23/07/2016 11:03 AM IST | Updated 29/07/2016 8:53 AM IST

Can The Bold Ideas Of The World Bank's New Chief Economist Save The Global Economy?

The global economy is passing through a tumultuous phase -- growth has been tepid and there are rumblings of an impending global downturn.

China, the poster child for expeditious development, is in a complex transitional stage, changing the gears of growth from a focus on manufacturing to services. The growth figures of the red dragon have been plummeting because of the transition, barring a marginal increase in the last quarter.

Multiple factors -- low commodity prices, weak global demand, and low exports -- are making global growth more challenging, and emerging as well as developing economies are struggling to deliver higher employment and better living standards. This apart, the target of decreasing debt levels remains elusive for the majority. And then of course there has been the volatility of the Brexit vote, which was a jolt to globalization and happened at a time when capitalism badly needs a revamp against neo-liberalism and arrogant nationalism.

Will Paul Romer finally change the status quo? Will he be able to bring radical changes in the development concepts of the World Bank?

But there may be a silver lining in the form of freethinking economist extraordinaire Paul Romer, the new chief economist of the World Bank. He is assuming this position at a crucial juncture, when emerging economies are expressing serious concerns over the relevance of institutions like the World Bank. Economists such as Joseph Stiglitz have also been lamenting for years that the Bretton Woods twins -- the IMF (International Monetary Fund) and World Bank – do not have the necessary competencies to ensure equality in growth.

Stiglitz, a Nobel-winning professor at Columbia University, was an outspoken chief economist at World Bank in the late 90s who had to resign before the completion of his tenure because of ideological differences with the management on the growing divide between the rich and the poor. Throughout his tenure, Stiglitz strongly advocated for the democratization of growth which was missing in the practical versions of growth theories implemented by the financial watchdogs.

So, will Paul Romer finally change the status quo? Will he be able to bring radical changes in the development concepts of the World Bank? Many commentators are hopeful that he will help usher in a new era for the global economy. Romer, who is known for his work on the endogenous growth theory, has demonstrated a deep interest in tackling poverty and inequality by giving more importance to investments in human capital, innovation, and knowledge.

But, what thrills me most of all is his brilliant idea of "Charter Cities". The concept is best introduced in Romer's own words:

"The two most interesting precedents for Charter Cities are Hong Kong and Shenzhen... They each played important roles in fostering reform of the Chinese economy. But it is an approach that can be used in any country that wants to implement reforms, even a developed country like the United States. It turns out that this is a unique time in human history when it is possible to start many new cities because there is an enormous, unmet demand for city life."

What Romer is visualizing is a startup city of sorts -- where a government will start a new city (it has to be a large one) where the rules and regulations will be managed by the city's authorities. There will be a document – a charter -- that describes the founding principles of the city. The advantage here is that the authorities can freely experiment with new economic reforms without too many complications, and in a manner that will not affect the existing ecosystem. The people don't feel that change is being imposed on them. Those who are ready to accept the principles can come and live in the city and those who disagree with the reforms there can opt out.

The revolutionary aspect here is about executing reforms. In Romer's words, "real reforms". He thinks that most of the so-called reforms in today's context are mere concessions. He makes this clear:

"It should be a Reform Zone, not a Concession Zone. Most zones are created to offer concessions to firms, not to implement reforms. The goal of a Charter City is reform, not giving out concessions, so in this sense, the motivation for a Charter City is totally different from the motivation behind most special zones.

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. If not, it is almost surely a concession, a gift to some special interest. A reform zone is a zone that implements one or more fundamental reforms."

So it's all about redefining the concepts of development and reforms. With the World Bank aiding mega development projects in emerging economies and developed nations, it will be intriguing to see whether Romer would take the risk of applying his theory of Charter Cities there.

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