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The World Bank Is Searching for Meaning

The World Bank Is Searching for Meaning

Wednesday, 31 January, 2018 - 08:45

Paul Romer’s departure last week as chief economist of the World Bank isn’t an event about just one man and his former job. His exit was undoubtedly influenced by individual factors, but it also illustrates broad challenges for the Bank as an institution.

Romer is, to put it bluntly, a contentious man. A celebrated researcher of economic growth, he has spent years vigorously attacking the ideas of his doctoral adviser, macroeconomist Robert Lucas, and the very field of macroeconomics itself. At the World Bank, his tenure has been marked by heated disputes, including one over how many times the word “and” should be used in official communications.

That sort of approach can be very useful in an academic setting. Indeed, many of Romer’s criticisms of macroeconomics were truths that others in the field had been afraid to speak (though I’m not so sure about his grammatical advice). But when it comes to navigating the complex bureaucracy of an institution like the World Bank, perfectionism, bluntness and prickly precision are not necessarily the most endearing traits.

But the bigger question concerns the Bank itself. The immediate cause of Romer’s departure probably had to do with a public clash over the widely cited Ease of Doing Business rankings. This index, which the World Bank updates frequently, is intended to measure how easy it is to start a business in a particular country.

An accommodating business environment is assumed -- both by the Bank and by many economists -- to be a good thing. It’s believed to result in more creative destruction -- the constant churning of industries and businesses that improves the economy through competition that eliminates inefficient producers. It also reduces monopoly power, by making it easier for new companies to enter a market and compete.

That’s the abstract theory, anyway. In reality, the ease of doing business is hard to measure -- the Bank’s criteria might not capture the factors that are most important in encouraging business dynamism, or the rankings might weight the factors incorrectly. Rich countries tend to be ranked higher, but this might just be because countries make it easier to do business once they get rich.

Romer made headlines earlier this month when, speaking to reporters from the Wall Street Journal, he accused the Bank of changing its rankings unfairly. Romer noticed that changes in the factors used to construct the index had the effect of raising Chile’s ranking under conservative governments and lowering it under socialist ones. Romer later clarified that he didn’t mean to assert that politics was a factor in the Bank’s decisions, but nevertheless the damage to the reputation of the rankings, and of the Bank itself, could be long-lasting. Though Romer’s tenure as chief economist had been marked by many clashes, this battle was probably the last straw.

Political motivations or no, however, the overall usefulness of the Ease of Doing Business rankings is highly questionable. Many free-market enthusiasts, such as John Cochrane of the Hoover Institution, believe that if countries up their position in the World Bank’s rankings, growth will follow as a matter of course. But the evidence says otherwise. In 2016, economics student and blogger Evan Soltas measured whether large increases in a country’s position in the rankings were followed by growth. He found no measurable effect, even in the long term, and that taking the World Bank’s advice on structural issues seems to do very little if anything for economic growth.

If Soltas’s result holds -- and given the poor performance of other rankings of business conditions, it seems likely it will -- it means that the World Bank has been recommending policies based more on faith and assumptions than on real hard evidence. Since countries often work hard to improve their position in the rankings, this means that the Bank has probably been squandering its policy clout. And if reforms intended to climb up the rankings end up making societies less equal, the Bank could even have been having a negative impact on the world’s poor. That would be a mistake along the same lines as the one made by the Bank’s sister organization, the International Monetary Fund, which recommended fiscal austerity policies that it later admitted had hurt the countries they were designed to help.

If true, this would be bad for the World Bank, which has been suffering an identity crisis in recent years. Global growth means that few countries need or want the Bank’s development loans, leaving it searching for a reason to continue existing. Many had envisioned the Bank, which employs a large number of academically trained economists, functioning as a think tank to advise countries on how to boost growth. No one needs or wants a think tank that is known for giving bad advice.

So although Romer’s exit will take the World Bank out of the headlines for a while, the deeper questions about its future remain. Its problems are much bigger than one contentious chief economist.

The Bloomberg

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