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Smart stimulation: Cash as code

Over the past six months, central banks and governments have opened financial floodgates to deal with the economic fallout from covid-19. By April, 106 countries had introduced or adapted social protection programs, mainly cash transfers, to help people affected by the pandemic. A McKinsey analysis of 54 countries estimates that governments have committed 10 trillion dollars by June, through grants, loans and leave payments to unemployment benefits and social assistance. The quantities greatly exceed the 2008 financial crisis (see graph).

This article was written by Insights, the personalized content arm of MIT Technology Review. It was not produced by the editorial team of the MIT Technology Review.

Along with this government spending frenzy, citizens are fully embracing digital finance. Paper money and coins are potential vectors of the virus (a city authority in India has even banned the use of paper money for home deliveries). The move to e-commerce has helped millions of consumers get used to digital spending, and they are unlikely to come back.

A unique infusion of silver in a generation

Some forward-looking governments and central banks are combining the two, using digital technology to disburse funds quickly and efficiently, and unlocking more data on the shape of the economic recovery. Experimental policymakers are using this once-in-a-generation injection of funds to reinvent the way governments make payments to citizens.

In Hangzhou, China, city authorities are working with Alibaba, headquartered there, to launch a digital coupon revival program through the Alipay platform. Coupon-based recovery initiatives are not new – the city used a paper-based system during the 2008 crisis – but publishing them digitally, in a real-time lottery, allows the government to analyze how coupons are spent, unearthing data on economic recovery. Unlike paper, digital coupons are flexible; the number, value and thresholds at which they are used are adjustable over time, allowing authorities to move them to the sectors that need them most. The program has been replicated in more than 100 cities across China.

China was already a forerunner in digital finance. The digital yuan is fast becoming the world’s first sovereign digital currency and is currently in pilot mode with four state-owned commercial banks. But many other countries are channeling stimulus funds through digital channels. The Malaysian federal government has paid nearly half the population $ 110 million through three e-wallets (Grab, Boost and Touch ‘n Go), helping to revive the digital payments industry.

Ghana, the first country to launch a covid-linked digital financial services policy, removed fees on low-value remittances, relaxed transaction and wallet size limits for mobile money, allowed for authentication processes to be transferable from SIM records and reduced interbank transaction rates. Neighboring Togo has set up a digital money transfer program called Novissi, providing monthly assistance to workers in the informal sector. Cash transfers go bi-weekly to a mobile money account, at $ 21 for women and $ 19 for men. Despite the difficulties of reaching beneficiaries who, by definition, lack papers and authentication documents, the project was set up in just 10 days, using the national voter database, to serve 12% of the population. . It has since evolved to focus more on specific regions of the country, deploying political choices such as movement restrictions at the district level.

Just as Togo has used existing assets such as the voter database, other countries have built covid payments on infrastructure already in place. In Chile, a national ID-linked service, CuentaRut, supports low-income people and has been used to channel payments from the government’s “Bono covid-19” emergency aid funds to bank accounts of more than 2 million citizens. Peru is expanding its government-to-citizen system to increase payments to existing and new beneficiaries, working with new financial service providers, including private banks and mobile money companies.

This contrasts with the United States, the world’s largest and most technologically sophisticated economy, which has stuck in the age of payments; an estimated 70 million American families have turned to bank overdrafts, payday loans and check tellers while they waited for paper checks to arrive in the mail.

Governments are also reducing the friction, fees and burdens that bog down the system. In Italy, from July 2020, merchants below an income threshold of € 400,000 ($ 471,000) are entitled to a tax credit equal to 30% of commissions on electronic payments, while the Egyptian central bank has raised the limit on electronic payments via mobile phones for individuals and businesses.

Non-governmental organizations and businesses are helping. Kenya’s Safaricom has partnered with public transport companies to enable them to accept cashless payments through M-Pesa, the country’s ubiquitous mobile wallet. SumUp, a fintech specializing in payment solutions for small and medium-sized businesses, has signed an agreement with the Italian Red Cross to provide SumUp card readers nationwide. Paga, a Nigerian mobile payment company, has removed fees for merchants. Anything that speeds up the flow of money will have far-reaching effects at a time when companies exist on the razor’s edge of solvency.

Hayek, meet Keynes

Unraveling the short and long term changes brought on by covid-19 is difficult. Some reforms, such as government reimbursement for telehealth consultations, could be reversed when the crisis subsides. But there will be fundamental changes in the financial landscape, especially with the pandemic that will give impetus to the major financial reforms already underway: the development of central bank digital currencies (CBDCs).

These digital fiat currencies have many attractive features. They could help citizens more efficiently, quickly and flexibly than current approaches such as check payments or tax breaks. They are programmable and adjustable to control how, when and where funds are used. A CBDC could function like an account that a person holds with a central bank, with tech companies, fintechs, or intermediaries developing user-friendly interfaces.

Other benefits include the production of real-time data on economic activity, more accurate and up-to-date data for gross domestic product estimates, near instant payment settlement, and better traceability to fight corruption and corruption. financial crime. CBDCs effectively deliver all of the efficiencies of digital finance, such as speed and reduction of processing, without ceding regulatory controls. They could also address two big concerns about private cryptocurrencies: money laundering and tax evasion. In fact, they could help treasuries fight against non-payment of certain taxes, thus increasing their income.

Better viewed as a regulated cryptocurrency, the idea has attracted interest from central banks and policymakers in the Netherlands, France, Canada and Singapore, as well as the International Monetary Fund. Dutch bank ING believes covid-19 makes CBDCs ‘more likely’ and Facebook-affiliated Libra association’s ‘Plan 2.0’, released in April 2020, argued that CBDCs could be integrated into the global currency network digital Libra.

The key, according to Zhiguo He, professor of finance at Fuji Bank and Heller at the University of Chicago, is to use the digitally supplied state money in a sophisticated, market-oriented way. “Government-to-person payments are exactly what happened in China from the 1950s to the 1970s, during the planned economy. We know it went wrong and markets are the answer. Payment in itself is therefore not the key to economic stimulation: information is.

Professor He, who sits on the academic committee of Luohan Academy, expects pandemic-induced welfare and stimulus payments to continuously improve digital delivery of government-to-person payments, but he also argues that digital currencies are best seen as a means, not an end. “From an economist’s perspective, the ‘first best’ is to have a system where we have all the information to calculate the tax multiplier for that person – how much GDP can be generated by giving that dollar a dollar. person, taking into account savings, the goods he / she buys and so on — and send the first dollar to those with the highest multipliers. Digital currency itself is only a small part of this ideal world. “

The first concern of decision-makers is to provide financial assistance to those who need it. Using digital technology could not only help them donate money faster and more efficiently, but could also help them understand the state of the economy and adjust support measures to target hot spots. reviews.

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