Charter Cities: Disruption and Little Else

3 years ago ccwa 2

13 Green ConnectorsFew ideas carry more weight in our startup-minded, Silicon Valley-venerating society than “disruption”. It’s a beguiling little word that carries both a sense of dynamism and a whiff of rebellion – consider its cousin, “creative destruction”. The idea of disruption is simple and compelling: Old, staid structures in business (especially tech) must be displaced through entrepreneurial competition, in which ideas are iterated and pitted against each other in the market until one emerges victorious. Call it the experimental method with a dash of natural selection. The notion of disruption has recently leaked out of San Francisco coffee shops and into the national public discourse, where it has been applied to local government, nonprofits, popular culture and much else.

Given disruption’s appeal, then, it should come as little surprise that some thinkers have made an explicit connection between running governments and running startups. Economist Paul Romer has spent the last decade advocating for his idea of “charter cities”, which has been hailed by some as a bold new plan for international development.

Since many developing nations are plagued by poorly-run, corrupt institutions, Romer argues, why not outsource the management of new cities to a disinterested third party? The pitfalls of local rule could be sidestepped, trade and labor could be liberalized, and new techniques of management could be tried if only the reins of city government were handed over to a qualified outsider, like a business. Democracy is not part of this picture; citizens are free to “vote with their feet” but have no direct say in the way the new city is run. As support for his idea, Romer cities a historic enclave of Western management: Hong Kong, long seen as a paragon of how a small pro-innovation government should be run.

The fact that Hong Kong was taken by force seems almost incidental to Romer’s analysis – indeed, if Romer’s plan seems attractive in theory it has yet to be cleanly carried out in practice. His first experiment with the policy was in Madagascar in 2008, when the Malagasy authorities, desperate to attract foreign investment, caught wind of Romer’s ideas and contacted him. Grand designs were drawn up for a new city in the undeveloped south, a jewel of the coast that would attract wealthy tourists and their capital. The city was to be run by the South Korean conglomerate Daewoo. However, Romer’s plan was cut short by the ouster of the Ravalomanana administration in 2009 – his experiment in libertarian utopia was not to be.

However, the idea of charter cities resurfaced a few years later, this time in Honduras. An aide in the Lobo administration discovered Romer through, of all things, a video of one of his TED talks, and decided his plan was just what the restive country needed. Romer was once again called in to meet with the local government, which proposed the creation of “special development regions” (REDs) in unpopulated areas, to be leased out to the highest bidder. In 2011, the Honduran congress voted this plan into law.

Objections surfaced almost immediately. REDs were to be built on the homes of long-oppressed indigenous groups, local leaders were not sufficiently consulted about the plan, and the legal basis of REDs was shaky. Even Romer distanced himself from the project after it became clear that the Lobo administration had already been signing memoranda of understanding with potential investors without consulting him. These objections proved to be too much: In 2012, the Honduran Supreme Court ruled REDs unconstitutional. However, another legislative push for charter cities has recently emerged, this time under the name “Zones for Employment and Economic Development” (ZEDEs). Charter cities’ moment in the sun is far from over.

Is the Honduran case evidence that charter cities are an unworkable idea, or has the movement simply not gained institutional footing yet? Before addressing the merits of Romer’s plan, it’s worth taking a moment to explore the intellectual origins of his idea.

Romer is best known in the economics profession as one of the creators of “endogenous growth theory”. This theory sought to expand on earlier, simpler models of national income growth, like the famous one that won Robert Solow the Nobel Prize in economics. Solow’s model has difficulty explaining why there are vast disparities in per-capita GDP growth across the world; in his model, countries should converge to the same “steady state” of growth over time. Successors to Solow would propose various external or exogenous ways of explaining underdevelopment, like geography and culture, but most of these stories fell flat or were untestable.

Romer and his contemporaries came up with an alternative explanation: National productivity growth comes from within the country, through investment in citizens’ skills – or to use the peculiar economists’ term, “human capital”. Increased investment in education and research and development leads to innovation, which benefits the whole country. The flipside to this conclusion, then, is that underdeveloped countries must have some local obstacles to innovation that prevent them from growing. This idea would influence development economics for years to come – in their 2012 blockbuster book Why Nations Fail, economists Daron Acemoglu and James Robinson argue that innovation-friendly government institutions are the only thing that can create sustained economic growth.

Romer’s personal life may predispose him toward seeing innovation through the lens of entrepreneurship. In the early 2000s, he left academia to found a software startup called Aplia. The ease with which Romer conflates private business practices with public policy no doubt comes from his time in the startup scene. After cashing out of the company in 2007, it was a small step from pitching software ideas to Valley investors to pitching development ideas to world leaders.

The charter cities plan is simply disruption applied to the government level. Romer’s intellectual colonization of politics with ideas from business economics parallels the actual colonization of the global South that he (all but) proposes.

Make no mistake: While Romer’s intentions are benign, his blank slate cities would become little but imperial protectorates for the global rich. If the Lobo administration’s opacity and mismanagement of the ZEDE scheme aren’t cause for concern enough, the list of investors lining up to build these brave new worlds should be. A Foreign Policy article details some of the members of the Committee for the Adoption of Best Practices, the legal caretakers of the ZEDEs:

“Barbara Kolm, the libertarian president of Austria’s Hayek Institute; Cato Institute senior fellow Richard Rahn; Ronald Reagan’s son Michael; Mark Skousen, producer of the libertarian FreedomFest conference; U.S. anti-tax crusader Grover Norquist; and even a member of the Habsburg family. “

Given the naked contempt with which the libertarian intelligentsia treat genuine expressions of democracy, it should come as little surprise that these model Randians have jumped at the chance to lead cities with absolutely no citizen checks on authority.

Even if the managers of charter cities were trustworthy, there is no guarantee that the cities would bring the broad-based economic growth that their advocates promise. Preliminary experience, like the building sites chosen in Madagascar and Honduras, suggests that they would largely be playgrounds for the rich, tourist attractions with little connection to local industry. The ZEDE law requires that “Hondurans must comprise 90 percent of a zone’s workforce and receive 85 percent of all wages” in the cities, but there’s no guarantee as to what those jobs would be. Cities dominated by low-paying dead-end service sector jobs are the probable outcome, especially since the ZEDEs are likely to have minimal labor standards.

This is cargo cult economics – “If you build it, they will come”. Romer and his supporters seem less concerned with the nature of the “they” than with following the commandments of economic orthodoxy: Don’t get in the way of innovation, just set up favorable initial conditions and let the virtues of the free market do the rest. Never mind that theory of disruption probably doesn’t even work in the narrow field of technology or that no country in history has developed absent non-market intervention of some kind. Simply follow the precepts of growth theory, and riches will follow.

Romer’s story matters because it demonstrates how ideas born in the halls of economics departments can have profound implications for the world outside. After all, the Honduran government aide who proposed the charter city policy discovered Romer through an Internet video! The profusion of voices brought on by modern communication technology has not made academics any less politically relevant; Keynes’s “academic scribblers” are alive and well.

If Romer and his contemporaries in development economics want to design real institutions, though, they must assume the social and moral responsibility that those positions entail. The disinterested technocrat is a dangerous myth. If economists refuse to engage with the world as it is, they have little authority to tell us how it should be.

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by Max Mauerman

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