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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Romer likes to clinch this point with an analogy from industry. A firm like IBM may develop a culture—a set of corporate rules—that is brilliantly suited to handling the institutional customers that buy mainframe computers. But when the PC is invented, and individuals become customers, the IBM culture proves awkward and slow; and reforming its rules turns out to be difficult. So along come Dell and Apple, with business models better targeted at household consumers, and pretty soon computer-users start preferring their products. Change from without comes more easily than change from within. Industrial progress comes from new entrants and new experiments, not from the slow process of changing established corporate bureaucracies.

Sometimes, Romer continues, established businesses subject themselves to an internal version of this process. They spawn experimental subsidiaries, known as “skunkworks,” to try out new business models. For example, the discount retailer Target began as an experimental skunkworks spun off by the old-line retailer Dayton Company. Target was given its own charter and allowed to test out a new approach; it succeeded so resoundingly that Dayton eventually ditched the parts of its business that ran according to the old rules and embraced the Target formula. Again, generating change within an organization is often less effective than driving change from without. If companies can change themselves by setting up subsidiaries with new rules, countries could do the same with charter cities.

Throughout our conversations, Romer maintained a steady confidence that poor countries will eventually welcome charter cities. At the end of one of his overseas trips, he messaged me from his iPhone: “Sadly can’t say more yet other than that in two cases I’m waiting for next step meeting w the president. As before I remain optimistic about response from developing countries.” In one case, Romer and his government counterparts have progressed quite far: they have identified the site for the charter city, and agreed that its success will require the construction of a new port. Meanwhile, Romer is equally confident that elite opinion will come around to his idea—and my own recent straw poll of development economists suggests that at least some of them have already done so.

But the largest obstacle Romer faces, by his own admission, still remains: he has to find countries willing to play the role of Britain in Hong Kong. Despite the good arguments that Romer makes for his vision, the responsibilities entailed in Empire 2.0 are not popular. How would a rich government contend with the shantytowns that might spring up around the borders of a charter city? Would it deport the inhabitants, and be accused of human-rights abuses? Or tolerate them and allow its oasis to be overrun with people who don’t respect its city charter? And what would the foreign trustee do if its host tried to nullify the lease? Would it defend its development experiment with an expeditionary army, as Margaret Thatcher defended the Falklands? A top official at one of Europe’s aid agencies told me, “Since we are responsible for our remaining overseas territories, I can tell you there is much grief in running these things. I would be surprised if Romer gets any takers.”

Sensing the resistance among potential trustee nations, Romer has come up with new variants on his formula. A group of advanced countries could share the burden of trusteeship, rather than one nation shouldering the responsibility alone. To reduce the sensitivities over land and sovereignty, the territory for a charter city could be provided by one country while the migrant workers come from another. When I asked Romer about setting up a charter city in post-earthquake Haiti, he recoiled at the idea: the country has no functioning government, so there is no entity that could transfer sovereignty over a parcel of territory in a legitimate way. But Romer was happy to contemplate creative variations on this theme. What if Mexico ceded some land for a charter city for Haitians, with the charter being administered by a consortium of outside governments?

Whatever becomes of Romer’s movement, it is going to be interesting. His thinking taps into so many currents of our era—an era in which millions of migrants embrace his vote-with-your feet vision; in which the old faith in democratic development is questioned; and in which globalization scrambles settled notions of who rules what where. On one side, critics will be scathing: Elliott Sclar, the Columbia professor, warns, “Charter cities amount to a new form of colonialism, and that’s the last thing we need right now.” On the other side, adherents will cheer eagerly: charter cities are “one of the best ideas that anybody in development ever had,” according to Michael Clemens of the Center for Global Development, a think tank in Washington, D.C. And throughout these debates, it will be hard not to sympathize with Romer’s plea for fresh thinking. Charter cities face plenty of obstacles, and I could have written an article that dwelt exclusively on them. But when African teenagers do their homework under streetlights, isn’t Romer right to think the unthinkable?

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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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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