talking point | the blog at LeeHudsonTeslik.com

Paul Romer’s Charter City Model

Posted in Development by teslik on August 6, 2009

cityscapeUpdate: After reading this post, check out our follow-up examining the arguments that have been made against Paul Romer’s charter city idea.

Stanford’s Paul Romer, in a new Ted talk, presents an idea for overcoming politically entrenched rules that derail economic development.

He starts with a question:  Why do teenagers in African country X  have cell phones – a relatively advanced technology – but not electricity – a much more basic one?

The answer, Romer says, is bad rules. For instance, the electric company in country X might operate under a rule where it has to sell electricity at a very low subsidized rate. It therefore cuts services because it is losing money on every unit of electricity it sells. The president of X, seeing the distortionary effects of this pricing dynamic, might be inclined to change this rule, but might also face opposition from companies and consumers, who protest to keep the bad rule in place because it keeps their electricity cheaper.

This is the age-old dilemma of politics getting in the way of policy. The challenge, Romer says, is to try to develop a framework for changing stubborn rules. You can’t simply do it by mandate, as becomes readily apparent to the president of X, because political pressure will get in the way.  So how do you get around bad rules?

Romer proposes an idea that essentially writes existing sovereign politics out of the picture. He recommends thinking on the scale of the city and developing new special administrative regions with good rules that can be expected to attract investors, businesses, and inhabitants alike. Such charter cities would be “opt-in,” as it were. The preexisting civic structure, bad rules and all, would be left to operate in parallel, and people and businesses and investors would choose to participate in the charter economy only if they decided the opportunities there were more valuable than, say, a lower electricity bill under the subsidies of the old system.

Romer’s strategy is more complicated than I can do justice to in a few paragraphs. But one basic takeaway is quite simple—governments would often be better off trying to create avenues around political roadblocks than trying to push through them. I’m curious what applications this basic idea might have in the United States, where economists commonly complain about the impossibility of getting good legislation pushed through Congress intact.

Addendum: This blog post provides good background on Romer’s research and his plans for spreading and eventually applying the charter cities idea.

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