Living Just Enough for the City? Extended Thoughts on the Charter Cities Proposal

The worst case scenario?

The worst case scenario?

Has everyone heard about Paul Romer’s Charter Cities idea yet? Chris Blattman heard him speak about it recently, announced himself interested and unconvinced – and Romer responded eloquently within a week. Aid Watch even gave him a Q&A in which to explain it all just the other day. It’s a radical concept getting a lot of press (or blog, rather).

Though the Charter City concept is sold a little bit like a home shopping network product (‘Yes – you too can create a developed state in just five easy steps’) we should not undervalue the innovative thinking it embodies. Romer wants to grow new dependent micro-states that can house the poor from less developed countries in a functional economy and service-provision unit. The thinking behind the idea can be summarized by these two quotes, both from Romer:

All it takes to grow a charter city is an unoccupied piece of land and a charter. The human, material, and financial resources needed to build a new city will follow, attracted by the chance to work together under the good rules that the charter specifies.

Sounds simple, but the devil is in the details:

The key … lies in timing. The charter comes first, then residents, investors, and employers each decide whether to come live under the rules that it specifies. Historically, the ability to vote with one’s feet has been a powerful force for progress. Charter cities offer a chance to amplify it, dramatically improving the rate at which people get access to better rules.

I’ve got a something of a personal interest in this. I come from a Charter City. At least, I think I do. I was born and raised in Hong Kong, an example that gets cited a lot when people talk about the concept though I point out below that I recognize very little of what Romer describes as ‘Hong Kong’ or her history.

He describes the One Country, Two Systems approach, in which China agreed to absorb Hong Kong without changing the Basic Law put in place by the British for 50 years as a Charter (incidentally, this is why Wong Kar-Wai’s magical sequel to In the Mood for Love was set in 2046). Of course, most Hong Kongers were emphatically not allowed to vote with their feet: the vast majority were unable to secure British citizenship and remained in Hong Kong under Chinese rule. Many who could win citizenship elsewhere voted for Vancouver.

Knowing the likelihood of my interest Matt alerted me to the idea a few months back, and I’ve been reading reactions with interest. I think the idea is profoundly and fatally flawed due to Romer’s ahistorical approach. Equally importantly, there are two major positives to the idea that should be more fully articulated and understood, so important are they. They are completely new – groundbreaking in the true sense of the word – and speak to what I see as the central problems of economic transformation.

The most minor positive is that Romer is suggesting something new. Just in itself, this is something to be celebrated. Genuinely new ideas should be welcomed with open arms. Beyond this, there are two major selling points to Romer’s idea from my reading of the concept. He does not make these points explicit himself, at least in what I have read.

Firstly, he is in effect proposing an exceptionally radical solution to the problem of dead capital that Hernando de Soto suggests is the root problem with capitalism outside of the West. If the ‘rules’ of the charter city properly codify private property and allow it to change hands with minimal fuss, while securing the rights of whoever holds it at a given point in time, assets can be converted into capital.

One would imagine these would be rules written into the Charter, and because a Charter City is working from a clean slate (theoretically, it’s a city with no history), they may be easy to institute and enforce, free from the restraining hands of past conflict and patron-client networks. Where it takes 175 bureaucratic steps and 19 years to gain lawful land in Haiti (according to de Soto’s research), the Charter City will have no such administrative deadwood to clear; perhaps the time can be whittled down to 6 months. Suddenly capital is created from assets.

Secondly, and even more radically, Romer is abandoning the nation-state as the unit of development by suggesting that the poor of say, Angola, be allowed to move and become part of the socio-economy of Hong Kong 2: Guantanamo Bay. This is radical. Most of the currently less-developed countries have complex and involved histories that continue to exert a strong influence on their politics, identity and economies, in most cases hindering any attempts to transform into a truly dynamic economy.

Romer’s idea bypasses this need altogether. Instead of creating a new capitalism in an existing country, Romer suggests we harness a pre-existing capitalism in a new space. International capitalism would be the motor of growth in a Charter City. That’s a tremendously powerful idea. We don’t need an indigenous capital class: it can come from abroad. And landless labour will be provided by the inflow of people who want to live in a state with good rules. At a stroke a capitalist system can emerge.

I should love the idea, and part of me does. Unfortunately, the little critic who lives in my head has been very vocal about the Charter Cities, and he makes a very strong case.

Most of these problems stem from the idea being at its centre, ahistorical. Romer doesn’t seem to consider the historical experience of state-building, creation of community and pioneering (for the labourers and the capitalists who go to these Charter Cities will essentially be pioneers) and so seems not to address some pretty profound difficulties. What’s more it isn’t clear that the historical experience of the city-states he cites were fully considered.

Firstly, Romer is putting a huge number of eggs into a pretty poorly defined basket: rules. He knows exactly what he means when he says ‘rules’. Yet, what the ‘right’ rules are much less clear. He says that they will vary from city to city, according to circumstance. He’s surely correct there, but at the same time says:

We know already what many of these rules are. We know how to enforce them…

I don’t think we do. The process of development in the currently developed countries is still poorly understood in the historical sense. We can see what happened to investment and consumption and so on, but we’re much more in the dark as to why certain things were possible, and why they happened. We don’t know why Britain underwent an Industrial Revolution when it did, and ideas but no certainties tell us what gave the Governments and civil societies of Taiwan and South Korea the power, unity and purpose to pursue policies conducive to rapid catch up growth, or why Japan developed so totally different a economic culture to the West, buts still adopted a form of capitalism that drove economic development. The ‘rules’ in each case were very different, complex in their evolution and have not borne replication elsewhere.

Beyond this, even if we know what the right rules are, can we be so sure that these are the root of creating growth where nothing now exists? Romer has cited one possible Charter State as a ‘Hong Kong in Guantanamo Bay’. But consider Hong Kong’s historical circumstances briefly. Firstly, it is a natural port; it had tremendous strategic importance in trade and during war. Its location just off the most populous country in the world gave it huge significance even before it was formally part of China; a number of businesses in Hong Kong exist solely to connect outsiders with the huge economic potential of the Mainland. Hong Kong’s primacy as a provider of services in Asia (particularly banking) evolved from its importance as an import-export hub.

Romer rejects this argument, flimsily arguing that no-one really thought Hong Kong was anything special before the British arrived. Well, the British arrived in 1841, and formed a colony in 1860. This not long after capitalism really starts taking off in England. Then Hong Kong was seized by the Japanese during World War 2. They too seemed to think it was a specially important place.

Culturally, too much can be made of the so-called Confucian work ethic, but it’s probably significant that Hong Kong avoided the Maoist clampdown on Confucianism, given that more than 90% of Hong Kong’s population is Han Chinese. Culture has played a part there. Cultures have rules, but not the kind that can easily replicated or imposed.

Romer also rejects the importance of culture, referring to it as ‘a side effect, not a cause, of economic development’. This is another bold claim, and he backs it up with an example that doesn’t actually prove anything. He says that in Paris, the current cultural norm tolerates public urination, but due to fines and enforcement a new one will probably emerge, discouraging it. Note the ‘probably’, and the extremely restrictive example. He’s used culture as another rule, not as a unifying identity which influences responses to external forces and stresses. Cultures have rules, but operate in much more complex ways than the application of a set of rules.

What’s more, Hong Kong’s ‘Charter’, the One Country, Two Systems concept and Basic Law is controversial. The Basic Law was revised significantly in the run up to the Handover (the moment of decolonization) – it was not in place in its 1997 state for much of Hong Kong’s growth experience. It has been the subject of controversy since the Handover, with democratic structures in Hong Kong modified, for example. Romer’s handling of the Joint Declaration and Basic Law is simplistic. The Joint Declaration was made in 1984. Hong Kong was already developing at a rapid pace by then. The ‘Charter City’ for Romer seems to date from a point well after the development path had been set. It’s ahistorical to claim Hong Kong’s ‘Charter’ status was the source of development. Of course, a different set of rules existed before this system; yet they were ever-changing and it’s far from clear that they didn’t evolve in response to development as much as they provided a foundation for it.

Hong Kong’s rules, its Charter, managed to make the most of its circumstances; but it had to have these circumstances first. There were natural resources and historical accidents that put it in a great position, and the same is true of other city states such as Dubai and Singapore. This indicates that a Charter City might need significantly more than good rules and empty land.

Charter Cities will likely also run into problems of identity and group behaviour. Immigration from diverse sources and entry into a new society would almost certainly lead to groupings of communities along various identity lines: linguistic, ethnic, national. As such, these societies would likely be particularly prone to conflict between groups, especially in their early stages when distributional conflicts are likely to arise, for example if any one group performs particularly well in the immediate term. Crises in particular may lead to a retrenchment within groups and a combative attitude vis-à-vis other groups. This would need to actively be mitigated through nation building.

In his response to Blattman, Romer acknowledges that in the case of Chicago, a Charter City-like idea (creation of high rises) failed spectacularly. However, his response is unconvincing. I quote:

… Sometimes they don’t work, as the public housing projects in Chicago demonstrate. Sometimes they work remarkably well. Architecturally similar high-rise buildings in Hong Kong and Singapore provided livable housing for large numbers of working poor in the 1960s and 1970s… the key difference between these cases lay not in the hardware or architecture but rather in the supporting rules, particularly those related to crime.

I don’t know very much about the Chicago example. It appears to me, though, that Romer hasn’t considered the social and cultural relations that existed in Hong Kong prior to the building of high rises. Hong Kong had in 1960 a much longer history than Charter Cities will have when they are built. As such, it had already developed social structures that could sustain high-density, high-rise living. It is not simply a case of law and governance. A complex, evolved social structure also placed restrictions on the kind of crime Hong Kong suffered (don’t forget Hong Kong has a well developed organized crime network, the Triads – and these often operated in these high rises). Such rules cannot just be set by a Government or Charter, they arise from within a society based on complex historical and social processes.

Charter City immigration, particularly when you consider that Romer expects that much of the workforce of Charter Cities would come from ‘slums’ and ‘subsistence agriculture’, would also be difficult to marshall into a coherent workforce. How would different (or non existent) educational qualifications be codified and used to signal in the labour market? What would be the lingua franca if you have Kiswahili speakers living next to Mandarin and Malay speakers, employed by Francophone companies, for example? The basic forms of social homogeneity-above-heterogeneity that the evolution of a community often gives rise to would need to be constructed.

What’s more, in Romer acknowledgment that the a Charter City might fail, he claims that this risk is borne by those with fixed assets, not the mobile labour forces that can move. If these people really are going to come from ‘slums’ and ‘subsistence agriculture’ he’s massively overestimating their mobility. The sunk costs of a migration are large, and emotional as well as material. It’s not at all straightforward to say that a destitute Malawian can up and off to Hong Cuba, and then leave five years later when it looks like it might fail. He’ll probably not have the money to do so and may already have foregone his place in his social network back ‘home’. The labourers who can come and go will be ones who are already middle income, and if these are the primary beneficiaries of the Charters, its impact on global poverty will be small.

Consider further the need for public goods. The corporations will not want to pony up for public goods such a streetlighting – it may be too great a sunk cost compared with other markets. Yet initial tax revenues would be paltry due to the poverty of the workforce; and in any case public goods such as policing would need to pre-date the establishment of factories and such. Such public goods cannot be provided little by little, either. If capital is to be attracted (let alone labour), the city cannot take time to evolve a public sanitation department based on tax revenues. They need to be provided big-bang style, all at once.

In providing these public goods, the Charter City may again run into problems of identity and social cohesion. I’ve previously mentioned Miguel’s study of Tanzania and Kenya, which suggested that in the absence of nation-building policies public goods may be more contested and difficult to raise funds for. Charter cities, being totally constructed, would presumably run into such problems on a large scale.

So ultimately, how do we judge the concept of the Charter Cities? As a solution to intractable economic problems, the idea must be applauded for its audacity and its capacity to reorient how we think about development. If it were workable, the solutions to creation of capitalist economies and resolving property rights issues would be among the best innovations economics has produced.

However, where the concept falls down is in its very ‘economistic’ approach. Economies are more than resources, rules and technologies. They are manifestations of social relations. The concept fails to conceive the economy in its context, and this is ultimately why I believe they would be a failed experiment, potentially catastrophically so, if identity politics play out in an unfavourable way.

But perhaps I’m missing something about how rules and Governance can address these issues. Do we know enough to try? I’m intrigued to hear what others think.

2 thoughts on “Living Just Enough for the City? Extended Thoughts on the Charter Cities Proposal

  1. Openworld

    October 7, 2009 at 7:31pm

    Several paths exist for Charter Cities/Free Cities to seed transformations in cultural/social relations.

    One is intrinsic. As noted by Alvin Rabushka of Hoover Institution, the creation of depoliticized economic zones in many parts of Asia has fostered individualism by greatly expanding opportunities for person:person trading — rather than feeding tribalism as in settings where winners of group-vs-group power struggles control the resources.

    Second, free areas have opportunities to spread new cultural memes by launching microscholarship initiatives that expand access to entrepreneurial schools for the poor. (Land grants in free cities for such initiatives can result in rapidly appreciating asset endowments). James Tooley’s research has shown how such schools tend to outperform public schools in preparing students with productive skills and attitudes.

    Third, immigrants to privately-developed free cities will very likely find themselves living in neighborhoods with vibrant private community associations. Covenant-based homeowner associations already offer a spectrum of culturally-tuned support services and systems. They can provide a responsive path for new residents to transit to the norms most valued in world cities.

    Finally, influential cultural institutions of the sponsoring country can be vested as beneficiaries and stakeholders in the success of the free areas. A share of annual land lease revenues (on the Hong Kong model) could go directly to fund their current and future endeavors. Build-Operate-Transfer agreements with private developers of Charter Cities, moreover, could convey most or all of the real assets of the free cities to them. Such framework can encourage moves in the prevailing culture over time in ways conducive to growth.

    Best,

    Mark Frazier
    Openworld, Inc.
    “Awakening assets for good”
    @openworld (Twitter)

  2. Ranil Dissanayake

    October 8, 2009 at 7:32am

    Mark, thanks for your comments. They’re very helpful and really made me think.

    First off, I think it is very important to distinguish between Charter Cities (which appear to be totally constructed, and would be populated by an almost entirely ‘new’ population) and free cities / zones, like China’s SEZs. I would like to add that I have absolutely no objection to the creation of more special economic zones within a country that promote entrepreneurship and growth and adopt new rules, as experiments (of course if they work spectacularly, they shouldn’t be special zones – they should be the norm).

    In the latter case, your points are all very valid, since we are talking about modifying an existing culture and identity and providing new forms of expression to them. In the former case, there is no existing culture or identity, so we are not talking about ‘transformations’ in cultural and social relations but ‘building’ or ‘creating’ them where none already exist except insofar as communities that exist elsewhere reproduce themselves post immigration.

    Now, taking your points in turn as applies to constructed cities rather than cities granted new status:

    1) Charter cities are not necessarily depoliticized: they are ruled by a Governing charter, and Romer does not rule out that this will involve representation, which will inevitably foster politicization, if not in the creation of parties, then in the creation of pressure-groups.

    The research you quote seems to be about economic zones in Asia (I haven’t read it – is it available online?), where pre-existing cultural norms and strong forms of identity exist. Promotion of individualist economic relations builds on a pre-existing social platform.

    That said, I would agree that person-to-person trading is more likely in Charter city, especially as Romer’s idea implies that all the capital (and thus jobs etc) will be controlled from outside the city, as it will flow in, responding to rules. However, the point I make about groupishness particularly pertains to the early stages of the charter city: it will not arrived as a fully formed society, which can be modified to push person-to-person trade. It will have to be built, and when this process is uneven (as it almost always has been in the creation of any kind of state) the absence of a pre-existing unifying identity may make group conflict more likely.

    Further, if public goods need to be provided (such as policing) or the project runs into rough times early on, without any unifying identity, conflicts over resource allocation etc. would likely take the form of pre-existing identities, which if migration occurs from a number of places, will be fragmented. The creation of individualist relations and identity won’t be complete (no society has totally individual identity) and it also won’t be immediate.

    2) This point makes a great deal of sense as far as the promotion of an ‘entrepreneurial culture’ goes. It won’t affect group identities, but that’s a different issue. The only issue is how quickly they could be created and brought up and running in a charter city where inhabitants don’t have the right of abode in the mainland associated with it, and therefore would just be another overseas student in such a school unless it was created inside a charter city.

    3) I’m not sure why it’s more likely that in a ‘new city’ created by charter and immigration, there would be vibrant private and community associations. It’s not like high rises in Hong Kong were created with fully formed social associations. The first ones to spring up and take advantage of the form was organised crime.

    4) This makes sense. Once cultural associations have sprung up they most definitely can be stakeholders in the success of the free areas, and this definitely can be conducive to growth. Again though, it’s the creation of cultural institutions that is the issue.

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