The World Bank on the way back to the Washington Consensus – with Chicago Boy Paul Romer

On Monday the World Bank made it official that Paul Romer will be the new chief economist. This nomination can be seen as a big step back toward the infamous Washington Consensus, which World Bank and IMF seemed to have left behind. This is true, even though Paul Romer has learned quite well to hide the market fundamentalist and anti-democratic nature of his pet idea – charter cities – behind a veil of compassionate wording.

Romer won significant academic merits with his theory of endogenous growth. He modelled the production of new knowledge within his model rather than letting it drip from sky in convenient increments, as growth theory had done before. At first sight, this sounds like a good qualification for the task at hand. However, Romer has admitted in an interview that it is of rather little use for development economics, because it fails to discriminate between the production of new knowledge at the knowledge frontier, i.e. in highly developed industrial countries, and the adaption of knowledge, which is of particular importance for catch-up processes in poor countries. Still is honors him, that he knows and talks about the limits of his theory.

However, his focus has been on something only loosely related to endogenous growth theory in the last seven years, anyway. Since about 2009 he has been promoting so-called charter cities as a model for development. This earned him newspaper notoriety, but also a fair share of criticism. His proposal amounts to declaring enlightened colonialism to be the best (or even only) way toward development of poor countries, and a good substitute to development aid. I suspect this is the reason, why Romer did not mention the charged word charter cities in his text about the nomination, even though he does talk about his role in the Urbanisation Project of Stern School, where he heads the project on charter cities.

In his reporting on Romer’s nomination, the Washington correspondent of Neue Züricher Zeitung, Martin Lanz, claims that Romer distanced himself over time from the libertarian ideas, which he inhaled as a doctoral student at the University of Chicago. However, his pet idea is only a tad less libertarian than homesteading phantasies of floating cities in international waters, of hedge fund billionaires like Peter Thiel who cannot stand the idea that they should be forced to live in a community with ordinary citizens and pay taxes for things they don’t care for. Even so, Lanz is amoung the rather few journalists who do not fail to notice and mention the colonialist spirit of Romer’s idea. He recommends that the World Bank, being already suspected of colonialist tendencies should not put too much stock in this idea, an advice that World Bank President Jim Yong Kim heeded in his public remarks on the nomination. He avoids the use of the expression charter cities, even though the idea is recognizable between the lines.

The name goes back to cities in the US who have availed themselves of the right that exists in some states to incorporate under their own statutes, independent from the laws that elsewhere govern the rights and responsibilities of city management.

Romer has in mind a version of the Hong Kong case, without the coercion. His cities are supposed to be extreme forms of free enterprise zones which some developing countries, including China, have been experimenting with for quite a while. The idea of the latter is to attract foreign investors by exempting them from certain regulations, duties etc. His charters cities go further. They build on the wholesale abrogation of all laws of the respective country. For countries with dysfunctional public institutions he suggested that they lease out the regions, where these charter cities are to be build, long-term to a consortium of enlightend industrial countries, which would do the management. What the British extracted at gunpoint from China, developing countries are expected to give voluntarily today. A World Bank manager commented on the idea in 2010 on the blog of the World Bank by quoting a magazine article, which called it “not only neo-medieval, but also neo-colonial”.

The libertarian spirit of the idea of the man who will be the World Bank’s chief economist from September reminds of the Washington Consensus that ruled into the 1990s. This is a name for the ideological position, enforced by World Bank and IMF, that the best and only way to development is the scrapping of government regulation and giving companies a maximum of freedom to go about their business. After the Washington Consensus evaporated during the Asian crisis and the dotcom-, Enron and similar upheavals, with Joseph Stiglitz one of the sharpest critics of the Washington Consensus held the office of chief economist. There was also the Chinese Justin Yifu Lin, a proponent of sector-specific industrialization planned and promoted by government.

There have not been too many takers of Romer’s idea so far. In Madagascar the government planned to introduce charter cities, but was ousted by an unexited populace before it could act on it. In Honduras, where the military installed a right-leaning government after a coup in 2009, the government changed the constitution to make charter cities possible. Romer was chosen as president of a transparency committee. The constitutional court declared the plans to be unconstitutional, since the laws of Honduras would not be valid in these regions. The government deposed the judges which had ruled against and put the plans back on the table. Romer withdrew and is not involved any more. Some household names of the republican establishment of the US are involved, though.

Romer’s disgust about what the regime in Honduras has made of his idea seems honest. He seems to be a much more moral person than earlier Chicago Boys like Milton Friedman, who had no qualms about co-operating with a bloody dictatorship in Chile. Still, Romer does not want to see that it is far from coincidence that his idea is attractive only to autocratic, right-wing regimes. On some level, he knows it, as one can infer from his interview, in which he says that Chinese autocrat Deng Xiaoping used charter-city-like arrangements like Shengzen because he “wanted a way to open the Chinese economy that avoided long argument and contention about what types of change to pursue and how to pursue them.”

Romer has learned quite well to hide the anti-democratic nature of his idea, maybe even from himself. He stresses that charter cities should be created on a clean slate, such that nobody would be forced to change their ways.

 “With a Startup City, you can propose something entirely new and let people choose whether they want to live under its rules, as embodied in its charter, the document that specifies its founding principles. People who want to try the reform can go there, and people who don’t, they don’t have to. With a startup, you can have reform without coercion.”

No-coercion is one key word, reform the other. In Europe, where decision makers are making excessive use of the words reform and structural reform, we have learned what this vague term means. It is used to hide the unpopular demand to shrink the government and to dismantle worker protections. Who would mind, if it works and it is voluntary, Romer would ask? If people don’t like it, they will not go into those new cities and they will fail.

This is pure window-dressing. The coercion is there, it is just depersonalized and farmed out to the market’s forces. Almost all developing countries suffer from mass unemployment. Jobs will be filled, regardless of the level of worker protection. Those who do not take them, will have even fewer, less attractive and secure jobs to chose from and those will be affected too.

Romer is aware of such spillovers, and he wants them, even though he prefers to talk about emulation of successes, rather than a race to the bottom. He makes it clear that the “reforms”, that are introduced in the charter cities – without the annoying public discussion about which reforms to pursue – are expected to spread to the whole country.

„Here are my two tests for whether a policy is a reform or a concession: Would you be happy if this policy lasts forever? Would you be happy if this policy spread to the entire country? If the answer to both questions is yes, it is a reform.”

World Bank President Jim Yong Kim seems to hope for the same, as he says on occasion of Romer’s nomination:

“We’re most excited about his deep commitment to tackling poverty and inequality and finding innovative solutions that we can take to scale.”

Replace “innovative solutions” by the skillfully avoided term charter cities and the plan is there to be seen.

In the interview, Romer says, that it is about trying out new forms of government. His earlier suggestion of long-term leases to foreign governments is one such form. However, when he is asked to give examples of possible reforms, he only talks about harmless technical stuff, like the management of traffic and energy production, things that do not require special ways of government and the abrogation of normal laws.

Paul Romer has obviously learned from past experience, what is better left unsaid. 

German version


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