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DAVOS 2020: Interconnection of Finance and Environmental Changes in the Digital Era

During the recent decade the global economy has been into a long period of expansion, that can be characterised by an extraordinarily accommodative monetary policy around the world. Central banks have been decreasing interest rates, and pursuing an accommodative policy in a synchronised manner, which resulted in a positive boost to global growth but has not produced the robust demand expected. Yet nowadays approximately 60% of global GDP is driven by consumer spending, therefore it is essential to ensure the global progress of economies.

Cutting interest rates as one of the monetary tools has a potential negative consequence: very high debt in some countries where the capacity of paying it back is low. Moreover, in the search for higher yield, low interest rates stimulate risk taking appetite. If there would be a negative shock, then that could trigger a recession, what tools would be available to respond? Thus, maintaining interest rates at a sufficient level would give the capacity to move them down in case of a need. However, there is so much appetite for very safe liquid assets that people are willing to hold them at an incredibly low interest rates rather than to spend it or invest and even pay to hold it. It's possible to get out of this liquidity trap by reducing people’s uncertainty and to use fiscal policy with regulatory reforms to stimulate the economy as well.  

The outlook for the financial services sector mainly focuses on 2 disruptive forces – digitalisation shift and climate change and sustainability. Both disruptions call for huge investments and change of the business model. While recently consumers were valuing comfort, time convenience and ease of everyday life, now there is a demand for transparency, business social inclusion and environmental influence. In the era of the Fourth Industrial Revolution, ESG investing, which takes company’s environmental, social and governance factors into consideration, is gaining momentum as shareholders demand action, and consequences grow for the companies that fail to adapt.

To reduce this anxiety in society that comes for a very rapid technological change that is displacing workers, came up the need to upscale and reskill them for a different economy of tomorrow. In addition to high-tech skills, specialized interpersonal skills will be in high demand, including skills related to sales, human resources, care and education.

In addition, the issue of tax avoidance has arisen among policy agendas around the world with the initiative of resolving the tax challenges arising from the digitalization of the economy. The initiative is already on track for 2-3 years and is striving to reach international consensus on the matter to avoid double taxation and tax competition.

Digitalisation creates a lot of buzz around building efficient healthcare ecosystem: personalized medicine, transparent and secured data system, entry of disruptive and non-traditional competitors, creation of effective communities’ system and public funding models. So how is it possible to build a more resilient and responsive health system in the next few years? This mission could be achieved by providing inclusiveness to medicine and healthcare services to people who do not have ability to use health services, creating transparent and secure online system with multilayer protection against cyberattacks, educating people on preventable medicine and importance of vaccinations.  As Gong Yingying, Founder and Chairwoman of YiduCloud Technology Co., fairly noted ‘We focus so much on seek care and not on health care’.

Artificial Intelligence (AI) in healthcare has great opportunities but also brings along big challenges: by knowing everything about the person’s mental and physical health together with strong computing power it can hack the human body. On that level the robot knows more about a person than oneself, which could potentially become the arms race.

The Fourth Industrial Revolution besides digitalisation and AI is accompanied by asset tokenization, which facilitates to hold a digital representation of the asset anonymously. The new blockchain technology enables slicing an ownership for a piece of art; a token can represent stable coin for example a dollar, fractalize real estate or any other physical asset. There are already platforms that are essentially marketplaces on two sides, such as in transportation and hospitality.

People are excited with tokenization because things that are now done by lawyers or fiduciaries will move to the simple code. It will become transparent and efficient, but the technology is new, and people rely on machines, not humans. Moreover, there are challenges and risks on the way to digitalized world like pursuing consumer protection and ensuring digital assets are really tied to the representation in the real world by establishing regulations in this industry.

Central Banks are now under pressure to respond to the dramatic developments of cryptocurrencies and improve the efficiency of payment systems. The effects of a Central Banks’ digital currencies on interest rates, financial stability, and security require careful assessment. On top of that, performance, interoperability, scalability, low regulation and security concerns leave Central Banks unconvinced that the technology is mature enough to replace current systems.

Incredibly low interest rates, low economic growth numbers and inflation requires policymakers to be more agile as there is tremendous liquidity in the world that is waiting to be unleashed. Digital disruption and climate changes have created financial sustainability risk as they are already influencing economies, making long-term forecasting quite blurry with lack of certainty. Hence the time has come to upgrade the settled attitude to the living, doing business and environment according to the new context.

February 19th 2020

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