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.
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As politically freighted as Romer’s ideas are, they also carry a continuing attraction to the people in charge of many poor countries, particularly those with rapidly growing populations. By some estimates, 3 billion people will move to cities in the next few decades, abandoning miserable and environmentally destructive work as subsistence farmers in the hope of better lives in manufacturing and services. In the absence of a Romer-type solution, these migrants will move into urban slums with no running water, high crime rates, few steady jobs, and sewage in the streets; charter cities seem a better option. And Romer’s idea has the great merit of paying for itself. Land in successful cities appreciates in value, creating wealth that can be unlocked to finance new buildings, businesses, and infrastructure. And so African officials continue to meet with Romer, and Romer continues to jet off to wherever they are ready to see him.

When you listen carefully, you realize that much of what Romer is saying should not be controversial. A few development economists argue that geography is destiny, but most share Romer’s conviction that decent rules are paramount. After all, Asia accounted for fully 56 percent of world income in 1820, only 16 percent in 1950, and a substantial 39 percent in 2008; what changed over this period was rules, not geography. Equally, Romer’s contention that a developing country can achieve good government by importing the credibility of foreigners fits with mainstream thinking. When Panama or Ecuador decides to do business in dollars, or when Slovenia embraces the euro, each country is importing the credibility of a foreign central bank. Similarly, joining the World Trade Organization is a proven way to import the rich world’s tariff structure, intellectual-property rules, and domestic regulations—and, just as important, to persuade investors that the reform is permanent. Importing foreign election monitors or peacekeepers can compensate for weak political institutions or security forces. And so on.

But Romer is also urging us to reexamine assumptions about citizenship and democracy, and this is where he gets more radical. 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—the whole point, after all, is to bring the governance of the developed world to workers in undeveloped places. It follows that the workers in Romer’s charter city wouldn’t be citizens in the full sense. They would be offered whatever protections the founding charter might lay down, and they would have to take them or leave them. Rather than getting a vote at the ballot box, Romer is saying, the residents of a charter city would have to vote with their feet. Their leaders would be accountable—but only to the rich voters in the country that appointed them.

This viewpoint is, to say the least, not in keeping with the idealized vision of development, in which freedom and prosperity advance in lockstep, with democracy serving as the necessary companion to economic progress. In the 1980s Ronald Reagan declared confidently, “Freedom works”; and in the 1990s Bill Clinton lectured foreign counterparts on how democracy had become all the more indispensable to progress with the advent of the “knowledge economy.” But assertions like these have seemed more fragile recently, with authoritarian China breaking growth records and state capitalism apparently thriving; Romer is hardly the only person to doubt that democracy is a necessary condition for economic progress. And to the extent that opt-in charter cities offer a third way—something between pure democracy and pure authoritarianism—those who care for liberty might do well to embrace the experiment. Charter cities make it harder for authoritarians to claim that their system offers the only fast route out of poverty.

The real test for Romer’s attitude toward democracy is not whether it conforms to Western ideals, but whether it appeals to the poor people whom Western aid agencies claim to be serving. And on this score, the answer is clear. In fact, you could say Romer’s assertion—that voting with your feet can be a palatable alternative to casting a ballot—already has 214 million adherents, for that is the number of people who have chosen to leave their home countries and settle as migrants in places where they have no political vote. Real development, as distinct from the idealized vision of development, involves hard personal choices. If people are willing to live as legal or illegal immigrants, with rights that range from limited to none, then logically, they should be even more eager to move to a Romerplex, which would promise most of the economic gains of uprooting to another continent while allowing migrants to stay closer to their families and cultures.

If you have stuck with Romer thus far, you are ready for the last part of his argument. If good rules are the key to development, it follows that the big development challenge is to grasp how to reform bad rules—and to accept that conventional approaches are not terribly successful. Think back to the African teenagers reading under the streetlights. The bad rules they contend with are well understood: dozens of World Bank missions have doubtless pointed out that price controls on electricity destroy the electric company’s incentive to sign up new customers. But what is not understood is how to abolish those controls, since the country’s elite, which is already hooked up to the electric grid, will fight tooth and nail against higher prices.

The standard response to this obstacle is to advocate democracy and hope that voters will force change: the minority that has electric light will be outvoted by the much larger number of people who have been denied it. But Romer argues that this way forward is too slow. People don’t always vote their economic interests, and elites with tentacles all over the ministry of energy may keep price controls in place for decades. So rather than wait in vain for electricity rules to change, we are better off starting a new experiment with brand-new rules—a charter city that stands outside the ministry’s authority. Rather than going at an obstacle head-on, Romer is saying, sidestepping it is frequently a better option.

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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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