respondents reported that their off-grid electricity solution did not fulfill any of their power needs, including almost two-thirds of Rwandans with off-grid systems.
Off-grid customers still exhibit strong demand for grid electricity. In most countries, off-grid respondents reported a high desirability for grid electricity. In fact, demand for a grid connection is significantly higher among off-grid households than those with no electricity at all.
On-grid customers rely heavily on generators. For example, nearly half of on-grid Nigerians also report generator reliance.
While these findings undermine a key assumption implicit in the on-grid versus off-grid question, they make sense given energy consumption patterns. Off-grid customers may appreciate the lights and basic appliances (e.g., phone charger, fan, small TV) that off-grid systems can power, but want to move up the energy ladder toward higher power appliances (refrigerator, larger TV) enabled by a grid connection. At the same time, on-grid customers face a host of reliability issues and thus see off-grid options as an important backup.
So what might this all imply for policymakers or initiatives like Power Africa?
We shouldn’t assume rural means off-grid and urban means on-grid. Better information about actual consumer behavior and demand would present a more nuanced picture and a variety of solutions.
Low-energy off-grid solutions should expect growing consumer demand for higher-energy systems over time.
Grid reliability is a major problem.
We conducted phone-based surveys on energy access and demand in twelve African countries. From these findings, we draw several potential policy implications. First, both grid electricity and off-grid solutions currently are inadequate to meet many African consumers’ modern energy demands. Second, grid and off-grid electricity are viewed by consumers as complementary, rather than competing, solutions to meet energy demand. Third, a market exists for off-grid solutions even among connected, urban Africans.
Even while policy solutions to address de-risking are being implemented, new technologies have emerged to address de-risking by increasing the efficiency and effectiveness of AML/CFT compliance by financial institutions.
Fuel subsidies are bad for the planet, expensive, and often regressive. With new, high-frequency price data researchers explore why they’re also so hard to kill.
Economists rarely reach the kind of consensus that we see on the topic of fuel subsidies. Bottom line: they’re a really bad idea. On the one hand, they encourage us to burn more fossil fuels and kill the planet, and on the other hand, they’re a massive drain of fiscal resources—equivalent to 6.5 percent of global GDP according to the most eye-popping IMF estimates—that are very poorly targeted at the poor.
Yet attempts to roll back subsidies often provoke strong political backlash. Movements from the Arab Spring in Jordan to Occupy Nigeria have marshalled popular resistance to raising fuel prices, and generally won.
So in the wake of the Paris accord, are countries doing anything to unravel these inefficient subsidies? At a CGD event this week organized by my colleague Todd Moss, Michael Ross of UCLA presented his multi-year project with Paasha Mahdavi of Georgetown and others to gather high-frequency gasoline prices from 157 countries around the world since 2003.
Global fuel subsidies are falling—but mostly due to a falling market price in the face of fixed price ceilings, not politically difficult reform
Two things jump out from the visualizations of their data that Ross, coauthor Chad Hazlett, and Mahdavi present in their recent paper in the journal Nature Energy.
First, the price you pay at the pump in most countries is higher than the global benchmark price of fuel, i.e., most countries are net taxers—not subsidizers of fuel. As it turns out, 95 percent of global fuel subsidies are concentrated in just 22 countries, all of which are also oil exporters. (Note the definition of a subsidy here is more restrictive than the expansive definition that IMF researchers use to get to 6.5 percent of GDP.)
Figure 1: Gasoline prices by country and benchmark price trends over time – Ross et al (2017)
Source: reproduced from Ross et al (2017): “Individual country price trends are shown in grey, and the global benchmark price is plotted in red. Countries fall into two groups: those with prices above the benchmark (who tax gasoline) and those below it (who subsidize it). The overall shape of many trend lines is driven by changes in benchmark price. In general, countries that tax gasoline also allow the price to fluctuate in tandem with global prices, while those that subsidize gasoline keep their prices fixed for long periods. All prices are in constant 2015 USD per litre.”
Second, the lower lines are much less squiggly. That means that countries which subsidize fuel, by charging a retail price below the world price, tend not to let the price move with market fluctuations—whereas taxes are more often defined in proportional terms.
Fixing the retail price has an interesting side-effect: when the world price of fuel drops, the subsidy—defined as the gap between the world price and the retail price—automatically falls. Cheaper gas masquerades as subsidy reform! Mahdavi et al note that most reductions in fuel subsidies since 2014 have come from this phenomenon—which is fine from a fiscal perspective, but isn't going to save the planet or our lungs from air pollution.
Figure 2: Net taxes and subsidies by country in 2003 versus 2015 – Ross et al (2017)
Source: reproduced from Ross et al (2017): “Eighty-three countries increased their net taxes or reduced their net subsidies between the first six months of 2015 and the first six months of 2003; they are shown in blue and lie above the 45◦ dashed line. By contrast, 46 countries reduced net taxes or increased net subsidies over the same period, and are shown in dark orange below the 45◦ line. While most countries had net taxes in both periods (placing them in the upper-right quadrant), 14 countries had subsidies in both periods (placing them in the lower-left quadrant). Just two countries changed from net taxers to net subsidizers (lower-right quadrant) while two others changed from net subsidizers to net taxers (upper-left quadrant). Text size is proportional to average gasoline consumption.”
Overall, are things getting better or not? The short answer is yes, but slowly. From 2003 to 2015, most countries started and ended as net taxers. And countries gradually raised gas taxes, shown by the cloud of names above the diagonal line in the upper-right quadrant. But most countries who started off with net subsidies kept those subsidies, as see in the population of the bottom left quadrant relative to the upper left.
So why do governments subsidize fuel? And why are climate-killing, anti-poor subsidies considered vaguely left-of-center and populist?
The proximate cause is obvious: attempts to remove subsidies are often met with angry protests. Subsidies are politically popular. But at a deeper level, why?
Trust in government appears to be one factor. In a forthcoming paper in Comparative Political Studies, Jordan Kyle looks at public support for replacing fuel subsidies in Indonesia with a targeted transfer program—in which, crucially, monies would have to pass through local government. Kyle documents large variation in corruption in existing programs and finds that this corruption is highly predictive of support for fuel subsidy reform. In villages where transfers tend to go missing, poor households in particular would prefer to keep inefficient fuel subsidies than move to a transfer system.
In a separate project in Tanzania with colleagues Nancy Birdsall, Jim Fishkin from Stanford, and Mujobu Moyo, we found hints of a similar dynamic: citizens who have more trust in the current government were more supportive of exporting Tanzania’s recently discovered natural gas reserves and using the money for other purposes—whereas those with low trust were somewhat more inclined toward using the gas on shore or subsidizing fuel.
The technocratic hope, embodied in India’s Aadhaar system of biometric identification, is that new technology will make it possible to replace inefficient subsidies with reliable electronic transfers that don’t leak and are beyond the reach of local corruption and rent-seeking. My colleagues Neeraj Mittal, Anit Mukherjee, and Alan Gelb have documented in detail how the Indian government has pursued this goal with the reform of cooking fuel subsidies. The politics of Aadhaar remain contentious to say the least.
Using their price data, Ross and Mahdavi have now turned to exploring the determinants of successful (i.e. lasting) reform, asking who raises the retail price of gas and when? That work is still in process, but preliminary results suggest a few factors. Reform is more likely when prices are low (so a price hike is less painful), countries face sovereign risk (so the expense of subsidies bites), and elections are far off.
At the end of the seminar, Ross noted that so far their model has very little explanatory power. A slew of political and economic factors can't seem to predict when fuel subsidy reform will happen. And that seems to be a good metaphor for experts’ understanding of this topic more broadly. Fuel subsidies are bad economics. They cost gobs of money, increase carbon emissions, and fail to reach the poor. But they remain popular, often with the people we think benefit the least.
We’re running a quick, two-minute survey to get your feedback on the podcast. What do you like? What could we do better? We look forward to hearing from you!
How should developing countries cope with new and emerging global challenges? How do we ensure they don't get left further behind?
These were some of the questions discussed at a recent CGD event, a conversation between World Bank Group president Jim Yong Kim and CGD president Masood Ahmed.
On this week’s podcast, we hear from Jim Kim on robots, blockchain, multilateralism, and development finance—including the critical role of private actors.
“There should be a new ethics of global development that includes the private sector, because it's the only way to get to the kind of volume we need to end poverty,” Kim said. To get there, he continued, multilateral development banks need to work together.
Hear more in the clip below.
This is also a special episode of the podcast—it's my last as host, as I am leaving CGD for a new role. Thank you for listening these past three years, and please stay tuned for more episodes of the CGD Podcast.
Last week I attended a high-level conference in Marrakesh on jobs and growth in the MENA region. What became clear is that, like the mythical Roman god Janus, there are two faces to most of the region’s economies. We can call them the young and the old. And that the choice for MENA governments to make is not which face of Janus to support, but rather how to ensure that both can co-exist and prosper.
One face is the dynamism of the thousands of young entrepreneurs turning their innovative ideas into flourishing start-ups, often with the help of new technologies.
The most visible successes in this genre are companies like e-commerce site Souq.com (bought last year by Amazon) and online transport-booking firm Careem, which are both now worth hundreds of millions of dollars and provide employment opportunities not just for IT professionals but drivers, accountants, marketing experts, lawyers, and blue collar workers alike. While it's noteworthy that Careem now employs 2,000 people and 500,000 drivers, what is more important is that it has empowered women to take up a profession that was hitherto male dominated.
And beyond these household names there are thousands of other new ventures that are spurring innovation and dynamism in the region, sometimes in the most unlikely circumstances. From a service matching job seekers with opportunities in Yemen to the Tunisian company that has designed and produced an amphibious car that it is successfully exporting to Europe and elsewhere, there are many examples of innovation in the region that are a match for any other part of the world.
One particular focus for innovation is Fintech. Around the world, the exponential growth in digital financial innovation is already disrupting how we transact: providing new ways of saving money, taking loans, making payments, sending remittances, and raising capital. In the MENA region where most people still do not have a bank account, the potential for using Fintech is even greater and some exciting new ventures have taken off in this field in recent years. Startups like Verify, which launched in 2017, are using blockchain technology to facilitate transactions and new ventures taking advantage of new technologies are emerging every week. So, one side of economic activity in the region is very positive, with examples of innovation and entrepreneurship and the promise of exponential growth and financial reward.
But the flip-side of Janus—the second face of middle east economies—reveals the large traditional companies which are struggling to compete in an ever more challenging market environment.
These are often companies that depend on the region’s high import barriers for protection from more competitive international rivals, or depend on favorable access to finance from public banks and a preferred position in selling their products to the government. Some of them are public enterprises that have lagged behind in modernizing their plant and equipment, management techniques, and business models, which need not just protection but regular handouts from the public purse to make ends meet.
The very technology driving growth and innovation in one part of MENA economies is seen as a threat by other companies whose business model and employment prospects will be disrupted unless they adapt and change much more quickly than in the past. To be sure, not all large enterprises are a drag on the economy. Some of the best known names are also the most effectively managed—from flag carrier airlines in the Gulf to fertilizer producers in the Maghreb. But still too many of the region’s traditional companies are lagging in a world where the pace of change is accelerating and only the agile will survive.
There is much to be done on both fronts to reconcile these clashing realities into strong, future-facing, diversified economies. And with a quarter of young people in the region out of work, 20 million more joining the labor force in the next five years, and tens of millions of women who want to take their rightful place in the economy, time is running short to take action.
Thus, I propose the following set of steps:
First, fix the business environment.
One of the biggest challenges for any entrepreneur in MENA is dealing with the government bureaucracy. Everything from getting a building permit to a start-up license to paying taxes or dealing with labor regulations can be much more onerous and time consuming than in most other parts of the world. Corruption—petty and grand—can make life even more complicated. In a recent survey, 55 percent of businesses in the region cited corruption as a major constraint. This is higher than the 39 percent in Latin America and the Caribbean or 36 percent in sub-Saharan Africa. Another big concern for MENA businesses is not being able to enforce contracts or to get fair and timely decisions from the courts when they have a commercial dispute. In today’s world when capital is mobile, it is more important than ever for countries to make a concerted effort to attract international firms, and retain the resources and talents of national investors. MENA’s countries must step up their efforts.
Second, scale back and re-think the role of the public sector.
As economies become more complex, the state needs to update its role as a regulator. Too many regulations in MENA countries were designed for the state dominated economies of the last century. They need simplifying and modernizing. At the same time, the public sector needs to shed much of its role as a producer. Why are government-owned factories in the region still producing cement or running hotels, businesses that are neither strategic nor natural monopolies? And the public sector can no longer be the employer of last resort—a model that has resulted in bloated bureaucracies, made it harder for private businesses to recruit competitively, and led to a public-sector wage bill that is no longer sustainable given the fiscal constraints that most countries now face. The technology revolution can also be used by governments to simplify how they work and how they interact with their citizens.
Third, focus on the special needs of both the new and traditional economies.
Digital economy startups in some MENA countries are hampered by the high cost of internet access—not just for themselves but for their potential clients. Access to finance is harder for firms who work with ideas and algorithms instead of factories and equipment that were part of traditional businesses. Fintech firms generally need a regulatory environment that is more flexible for their startup phase than is the case for established firms in the financial service industry. However, only a handful of MENA countries have specialized Fintech regulations in place today. A key to developing a supportive environment for digital economy firms is for governments to engage with them in a regular dialogue—to understand better what drives them and what is holding them back. This will require developing new channels of communication since the traditional private sector interlocutors for governments are generally representative of the established and older firms.
At the same time, there is a need to modernize the "old" economy. While the digital economy will generate many new successes and attract substantial media attention, the bulk of private sector activity and jobs in the MENA region will continue to come from the kinds of businesses that have been around for a generation. Helping these businesses to grow, modernize, and adapt to a more competitive global marketplace remains a key priority for growth and prosperity. This is where actions to improve the business environment will be most impactful. This is also where gradually opening MENA economies to international trade and investment will help to bring the technology, management skills, and market access that will raise value added and product quality. Finally, this is where a mindset change is necessary to move to promoting private business rather than protecting well connected private businesses.
Finally, strengthen links between the education system and the job market.
Education systems worldwide are struggling to adapt to the new skills that will be needed by tomorrow’s workers. In MENA, too many graduates don’t even have the right skills for today’s private sector jobs. There are some good examples of vocational and job related training in countries across the region but these need to be scaled up and mainstreamed. A special challenge is to ensure that the 28 million children in the MENA region in need of humanitarian assistance due to continuing violence, displacement, natural disasters, and economic inequality do not end up as a lost generation robbed of their education and of their prospects. And it is important that women and girls receive the same education and training so they too have the right skills for private sector jobs. Increasing women’s participation in the job market is not just important for them but could generate a trillion dollars of economic growth over the next decade.
In order to implement these four changes, the MENA governments must have a more proactive approach to learning from the successes of their peers. Within the region there are good examples in every area. The United Arab Emirates, Jordan, and Egypt have made fast progress in enabling Fintech startups. Morocco has been able to strategically target and catalyze the establishment of new industries (automobiles and aeronautic parts) which today generate more export revenues than its traditional sectors. Qatar and the UAE have made rapid progress in improving their business environment. Iran and Jordan have valuable experience to share in phasing out generalized and wasteful energy subsidies and replacing them with targeted cash transfers to needy households. Drawing upon the repository of knowledge in regional and international organizations can be an added source.
The task ahead is to learn from each other’s experiences and to adapt them to each country’s own circumstances. This is not glamorous work but it’s what’s needed to move forward. The priority, as Christine Lagarde concluded at the conference, is to act now.
When RCTs are not an option, geospatial data can be a powerful tool for evaluating development projects – opening up opportunities to understand what works, what doesn’t, and why - at a substantially lower time and cost. Dr. Ariel BenYishay will provide an overview of the growing field of geospatial impact evaluation highlighting how the increasing availability of geo-referenced intervention and outcome data offers many new opportunities for research and evaluation across the development field that can be just as (if not more) effective as randomized control trials (RCTs). Dr. BenYishay will share a recent case study using geospatial data that measured the impacts of Chinese development activities on sensitive forests in Tanzania and Cambodia between 2000 and 2014 that shows how powerful this tool can be.