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Services are being disrupted. Then jobs. Next, tax systems

This is an edited excerpt of a speech by Estonian President Kersti Kaljulaid at the St Gallen Symposium on Wednesday. She recounts her country's experience digitalising services and giving everyone a digital ID that eliminates the need to queue at a bank or pick up mail from a post office. She then highlights the way technological development will change jobs and challenge governments' ability to tax income.

As President of Estonia, I represent the world's only digital society which actually has a state - the Estonian digital society of 1.3 million people, our whole population.

We have gone through a societal disruption to make sure that our citizens and businesses have a totally digital environment to deal with both the state and also with their private partners. At no point during this process has Estonia created any cutting-edge technology. Tech-wise, all we use is pretty well tried and tested by other actors, mostly private, in the world. It makes it cheaper and more reliable. Part of it is even open data, namely our e-voting system, so all and sundry can try to hack it if they can - but they have not managed in seven years.

The disruptive innovation from Estonians is thus not technology itself. The innovation lies elsewhere - in the process of bringing businesses and government together to help all people, young and old, to benefit from digital service options available.

Already for 17 years, Estonians have a digital ID and can use this to sign and time-stamp documents such as private contracts, apply for different public services, pay fines and taxes, query the registries, change their services packages and simply send encrypted e-mails.

It took some special effort to get all people in all generations to use it, but through a patient coaching plan called Tiger Leap, this was achieved - including for the older generation, who soon realised the advantages of taking to the PC instead of boarding the bus in order to communicate with, say, the pensions office. Even if the computer was at first more often found in the village library than at home, it was remarkably closer than the office.

Digital ID has been an integral part of all ID cards since 2001. Digital identity is created at birth, automatically and in the background, when a doctor enters the details of a birth into medical records, without the doctor hitting one additional button to undertake this task. Doctors are civil registry managers, but they do not even notice! The parents can then later on, using their own IDs, add a name to the baby with an already created e-identity. They can then start applying for social services and kindergarten places, if they wish, from their maternity hospital room.

A new digital citizen is born.


President Kersti Kaljulaid says governments need to start thinking about how they will replace the current model of a tax river with an intermittent trickle from various streams. PHOTO: REUTERS

Both private and public entities use the same platform, called Crossroads, for safe identification purposes, thus making the number of services available unlimited. Nowadays, some of the services are also open to citizens of other countries, called e-residents.

There is no enforcement to go digital. But as it is simple, cheap and available, everybody has done so by now. As it has to be simple, cheap and work every time, it cannot be too innovative, untried and untested. It demonstrates that for a society with high rates of technological penetration, a system that is not cutting edge may pay off better than having something truly innovative in the hands of a few select people.

You all have experienced this - the lives of millions have been transformed by cheap cars or washing machines, not by deployments to the moon. It is important to keep that in mind when digitalising societies.

NO MORE QUEUEING AT BANK OR POST OFFICE

We save 2 per cent of our gross domestic product by never visiting any public office and we have very few bank offices left in the country. Post offices have been replaced by automatic delivery lockers too. A delivery announcement is routinely an SMS. The laziness of people to go and queue allows businesses to save huge costs by offering digital, automated solutions without facing the risk of losing their client base.

Two per cent of GDP is a huge amount of savings, and it is skewed towards simple people and SMEs, which cannot face high administrative burdens in order to verify the identities of their business partners or communicate with the state and its databases.

Estonia in 2006 graduated into the group of high-income countries in International Monetary Fund tables. We consider ourselves middle income as we compare ourselves to the Nordic countries, but overall, we have done pretty well, having graduated only in 1991 from the Soviet Occupation as a poor nation.

Having explained how a digitally disrupted society works, I will come to the other two questions I see on the horizon which will disrupt our societies through technology implementation.

THE FUTURE OF JOBS

First, on the future of jobs. Industrial-sector jobs are indeed vanishing fast and I hear weird voices saying that we need to therefore pay everybody a sustenance fee and get money for that from taxing robots.

It sounds pretty absurd. I doubt that we would have reaped the full benefits for our societies from the the Industrial Revolution if we had decided to tax tractors and pay a sustenance fee to everyone who lost his job in agriculture!

Of course, that transition was socially painful and costly for a majority of people, but that was because of the lack of education, medical treatment and other social services we offer to people nowadays. It is not so scary for the lower middle class and poor this time, who face the deterioration of industrial employment.

Instead of curbing people's ability to adapt by talking about sustenance fees, we should focus on the ability of modern technology to raise the earning capacity of the society as a whole. We must not take technological development simply as something limited to better industrial processes and therefore to job losses. It is not - it is comprehensive change, it reaches out to every single person.

In fact, many jobs created by technological development are surprisingly neutral to occupation or education. One might call them egalitarian opportunities even. They are not reserved for the wise, well-educated and tech-savvy. Yes, those firms do best by creating tech infrastructure, but some of the quickest-growing companies sell actually strikingly simple services, or services we did not think existed at all.

Think of chatting to each other, in the long version, Facebook; in shorthand, Twitter. Or Uber and AirBnb, which allow people to turn their spare resources into service for others. These are big examples, but versions of small and medium-sized enterprises exist too.

A bookkeeper can work for 10 companies from any end of the world. His market is not global, I admit, as you need to know the laws, but it is bigger than his physical range is - where he goes to work by car, bus or train.

In handicraft - a time-tested career option for people who do not wish to obtain degrees - craftsmen were previously limited in their earning capacity by the ability to drive around local markets or, later, in the 20th century, by the ability to sign distribution contracts with, say, souvenir stands.

Today, I know a guy in Estonia who is South African, who lives in a little county of 8,000 people and produces world-class bows (for archery) and his market is somewhere among the global billions of people, none of them living closer than probably 200km from him.

These examples show how technology enhances earning capacity and lowers provision costs in traditional tasks. In addition, tech use and more free time for larger numbers of people stemming from efficiency gains create new jobs that we do not know of yet. We know of travelling YouTubers (people who travel and take YouTube videos to gain followers), but we don't know what the next job trend might be.

To sum up, job creation will continue beyond the industrial age as it did beyond the agricultural period. The transition should be more tolerable to vulnerable classes of poor and uneducated due to existing social systems and the democratic nature of this transition, which creates opportunities for all social classes.

TAXING THE DIGITAL NOMAD

This brings me to the Alice In Wonderland issue. You remember, when the cat vanished, but the grin just lingered on?

If we talk about disruption to current jobs and working habits, we need to test whether our governance models will sustain through these disruptions. Or will our tax base - let's take a simple example, social tax base - simply vanish together with industrial jobs? If we do not believe that the grin stays on without the cat, we need to assume that the social security model built on the industrial model of work cannot survive if the industrial model itself is gone. Indeed, new jobs and income-generating methods are free from the constraints of physical location, and are therefore geographically not attributable to any one state; and they are not easy to classify as employer, employee, benefits from assets, et cetera.

Worse, everybody is doing more than one thing, for more than one customer. The economy is much more centred on each individual and his or her creation of added value rather than on enterprises.

Add to this the fact that people do all these varied things intermittently and take long breaks if they can afford it. Working 12 months a year, eight hours per day for 30 years and then retiring is not an option the younger generation wants.

If we offer them societal support to opt in and out, what would be the result? Many people opt out of social security plans in the early years of their career, only to plan to opt back in once they need these services such as medical benefits or putting kids through school. Pension systems are the only ones which do not allow full benefits if you opt in later in your career. But medical, educational and all other systems are 100 per cent vulnerable.

We lose the best part of the tax income from the life-cycle value creation of each individual - the years between 20 and 35, maybe longer, if the need to have and school kids are not there. And they will then later opt in.

It is not sustainable or tolerable for governments.

Governments need to start thinking about how they will replace the current models' tax river - flowing in from the lifetime of careers defined as employee, employer, enterprise, independent worker, renter - with new streams. There will not be a river, rather an intermittent trickle from various streams. They may not be linked with any geographical state at all.

We are hunting down huge companies to make them pay their fair share of tax in every country. Imagine trying to come to terms with every digital job nomad on where they need to pay their taxes. Yet we want them to pay and be somehow connected to our society's social security network. They want it too, but the effort to stay in one place, one job, permanently or with certain allowed gaps in order not to lose benefits simply does not fit their understanding of work and life. We force them out with inflexibility, unless we offer them easy flexible opt-ins.

I have no answer to this disruptive development and on how to come to terms with it, but I see we need to tackle this as quickly as possible.

The ones who go quicker will win. Digital and other nomads will dock only at places which offer them more flexibility in paying taxes and earning benefits.

That's the next societal disruption - changing the perceptions about jobs and social models built upon the old perceptions. The disruption is already happening, but governments all around the world are still grappling with the previous one - the digital disruption to their services model.

As an Estonian, I am relieved we can already concentrate on the new challenge as the old one for us has been solved.

A version of this article appeared in the print edition of The Straits Times on May 06, 2017, with the headline 'Services are being disrupted. Then jobs. Next, tax systems'. Print Edition | Subscribe