Charter Cities debate, round 2

In case you haven’t been watching, economist Paul Romer is pushing for the world to turn its unpopulated spaces into new cities, governed by a new set of rules, where the world’s poor would be free to relocate and build successful economies. Think Singapore except you’re allowed to chew gum.

(Want to know more? See Romer’s proposal, his TED talk, or an Aid Watch Q&A.)

Two weeks ago I saw Romer speak. We chatted afterwards and continued the discussion on our blogs. Romer parried some of my initial concerns. But still I felt unease: humans aren’t so good at inventing new systems of governance. Most collapse. A small few succeed. A charter city sounds like an expensive gamble.

Last week, Romer responded. His points? First, we actually have a good idea what rules work well, so that mitigates the risk. Even so, the new system aspect of charter cities definitely poses a risk. But if successful, they also offer high reward. People can choose whether or not to come. And if it fails, the risk falls mainly on the owners of fixed assets; mobile laborers can leave.

Let’s take these one by one.

I agree we have a general idea of what principles work well, but the sum of many good rules is not always a good system. And sometimes little details can destroy the system (think repealing the Glass-Steagal Act). I think the risk is mitigated, but not by much.

Even so, if you’re living on a dollar a day and your crops might still fail, that kind of risk and return might look pretty good. And the fixed asset holders would indeed bear a lot of risk (and be inclined to help stem it).

I’m pretty sure, however, that the risk would fall wider than that. The amazing thing with the Chicago projects I mentioned last time: people seldom left, even as things got really bad. I work in war zones. People barely leave their homes at gunpoint. There are real social and psychological costs to moving, not to mention the transport costs, and people tend to stay put–especially the poorest and most vulnerable. If a charter city failed, out-migration may have to be forced.

There’s another risk: to the host or sponsor country. To me, charter cities look too big to fail. If things start to go wrong, what would be easier: fix the charter city, or let people into the host country? I imagine a lot of pressure for the latter.

If charter city citizens know this, then they even have an incentive to make things fail (or, like a Lehman Brothers exec, take unwarranted risks). Could this create the next great moral hazard problem in human history?

Let’s say, though, that none of these things are problems. Say we know the rules, the risks can be confined, and there’s no moral hazard. Could we make a charter city happen?

Fundamentally, I think this is a problem not of economy, but political economy. There are the new rules we want and the new rules we can have. We are limited by what is politically possible.

Suppose the ideal set of rules exists. To get it implemented, what sacrifices and compromises must be made? What interests will bend the rules in their favor? Can the new system bear such perversion? We are seeing this political struggle with the US health care bill. What is politically possible might be unworkable.

If there’s any chance charter cities might take hold, we ought to have the politics planned out along with the rule set. The US planned for the invasion of Iraq, but not the victory. Even if we know what an ideal Charter City looks like, have we mapped out how to get there amidst the lobbyists, big business, and international interests?