Deliver Your News to the World

Digital Revolutions in Public Finance: Visionaries, Plumbers & Architects

Moscow – WEBWIRE

Remarks by Vitor Gaspar, Director of the IMF’s Fiscal Affairs Department, at the plenary session “Digitalization of Public Finance: International Experience and Domestic Features” during the Moscow Financial Forum “Financial Systems of the 21st Century Competitive Economy: Challenges and Solutions.”

We have examples of successful interactions between policymakers and stakeholders. In Kenya, the money-transfer system M-Pesa originated a revolution in tax policy and administration. It included a web-enabled application for tax administration (the iTax System) and the possibility for taxpayers to pay taxes and access their tax information through their mobile phones (the M-service platform). The book describes these innovations, detailing the critical role of the monetary authorities and the telecommunications regulator in providing an appropriate legal and regulatory framework, and the importance of the modernization efforts of the Kenya Revenue Authority prior to the implementation of the iTax and M-service systems.

Another wonderful example of fruitful interaction between policymakers and stakeholders is documented in a paper by Muralidharan, Niehaus and Suktankar, 2016a (as quoted in Duflo, 2016). The paper analyses the MNGREGS program in India. The program is a demand-based workfare program. It provides up to 100 days of work for rural households.

However, the program was affected by widespread corruption. A careful randomized experiment was carried out to evaluate the effect of biometrically validated payments, through the use of smart cards. [3] They found that leakages in payments were reduced and that delays in payments were shortened. Perhaps more important, the design of the experiment allowed for follow-up work on the effect of the policy on private sector wages.

Muralidharan, Niehaus and Suktankar reached a startling conclusion: by strengthening the effectiveness of the program in putting a lower limit on wages, it so reinforced the market position of the low paid that private sector employers were led to increase the wages they offered – and substantially: 90 percent of the gains accrued to individuals came from this general equilibrium effect.

The book includes a chapter by Susan Lund, Olivia White and Jason Lamb, who estimate that digitizing payments in developing countries can lead to savings between 0.8 and 1.1 percent of GDP, on an annual basis. [4] Of this total about 0.5 percent of GDP corresponds to fiscal savings. The remainder corresponds to estimated gains for enterprises and individuals. The estimates are based on available data for seven countries: Brazil, China, India, Indonesia, Mexico, Nigeria and South Africa.

These seven economies correspond to more than 60 percent of GDP of all developing economies. [5] The range of gains estimated, for this group of seven countries, is substantial. At the extreme we have Nigeria, with potential gains in the range from 1.0 to 1.7 percent of GDP, and South Africa, with 0.2 to 0.4 percent. The pecking order is clear: the more backward a country is in the adoption of digital payments, the higher estimated potential gains. In Nigeria and Indonesia, only 20 to 25 of the volume of transactions associated with government expenditures was digitalized. The proportion was even lower on the revenue side, with only 10 to 15 percent using digital channels.

It is remarkable that these estimates take only into account direct monetary savings. There are other possible benefits associated with increased use of digital payments by individuals and businesses: improving government service delivery; reductions in tax evasion and avoidance and a levelling of the playing field. Nevertheless, as the above experience with workfare in India shows, these indirect, general equilibrium effects, may well be substantially bigger.

This is not to say that digitization can offer a perfect technological solution to fundamental policy and institutional problems. In Digital Revolutions, Ravi Kanbur, cautions against over optimism in viewing technology as a solution for difficulties in targeting public expenditure for poverty reduction. In addition, digitization does not necessarily eliminate constraints brought about by political economy considerations, norms, and existing institutions.

Architects: Design shapes results

Greater access to information and enhanced digital systems and processing capabilities could also open up new options for policymakers. Our book offers some ideas on how the digital revolution might offer scope to rethink the design of tax systems.

Tax systems, which encompass tax policy and revenue administration, are based on the information the tax authority can access. Digital information affords better enforcement of existing rules; while access to richer information sets allows for improvements in the rules themselves. As Bas Jacobs explains in the book, as the available information set expands, policy design options also expand. For example, tax liabilities could be conditioned on not only the taxpayer’s current yearly income, but perhaps even lifetime income and wealth. By conditioning tax schedules on more information, the government can target income redistribution better and potentially in more efficient ways.

Digital systems present new roles for consumers and third parties in facilitating enhanced compliance.

The emerging peer-to-peer (P2P) economy, in which a digital platform intermediates transactions between individual buyers and sellers, has introduced organization and formalization to previously informal and perhaps undocumented activities.

Digitization presents new opportunities, and in the book Aqib Aslam and Alpa Shah argue that digital platforms can act as crucial interlocutors for tax administrations by proving third party information or even acting as agents—by, for example, withholding taxes.

At the same time, if revenue administrations and policymakers approach digital revolutions in a passive way, they may well witness increased erosion of tax bases as individuals and businesses use new possibilities to engage in tax evasion or tax avoidance.

That may be particularly relevant for international taxation, an issue gets close attention in the book. Over recent years, digitization has intensified challenges in international taxation by enabling an increasing number of companies, including many household names, to operate and sell electronically in multiple jurisdictions without having much of a physical presence there.

As discussed in the book’s chapter by Michael Devereux and John Vella, one approach to this problem is to widen the current notion of what it means to be active in a country for tax purposes. A more radical alternative is to change the nature of the corporate tax more profoundly, to impose the tax liability where consumers or shareholders are located, rather than where the business has a production-related presence. In both cases, digital technology is instrumental in implementation.


Digital revolutions in public finance open ample opportunities for countries all around the world. Such revolutions offer the promise of more inclusive societies, benefiting from lower transactions’ costs; more effective provision of public services; and a more transparent and accountable public administration. The possibilities cannot be fully grasped at present. However, technology is not a panacea. It is not an end in itself. It will serve whatever purposes societies choose. Visionaries, architects and plumbers will have to work hand-in-hand with a combination of vision, strategic thinking, political will, attention to detail and capacity to adapt. Although the outcomes of revolutions are inherently hard to predict, our book make clear that the effects of the current and future digital revolutions are likely to be profound.


Duflo, Esther, 2016, 2nd Annual Richard Goode Lecture, The Economist as Plumber: Laying the Pipes, Fixing the Leaks, Washington DC, HQ2 Conference Hall 1, available at

Gupta, Sanjeev, Michael Keen, Alpa Shah and Genevičve Verdier, Forthcoming in 2017, Digital Revolutions in Public Finance, International Monetary Fund (with the support from the Bill and Melinda Gates Foundation).

McKinsey Global Institute, 2016, Digital Finance for All: Powering Inclusive Growth in Emerging Economies, McKinsey Global Institute, Washington, D.C. available at:

Muraliharan, Karthik, Paul Niehaus and Sandip Sukhtankar, 2016a, Building State Capacity: Evidence from Biometric Smartcards in India, American Economic Review, 106 (10): 2895 – 2929.

Muralidharan, Karthik, Paul Niehaus, and Sandip Sukhtankar, 2016b, General Equilibrium Effects of (Improving) Public Employment Programs: Experimental Evidence from India. Working Paper.

Naritomi, Joana, 2015, Consumers as Tax Auditors, Working paper, London School of Economics, London.


[1] I would like to thank Jacqueline Deslauriers, Sanjeev Gupta, Michael Keen, Tigran Poghosyan, Alpa Shah, and Genevičve Verdier for their help with preparation of these remarks.

[2] The free electronic version of the book will be available in PDF format on the IMF’s website in mid-November, courtesy of the Bill & Melinda Gates Foundation. My colleague Sanjeev Gupta has just presented the summary of the book at a G20 event co-organized with the Brookings Institution and hosted by the Argentinian presidency in Buenos Aires.

[3] In India, the government has combined the use of unique biometric identifiers (the Aadhaar program) and financial inclusion for both efficiency and effectiveness in social benefits and to reduce the number of illegitimate beneficiaries under welfare programs. In early 2017, the program had already reached 1.15 billion people. The potential for society and policy is just beginning to be explored. A recent decision of the Indian Supreme Court to recognize a fundamental right to privacy is a reminder, however, that sharing information with government in ways that may, for instance, enable it to collect tax revenue more effectively, can be contentious.

[4] Their work draws on earlier analysis by McKinsey Global Institute (2016).

[5] The authors use their methodology to compute potential gains for individual countries. Then they extrapolate for the group of developing economies, assuming that potential gains are proportional to GDP weights.

( Press Release Image: )


This news content was configured by WebWire editorial staff. Linking is permitted.

News Release Distribution and Press Release Distribution Services Provided by WebWire.