Why governments should embrace technology

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Welcome to the latest edition of the OMFIF Podcast. My name is Nikhil Sangani. I'm the Managing Director of OMFIF's Economic and Monetary Policy Institute.

 

And today I'm joined by two very special guests to discuss a, well, quite a topical issue right now, the future of public money. For context, we at OMFIF have just published a report on this topic last month at the sidelines of the IMF and World Bank meetings alongside our partners at EY. And this report highlights the urgency through which governments must act to support the sustainability, but also the impact of public spending and public finances.

 

More broadly, three of the key themes that we touch on in this report is about the need to adapt fiscal frameworks, accounting standards, and embracing new technology to help towards this goal. And it's that last topic, how technology can support with the management and allocation of public funds, which will be the topic of today's podcast. So joining me to delve into this topic, we have Mark McDonald, the Global Public Finance Management Leader at EY, and Joachim Schroer, the Principal Economist for Digital Transformation of Industry at DG Grow at the European Commission.

 

Mark and Joachim, thank you very much for joining us.

 

(1:40 - 1:45)

Thank you so much for the invitation. Happy to be here. Indeed.

 

Thank you very much. Thanks.

 

(1:45 - 2:21)

So we can dive straight in and Mark, I'll come to you first. We mentioned in the report itself a couple of reasons and examples as to how blockchain and AI in particular can be used, but technology more broadly, towards the goal of improving public spending outcomes in terms of reducing fraud and error and also improving forecasting to reduce wastage in public funds. Just coming to you on some of the initial remarks about that topic more generally and some of EY's work in that stream and your experience of how governments can use this new technology to support their operations.

 

(2:23 - 6:03)

Well, I think you're absolutely right to highlight in particular those two technologies, but to put it in the context of broader technological innovation and what it is serving up as an opportunity to public finance managers essentially everywhere in the world. And so rather than kind of deal with it at a technical level, let me answer your question kind of in two timeframes and an immediate term timeframe and then a near term timeframe. So both of them in a sense are very, very current.

 

What I'd say to you is that there has been and continues to be an absolutely fundamental advancement in the informational basis for decision making that rests on these technologies. In particular, the ability to forecast, the ability to trace up and down delivery chains essentially turns what traditionally has been exposed in information, often with quite significant time lags into current time information. And when applied and considered in the modern context of decision making where we're always seeking enhancements in efficiency, productivity, outcome and so forth, the ability to turn time in our favor is something that I think these technologies really have a lot to offer.

 

Second one happens to do, in my mind anyway, with integration. And there it's kind of the integration between the financial components of public finance, the organizational components, essentially the way that expenditures are consumed, the way that they are driven. And as we say in the paper, most important, the outcome focused information and bringing those perspectives together again is a new opportunity that allows us to quite significantly change the decision making environment.

 

And then the third one would be more of a financial one, but an important one. And that's the ability to reduce administrative cost burden. And that's kind of inside bureaucracies, but also inter-bureaucratic relationships and also in the cost burden that exists between industry and government.

 

And the ability to use technology to reduce administrative cost burden is happening now at a scale we haven't witnessed before. And some of that can be tied purely to the technology, things like shared ledger nature and so forth of transaction management. But it is essentially in innovation, smart contracts, the ability to execute a new set of capabilities.

 

Now, that's all happening right now. So that's the immediate term. And then the near term, what I'd highlight and I'd actually be very, very interested to hear for Joachim's perspective on this.

 

I think we've got the emerging advent very, very quickly of value exchange, in particular on chain. And so digital currency might be the easiest way to see these things emerge. And the EU's MICA regulations that were announced just this past summer may well actually be the trigger point that we're all going to collectively look back on and recognize as truly game shifting in the application of technology.

 

Not just in public finance, but as I've said, in the relationship between what the state can offer up, what governments can offer up and economic actors can take advantage of. And I think that's a fundamental opportunity for us.

 

(6:04 - 6:27)

Thank you, Mark. And yes, a useful way to frame that, particularly in the near-term points on informational basis, integration and cost burden. But as Mark very nicely teed up for you, Joachim, to join in the conversation there, particularly on that long term point in that integration between the state and industry more generally and how they're using technology.

 

Any comments you'd like to share on that point specifically?

 

(6:28 - 11:17)

Excellent. And I must say that this very, very good report that I had the honour to participate to a little bit, as well as Mark setting the scene here, is already a lot of information that comes in very well together to show, indeed, the long term perspective, but also the strategic approach on the one hand side that on the other hand side will deliver very concrete results. And I think that very well starts our discussion here, because indeed, from a long-term perspective, what we are looking at when we talk about the digital economy or digital transformation of the existing economy is, in my opinion, a sort of Web3 framework.

 

Now, Web3 is a very generalised framework where bottom up you have communities that define for themselves what their value system is, and then they find a carrier for their values, which we usually call a token. And the blockchain system guarantees not only the safe creation, but also the safe transfer of value globally with a lot of efficiencies that Mark has already mentioned and that are outlined in the report and a lot of perspective. This is a very broad theoretical view, but I think it needs to be noted that for the last at least 10 years, there has been a massive interest everywhere to explore into this from both sides, from the existing economy with all its deficiencies, with all the, let's say, structural issues that are highlighted in the report, but also from really a lot of people starting with 4 billion gamers, then a lot of startup companies, etc., that try to push the boundaries of what the technology offers. And the technology offers a lot of things.

 

So I would summarise that in three elements and in parts. You have already both alluded to that. On the one hand side, the technology creates a safe base for safeguarding the validity and the integrity of documents, which is extremely important in a public but also in a private space where we have document-based systems everywhere.

 

But documents can be relatively easily forged, they can be relatively easily created into fake documents, but also systems can be hacked, which is why the distributed nature of systems is very important. Then secondly, you have this value chain aspect that Mark already alluded to. So basically you have a real time, very low cost mechanism where you can track and trace activity and activity can be physical products and industrial value chains, but activity can also, if that is included in the token as a container, information or intellectual property right or whatever you try to define in the group and then safely transfer.

 

And this is very, very important because if you combine that with the certification so that you cannot falsify documents on the one hand side and the very near time exchange of documents in large, secure databases, we come to that, then you have a very strong asset. And third, I would also put it in perspective with you mentioned already artificial intelligence, but I would also look into supercomputing, quantum computing and other elements because the blockchain is, in my opinion, an integral part of every business model or every public policy model that tries to adopt these principles because blockchain is a sort of checking system for other technologies. Artificial intelligence, we know that is more and more corrupted by bad, even fake data.

 

The situation is going worse. The more the bigger LLPs are emerging with limited check of integrity of original data and processes. This is what the blockchain can deliver.

 

On the other hand side, we know that centralized systems are very prone to cyber attacks, but also we have the risk, also the chances, of course, of quantum computing coming up where we have the question on the viability of encryption in the future and decentralized blockchain infrastructures, especially those currently that are based on Ethereum, but also others are already providing very clear answers to make encryption cyber proof or quantum proof.

 

And this is something where I think when we take the long term perspective, the strategic perspective that is very well set in the report and that Mark has already alluded to, we must not fall into the trap of seeing a technology on its own. We must not fall into the trap of just having some small use case where we say, OK, this has one advantage, but let's not discuss the others. All of that has to be integrated into a pan technology perspective with a very clear output driven approach.

 

And I think this is exemplified by an increasing number of blockchain projects that we already see.

 

(11:18 - 12:24)

I mean, particularly that output focus drive is something I know, Mark, that you've been very keen to stress in the various discussions and engagements we've had for this project. And I think, I mean, just hearing you both, there's clearly a lot of examples of where technology can be used to either with data authentication and reducing the risk of fraud with speeding up processes and having real time reporting, reducing administrative burden, just to name a few of the examples. So it's clear where there are benefits and perhaps there are use cases in some areas of where this is happening.

 

But clearly, it's maybe at this stage still and it's relatively nascent stages as to where this is in broader public finance systems. And I wonder, Mark, you talk to governments and public finance practitioners on a daily basis, I assume. Where are you seeing right now the hurdles to implementing some of these technologies?

 

Is it the cost of it? Is it some administrative sort of burdens and not maybe having the right skillset? Is it just the lack of awareness right now on some of these benefits?

 

Where do you see the inertia right now?

 

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Well, I think it's the third point that you just raised. I do think there's an awareness to understanding to the decision making permission to try and achieve the things that for many, many, many, many years we have said we have wanted to achieve. And now all of a sudden, we're probably able to do that and do that actually in a way.

 

And Joachim has just outlined in quite substantive detail that issues of security and cost and privacy and so forth, in fact, can be enhanced by this. So on the one hand, we've got people who claim, I think, genuinely to be seeking the advantage that is being offered to them. But then on the other hand, finding it difficult to permit themselves to actually achieve that.

 

And so the but the positive circumstance of that is that that, I think, quite quickly is going to start to be overcome. And so what might at the moment be a relatively poor understanding or a relatively limited dispersion of this sort of technology hopefully is going to be replaced by its advantages. And as professionals, we're all in our way, deeply involved in this marketplace, in this community.

 

The right question to ask or the right position to put forward is not one of criticism, but in fact, one of encouragement. And so really, I think it's our obligation to try and take the understanding that we have to share that and to encourage people really to seek the advantage that innovation provides. And, you know, I mean, listen, the podcast is just an example of an opportunity to try and do that.

 

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Very good. Yeah, I mean, Joachim, on the same point, maybe sharing some of your perspectives as part of the European Commission and how you're trying to presumably engage with a lot of policy makers on these topics. Is that something that you sense that there's greater willingness to engage in these topics now?

 

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There is great willingness, but you do not see it that much. And that's an interesting point. As in the European Union, we are starting now at the beginning of a new five year policy cycle.

 

And I receive many questions when people from the outside look into our likely initiatives. Where's the blockchain? Where's the crypto space?

 

We talked so much about that the last 10 years and now you don't see it that easily. On the other hand side, and that's my answer to that, we see a massive increase in project that require tokenization of blockchain infrastructures at the core, like the digital product passport, like the whole work on verifiable credentials for documents based systems, like the whole discussion on CBDCs, for example, the digital euro. And I could mention many, many more examples.

 

So what we realize is that many people are shy to talk about blockchain, but they are implicitly taking a direction where blockchain is the only technology that can actually deliver the concrete output. And this is interesting. So this requires a set of experts that basically know how to steer these processes and what elements that requires.

 

We are lucky to have that in Europe because we have very early, already eight years ago, declared blockchain as a priority for the public sector and all policy fields. And then Mika that you mentioned at the beginning is only a tiny, tiny part of actually the whole spectrum of things that we have already been doing. The whole anti-counterfeiting blockchain infrastructure and the real economy, many other things that are very concretely and advanced in the pipeline.

 

So I think this is very much developing in a good direction. Moreover, we are learning from individual use cases we briefly touched upon. So, for example, we had an e-residency in Estonia, but now also in other countries.

 

For example, we have countries like Georgia, but now also some African countries that start relatively easily with land and property registers on the blockchain. We have the whole discussion on wholesale CBDCs with three proof cases in the European Union. And I could go on endlessly like that.

 

I just want to indicate that indeed. And that is really important, I think, for our audience to understand. We are not talking theory here.

 

We are not talking about any sort of very hazy schemes. We are talking the absolute, complete reality now. But if you're not an expert, it's very hard for you to see that because blockchain is a layer underneath that normally the technical guys program that if they are good and integrated into the process.

 

But you don't really know that it is blockchain driven in a way like your smartphone as such. And this, of course, is challenging because there's a lot of requirement actually to get your team in the correct way together. We might come to that in a second, but also to be open enough to engage worldwide on best practice examples, because we have a lot of countries, a lot of authorities that take the lead in their area, but they are not yet well connected.

 

And this is something that I see every day where actually the largest part of my effort goes into this networking of bringing people and projects together to create the learning experience. But there we are indeed in our infancy and that we must step up a lot with your help, with the help of many others in order to really get the concrete output that we want, because as we can see in the report, we know precisely where we are going to or where we want to go to. But we need everyone to align on these objectives and work together.

 

(18:15 - 19:23)

Very much so, and I guess that really re-emphasizes the ethos of ONFIF in trying to take these examples and share it around the wider community across the public and private sector. And I think just on that point, I mean, we launched this report, as mentioned, in the sidelines of the IMF World Bank Group meetings where there were various international organizations and finance ministries involved from across the globe. When Mark and I discussed some of these issues, and one of the comments that was made is that there's either a lack of examples or a lack of understanding of some of the use cases of these technologies, where sometimes, as you mentioned, Estonia is often referenced or India, which we covered in the report.

 

But outside of that, often there's not many clear examples of where governments are using technology to improve the outcomes of their management of their public finances. And I guess just on that capacity building or understanding point, Mark, is there any other points you'd like to share about how, what's the path in which we can get governments to better understand the uses and examples of where these technologies are helping right now?

 

(19:24 - 26:19)

Yeah, the instinct, I think, is to somehow, you know, just repeat a series of anecdotal examples. And while that is interesting, they are, in a sense, no more than anecdotes. So, you know, and it's quite it's quite easy for jurisdictions to say, well, that's interesting, but my jurisdiction is fundamentally different than this other one that has just, you know, published or publicized some sort of application of new technology.

 

The reliance, however, and, you know, Jochen mentions the smartphone or the Internet or public blockchains, you know, these are infrastructure level, economic institution level advancements. And so really the question probably shouldn't be about can I find another anecdote to share? It really should be a much more disciplined requirement to seek the benefits that come with that level of infrastructure based, economic, institutional based innovation.

 

And that really is, I think, where we have to go to. And we're starting to see some some really proper examples of that. Perhaps interestingly, I certainly in my own world, I find that some of the international financial institutions, places like the World Bank, places like the IMF and so forth, they seem to be leading the charge with potential application of this.

 

And it's perhaps because they don't have quite the same level of direct political oversight. And so that might just allow them to seek innovation. It is also their role to seek innovation, in a sense, on behalf of other institutions.

 

And so I think we're starting to see that come to bear. The one thing I'll say, and I'll kind of close with this, is that no matter what that specific application is, we have to approach this in a manner that encourages what I think is an entirely new dimension of public-private partnership in the delivery of this. Governments are not going to be the entities, the providers of the solutions in this revolution.

 

They have to be the stewards. They have to establish the necessary conditions so that economic advantage can be sought and realized, so that democratization of information and exchange can be sought and realized, so that individual privacy and autonomy and agency in the citizen and business relationship to the state can be realized and can flourish. The role of government in that is to establish those conditions.

 

And then in partnership, like in so much of the economic history of the world, the actual delivery takes place in the commercial and in the private sector. And to me, that is probably the most significant opportunity that we are, again, in the early stages of, but undoubtedly there is going to be a significant opportunity for those jurisdictions that get it right, that seek that level of innovation. They're the ones who are going to be competitive and they're the ones who are going to realize the advantages.

 

Nikol, if you allow me to just jump in on what Mark said, because I think he hits a very important point, the role of government and the public-private partnerships. This is something that we now realize in hindsight. I must say that we have been very lucky at the European Commission seven, eight years ago when we started our work on blockchain in earnest, that if I may say it like this, we were left alone by the political top layer in a way.

 

So we had a team that came up more or less spontaneously, people that were exposed to technology, interested in that outside their job, and it fit in very nicely. And that was the trigger for all the work that has been done since. The more the political level comes in with, I would say, more short term interests or with limited knowledge and time to really get acquainted with all these things, the more problematic it becomes.

 

And yesterday I had the honor to be part of an exercise at Cambridge University where I teach from time to time, and we had a discussion on sub-tech. And I found the supervisory tech perspective very interesting because there was a discussion on a study that said that only 16 percent of concrete use cases that are being developed in organizations actually start with some sort of sub-tech group getting together with a strategic outline and a clear organizational view on all the aspects. And this is really a massive problem that I realized then in its dimension.

 

We see it everywhere, but I'm always promoting and I think that is a valid part learning by doing. For me, it doesn't matter that much where in this space you start because your learning will come so rapidly that the most important thing is actually that you do start somewhere and you go into the details and start this process. But the more high level we get, the more we talk about these fundamental societal challenges that Mark has alluded to and that are very clearly summarized in the report, the more indeed we need this long term and strategic view.

 

And for that, you need to take a group of the private and public sector together, a sort of very well-designed team that takes a coherent sub-tech perspective on how to steer the process internally. What are the ingredients, the skills, the tech, etc.? And what is the context externally?

 

And if you manage that process properly, you have a massive lead. You have a massive advantage. But at the end of the day, also, this is a very temporary advantage, of course, because technology is innovating so fast, moving forward so fast that it will put you in a good position.

 

But you have to continue your work. And this is to the benefit basically of everyone in the global economy. So I think this systemic perspective, but starting really from what I would indeed expect from a good group of experts, consultants, the players from the public and private sector, this mix is the absolute ingredient and necessity that has the most value, actually, when you are shaping the digital future of your organization.

 

(26:20 - 27:41)

Very good. And I think that's a good point to end on, that sense of maybe start small, but with a varied group and build from there. In many ways, that's something that with our partners at EY, with Mark and his team, we try to do as part of this report is maybe start small, take a topic and build it from there.

 

And that's something we'll continue to look to do in the coming months and years on this work stream. Yeah, unfortunately, we've run out of time there, but I think there's plenty more where we can go into these discussions in more detail, as mentioned. And for those who are interested, we've referenced it a couple of times, but please take a look at the reports where we delve into some of these issues and much more.

 

And if I could just very quickly summarize at least my takeaways from the discussion here before handing over to Mark and Jochen just for a final quick word is that it seems that some of the benefits of using new technology, whether that's blockchain or otherwise, it is pretty clear in terms of authenticating data, in terms of reducing administrative burden, making governments more efficient. It seems like one of the next steps for governments to take that path is to increase the understanding and awareness of what can be done here. And it's really the need for public and private partnerships to drive governments in the right direction.

 

At least those are my takeaways. I don't know, Mark or Jochen, if you have any any final thoughts to add to that.

 

(27:43 - 29:03)

I think you I think you presented a great summary. I would just hit the point that, you know, this is an example, but collectively, I think it is our responsibility to continue to have these sorts of conversations and to really seek the public interest benefit that innovation and technology presents us the opportunity. Thank you, Nikhil and Jochen, obviously, for your participation.

 

It's really great. Thank you also very much from my side. And let me just say, indeed, one thing as regards technology, and you can also see that in the report, we need not be carried away by technology.

 

Technology needs to be put into perspective. So I understand the skepticism of some people that say, let's not get overly occupied with technology, the more so as public authorities always say that they are technology neutral. I just want to emphasize that when we talk about this technology here, DLT systems, blockchain, also the linkages to the other technologies, this is massively extending the opportunity space.

 

So tech needs to be put into perspective. But please be aware that by applying that technology, you'll make the cake much bigger that can be distributed. And this, I think, is a value in itself.

 

So thank you very much for this discussion. And I'm looking very much forward to any follow up.

 

(29:05 - 29:17)

Very good. Yeah, I couldn't wrap it up better myself, so perhaps we can leave it there. Thank you, Mark and Jochen, for the conversation.

 

And yeah, we hope to continue engaging in this very soon. Thank you all for listening. So bye.

 

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Thank you. Bye bye.

 

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Thank you for joining us for this edition of the OMFIF podcast. If you found today's conversation engaging, make sure to stay tuned for additional thought provoking discussions on worldwide finance, economics and policy by subscribing to our channel. Stay connected of the latest developments by following us on our LinkedIn page, OMFIF Economic and Monetary Policy Institute.