When: 19 June 2019
Where: Eurofiling Conference 2019, Frankfurt, Germany
Erkki Liikanen, Chair of the Trustees of the IFRS Foundation, delivered a speech at the Eurofiling Conference 2019 in Frankfurt, discussing whether digitalisation will deliver increased productivity to the global economy and how the IFRS Foundation is undertaking its own digital transformation.
It is a pleasure to be with you today. My name is Erkki Liikanen and I serve as Chairman of the IFRS Foundation Trustees. I and my fellow Trustees are responsible for the governance, strategy and oversight of the International Accounting Standards Board, which sets global IFRS Standards.
By way of background, I served as a European Commissioner from 1995 to 2004, and, during my second mandate I was responsible for determining the EU’s approach to technology and the internet. After this, I became a central banker and spent 14 years as Governor of the Bank of Finland. After stepping down as Governor last year, I became Chairman of the IFRS Foundation Trustees.
This may seem an eclectic mix of roles and responsibilities. However, over time these distinct strands have become more intertwined.
Central bankers are avid readers of IFRS-compliant financial statements produced by banks they supervise. Central bankers also pay a great deal of attention to technology, and its role as a driver of economic growth. And the IFRS Foundation needs to stay abreast of technology and digitalisation, how it is affecting the preparation and consumption of financial information, the accounting challenges of crypto-assets and for the efficiency and effectiveness of its own internal operations.
So, everything is now interrelated, or perhaps interdependent. This is what I would like to talk about today.
Almost everything we do has a digital dimension to it. Indeed, increasingly it is digital only. This presents both opportunities and challenges to policymakers around the world.
When I became central bank governor in 2004, globalisation was one of the main factors contributing to economic growth. At that time, the working assumption was one of ever-closer economic integration, the dismantling of barriers to trade and a reduction in friction for cross-border economic transactions. Except for the period of the financial crisis, this globalisation dividend has helped the world economy to grow at a reasonable rate, benefiting both advanced and emerging economies alike.
However, the economic growth cycle is now maturing, with various factors that may impede its longevity. Globalisation itself faces some challenges, in part, due to political preferences in the United States and elsewhere. Global growth is softening, threatened by trade policy tensions, Brexit, and slowdowns in the Chinese economy and the Eurozone. How should policymakers ensure that the spoils of globalisation are inclusive and evenly spread—an important consideration when responding to the challenge of populism.
Meanwhile, during the last decade productivity growth rates among mature economies are only about half those of the previous decade.1
This combination of ageing, low productivity growth and threats to globalisation present central bankers with interesting challenges.
An interesting debate taking place in academic circles is whether digitalisation, the process of leveraging technology and digitisation to improve business performance, can take up the slack resulting from the productivity and economic headwinds I described. More specifically, will digitalisation be as important to productivity growth as the earlier break-through technologies?
Once we get standards for digitalisation properly done, when everything can be completed electronically end-to-end, and once data can be shared and accessed with little friction, how will this impact future productivity?
The question is relevant for this audience. The implementation costs of electronic filing and digital reporting are easier to calculate. But what about the productivity benefits?
In economic theory, two schools of thought have emerged. Let’s call them the pessimists and the optimists.
Pessimists, such as Robert Gordon, argue that the benefits of digitalisation are often over-hyped by those he calls ‘techno-optimists’. Such pessimists conclude that the benefits of innovation are mainly in the areas of entertainment and communication, and less likely to deliver material improvements in productivity because the headwinds against growth are too strong.2
Others, such as Tyler Cowen, argue that rich countries have picked most of the ‘low-hanging fruit’ of growth, and because of this the mature economies such as the US have reached a historical technological plateau.3 Added to this pessimistic view is Robert Solow’s often-cited ‘productivity paradox’, that ‘you can see the computer age everywhere, except in the productivity statistics’.
On the other side of the argument are the optimists.
For example, Erik Brynjolfsson argues that technological innovation may not drive productivity, but the complementary business processes and human capital that it empowers has the potential to do so—creating the need for greater efforts to update skills, organisations and institutions to realise those benefits.4
Consistent with this optimistic view is Joel Mokyr, who argues that history is not always the best guide to the future—‘we ain’t seen nothin’ yet, the best is still to come’.5 Or, as futurologist Roy Amara put it, we overestimate what technology can accomplish in the short term and underestimate what it can accomplish in the long term.
In his 2019 Yrjö Jahnsson lecture, Daron Acemoglu offers some middle ground.6 He argues that various factors are acting as bottlenecks to realising productivity gains. Not all technological developments progress at the same rate, many organisations are not ready to extract the benefits from these technologies and many institutions, particularly regulatory institutions, also lack preparation. Finally, he argues, a skills shortages lingers because we are preparing students for the technologies of the 21st century with an educational system designed in middle of the 20th century.
Personally speaking, I share Acemoglu’s ‘reasonable optimism’ on this topic. Technology is an important enabler, but it needs to work itself through and the real benefits will only come once the procedures can be fully implemented.
Investors seek diversification and investment opportunities. The digitisation of financial information can help them to achieve these goals. It is important that we continue to work to facilitate cross-border transactions and support transparent, accountable and efficient financial markets in a digital world.
This brings me neatly to the second part of my presentation—what is the IFRS Foundation doing about technology and digitalisation?
As most of you will know, for many years the Foundation has played an important role in the digital reporting space, by providing the IFRS Taxonomy to support the electronic filing and consumption of IFRS compliant financial information. Indeed, many of you here today will have been involved in its development, as part of our Taxonomy development team, by participating in our advisory bodies or by commenting on our proposals. Your past and hopefully future contribution is important to us and very much appreciated. Thank you.
We’re now starting to see regulators around the world fully embrace electronic filing with the IFRS Taxonomy being used in Chile, Peru, Mexico, South Korea, South Africa, Australia and the US. Earlier this month, the European Commission finalised its proposals to require listed companies that prepare consolidated financial statements using IFRS Standards to tag their primary financial statements using the IFRS Taxonomy for financial years starting on or after 1 January 2020. The requirement is part of the European Commission’s move to the European Single Electronic Format, an electronic format for EU annual financial reports introduced to support accessibility and transparency of financial information. This is excellent news in the move toward achieving the full benefits of electronic reporting that will be realised with global adoption of the IFRS Taxonomy.
I also note the US Securities and Exchange Commission’s previous decision to allow the use of the IFRS Taxonomy by non-US companies listed in the United States using financial statements that reflect IFRS Standards. This includes both detailed tagging of both the primary financial statements and the notes to the primary financial statements. The tagged data is now available and used by the IFRS Foundation in empirical research underpinning standard-setting.
These are important steps in building out the institutional infrastructure as highlighted by Acemoglu. Indeed, the IFRS Foundation itself is part of that infrastructure, and we recognise the importance of our role in developing and maintaining a high quality IFRS Taxonomy. The IASB has recently appointed a staff person to lead its technology-related standard-setting work. As part of this work, we will continue to explore how technological developments affect the way financial information is consumed and what this means for our Taxonomy strategy, as well as how technology-related innovations affect our standard-setting process.
At the same time, we will practice what we preach. Therefore, the IFRS Foundation is about to embark on its own digital transformation. During the last Trustees’ meeting, we signed-off a long-term plan for the IFRS Foundation to completely overhaul its technology systems, and with it, a plan to establish a roadmap for the ‘digital experience’ to be offered to stakeholders around the world.
Consistent with Brynjolfsson’s observations, we call this a ‘business process and technology’ programme, recognising that benefits come not just from technology, but also come from rethinking our business processes to deliver enhanced value to our stakeholders around the world. It’s a three-year programme of investment, but we’re excited about its potential. Recognising the importance of this initiative, we have formed a permanent Trustee subcommittee on technology to oversee the programme.
1Conference Board (2019), “Global Productivity Growth Remains Weak, Extending Slowing Trend”, www.conference-board.org
2Gordon (2016), ‘The Rise and Fall of American Growth”
3Cowen (2011), “The Great Stagnation”
4Brynjolfsson (2014), “The Second Machine Age”
5Mokyr (2018), “A Culture of Growth”
6Acemoglu (2019), www.yjs.fi