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?

15 thoughts on “Charter Cities debate, round 2

  1. I couldn’t agree more Chris, and this speaks of a broader problem in the economics profession (and I’m sorry to say, particularly in the US – your good self excepted). The balance between what is ‘ideal’ and what is possible in policy advice and analysis is dangerously out of kilter, and has been for some time.

  2. Private development of new communities offers a way ito reduce risks of Charter City failure. The concession agreement establishing Freeport, Bahamas (approx. 200 sq miles) led to private funding of airports, ports, streets, roads, power and water systems on uninhabited areas. ZonAmerica in Uruguay, Songdo in South Korea, as well as Reston, VA and Columbia, MD in the US also offer examples of large-scale free zone or multiuse developments driven by risk-taking capital rather than government subsidies. Open tenders for private development of new Charter City sites — after a country puts agreements in place to build trust in its business climate reforms — lessen risk of boondoggles or market-insensitive implementation that have so often attended tax-funded projects to develop new communities (includng Cabrini Green and other public housing projects as you have cited).

    A key factor in the success of privately-funded Charter Cities, however, will be Build-Operate-Transfer or similar success-sharing provisions in the greenfield concession. It is vital that such agreements create lasting constituencies with stakes in the success of new free cities. Success-sharing frameworks created at the outset can minimize political risk from envy-sowing demagogues in the surrounding country as the new community flourishes (political backlash against Freeport’s success almost undid the venture in the 1960s). Promising further ways for Charter Cities to expand their base of incountry support are mapped in comments at http://j.mp/10ZT2G .

    Best,
    Mark Frazier
    Openworld.com
    @openworld (twitter)

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  4. A good post with important points …
    I would say that your prior worry of matching Romer’s ‘smartness’ is brought to shame. No matter how banal, wise and humble towards reality always beats smart.
    In the trail of changing development grand scheme solutions throughout the last 60 years or so, I honestly don’t get this continued ghost chase within economics.

    Is it time to talk epistemology, or even ontology? I think it is.

    “…the sum of many good rules is not always a good system”. In economics and not least econometrics however, the reversed and opposite sentence is generally taken to be a valid statement. Is it is not?

  5. … The ‘…reversed and opposite sentence…’ being ‘a good system is the result of good rules’.

  6. ah, I see Mark Frazier has linked to my own piece on this in his comment! thanks.

    Your last point is the most important: it’s a question of political economy, not of economics. I’d go even further: it depends on an understanding of history. Romer’s frequent citation of Hong Kong is based on poor history. He bases his argument around three or so facts without any understanding of the historical processes that led up to them or that have continued to work on them.

    That’s the ultimate problem. Charter cities could only have been proposed by someone who hasn’t looked at how states emerged, how their rules and governance systems evolved and how people and systems evolved in relation to each other in real historical examples. The idea that rules alone define these processes snubs the entire disciplines of history, sociology and anthropology.

  7. There may be risks, but they must be weighted against the potential benefits. In the US, the not so bad status quo could be more secure than an hazardous charter city. But there are places in the world where it seems things can’t go any worse, most of the time for institutional reasons. I’m not thinking about Cuba like Paul Romer, but about much worse off countries such as Etiopia or Haiti. Even after several decades of efforts by the UN and the international community, things seems to be getting worse. Any idea with a slight chance of success needs to be tried since it could be a way to get future generations out of a seemingly hopeless situation.

  8. I don’t buy the economics / political economy schism in this context. What is economics without actors?

  9. “We are seeing this political struggle with the US health care bill. What is politically possible might be unworkable.”

    No, not “we”. Just “you” Americans. If you look around at “we”, every other developed nation (that is, every nation that can afford it except USA) has Universal Healthcare. Generally the obstacles to liveable cities in developed world are the same corporatist interests; cutting taxes and underfunding bike trails, public transit, daycare centres (builds sense of community for parents)….that are brainwashing you into believing “we” won’t implement these magical rules (I like Chicago’s liveable wages and public housing seems to work where dispersed in middle/upper class neighbourhoods to my knowledge). You keep saying you know what these rules are: tell the world. To my knowledge the rules are be like N.Europe and not like America, for developed nations. For developing actors I was following my old PM’s (P.Martin) plans on tying aid to Africa based on recipient “competancy”, but my new Neocon PM switched the aid to Latin American trade partners so I lost interest. I assume if a city builds schools and hospitals and fights corruption and crime you fund it. Why build new port Canberras instead of using your salaries to analyze what works and lobby to direct flows to such cities?

  10. There are obviously large political obstacles to the establishment of a charter city, but isn’t part of the job of the economist to outline what is best, so that we know where to aim? Look at the global successes in lowering tariffs on trade, despite being “politically infeasible” and all based on economists arguing about what is the best thing to do. Charter Cities (and MIGRATION!!) are directly analagous. That something is politically difficult does not mean that we should not argue that it is the right thing to do.

  11. I don’t understand the question. If we knew how to avoid the inefficiencies (including political) to creating mentally/physically healthy and commercially successful cities, how can we avoid the political inefficencies?!

    Defining “political obstacles” as different then other obstacles and just what these two different things are is not specified. Nietzsche would observe correctly that where there isn’t anarchy, the aristocrat class (rich people) shames poor people into blaming themselves for poverty instead of politically attacking the rich. An applied observation is that in Canada our farmer provinces (before tar made us evil) spawned a left wing Party the addresses their interests (gave us Universal Healthcare) whereas in the USA have been tricked into voting Republican. So are you asking how to avoid the latter? Educated population (good public schools), screw the MSM, built a good public broadcaster (radios where poor). EU tax rates, not USA. Have children play rather than watch TV…use marketing to educate rather than consume diabetes or make rich people richer where rich aren’t societally productive….basically discourage warfare and encourage class warfare.
    And for now just put the Charter money in existing populations that don’t have clean stoves, drip irrigation, mosquito nets, hospital clinics, primary schools, radios, solar panels, cel phones, microfinance, drip irrigation, seeds…where the latter won’t be stolen/destroyed/unused.

  12. Not even Dean Baker thinks repealing Glass-Steagal had anything to do with the recession. People keep using it a synechdoce for things they dislike rather than pointing out how it actually caused anything.

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