Today’s post is from Darcy Allen, Research Fellow at Melbourne-based free market think tank The Institute of Public Affairs, and recent author of a new report – “The sharing economy: how over-regulation could destroy an economic revolution”.
The ‘sharing economy’ has emerged because new technologies such as the internet have drastically reduced transaction costs.
Embracing these developments, budding young entrepreneurs have launched businesses that help individuals exchange resources.
Examples such as the ride-sharing Uber and the accommodation-sharing Airbnb are making exchange more efficient by helping to coordinate information about mutually beneficial transactions. These businesses make money by taking a fee for facilitating the trade.
Why has the sharing economy emerged? The underlying reason is transaction costs – the costs of coordinating an exchange. This includes the discovery, bargaining, and policing costs of exchange.
As these costs fall it becomes more feasible for consumers and producers to transact. Transaction costs have now fallen so low that buyers and sellers can exchange the excess capacity of their existing resources with ease and convenience. Hence the emergence of the ‘sharing economy’.
These companies do not sell the ‘resources’ mentioned above. Rather, they sell the software, the matching algorithms, and the reputation of their business. This package provides a service where private parties can discover, bargain and police their own transactions.
Private parties are fast flocking towards these new platforms because of their advantages over traditional exchange: more sustainable use of scare resources by utilising idle capacity; often lower costs for consumers because of decentralised transactions; the ability to customise the details of the exchange; and flexible employment opportunities particularly for the unemployed.
But the future of these benefits is all but smooth sailing. The debate involves regulators, governments and incumbent industries. This is expected with any disruptive innovation. Incumbent industries scramble to protect their valuable position using the political process.
The underlying question of these debates is not really over whether the sharing economy has economic benefits. The question is over who is more effective at regulating emerging markets – governments or civil society?
A recent report by the Melbourne-based free market think tank the Institute of Public Affairs, The sharing economy: how over-regulation could destroy an economic revolution, explores how misguided and heavy top-down regulations could crowd out the benefits of the sharing economy.
Much of the problem stems from a misunderstanding of the costs of government intervention on one hand, and the increasing ability for markets, businesses and consumers to self-regulate on the other.
To be sure, these debates over government imposed control and evolving self-regulation will continue. But it is not sufficient to approach each issue on a case-by-case basis; decisions must sit within a broader regulatory design framework that provides the flexibility and adaptability to future challenges.
This post provides three such design principles.
Regulation should not be by default; it should be the second alternative if bottom-up governance fails.
Regulators must avoid hasty regulation. Imposing rules on an emerging industry naively assumes that regulators understand the future of that industry. Rather, the reaction of regulators should be to encourage and enable the development of bottom-up, organic, self-regulating institutions.
Some may recognise this as Adam Thierer’s idea of Permissionless Innovation. Governments too often follow a ‘precautionary principle’ – that is, regulating against the possibility of hypothetical harm. This locks entrepreneurs into rigid rules that stifle innovative activity.
The sharing economy has a large potential for self-governance. This is an alternative to government control. It is common for sharing economy platforms to have reputation mechanisms and insurance systems that fill some of the void where government regulation is assumed to sit.
These solutions are often cheaper, quicker and more flexible than their government alternative, and over-regulation can destroy these complex structures. It is the nature of politics that regulation is rarely able to evolve as technologies and industries evolve.
Moving away from occupational licensing as a signal of quality.
Occupational licensing is government deciding who can supply what services in the market. Licensing is often justified on the basis that it signals quality and safety for consumers.
This is all well and good, but occupational licensing also has costs. It is widely recognised that government-imposed licenses create supernormal profits for insiders, and are highly inflexible to changes in industry structure.
The sharing economy has created significant tension around occupational licensing. This is because private parties can now easily provide services – like transport and accommodation – through unconventional and decentralised markets.
The solution is to encourage alternative approaches such as professional certification to signify quality. Certification does not legally prevent individuals from providing certain services; it allows the market to decide. The benefit is that private parties determine whether the benefits of the certification outweigh the additional costs of providing the good.
We must encourage the sharing economy to create, test and refine their own certification bodies. For example, AirtaskerPRO is an additional screening process including an ID check and an in-person interview to obtain a badge on the user profile. These need to be embraced.
Make regulation technology-neutral to avoid entrenching industry structure.
Technology-specific regulation only survives the test of time when there is little innovation. Yet traditional industry structures are continually being displaced. Creative destruction is a good thing.
However, when governments regulate an industry, these regulations by their nature define and determine the structure of the industry.
Many sharing economy regulatory contests come down to questions such as ‘what is a taxi?’ or ‘what is a bank?’ As industries shift and innovate, these definitions blur. But regulatory frameworks tend to be fixed, based on the assumptions built into the industry structure that they were original designed to govern.
If governments want to encourage the sharing economy, they need provide a reliable, predictable, technologically-neutral legal system that both keeps industry-specific regulation to a minimum and favours private solutions to regulatory problems over public ones.
In preparation for the 2015 Global Forum on Development, which will focus on how access to financing can contribute to inclusive social and economic development, the OECD Development Centre, United Nations Capital Development Fund (UNCDF) and the Better than Cash Alliance have developed a series of articles exploring the key issues and dimensions of financial inclusion. Today’s post is by Emilie Romon of the OECD Global Network of Foundations Working for Development (netFWD) and Sabrina Sidhu, from the Better Than Cash Alliance.
What do a family foundation based in Canada, a semi-public foundation established in the United Arab Emirates (UAE) and a corporate foundation from one of the world’s leading banks have in common? At first sight, not much beyond the fact that they are all charitable organisations. But a closer look tells us that they all dedicate time and resources to the same cause: financial inclusion.
There is growing evidence that financial sector development offers the opportunity to address inequality through interventions to ensure that economic growth translates into poverty reduction and employment. These efforts help to alleviate worries that economic integration and liberalisation of financial markets will lead to narrow, impervious corridors of spectacular growth surrounded by a hinterland of poverty. According to a report by the World Bank Development Research Group, governments can save up to 75% with electronic payment programmes – because the costs of handling, securing and distributing cash and administering these cash programmes is so expensive.
By empowering poor households to take a long-term view of education and health, financial inclusion complements government policy. It also helps reap the demographic dividend by ensuring healthier and educated young people raise productivity and attract further investments in the real economy.
Many foundations work to support those living in developing countries who do not have access to formal financial services such as loans, insurance, savings accounts, etc. They may also lack the skills needed to manage their financial assets in a sustainable way. Through financial inclusion, foundations empower individuals to lift themselves out of poverty, enhance their livelihoods and avoid excessive indebtedness.
Why do foundations get involved? Firstly, foundations are generally more willing to take risks and have more flexible means of operation than traditional aid agencies. They have also taken the lead in innovation, for example by inventing and making new digital payment systems accessible to the poor. An OECD Development Centre study on venture philanthropy paints a generally positive picture of the approaches used by foundations.
The Lundin Foundation works with farmers and small enterprises in Sub-Saharan Africa to enhance employment opportunities and bring their products to market. Because farmers often do not have access to formal financial services — which constrains their ability to scale up — the foundation makes financial services accessible to these farmers. Lundin recently invested in Agriculture and Climate Risk Enterprise, Ltd. (ACRE), which provides affordable insurance to farmers against climate risk, and sponsored the development of West Africa’s first dedicated Agribusiness SME Venture Capital Fund.
In the UAE, where 70% of Emiratis under the age of 30 are indebted, rising depression amongst youth is often attributed to financial stress. Increasing divorce rates in the country have also been linked to excessive debt. Faced with a problem of such magnitude and because no nationwide initiative was addressing the issue, the Emirates Foundation for Youth Development decided to make financial inclusion and literacy one of their six core programmes. Through the Esref Sah (“Spend true”) programme, the foundation raises awareness among the Emirati youth on the importance of managing their assets and provides adequate capacity building training. In 2014, the Emirates Foundation has engaged 2 434 youth and parents through a series of workshops across the country.
Similarly, the Citi Foundation follows a ‘more than philanthropy’ approach, by giving not only money to their grantees, but also coaching and training in order to reinforce their capabilities. In addition to financial literacy programmes delivered around the globe, the foundation seeks to strengthen microfinance institutions (MFIs) that offer small loans to low-income individuals, by helping them build their institutional and management capacity.
While these programmes gain considerable momentum, a larger range of development actors are also coming together to leverage their comparative advantages in support of financial inclusion. The Better Than Cash Alliance for example is a unique UN-based Alliance that is funded by three major foundations (Bill and Melinda Gates Foundation, Ford Foundation and the Omidyar Network), three payment providers (Citi, MasterCard and Visa) and one bilateral donor (USAID).
Housed at the United Nations Capital Development Fund, the Better Than Cash Alliance provides expertise in the transition to digital payments to achieve the goals of empowering people and growing emerging economies. In addition to raising awareness of the benefits of replacing physical cash with electronic payments, the Alliance facilitates the transition for governments, the development community and the private sector. While physical cash payments are more effective than distributing in-kind goods, there is a growing body of evidence that digitizing payments can create lasting benefits for people, communities and economies. Why? Because they are a more cost-effective, efficient, transparent and safer means of disbursing and collecting payment.
The support from the three foundations to the Better Than Cash Alliance and their commitment to work with governments, private sector and development partners is deeply rooted in their own vision for increased financial inclusion in developing countries. Bill Gates, the co-chair of the Bill and Melinda Gates Foundation, predicts that in the future all “transactions will be digital, universal and almost free”.
Increasing financial inclusion at a national level is a complex task and requires a number of actors, in order to ensure that the vast range of products, services, policies and regulations as well as infrastructure upgrades are met. This will require both technical skill, significant human capital to ensure the change happens and deep financial resources. Thus, a multitude of players will be required for multi-dimensional sectoral change at country level and there is no doubt that foundations have a key role to play in increasing financial inclusion globally.
Can you have your green cake and eat it too? Environmental policies as an ingredient for economic growth
Today’s post is by Maroussia Klep of the OECD Environment Directorate
In today’s hard times, policy-makers can find it difficult to sell their environmental policies. To many, these policies represent a burden on the economy. They might secure the well-being of our grandchildren, sceptics argue, but risk preventing the growth we badly need today.
In this context, recent OECD findings provide renewed optimism. As revealed by thorough economic assessments, well-designed green policies not only secure long-term wellbeing, but can uphold current productivity levels too. In other words, it is possible to increase the economic pie and make it greener at the same time.
As ecological concerns gained momentum in the last decades, many studies have attempted to identify the impacts of environmental policies on the economy, with varying conclusions. In the United States for instance, scholars tried to relate the economic slowdown in the 1970s to the introduction of such policies; but their results were largely inconclusive. On the opposite side, economist Michael Porter suggested in a 1991 article that stringent policies could actually increase competitiveness: “strict environmental regulations do not inevitably hinder competitive advantage against rivals”, says Porter, “indeed, they often enhance it.”
In a report published this month, OECD splits the difference. The in-depth empirical analysis across OECD countries in the last twenty years revealed that well-designed green policies can sustain current levels of productivity growth.
When new policies are put in place, the more productive and technologically advanced firms are usually those able to reap the most benefits. They have indeed the firepower to seize market opportunities and rapidly adopt new technologies. Besides, once technological improvements are realized in an industry, the positive economic effects will often spread out across industries and countries via integrated production chains. According to OECD, these positive outcomes can be further encouraged if environmental policies offer flexibility for compliance, a reason to favour market-based instruments (such as taxes) over rigid regulations and standards.
In parallel, the less productive and technologically advanced firms may require more investment in order to comply with regulations, and may even have to drop out of the market if they are unable to adapt to changing conditions. In a competitive market, such entry and exit should lead to a swift reallocation of capital and sustain overall industry productivity.
It is therefore essential for policy-makers to support market competition. In particular, the design of environmental policies should as far as possible guarantee a level-playing field among competitors.
This brings us back to our recipe: which are the key ingredients for a “growing green cake”?
First and foremost, OECD argues, legislators shall ensure that the burdens imposed on competition by new policies are minimised and do not inhibit the entry of new and potentially cleaner firms and technologies. As highlighted in the report, countries such as Canada, New Zealand and Israel could further reduce the high administrative costs imposed on new entrants and facilitate access to environmental licences. In the same vein, instruments that favour incumbents, such as subsidies based on past performance, may put young firms at a disadvantage and impede market entry.
But the report also provides encouraging examples. In many countries, green policies and economic wellbeing go already hand in hand. The Netherlands, Switzerland and Austria, for instance, have implemented relatively stringent environmental policies that remain competition-friendly. For this, they have set measures to facilitate market access for new entrants, minimize red-tape and provide fair and equal conditions to all market players. These successful case studies can inspire policy-makers in OECD countries and beyond when designing green policies or revising existing ones.
Of course, the priority of environmental policies is to secure long-term sustainability. However, if the right conditions are put in place, greening the economy while upholding today’s growth trends could become a piece of cake.
The Porter Hypothesis at 20: Can Environmental Regulation Enhance Innovation and Competitiveness? by Ambec et al. in the Review of Environmental Economics and Policy
Today’s post is from Erik Solheim, Chair of the OECD Development Assistance Committee (DAC)
The donor countries representing well above 90% of all global development aid agreed in the Development Assistance Committee of the OECD on December 16 on a set of measures to modernize official development assistance, ODA. We will build on the historic success of aid and make it fit for the future. The goal is to provide more and better aid and support the global process of financing the post-2015 sustainable development goals.
The huge development progress over the past decades has made the world a better place to live than at any other point in human history. Extreme poverty, child mortality and malaria have been halved. The majority of people on the planet are better educated and live longer and healthier lives than ever before. But progress has been uneven. Development in states at war and in the poorest nations has been much slower. Conflict has even reversed development in some nations by 20-30 years. Extreme poverty will increasingly be found in weak states and in vulnerable groups such as indigenous communities, small scale farmers, ethnic and religious minorities, and the disabled. The majority of the very poor are women and they are living in rural areas. Global economic growth alone will not get all these people out of poverty. Specific policies targeting the most vulnerable groups and directing more resources to the least developed countries will be required to end poverty.
This is why the Development Assistance Committee has agreed to provide more development assistance to the least developed countries and other nations most in need, including small island states, land-locked countries and fragile states and nations in conflict. Those who have committed have reconfirmed the UN targets of 0.7% of national income for development assistance and at least 0.15% for the least developed countries. New agreed rules for concessional loans will give the poorest nations better access to this important source of development finance. The Development Assistance Committee agreed to modernise the reporting of concessional loans to encourage more resources on softer terms to the poorest nations while putting in place safeguards to ensure debt sustainability. The result of all this will be more and better development assistance to the poorest nations. More grants for schools and hospitals. More loans for railways, manufacturing plants and clean energy.
Development assistance is an important source of external funds for the least developed countries. But the big drivers of global development are private finances and domestic resources. Development assistance reached a record high of $135 billion last year, but foreign direct investments are almost 5 times greater. By far the biggest share of the money spent on education in the developing world comes from domestic resources. A three letter word for development is “tax”. A 1% increase in developing country tax revenues would mobilise twice as much for health, education and roads as total development assistance.
But development assistance can have a big impact on global sustainable development if used smarter to mobilize more private investments and domestic resources. $20 trillion will be invested annually across the world in the coming decades. More of this should be directed to green growth and development.
As our contributions to the global process of financing sustainable development, the OECD Development Assistance Committee will continue to develop new statistical measures to account for and mobilise more private finances. A new statistical tool measuring total official support for sustainable development will complement, not replace, official development assistance data. The purpose is to use public funds to mobilise more of those $20 trillion for green growth and development by making better use of the available financial instruments such as guarantees and equity investments. This work will be refined leading up to the third international conference on financing for development in Addis Ababa. We encourage all nations, private sector and civil society organization to work with us.
Better rules for development assistance are only relevant if it reduces poverty and has a real impact on the life of real people. More and better development assistance will help us towards eradication of extreme poverty by 2030. Our new broader measure is an additional contribution to the UN led process of shaping the sustainable development agenda and ending poverty while protecting the planet.
In preparation for the 2015 Global Forum on Development, which will focus on how access to financing can contribute to inclusive social and economic development, the OECD Development Centre, United Nations Capital Development Fund (UNCDF) and the Better than Cash Alliance have developed a series of articles exploring the key issues and dimensions of financial inclusion. Today’s post by James Eberlein of the OECD Development Centre and Kameshnee Naidoo of UNCDF provides an overview of the Financial Access Landscape and the usage of financial services by consumers in Myanmar. These findings are some of the highlights from the recent “Making Access Possible” (MAP) diagnostic undertaken in Myanmar and draws on the OECD’s Multi-dimensional Country Review of Myanmar.
U Chit Po is 49 years old and runs a grocery store in Myanmar. He is responsible for his wife and two children. He recently had a major health scare and consequently would like to retire soon. U Chit Po has no medical coverage, as there is no license for the health insurance market in Myanmar. His income consists of profit from his small business and interest on loans to others, which he lends at 20% interest per day. He has never saved in a formal banking institution, but his knowledge about the value and complexities of saving are highly sophisticated. He feels that banks have so much red tape, especially for provisions which he might need to access at short notice, and the interest offered by banks on savings is so little, that it is not worth the hassle.
Like U Chit Po, most adults in Myanmar do not use formal financial services. More than half of all credit in the country is sourced informally, through people like U Chit Po who on-lend their savings as a way of generating additional income. While such local intermediation plays an important role in the local economy, from a public policy perspective it means that such funds are not available for national investment.
Nature of financial services usage in Myanmar
Source: FinScope Myanmar, 2013
For people who do use formal financial services, it is common for such usage to be limited to one service — a phenomenon known as being thinly served. 30% of the total adult population have access to a regulated financial service from a regulated institution, but only 6% have access to more than one (a combination of credit, savings, insurance and payments); this is higher for urban adults than rural, as shown in the figure above.
The development of the rural financial system is particularly critical. Of all the segments of Myanmar’s economy, the rural sector is the most underserved by the formal financial system: only 2.5% of all loans go to this sector, even though it represents 30% of GDP and two-thirds of employment. Improving access to finance in rural areas could catalyse a process of agricultural modernisation and the creation of non-farm jobs, which will be critical for the future.
Thinly-served populations results in adults using ‘inappropriate’ financial services to meet a particular financial need. Like U Chit Po, 31% of the adult population in Myanmar experienced illness within their household or family that resulted in medical expenses. However, in the absence of health insurance, 47% of adults reported using credit, 27% sold assets or reduced expenditure, 22% used their savings and 4% did nothing. In all these responses, adults are forced to rely on wealth-depreciating mechanisms, leaving them more vulnerable to shocks in the future and undermining the productive allocation of resources.
The UNCDF’s Making Access Possible (MAP) programme unpacks the realities of adults like U Chit Po, across various economic groups based on their income profile, to understand the needs of different segments of the population and to position the supply-side response within the current contextual and market challenges. These include a heavy reliance on paper-based banking systems, a rapidly changing political economy and a modernising financial sector that will require new skills and approaches to meet needs on the ground.
MAP targets low-income consumers, as well as small and micro businesses, and hence its application in Myanmar is supporting the Government’s objectives to improve access to financial services, reduce poverty and catalyse jobs and economic activity. The figure below gives an idea of the levels of income and the size of these different groups of consumers that are not being efficiently served.
Target markets for financial inclusion in Myanmar
Source: FinScope Myanmar, 2013
To achieve this, UNCDF, in partnership with the Ministry of Finance, developed a roadmap for financial inclusion. By analysing the various options available, timelines and resources required, it will assist the Ministry in developing policy and setting out its priorities for financial inclusion in the short, medium and long terms, and in attracting development partners to support specific areas of financial or other need.
The roadmap was presented at the ASEAN Financial Inclusion Conference hosted in October by the Ministry of Finance of the Government of the Republic of the Union of Myanmar in Yangon. The event took place in the framework of Myanmar’s contribution as the Chair of the 18th ASEAN Finance Minister’s Meeting and offered a space to develop a collective agenda. It concluded with the Yangon Outcomes for Financial Inclusion, a set of recommendations to accelerate financial inclusion in the ASEAN region.
The Conference was part of UNCDF’s new programme, Shaping Inclusive Finance Transformations (SHIFT) which aims to double financial inclusion in the ASEAN region by 2020, and will focus on interventions at country level while bringing cross-border and regional solutions to problems that cannot be addressed by any single country. It also seeks to take advantage of economies of scale, including training and policy research and advocacy to make financial inclusion a key outcome of the financial integration process.
With the recent changes in government and new investor interest, Myanmar is poised for growth. In its 2015 Economic Outlook for Southeast Asia, China and India, the OECD Development Centre forecasts that Myanmar’s economy will grow by nearly 7.8% over the next five years. This has the potential to move millions of people out of poverty. There is growing evidence that financial inclusion can play a critical role in contributing to equitable growth policies that reduce poverty and inequality.
Given the current level of development of the financial sector in Myanmar, much work needs to be done to further expand access and, importantly, to improve the quality and depth of services offered to those already financially included. Thus the roadmap will provide a structured approach to that that the benefit of economic growth is shared across the poor and marginalised groups.
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