Can "Charter Cities" Change the World? A Q&A With Paul Romer

Weak institutions and bad rules are some of the most significant obstacles to economic growth in developing countries. Paul Romer, an economist known for his work on economic growth, has a plan to change that and recently resigned his tenured teaching position at Stanford to devote his full energies to the challenge.

“Moving from bad rules to better ones may be much harder than most economists have allowed.”

Romer’s plan calls for the establishment of Hong Kong-like “charter cities,” special zones within developing countries with better rules and institutions.

The project has already attracted quite a bit of attention from both economists and the media. William Easterly, the development economist, told Newsweek, “There’s a thin line between revolutionary and crazy. Paul Romer has been adept at walking that line throughout his career, staying just out of the crazy part. He’s still tiptoeing along that line with this new idea.” Romer agreed to answer some of our questions about his crazy and/or revolutionary plan below:

Q.

You recently gave up your tenured teaching position at Stanford to launch an ambitious development initiative. Can you tell us about your new charter cities project?

A.

Yes, instead of being a professor, I’m now a senior fellow there, which means exactly what it says: I’m officially an old guy.

The key to the project is a charter city, which starts out as a city-sized piece of uninhabited territory and a charter or constitution specifying the rules that will apply there. If the charter specifies good rules (or in our professional jargon, good institutions) millions of people will come together to build a new city.

Q.

What makes you confident that land and a good charter are all it takes?

A.

A well-run city lets millions of people come together and enjoy the benefit they can get from working together and trading with each other. The benefits per person increase with the total number of people; this is why big cities are more productive than small cities or villages. Of course, none of this is new. Adam Smith was referring to the power of exchange and the importance of increasing returns when he wrote that, “the division of labor is limited by the extent of the market.”

There are many signs of the value created by all the exchange that takes place in a city. We see it in productivity and wage data. We also see it in the increase in the value of the land. Millions of people are willing to pay high rents just to live and work around millions of other people who are also paying high rents. Why? To get the benefits that come from exchange and interaction with so many others.

In the developing world, most people don’t yet live in big well-run cities. Given the chance to move to one, hundreds of millions of people would go there to get a job, get an education for their children, and live in a place that is clean, safe, and healthy. Other people will make a profit by hiring them or supplying them with infrastructure and other services. If the rules let this happen, everyone can be better off. It doesn’t take any charity to build well-run cities.

Q.

What kinds of rules would have to be specified in a charter for a new city?

A.

Rules about public sanitation are a simple and familiar example. Without them, a city can’t be a healthy place to live; but these rules don’t just happen. The rules for a city are different from the ones for a village, but as a village slowly gets bigger, a city may be stuck with the rules of the village.

In a village, it might be O.K. to rule that anyone can urinate anyplace they want. In a modern city, it is better to have a rule saying that people have to urinate into toilets connected to the sewer system. According to a recent news report, the city government in Paris is having trouble enforcing this rule. They have special police units that give tickets to men who urinate against walls. So when we speak of rules, we must understand both rules on paper and an effective system of enforcement.

In many cities in poor countries, health is bad because governments don’t enforce basic rules about sanitation. The crime rate is appallingly high because the government doesn’t enforce rules that prohibit theft and violence. Traffic fatalities and congestion are both high because they don’t have good traffic rules or if they do, they don’t enforce them. The fact that people still flock to cities with such bad rules tells us something about how big the other benefits from living in a city must be. But given the choice, they would surely rather go to a city with good rules instead of one with bad rules.

Q.

You have argued that new cities can speed up growth in the developing world. Aren’t the cities that the world needs springing up naturally? Why do we need the construct of a charter city to encourage faster or better urbanization?

A.

Economists tend to assume that societies will naturally adopt good rules. If that were true, societies would put in place the rules needed to get the gains from a city and well-run cities would indeed spring up.

The evidence suggests to the contrary that many societies are stuck with bad rules. Moving from bad rules to better ones may be much harder than most economists have allowed. The construct of a charter city is a suggestion about how we can change the dynamics of rules. It is a way to speed up the rate of improvement in the rules.

There is an analogy that may be helpful here. Large corporations operate according to an internal set of rules that we sometimes call a corporate culture. A natural question to ask is what mechanisms lead to improvement in the rule-sets that prevail in all the corporations in an industry. If you think of an industry like computing, it is immediately evident that much of the change comes from the entry of new organizations. They have new rule-sets that attract resources away from the existing ones.

IBM had good internal rules for working with big corporations and data centers, but they didn’t work as well for working with small businesses and individual consumers. If IBM had been the only company allowed to be in the computer business, it would have taken a very long time to get where we are now, with networked computers in our pockets. The entry of new organizations like Digital, Intel, and Apple that operated under very different internal sets of rules sped up change in the industry.

Charter cities are a way to bring the power of entry and choice to the dynamics of the rules for cities.

Q.

Let’s move on to logistics. Who might grant the charter for one of these cities and see that it will be enforced?

A.

Different charters could specify different arrangements. This means that we could try many new types of innovative structures.

If a national government has sufficient credibility, it could start a charter city within its own territory and administer it from the national capital. This is, in effect, what some countries have done when they have created special economic zones with rules that are different from the ones that prevail in the rest of the country. You could imagine that a country like India might try something like this to speed up urbanization by cutting through many local rules that get in the way of urban development.

In poorer countries that don’t have the same kind of credibility with international investors, a more interesting but controversial possibility is that two or more countries might sign a treaty specifying the charter for a new city and allocate between them responsibilities for administering different parts of the treaty.

Let me give you a specific example. Right now, the United States and Cuba have a treaty that gives the United States administrative control in perpetuity over a piece of sovereign Cuban territory, Guantanamo Bay. I’ve suggested that Canada and Cuba sign a new treaty in which Canada would take over administration of this area, bring Canadian rule of law there, and let a city grow up that could bring to Cuba some of the advantages that Hong Kong brought to China.

Q.

Why will governments, particularly the entrenched, corrupt governments found in many countries, be willing to cede control of these zones?

A.

First let me push back on an assumption that many people make and that seems to be implicit in your question. This assumption is that “bad guys” are why so many people are stuck living under bad rules. If you were a good guy and were the mayor of New York, would you be able to build enough consensus to implement congestion pricing for traffic, at least within our lifetimes? Or would you be strong enough to be able to coerce the people who don’t want it to go along?

Narratives about good guys and bad guys are always entertaining, but there is a deeper reason why people get stuck under bad rules. For those of us who live in the United States, it is easier to understand in a context like New York that is more familiar. It is quite possible that its existing political system will never allow an improvement like congestion pricing, and yet many people would happily move to a new city that had sensible pricing and smoothly flowing traffic at all hours of the day. Systems of rules are “sticky”; they are difficult for any leader or group to change.

With this in mind, suppose you were the president of Cuba. Suppose you wanted to do for Cuba what Deng Xiaoping did for China: engineer the transition from communism to rapid market-led growth. To do this, you might want to create a special zone where some of your citizens could opt-in to the market system without forcing others to make this change. You might be able to do this with a charter city that you control out of the president’s office.

Now suppose you also want to make a binding commitment to rule-of-law protections for the foreign investors and potential residents from foreign countries you’d like to attract to this city. Investors from the rest of the world could finance the infrastructure for a new city in exchange for fee income from users. Entrepreneurs and managers from the rest of the world might come and run the businesses that would hire millions of people. Many of these highly educated and experienced people might be émigrés who left when the island turned to communism. These investors and these potential residents will come only if you can promise them the protections afforded by the rule of law.

By yourself, with the Cuban institutions that you control, there is simply no way for you to make a credible binding commitment to the rule of law. You could simply change your mind later. More importantly, your successor, whomever that may be, might want to back out of any promises you make.

The only way for you and your contemporaries to make a binding, long-term commitment is to sign a treaty with a country like Canada and to use it as a third-party guarantor. In effect, what a treaty lets you do is leverage the existing credibility of Canadian institutions and bring in the rule of law.

Q.

But what if some future government in Cuba wants to violate the terms of the treaty and take the city over once it is built?

A.

This is why the example of Guantanamo Bay is so revealing. In practice, countries around the world, even countries that can’t get along, still respect treaties. Cuba respects the treaty with the United States, even as they complain bitterly about it. Another good example is Hong Kong. The British clearly did not want to live up to the terms of the treaty they signed, which returned control of important parts of Hong Kong to China after 99 years. China didn’t want to wait that long to get Hong Kong back. But in the end, for 99 years, they stuck to the terms of the treaty they signed.

Of course, in relations between countries there is always the possibility of an act of war that violates a treaty, but few nations are willing to cross such an explicit “bright red line.” Think back to how easy it was to mobilize a military reaction to Iraq’s invasion of Kuwait. The armed nations of the world don’t respond well to unilateral acts of war.

Q.

It all sounds great as a theoretical exercise, but honestly, don’t your colleagues tell you that something like this will never happen?

A.

They do say this, which is actually kind of ironic when you line it up with the other things they say.

They recognize that the construct of a charter city is something that could make everyone better off. They admit that there is no technological or economic constraint that keeps us from building many of these. Then they say that for political reasons, it will never happen. They tell me that you can’t change politics; you can’t overcome nationalism; there is no way for countries to work together to extend the reach of good rules.

Then these same economists suggest that we should just stick to business as usual. We should offer conventional economic advice and assume that political systems will naturally follow our advice when we point to something that could make everyone better off. But of course, they have already revealed that they don’t believe this.

What’s going on here is a kind of self-censoring. Economists seem to think that we should propose things that are acceptable and that political systems will pursue, but that we should avoid proposing or even discussing things that are controversial or politically incorrect.

I think we’d do our jobs better if we just said what’s true without trying to be amateur politicians.

For example, back in the 1950’s and 1960’s, lots of development economists didn’t talk about the benefits of direct foreign investment and spoke instead of self-sufficiency because they thought that this was what the political actors in most poor countries wanted to hear. Now, of course, almost all developing nations are encouraging inward DFI. When we self-censored back then, we just slowed down movement toward global flows of technology via foreign investment. It happened despite what development economists said, not because of what they said.

Think about the truly important changes in political systems. Back in the middle ages, suppose that someone described a legal system that enforced rules and contracts that everyone had to obey, even the country’s leaders. What would informed opinion of the day have been? “Great idea, but it will never happen.” No question it was hard to pull off, but it did happen.

People always think that the unfamiliar is impossible. Many times, all that holds us back is a failure of imagination.


Nick

Chandigarh, India, is a planned city with stricter enforcement of rules and institutions that is fairly successful.

DRM

I tend to agree with the "weak institutions, bad ED outcomes" idea. The issue is that places with 'good' institutions cannot be replicated as simply as Romer describes on a 'city-sized piece of uninhabited land.' While I don't disagree with Romer's intentions, the history of urban planning, over the past 150 years or so is filled with failed examples of more or less the same notion.

Joe Smith

Hong Kong succeeded because:
1. it had a natural harbor;
2. the British military imposed law and order (and executed any pirates or bandits it laid its hands on).

The Hanseatic League provides an interesting historical example - Cities which obtained charters granting them exemptions from the worst depredations of the local rulers and prospered by co-operatively defending themselves against pirates and bandits.

Ravi G

Well Mark Twain I think once said - History aint repeatin itself but it sure does rhyme.
All you need is charter cities, then for these charter cities to protect themselves and their valuable economic assets from surrounding lawlessness there will be a Blackwater type firm
After that the Charter City with Blackwater Type security will try to 'expand on its success' by making deals in the hinterland.
Just a few more simple steps and you have colonialism 2.0
By the way Colonialism 1.0 is East India Company and its factory in Kolkata which got the right to bear arms after lawlessness resulted in trade losses after the collapse of the Mughals.In a few decades they took over the Bihar and Bengal regions of India and extorted so much that a famine knocked out a third of the population in the 1770's. To this day the region is India's most populated and least prosperous. Strong institutions anyone ??
Paul Romer should really be playing sudoku with Myron Scholes or maybe he can write on how Charter Cities will have strong and efficient markets

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Adam

I wonder about the opportunity cost of charter cities. In creating these ideal-rule enterprise zones, would we drain much of the talent from the rest of the country? Could charter cities make life outside in the rest of the country even worse?

LWNMAC

"I've suggested that Canada and Cuba sign a new treaty in which Canada would take over administration of this area [Guantanamo], bring Canadian rule of law there, and let a city grow up that could bring to Cuba some of the advantages that Hong Kong brought to China."

The proposal to position Canada as America's 'baggage-free, political incubator' is as flabbergasting as it is flattering. What you call a treaty-brokered 'administrative' role, others might simply declare 'neo-colonial'. Frankly, beyond the shared but fuzzy interest of a peaceful and prosperous hemisphere, what direct historical, cultural, or geopolitical relationship does Canada have to Cuba?

The US however does have a geopolitical interest (oil, it appears), a long cultural link to build from, plus historical legacy to improve upon. So, let America do the incubating, please: no part of Cuba, beyond fostering good trade relations, is Canada's egg to sit on.

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Imad Qureshi

This is a great idea but political concerns are legitimate. I am from Pakistan and I wish we can let Canada manage a charter city in Pakistan. But politicians there, especially those not in government will raise this against national pride and very easily and possibly successfully resort to violence to stop something like this. I wish I am wrong.

Steve

"I think we'd do our jobs better if we just said what's true without trying to be amateur politicians."

Ahh yes, and in comments too.
A terrific way to innovate is to consider the possibilities of proposals like this one and see where it might just lead.

I see not just charter cities as economic zones though. How about environmental or quality of place zones; interesting to set it up and see if it attracts people and investment. -Steve

Timothy Anyasi

First a big thank you for trying. The world must thank you for this effort. Haven said this, to solve the many problems of the developing world is simple. Give aid only to countries that have no restriction to property rights and immigration. Urinating on the road means violating some ones private property and may land you in court.
Also by having zero restriction on immigration like the good old USA. It will allow people to escape from poorly ruled neighboring country. All this without the risk of colonialism 2.0

The infrastructures will appear overnight and the country will self evolve into an industrial giant.

Ryan Wood

Prof. Romer cites Xiaoping's "free market" zones as evidence of good development practice. While this may be true in a strictly capitalist economic sense, we should realize that those same zones are the site of enormous amounts of human right and environmental transgressions.

Ensuring that any new experiments in "charter cities" not only focus on economic development but, more broadly, on human development as well, is crucial. Indeed, international standards of human rights and environmental protection should be a precondition with respect to such endeavors, not an afterthought. Perhaps the professor assumes that these "charter cities" will not be successful without protections against labor and environment abuse, because no one would want to live there. I would point to his own examples - particularly Shenzhen - as refutation.

It is disappointing that the author and Prof. Romer chose to speak about development in such broad abstractions and not discuss the implications the "charter" proposal on human rights and the environment in any substantive way.

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srd

Yes! I'd move to a charter city.

The US should start negotiations on turning Guantanamo Bay (might have to be renamed) into a charter city.

Econoclast

My gut feeling is Paul Romer's initiative is vindicating Lee Kuan Yew especially when the cocacolonised useful idiots were mocking his approach. Long live the (sane) Nanny!

Jk

This sounds like a large scale gated community. Charter cities, as I understand them here, would inevitably lead to an apartheid system. The idea does support our approach as a nation to have the biggest guns. The real solution is quite the opposite, an open system in which diverse communities develop multiple survival strategies instead of one "too big to fail" set of rules. Diversity and chaos provide the neatest solution. JK

Ken

Could Sochi on the Black Sea be Charter City? This could be an unique, one time incredible opportunity for the Russian people. The government will be spending huge sums, training people to be internationally effective/receptive and the Olympics would be the best possible time to sell the Sochi Charter City concept with little incremental cost. What happens there could be protected (and would be containable) using the mountains and the Black Sea as a natural barrier.

With a concerted effort, the education, natural talent and pride of the Russian people could make a Charter City concept a huge economic and social success. Worst case for the Russians would be at least a significant influx of new investment money. On the other hand, as suggested by Paul Romer, a coastal area in India or Cuba may be more actionable and have more exponential benefits to their well educated large populations.

Uma

i agree with commenter Mr.Amit. This is typical Ivory Tower speculation by Americans with little local knowledge about the realities of third world countries. There are "too many a slip between the cup and lips". Land is one of the most scarce resource in most developing countries. Such zones will inevitable involve taking of land form poor small farmers ,with very little given back to them as remuneration.One rendered landless,whatever compensation they get will be squandered away by this simple folks. Slowly the dispossed will join the ever increasing unskilled labour migrating to cities for menial jobs , creating slums( Watched Slumdog Millionaire?) Parallel to this tragedy will be the swift ,illegal diversion of this land by the powerful elements in cahoots with government agencies.

Uma

Example of Charter city = Dubai

jd

How about the U.S. lease Detroit to South Korea or another developed nation? We seem to have forgotten about it anyway.

J R A

Even though this is a late comment is just as good.
Charter Cities with a new set of rules, developed countries doing business in underdeveloped countries, rules to change rules.
That's not what is needed what we need to change is the way third world politicians apply the existing rules in order to maintain their popularity and keep getting their living money out of the Public Office they occupy. We need a Democracy without politicians.

Nathan

Obviously Mr. Romer needs to spend more time in Africa where the Chinese are trying to do this very thing with much local animosity. You cannot have 2 rules in one nation and if it were to happen in South Africa just think of the nice new criminal opportunities that would be unleashed on the enclave from the informal settlement built next to the city....

Byron Ventura

Watch this video, and know how many questions Paul Romer can’t answer to Carlos Sabillon about the true of charters cities.

http://www.youtube.com/watch?v=FLk32uBkCzk

Carlos Sabillon´s profile:

Dr. Sabillon obtained a doctorate in International Relations from the University of Geneva, Switzerland as well as a post-doctorate in International Economics from the Ludwig Maximilians University in Munich, Germany and a post-doctorate in Economic History from the University of Geneva, Switzerland. He has a total of seven university degrees and obtained each one of them in half the normal amount of time. He speaks fluent English, French, German and Spanish and has published three books published three books with reputed academic companies in New York, USA. In those books Dr. Sabillon presents a new mechanism by which nations can attain fast economic growth without damaging the environment.

http://es-es.facebook.com/drcarlossabillon

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