Assuming away politics doesn’t work

Economist Paul Romer, best known for his work on Endogenous Growth Theory, is floating the idea of “charter cities” as a way to spur development in poor countries. Romer argues that charter cities in developing countries can help get around the political roots of poverty, such as weak adherence to the rule of law, rampant corruption, and predatory bureaucracies:

How would such a city work? Imagine that a government in a poor country set aside a piece of uninhabited land. It invites a developed country to enter into a new type of partnership, in which the developed country sets up and enforces rules specified in a charter. Citizens from the poorer country, and the rest of the world, would be free to live and work in the city that emerges…

And the new zone created need not be ruled directly from the developed partner country – residents of the charter city can administer the rules specified by their partner as long as the developed country retains the final say…

Romer argues that because the cities will be uninhabited at first,

…as these cities seek out residents, the leaders and citizens in existing countries will face the most effective pressure for good governance – competition.

I think that Romer is on to something here. He is taking a stab at a great injustice when it comes to development: sovereignty is fiction, but poverty is real. Why should people who live in poor countries suffer because they have bad governments? The poor in poor countries are those who are least likely to be able to emigrate to wealthy ones, so charter cities plausibly provide an alternative.

Nevertheless, the important question is not whether they would work in theory, but whether they would work in reality and this is a tough question. One problem is the commitment one that Romer discusses: once the city exists, the host government can renege on the promise to accept the terms of the bargain. Thus, there would need to be a credible enforcement mechanism and I wonder if a treaty – as Romer suggests – is enough. Let’s suppose it is. The more important question is whether host countries would want charter cities. Here I think Romer is on shakier ground. He cites two quasi-examples of where this has worked, Hong Kong and Mauritius. I am not sure these are great examples as Hong Kong was a formal British colony and the Government of Mauritius saw special export zones as an important part of their own economic development program, as Romer makes clear.

Poverty is pervasive in many developing countries because politicians are not committed to economic development, but personal enrichment and maintaining political power. If economic development is consistent with these objectives, such as in China, then they could work. However, charter cities are not necessary in China because the government is committed to economic development.

In my opinion, the question is whether governments in most developing countries would have the political incentive to allow charter cities. I think in many cases the answer is no. To have a booming economic enclave due to good governance within a country would demonstrate clearly the failings of the existing government and thus might plausibly create demands for reform. Why politicians who are content with their country’s current political situation would want to take such a risk is not clear. North Korea is an extreme – yet clear – example of where something like this could happen. I thus conclude that the countries that need these the most – those with the lousiest governments – are those who would want it least. Similarly, while weak governments in failed states, such as the Democratic Republic of the Congo or Somalia, might welcome charter cities, because the governments in these countries can’t provide security, I can’t imagine who would want to take the risk of setting up a charter city in such a territory.

Romer’s idea is the latest version of trying to spur development by getting around politics. In many ways it’s an updated – and more extreme- version of the Washington Consensus and Romer has made the same mistake that proponents of the Washington Consensus made. The Washington Consensus did not fail because it’s bad economics, but because it’s bad politics. I think charter cities fit the same category.