Wealth of Nations July/August 2010

The Politically Incorrect Guide to Ending Poverty

In the 1990s, Paul Romer revolutionized economics. In the aughts, he became rich as a software entrepreneur. Now he’s trying to help the poorest countries grow rich—by convincing them to establish foreign-run “charter cities” within their borders. Romer’s idea is unconventional, even neo-colonial—the best analogy is Britain’s historic lease of Hong Kong. And against all odds, he just might make it happen.

Halfway through the 12th century, and a long time before economists began pondering how to turn poor places into rich ones, the Germanic prince Henry the Lion set out to create a merchant’s mecca on the lawless Baltic coast. It was an ambitious project, a bit like trying to build a new Chicago in modern Congo or Iraq. Northern Germany was plagued by what today’s development gurus might delicately call a “bad-governance equilibrium,” its townships frequently sacked by Slavic marauders such as the formidable pirate Niclot the Obotrite. But Henry was not a mouse. He seized control of a fledgling town called Lübeck, had Niclot beheaded on the battlefield, and arranged for Lübeck to become the seat of a diocese. A grand rectangular market was laid out at the center of the town; all that was missing was the merchants.

Fast-forward several centuries, and Henry the Lion’s would-be heir is Paul Romer, a gentle economist at Stanford University. Elegant, bespectacled, geekishly curious in a boyish way, Romer is not the kind of person you might picture armed with a two-handed flanged mace, cutting down Slavic marauders. But he is bent on cutting down an adversary almost as resistant: the conventional approach to development in poor countries. Rather than betting that aid dollars can beat poverty, Romer is peddling a radical vision: that dysfunctional nations can kick-start their own development by creating new cities with new rules—Lübeck-style centers of progress that Romer calls “charter cities.” By building urban oases of technocratic sanity, struggling nations could attract investment and jobs; private capital would flood in and foreign aid would not be needed. And since Henry the Lion is not on hand to establish these new cities, Romer looks to the chief source of legitimate coercion that exists today—the governments that preside over the world’s more successful countries. To launch new charter cities, he says, poor countries should lease chunks of territory to enlightened foreign powers, which would take charge as though presiding over some imperial protectorate. Romer’s prescription is not merely neo-medieval, in other words. It is also neo-colonial.

Inevitably, Romer’s big idea attracts some skeptical responses. “Paul is very creative,” says William Easterly, a development economist at New York University, “and sometimes creativity can cross the line into craziness.” The way Easterly sees it, charter cities (like charter schools in American cities) may provide an alternative to incumbent government systems, promising experimentation, competition, and perhaps a new way forward. But Easterly also worries that Romer has fallen prey to an old siren song—the idea that you can slough off debilitating customs and vested interests by constructing a technocratic petri dish uncontaminated by politics. Other critics are blunter. “Romer makes it sound as though setting up a charter city is like setting up a fairground,” Elliott Sclar, a professor of urban planning at Columbia University, told me. “We take a clear piece of land, we turn on the bright lights, and we create this separate environment that will stand apart from everything that’s around it. I wish it were that simple.”

However simple-seeming his ideas, Romer is no lightweight. Starting in the late 1980s, he produced a series of papers that changed the way his profession thinks about economic growth; his most celebrated contribution, published in 1990, “was one of the best papers in economics in 25 or 30 years,” in the estimation of Charles I. Jones, a colleague of Romer’s at Stanford. Before the Romer revolution, theorists had explained an economy’s growing output by looking at the obvious inputs—the number of hours worked, the skills of the workforce, the quantity of machinery and other physical capital.

But Romer stressed a fourth driver of growth, which he termed simply “ideas,” a category that encompassed everything from the formula for a new drug to the most efficient sequence for stitching 19 pieces of material into a sneaker. In statistical tests, the traditional inputs appeared to account for only half the differences in countries’ output per person, suggesting that ideas might account for the remaining half—and that leaving them out of a growth theory was like leaving the prince out of Hamlet. And whereas the old models had predicted that growth would slow as population expansion put stress on resources, and as new investment in skills and capital yielded diminishing returns, Romer’s New Growth Theory opened the window onto a sunnier worldview: a larger number of affluent people means more ideas, so prosperity and population expansion might cause growth to speed up.

Romer’s enthusiasm for technology made him a natural West Coaster, so it is not surprising that, after spells on the faculty at the University of Rochester and the University of Chicago, he fetched up at the University of California at Berkeley and then at Stanford’s Graduate School of Business. But the next turn in his thinking involved a rebellion against the libertarianism of his Silicon Valley home. “I was willing to be a bit confrontational,” Romer says, impishly. Starting with a paper he presented at a World Bank conference in 1992, Romer began to emphasize that “ideas” included more than just technologies and manufacturing processes. Ideas were also embodied in customs and institutions—or, as Romer later came to put it, “rules”—patent law, competition law, bankruptcy law, and so on, as well as the softer “norms” that govern people’s behavior. Indeed, these rules could be even more important than technologies, however much the digerati of Silicon Valley might wish to believe otherwise. Without new technologies, an economy might grow slowly. But without decent rules, an economy cannot even make use of the technologies that already exist.

Presented by

Sebastian Mallaby is the Paul A. Volcker Senior Fellow for International Economics at the Council on Foreign Relations and the author of More Money Than God: Hedge Funds and the Making of a New Elite.

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