Sunday, June 27, 2010

Charter Cities

Sebastian Mallaby’s The Politically Incorrect Guide to Ending Poverty (The Atlantic, July/August 2010) is an intriguing read on multiple levels. Here is the synopsis:

In the 1990s, Paul Romer revolutionized economics. In the aughts, he became rich as a software entrepreneur. Now he’s trying to help the poorest countries grow rich—by convincing them to establish foreign-run “charter cities” within their borders. Romer’s idea is unconventional, even neo-colonial—the best analogy is Britain’s historic lease of Hong Kong. And against all odds, he just might make it happen.

Because it’s the key to Romer’s thinking, I will quote the Hong Kong example at length:

For much of the 20th century, Hong Kong’s economy left mainland China’s in the dust, proving that enlightened rules can make a world of difference. By an accident of history, Hong Kong essentially had its own charter—a set of laws and institutions imposed by its British colonial overseers—and the charter served as a magnet for go-getters. At a time when much of East Asia was ruled by nationalist or Communist strongmen, Hong Kong’s colonial authorities put in place low taxes, minimal regulation, and legal protections for property rights and contracts; between 1913 and 1980, the city’s inflation-adjusted output per person jumped more than eightfold, making the average Hong Kong resident 10 times as rich as the average mainland Chinese, and about four-fifths as rich as the average Briton. Then, beginning around 1980, Hong Kong’s example inspired the mainland’s rulers to create copycat enclaves. Starting in Shenzhen City, adjacent to Hong Kong, and then curling west and north around the Pacific shore, China created a series of special economic zones that followed Hong Kong’s model. Pretty soon, one of history’s greatest export booms was under way, and between 1987 and 1998, an estimated 100 million Chinese rose above the $1-a-day income that defines abject poverty. The success of the special economic zones eventually drove China’s rulers to embrace the export-driven, pro-business model for the whole country. “In a sense, Britain inadvertently, through its actions in Hong Kong, did more to reduce world poverty than all the aid programs that we’ve undertaken in the last century,” Romer observes drily.

The article’s other main example, about a similar story from 12th-century Germany, is an interesting historical nugget by itself. However, the examples are there to illustrate that Romer’s idea is based on what has worked. The politically incorrect part is the implication that uncle rich country needs to be in charge for success to occur.

It’s not as bad as it sounds. Maybe you know the story of the fisherman who encounters a hungry man? If the fisherman gives the hungry man a fish, the man will still be hungry tomorrow. But if the fisherman teaches the hungry man to fish, the man can get his own fish ever after.

If that sounds more like charity than colonialism, it is. Think of Romer’s idea as Foreign Aid 2.0—informed by the experience of traditional foreign aid, which despite efforts to the contrary often failed to get beyond giving fish. In contrast, Romer’s approach is to transplant the equivalent of a fishing infrastructure, including the laws and experts to manage it.

It’s an audacious idea, susceptible to criticism from all quarters. There is an army of devils in the details, so much so that the idea may never get a real try. But Romer deserves huge credit for tackling a hard problem from a new angle.

The article is a worthy read.

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