The global COVID-19 pandemic has turned the once unthinkable into legislation. Governments are underwriting business and health care, and regulating personal behaviour, in unprecedented ways. The world’s primary multilateral financial institutions – the International Monetary Fund and the World Bank – are being asked to throw away their rulebooks to save the world’s imperiled developing economies.
But when the pandemic passes, a fiscal reckoning in some form will be essential. After all, the bill for the pandemic will one day fall due, and governments will need to be far more certain than they are today that businesses and individuals will be able to pay their fair share of tax. This will occur in a global-governance environment that was already changing radically, owing to the impact of digital technologies.
Long before the pandemic, there was a growing need to rethink global institutions for a world of intangibles. Now, that process is being accelerated, and will soon usher in a period in which the Bretton Woods institutions, the pillars of global governance since World War II, will be judged and most likely reinvented.
The Tax Gap
In late November 2019, a dozen EU member states voted against a proposed rule to force multinational companies to report the profits they earn within each EU country. This modest measure would have enabled European countries to collect revenue from their own citizens’ commercial activity on platforms such as Amazon, Facebook, and Google. The digital giants operate around the world, yet their reported profits are disproportionately concentrated in countries with the lowest corporate-tax rates.
One such tax haven – and one of the countries that opposed the rule change – is Ireland, whose tax policies have helped fuel a global race to the bottom. Half of all corporate taxes paid in the country come from just ten multinationals, and 20-60% of government revenues from corporate taxes are due to “excess,” which the Irish Fiscal Advisory Council defines as “[revenues] beyond what would be projected based on the economy’s underlying performance and historical/international norms.”
In other words, because a lack of governance and coordination utterly distorted the principles of equity and efficiency in tax regimes, Ireland is taxing profits earned elsewhere. And this is but one example of the broader disconnect between digital platforms and their sociopolitical context, which is sure to widen after the COVID-19 crisis has passed and the budgetary reckoning begins.
Digital Coordination
Globally, our digital infrastructure is undergoing a sweeping transformation. Whereas the first wave of Internet expansion featured the proliferation of open networks, we are now in the midst of a digital arms race. The competition between software stacks, data-collection capacities, and digital business models is creating clashes across developed and emerging economies, and within democratic and authoritarian countries alike.
At issue is the core architecture of the digital economy itself. The fundamental dynamics of the current framework are straining global-governance institutions, and demanding that we create a new set of legal, regulatory, and ethical structures. While the natural growth of the Internet and the digital economy appears gradual and evolutionary, we should recognize that we are actually on the cusp of revolutionary change.
Questions about digital governance will be central to how we reconstruct our post-pandemic world. Digital technologies and the coronavirus are both manifestations of an era of under-managed hyper-globalization, and the pandemic threatens to deepen the economic, geopolitical, and technological divide between the United States and China. At the national level, from governments’ ability to raise resources and fund public policies to concerns about privacy, civil liberties, and security, technology-adjacent issues that were rising on the political agenda before the current crisis will demand even more urgent attention now.
After all, governments emerging from the current economic shock will be in dire need of revenue. And after the society-wide lockdown, technologies that have become deeply embedded in our lives more or less overnight will need to be scrutinized. As recent controversies over the videoconferencing service Zoom show, policymakers should take a hard look at issues such as data privacy, surveillance technology, the inequities embedded in algorithms, and the integrity of our information ecosystem.
Clearly, the status quo of an untaxed and largely unregulated platform economy is no longer tenable. As in the immediate aftermath of World War II, the world again faces a yawning gap between the social, economic, and political challenges we face and the design of our governance system. It is therefore time to imagine a new Bretton Woods for the post-pandemic digital era.
Virtual Concentration
The Internet was once defined primarily by an absence of centralization. But now what matters most are concentrations of data and computational capacity. The platform economy, artificial intelligence (AI), the surveillance state, and quantum computing all demand large-scale data sets, and all entrench centralized nodes of influence.
These new capacities are revolutionizing every economic sector that matters, from financial services, media, and public health, to transportation and agriculture. Having been built on top of the new digital infrastructure, computational capacity and AI-driven analytics now power the global economy.
Yet they are also concentrating decision-making and expanding the power of those who control the data. This new reality poses difficult policy challenges, because it produces winner-takes-all economic outcomes, concentrations of influence that circumvent democratic institutions, unanticipated national- and human-security threats, and entirely new geopolitical blocs.
Whereas the industrial economy was dominated by the production, trade, and consumption of tangible goods, the digital economy is built on the production, collection, and protection of information. It operates according to an entirely new system of incentives for production and innovation, and of the capture and distribution of financial gains. More often than not, the source of value lies not in production or exchange, but in intellectual-property rights. Indeed, IP is now the world’s most valuable asset, accounting for 84% of the total value of S&P 500 companies.
This imbalance is reflected in the disconnect between existing financial governance institutions and the real economy. Just as trade agreements governing tangible assets seek to open up foreign markets and achieve economies of scale, the governance of intangibles must focus on IP and data protection. Unfortunately, the current, haphazard approach to governing the digital economy has reinforced geopolitical divides. China, the United States, and the European Union each represent distinct systems with incompatible norms, regulatory regimes, values, and corporate and state interests.
China, for example, built a firewall to protect major tech champions like Baidu, Tencent, and Alibaba, and is now helping them expand their reach globally through its Belt and Road Initiative, even furnishing other authoritarian governments with high-tech tools to help them maintain social and economic control. As Chinese soft power extends to the shipment of medical supplies during the pandemic, we are seeing a convergence of the country’s strategic and digital infrastructure aims. Perhaps the personal protective equipment and other emergency support offered by China to France or Canada will shift those countries’ thinking about how to award 5G contracts.
The US also has aggressively championed its own tech companies – Facebook, Amazon, Google, Netflix, Microsoft, and Apple, in particular – by securing favorable international rules about data sharing and collection, platform governance, and IP (most recently through the US-Mexico-Canada Agreement), while otherwise relying on a laissez-faire regulatory approach. Finally, the EU, which does not have any globally competitive digital tech companies, has been leading on standards and regulation, data-rights regimes, and competition policy, all of which it hopes to export as a mode of global influence and market creation.
Behind these rivalries are concrete issues that demand global governance. We need a forum through which to balance, and ideally reconcile, tensions between freedom of speech and privacy online, and now between privacy protections and the need for surveillance to track the spread of contagious diseases. Other points of contention include the governance of tangible and intangible assets, individual rights and collective protections, and incentives for innovation versus the need for appropriate regulation and adequate taxation.
Outdated and Defunct
The problem is that our current global institutions were built for a different world. When the world’s leaders gathered at Bretton Woods, New Hampshire, in July 1944, they agreed on the design for a global institutional system to stop wars between countries and to regulate the functioning of the tangible economy.
But that system was for a world of borders, industrial production, and the trade of commodities and manufactured goods. The digital world is none of those things. As we emerge from another period of global destabilization, we are similarly in need of a new governance framework.
Looking ahead, one option, of course, is to acknowledge the complexity and technological challenges of regulating the rapidly changing digital sphere and delegate governance to the platforms themselves. This is already beginning to happen with digital payments and online content. Facebook’s Libra initiative and its new content-moderation council, for example, point to a striking degree of corporate self-governance in domains where governments’ jurisdiction was, until recently, unambiguous and unchallenged.
In our view, accepting the trend toward self-governance would be a profound, even dangerous, mistake. The COVID-19 pandemic has shown why public authorities need to have access to accurate and timely data. Only then can they design interventions for the public good and prevent disinformation from worsening an already fraught situation. Despite significant efforts to police medical misinformation during the pandemic, the tech giants’ financial incentives remain misaligned with the public interest.
After all, policing misinformation on digital platforms has never been about stopping individual bad actors, or about individual content-moderation decisions. Rather, it has always been about the design and the financial incentives of the platforms themselves.
A system dominated by a handful of firms in just two countries could never be trusted to protect the global public good. Addressing a structural vulnerability demands governance, not good will. Given the challenges posed by the new digital infrastructure, it is clear that our only option is to create new global governance institutions.
The starting point is straightforward. The international community should hold a conclave to articulate a vision, establish the “rules of the game,” and design an international institutional architecture for a new era. And, unlike in 1944, when the victors of World War II and a few delegations from poorer regions and countries occupied all of the seats at the table, we can hold such discussions in a truly global forum: the G20, whose members account for around 90% of global GDP, 80% of trade, and two-thirds of the world’s population. The aim is not just to create new institutions and processes, but also to repurpose and strengthen existing ones where appropriate, as the current debate over the World Health Organization demonstrates.
What's the Program?
A digital Bretton Woods agenda should include five elements. First, we need a universal declaration on AI, given existing inequalities in access to data and analytic capacities, not to mention the far-reaching potential for misuse. Algorithms are not value-free. The data upon which they rely and the formulae guiding their decisions tend to reflect their designers’ historically and socially conditioned biases.
Fortunately, an ethical framework for algorithms and AI can be universalized in the same way that personal protections have been through the Universal Declaration of Human Rights and other agreements. As the analogy implies, such commitments will not always be upheld in every detail by every country. But it would nonetheless create a global standard. A universal declaration on AI would act as a guide for national and sub-national legislation, as a framework for “naming and shaming” violations, and, ultimately, as a mechanism for applying penalties, following the example of the International Court of Justice.
Beyond the international human-rights regime, there are also analogous commitments to pursue universal health coverage and protections for children. What matters is not the specific model, but the intent behind it. An AI declaration would need to embody a broad-based normative consensus and be signed by as many countries as possible. Here, the recent G7 statement on AI offers a good starting point for holding a more global discussion on the ethos that should underpin transformative technologies in general, and AI in particular.
Second, we need a new forum for diplomatic and global coordination to overcome the geographic balkanization of data governance. The state-centric China zone and the firm-centric US zone are mirror images of each other: in neither case do individuals have sovereignty or control over their personal data. By contrast, the EU’s General Data Protection Regulation offers a higher degree of control to individuals on questions of privacy and the use of their data.
From an international perspective, the biggest problem is that the three zones cannot “talk” to one another. As a result, no tech firm can be truly global, because it has become impossible to comply with the rules of one zone without violating those of the others. The situation is a recipe for dysfunction, rising transaction costs, and lost credibility for firms and governments. Citizens in any given zone will rightly question whether the spaghetti bowl of rules and protocols are really in their interests. And then there’s the question of India, Canada, Japan, Australia, and the vast majority of the world’s countries that are left to make up their own hybrid rules, or to piggyback on one of the three other zones.
Clearly, global diplomacy is in order. Airing mutually incompatible viewpoints and searching for common ground was precisely the point of the original Bretton Woods Conference, where delegates debated exchange rates and global trade, among many other issues. Today, we need to figure out how to strike a balance between the individual, the firm, and the state when it comes to managing data. That process will not be smooth, and the result probably will not look particularly elegant.
But that is the nature of compromise. Power politics and individual personalities certainly will play a role in the outcome. What matters at the end of the day, however, is not whether we have achieved some abstract ideal, but whether we have improved upon a dysfunctional and unsustainable status quo.
It Must Be Global
The third item on a digital Bretton Woods agenda should be a new global regime to address the problem of tax arbitrage by multinationals whose value is derived largely from intangibles. Last July, France decided unilaterally to introduce a 3% tax on digital services, effectively targeting the US tech giants directly. But the OECD, meanwhile, has been developing a multilateral framework that would prevent tax avoidance without openly discriminating against specific firms.
Still, the question of taxation goes beyond revenues. The digital economy is driven by proprietary technology, most of which is created in a few hubs around the world. It is the nature of the innovation economy to privilege first movers, strategic behavior, and economies of agglomeration. As a result, and despite many unknowns about what the future holds, one thing is clear: Absent significant public-policy responses, income and wealth disparities will worsen, both within and between countries.
Because so much IP is generated by multinationals, profits from technological advances will (correctly) accrue to those firms. Though the trend in recent years has been toward consumption-based taxation and away from corporate taxation, the nature of the digital economy suggests that this should be reversed.
The outsize rents of large, powerful, and agile multinational firms have put tax-base erosion and profit shifting squarely on the agenda. But the solutions call for much more cross-border cooperation. At a time when governments worldwide are taking on unprecedented levels of debt to keep their economies functioning amid pandemic lockdowns, every source of revenue counts. We can no longer afford to permit clever arbitrage schemes to leave so much wealth untaxed.
Fourth, and on a related note, we need globally standardized definitions to measure all aspects of the digital and intangible economy. The current national statistical conventions are either not fully harmonized or not functioning at all. Just as the United Nations-based System of National Accounts introduced consistency in key economic statistics starting in 1947, an international convention on statistics for the digital era would provide a similar global public good. It would also form the basis for good research, policymaking, and civic action. As in so many other areas, policy interventions will be only as good as the data permit.
Finally, and more broadly, the world needs a specific institution for policy and regulatory coordination. The current “light-touch” approach to digital regulation has eerie parallels to the regulation of the financial sector in many Western countries before the 2008 financial crisis. That disaster prompted the creation of the Financial Stability Board and other institutions that now strengthen and harmonize banking regulation at the global level.
Drawing on the FSB experience, the Centre for International Governance Innovation has proposed a Digital Stability Board (DSB) to shape global standards, regulations, and policies across the platform economy. This new body could offer advice on best practices, as well as insights about the regulatory and policy actions needed to address vulnerabilities in a timely manner. It could monitor risks arising from new technologies – including their impact on civil society – and develop regulatory and policy interventions to address them. And it could ensure that its efforts complement the work of other institutions, such as the World Trade Organization.
Moreover, the global trade system itself needs new rules to reflect big data and AI, as well as an updated framework with which to assess new technologies’ implications for trade and trade-rule compliance. The COVID-19 pandemic provides an entry point for the DSB, or a similar global policy-coordination body, which could start by focusing on issues related to the health sector and health data.
Proven Models
Together, emerging digital infrastructures have created a new layer of operational capacity within the international system. They have enabled new forms of collective action and seamless communication on a mass global scale. But while these capacities have yielded tremendous benefits – by, for example, empowering new civic movements, improving social and political inclusion, and driving income growth – they have also come with social, political, and economic costs.
Digital platforms have been used to sow distrust and to organize extremist groups. Harmful speech is being both amplified and targeted at vulnerable and suggestible audiences. In the US, such tribalism seemed to lead Republican-leaning areas to discount early warnings of the pandemic, eschewing the necessary measures for limiting its spread. Seemingly cutting-edge algorithms have proven to be plagued by age-old racial, gender, and social biases.
Digital platforms are also fueling political polarization and a deterioration of public discourse. Illiberal and autocratic regimes have harnessed new technologies to undermine democratic institutions and elections, and to stifle speech and political activity. This trend, too, has been accelerated by the pandemic, not least in Hungary, where Prime Minister Viktor Orbán has exploited the crisis to gain near-absolute power indefinitely. Likewise, in the economic sphere, inequality is widening alongside the emergence of new global monopolies, and the pandemic has cast the real-world effects of current disparities of income and wealth into sharp relief.
These developments require unconventional approaches to governance. One silver lining of the pandemic is that it has created space for new ideas, with even longstanding champions of the status quo now advocating for hitherto radical policies such as universal basic income.
The Bretton Woods analogy is not perfect, and the five agenda items described here are neither sufficient nor exhaustive. Unlike in the post-war period, today’s world has no clear victor, consensus on political economy, or strong global yearning for peace and stability after decades of turmoil. Nonetheless, as in that period, there is a clear disconnect between the nature and scale of our challenges and the design and capacity of the existing global-governance regime.
As we emerge from another shock to our global system and barrel down a new path of economic, social, and technological change, we urgently need to update our governance model. As with the post-war industrial economy, we need a Bretton Woods-type model that mitigates the negative implications of the digital revolution and ushers in a new era of shared prosperity and public health.
This article originally appeared in Project Syndicate.
