In celebration of the 75th anniversary of the Bretton Woods Organisation, the following essay by Philippe Amon, Chairman & CEO of SICPA, was included in a compendium on perspectives on the future of the global economic system. It sets out his strategic vision on the future Economy of Trust.
Our economic well-being depends on ever more complicated and interconnected transactions and decisions that cross over traditional borders and sovereignties. This interdependence forms a delicate network of interactions. Trust at each stage is crucial, but the balance can be fragile. When it is lost, the impact can be wide-reaching and perhaps irreparable. The «economy of trust» is about using modern technology and innovations, empowered by the concept of «trust by design», to reinforce and sustain this network.
Day-to-day transactions generally involve questions. For example, a consumer will ask, Can I enjoy my milk with confidence? Can I trace it «from farm to fork»? Behind such questions posed by consumers lie a number of other related queries voiced by all those engaged in supplying milk. The farmer may wonder, Is the cow feed free of harmful constituents? Where does the feed come from? Can I track the milk after it leaves my farm?
The wholesaler might inquire, Am I certain of the origin of the milk? Can I trace it throughout the supply and distribution chains? The retailer wants to know, Can I be sure the milk has not been adulterated or diluted? Am I on a level playing field with my competitors? The authorities ask, How do we ensure that economic actors are paying the correct taxes or receiving the right subsidies? How do we facilitate compliance with health standards?
TRUST IS ESSENTIAL
The questions set out above are distinct, but what they have in common is their reliance on trust. Every day, economic and social actors make a myriad of decisions based on the trust they have in their transaction partners, in the transactions themselves, in their governments, and even in the global environment. Trust at a micro level has an impact at a macro level, as well as on the global stage. This simple example of the glass of milk is replicated millions of times daily, in more or less complex situations.
When this trust is compromised, economic activity suffers and social cohesion is undermined. In the past, breaches in the supply and distribution chains of food products have resulted in significant economic costs—loss of human lives, destruction of livestock, damage to the reputation of companies, and ultimately, changes in consumers’ habits. In other contexts, trade in illicit goods and services may support the financing of criminal enterprises and terrorist organisations. The underdeclaration of tax due hinders domestic revenue mobilisation, challenging the efficiency of governments and feeding a sense of unfairness. Identity theft undermines online sales, drives the darknet, and more ominously, facilitates human trafficking. Unprotected voter rolls endanger the credibility of elections and democratic systems.
Lack of trust may even play a role in the perceived sense of loss of government sovereignty and in doubts about the continued improvement in living standards.
When trust is enabled, the benefit is substantial. Enabling trust in economic relations is a key driver of growth and can transform business relationships. Trust is needed to promote an economy that is inclusive, transparent, and accountable. Trust promotes efficiency, facilitates company relations with suppliers and customers alike, and reduces administrative costs. It can increase consumer confidence, a key ingredient in spending decisions. For governments, trust can facilitate the collection of taxes needed to finance necessary public services. For citizens, it can ensure that the government and the private sector are seen as legitimate actors making good use of limited resources.
BUILDING A NEW ECONOMY OF TRUST
«Enforcing trust» must give way to «enabling trust.» Governments, businesses, consumers, and citizens have relied over time on many ways to generate trust. In some circumstances, a handshake might be sufficient to cement a deal. Governments often take steps to enforce trust through regulations and programs, such as hiring quality and tax inspectors to scrutinise production sites and tax returns, or imposing penalties on those who misbehave. Such an approach is never completely successful and entails significant costs. The rapid development of new technologies is opening up a new, more efficient approach that benefits all stakeholders, whereby enforcing trust can be replaced by enabling trust.
The technology-driven enabling of trust underpins the economy of trust and ultimately acts as a tool of prevention. This change of paradigm is facilitated by innovation, the combination of digital and material technologies, advances in data analysis and artificial intelligence, and the ability to create trust by design. Digital solutions have major roles to play: enabling products and transactions to be seamlessly and securely identified, authenticated, tracked, and traced throughout the product life cycle; safeguarding intellectual property rights; assuring the correct application of tax policies; protecting the integrity of personal identity; and promoting citizens’ well-being.
Trust is strengthened by third-party validation. Governments are increasingly challenged by the evolving nature of borders and the virtual world created by the Internet. In response, they have classically adopted the «trusted trader» model, based on risk profiling, self-regulation, and self-declaration. But what happens when it fails? What if producers or distributors cheat? Looking for fraudulent behavior is like looking for a needle in a haystack. A third-party validator tasked with guaranteeing the legitimacy of supply and distribution chains can ease the burden on stretched governments and deter rogue operators.
DIGITAL SOLUTIONS DESIGNED TO ENABLE TRUST
Secure track and trace (T&T) solutions open up a wealth of opportunities. They can ensure that we know where a product and its constituent components come from, that production conditions were as prescribed, and that its journey from manufacturer to consumer is identified and recorded. There are four steps to T&T. Step one: The identity of the product—the «product passport»—is created, using automated verification equipment and processes. Step two: Unique authentication marks are applied to the product or its packaging. They could take the form of a secure label or stamp affixed to the packaging, or a direct mark on it. Physical security features are combined with a digital data bearer, such as a two-dimensional bar code. Step three: The product’s journey to the consumer is tracked, with key events recorded. Consumers can check the digital marks of any product they purchase thanks to applications on their smartphones. Through their reporting of suspicious products, consumers contribute to the fight against illicit trade and are actively empowered to build an economy of trust. Step four: The data generated in the previous steps can help build a «digital twin» version of the product that can be exploited thanks to business intelligence. At a broader level, these product-specific data can be linked to or integrated with data from multiple other sources, facilitating interagency data exchange. Secure markings represent court-admissible evidence for the prosecution of offenders.
Governments are increasingly deploying secure T&T systems to manage high-risk situations, such as combating tax fraud. A wide range of excisable products are covered by these systems, such as tobacco, beer, wine, spirits, mineral water, soft drinks (increasingly relevant with the imposition of health-driven «sugar taxes»), and CDs and DVDs.
Early adopters were Brazil, Malaysia, and Turkey. They were joined by countries such as Chile, Ecuador, Georgia, Kenya, Morocco, and Tanzania. Using SICPATRACE® solutions, they have optimised their collection of tax revenue and enhanced their capacity for tax administration. They have also protected the legitimate economy, created a level playing field, improved public health, and empowered citizens. Similarly, in the health sector, the serialisation of pharmaceutical products helps create trust that a pack of pills is genuine. In the oil sector, the injection of a secure molecular marker into the fuel ensures that gasoline bought at the filling station is unadulterated, does not damage the vehicle, and fully respects tax laws.
Emerging digital integrity solutions will strengthen current solutions to bolster trust. To be effective, digital integrity solutions need to deliver on multiple levels, ensuring the integrity, immutability, and security of data; freedom from tampering and counterfeiting; confidentiality, privacy, and right of consent; sovereignty; traceability, auditability, and accountability; device integrity; and system resilience. Importantly, data must be protected from hacking and from leaks. Those transacting in the digital world must own their own data and the proof of their transactions, independently from those who manage the system. Transaction proof can take the form of a «digital receipt,» equivalent to the old bank receipt received after a deposit. To guarantee these properties and enable trust, digital integrity solutions need to incorporate several layers of technologies that mutually reinforce each other, including cyber-security, cloud computing, encryption, digital identity, artificial intelligence, a digital-physical link, and blockchain. In Estonia, blockchain secures a large number of digital records and databases to make them immutable and tamper- proof. Blockchain further secures the traceability and auditability of data, making people accountable for their interventions. But again, a single technology—even blockchain—will not be sufficient to solve all issues.
Digital solutions will facilitate the collection of data, but the use of these data must be appropriately regulated. On the one hand, the generation and effective exploitation of data and digital technologies (such as tracking illicit financial flows) can help combat crime, generate value for consumers (i.e., the data can be monetised), and deliver efficiency gains for businesses. Digitalisation of identity has the potential to unlock access to banking and social safety nets, and more broadly, to assure economic gains for all. On the other hand, however, digitalisation can endanger the right of individuals to privacy, which in some cases might even be life threatening. That is why so many governments are addressing the issue of digitalisation, data privacy, and ethics.
«Enabling trust» is likely to provide the most favorable cost-benefit ratio for all actors. It is clear that digital solutions have a cost in terms of research, development, and implementation. However, the cost of alternative solutions—wementioned posting tax inspectors inside production plants—is clearly higher. The Kenya Revenue Authority reported that its new digital tax stamp system was much cheaper than the previous control system, that cost reduction was a key driver of choosing a digital solution, and that digitalisation had improved efficiency. Ultimately, the cost of digital solutions must also be balanced against the option of not adopting measures to create the economy of trust. Common sense dictates their adoption. As technology evolves and digitalisation deepens, new trends will emerge. «Digital twins» that mirror real transactions and assets are becoming more common. The gap between physical and digital transactions will become increasingly blurred. For government, this development means that the declaration process used for taxation will be replaced with transaction-by-transaction monitoring based on trust by design. Governments will move away from being enforcers of standards and taxes, with all the cost and complexity that this role traditionally entails, to become certifiers of trusted third-party technology agents. The free-market economy will continue to drive technology solutions that create value and generate benefits for businesses, consumers, and the government—provided governments facilitate an enabling environment in which innovation can thrive. As global demographic shifts continue, there will be increased incentives to ensure that technologies are inclusive. It is vital that the full range of technologies, be they material or digital, and their benefits be accessible to the vast majority. New technologies must not be resource greedy and must help us make better, indeed the best possible, use of the world’s scarce resources, promoting a healthy and sustainable environment. Digitalisation and data will modify governments’ approach to legislation and regulation. Governments will need to strike the right balance between technology- specific measures and simple solutions that are globally compatible.
THE ROLE OF
THE INTERNATIONAL COMMUNITY
The economy of trust is vital in supporting achievement of the Sustainable Development Goals (SDGs) by 2030. None of the 17 goals directly aims to promote trust, yet nobody expects that any of them can reasonably be achieved without strengthening trust. Goal 1.A mandates the significant mobilisation of resources by governments to implement policies to end poverty in all its dimensions. The adoption of secure T&T solutions can help substantially with domestic resource mobilisation. Goal 14.6 mandates that countries implement international instruments to combat illegal, unreported, and unregulated fishing. Fish traceability systems can enable trust among all actors in a sector fraught with challenges. And that is not to forget that the measurement of progress toward the SDGs requires trusted data, which in most cases can be generated and collected using digital technology.
The mandate of the International Monetary Fund (IMF) and the World Bank to provide policy advice, program financing, and technical assistance means that these two institutions have a key role in the economy of trust. Public support for the continuing role of international institutions such as these two depends on their relevance in a globalised world. These institutions emphasise good governance and the rule of law. These key pillars to enabling trust could be supplemented by these institutions’ lending support to the full range of available technologies.
To keep up with the evolving economic landscape and pace of digitalisation, both institutions need to be well informed about the characteristics of technological progress, the linkages between technological progress and economic outcomes, and the technology standards set by other international institutions. Both institutions are becoming more open to interacting with providers of technology solutions. Recognising the need for such solutions, the World Bank has launched the Global GovTech Partnership, bringing together governments and the private sector for digitalisation. The IMF and World Bank must also fully leverage the work done by other international institutions. For example, the World Health Organisation Protocol to Eliminate Illicit Trade in Tobacco Products mandates the adoption of digital T&T solutions for tobacco products and dictates that such systems be developed by third-party agents, not by the tobacco industry itself. For its part, the Organisation for Economic Cooperation and Development has taken the lead on disseminating knowledge about digital technologies, including blockchain. The staff of the World Bank and the IMF would benefit from a deeper understanding of such digital technologies. Finally, technical assistance given by both Bretton Woods institutions—often assessed by recipient countries as the most beneficial support they receive—is still largely limited to training officials and supporting the design of institutions and internal governance systems. Relatively little technical assistance is given in terms of advice and provision of concrete technology solutions to help authorities strengthen their processes and move up the technology ladder. This gap is waiting to be filled and presents an opportunity for both institutions.
The relevance of the mandate of the Bretton Woods Committee is undeniable. Bringing together representatives of international institutions, governments, and the private sector, and promoting the cross-fertilisation of ideas and innovation to address current and upcoming challenges, are essential. We strongly support this ambition. The Committee should continue to stimulate discussions on emerging topics linked to innovation and technology through organising seminars as well as including these topics at its Annual Meeting and International Council Meeting. It should extend this discussion beyond the financial sector, addressing innovation, technology, and the economy of trust in the contextof the real sectors of the economy, the increasing cross-border activities, and the spread of public-private partnerships.
Thanks to these discussions and linkages, the committee will contribute to promoting a better understanding among actors and demonstrating the value of international economic cooperation based on trust.
Printed as separate publication extracted from the book Revitilizing the Spirit of Bretton Woods, 06.2019