How Blockchain Could Help Emerging Markets Leap Ahead

How Blockchain Could Help Emerging Markets Leap Ahead
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Much has been made of the potential for blockchain technologies to open up new vistas for business and society. But is there a way for this revolutionary technology to empower the rich and poor alike? We argue that, like previous revolutionary ideas, blockchain has the potential to help developing nations leapfrog more-developed economies.

Leapfrogging — using the lack of existing infrastructure as an opportunity to adopt the most advanced methods — has been a highly effective strategy for developing nations over the last few decades. The most visible example of leapfrogging today is in nations like Kenya and South Africa, which have rolled out near-universal telephone access using 3G networks instead of laying down copper cables, and provided internet access by smartphone rather than with desktop PCs. But it’s not just physical infrastructure that can be leapfrogged.

One of the 20th century’s most celebrated examples of leapfrogging happened in Japan, when the country recovered from the ravages of World War II by embracing sophisticated new manufacturing techniques. Quality control revolutionized Japanese manufacturing in the 1960s and 1970s, even though the concept could not find a foothold in American manufacturing (although it was originally developed by an American, W. Edwards Deming). Quality control became a cornerstone of industry in Japan, reshaping the country’s national brand around companies known for manufacturing excellence, such as Toyota, Canon, and Nikon. European and American companies had to play catch-up for decades.

One of today’s most celebrated examples of leapfrogging is the M-Pesa mobile payment system in Kenya and Tanzania, which lets people bank in their national currency using only their phones, leapfrogging traditional banking practices and creating a mobile banking revolution. This in turn boosted development by allowing relatively poor farmers to reliably send and receive payments at affordable rates, fostering economic growth by lowering transaction costs. Research funded by the Bill & Melinda Gates Foundation has found that mobile money services have lifted 194,000 Kenyans out of poverty, with a particularly large impact in female-headed households.

Simply copying the banking systems of the West, which have been built up over centuries, would not have been as easy or as effective for the people of Kenya and Tanzania. An added benefit is that mobile money services such as M-Pesa are more advanced and sophisticated than those found in many developed economies. It simply made more sense to leapfrog the financial infrastructure of the developed world, rather than support outdated legacy systems.

Where are the opportunities for developing economies to leapfrog now?

India’s Aadhaar biometric ID card system is a great example. It secures transactions by “anchoring” people’s identities, thus facilitating trade. The system assigns a unique 12-digit number to all Indian residents, which is stored in a central database along with biometrics such as fingerprints and iris scans. If someone wants to perform a transaction, such as opening a bank account, they present the card and have their fingerprint or iris scanned. This helps to prove their identity, cutting down on fraud and creating market efficiencies. The system currently serves a billion people. This is by far the largest and most comprehensive adoption of biometrics technology by any government in the world; transactional security is a priority in India. Aadhaar can be used to sign up for new mobile phone service, a process that still requires paper ID in many countries and is frequently subject to fraud.

Transactional security extends beyond biometrics, which only secure the last link in a financial transaction; blockchain could secure the entire transactional process. For developing economies, this security is vital for ordinary people who want to trade. Even better, blockchains can spur local high-tech innovation. The natural decentralization of blockchain means that distance to infrastructure like data centers doesn’t matter. Developing nations can build their own technology hubs, and any code created there would be as secure as services created anywhere else in the world. Everywhere is the same to blockchain, which could support home-grown technology industries in many developing countries.

Blockchains can also address the most pressing needs of developing-world governments: the modernization and digitization of government functions. The current world leader in blockchain adoption is Dubai, and there is much in Dubai’s approach that could be adopted by developing world nations. The Dubai Blockchain Strategy (disclosure: Vinay is the designer) envisions moving all government documents — more than 100 million documents per year — onto a blockchain by 2020, creating a new platform for innovation and huge cost savings.

The approach Dubai is taking to blockchain adoption, with the central government providing services on the blockchain as a way to spur innovation, could be an example for developing countries looking to kick their economic growth into a higher gear by establishing standards of integrity in fundamental systems of trade — particularly where exports require strong evidence about the origins of goods, like coffee or timber.

The Internet of Agreements is our technology vision for trade facilitation, building on core concepts in the blockchain space. We believe that any agreement or transaction can be supported by technology, and our vision is simple: global trade, local regulation, and computers handle the red tape.

Global trade, with local regulation facilitated by technology, works because technology makes the transaction costs manageable. We don’t necessarily need huge unifying platform agreements like the Trans-Pacific Partnership or even the European Economic Area to reduce the paperwork associated with trade and borders — if we have the right technologies. Blockchains default to being open data, which would allow governments and companies to rapidly learn from, test, and evolve new, more efficient best practices for conducting and facilitating trade. In such a future, the transaction costs of economic activity are drastically reduced in much the same way that the internet reduced the transaction costs of publishing and communication, resulting in the explosion of ideas we associate with it today. The usefulness of blockchain has similar promise. Just getting the costs of regulation and compliance down would open world markets and create wealth, but that doesn’t have to mean changing local regulations.

Blockchain has already drawn the attention of the economist Hernando de Soto, who has worked for decades on improving access to the formal economy for the world’s poor. He has commented that the reason poor people don’t have more access to the formal economy is twofold: (1) the record-keeping systems in their developing world countries are unreliable and (2) they won’t give up information about themselves and their transactions because they don’t trust the people they’d be giving it to (i.e., their own governments). “They don’t want to be vulnerable to something that can be used against them,” says de Soto. “And that’s what’s interesting about the tamper-proof blockchain — if you can get the right message about it out there, [people will see] that it’s worthwhile recording yourself.”

Because it was explicitly designed to function in an environment where participants cannot necessarily trust each other, blockchain technology is extremely secure. Records held on a blockchain database are immune to being tampered with by third parties, and can thus be authoritative. Smart contracts can provide automatic and predictable execution, again removing the ability for third parties to subvert agreed-upon processes. The benefits for a developing economy are clear: There’s less potential for fraud and corruption, trade becomes more efficient and less costly, government becomes more effective, and local technology hubs can form to build out the infrastructure and export the knowledge gained.

If M-Pesa and similar services could lift tens of thousands of people out of poverty, imagine what a full-scale transformation built on blockchain might do. It could create hyperefficient government with provably trustworthy infrastructure; new markets and opportunities for citizens to access the formal economy on equal terms; efficiencies of operations that lower prices and improve the quality of goods for all consumers; and a kickstart to high-tech innovation around the world. All the goods flowing in and out of developing world countries could be tagged. For example, safe medication, protected from fraud, could flow in, while properly harvested wood and safely manufactured goods flow out. Educational records, business histories, health care information, and credit ratings could all be made usable the world over, helping those who want to trade or travel to prove their credentials. Anybody who has ever paid too much for a college transcript or tried to clear a shadow on their credit score can see how systems like this would be helpful in our daily lives.

Nations that already have somewhat efficient systems might lack the incentive to adopt blockchain technologies at this time, but the rest of the world may well see an opportunity to innovate on internet time. If they do, the many ways they might leapfrog developed nations are limited only by the imagination of billions of people whose first real access to governance and trade infrastructure will look entirely 21st-century. Those are big dreams, and we should not be surprised if some of the world’s next leading megabrands and global platforms are born far away from the traditional centers of technology development. The future is global, and so is blockchain innovation.

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