The World Bank and Middle East Development Policy

In July 2016, the World Bank appointed American Paul Romer as the Bank’s chief economist. This was quite a radical decision; the World Bank usually prefers conservative figures for its top positions, whereas Romer is a commercial and intellectual entrepreneur, who left the academy, first to establish Aplia, which heralded a transformation in the higher education sector, and subsequently to launch the “charter cities” development project. This latter innovation is yet to bear fruit, but in light of the Middle East’s current predicament, there is an opportunity to rehabilitate it with the assistance of the Gulf countries.

To understand the idea behind charter cities, one must first delve into Romer’s academic and intellectual past. Tackling low living standards has been the most important problem that economists have tried to solve since 1776, when the Scottish intellectual Adam Smith published his treatise, “The Wealth of Nations,” initiating the birth of modern economics.

The theory of economic growth has developed over the centuries, and in the 1980s, experts concluded that what distinguishes rich countries, such as America and France, from poor ones, such as the Democratic Republic of Congo and North Korea, is the volume of physical and human capital accumulated, including machines, factories, tools, educational qualifications, and so on, all of which raise the productivity of workers. Accordingly, to raise living standards in a poor country, a sustained period of national savings, and hence capital accumulation, is required, to provide workers with more advanced tools, equipment, and skills.

In 1990, Romer published a paper where he proposed a set of factors that he regarded as more important than the traditional set in explaining the global variation in economic development. He emphasized knowledge, innovation, culture, and social norms. Romer theorized that if, for example, the Kenyan government wanted to raise a Kenyan worker’s productivity to that of his/her American counterpart, then equipping him/her with the same machines, tools, and education would not suffice. Rather, there would need to be a fundamental change in the work environment; in particular, the US is characterized by (relatively) impartial and transparent enforcement of the rule of law, protection of property, incentives to innovate, and a general assurance that people’s rights do not get violated.

Romer’s theory was accepted by his peers, but he did not go on to develop it because he retired from academia, choosing instead to become one of the innovative entrepreneurs that he studied during the 1990s. At the start of the new millennium, he returned to his research, but not with the aim of building upon it, but rather seeking to apply it in the developing world.

Romer argued that poorer countries would need decades or more to overcome the barriers to a positive economic environment, such as corruption, political intransigence, weak legal systems, and widespread insecurity; he wanted a faster solution. Romer was fascinated by the case of colonial Hong Kong, which was geographically part of China, but was administered by the UK. He noted that while the Chinese people were largely impoverished and economically backward, due to communism and corruption, Hong Kong prospered due to its economic openness and its unbiased legal system, especially in the domain of property rights.

Romer sought to replicate this experiment elsewhere by convincing the governments of development countries to establish independent cities within its territory. These charter cities would not submit to the country’s law, instead being administered according to their own legal charters. Who would manage the cities? At the outset, Romer tried to convince the governments of rich countries to run the charter cities, in a similar fashion to Hong Kong. However he surmised that the host country’s citizenry would object to such an arrangement due to its similarity to colonialism. Instead, Romer proposed independent management boards staffed by people from a range of advanced economies, to emphasize the project’s developmental goals over its colonial luster.

Romer reached an advanced stage of negotiations with Madagascar’s government, but the people rejected the move at the eleventh hour. The Honduran government went a step forward and launched a charter city, but Romer resigned from its board after the Honduran government violated its independence. In the wake of his appointment as chief economist at the World Bank, he is surely looking for an opportunity to rehabilitate the project.

In the Middle East today, one of the leading cause of wars and instability is the economic weakness of most countries, especially the republics. In spite of the widespread chaos, countries such as the UAE and Qatar have succeeded in creating an environment conducive to production, and hence high living standards. Perhaps not as successfully as Singapore or Switzerland, but certainly preferable to the prevailing alternatives in the Middle East. This is not merely an artifact of the Gulf countries’ oil wealth, as there are other countries in the region that are endowed with huge amounts of oil and non-oil resources, but suffer from poor business environments.

This raises the possibility of cooperation between the World Bank (under Romer’s stewardship) and the Middle East countries for the establishment of charter cities, with opportunities for the governments of Abu Dhabi, Dubai, and Qatar to occupy posts in the management boards. A large proportion of the violence in the region can be attributed to the lack of economic opportunities, and the widespread corruption; as such, in response to the unfolding conflicts, consideration should be given to using economic policies in parallel to the security and political interventions favored at present by the major powers.

Several GCC countries, especially Saudi Arabia and the UAE, have realized the importance of economic policies to regional stability, but they have focused on traditional interventions, such as direct foreign aid and investment, which they have deployed in Egypt, Lebanon, Yemen, and elsewhere. In an effort to improve the performance of such policies, the GCC countries may wish to consider Romer’s charter cities. With the traditional solutions failing in various Middle Eastern countries, there is a pressing need to consider novel alternatives.

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