Saturday, June 12, 2010

Romer’s Charter Cities: A Really Witless Approach to Development

One of the great pleasures historians have is going back through the dead-end schemes of long-ago generations, the ideas, hailed as brilliant at the time, that are perfect fodder for can-you-believe-this curiosities today. You know, strange dietary regimes, inventions that run up against the laws of physics, wacko monetary systems. Smart people dreamed this stuff up, but now all we can do is shake our heads and smile. Surely future historians will find similar boneheadedness today.

Surely, and they can start with this utterly bizarre but characteristic puff piece about Paul Romer and his Charter City fantasy in the latest issue of The Atlantic. If this account is correct, it is all quite simple: Economic development depends on having the right rules in place for the economy. The right rules are privatization, free markets, and the protection of property rights. Investors have to believe these rules will be permanent before they are willing to invest. Therefore the formula for successful development is for governments in poor countries to turn over a portion of their territory to be run according to free market rules under the control of a willing rich country. A return to colonialism? Absolutely, but now it would be voluntary on both ends. Take control of some of our cities, the poor country governments would say, and force us to follow the true path to riches. Romer has set up a little enterprise to market this idea, and he says he has some nibbles.

The article in the Atlantic is pure hagiography, so it’s up to the rest of us to ask a few hard questions. Like: why are you so sure that there is only one correct set of rules, and it’s the one with a University of Chicago economics department logo? Safeguards for property rights in China? What planet are you on? And why would you suppose that the western powers that brutalized and robbed their colonies in olden days would be so virtuous today? In other words, do questions of venality and capture not apply to our governments, only theirs?

One could go on. An example crops up repeatedly in the article: kids in Guinea (they don’t say which one, not that the author seems to care) have cell phones but no electricity at home. The reason given is price subsidies, which reduce incentives to extend electricity to more homes. But how do we know this? Did the US, with a history that includes the Rural Electrification Administration and the Tennessee Valley Authority, and with many municipal utilities today, create its system through market incentives? Do countries with rapidly growing electrical grids, like China, all follow this formula today?

Here is something else: if foreigners are running your city, this means you have no political control over them—no democratic rights. Loss of democracy is a bad thing, right? Not for Romer. He points out that people who migrate in search of economic opportunity are voluntarily foregoing democratic rights in favor of income. He want to make his charter cities magnets of migration too. If migrants put more value on livelihood than the right to vote, that’s their choice, and it is their “preference” for democracy rather than yours that should count.

Actually, why go through all the bother and expense of migration? Why not just pay people to give their vote to someone else? There’s a history to that, too, in rich countries like the US. If democracy is essentially a private consumption good, valued according to willingness to pay, why not let the market rule?

Behind it all, and apparently beyond the awareness of either Romer or his chronicler, is the ghost of Friedrich Hayek. The charter cities idea is warmed-over constitution of liberty à la Hayek. According to this view, a liberal, free market economy is the very embodiment of liberty, but it is under threat from the short-sighted passions of planners, populists and other usurpers. Thus societies need to be placed under a constitutional constraint that protects economic liberalism against the threat of majority rule. Hayek, of course, did not see the need for foreigners to impose this constraint. It could be enforced equally well by elements within one’s own country. He preferred a more legitimate constitutional process, but if the country happened to be Chile, the element could be Pinochet.

UPDATE: I woke up this morning thinking about the Northern Marianas. Why settle for charter cities when you can charter whole islands?


YourAverageEuropean said...

Brilliantly written. I couldn't agree more!

Suzan said...

Thank you for commenting on this.

I've been suspicious about the integrity bona fides of The Atlantic for years now.

And it's starting to smell.


Behind it all, and apparently beyond the awareness of either Romer or his chronicler, is the ghost of Friedrich Hayek. The charter cities idea is warmed-over constitution of liberty à la Hayek.

Jack said...

The article suggests what many have suspected for a while now. That is that the publisher and editor of the Atlantic are attempting to recreate the editorial content of the Atlantic Monthly, as the magazine was first entitled. This is a sly trick on their part to create the image of a fact bvased journal while focusing on literary review of fiction and similar forms of conceptual economics. Note that the Atlantic is the source of other great fiction produced by contributors such as Megan McCardle and Jeff Goldberg.

Anonymous said...

I thought the article was complete gibberish. Central planning by nasty, evil foreigners, bad, bad, bad. Planning by the local oligarchy (elected through sham local elections), good, good, good. I can take you through city after city, town after town, ruined by greedy local developers. For that matter, the rampant property speculation in Nevada, Arizona, California & Florida had nothing to do with Chinese investors & everything to do with greedy locals empowered by even more greedy Wall Street banks.

That this ugly cabal would try & impose itself on international markets is to be expected. Look at what happened in, say, Ireland. Latvia. Iceland. The excuses are not original, they are not even clever. In Africa, speculators are paying the locals to grow crops exclusively for export. Which would be colonialism, provided you can somehow distinguish what's going on overseas from what's happening right here at home.

Nicholas Shaxson said...

To be fair to the Atlantic Monthly, it does contain one or two balancing quotes. Here is one:“Paul is very creative,” says William Easterly, a development economist at New York University, “and sometimes creativity can cross the line into craziness.” Which kind of sums the idea up. And if the author - Sebastian Mallaby, who should know better - had done any research, he would realise that there are any number of such places around the world. Take a look at the Cayman Islands, and you will see what I mean.

Jimbo said...

As someone who has worked on environmental governance and economic development for 30 years in the "developing world", I heartily agree with this response to this stupid proposal by this guy Romer. There are so many socio-cultural reasons and historical evidence why this neo-colonial idea wouldn't work that one wonders if this is not just a typical prank. It is DOA. That said, global value chain operators (import-export) have imposed rules and QA/QC standards on their local partners that do affect significantly de facto and de jure governance of many counries economies. Just not in an overtly colonial manor.

Steve Sailer said...

The United States is already operating one of these places in the North Marianas Islands. Remember, that was part of the Jack Abramoff-Tom DeLay scandal? Fly in a lot of Asians to work in garment sweatshops but you can still put “Made in the USA” on the label.

Congress also gave the Saipan government the privilege of setting its own immigration and wage policies. So the Northern Marianas established a guest worker program. Tens of thousands of women were imported to toil in sweatshops within barbed wire enclosures. Some who got pregnant were forced to have abortions by their employers. Others were assigned to bordellos.

Jack Abramoff was paid $9 million to persuade former House Majority Leader Tom DeLay not to let the House to follow the Senate’s lead in cracking down on these abuses.

DeLay saw the Northern Marianas as a pathbreaking role model for American immigration policy. Lou Dubose and Jan Reid reported in their 2004 book The Hammer: Tom DeLay: God, Money, and the Rise of the Republican Congress:

“When [DeLay] returned from the trip and a reporter pressed him about sweatshops in the Marianas, he said, ‘I saw some of those factories. They were air-conditioned. I didn’t see anyone sweating.’ Then he laughed. Inspired by the labor model he saw on Saipan, he threw out a daring and philosophical idea: the United States should establish an identical ‘guest worker’ program ‘where particular companies can bring Mexican workers in.’ The Mexicans would be paid ‘at whatever wage the market will bear.’”

gordon said...

What's the difference between "charter cities" and Special Economic Zones, which have proliferated in many countries over the last 20-30 years?

Peter Dorman said...

Gordon: completeness (not just rules for a few foreign investments but for the entire city) and loss of sovereignty.