Speech

Building a Better Digital Economy

June 24, 2021

I want to thank the IDB for inviting me to be here with all of you this week. As a technologist, who then went into finance, and now is in public service, I think the need for discussing these issues has never been greater, and there’s no better context to have it in than with respect to Latin America and to be here in Miami.

This is one of the first conferences I’ve been to since the onset of the COVID-19 pandemic and it’s impossible to have lived through the past year and not come out with a different perspective. One thing for certain is that our reliance on technology lessened the impact on the pandemic. You could order meals, sign mortgage loan agreements, and hold a virtual quinceanera thanks not only to technological innovation, but the accompanying societal adoption. This trend, by all indications, is going to continue at light-speed. We all need to be ready.

All countries should do everything they can to use this technological super cycle for a much-needed growth tailwind that raises living standards and addresses longstanding challenges. It is important for me to be here, in Miami, and to speak with leaders like you is because building a better digital economy is particularly important for Latin America and the Caribbean. Our research at the IMF indicates that this region has lagged others in ensuring that all people can share in the prosperity that a digital transition brings.

This digital divide exists because many do not have access to digital technology, or if they do, they lack the skills to use it productively. This digital divide is already giving way to an economic divide, and if further left unaddressed, a social divide isn’t out of the question. That’s something this region cannot afford. The people of Latin America and the Caribbean deserve every opportunity to pursue prosperity — prosperity that is now inextricably linked to continued technological innovation and commercialization.

There are proper roles for the government and for the private sector. Both will need to collaborate to maximize the growth opportunities that present themselves. If done well, governments will be able to deliver prosperity to citizens after a year in which IMF data shows standards of living in most countries declined, and the private sector will be able to offer transformational products, in new markets, to more customers, with higher incomes. It truly can be win-win.

We know how this can work, because it works in other places. I come from California, a then-frontier that people flocked to in the 1800s in search of gold, leaving behind their more comfortable and established lives on the East Coast. I’m convinced that spirit, somehow and someway, persisted in the California ether and gave rise to the Silicon Valley that has powered California’s economy. But all people, by our nature, want to push the boundaries of what’s possible to improve our lives and secure a better future for the next generation. That same spirit has ignited tech hubs all over the world, where disrupters and the investors that believe in them are injecting dynamism and growth into their economies.

To make this work in Latin America, we need to focus on some key issues.

First, there needs to be sufficient investment in basic digital infrastructure. Governments and private firms both need to play a role, but governments should focus on investments that may be inaccessible or unprofitable for private providers. Some of this is physical infrastructure — after all, it’s impossible to participate in the digital economy if you’re not connected — but a lot of it is also digital identity infrastructure and critical data on SMEs that private firms can use to construct a better ecosystem for startups. It is reassuring that we have a strong partner in IDB that understands this and can help build out digital infrastructure of various types throughout the region. In some areas of work, where it’s possible to coordinate this across countries as well, the region will see even greater benefits.

Second, governments need to reconsider their regulatory frameworks and make sure ey are conducive to private sector investment and innovation. Regulation that is too tight favors companies that are large enough to afford expensive and complex compliance. Right-sizing regulation with an eye toward facilitating the entry of smaller firms may be opposed by established players, but a more dynamic economy is in everyone’s interest, attracting investment and creating better-paying jobs. We can start today. In the case of FinTech, for example, mechanisms like guidance units set up within regulators and so-called “sandboxes” can be used as a stop-gap measure to encourage innovation while more thorough reviews are undertaken.

Third, new firms need access to the right people. Developing human capital is key. Governments need to invest properly in education, particularly in STEM fields, while the private sector needs to assist by investing in training employees for that “last-mile” on technical skills specific to their business. The two go hand in hand, and this is an example where coordination makes all the difference.

Fourth, the financial sector needs to be capitalized and regulated with an eye toward maintaining stability while also channeling capital to new market entrants. The safest entity to lend to may be a government, a state-owned enterprise, or a conglomerate with outsized market power, but a financial sector that is overly incentivized to allocate capital to these entities is effectively starving more dynamic parts of the private sector of the resources they need to grow. In the long-term the goal is to have a mix of banks, capital markets, and even FinTechs themselves allocating capital to new firms, each able to finance at different scales, on different terms, and assume different risks. Governments that maintain capital account openness can avail themselves of foreign investment, much of which is engaged in a global search of good investment opportunities at a time when yields are low in many Advanced Economies.

Fifth, investors and firms need access to a sound and stable legal framework with a judicial system that understands property rights, including the importance of intellectual property rights. Startup investing is almost by definition one of the highest-risk investments you can make, and it’s difficult to attract it at sufficient scale if the private sector isn’t clear on what their rights are or if they will be able to enforce their rights when needed.

Many countries in Latin America and the Caribbean need to make substantial improvements in one or more of these areas to fully unlock a digital economy that powers growth and is inclusive of people that, to date, are falling further behind.

It’s also worth noting that there are emerging challenges that need to be addressed. Safe, trusted, and reliable digital ecosystems lie at the heart of adoption and usage of new digital products and services. Cyber threats increase exponentially as consumers connect through their mobile devices to a host of communication networks such as public Wi-Fi. It becomes important then to ensure that the entire digital ecosystem is designed with cyber security in mind. The development of global standards in this domain must keep pace with the changes, especially as we move into a quantum processing world with super computers. Of course, with such computing power and advanced analytics, we need to equally be aware of biases that may be built into algorithms that may impact the digital divide.

At the International Monetary Fund, we want to do all we can to support countries during this transition. It starts with deploying our expansive analytical expertise to help countries understand the amount of growth that they could be leaving on the table without acting now, as many of the elements that I highlighted can understandably be politically difficult to execute. In the FinTech space, the IMF along with the World Bank proposed the Bali FinTech Agenda, which reinforces competition and commitment to open, free, and contestable markets. We are preparing to deepen our work on digital money and the implications this has for the international monetary system that we have been responsible for since our creation. Crypto currencies, stable coins, and central bank digital currencies have sweeping implications for monetary policy, capital flows, and the role of the financial sector.

Building a better digital economy is therefore a collective effort amongst a wide set of stakeholders and it’s great to have the IDB convening all of us here to put some energy into the conversation. We need to take action now and Latin America can show others how to successfully accelerate development of the digital economy. We need greater enhanced focus to ensure that the digital revolution benefits the many and not just the few.

Thank you very much for your time this afternoon. I’m very optimistic on the prospects for the region and you can count on me, my colleagues at the IMF, and of course the IDB, to do all we can to help this region realize the full growth potential that digital innovation brings.