More on Romer’s Great Folly

"You too can have this city, if you just purchase a simple, easily applied set of rules. Retails at $49.99"

Reader Adam alerted me to a piece in The Atlantic on Charter Cities. Long-time readers will know I’m profoundly critical of Paul Romer’s ahistorical, acultural thinking on the idea, which reveals a basic lack of understanding about how cities, migration and laws actually arise and work.

The article is full of badly reasoned logic, too. It says that Romer has been criticized for his Charter Cities idea, but then defends him by saying that he came up with New Growth Theory. So what? Clever people have stupid ideas sometimes, and people who are expert in one field might turn out to be ordinary or worse in another.

A lot else in the piece, some of which comes direct from the mouth of Romer worries me. Here are a few quotes, the first of which Adam pointed out in his e-mail:

“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.

This is the closest that Romer comes out advocating colonialism outright. Never mind that my earlier criticism pointed out some of the hundreds of holes in his story about how Hong Kong came to be so successful, Romer is decided: Britain made Hong Kong successful by importing new rules. The fact that Hong Kong’s legal code took something close to half a century to evolve, and a further 20 years to be enforced correctly, is completely ignored. I know – my family are all lawyers, and some have been key players in the evolution of that legal code and witnesses to the creation of a police force and institutional structure to enforce it.

“Anything that involves land can be manipulated by people who want to rise up against a leader,” [Romer] began. “You have to find a place where there’s a strong enough leader with enough legitimacy to do this knowing that he’s going to get attacked. It narrows the options quite a bit. But we shouldn’t give up without trying a few more places.” In short, a disappointment with one client is no excuse for failing to pitch other ones. Any entrepreneur knows that.

So, in other words, the only kind of places where a Charter City might actually work are where the Government is strong, has a legitimate leader, and able to resist opposition. Sounds like the kind of Government that least needs a foreign power to come in and govern a city for them.

When you listen carefully, you realize that much of what Romer is saying should not be controversial. A few development economists argue that geography is destiny, but most share Romer’s conviction that decent rules are paramount.

Another worrying statement. The problem is not that economists think that rules are important. The problem is that they are not independent entities. They do not exist in a vacuum, apart from the culture, history, geography, and so on they relate to. Romer’s approach is wrong not because he thinks rules are important or that countries should invite rich Governments to enforce them, but because Romer thinks he already knows the rules, and that they can be imported anywhere. That’s not how it works. In a recent post I pointed out how different rich countries are from each other. That’s partly because their rules, evolved over hundreds of years in some cases, are specific to each of their own contexts. Romer doesn’t see this. He just sees the rules of today, and imagines that they can be peeled off a society and pulled over a new one, like a one size fits all t-shirt.

Finally, one of the old clichés:

But when African teenagers do their homework under streetlights, isn’t Romer right to think the unthinkable?

Romer is right to think outside of accepted conventions, of course. But when his ideas are so misshapen, so at odds with the reality of the world, no amount of poverty in the world justifies their continued advancement.


"Over the line! Mark it zero, Dude!"

Lee has a thought provoking post about institutions over at his blog. Responding to criticisms that the idea is too diffuse and difficult to pin down, he expresses admiration for Paul Romer’s use of the term ‘rules’ rather than the vaguer terms ‘institutions’ and ‘good governance’ (though this is ancillary to his main point, that migration reduces the importance of institutional change). He’s right – it is a more concrete term, but I still take great issue with the way the concept has been used by Romer.

Romer has made rules the centrepiece of his Charter Cities idea. For him, rules are the laws, regulations and norms that govern an economy and society. The Charter Cities idea runs on two central premises: one is that developing country Governments don’t have the right rules or the capacity to enforce them properly. The second is that the ‘correct’ rules are known and can be imported, as can enforcement capacity.

I don’t for a second doubt that rules and enforcement are deeply important for economic development, whether you want to call the bundle of policy associated with all of this institutional economics or governance reform. There are a great number of examples of this historically. When historians debate why the Great Transformation of the Industrial Revolution and rapid economic development occurred in the West and not in other historical centres of commerce such as China, India and parts of the Middle and Near East, one of the most important factors is the emergence of a clear set of rules relating to property and financial intermediation, as well as the improving functioning of the legal system in Britain and the US in particular. Another example is the emergence of property law in the US, which Hernando De Soto has convincingly argued was central to the development of capitalism in the US.

There are also examples of rules that were imported to power economic progress. In particular, when the British brought their banking and legal system to India, it caused a massive spark in Indian businesses: increased investment and hence a more dynamic economy emerged out of the ability to lend and borrow against clear rules.

That said, the reality of how rules emerge and are enforced is far more complex than Romer and many advocates of good governance and institutional approaches to economics recognise. I’ve seen a lot of people write some variation of ‘we know what good rules are’ or ‘we have a good understanding of what institutions stimulate development’. Despite this, I’ve never seen anyone actually set down on paper exactly what the correct legal framework and institutional makeup for development is. If we really did know what worked, surly someone would have written a fairly uncontroversial but best-selling book about this, right?

The basic problem is that we have a fairly good knowledge of what rules and institutions work pretty well where we live, and we assume that these are objectively ‘good’ rules and institutions. Not enough consideration is given to matters of variance across time and space. This is extremely important when considering rules and institutional policy for developing countries.

The first point to make is that rules vary in important ways across space. This is obvious. When people say that ‘we know the rules that make for good development’ do they think that rules (any rules) are the same in all places? A passing interest in world affairs will demonstrate that very important rules are different in different places. Take laws on rape. Most people would assume that laws on something as awful as rape would be relatively straightforward. They’re not. The legal framework around constitutes rape varies across countries quite significantly. Statutory rape is a good example of this. In France, in order to be convicted of statutory rape, it has to be proven that the accused knew the age of the victim. In other words, it’s actually a legitimate legal argument in France to say ‘well, she sure looked old enough!’ Such knowledge does not need to be proven under UK law, for example. Even the basic set of possible verdicts can vary. In some countries, a case can return a verdict of ‘not proven’ – which is different to saying the defendant is guilty or innocent.

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Is this the City that Launches a Thousand Charters?

Coming soon, a brand new city!

I’ve written enough about Charter Cities for most readers to know exactly what I think of the idea. Without restating my previous arguments, news that Honduras are considering (and indeed it appears that Congress has passed a motion in favour of) establishing a 1000 square kilometre “Charter City” within its own borders has set off a few thoughts in my mind.

  • There seem to be some pretty significant differences between what the Government of the Honduras is proposing and what the original conception of a Charter City was. Firstly, is there any external power providing enforcement and the rules? The whole basis for the Charter City idea was that developing countries themselves didn’t have the rules or the credible threat of enforcement – hence the need to borrow both from outside. Secondly, it doesn’t seem clear at all that workers from all over will be allowed to enter the Charter City, given the rhetoric that it is an alternative to Hondurans emigrating to the States.
  • If the rules, enforcement and people all come from Honduras, what makes this a Charter City, and not an special economic zone? A Charter City without foreign presence is just a city with a good set of rules, good enforcement and free entry/exit. Is calling this a Charter City rather than a special economic zone or semi-autonomous state/city simply a marketing exercise to attract attention and investors, by distinguishing it from all the other free zones worldwide (think Shenzhen, Dubai, Djibouti City and so on)?
  • If this is just a city with better laws and enforcement managed by the Honduran Government, I think the rest of the Honduras can easily argue: why don’t we get the better laws and enforcement? Why are they being restricted to this city? If finance is a problem, but they know what rules they need and how to enforce them, this is the perfect situation for ‘big aid’ to step in and fill the gap.
  • Lastly, for all I’ve criticised the idea as fuzzy thinking, it is true that rules and institutions are of crucial importance to development. Where Romer and I disagree is that Romer thinks these are transferable and easily applied in new contexts, and I do not. That said, some rules can be easily transferred if enforcement will is there. Whether this city in Honduras works will depend on how many alien laws, regulations and enforcement systems they import, and how many are homegrown.

My final word on it? I’m not sure it is a Charter City in the sense Romer had it when he first started working on the idea. But it does take ideas from the Charter City concept, and though we can argue about how new the ideas it is taking are, it’s still a great thing to see a country take a bold step in its attempt to create jobs and better conditions for development. I hope it works, and look forward to reading more about how it will be structured.

Importing Capitalism

The uber-capitalist vs. The future development worker

Among my pretty strenuous criticisms of Paul Romer’s Charter Cities concept, I did point out that there were genuinely interesting insights and ideas underpinning the idea. One of them was the idea that a functioning capitalism does not need to be generated domestically, but can simply be imported in the form of international capital, multi-national companies and so on. I spent last weekend in Nairobi with a couple of friends, one of whom is an entrepreneur there. He told me about recent developments in the Kenyan economy, positive and negative, and this issue of the source of the capitalist impulse came up again and again.

Take telecommunications. Telecoms is big business in populous countries with high rates of mobile ownership like Kenya, and the services available there are both expanding and becoming cheaper rapidly. The biggest players in Kenya’s market are Safaricom, which holds something close to 80% of the market; and Zain, which appears to be their main threat in the short term. Zain is aggressively pursuing a strategy of cutting prices to increase market share by offering phone calls to any network (and even international calls) for just 3 Kenyan Shillings a minute. That’s roughly 4 cents in dollar terms, and it’s being marketed as a permanent price change, not a promotion. Meanwhile, Safaricom have one major trump card that they are using to hold on to their market share: M-Pesa, which they run. M-Pesa is the great Kenyan success story so beloved of development workers, which allows people to transfer money instantaneously and very cheaply using mobile phones. This is all great for consumers, who are using more and more varied services on their telephones.

How great this is for the economy, though, is not as clear-cut as it seems. Safaricom, while marketed as a Kenyan entity, is actually majority owned by the UK telecoms company Vodaphone (much in the same way that Malawi’s Kuche Kuche is marketed as ‘Mowa Wathu Wathu’ – ‘Our Beer!’ – despite being brewed by Carlsberg). And M-Pesa was actually developed by Vodaphone and is administered largely in the UK, where all of the servers that it depends on for functionality are based. M-Pesa actually only have a handful of employees actually working in Kenya. Zain, too, are no longer an African company. They were sold by Mo Ibrahim a few years back and are now Kuwait-based. The profits generated from their business in Kenya are repatriated to foreign owners, minus corporate tax.

Instinctively, the mind recoils a little from this realization. Economic development is taken to mean the establishment of some kind of domestic capacity to produce goods and services and generate jobs. Often, the left assumes that multinational companies are damaging to domestic economic prospects, often painted as parasitic on the local economic resources or stifling the prospects of indigenous economic development. The knowledge that profits from business activities leave the country in which they are earned is also unsettling: it feels like the benefits of business are largely accruing to external players rather than the domestic economy, and hence reducing poverty within the country.

But while it’s true that economic development in almost every currently developed country involves and is ultimately powered by the emergence of a domestic capitalist class, looking at the issue from both the historical and the economic perspectives demonstrates that the dominance of international capital in emerging African economies is neither unusual nor necessarily a bad thing.

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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.

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