With Romer back to a US-inspired World Bank? (extended)

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.

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[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.

[2] The Economist, “The World Bank hires a famous contrarian”, 18th July 2016.

[3] For history and English explanation, see https://en.wikipedia.org/wiki/Stadtluft_macht_frei.

[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.