a fine balance - the economist · a fine balance: regulations and the societal benefits of...

A fine balance: Regulations and the societal benefits of disruptive technologies

A FINE BALANCE: Regulations and the societal benefits of disruptive technologies

1 A fine balance: Regulations and the societal benefits of disruptive technologies

© The Economist Intelligence Unit Limited 2019

About the research and acknowledgements

A fine balance: Regulations and the societal benefits of disruptive technologies is a report written by the Economist Intelligence Unit and sponsored by Philip Morris International. Through the lens of two case studies on e-scooters and blockchain and rural finance, the report explores the struggles of regulating new technologies that have upsides for society but also present a range of risks.

Insight into the subject was provided by several experts in the field. We would like to thank the following individuals, listed alphabetically by surname, for their time:

• Chris Riddell, futurist commentator, speaker andconsultant

• Kai Riemer, professor of information technologyand organisation, University of Sydney

• Justin Rose, managing director and partner,Boston Consulting Group

• John Rossant, founder and chairperson,New Cities Foundation

• Emma Weston, cofounder and chief executive,AgriDigital

2



Introduction

Disruption has become the business buzzword of the decade. It can often have negative connotations. But the reality is, it perfectly encapsulates the speed, breadth and progress that technology and science can bring about for players in any industry.

In today’s business world, many successful companies that don’t keep pace with the latest technological and scientific advancements run the risk of failure. On the other hand, those that harness innovation can respond better to customer needs and are more likely to thrive.

Take the example of the car industry: The combustion engine was revolutionary in the 1850s. In the 2020s, electric and hybrid power will all but consign it to the history books. In a similar fashion, a company like Philip Morris International (PMI) is evolving into a science and technology-driven enterprise, focused on delivering better alternatives without combustion for its customers.

This is an era of drastic change. The case studies in this paper illustrate the tech disruptors addressing areas of society that are craving the benefits of technological and scientific innovation.

The advances in urban transport and blockchain in rural finance have the potential to prove all the pessimism wrong.

Moira Gilchrist PhD, Vice President Strategic & Scientific Communications



Disruption defined

At its heart, disruption is about solving market problems by creating solutions that are easier, faster and more accessible to new markets. “Disruption typically comes out of a situation where we did things poorly, with a lot of friction getting in the way of getting something done. It’s about reducing the number of steps it takes to do something,” says futurist commentator and consultant Chris Riddell.

Disruption typically comes out of a situation where we did things poorly, with a lot of friction getting in the way of getting something done. It’s about reducing the number of steps it takes to do something

Take the example of paying for a loaf of bread. The old method of payment involved retrieving a wallet, finding the right bank card, sliding it into a machine and entering a pin. The new way? Simply tap a smartphone onto a reader.

Whether it’s a drone delivering a pizza, a new way of getting from A to B or using augmented reality to try a new shade of lipstick, these new or enhanced technologies are disruptive because they render older ones obsolete. The momentum tends to gather quickly, upheaving markets and leaving traditional businesses in their wake. “Everyone wants to be disruptive. Nobody wants to be disrupted. We are seeing large organisations reinventing themselves to make sure that they are not left behind. It’s been one of the biggest trends of 2019,” says Mr Riddell.

Legitimate concerns or unfounded fears?

With automation and artificial intelligence becoming increasingly common, there are legitimate concerns about job security among clerical workers, or those charged with repetitive tasks.

However new jobs are simultaneously being created as a direct result of technology, says Mr Riddell. “Healthcare is the fastest growing industry on the planet earth because of technology. Gaming is also growing at unprecedented rates. These industries are not growing themselves: they are growing because of technology,” he adds.

While there are some real concerns for certain jobs, the overall impact tends to be overestimated, says Kai Riemer, professor of Information Technology and Organisation at the University of Sydney. “It’s quite rare for a technology to come along and do away with an entire profession. What is more likely is that we will invent new tools that will change the way in which certain professionals do their work. And we might need fewer people. But we might also need more people to actually look after the technology,” he says.

He points to the introduction of the personal computer as an example of unfounded fears about job losses. “When it was invented, people thought we didn’t need secretaries or even office workers. But the entire service industry and office work has expanded.”

When it comes to stagnant wages, technology is not necessarily the culprit, say experts. “It’s probably more likely that the institutional environment in which technology is being utilised is the problem,” says Mr Riemer.

The pace of policy

Regulators around the world are scrambling to keep up with the pace of change. Balancing the need for innovation and other societal benefits with concerns around safety

4



and privacy is a difficult task – and it is one that some regulators avoid altogether.

“Governments have historically been focused on trying to ban particular types of technologies and trying to legislate their way out of this,” says Mr Riddell. “Policymakers have been fixated on trying to create regulatory frameworks to ensure that these tech companies in Silicon Valley and Asia aren’t allowed to run rampant. Of course, things can go terrifically wrong. The best example of that is the Facebook and Cambridge Analytica scandal.”

We now subscribe to music as a service. Going back to the record is not an option, and most people would agree that this has changed the industry for the better

The societal benefits

The music industry offers an illustration of the societal benefits of disruptive technology. “In the old days, we had a music industry that revolved around producing, selling and owning records. The entire industry was built on the record as the product, which means it was an ownership model,” explains Mr Riemer.

The idea of owning an artist and the rights to their music has been turned on its head.

“We now subscribe to music as a service. Going back to the record is not an option, and most people would agree that this has changed the industry for the better.”

However, Mr Riemal points out that ‘better’ is subjective, and that disruption will always produce winners and losers. What is important, he says, is whether society benefits.

“If you look at the worries around piracy and music sharing; that by getting rid of the ownership model we were entering into a cultural dark age – it has not eventuated.”



E-scooters and urban transport

Motorised scooters are older than traffic lights, having been invented more than a century ago. But it wasn’t until a Los Angeles start-up launched a shared, dockless electric scooter scheme that their popularity began to soar. “What is truly new and driving massive adoption is the concept of shared and dockless scooters – which has dramatically lowered the cost of usage and made them ubiquitously available to a wide range of people,” says Justin Rose, managing director and partner at Boston Consulting Group.

What is truly new and driving massive adoption is the concept of shared and dockless scooters – which has dramatically loweredthe cost of usage and made themubiquitously available to a widerange of people

Within six months of its launch, the start-up Bird became the fastest company in history to reach a valuation of US$1 billion. Although it now has a host of competitors, it remains a global leader and deploys a fleet of tens of thousands.

E-scooter share services exist in more than a hundredcities, with the biggest growth markets in Europe andthe United States. Last year, 84 million trips were takenusing a shared, lightweight vehicle such as a bike, e-bikeor e-scooter in the United States alone. According to areport by the National Association of City TransportationOfficials, that figure is twice the number of trips taken

in 2017. This growing disruptive force to the automobile industry has been dubbed the ‘micro-mobility revolution’.

“Micro-mobility is here to stay. We’re only at the beginning of where this is going,” says John Rossant, founder and chairperson of the NewCities Foundation, a global non-profit network.

Easing vehicular congestion

E-scooters tend to be used for journeys of between oneand three miles long, says Mr Rose. They are thereforecredited as solving the “first mile and last mile problem”created when public transport options are beyond easywalking distance. E-scooters reduce traffic congestionbecause more people use public transport, as even citieswith the best public transport infrastructure still have aproportion of residents who lack a nearby route.

“When e-scooters are used to replace a car trip, that’s obviously directly reducing congestion. However, it often replaces walking. There may be some public health implications down the road from that,” says Mr Rossant.

Environmental impact

Despite being electric, e-scooters have a poor environmental reputation, says Mr Rose. This is due to early generation e-scooters possessing short battery lives and half-lives, which led to estimates of relatively significant emissions from the scooter itself, the electricity and the effort required to service them. “Those days are past. Leading companies like Bird have innovated aggressively around the e-scooter itself and the size of the battery. The result: scooters are now expected to last a year or more and batteries need to be recharged far less frequently. This has reduced the emissions footprint greatly,” says Mr Rose.

6



Pedestrian safety

Like many forms of disruptive technology, the laws around e-scooter use are struggling to keep pace with their growingpopularity. Some countries, such as the United Kingdom,have banned them altogether. The Associated Press reportsthat 11 people have died in electric scooter accidents sinceJanuary 2018. Bird’s director of safety, Paul Steely White,points out that the number of injuries amounts to less than1% of the total number of e-scooter rides worldwide, whilecar accidents kill one million people every year.

This is emerging as the default regulatory mode, which is to have two or three operators in a city. You want a degree of competition, but not a complete Wild West

“A number of accidents and deaths have already been reported. Regulators that delay in establishing safety ordinances and public guidelines risk stoking opposition, which could lead to rules that are more restrictive than necessary,” says Mr Rose.

Discarded and unused scooters

“Many communities and municipalities have viewed shared scooters and bikes as toys — or worse —nuisances. Some of this is due to scooters left on corners and sidewalks, which can block paths for pedestrians and cause unsafe conditions,” says Mr Rose. The motor and durability of the

e-scooter itself must be improved to reduce the numberof damaged or undercharged scooters on roads, as ridersare often forced to abandon their ‘flat’ e-scooter. Butinnovation is overcoming the problem: some companiesrequire users to submit a photo of the vehicle parkedout of the way of footpaths, others pay workers toretrieve them and the first autonomous scooter has beendeveloped to solve this problem.

Regulation

The first e-scooter share schemes were rolled out in San Francisco, Washington DC and Los Angeles without regulatory approval. The backlash from local governments was swift, as authorities were flooded with public complaints. Some cities responded by issuing temporary bans, and a decades-old ban remains in place in the United Kingdom.

“Bird was the pioneer, and it started out like Uber in the sense that Uber unveiled a completely new service. Cities had never seen anything like it. There was no regulation because previously there’d be nothing to regulate,” says Mr Rossant.

Paris has more than 20,000 e-scooters and it previously had an open-door policy to e-scooter share services. However, in June it introduced speed limits, parking rules and restricted the number of operators to three, along with the overall number of e-scooters. “This is emerging as the default regulatory mode, which is to have two or three operators in a city. You want a degree of competition, but not a complete Wild West,” says Mr Rossant.

In September, France’s transport ministry went a step further when it banned electric scooters on sidewalks, along with other regulations. “Municipal facilities in every city have quickly learned that they need to put in regulatory environments that don’t suppress innovation or choice for citizens. But you can’t have a free for all. I think cities are learning from one another,” says Mr Rossant.



PMI’s perspective Harnessing Disruption Through Dialogue

Scientific and technological innovation enable progress, which has enormous potential to improve the world we live in. Today, we are witnessing first hand what happens to society when science and technology move at an ever-increasing pace.

Regulatory bodies across the world are called upon to manage the impact of disruptive transformations on existing standards and norms. This is an extremely challenging task.

For centuries, regulation has followed an input-output type of model: Existing legislation and evidence accumulated over long periods of time have been the starting point to set new rules needed to govern new processes. This is no longer sustainable in a world where the boundaries of what is scientifically and technologically possible are being reshaped every day, and the opportunities and risks are hard to determine with certainty.

It is no surprise, therefore, that regulation in the era of disruption tends to follow the known path and lean toward the status quo. The capacity to continue innovating for the benefit of society is significantly limited when regulation is unable to account for, and adapt to, the pace of scientific and technological progress.

It is critical that regulation is thorough and ensures safety and quality principles during times of disruptive innovation. However, more attention must be paid to those new and unknown features that may initially create concerns yet in the long run have the power to raise the bar and deliver value in a better way.

In any context, the most logical way to deal with uncertainty is to set prejudices aside, ask questions and engage in an honest and transparent dialogue. This is precisely why conversations between all actors of the disruption ecosystem —companies, customers and regulators—are critical to ensure the optimal balance between technology-driven advancements, consumer protection and commercial results.

In the era of disruption, the debate on innovation cannot happen behind closed doors.

8



Blockchain and rural finance

Getting food from farm to plate involves a complex supply chain that can involve hundreds of intermediaries. Different players may wish to cooperate, but are held back by a lack of trust, among other constraints. The emerging technology of blockchain, a distributed ledger technology (DLT), can help create broader and more inclusive agricultural finance markets.

Larger and larger multinationals were taking more of the transaction volume in supply chains, which was squeezing out competition and diversity

It does so by providing access to working capital in a way that is timely and flexible – whereas currently it is difficult to come by for all but the biggest operators. “Larger and larger multinationals were taking more of the transaction volume in supply chains, which was squeezing out competition and diversity,” says Emma Weston, the CEO and co-founder of AgriDigital, the world’s first cloud-based commodity management platform.

Blockchain provides an underlying ledger of transactions that can be recorded and shared across a network of participants, and this allows players from across the supply chain to interact on one platform, thus reducing inefficiencies. “Agriculture is the least digitised industry in the world by a long way,” says Ms Weston. “We couldn’t find good technology for what we required, so we built our own. Our focus was on how we could use emerging technology to solve age-old problems.”

Chained together

Blockchain has the potential to make huge inroads for farmers and small and medium enterprises by making it possible to access asset-backed commodity finance. It will no longer depend upon credit history. Rather the transparency of the underlying asset, and being able to monetise that asset as a commodity, is what will inform the financing decision.

“That level of transparency is important because new investors have confidence, which brings new sources of liquidity into the supply chain,” says Ms Weston. These new sources include non-traditional financing options outside of banks. There are also potentially enormous benefits for those in the developing world, where a significant number of borrowers would not pass traditional credit assessments. “Blockchain is exciting because it can democratise access to finance,” says Ms Weston.

Risks and concerns

Although blockchain emerged a decade ago, its application remains relatively new. There is therefore a lack of trust in the data written onto the ledger.

But perhaps the biggest concern is privacy. “Not all of the privacy solutions that we might expect with a more mature technology are out there yet,” says Weston. However, she is confident that such concerns will be assuaged over time, and draws a comparison with the early days of the internet. “To begin with, [the internet] was not as secure as many users wanted, which is why we built intranets and didn’t disclose too much. Over time, the infrastructure and utility developed and additional features were built. Now we have secure processes and huge financial transactions take place on the internet.”



Another perceived risk relates to payments. Blockchain uses digital currencies as the means of a value exchange. Some – quite rightly – perceive these as volatile. Weston would therefore prefer to see central bank issued currencies in their place.

Regulation

Weston believes that blockchain and its application is so new that it is not yet known how it should be regulated,and that in the case of emerging technologies, this is often discovered through practice. “It’s not unusual for technology to run ahead of regulation. I think that’s a fairly normal state of affairs. I don’t think there’s anything wrong with that,” she says.

It’s not unusual for technology to run ahead of regulation. I think that’s a fairly normal state of affairs. I don’t think there’s anything wrong with that But it is at odds with a tendency among policymakers to create certainty. “I think that the industry needs to take the lead and help regulators – it should be a hand- in-hand kind of relationship. I think that’s how we will get the best commercial outcomes and sufficient protection for users.”

Weston emphasises that legislation should be technology-neutral to avoid stifling innovation.

“Wherever possible, we shouldn’t be seeking to regulate blockchain as such. We should be looking to regulate industries or transactions, irrespective of the technology on which a particular transaction takes place, or the technology that is supporting particular industries.”

Conclusion

The speed with which disruptive technologies are being adopted makes it difficult for regulators to keep pace. However, knee-jerk reactions that result in an outright ban on certain technologies stifles innovation, financial growth and societal benefit. Regulators that instead grapple with complex issues, look elsewhere for success and listen to all stakeholders are far better placed to strike the right balance. This is important because disruption is here to stay, and the pace of change is likely only to hasten.

10A fine balance: Regulations and the societal benefits of disruptive technologies

11



LONDON20 Cabot SquareLondon, E14 4QWUnited KingdomTel: (44.20) 7576 8000Fax: (44.20) 7576 8500Email: [email protected]

NEW YORK750 Third Avenue5th FloorNew York, NY 10017United StatesTel: (1.212) 554 0600Fax: (1.212) 586 1181/2 Email: [email protected]

HONG KONG130112 Taikoo Wan RoadTaikoo ShingHong KongTel: (852) 2585 3888Fax: (852) 2802 7638 Email: [email protected]

While every effort has been taken to verify the accuracy of this information, The Economist Intelligence Unit Ltd. cannot accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in this report. The findings and views expressed in the report do not necessarily reflect the views of the sponsor.

GENEVARue de l’Athénée 321206 GenevaSwitzerlandTel: (41) 22 566 2470Fax: (41) 22 346 93 47Email: [email protected]

DUBAIOffice 1301aAurora TowerDubai Media CityDubaiTel: (971) 4 433 4202Fax: (971) 4 438 0224Email: [email protected]

SINGAPORE8 Cross Street#23-01 Manulife TowerSingapore 048424Tel: (65) 6534 5177Fax: (65) 6534 5077 Email: [email protected]

a fine balance - the economist · a fine balance: regulations and the societal benefits of...

Documents