[shaddi]

I'm not going to fault this piece for being hand-wavy and poorly justified: it is that, but then again, it's a piece of popular journalism which is allowed to be. So, I'll criticize the broader idea.

This article cites China as a model. Hong Kong did not pull the rest of China up as it grew. It certainly played a role, but frankly the communism that took resources from the urban coast and built roads, schools, and other infrastructure in rural areas was more likely a bigger contributor to the massive improvement in (purely economic) standard-of-living for most Chinese.

It was in particular /not/ enlightened foreign rule of urban areas that did this. If we accept that all geopolitical entities respond to incentives, it is not clear that direct foreign control of areas of the developing world will produce the ideal outcome for those areas: this will only be the case when the incentives and interests of both the local population (which is not monolithic, btw, but we'll ignore that for now) and the foreigners align; long term prosperity requires that incentives align for both in the long term, which seems terribly unlikely. Moreover, the history of development is fraught with stories stories good-intentioned outsiders failing to make a beneficial impact because they poorly understood the complex local situation, and it's simply unrealistic to assume you can just start with a clean-slate-by-fiat in a "charter city" and build without considering a place's history.

I think Romer has a good core idea, one that few people would argue with. Namely, development is not just a matter of fixing the "Production = F(capital & labor)" equation; good governance, good ideas, and good people all are required. While it may be surprising to some, this is an idea that is pretty well understood (at least at a high level) in the development community/industry. My beef with his idea is a flawed execution, and one that I think could be potentially damaging in the long term. These ideas need to come from local populations and make sense for their own contexts.

As an analogy, you just aren't going to reproduce Silicon Valley by emulating the Bay Area's regulations and investment level: there is a whole history that made it the way it is. Attempts to do so are kind of doomed from the start, so it's better to focus on creating new centers of prosperity that make sense for the local context. I don't think foreigners are well positioned to do that.

---

Another point to make, the Millennium Villages Project had a similar premise to Romer's. The idea was that solving the problems of poverty in particular villages through strong international partnerships would lead to spillover effects throughout the surrounding areas. Everything I've heard about it is that the results have been alright, but not really that great. Besides a bit more of a heavy-handed foreign-involvement approach, I'm not sure if the "charter cities" idea really is that different than MVP and hence it's not clear how it will overcome the obstacles MVP faced.

Edit: William Easterly is quoted here. He has an awesome book, "The Elusive Quest for Growth", that discusses a lot of non-intuitive reasons why development efforts have historically failed. I would highly recommend it.

[econ11]

"The communism that took resources from the urban coast and built roads, schools, and other infrastructure in rural areas was more likely a bigger contributor to the massive improvement in (purely economic) standard-of-living for most Chinese."

That is just shockingly untrue, intellectually dishonest, and utterly asinine. I have no clue why your post was up-voted so highly. China reformed its communistic system and embraced capitalism toward the late 70s. GDP growth has grown staggeringly since, and is the fastest growing large economy caused by its move toward a freer market system. Communism hardly caused a dent for its GDP growth between the 50s to the late 70s [1], but instead, caused widespread famine, the greatest destruction to real estate in human history, and deaths in the millions due to massive starvation. [2]

The graph below basically discredits communism contributing anything to the "massive improvement in (purely economic) standard-of-living for most Chinese". [3]

[1] http://en.wikipedia.org/wiki/Economy_of_the_Peoples_Republic...

[2] http://en.wikipedia.org/wiki/Great_Leap_Forward#Consequences

[3] http://en.wikipedia.org/wiki/File:Prc1952-2005gdp.gif

[shaddi]

I never meant to say communism was responsible for the country's economic growth. Clearly, liberalisation caused that, as your graphs imply. However, the growth was concentrated on the coast, and the existence of a central command economy was the direct mechanism for infrastructure development in rural areas that were not directly benefiting from liberalisation. I don't claim communism is a good approach to economic growth, I meant it as a counterexample to the claim Hong Kong brought liberalism to the countryside and poverty went away. Hong Kong brought the wealth, Beijing redistributed it (violently).

I expect I was upvoted for commentary on the charter city idea, not because I proposed communism as an alternative. Thank you for bringing up an important point though.

Edit: please include the full sentence from my post, I think the part that you removed obscures my meaning.

[anigbrowl]

The Chinese coastal cities got rich in part by emulating Hong Kong, providing much of the capital required to further develop the interior (much of which remains quite poor, however). There was a news story recently which illustrated how Shanghai had changed over the last 20 years with two photos taken from the same vantage point in 1990 and 2010. Even as recently as 1990, Shanghai just looks like a low-rise town, nothing special. The 2010 photo looks like a spaceport. This was in large part the result of Deng Xiaoping saying that the government was OK with people getting rich and would no longer treat it as an economic crime.

[econ11]

RE: "...a bigger contributor to the massive improvement in (purely economic) standard-of-living for most Chinese"

Hong Kong's prosperity influenced China to transform into a freer economic system. The roads, schools, and other infrastructure built from China's centrally-planned economy would've been much more affordably built with a higher and growing GDP; instead, doing those projects shifted much-needed resources during its Great Famine and many other periods of starvation into unnecessary and ultimately lethal projects that caused the deaths of a lot of people.

[shaddi]

Once again, I don't dispute that; we're in full agreement. My key point is that the effects of liberalism that lead to growth in Hong Kong did not lead directly to growth in rural China; as nice as that would be, there were other forces at play that caused that. Another way of putting this is to say that the effect of the communist government was to constrain growth around Hong Kong, and infrastructure development occurred in rural areas despite that.

The motivation behind "charter cities" is exactly that such a direct effect from liberalization would occur, whereas that doesn't necessarily follow and certainly not well-illustrated by the article's example. It is just one point in a broader criticism of the whole concept: such cities may provide an example, but they don't solve the (IMHO, harder) problem of affecting change in the non-charter city areas, which will still face broader structural obstacles. The existence of a Hong Kong is not a sufficient condition for broad societal change, though it is certainly a helpful one, if not exactly necessary.

I'm happy to continue this discussion via email, no need to take up more of this thread.

[Confusion]

  China reformed its communistic system and embraced
  capitalism toward the late 70s.

As someone claiming to be countering something 'shockingly untrue, intellectually dishonest and utterly asinine': take a look in a mirror please. China has never 'embraced capitalism toward the late 70s'. That's a PR ploy. On the one hand, the trivial 'free internal markets' have always been there, as much as they have always existed in Cuba. A complete lack of internal markets has never been implemented anywhere, except for perhaps North-Korea.

On the other hand, for a vast majority of purposes, there are still no free internal markets in China. You can't just start a company manufacturing bicycles and expect to sell them: the government still tightly controls who is allowed to do what and when. Whether you call it a communism, an oligarchy or even a dictatorship doesn't matter: that's not embracing capitalism. At most they've acknowledged how capitalism effectively rules the international markets and gone effectively along with the flow. Internally, there's a far cry from free markets.

Ascribing China's growth to 'embracing capitalist principles' is just wishful thinking from people that think capitalism is the source of all good things. If anything is responsible, it's the fact that a well-informed leadership with a strong vision can pull a country from the dust, like no president of a democratic country would ever have the mandate to do. That is what has happened in China, capitalism be damned. Touting 'capitalism' has just made them look good enough in the eyes of the West to make it that much easier to pull it off.

[noilly]

At the same time, Hong Kong served as a model for China to emulate when it gradually liberalized its economy, beginning with the SEZs in coastal southern China in the 1980s. I think charter cities could be a novel way of easing people who have lived in generally corrupt and economically distorted environments into better institutions. Westerners take for granted that the trust embedded in the social contract and the civic and economic habits that emerge from this trust are not a given in many places (i.e. trust that the government/criminal entities/rent extractors will not capriciously bend things to their advantage).

[notahacker]

If nothing else, well-run quasi-independent liberal cities with a reputation for lower corruption are very good at attracting foreign investors, and multinational businesses that do more than just extract raw materials. Setting up artificial boundaries that allow the poverty of the rest of the country to be overlooked by visitors also adds to the business-friendly appeal, and despite the cynicism of such an approach could conceivably benefit the poorer parts of the country in the long run.

On the other hand Hong Kong is the exception to the rule that developed countries haven't exactly turned the few pieces of overseas territory they still control into beacons of prosperity. And the example of Singapore shows that effective organisation from within can build a viable modern city state from nothing at least as effectively as British-run Hong Kong. There are many factors the two had in common during their period of rapid economic growth; being in the thrall of a paternally-inclined colonialist wasn't one of them.

[anigbrowl]

Singapore was run from London until 1959, when it was granted independence (it declared complete independence from the commonwealth in 1963). At that time it already had the highest GDP per capita in Asia; the first Prime Minister, Lee Kuan Yew essentially ruled the country until 1990. Known as Harry to his friends, he attended an elite prep school in Singapore and later studied at the London School of Economics. He developed the institutions that were already present in Singapore rather than having to build them from scratch, and I think most people would agree that his governance was pretty paternalistic.

I personally think the British are pretty good at this sort of thing, and I say that as a native of a former British colonial possession myself.

[notahacker]

His governance was very paternalistic; far more so than the pluralist democracy the British would have preferred to leave behind. As much as I'd love our fine educational institutions to take the credit for Lee Kuan Yew, I figure that we'd also then have to take the blame for Saif al-Islam Gadaffi, amongst many post-colonial Prime Ministers, Presidents, Ministers and faction leaders who had the privilege but not the vision.

Singapore might have had one of the higher GDPs in Asia at the time of independence, but most of the population lived in absolute poverty - the government-financed apartment blocks, vast industrial estates on reclaimed land and most of the financial centre came afterwards, as did the country's appearance in top ten GDP per capita lists. I don't find it particularly easy to believe that the same >7% average annual growth rate would have been achieved if we were in charge.

I think Hong Kong and Singapore are pretty exceptional as former colonial powers go (with a shared characteristic more obvious than British rule being the high proportion of culturally Chinese people) and I am British.

[anigbrowl]

We're largely on the same page, I think. I certainly don't wish to denigrate the work, ideas, and motivations of post-colonial governance where it has been a success. And you're right as well that the British probably hoped to see Singapore develop in a somewhat less authoritarian direction than it did, or to discriminate less heavily in favor of ethnic Chinese people rather than Malays and Indians, as was the case until fairly recently.

I'm inclined to give a few extra points to the British colonial legacy, despite numerous moral and political failings along the way because their former possessions seem to have come out somewhat ahead of other countries' former possessions as independent nations. It's entirely possible that this has more to do with some basic factor like fluency in the English language, rather than any administrative genius. Among ex-British success stories (none without reservation or controversy) I'd count HK, Singapore, India, Ireland, Israel, the USA, Canada, NZ and Australia. Other places, such as Pakistan and Jamaica and various middle eastern countries, have had less success.

BTW, I'm Irish if you were wondering about the cultural context. So we've had the experience of being independent for longer than many other former territories, but still being partly colonized (northern Ireland) in the view of a few; among people's grudges are things like pre-industrial negligent genocide (famine next door? who cares) and post-industrial political oppression (from 1916 to very recently up north), but on the other hand we were arguably better off insofar as we were ruled directly from London and represented in the British parliament (prior to independence) rather than through a governor or privy council.

Like the US, as soon as we gained independence from Britain we constituted ourselves as a republic with an elected president (although our constitution is a very boring read by comparison), but unlike the US almost all power is vested in the parliament, which runs almost exactly like the British one, and our legal system is exactly like the British one - barristers, wigs, freemasons and so on ;-)

Seriously though, this is the heart of my point: all the countries that were formerly part of the British empire have held onto Britain's common law legal system with few major changes, even though they may have reorganized their political system substantially. American law has been the most highly developed spinoff of this, because with both a federal system and 50 different states, it's larger and more diverse than the law in most other countries, including Britain itself.

Other former colonial powers such as France, Spain, Portugal and the Netherlands left their colonies with civil law systems derived to varying degrees from Roman and Napoleonic codes. It's too much to go into here but a key characteristic of such systems is a much stronger weight for statutory law and a court system where judges hold more of a prosecutorial role and there is less emphasis on trial by jury. I personally feel this leads a more unitary style of government where power flows from the top down and that this inhibits social and economic development somewhat. Others consider that more democratic - a philosophical issue that won't be resolved here.

[shaddi]

Of course, that is clear. However, declaring a Charter City won't magically erase corruption and other structural causes of poverty, and bringing in a foreign party to impose governance brings its own set of issues / has historically not worked out well.

Something closer to the lines of SEZs seems to capture the best of both worlds and makes more sense to me. It's a way to encourage liberalization (which we'll accept as a purely good thing for now, though obviously there is debate on that), bring in improved regulation, and provide some foreign expertise which could be helpful. It also aligns incentives a bit better, since it specifically focuses on business, rather than all aspects of governance (it's easier for us all to get along when we're in a mutually profitable relationship).

[anigbrowl]

The problem with a SEZ is that most people don't want to be industrialists, so an industrial park doesn't seem all that exciting unless you own a slice of it. At best, for ordinary folk all it does is jobs. That's a good thing, but there's more to life than just working.

A city, on the other hand, is somewhere to live. Poorer residents might work the exact same hours for the same pay, but living in the same place that they work means they're getting indirect benefits like physical and legal infrastructure. They're not just bussed into the SEZ to work in the morning and bussed out again in the evening, back to their 3rd world existence where they may have few economic or political rights. A SEZ on its own only produces goods, but a city produces people and lifestyle and cultural wealth, and thus fills an aspirational function. People go to big cities to pursue their dreams and make money, even though they know it may be expensive and difficult. A SEZ with nobody living inside it is just a place to work, and reduces the people who work there to commodity labor with no stake in the longer-term future of the place.

[shaddi]

Excellent point -- no simple solutions. It's why this is a hard problem.

[joe_the_user]

It seems fairly clear to me that China succeeded by inviting foreign investors in, offering them a good deal and keeping them on a tight leash. The last is a big "and".

You can contrast China's relative success to the failure of Mexican Maquiladoras. By allowing US companies to set-up shop in fashion that involved no commitment, no building of infrastructure and no requirements to keep capital in the country, Mexico opened itself up for the situation of today, where US companies in Mexico are closing shop and moving to ... China.

Edit: China also had the luxury of being so big a market that many investors have the "I can't afford not to be there" mentality. I'm not sure if any other country could duplicate that now.

[yummyfajitas]

Failure of Maquiladoras? Could you explain this statement?

As far as I know, Mexico has more or less continually grown since NAFTA, and Maquiladoras play an important role in their economy. They certainly are facing competition from much less wealthy countries (like China), but so is everyone else in the industrialized world.

http://www.google.com/publicdata?ds=wb-wdi&ctype=l&s...

[protomyth]

Mexico has other problems that obscure any direct comparison. Government corruption in Mexico is a big factor as well as having the US on it border providing better opportunity plus the war on drugs.

[Tichy]

"a bigger contributor to the massive improvement in (purely economic) standard-of-living for most Chinese."

Has this game even been played out it? From far away, China does not look like a desirable place to live in. Maybe they are just destroying everything in exchange for a few good years?

I remember having read somewhere that the Russians destroyed the Aral sea by starting excessive wheat farming on it's borders. So they had good wheat yields for a couple of years. But then suddenly the Aral sea was gone completely, and with it the wheat. I wonder if we might not see a lot of such things in China eventually.

[warrenwilkinson]

I don't think Romer was advocating foreigners set up these zones. I think it's just that Romer is a foreigner in most the places he tries to implement his ideas.

The idea is good laws and low taxes make very wealthy cities. See also the free state project (http://freestateproject.org/) which is trying to make New Hampshire more economically free.

[jdp23]

"In the kind of charter city he imagines, the governor would be appointed by Canada or some other rich nation, but the people who work there would come from poor countries."