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"How can Kazakhstan make sure it stays up to date on a digital future?" an interview with Professor David De Remer

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How can Kazakhstan make sure it stays up to date on a digital future?

In one of its articles, McKinsey defines digital transformation as “an effort to enable existing business models by integrating advanced technologies”. According to Deloitte Insights, “Digital technologies are accelerators of innovation. They can improve efficiency, power new products and services, enable new business models, and blur the boundaries between industries. Every successful enterprise will one day be a digital enterprise”.
We talked to Assistant Professor of Economics at Nazarbayev University Graduate School of Business David De Remer about such an important topic as digital transformation.

David, could you kindly clarify what “the digital transformation’’ phrase means to you and why it is important?

Digital transformation first came to mean widespread adoption of late 20th and early 21st century technologies like computers, smartphones, digital record-keeping, and online consumption of news, entertainment, and social networking. That transformation is already widespread. Nowadays digital transformation refers more to a newer wave of digital technologies such as artificial intelligence, big data analytics, and blockchain. Innovation will continue to reshape our business processes and relationships over the next decades in ways each of us can not yet fully imagine.
Promoters of new digital technologies will often claim that economic change will be even more rapid than before, but I am not so easily convinced. I am skeptical whenever I hear a techno-optimist say “the old laws of economics will no longer apply” without some specifics to back up such a grandiose claim. Thus far this century, predictions I have read about the pace of job offshoring and automation typically have not materialized. While certainly some specific job functions may be offshored or automated, there remains a role for nuanced local knowledge and human ingenuity. So I am convinced by those who argue that new technologies will more often be complements rather than substitutes for human labor.
Kazakhstan has for a long time recognized the importance of digital transformation. Kazakhstan’s government and various international organizations all see digital transformation as central to Kazakhstan diversifying the economy and reducing reliance on natural resources. Kazakhstan’s resource wealth can go toward providing the public goods necessary to facilitate that transformation. There has clearly been a large emphasis on building technology skills at all stages of the education system and providing digital infrastructure, both urban and rural. There are efforts to encourage entrepreneurship and startups, like Astana Hub, and studying factors that create a suitable ecosystem for entrepreneurship is a key priority of research at NUGSB.
But importantly, a successful digital transformation is not just a matter of generating a large number of people with specific digital skills. One of the first ideas I teach in Full-time MBA (FTMBA) Macroeconomics course is that there are decreasing returns to accumulating any one type of machine or one type of worker. Education is not just accumulating one specific body of knowledge, but more importantly, education is building a foundation for lifelong learning. The world will always change in ways we cannot anticipate and we all need the intellectual flexibility and creativity to respond to those changes. We recognize this goal of lifelong learning at NU in our graduate attributes, but economic development will depend on how widespread lifelong learning is at all ages and all regions of Kazakhstan.
Lifelong learning is surely on the radar of organizations like the OECD who advise Kazakhstan on its development strategy, but an economy that promotes lifelong learning cannot easily be provided in top-down fashion. Students and recent graduates in Kazakhstan are eager in my experience to improve themselves and provide creative work, but their skill acquisition and creativity needs to be rewarded in the labor market here for this to happen. Supporting entrepreneurs is essential, but in a healthy economy, successful private sector firms at all ages need to be able to expand and thrive. None of what I have just described is specific to the digital economy, but these economic ideas remain essential to the success of the digital economy.

David, as an international economist, could you explain how you see “the digital transformation’’ affecting international trade in Kazakhstan?

Trade offers one of the clearest examples of how blockchain technology can benefit society. The example is one that I teach in my FTMBA Elective Global Economics for Managers.
Many would be surprised how much international trade transactions are still reliant on paper documents, and the COVID-19 pandemic laid bare the limitations of paper transactions. The first wave of digital technology I mentioned earlier skipped right over trade transactions. Why? Electronic documents until recently had been too easy to forge, so most laws governing trade transactions today still require paper records. You can transfer exclusive ownership of a paper document by physically passing it along, but the problem of transferring exclusive ownership for digital documents has been solved only more recently with blockchain. So the use of blockchain for trade transactions is a great illustration of how blockchain has uses beyond its much-hyped application to cryptocurrency: blockchain offers global solutions to transferring and verifying ownership of any digital record.
The advantage of blockchain in trade transactions is not just the greater efficiency of digital vs. paper technology, but also the trust and transparency of the distributed ledger. Trust and reputation are critical in trade transactions, because of long lags in shipping from exporter to importer. Of note for firms in Kazakhstan, blockchain creates greater opportunity for smaller or more remote enterprises to establish a verifiable reputation in international trade.
Regarding the importance of trade for Kazakhstan more broadly, international organizations like the World Bank and World Trade Organization have long-stressed the role of integration into global value chains for economic production. Here the numbers show that Kazakhstan is lagging behind similar countries. No one would argue that export diversification is crucial for Kazakhstan, but too much policy aimed at import substitution may run counter to this goal. While countries like Korea who developed successfully out of the middle-income level used some trade protection, they also strategically made imported inputs easily available duty-free for firms downstream to compete successfully. China’s Belt and Road, connecting China to Europe, and the digital silk road all offer opportunities for Kazakhstan to be better integrated in the global economy, but Kazakhstan needs to be careful not to be overly self-reliant.

David, please, share with us if you see how digital money affects the banking system, including the long term perspective?

The most interesting macroeconomic policy question of the 2020s will be how Central Banks will enter the space of digital currencies, known as Central Bank Digital Currencies (CBDCs). I discuss this issue in my M.S. Finance Elective Economy Policy in Global Markets and my FTMBA Macroeconomics course.
Private cryptocurrencies by now have achieved widespread adoption as a speculative asset and some limited adoption as a medium of exchange. The explosion of cryptocurrencies has forced Central Banks, including the U.S. Federal Reserve and the National Bank of Kazakhstan, to accelerate research into plans to issue digital currencies of their own. Digital payments within the traditional banking system have become faster and more reliable in recent years, but these payments still lack the directness and anonymity of payments in physical currency. Recent digital currency technologies can then be better substitutes for physical currency than current electronic payments.
Many cryptocurrency advocates will claim CBDCs will not succeed, because cryptocurrencies’ value is that their supply cannot arbitrarily be increased by a Central Bank. A counterpoint is that currencies in fixed supply lead to substantial price instability as money demand varies, and we see this today in cryptocurrency price volatility. In contrast, modern Central Banks build a reputation for managing their money supply to achieve price stability, specifically, low and stable inflation rates. While Central Banks are far from perfect at achieving this goal, they are successful by historic standards. On that basis, I expect that Central Bank currency will continue to be the dominant form of currency in the global economy.
The general public also underappreciates the value of Central Banks in providing liquidity to serve as lender of last resort in times of panic to prevent financial collapse. Bitcoin’s October 2008 invention coincided with populist frustration over money creation to support some irresponsible actors in the global financial crisis, but we have historically seen the worst financial crises in countries where Central Banks have no ability to provide liquidity in times of panic. The history of financial crises and macroeconomic stabilization does not support the view that global financial stability would be improved by the world exclusively transacting in a private cryptocurrency of fixed supply.
How exactly Central Banks will enter and regulate the space of digital currencies is crucial, and even small decisions can create large tradeoffs. To illustrate the stakes here, I bring up how Kazakhstan-born American Saule Omarova was horribly tarred as a communist by members of the U.S. Congress when she was nominating a leading bank regulation position. These moments were shared widely on social media in Kazakhstan, but few may understand the motives behind these smears. If a CBDC is widely accessible to the public, it would weaken the traditional banking model of collecting and lending deposits. Omarova was a leading advocate for such a CBDC in her academic research, and surely this led to some powerful opposition
I will watch carefully how CBDCs will progress in the coming years, and I will integrate the latest developments into my courses and my research. Policy decisions about CBDCs will impact whether the US dollar remains the dominant global currency, and how much smaller open economies like Kazakhstan's will continue to transact in their domestic currencies.

In conclusion, we would like to note that both the professor De Remer and the NUGSB are aware of the importance and scale of the changes taking place in the course of the current digital transformation, including in the field of finance, banking, investment management and etc.

To quote Forbes “The era of digital transformation is here for companies of all sizes and types, from Fortune 500s to startups. The term refers to companies leveraging enhanced technology to improve their business capabilities, operational efficiencies and ultimately, their customers’ experiences. If companies approach digital transformation in a structured, timely way, they can gain benefits that could give them an improved competitive advantage”.