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International Monetary Fund. Asia and Pacific Dept
Pre-COVID-19, economic policies under “Abenomics” helped ease financial conditions, exit deflation, and raise labor market participation, but fell short on the deep reforms needed to raise productivity and achieve inclusive and sustainable growth. The Japanese economy is now recovering from the pandemic amid strong policy support that has helped to mitigate the downturn. Japan had substantially lower rates of COVID-related infections and deaths than most advanced economies.
Ms. Monique Newiak, Mr. Abdoul A Wane, and Mr. Alex Segura-Ubiergo

Abstract

Governance and corruption issues have taken the center stage in international discussions, especially after the adoption by the IMF in 2018 of a new framework for engagement on governance and corruption. Sound institutions that guarantee integrity in the management of public affairs are critical on the path toward higher and more inclusive growth. Corruption undermines the quality of institutions, weakens the effectiveness of government programs, and compromises social trust in government policies. Indeed, countries around the world that improved their governance systems are reaping a “governance dividend,” and governance-enhancing reformist countries in sub-Saharan Africa include Botswana, Rwanda, and Seychelles. In addition, Liberia, Sierra Leone, and Angola demonstrate that important reforms are possible, including in fragile environments. The importance of good governance has acquired even more importance as countries try to introduce policies to fight the ongoing COVID-19 pandemic. Special attention to governance in an emergency context, including situations associated with conflict, other health crises and natural disasters, is therefore essential. Innovation and new technologies are critical instruments that policymakers can use in their efforts to improve governance and transparency.

Nordine Abidi, Mehdi El Herradi, and Sahra Sakha
The COVID-19 pandemic has resulted in an unprecedented shock to firms with adverse consequences for existing productive capacities. At the same time, digitalization has increasingly been touted as a key pathway for mitigating economic losses from the pandemic, and we expect firms facing digital constraints to be less resilient to supply shocks. This paper uses firm-level data to investigate whether digitally-enabled firms have been able to mitigate economic losses arising from the pandemic better than digitally-constrained firms in the Middle East and Central Asia region using a difference-in-differences approach. Controlling for demand conditions, we find that digitally-enabled firms faced a lower decline in sales by about 4 percentage points during the pandemic compared to digitally-constrained firms, suggesting that digitalization acted as a hedge during the pandemic. Against this backdrop, our results suggest that policymakers need to close the digital gap and accelerate firms’ digital transformation. This will be essential for economies to bounce back from the pandemic, and build the foundations for future resilience.
José Garrido, Ms. Yan Liu, Joseph Sommer, and Juan Sebastián Viancha
This note explores the interactions between new technologies with key areas of commercial law and potential legal changes to respond to new developments in technology and businesses. Inspired by the Bali Fintech Agenda, this note argues that country authorities need to closely examine the adequacy of their legal frameworks to accommodate the use of new technologies and implement necessary legal reform so as to reap the benefits of fintech while mitigating risks. Given the cross-border nature of new technologies, international cooperation among all relevant stakeholders is critical. The note is structured as follows: Section II describes the relations between technology, business, and law, Section III discusses the nature and functions of commercial law; Section IV provides a brief overview of developments in fintech; Section V examines the interaction between technology and commercial law; and Section VI concludes with a preliminary agenda for legal reform to accommodate the use of new technologies.
Parma Bains, Nobuyasu Sugimoto, and Christopher Wilson
BigTech firms are gradually entering the financial sector and becoming important service providers, particularly in emerging markets. BigTechs have entered financial services using platform-based technology to facilitate payments and more recently expanded into other areas, such as lending, asset management, and insurance services. They accumulate data from their nonfinancial and financial activities and draw on consumer data held in different parts of their business (such as via social media). BigTechs are applying new approaches to existing financial services products and services such as underwriting using big data and are also applying machine learning for their key business decisions, such as pricing and risk management across multiple financial sectors. Incumbent financial firms have also increased their reliance on BigTech firms to host core IT systems (for example, cloud-based services, which have the potential to improve efficiency and security). This rapid and significant expansion of BigTechs in financial services and their interconnectedness with financial service firms are potentially creating new channels of systemic risks. To achieve effective implementation and multiple objectives of financial regulation and supervision, a hybrid approach, combining a mix of entity- and activity-based approaches, is needed.
El Bachir Boukherouaa, Mr. Ghiath Shabsigh, Khaled AlAjmi, Jose Deodoro, Aquiles Farias, Ebru S Iskender, Mr. Alin T Mirestean, and Rangachary Ravikumar
This paper discusses the impact of the rapid adoption of artificial intelligence (AI) and machine learning (ML) in the financial sector. It highlights the benefits these technologies bring in terms of financial deepening and efficiency, while raising concerns about its potential in widening the digital divide between advanced and developing economies. The paper advances the discussion on the impact of this technology by distilling and categorizing the unique risks that it could pose to the integrity and stability of the financial system, policy challenges, and potential regulatory approaches. The evolving nature of this technology and its application in finance means that the full extent of its strengths and weaknesses is yet to be fully understood. Given the risk of unexpected pitfalls, countries will need to strengthen prudential oversight.