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Charter Cities
Paul Romer, the seminal thinker on economic growth, accepts that aid can be useful to poor countries, such as Haiti, when disaster strikes. He is very sceptical, however, about its efficacy in setting such countries on self-sustainable developmental paths. His proposal might be useful for Guyanese policy makers. He argues that one reason for “the failure could be traced to weak or wrong rules. The right rules can harness self-interest and use it to reduce poverty. The wrong rules stifle this force or channel it in ways that harm society.
The deeper problem, widely recognised but seldom addressed, is how to free people from bad rules. Instead of focusing on poor nations and how to change their rules, we should focus on poor people and how they can move somewhere with better rules. One way to do this is with dozens, perhaps hundreds, of new “charter cities,” where developed countries frame the rules and hundreds of millions of poor families could become residents.
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. It could create economic opportunities and encourage foreign investment, and by using uninhabited land it would ensure everyone living there would have chosen to do so with full knowledge of the rules.
To understand why rules are the way to harness self-interest, and why such new cities could work where old cities have not, look …at the example of electricity. We know from the developed world that it costs very little to light a home—on average, less than one US penny an hour for a 100-watt bulb. We also know that most poor people in Africa are not starving. They could afford some light. Africans do not lack electricity because they are too poor. Indeed, reliable power is so important for education, productivity and job creation that it would be more accurate to say that many in Africa are poor because they don’t have electricity. So why don’t they?
US customers have cheap electricity mostly because rules channel self-interest in the right way. Some protect investments made by utilities, others stop these companies abusing their monopoly power. With such rules, companies win; efficient providers make a profit. But customers win too; they get access to a vital resource at low cost. It’s the absence of these rules that explains why many Africans don’t have electricity at home. It might seem a simple insight, but it took economists a long time to understand it.
Put simply, some countries are better able to establish the type of rules that help good ideas spread, while others are trapped by bad rules that keep ideas out. The rules stopping cheap electricity, for instance, are not hard to identify. The threat of expropriation or political instability stops many western electricity companies moving into Africa. Those that do set up there can exploit their power as monopolists to charge excessive prices. Often they offer bribes to stop rules being enforced, or pay bribes themselves. Good rules would stop all this. So to unleash the potential of the marketplace, poor countries need to find a way to create good rules.
The challenge in setting up good rules lies in solving what economists call “commitment” problems. How can a developing country promise to keep the rules that govern investment fair? The answer may be what have been called “Charter Cities”. Some economists have objected that a charter agreement between two countries will not necessarily solve the commitment problem that lies at the heart of development failures. The leaders of many countries enter into agreements, sometimes with the best intentions, that subsequent leaders or officials do not honour. To guard against such an outcome, partners in a charter city must negotiate a formal treaty, like the one that gave the British rights in Hong Kong, (which can be seen as the first Charter City).”
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