Leonardo Badea (BNR): Digital transformation – a new catalyst of economic stability

Opinion by Leonardo Badea, Deputy Governor, National Bank of Romania (BNR)

Caught in the whirlwind of everyday problems, which in recent years have become more and more complex, we rarely have the respite to notice the many transformations in modern society induced by the rapid progress of information and communication technology (ICT). Digital transformation is already becoming commonplace for many countries in the world, but there are still important inequalities. It is true that globally public spending continues to grow due to changes in living standards and rising social needs, but this requires an increase in income, which can be catalyzed by the digital transformation.

Starting from the analyses performed at international level by different experts, in my opinion, the digital transformation of a country can be assessed as a level of development through five key directions:

1. The level of access of the population to digital services indicated by the level of the price of the service and the possibility of fast procurement; in this sense, the countries that manage to offer low prices or to have free access to these services will have a much faster development.

2. The degree of accessibility to state-of-the-art digital applications, in fact we refer to the users’ ability to have access from the point of view of the technological development standard and of the purchasing power to technologically complex products.

3. The reliability of digital services measured by the quality (stability) of the connection and the speed (rate) of data transfer, because the infrastructure necessary for digital transformation is a diversified one.

 4. The skill level of the workforce to easily use the computer applications available to increase productivity because, as they say, grey matter is the most important resource of a country.

 5. The existence of a digital ecosystem developed as a result of the incorporation of digital services and products in the economic and social architecture of society, which of course is an important step in the widespread use of processes developed in the virtual environment.

The resilience of the Internet – the lesson of change

During the pandemic crisis, which in Romania and everywhere in the world is in full wave four (but with different intensity), the Internet has proved a remarkable resilience. This resilience was normal somehow, because the Internet was built to withstand shocks – both predicted and unforeseen – as it was initially created and used for the first time in the military. As a result, the operation of the new product, which was to be based on the concept of the internet network, had to be as resistant to attack as possible and to minimize downtime. I believe that without the necessary infrastructure and the services offered by the Internet, the management of the pandemic crisis would have been much more difficult and its negative effects wider than those experienced so far. With the help of the Internet, we have managed to develop remote work primarily as a weapon in the fight against the pandemic and only secondly as a flexibility and modernization tool in the work process. We were able to communicate operatively through online meetings, conferences, and workshops. We had the means to organize, collect, and analyze the statistics that allowed us to obtain the information necessary to manage the complicated health situation. And last but not least, the researchers were able to work in parallel and exchange information in real time to build the medical response that provided us much faster than in other similar situations in history with both the vaccine and the treatment strategies to reduce as much as possible the loss of life. These are just a few examples of how the service has been used.

Today, in many areas of our lives, we enjoy the ability of the Internet to enable us to communicate globally. Even if users in a country experience network problems, they remain connected as other servers become available in a very short time to take over the data flow, just like a biological compensation mechanism.

During the pandemic crisis, the fundamental role of the Internet was highlighted to support the further development of economic activities and to allow the continuation of the communication process between users. This, together with the support measures taken by governments, central banks, and international bodies, has helped many companies to maintain their financial stability and business reliability.

We can expect the Covid-19 pandemic to further change the way we use and rely on the Internet. The prevalence of digital technologies and connected devices will continue to help many organizations remain effective in the market in exceptionally harsh conditions.

In a post-Covid-19 world, many companies will continue to operate remotely to some extent, as long as it reduces fixed costs and increases productivity. As noted above, the trend to use telework began long before the pandemic, but Covid-19 accelerated it. The work-from-home model opens up vast opportunities for growth, global talent recruitment, job creation and, ultimately, for increased prosperity. This opportunity of the Internet is at the same time a challenge for the nations of the world to succeed together, through cooperation within international bodies to develop programs that contribute to reducing development gaps. In fact, only half of the world’s population has access to the Internet today.

After 2023, I believe that we are entering another phase of society’s development catalyzed by this “Great Reset” of consumer behavior that has shifted to the online environment and that is real and is happening right now. We must react with swift measures so that the reset brings a better world and does not deepen the existing gaps and inequalities.

We therefore see that digitalization adds to other significant challenges of our time, such as an aging population, differentiated population growth by region, climate change, and changing consumer preferences.

The current crisis caused by the successive waves of the Covid-19 pandemic has shown that society needs to be better prepared in the future for massive disruptions in global supply chains and to develop back-up solutions to succeed to replace at least temporarily, for certain periods, a network failure, so to speak, the ruptures that may occur in the operation of these global supply chains. But how could this be done? Clearly, by developing the production of basic goods at national or regional level and maintaining warehouses stocked with non-perishable essential products that can act as a “buffer” for use in times of crisis. It is also necessary to develop the capacity to react and maintain economic activity in the event of seemingly unexpected global events that produce social and economic stress.

Digitalization and economic stability

The advancement of digitalization brings both advantages and vulnerabilities for the economy and the financial system. The main risks are related to the increasing dependence on the proper functioning of computation and data transfer infrastructures. Therefore, cyber risk is becoming one of the most prominent in risk dashboards all over the worlds.

But there are many other relevant vulnerabilities related to digitalization. In the financial sector, digitalization creates the conditions for improving the accessibility of services and increasing the intermediation, which could lead to the decreasing social inequalities. However, the accelerated development of digital assets markets (the most popular of which are cryptocurrencies) is already putting financial regulators on high alert due to their size and complex interlinkages with the traditional financial sector, posing significant risks to financial stability. Average daily turnover in cryptocurrency markets already reached USD 1 trillion (this October), and the total market value of the most popular cryptocurrencies has exceeded USD 2.6 trillion. At the same time, the segment of stable currencies and that of capital market funds investing in cryptocurrencies (some of them already traded on the regulated stock exchanges) also imply complex and significant interconnections with the traditional financial markets.

These developments argue that digital assets need regulations similar to those that consolidated and transformed the traditional financial system after the global financial crisis of 2007, making it one of the most resilient segments of the economy (so far) during the pandemic crisis and able to contribute to mitigating its negative effects.

Digitalization is relevant for all macro-financial policies, including from a monetary policy perspective. According to a recent research paper published by the European Central Bank (ECB), digitalization can be seen as a major supply / technology shock affecting macroeconomic aggregates that are important for monetary policy, such as production, productivity, investment, employment, wages, and prices (Anderton et al., 2020). The authors’ conclusions are particularly relevant to understand the impact of digitalization on economic stability and show that it increases productivity and lowers prices, having implications for monetary policy and its transmission. They argue in the favor of structural policies aimed at taking full advantage of the potential gains from digitalization.

At the same time, a report published last month by the Working Party on Digitalization, chaired by Robert Anderton (ECB) and Gilbert Cette (Banque de France), formed as part of a broader effort to review the ECB’s monetary policy strategy, shows that increasing digitalization has made it more difficult to measure prices due, among other things, to faster changes in products and their quality, but also to new ways of pricing (e.g. dynamic or customized pricing and services that previously were offered for a fee, but now they are “free”).

As shown in both studies cited above, digitalization can significantly affect the frequency, impact, and transmission of shocks, adding to the uncertainty and complexity faced by policy makers. Especially in Romania, because we are facing important structural macroeconomic imbalances and increasing inflation, a policy mix that includes the objective of accelerating the digitalization of the economy could help mitigating these vulnerabilities, through a balanced implementation and regulatory mechanisms for the proper management of related risks.

What are we heading for?

The global digital landscape continues to evolve rapidly, a dynamic that has been accelerated by the pandemic crisis whose effects have led to increasing demand for digital platforms, software, hardware, and services. In the midst of these changes, we must continue to prioritize the development and effective application of digital technologies in the economic sectors, both public and private. As global supply chains continue to transform while services and interactions between demand and supply actors move widely in the online environment, more emphasis will be placed on securing supply and encouraging local production for goods such as food, medicine, and technological components.

The pandemic has shown that consumption habits can change rapidly. An example is the Internet consumption. According to specialists, online orders, combined with an increased dependence on digital services, both for entertainment and work-related tasks, have led to a 20% increase in total Internet use.

In my opinion, in order for some of the solutions needed in emerging countries to be applied, we should increase investments in strategic research programs in specific areas of the digital environment, in order to build basic technologies that can be developed further by the private sector, thus supporting the growth of the economy. Public sector investment in research should therefore focus on improving core digital capabilities in new technological areas, namely:

 1. Artificial intelligence (AI), which is considered one of the most important technologies of this century, with fierce global competition for the best AI capabilities, both in the public and private sectors. The development of the products and services offered must focus on improving living standards and respecting the central importance of human subjects in this process.

2. Cyber security, as cyber risk ranks among the top ten risks in the next decade, according to the Global Economic Report prepared by the World Economic Forum (2020). Our ability to strengthen and develop cybersecurity capabilities will become even more important as cyber threats and challenges increase in complexity. We need to develop local cybersecurity capabilities for trusted software, mobile and cloud systems, and for securing critical infrastructure. Digital trust and security will become increasingly valuable as business and social interactions continue to migrate more and more into the digital space. Therefore, reliable technologies and their protection will become a key factor.

3. Quantum computing leverages the properties of quantum physics to store information in the form of quantum bits or qubits. Quantum computers are expected to provide significant improvements in computing speed over conventional computers in solving optimization problems, which play a key role in many economic sectors and to reduce power consumption.

4. 5G communications are globally recognized as the next big leap in wireless communications. The potential speed and bandwidth capability of 5G can enable digital applications that are changing the way we relate to industries that produce high added value. Smart factories will be a common component of the economic landscape and will require a skilled workforce adapted to the new labor requirements. The World Economic Forum report (2020) estimates that by 2035, 22.3 million jobs will be generated in the global 5G value chain alone.

According to International Data Corporation, by 2022, 70% of organizations will use digital technologies to transform their business processes and improve customer experience, productivity, and resilience for sustainable development.

Fortunately, there is a major concern at EU level to bring capacity into new digital technologies and to use this in the transition to a sustainable economy, with the stated aim to become climate-neutral by or around mid-century. Digital platforms, the Internet Things, the Cloud, artificial intelligence, quantum computing are already changing the content of today’s industries by determining a technological plus and the emergence of new products and services. Even at EU level, 42 percent of citizens do not have basic IT knowledge. It is important that in this development process there is a global concern to use this development opportunity to reduce inequalities and increase the level of social inclusion. Taxation will also need to be incentivized but taxation should be done where revenue is actually generated so as not to allow for tax optimization operations.

The future will bring challenges in adapting to the digital ecosystem in which development opportunities will be immense, but at the same time, we will have to face new associated risks. We need to be wise and flexible and reflect on an old Chinese proverb – “when the wind of change blows, some people build walls, others build windmills“.