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Cities Within Cities: A Spin on the Charter City Model

Posted in Development, Real Estate Markets by teslik on June 2, 2010

I had breakfast yesterday with an old friend who is interested in architecture and urban development (and redevelopment). We bounced around an idea related to charter cities, a topic I’ve written about here before (see here and here), but with a twist.

Specifically, we considered how preexisting cities could use something akin to the “charter city” model to promote redevelopment—given that local politics can be as much of a roadblock at the municipal level as at the sovereign level.

Think of it as extreme zoning: A city could charter a specific area (say, a space dominated by shuttered factories). The municipal government could then, essentially, give the area a clean slate from a regulatory perspective (low taxes, incentives to lure businesses and investment). A task force would then work directly with an architecture firm and with potential clients in order to craft a new, business-friendly charter area, perhaps in line with a road-map provided by the city (in terms of desired population density, industry preferences, etc.). In the long-run, such a project might well pay off several times over for the city, given that the boost to GDP and spending would not be confined to the economic zone.

To a degree, this model already exists. Some countries have accomplished a similar end through the construction of special economic zones, though typically the space appropriated for such projects does not come from urban areas. Countries with strict social laws have also formed business zones where those laws do not apply—on a recent trip to the U.A.E., I was impressed by one such zone, the Dubai International Financial Centre.

Could a twist on this model be applied in ailing American industrial cities?  Detroit?  Pittsburgh?

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Paul Romer’s Charter Cities: Parsing the Counterarguments

Posted in Development, Economics by teslik on August 11, 2009

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Paul Romer’s charter cities idea, which I outlined last week, has prompted some interesting debate among high profile economics bloggers. I wanted to outline the scope of what has been said, because I think the idea is sufficiently intriguing that delineating the nuances and counterarguments will be a useful process.

Discussion of Romer’s idea falls under two main questions: first, whether Romer’s idea will work, and second, whether it is morally or politically advisable.

Will it work?

Analysis of the viability of Romer’s plan also falls into two categories:  The question of whether governments will be able to implement it, and the question of whether governments will be willing to implement it.

Ability to Implement:

Will Wilkinson questions whether governments would be able to establish charter cities, assuming that they want to:

Why won’t the bad rules that have impeded endogenous development also impede the adoption of a higher-order rule-reforming rule? I don’t really see the loophole that Romer needs to get started.

In other words, the same bad rules that gum up the process of trying to implement good economic policy could implement the process of trying to establish charter cities.

Arnold Kling invokes Bruno Leoni to point out a different potential problem—the feasibility, or infeasibility, of implementing laws in a top down way that may run counter to preexisting culture. Romer, says Kling,

makes it sound as though we can take rules “manufactured” in, say, Canada, and export them anywhere in the world. Leoni would say that instead most law is embedded in social customs In fact, my daughter who just spent the summer in Tanzania, says that the custom of seeing law as something that ought to be obeyed is not nearly as natural there as it is here.

Alex Tabarrok says the fact that charter cities would be “built on uninhabited land with plenty of immigration from the charter nation” helps to mitigate Kling’s concern.

Willingness to Implement:

Tyler Cowen, meanwhile, doubts whether governments would be willing to attempt charter cities:

I fear that Hong Kong is a cautionary tale… Due mostly to the pressures of nationalism, the world’s most successful development experiment was ended without a second thought.  And its initiation was backed by brute colonial force.  Which country is most likely to allow another country to manage part of its territory in a new experiment?

Tabarrok counters this argument as well, saying “we shouldn’t think of what happened in 1997 as China taking over Hong Kong but rather as the final element of Hong Kong taking over China.”

(For what it’s worth, Romer himself raises the possibility that some countries might interpret bilaterally constructed charter cities as a form of colonialism. He rejects this line of reasoning, however, saying: “The thing that was bad about colonialism, and the thing that is residually bad in some of our aid programs, is that it involved forces of coercion and condescension. This model is all about choices, both for leaders and for the people who will live in these places—and choice is the antidote to coercion and condescension.”)

Is it Moral?

Here the question essentially whittles down to one of realism versus idealism.

Will Wilkinson, in the same post linked to above, outlines the idealist argument before tepidly rejecting it:

What the example of Hong Kong communicates is that authoritarian, illiberal, undemocratic regimes need not feel threatened by semi-independent city states with working “liberal” market institutions. It says to rulers that their countries can get rich without granting their subjects real freedom.

Wilkinson questions whether Romer supports this message, or whether he simply thinks that faster growth in charter cities will eventually lead to liberalization in the countries that founded them.

For his part, Wilkinson supports the latter conclusion (though it makes him uneasy), but eventually wonders whether charter cities, though they appear to require liberalized governments to support authoritarianism, might actually be a clever form of democracy promotion:

I’m convinced that it would probably be better for both the liberty and welfare of the Burmese people, for example, if the junta tried to go the Singapore/China market authoritarianism route rather than hold free elections and establish a democratic government. I’m not happy with this conclusion. Unlike many of my libertarian friends, I do not think democracy is incidental to liberty. But suppose it turns out that democracy is incidental to economic growth — that it is correlated with but unnecessary to growth. Suppose further that illiberal rulers will welcome isolated experiments in the institutions of growth as long as they don’t come bundled with democratic institutions. If economic liberalization eventually has liberalizing political spillovers, promoting democracy directly could turn out to be self-defeating. Could it turn out that liberal democrats do the most for liberal democracy by promoting market authoritarianism?

Kling goes through a similar analysis, reacting to Wilkinson’s term “real freedom.” He concludes, in as many words, that the most real form of freedom is choice—and thus that the charter city model, by giving citizens a choice of economic models, does provides freedom, even if it also increases the sustainability of authoritarian regimes. He posits:  “If you lived in North Korea, which would you rather have–the right to vote or the right to leave?”

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.