The Journal of Economic Perspectives A journal of the American Economic Association Winter 2016 The Journal of Economic Perspectives A journal of the American Economic Association Editor Enrico Moretti, University of California at Berkeley Co-editors Gordon Hanson, University of California at San Diego Mark Gertler, New York University Associate Editors Anat Admati, Stanford University Nicholas Bloom, Stanford University Dora Costa, University of California at Los Angeles Amy Finkelstein, Massachusetts Institute of Technology Seema Jayachandran, Northwestern University Guido Lorenzoni, Northwestern University Emi Nakamura, Columbia University Richard Newell, Duke University Valerie Ramey, University of California at San Diego Scott Stern, Massachusetts Institute of Technology Managing Editor Timothy Taylor Assistant Editor Ann Norman Editorial offices: Journal of Economic Perspectives American Economic Association Publications 2403 Sidney St., #260 Pittsburgh, PA 15203 email: [email protected] The Journal of Economic Perspectives gratefully acknowledges the support of Macalester College. Registered in the US Patent and Trademark Office (®). Copyright © 2016 by the American Economic Association; All Rights Reserved. Composed by American Economic Association Publications, Pittsburgh, Pennsylvania, USA. Printed by R. R. Donnelley Company, Jefferson City, Missouri, 65109, USA. No responsibility for the views expressed by the authors in this journal is assumed by the editors or by the American Economic Association. THE JOURNAL OF ECONOMIC PERSPECTIVES (ISSN 0895-3309), Winter 2016, Vol. 30, No. 1. The JEP is published quarterly (February, May, August, November) by the American Economic Association, 2014 Broadway, Suite 305, Nashville, TN 37203-2418. Annual dues for regular membership are $20.00, $30.00, or $40.00 depending on income; for an additional $15.00, you can receive this journal in print. E-reader versions are free. For details and further information on the AEA go to https://www.aeaweb.org/. Periodicals postage paid at Nashville, TN, and at additional mailing offices. POSTMASTER: Send address changes to the Journal of Economic Perspectives, 2014 Broadway, Suite 305, Nashville, TN 37203. Printed in the U.S.A. The Journal of Economic Perspectives Contents Volume 30 • Number 1 • Winter 2016 Symposia The Bretton Woods Institutions Carmen M. Reinhart and Christoph Trebesch, “The International Monetary Fund: 70 Years of Reinvention” ..................................3 Barry Eichengreen and Ngaire Woods, “The IMF’s Unmet Challenges” .......29 Michael A. Clemens and Michael Kremer, “The New Role for the World Bank” ..53 Martin Ravallion, “The World Bank: Why It Is Still Needed and Why It Still Disappoints” ................................................77 Richard Baldwin, “The World Trade Organization and the Future of Multilateralism” .............................................95 Oil and Gas Markets Thomas Covert, Michael Greenstone, and Christopher R. Knittel, “Will We Ever Stop Using Fossil Fuels?” ..................................... 117 Christiane Baumeister and Lutz Kilian, “Forty Years of Oil Price Fluctuations: Why the Price of Oil May Still Surprise Us” ..................... 139 Anthony J. Venables, “Using Natural Resources for Development: Why Has It Proven So Difficult?” ........................................ 161 Articles Xavier Gabaix, “Power Laws in Economics: An Introduction”. 185 Lawrence F. Katz, “Roland Fryer: 2015 John Bates Clark Medalist” ..........207 Features Dotan Leshem, “Retrospectives: What Did the Ancient Greeks Mean by Oikonomia?” ...............................................225 Timothy Taylor, “Recommendations for Further Reading” .................239 Correspondence: “The Doing Business Project: How It Started,” Simeon Djankov” .................................................. 247 j_contents_and_statement_301.indd 1 1/20/16 6:40 AM Statement of Purpose The Journal of Economic Perspectives attempts to fill a gap between the general interest press and most other academic economics journals. The journal aims to publish articles that will serve several goals: to synthesize and integrate lessons learned from active lines of economic research; to provide economic analysis of public policy issues; to encourage cross-fertilization of ideas among the fields of economics; to offer readers an accessible source for state-of-the-art economic thinking; to suggest directions for future research; to provide insights and read- ings for classroom use; and to address issues relating to the economics profession. Articles appearing in the journal are normally solicited by the editors and associate editors. Proposals for topics and authors should be directed to the journal office, at the address inside the front cover. Policy on Data Availability It is the policy of the Journal of Economic Perspectives to publish papers only if the data used in the analysis are clearly and precisely documented and are readily available to any researcher for purposes of replication. Details of the computations sufficient to permit replication must be provided. The Editor should be notified at the time of submission if the data used in a paper are proprietary or if, for some other reason, the above requirements cannot be met. Policy on Disclosure Authors of articles appearing in the Journal of Economic Perspectives are expected to disclose any potential conflicts of interest that may arise from their consulting activities, financial interests, or other nonacademic activities. Journal of Economic Perspectives Advisory Board Kristen Butcher, Wellesley College Janet Currie, Princeton University Franceso Giavazzi, Bocconi University Claudia Goldin, Harvard University Robert E. Hall, Stanford University Greg Ip, Wall Street Journal Hongbin Li, Tsinghua University Scott Page, University of Michigan Paul Romer, New York University Elu von Thadden, University of Mannheim Journal of Economic Perspectives—Volume 30, Number 1—Winter 2016—Pages 3–28 The International Monetary Fund: 70 Years of Reinvention Carmen M. Reinhart and Christoph Trebesch s recently as 2008, the International Monetary Fund (IMF) seemed to be winding down its business. After the Argentine and Uruguayan crises of A 2001–2003, the world had been comparatively free of financial crises. IMF lending, whether expressed as a share of world GDP or imports, fell to its lowest levels since the early 1970s, as shown in Figure 1. Dollar amounts declined more markedly than the number of programs, as lending to the larger emerging market and middle-income countries mostly came to an end. Loans to low-income countries (involving smaller dollar amounts) became increasingly overrepresented among the remaining IMF programs. A view emerged that perhaps an institution whose primary roles were economic surveillance and crisis management had outlived its usefulness. This interpretation of events may have motivated the IMF to down- size (Obstfeld and Gourinchas 2012). Treating this temporary calm as the “new normal,” the IMF shrank the size of its staff, which had expanded considerably in previous decades in response to a sharp increase in its membership (as reported, for example, in The Economist 2008). However, the emergence in 2007–2009 of the deepest and most synchronous financial crisis in the world’s largest economies since the 1930s put an end to the notion that the IMF was redundant. As Kindleberger (1978) had wisely observed decades earlier, financial crises are “a hardy perennial.” By practically any metric, ■ Carmen M. Reinhart is Minos Zombanakis Professor of the International Financial System, Harvard Kennedy School of Government, Cambridge, Massachusetts. Christoph Trebesch is Assistant Professor, Department of Economics, University of Munich, Germany. Their email addresses are [email protected] and [email protected]. † For supplementary materials such as appendices, datasets, and author disclosure statements, see the article page at http://dx.doi.org/10.1257/jep.30.1.3 doi=10.1257/jep.30.1.3 j_reinhart_301.indd 3 1/20/16 6:49 AM 4 Journal of Economic Perspectives Figure 1 IMF Lending as a Share of World Trade and GDP, 1960–2014 1.80% Share of world GDP (right scale) 0.45% 1.60% 0.40% Share of world GDP (right scale) 1.40% Share of world imports (left scale) 0.35% 1.20% 0.30% 1.00% 0.25% 0.80% 0.20% 0.60% 0.15% 0.40% 0.10% Share of world imports (left scale) 0.20% 0.05% 0.00% 0.00% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Sources: Gold (1970), International Monetary Fund, International Financial Statistics, Monitoring of Fund Arrangements (MONA) Database, World Economic Outlook, Joyce (2005), Killick (1995), and Mody and Saravia (2006). the post-2008 IMF programs to several European economies are the largest in the IMF’s 70-year history. As Figure 1 shows, in 2010 the new programs to the wealthier borrowers brought total IMF commitments, measured as a share of imports, close to their historical peak in the early 2000s, while as a share of world GDP, IMF commit- ments hit an all-time peak. The IMF has reinvented itself on several occasions and in different dimensions since its creation approximately 70 years ago.1 Under the Bretton Woods system, the IMF oversaw a network of mutually pegged exchange rates. A key challenge of that system was to get the parity “right.” Otherwise, an economy with an overvalued currency would be vulnerable to a weakening in the balance of payments and inter- national reserve losses. Because exchange rate misalignments