Why Isn’t The World Bank’s Choice of Chief Economist More Controversial?

By Ingrid Harvold Kvangraven

This week it became clear that the World Bank has chosen Paul Romer as its next Chief Economist. As Chief Economist he’ll have the overall responsibility of the Bank’s research program and be able to shape the developments of the highly influential development institution. Commentators have named the choice of Chief Economist impressive, great, huge news, bold, and forward-thinking. The choice of World Bank Chief Economist rarely garners this much attention – so, why the fuss?

A Contrarian Economist?

Romer is a superstar economist. He has been mentioned as a possibility for a Nobel Prize in Economics and he was once listed among Time’s 25 most influential Americans. Romer was also labeled as a “contrarian” by The Economist earlier this week – because of his critique of the Economics discipline for its mathiness, which he argues ‘lets academic politics masquerade as science’. Although Romer’s claim may very well be valid, he demonstrates a lack of knowledge of history of economic thought in his somewhat ironic choice of examples. Obnoxiously, he dismisses Joan Robinson’s critique of the aggregate production function as ‘academic politics’ and praises Robert Solow’s work as ‘science,’ despite the fact that Paul Samuelson himself acknowledged that Robinson’s side won the debate (see Lavoie and Seccareccia’s blog post in response to Romer’s paper on mathiness). He may be somewhat of a contrarian for dismissing the mathiness of the field, but there is not much evidence of Romer having read much Economics (or other disciplines) beyond what’s placed firmly in the mainstream.

Of course, one would not expect Romer to dismiss the Solow model, which is the foundation for his famous 1990 paper on endogenous technological change. While the Solow growth model lacked an explanation for growth, as technology is exogenous in the model, Romer managed to develop a model to explain growth by introducing the development of new ideas as endogenous. He argues that the spillover effects of a knowledge-based economy will lead to economic development and therefore advocates for investments in human capital and innovation. Despite the model’s seemingly break from the “old” growth theory, many critics have pointed out that it still builds on the same unrealistic assumptions of a one-sector economy, a single-labor market, microfoundations, and identical firms (see more here or here). What’s more, the endogenous growth models lack any account of broader social and economic transformation or country-specific circumstances and are subject to the Cambridge capital critique of aggregate production functions (see Cohen and Harcourt or Isaacson). Despite the many drawbacks of endogenous growth theory, the models have come to underpin a lot of World Bank policies (as pointed out by Ben Fine). Thus, in a sense Romer’s ideas have already influenced the Bank greatly for many years.

A Boon To Development Research?

As is well known, the World Bank has positioned itself as a “knowledge bank” since the 1990s under James Wolfensohn’s presidency, which can be interpreted as an acknowledgement on the part of the Bank that its financial weight might be on the decline.

While the so-called Deaton report, a comprehensive evaluation of World Bank Research led by Angus Deaton in 2006, found that World Bank research methodology is technically flawed, biased and selective, with an excessive focus on cross-country comparisons and cross-country regressions, in 2011 Elisa Van Wayneberge and Ben Fine found that the report had little impact on the methodologies used in World Bank research. Others have accused the World Bank’s research department for producing research with the aim of ‘paradigm maintenance.’ A change of direction in the Bank’s research department is much needed.

Romer has, in fact, provided important methodological critique of development economics, for example in his blog post Botox for Development from last year. In it he criticizes the methodological move in development economics towards micro-oriented and data-driven development that focuses on micro-intervention that make things a little better for poor people, rather than taking a more comprehensive approach to development. Romer would rather see large-scale projects in urban areas, because he believes they this will have a bigger effect on GDP than any micro-intervention.

Romer’s critique is valid in many ways and development economics would benefit from a more diverse set of methodologies. Moreover, although moving away from piecemeal tinkering to more large-scale projects could be a good idea, much would depend on what type of large-scale projects Romer has in mind.

A Neocolonial Approach To Development

Despite having little experience working in and with developing countries, Romer has come up with a grand scheme for spurring growth and development. Building on his work on endogenous technical change, Romer argues that development efforts should be focused on urban areas, where innovation and technological change happens.

Romer argues that developing countries would benefit from creating pockets within urban areas that are administered by a more advanced country, so-called charter cities. The advanced country will develop a small part of the country by introducing good institutions, and the benefits of development will spillover into the rest of the economy. Romer’s ideal example is Hong Kong. Rather than seeing Hong Kong’s signing away to Britain as unjust or humiliating for China, Romer sees it as an intervention that has done much more to reduce poverty than any aid program and at a much lower cost. Therefore, he concludes that the world needs more Hong Kongs.

There are clearly many problems with this approach. First of all, Romer argues that charter cities will be a space to implement rules that are ‘known to work well’ – as if there is already a set of “rules” out there that social scientists agree that ‘work well’. Thereby Romer – as many economists do these days – dismisses the fact that there is disagreement over which institutions foster development and which don’t (see Reinert or Bardhan on institutions). Perhaps more importantly, he suggests that there is one set of rules that can easily be implemented and work anywhere – no matter where. Even William Easterly – a staunch free market proponent – admits that although he believes that free markets work, he has seen again and again that free market reforms often don’t. Thus, rather than being innovative and bold in his approach to development, Romer draws on the age-old development idea of tabula rasa – the blank slate. But the slate is not blank; the institutions within the host country, social, political and legal, will inevitably affect the operations in any charter city.

However, the most controversial element of Romer’s proposal is that a country would gain from giving up sovereignty to a more advanced nation that can better administer its affairs. Yet again this is an age-old idea that dates back to development economics’ colonial origins (it is incidentally also an idea that he shares with the new British Foreign Secretary Boris Johnson who has argued that African countries would be better off if still under colonial rule). This plan has an obvious neo-colonial flavor, as Aditya Chakrabortty recently pointed out. Unsurprisingly, when he tried to implement the plan in Madagascar, there were massive popular uprisings against the President who had agreed to lease a part of Madagascar to a South Korean corporation for 99 years. In Honduras, Romer’s plans were ruled to be unconstitutional.

A Typical Chief – Of The 1990s

Finally, selecting an American with practically no experience working in or with developing countries, as Chief Economist of the World Bank – an institution that works exclusively with developing countries – is a choice that goes against the recent developments in the Bank.

When Justin Lin was selected in 2008, he was the first chief economist from a developing country. Some viewed this as a step towards acknowledgement on the part of the Bank that not all ‘solutions’ to development can be found in the West. In particular, it was an acknowledgement of the developmental success of China – Lin’s home country.

Furthermore, 2012 marked the first time the World Bank selected a President with a development record – President Jim Kim. Kim was also the first President born in a developing country. Of course, as Jim Kim is a naturalized American, his selection is still in keeping with the gentlemen’s agreement that an American leads the World Bank and a European leads the IMF.

In 2012, Kaushik Basu – an Indian with experience as economic advisor to the Government of India – was selected as the successor to Justin Lin. Thus, as Scott Morris, former US Treasury official, suggests in the Financial Times, the selection of Romer is a move back to the pattern of picking ‘American superstar economists’ for the position. In the 1990s this was common practice, a decade where both Joseph Stiglitz and Larry Summers served as Chief Economists of the Bank.

Selecting a Western economist with little development experience and with his most famous prescription for development being fundamentally neo-colonial can hardly be considered an ‘impressive’, ‘great’ or ‘forward-thinking’ choice for an institution claiming to serve developing countries.

Thanks to Mike Isaacson, Maria Dyveke Styve and Daniel Younessi for helpful feedback. All errors are mine.

This blog post was originally published on The New School Economic Review blog.

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