Paul M. Romer, mostly known for his seminal
contribution to endogenous growth theory and defender of special zones
(´Charter Cities´), will be the next chief economist of the World Bank. His
nomination last Monday was greeted with overwhelming enthusiasm[1],
especially by academic peers.
With Romer, the
World Bank can strengthen her profile as knowledge bank. That should help to
differentiate the multilateral fauna of development banking. It was Paul Romer
who enriched growth theory by endogenizing ideas and Know How, rather than
treat human capital as an exogenous residual. From his pioneering work it would
follow that open economies grow faster in the longer run if they foster
institutions and a social model that help create and disseminate know how. From
there to Romer´s idea of “Charter
Cities”, new cities in poor countries, is a quick link[2]
as urban agglomerations tend to breed the generation and dissemination of
ideas.
Romer´s “Charter
Cities” are supposed to foster development within poor countries via the
creation of new special zones that are free from corruption and where property
rights are respected. Europe knows what Romer discovered and re-packaged
already since the Middle Ages: Stadtluft
macht frei[3].
Serfs could flee the feudal lands and gain freedom in this way, making cities a
territory outside the feudal system to a certain extent, similar to “Charter
Cities”.
The
developmental role of “Charter Cities” is derived from the experiences of the
former British crown colony Hong Kong and the Chinese special economic zone
Shenzhen. Not only the historical origin of Romer´s concept has a neo-colonial
smell, but also the fact that the poor-country government has largely to give
up control to foreign investors. Honduras tried the concept in 2011 by
modifying the constitution to allow judiciary, police, economics and finance to
be removed from central government in new ´special development zones´. Critics
have pointed to Honduras´ past as a “banana republic” under US corporate
dominance. Rather than becoming
prosperous development poles, special zones or model cities can easily turn
into heavens for tax evasion, money laundering, corruption and sweatshops,
warned the Neue Zürcher Zeitung
already in 2012[4].
I regret that
the World Bank reverses the newly-established tradition to select her chief
economist from an emerging country. With the former and the current chief
economists, the World Bank brought the Chinese and Indian development
economists Justin Yifu Lin and Kaushik Basu to DC. To my knowledge, Professor
Lin was the first chief economist at the bank who did not come from a North
American university[5].
Especially the nomination of Lin had reflected Shifting Wealth, the
recalibration of the world toward the East; not just economic or political, but
also paradigmatic.
I venture the
hypothesis that the choice of a US economist can be explained by multilateral
fragmentation, compatible with Hirschman´s exit-voice dichotomy[6].
The US could not prevent establishment of the AIIB, China´s successful attempt
to exit the US-led multilateral banking system. Capital-rich China is hard to
compete with for the US on the basis of funding alone; but the World Bank may
counter the decline in its relative importance on the basis of Know How. Whatever
the official rhetoric, the choice of Romer will perhaps help restore the old
world of paradigmatic US dominance in development banking.
[1] For a rare criticism, see Norbert Häring, The World Bank on the way back to
the Washington Consensus – with Chicago Boy Paul Romer, 19. Juli 2016. Häring equates the
poster city Hong Kong with an neocolonial inclination of the future World Bank
chief economist.
[4] Peter Gaupp, “Honduras: Entwicklungspol oder Steueroase?”, Neue
Zürcher Zeitung, 4th October 2012.
[5] François Bourguignon came from the Paris
School of Economics but had started his academic career in Ontario, Canada.
[6] Helmut Reisen, “Will the
AIIB and the NDB Help Reform Multilateral Development Banking?”, Global Policy, Volume
6, Issue 3, pages 297–304, September 2015.
