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Paul Romer’s Charter Cities: Parsing the Counterarguments

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


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?”

Rebuilding the Economics Field

Posted in Economics by teslik on August 5, 2009


Robert Skidelsky has contributed a thought-provoking response to the FT’s “arena debate” on how to rebuild the stature of economics as an academic field. Skidelsky notes that even Queen Elizabeth has taken economists to task for not doing a better job of foreseeing the economic crisis. He then outlines what, to his mind, went so wrong, and concludes with three paragraphs of recommendations for the “reconstruction” effort:

The reconstruction of economics needs to start with the universities. First, degrees in the subject should be broadly based. They should take as their motto Keynes’s dictum that “economics is a moral and not a natural science”. They should contain not just the standard courses in elementary microeconomics and macroeconomics but economic and political history, the history of economic thought, moral and political philosophy, and sociology. Though some specialisation would be allowed in the final year, the mathematical component in the weighting of the degree should be sharply reduced. This is a return to the tradition of the Oxford Politics, Philosophy and Economics (PPE) degree and Cambridge Moral Sciences.

Beyond this, the postgraduate study of macroeconomics might with advantage be separated from that of microeconomics. Courses in microeconomics should concern themselves, as at present, with the building and testing of models based on a narrow set of assumptions. Their field of applicability lies in those areas where we have reliable views of the future. Macroeconomics, though, is an essential part of the art of government, and should always be taught in conjunction with subjects bearing on this.

The obvious aim of such a reconstruction is to protect macroeconomics from the encroachment of the methods and habits of the mathematician. Only through some such broadening can we hope to provide a proper education for those whose usefulness to society will lie as much in their philosophical and political literacy as in their mathematical efficiency.

This reminded me of the ethics oath a group of Harvard Business School students recently signed. I wonder what the chances are of a similar movement arising at one of the leading graduate schools of economics?