The World Bank’s Choice of Chief Economist Will Not Benefit Developing Countries

Paul Romer’s policies seem absolutely blind to the history of development and the advantages European nations derived from the brutal oppression of much of the Third World.

How will new World Bank chief Paul Romer pan out? Credit: Reuters

How will new World Bank chief Paul Romer pan out? Credit: Reuters

Eight years on from the 2008 financial crisis, the world economy is yet to witness any sustainable recovery. Several eminent economists such as Paul Krugman and Larry Summers are beginning to question whether low rates of growth have become the new normal for developed economies, no longer a short-term aberration but quite possibly a worrying long-term trend. In the midst of this anxiety with regards to the future of economic growth, it should come as no surprise that the World Bank has appointed Paul Romer, one of the foremost growth theorists, as chief economist of the World Bank.

Yet while the developed economies might stand to gain from Romer’s insights with respect to growth, the developing world should be extremely wary. Romer believes that a successful policy initiative could involve developing country cities being free from the regulatory burdens and political interference of the domestic political authority, while providing a safe haven for foreign investment and being directly administered by a foreign government. It is hard to argue with those who believe that his ideas smack of an arrogant neo-colonialism. The appointment of Romer as chief economist to the World Bank does not provide one with confidence that the problems of developing economies will be tackled in a meaningful way.

The key to growth

According to early growth theory, the rise in per capita incomes solely depended on technological progress. The key assumption here is that the rate of growth of technology is – in the language of economic modelling – “exogenous” or the same for all countries, implying that technological growth does not depend on the particular state of the economy. Poorer countries can adopt the same technology as their richer counterparts, as long as they do not erect barriers to trade. Poorer countries will grow faster than richer countries initially as they reap the benefits of imported technology, leading to a gradual process of equalisation or “convergence” of incomes over time.

Empirical work refuted the notion of convergence, with a number of studies revealing that the gap between richer and poorer countries widened over time. Paul Romer’s work on growth theory sought to explain this trend. Romer’s innovation lay in conceptualising technological growth as an economic process, and hence making it endogenous, i.e. making it a function of the economic decisions of agents and participants within the model. If technological growth was faster in richer countries as compared to poorer countries, then there would be every reason to expect that the rich country would witness, on average, a faster rate of growth of per capita incomes.

The key factor which leads to growth is the development of new ideas. Romer laid a lot of stress on research and development; countries that can afford a higher investment in R&D would show a faster increase in living standards. Policies that encouraged investment in human capital and the development of scientific knowledge were key. Since the development of new ideas required a sophisticated infrastructure and a scale of investment that only richer countries could provide, it is easy to see why the gap between rich and poor would not easily be bridged.

In the face of slowing growth, the policy choices facing the developed economies are clear. Investment in higher education and scientific progress is essential in order to break the shackles of low growth. The massive inequalities in access to education and the crushing burden of student debt act as constraints to growth. The World Bank’s choice of Romer as chief economist gives us an indication as to their diagnosis of the current economic malaise and the likely solution.

Urbanisation and development

Romer’s most controversial idea relates to urbanisation and the role of cities in development. The growth of many modern economies can be tied to the growth of cities; innovation and growth feed off each other in modern cities simply because successful growth in the past has laid down a suitable infrastructure for the future, and the presence of so many talented and skilled workers in proximity to each other can enable the generation of new ideas.

Yet his policy prescription to achieve this aim is extremely dubious. In order to allow the government to push through the reforms necessary to overcome vested interests, the city would have to be a new one set up from scratch, attracting workers and investors through the judicious use of incentives. Romer goes on to propose that the administration of the city be handed over to a foreign government, much like the case of Hong Kong, administered for a long while by Britain before being absorbed by Chinese control.

To be fair, Romer does not believe in a corporate city. The city would require strict guidelines for proper democratic decision making and transparency. Yet there is something profoundly disturbing in a development idea that proposes control over the administration of a city to be handed over to a foreign entity, outside the ambit of the democratically elected national authority’s control.

While it cannot be denied that cities did play an important role in the development of many modern economies, it does not stand to reason that the very same model of development is appropriate today. Much of the problem with countries like India is the lopsided nature of growth, where it is only cities that display rapid growth, leading to large-scale migrations from other areas. The increase in urban migration has caused problems such as urban squalor, slums, over-crowding as well as conflict between migrants and nativist political parties. All these concerns do not find expression in Romer’s proposals.

Romer’s way out is to create a number of such cities, to experiment with reforms in different cities so that the appropriate one could be implemented on a larger scale across the country. Notwithstanding the problems in treating questions of political process as a randomised trial, the specific context of developing economies like India raise profound concerns with such a move. Would the process of land acquisition to set up these new cities be completely fair?  

Romer’s vision consists of cities competing with each other to attract workers, with migrants “voting with their feet” in order to choose the best place to live. The fact is that India already faces a massive surplus of mobile labour set loose by the stagnating agricultural sector, for whom mobility is a compulsion, not an act of choice. There is no incentive for profit-oriented businesses to “compete” for their attention, simply because surplus labour in India has no other place to go.

Growth versus development

The central problem is Romer’s idea of the differences between growth and development. In his own words, growth can be conceptualised as a question of how to advance the technological frontier, while development is about reaching that frontier. This is flawed on two fronts. Firstly, it implies that certain questions relating to development – such as inequality – is only the preserve of developing economies and not that of the developed world. The political effects of sustained inequality in the developed world are worryingly evident to all.

Secondly, it propagates the notion that all developing economies need to do to better their lot is to import the best practises of the frontier and merely adapt them to the local context. In identifying the technological frontier with the developed world, Romer seems to believe that administering an economy with the political institutions of an advanced nation is bound to aid growth because it allows the developing economy to advance towards the “frontier”, however hazy a concept it is when taken outside of the strict frame of technological advance. Such a conception might work when it comes to the production of goods, but not with the institutional and political frameworks within which actual economies operate.

This is a teleological view of development, which believes the ends – standards of living in the developed world – justify the means – a neo-colonial model of development. While there is no denying that the developed world holds lessons for the developing economies to emulate, Romer’s policies seem absolutely blind to the history of development and the advantages European nations derived from the brutal oppression of much of the Third World. The pressing question of whether democracy and national sovereignty should be sacrificed on the altar of economic growth is never debated here, and it is extremely worrying to see the World Bank – an institution of considerable economic, financial and political power – place their trust in a technocrat who has no reservations on the question. Given the extensive role that the World Bank plays in setting the agenda of development and its impact on policy for many of the world’s poorer nations, it is impossible to expect that the appointment of Paul Romer would represent a step in the right direction of solving the word’s economic problems.  

The author is an Assistant Professor of Economics at St Xavier’s College, Mumbai.