Is the World Bank Group ready to think big again? That’s what many development specialists are hoping following the appointment of Paul Romer, director of the Urbanization Project at New York University’s Stern School of Business, as the development bank’s new chief economist.
Romer, 60, is one of the more original and wide-ranging thinkers in economics today. He came to prominence in the 1980s as a proponent of so-called Endogenous Growth Theory, which holds that economic progress depends not just on capital and labor but on the ideas and knowledge that drive technological change. Classical growth theory had regarded such change as exogenous, a random variable outside the economic system, but Romer contends that public policy in areas like education and research can foster it and lift growth rates.
More recently, Romer has focused on the role of urban areas as fonts of innovation and economic dynamism. He has urged poor countries to consider creating new cities, along the lines of Shenzhen in China, to experiment with economic and political reforms. Given that urbanization has been a key driver of growth in developing economies, he may be pushing on an open door with many World Bank clients.
Romer hasn’t hesitated to take on what he considers the failings of his own profession. “Looting: The Economic Underworld of Bankruptcy for Profit,” a seminal 1993 paper he co-authored with George Akerlof, a University of California, Berkeley, economist who would go on to share the 2001 Nobel Memorial Prize in Economic Sciences (and is married to a certain Janet Yellen), argued that lax regulation and government guarantees can give firms an incentive to go broke at society’s expense. Politicians and economists who pushed for the deregulation of the U.S. savings and loan industry in the 1980s failed to see that those measures were bound to produce looting, it stated.
Intriguingly, for someone who obtained his Ph.D. from the University of Chicago, that bastion of free-market economics, Romer wrote a paper last year criticizing some of the Chicago school’s leading lights — including Robert Lucas, his thesis adviser and a Nobel prize winner — of what he calls mathiness, or combining complex mathematics with loose language to defend existing theories rather than investigating data with rigor and open-mindedness. He tells Institutional Investor that he hopes to use the World Bank’s role as a consumer of academic research to “reject pseudoscientific nonsense that survives in the academic bubble” and help the economics field get “back on track.”
“Paul is a true visionary,” says Maurice Obstfeld, recently appointed chief economist at the bank’s sister agency and Washington neighbor, the International Monetary Fund. “I think his presence on 19th Street is going to enrich the policy conversation.”
Romer takes over this month from Kaushik Basu, an Indian economist who came to the bank via Cornell University. Although he often said he could never see himself working in Washington, Romer hit it off quickly with Jim Yong Kim, the World Bank’s president. Kim called him to the bank’s headquarters for a half-hour interview when he was weighing candidates, and the two men ended up talking for more than two hours.
“Paul said to me that his only concern about coming to the World Bank was whether he could have impact at scale,” Kim says. “The minute I heard that, I decided I would do all I could to recruit him. I’ve spent my whole career wanting to have impact at scale for the poor, and here was one of the greatest minds in the world on economic development theory saying he didn’t want to do anything small.”
Romer arrives at a bank in some turmoil. Although lending continues to grow and Kim has intensified work with key countries, including China and India, many employees never took to Kim, a physician with no formal development background, and still seethe over a restructuring by the president in 2013 and 2014 that forced out several senior executives. After the Obama administration last month nominated Kim for a second term, which would begin July 2017, the bank’s staff association publicly called for a lengthier and more transparent search process to end a “crisis of leadership” at the bank. The nomination period closes on September 14, though, and all signs suggest that Kim will easily win a second term and perpetuate U.S. control of the presidency.
He certainly has Romer’s vote. In a post on his website titled “Why It Makes Sense for an M.D. to Lead the World Bank,” Romer said that doctors, unlike economists, act quickly because they know delay can be deadly. He applauded Kim for seeking to transform the bank “into the type of impatient organization that forces decisions, refuses to settle for modest success, and shuts things down without concern for the feelings of insiders.”
Like his boss, Romer is not afraid of bruising egos. Life at the World Bank is about to get very interesting.