"Competitive private platforms deliver digital financial inclusion faster than state-built systems"

"do not include the full implementation and maintenance cost of a digital government. The costs of cybersecurity, for example, can be substantial—in the United States, some have estimated that the federal government spent at least US$28 billion (0.2 percent of GDP) on cybersecurity in 2016.42 Last, excessive spending can also result from weak procurement procedures and the poor choice of vendors, which can lock countries into specific proprietary and inflexible technologies (Gelb and Clark 2013). Administrative and institutional capacity. Political, institutional, and human capacity constraints could hinder governments’ adoption of technology. Coun- tries with severe institutional constraints will find it difficult to mobilize resources for digital solutions, even if digitalization can generate efficiency gains. Faced with different capacity constraints and data limitations, countries have absorbed new technology at differing paces—many countries have adopted small-scale digital initiatives and few governments have launched a foundational digital program that affects the entire public sector, in part because of capacity constraints or past failures in introducing integrated digital programs (Corydon, Ganesan, and Lundqvist 2016). Country experience also points to a need for high-level political commitment to coordinate prog- ress on digitalization, make a transparent assessment of its effect, and overcome political inertia. Even if 40https://www​.bloomberg​.com/​view/​articles/​2015​-03​-04/​envying​ -estonia​-s​-digital​-government. 41Customer transaction services include payments, applications and registrations, and complaints and resolution. 42The budget watchdog Taxpayers for Common Sense estimates that unclassified federal cyber spending rose from US$7.5 billion in 2007 to US$28 billion in 2016. See http://​www​.taxpayer​.net/​ national​-security/​cyberspending​-database/​. ©International Monetary Fund. Not for Redistribution 65 CHAPTER 2  Digital Government International Monetary Fund | April 2018 digital solutions offer better outcomes, stakeholders who benefited from the status quo may have little incentive for adoption, and could attempt to delay its implementation (Muralidharan, Niehaus, and Sukhtankar 2016). Vested interests whose rents are threatened may also subvert the adoption and limit its effectiveness (Krusell and Rios-Rull 1996; Parente and Prescott 2000). As in other government initia- tives, pursuing digitalization without strong political support could waste resources. Parallel efforts in strengthening fiscal institutions could help. According to a recent study, stronger institutions are positively correlated with better outcomes on digital projects (World Bank 2016). Digitalization of payments should be an integral part of broader efforts to improve public financial management institutions (Cangiano, Gelb, and Goodwin-Groen 2017). In 2016, Mexico used elec- tronic payments for revenues and expenditures as part of its public financial management modernization reforms. In Ghana, the e-Zwich biometric system was used to achieve public financial management objectives to resolve government payroll problems by consolidating salary payments digitally across various ministries and public agencies and strengthening tax administration. International cooperation. Resolving some of these challenges may not be possible for individual gov- ernments and may require multilateral efforts. Dig- ital markets facilitate the mobility of capital, which can enhance productivity but also make it easier for multinational corporations to shift or keep profits offshore in"

"-Groen 2017). In 2016, Mexico used elec- tronic payments for revenues and expenditures as part of its public financial management modernization reforms. In Ghana, the e-Zwich biometric system was used to achieve public financial management objectives to resolve government payroll problems by consolidating salary payments digitally across various ministries and public agencies and strengthening tax administration. International cooperation. Resolving some of these challenges may not be possible for individual gov- ernments and may require multilateral efforts. Dig- ital markets facilitate the mobility of capital, which can enhance productivity but also make it easier for multinational corporations to shift or keep profits offshore in low-tax jurisdictions. This may intensify tax competition and international tax planning. New tax challenges from technology, such as the digital submission of fraudulent VAT refund claims in Europe (OECD 2017b), may each be too small or too difficult for individual tax administrations to tackle, despite the significance of fraud in the aggregate. Thus, there may be room for international efforts to overcome these fraud opportunities. Policy Implications and Conclusions Digitalization can bridge information gaps between governments and economic actors, improving the efficiency of policy and the lives of citizens. Greater information can enable governments to better enforce tax compliance, improve the delivery of public services, ensure participation in the social safety net, and design policies that are more consistent with individual cir- cumstances and behavior. Even if digitalization broadens options for govern- ments to better design and implement policies, how viable these policies are ultimately depends on polit- ical resolve. The challenge is to adopt digital tools to enhance government policies, while mitigating the risks associated with digitalization. This will require action on several fronts: •• A comprehensive reform agenda. Digitalization is not a substitute for administrative capacity, institution building, or structural reform. For example, the case studies in this chapter suggest that although digitalization can help improve tax compliance and the efficiency of social protection spending, its success hinges on the implementation of parallel reforms, that is, an overall reform strategy is needed. In South Africa, the digitalization of tax adminis- tration was accompanied by initiatives to improve tax compliance. In India, reductions in leakages in the distribution of LPG subsidies were achieved not only with digital tools but also with a reform of the pricing mechanism. •• Risk mitigation. Governments will need to address the multiple sources of digital risks. Failure to deal with privacy issues and cybersecurity could compro- mise digitalization efforts. Lack of trust could erode the desire to participate in e-government or under- mine policy objectives. In South Africa and India, lack of attention to privacy issues initially posed some important challenges to the digital programs for social protection. •• Adequate resources. Digitalization will not come without cost. Participation in digital governments requires substantial investments in capacity build- ing and digital infrastructure, as well as resources to finance recurring costs to account for regular maintenance and cybersecurity. Governments need to create fiscal space to undertake these crucial investments. •• International cooperation.  Greater exchange of information across countries can help governments uncover and tax hidden wealth and income, but the success of these exchanges in practice requires international cooperation to ensure enforceabil- ity and security of data exchanges. Furthermore, ©International Monetary Fund. Not for Redistribution 66 FISCAL MONITOR—Capitalizing on Good Times International Monetary Fund | April 2018 the increase in the scale of cross-border activities associated with digitalization may call into question the very architecture of international taxation when it comes to the allocation of taxing rights."