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IMF AR 2018 IMF Annual Report 2018 Building a Shared Future

Harnessing Technology for Good

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Ensuring technology gains are widely shared

Behind the scenes

Digitalization—the integration into everyday life of digital technologies that facilitate the availability and processing of more reliable, timely, and accurate information—presents important opportunities and challenges for fiscal policy. The April 2018 Fiscal Monitor analyzes how it can change the design and implementation of fiscal policy now and in the future, with illustrative examples of tax administration and policy, public service delivery, and spending efficiency. The analysis suggests that adopting digital tools could increase indirect tax collection at the border by up to 2 percent of GDP per year. On the spending side, the experiences of India and South Africa show how digitalization can help improve social protection and the delivery of benefits. Mitigating risks from digitalization requires a comprehensive reform agenda, adequate resources, and a coordinated approach toward a long-term version of the international tax architecture.

Since the beginning of the industrial revolution, the effect of technological change on job prospects and inequality has been a concern. This is especially the case with recent rapid advances in information technology. The IMF has been exploring the topic in various areas that include the future of work and implications for both financial stability and fiscal policy. The goal is to ensure that technological advances support rather than impede macroeconomic soundness and inclusive growth.

Figure 1.4: Citizens have more options as governments become more digital

A chart showing the high degree of digitization among government administrative functions

The United Nations tracks 193 member countries for the adoption.

Source: Sources: United Nations e-Government Survey 2016; and World Bank 2016.

Since machines can perform an increasing array of tasks and are becoming cheaper relative to labor, new technological advances could prove highly disruptive. This could lead to fewer, less stable job prospects, as well as greater inequality, given that technology progress tends to benefit business and the most educated workers, exacerbating the decline of the middle class and the gap between the richest and the poorest citizens. An IMF paper analyzes the effects of technology on work and offers some policy options, such as increasing public spending on education and training and using fiscal policy to make sure growth is broadly shared.

The IMF also explored both the potential for and risks of new financial technologies. Dubbed Fintech, this nexus of new technologies includes artificial intelligence, big data, biometrics, and distributed ledger technologies such as Blockchain. These technologies offer many advantages, including faster, cheaper, more transparent, more inclusive, and perhaps even more user-friendly financial services. For example, artificial intelligence plus big data could automate credit scoring, smart contracts could allow investors to sell assets when predefined market conditions are satisfied, and mobile phones combined with distributed ledger technology could allow for direct financial transactions that bypass banks. The IMF found that digitalization can simultaneously make tax compliance easier and improve public service delivery. Digitalization can also improve governance and fiscal transparency, which makes corrupt transactions harder to hide.

Yet, there are also risks. By accelerating the speed and volume of transactions, new technologies can induce greater market volatility, and heighten vulnerability to cyberattacks, increase concentration risks, and lead to fewer internal controls. And they can open the door to nefarious activity—not only cyberattacks and violation of privacy, but fraud, money laundering, and terrorism financing. Regulation needs to adapt to this new financial world, including to address vulnerabilities stemming from new opportunities for fraud and cyberattacks.

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How can Fintech be regulated without undermining innovation?
  • Expanding oversight. As financial services move increasingly from well-defined intermediaries to looser networks and market platforms, focus regulation on specific financial services as well as entities like banks and insurance companies.
  • Boost international coordination. As technological networks and platforms do not respect national borders, ensure international coordination to stop a regulatory race to the bottom.
  • Modernize legal principles. Clarify rights and obligations in the new financial landscape, including the legal status and ownership of digital assets and tokens.
  • Strengthen governance. Develop rules and standards to ensure the integrity of data, algorithms, and platforms and enhanced consumer protection across numerous dimensions, including transparent and balanced contracts and privacy rights.