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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?
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.
One of the bubblier aspects of the recent enthusiasm for all things blockchain has been the rise in popularity of initial coin offerings (ICOs), also known as token sales. By design, the acronym calls to mind the more traditional fundraising model of initial public offerings (IPOs), in which companies sell equity stakes to investors. With ICOs however, companies use blockchain technology to issue digital assets (usually referred to as tokens or coins) to investors rather than equity stakes. Another key difference—at least for the time being—is that ICOs are virtually unregulated. In fact, many of the advantages ICOs have over more traditional fundraising platforms derive from their unregulated status.
ICOs are a relatively new phenomenon whose use did not take off until the middle of last year. Before 2017, companies had raised less than $300 million through ICOs. By the end of the year however, companies had issued $1.7 billion worth of digital tokens (representing year-on-year growth of 600 percent). While this is a miniscule amount compared to the funding raised globally through IPOs ($188 billion in 2017), and venture capital ($155 billion), the remarkable growth of ICOs looks set to continue, at least until regulators clamp down.
Most of the companies who raise funds through ICOs offer blockchain-based services or products, including several companies that aim to use the technology to support economic development. From the perspective of a start-up, ICOs offer several advantages compared to other funding sources. First, they are much easier and faster to conduct than IPOs because they are not strictly regulated (more on this below). Second, the funds raised through ICOs are non-dilutive, which means that founders can receive money without having to give up an ownership stake of their companies. Finally, tapping funds through an ICO allows companies to take advantage of the hype surrounding blockchain technology and cryptocurrency.
At the moment, many ICO investors don’t appear to be particularly discerning about the tokens they buy, and would-be entrepreneurs have responded by offering up some rather questionable business models. Take for example, Dentacoin, which raised $2.1 million through its ICO in October 2017, selling roughly two trillion tokens priced at a fraction of a cent. Since that time the value of these tokens has increased by 1,913 percent (which means that $1,000 worth of tokens bought in October is now worth roughly $20,000). But what will Dentacoin actually do? The company’s white paper asserts that:
Through creating and implementing the first Blockchain-based platform for trusted dental treatment reviews, the Dentacoin Foundation will allow patients voices to be heard and dentists will have access to up-to-date, extremely valuable market research data and qualified patient feedback.
Dentists can exchange DCN tokens with patients for their reviews, while patients can utilize DCN tokens on various dental services or reserve tokens as an investment tool. In future, the company plans to launch blockchain-based insurance platform and healthcare database.
Dentacoin’s business model begs (at least) two questions:
Why is it worthwhile to store patient reviews on a blockchain, when websites like Yelp and ZocDoc already provide easily accessible customer reviews?
And perhaps more fundamentally, what is gained from using a Dentacoin token to purchase dental services rather than cash, which as the Financial Times notes in its excellent “ICOmedy Series” has the wonderful advantage of being accepted everywhere?
Skeptics might argue that the ICO market attracts companies with poorly-thought out business models that are unlikely to attract the attention of venture capitalists or investment banks.
Social entrepreneurs get in on the act
There have been at least two ICOs conducted over the last year by start-ups with a social entrepreneurial/economic development focus. In April 2017, Humaniq raised more than $5 million through its ICO. In its white paper, the company outlines its plan to use “blockchain technology combined with biometrics and a focus on mobile technology” to provide financial access to the two billion unbanked. However, the details are fuzzy and, nine months after its ICO, the company’s website does not identify a single project that it is working on (Humaniq did not respond to a request for comment).
Another start-up that aims to use blockchain technology to improve financial access is Moeda, which raised $20 million in its August 2017 ICO (Moeda also did not respond to a request for comment though a PR firm working for the company did). Like Humaniq, Moeda intends to combine blockchain technology with digital ID to help users obtain financing. Per the company’s white paper, it will roll out first in Brazil and “the long-term product vision is to create a lower cost global transparent and network of trust and cooperation like Kiva/Alipay/Paypal solution for the underbanked population of the world.” Once again, however, the details are vague and most of the white paper is frankly incoherent, like the following head-scratching aside on the Nash Equilibrium:
The Nash Equilibrium is a concept of game theory where the optimal outcome of a game is one where no player has an incentive to deviate from his chosen strategy after considering an opponent’s choice. Overall, an individual can receive no incremental benefit from changing actions, assuming other players remain constant in their strategies. MOEDA impact metrics model is develop [sic] to prove that investing and the performance potential of capital can coexist in a sustainable way. Everybody can win, that is no trade-off between well [sic] while doing good.
The point is not to disparage either Moeda or Humaniq. It’s possible that one or both companies can bridge the gap between developing decentralized applications (or “dapps”) and using those applications to solve some of the thorny problems that have left so many outside the formal financial sector (to that end, Moeda reports that it already has five “Pilot Seed Projects” underway and lists IBM, the United Nations Sustainable Development Goals Initiative, and the Green Cross as strategic partners). However, there is nothing in the materials provided by these companies (including white papers, websites, and promotional videos) that suggests this is a likely outcome. This implies that most of the people who bought tokens from them were doing so for speculation rather than impact investment (which could be a problem for a company like Moeda, whose business model appears to rely on having investors spend rather than hold its tokens).
Making sense of the ICO craze
It’s easy to see why so many start-ups are eager to use ICOs: they require less work than traditional funding sources and offer a chance at a big payoff. But what does owning a token actually mean? And why are investors so eager to invest in them?
According to the company Stellar (which offers a platform for ICOs), a “token is a cryptographically secured digital representation of a set of a rights,” which differ depending on a company’s business model. In some cases, token owners are given a right to access a company’s platform, product, or service (such assets are often referred to as “utility tokens”). For example, investors who bought tokens in Filecoin ICO in August 2017 (which raised $257 million in the largest ICO to date) can exchange those tokens to access spare hard drive space from computers on a decentralized storage network. In other cases, token owners are given the right to receive payments aligned to a company’s future earnings These assets are often called “securities tokens” or “tokenized securities.” In either case, investors also can trade their tokens on a secondary market.
One theory about why ICOs have become so popular is that they offer a way for investors who have profited from the rapid appreciation of bitcoin and other virtual currencies a way to re-invest those gains while avoiding taxation. In the United States, virtual currencies are treated as commodities, and trading them into US dollars (or any other fiat currency) is a taxable event. This means that an early investor in bitcoin would have to pay capital gains tax on her gains if she exchanged them for dollars. Because investors can buy tokens using their virtual currencies without first having to exchange into fiat, ICOs offer a convenient way to invest into different assets without incurring a capital gains tax.
This helps to explain the behavior of some US ICO investors, but it’s also true that the boom in ICO activity that began in mid-2017 preceded the most dramatic spikes in the price of bitcoin. In addition, much of the investment in ICOs appears to come from Asia.
A limited time offer?
The start-ups involved in most of the ICOs conducted to date have been able to side-step the disclosure and investor protection requirements normally associated with securities issuance because regulation has naturally lagged behind technological innovation. This doesn’t mean however, that regulators have been sitting idly by. China banned ICOs in September, followed by Korea later in the month.
In the United States, the Securities and Exchange Commission (SEC) first warned about ICOs in July, and emphasized that “sponsors of offerings conducted through the use of distributed ledger or blockchain technology must comply with the securities laws” and concluded that a specific token sale (the DAO token) was a security under our federal securities law. More recently, SEC Chairman Jay Clayton noted that, as ICOs “are currently operating, there is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation.”
And in a strongly worded op-ed published this week in the Wall Street Journal, Clayton and J. Christopher Giancarlo, chairman of the Commodity Futures Trading Commission (CFTC) warned that “the SEC will vigorously pursue those who seek to evade the registration, disclosure, and antifraud requirements of our securities law.”
At some point in 2018, the SEC will almost certainly issue more detailed guidance on the responsibilities of US companies that conduct ICOs. In the meantime, companies of all stripes that consider raising funds through them, including social enterprises, should proceed with caution.
For so long we’ve operated under the prevailing assumption that greater economic cooperation among countries would guarantee peace and stability. But now, the world finds itself in a dramatically different context—one that is fractured socially, politically, and economically. Today, more than 2,500 top decision-makers from around the world are gathering to kick off the 48th World Economic Forum Annual Meeting in Davos, Switzerland to address these new challenges.
This year’s theme, “Creating a Shared Future in a Fractured World,” sets the stage for important discussions that prioritize global engagement and innovative solutions to address today’s challenges. Below, CGD’s experts weigh in to shed some light on the ongoing debates, with innovative evidence-based solutions to the world’s most urgent challenges, and also discuss what’s not on the agenda but should be.
For the policymaker looking to improve the delivery of benefits, or for the financial institution trying to expand its customer base, the gap between technical solutions and the situation of the average technology user represents fertile ground for the many new opportunities that the digital economy provides.
This year, the global migration crisis finds itself buried in the agenda. However, it will remain one of the most urgent issues for generations to come if international leadership fail to tackle human mobility with pragmatic, fact-based policy tools. Now more than ever, innovation is imperative. To that end, Michael Clemens has a unique proposal.
Meeting the Sustainable Development Goals will require a major ratcheting up of private finance. So far, that hasn’t happened. Strengthening the role of the MDBs in mobilizing the private sector should be high on the agenda at Davos, says Nancy Lee.
There is no shortage of skepticism about whether global leaders at WEF are serious about addressing the needs of the poor and vulnerable, writes Cindy Huang. Visible progress through core business commitments would send an important signal that refugees are a crucial investment, not a cost—and that corporate leaders are committed to taking action towards, not just talking about, solutions that deliver social and economic impact.
As leaders of countries and corporations from around the world gather in a tony ski resort for this week’s World Economic Forum annual meeting, they will pass by posters showing the faces of people whose daily income is less than the price of a Swiss cup of coffee. The distance between those leaders and the people on the posters may be immense, but it is shrinking rapidly thanks to new digital technologies. Armed with a digital ID, a mobile phone, and a bank account, the landless laborer in rural Bangladesh is becoming an integral part of the new digital economy that will shape the politics and profits of the future. The top of the pyramid (Davos invitees) can no longer ignore the bottom (like the women in the Indian village described in a recent CGD blog post).
As the WEF notes, digitization is transforming business models, the policy landscape, and social norms. But what does it mean on the ground? Over the past few months, we’ve been analyzing a dataset from the Indian state of Rajasthan to better understand the use and impact of digital technology on people. Among other things, the data show how digital technology can be used to improve the delivery of subsidies and pensions and to achieve financial inclusion; nearly 100 percent of household survey respondents now have a bank account. That’s an impressive accomplishment, but it is not the whole story. We’re concurrently finding gaps in how much people actually use those accounts. Likewise, even though women do transact on the accounts, it is still men who use the household mobile phone (and by extension control the family finances), often because women lack the requisite mobile literacy. Digitization can be inclusive but it opens the risk of a gender-based digital divide.
For the policymaker looking to improve services and the delivery of benefits, or for the financial institution trying to expand its customer base, the gap between technical solutions and the situation of the average technology user represents fertile ground for the many new opportunities that the digital economy provides.
Governments can use technology to reduce exclusion…
Governments are investing significant resources to create digital infrastructure, but these investments will only realize their full potential if the private sector takes advantage of digital public goods. For example, last week CGD learned how Malawi has just achieved near-universal electronic ID coverage for its adult population in less than six months. The government and institutional donors together invested $52 million to register all adults at a cost of around $5.50 per head. This is a significant outlay for Malawi, but the government anticipates many benefits, ranging from extending the right to identification to their citizenry to increasing tax revenues and expunging payroll ghosts. Also important are the opportunities for the private sector, such as increased financial inclusion and enhanced ability to travel.
Malawi isn’t alone. Governments—from municipalities up to the national level—are using digital technologies to accomplish a variety of goals as several recent CGD publications have pointed out. Specifically:
Targeting the poor with transfer subsidies directly into their bank accounts generates fiscal savings, allows governments to eliminate market distortions, and fosters competitive markets (see CGD case study of India’s targeted liquid petroleum gas subsidy).
Financial inclusion supported by electronic Know Your Customer (e-KYC) based on digital ID opens up opportunities for formal participation in financial markets, especially for women.
…and there’s a huge role for the private sector as well
In and of themselves, improvements in public programs can yield substantial economic and social benefits. But the greatest benefits will come if the private sector builds on top of the digital infrastructure to expand opportunities. One might think of the private sector as the multiplier effect on top of a digital government stimulus package. Take the opportunities that India’s Unified Payments Interface opened to the mushrooming number of private providers of digital financial services, or the dramatically lowered cost to onboard a banking client through its e-KYC service. India is not alone; the identification infrastructure built in Kenya underpins its remarkable expansion of mobile financial services. The ID system reports responding to over a million identity checks a day through its automated system, mostly from financial institutions.
This is not just the public sector trumpeting about possibilities either: Mastercard, the Secure Identity Alliance, and the GSMA (a worldwide trade organization of mobile network operators) have all endorsed the Principles on Identification for Sustainable Development, which CGD facilitated in 2017 with the World Bank Group.
As policymakers and private actors gather at Davos, enthusiasm over technological innovation will undoubtedly run high. But that technology is most effective when everyday users—not just early adopters—can easily take advantage of it. How can we extend human-centered design to focus on the millions who are entering the digital economy every day? Finding ways to ensure that all groups on the margin are included is not only a political and social imperative, but an opportunity for the private sector to serve new markets in the digital economy. The leaders in Davos are just a WhatsApp message away.
On Friday, the World Bank’s chief economist, Paul Romer, told the Wall Street Journal that the Bank unfairly influenced its own competitiveness rankings. He highlighted the case of Chile which suffered lower rankings on the Doing Business index during the Bachelet administration versus the Piñera years, and recalculated these rankings on his personal blog. Today, he issued a clarification of his views.
In a statement, the World Bank announced that it would carry out an independent assessment of the Doing Business indicators.
This led to a flurry of tweets about the shortcomings of the Doing Business index. Former World Banker Martin Ravallion writes:
Whether or not there was deliberate manipulation of its Doing Business Indicators, the Bank should better acknowledge the huge uncertainty about this index especially in the middle 80% of country rankings. Only top and bottom seem reliable.https://t.co/ylJbt1jkaOhttps://t.co/1clq4Y3HY1
The narrowness of the questions also reflects normative bias. As we are painfully learning, a 'good' business environment is dependent on broad social legitimacy - which in turn often incorporates "restrictive" regulation.
We are not overwhelmed by Romer’s observations. Everyone knows, or should know, that there is a substantial degree of imprecision on all governance or economic-management-related ratings and that even small differences in ratings can sometimes correspond to big rankings differences because of clustering of scores. The biggest differences in rankings for Chile (by Romer’s calculation) are around 10 places, which is not a big deal even for a fixed methodology. If the difference had been say a change from a ranking of 34 to, say, one of 90, we would have been more impressed! The error range for World Bank’s Worldwide Governance Indicators (WGI)—one of the few to publish error estimates—is revealing. For a mid-level country like Ecuador, the error ranges for the individual indicators in various years correspond to rankings differences of between 20 and 40 countries!
However, this latest kerfuffle does present an opportunity to improve the Doing Business index. Here, we pose three fixes to avoid future scandals and improve the index:
First, the World Bank should acknowledge that any system of ratings will inevitably embody a range of uncertainty—the Doing Business indicators can be improved by estimating standard errors for each index subcomponent and for the overall index. This is difficult to do for expert-based indicators because it requires several independent assessments, but it is not impossible. For example, Gelb, Ngo, and Ye (2004) estimated that the standard error for the World Bank’s Country Policy and Institutional Assessment (CPIA) ratings was around 0.25 for measurements of policy reforms on a scale of 1 to 6. A related point is that Doing Business has changed its methodology over the years but has not documented these changes very well (for example, in area of labor markets where it was accused of a right-leaning agenda by its anti-union stance or on tax where it rewarded countries with lower corporate tax rates). An assessment carried out in 2008 by the World Bank’s Independent Evaluation Group revealed changes to many countries indices and rankings, some far greater than Romer's estimates for Chile. Clear explanations with links to changes in underlying methodology will likely lead to fewer accusations of data manipulation.
Second, the Bank needs to ask itself whether the Doing Business scores are unduly influenced by the degree of World Bank Group engagement in the private sector agenda. This could be because there is more known about the business climate or because the Bank defines certain countries as “good guys” as they engage—or appear to engage—on private sector reforms. A rating can be skewed, perhaps unconsciously, by individuals with particularly favorable or negative views on a country or its current government. We have no evidence to support this for any particular case, but there has long been sensitivity to this possibility for the CPIA, which is why the process of estimating the CPIA embodies layers of independent checks by units that are not part of the operating units of the World Bank Group.
Third, the Bank must consider the value of multiple independent estimates, even though this is hard to do for expert assessments. The CPIA exercise mentioned above was only possible because the ratings of each organization (World Bank, African Development Bank, etc.) were confidential at the time, so that the assessments were truly independent of each other. Independent assessments would be hard to make for the Doing Business indicators, but perhaps some pilots could be done on a few countries. One possibility is to use other indicators to spark questions (comparing Doing Business to Enterprise Surveys to ask—is Country X really that good? What are the differences between de facto and de jure estimates?)This can help to flag flagrant outliners.
In the end the World Bank has to rely on its own judgment to produce a more robust and more clearly communicated index of the business climate. Last week’s events present an opportunity to do just that.
Recent advances in the scope and sophistication of identification systems could have far-reaching consequences for development. While there is no one-size-fits-all approach, there are common features that ID systems should share if they are to support development.
Digital identification has become a focus for development policies and programs, and not a moment too soon. ID programs are being rolled out at a rapid pace, often in countries with little in the way of identification infrastructure. The capabilities of the new systems are dramatically increased through digital technology, in particular, biometrics, while their reach is expanding through integration with mobile technology. Some developing countries are at the global frontier. India’s Aadhaar program is a pioneer in digital identification on several fronts, including through the program’s integration with mobiles and financial accounts to reform the country’s vast array of schemes and programs (the so-called JAM Strategy) and its use as a platform for a range of advanced services (the “India Stack”). Similarly innovative and sophisticated systems are being rolled out in many countries.
Our new book—Identification Revolution: Can Digital ID be Harnessed for Development—considers where these trends are heading. Is everyone on the planet fated to be uniquely identified by a number? What are the implications for development? Will the new systems help people to assert their existence and their rights, strengthen the administration of public programs and enhance government accountability, and open up opportunities by reducing transactions costs? Or will the new systems exacerbate already-existing risks, such as the exclusion of vulnerable groups and the erosion of privacy? Will the considerable sums being spent on the new systems prove to be a waste of money?
The Opportunities and Risks of the ID Revolution
We wrote this book to provide a basis for discussion of this rapidly evolving area. We conclude that digital ID has the power to do both tremendous good and to inflict serious harm depending on how it is used. On the positive side, not only is “legal identity” now recognized as an SDG in its own right, but the ability to assert one’s identity is also important for the achievement of at least eight SDGs and 19 targets, from enabling access to economic resources to financial inclusion, gender equality and empowerment, social protection, and clean elections. Together, identification and enhanced payments systems, especially through mobiles, have the potential to greatly strengthen state capacity.
On the other hand, there are also examples that illustrate the potential downsides. Some of the systems in use today to help deliver social payments or underpin engagements between citizen and state have their origins in repressive or exclusionary policies; examples include Spain and South Africa. Several countries have committed millions of dollars to ID systems that have delivered few benefits to the poor; in some cases, the formalization of identification processes had led to increased statelessness and marginalization. But, given the many powerful drivers for implementing the new systems, it is not realistic to turn back the clock. Every country in Africa, for example, either has, or has committed to, a national ID system. The task is to ensure that digital ID systems are as development-friendly as possible.
Making Digital ID Work for Development
How can stakeholders support development-focused ID systems? First, they should take the SDG agenda seriously. Together, the identity-related goals and targets include virtually all the useful applications of ID systems. If there is not a coherent plan to link systems with such uses, the ID-related investments are not likely to produce much of a development return.
Second, governments and development partners should move towards a more strategic view of identification policies and systems as a component of development policies and investments, including the goal of an integrated, lifetime system encompassing civil registration and identification. This strategic priority applies to both developing countries and their development partners; in previous research we found that donors have been supporting many ID programs, but in an ad hoc way directed to particular projects, whether a transfer or health program, or an election. This approach may have supported useful experimentation but has also contributed to multiple redundant systems.
Third, the development community needs to move toward a common set of principles to help shape engagement. These include the essential principle of inclusion of poor and vulnerable groups; a focus on the legal and institutional basis for the systems to ensure that they support, rather than erode, users’ rights (including data privacy: only about half of developing countries have a legal framework covering this area); and technical features and standards to ensure robust performance and avoid countries being locked-in by vendor-specific hardware and software.
Progress Toward a Strategic Approach to ID and Development
Fortunately, there is progress. So far, some 22 organizations—virtually all the significant players in the area—have endorsed a set of common principles to help establish a shared understanding of the issues and encourage cooperation. The multilateral development banks and many bilateral agencies have launched initiatives to facilitate a strategic approach to identification and improve our understanding of the strengths and weaknesses of multiple country systems. New initiatives, such as ID4Africa, have been established to enable South-South learning by bringing together governments, development partners, and the identification industry itself to share experiences and learn about the still-rapidly-evolving technology. Emerging work on technical standards and open source approaches can help countries avoid vendor lock-in and foster interoperability between digital ID systems, including across borders.
It is still early days in the identification revolution, but understanding the institutions, policies, and technologies shaping digital identification systems today will be critical for anyone concerned with inclusion, governance, access to rights, the quality of service delivery, and many more issues at the heart of twenty-first century development. Our book offers a primer on identification and registration systems in the digital age, including practical guidance for governments and development partners on ensuring that digital ID systems achieve their full development potential.