The Gates Foundation recently asked Bryan Caplan, an economics professor at George Mason University, to write a memo that lays out the case for charter cities. Caplan begins by pointing out that redistribution, by itself, cannot overcome poverty in the developing world.
Anyone serious about reducing world poverty must come to grips with a single key fact: Redistribution from rich to poor has not and cannot solve more than a tiny fraction of the problem. Even if you could perfectly equalize income in Third World nations with zero effect on production, the citizens of Third World countries would remain mired in poverty. Take Bangladesh. With a GDP of $256B and a population of 164M, equalization would at best give each citizen an income of $1561 per year – about $4 a day. Countries do not overcome poverty by sharing production more equally. They overcome poverty by increasing production – what economists call “economic growth.”
If more people from the developing world had opportunities to live and work in safe, productivity-enhancing environments, they could, by themselves, do much to reduce global poverty. Caplan cites The Place Premium, a paper by Michael Clemens, Claudio Montenegro, and Lant Pritchett, in support of his point. They find that, simply by switching jurisdictions, workers from developing countries can reap enormous wage gains by moving to relatively well-run countries.
The lesson: Third World workers are less productive than First World workers largely because they live in the dysfunctional countries.
Caplan sees charter cities as an effective alternative in light of the unpopularity of immigration in the world’s high-income countries.
The first-best solution to global poverty, therefore, is for the First World to allow much higher levels of immigration. Unfortunately, despite its low absolute level (annual U.S. immigration is well under 1% of its population), immigration is already extremely unpopular…The challenge, then, is to figure out a close substitute for free migration from the Third World to the First. This is the challenge that Paul Romer’s increasingly influential “charter cities” proposal tries to meet.
It’s well worth reading Caplan’s take on charter cities in its entirety, but it’s also worth clarifying a couple of points. 1. Though its possible that a for-profit corporation could successfully run a new city, this particular governance structure is not part of the Charter Cities organization’s proposal. 2. Though we’ve had good discussions with people at the Gates Foundation about urbanization in general and the charter cities proposal in particular, we have not asked for their financial support.
Notwithstanding their principles, our experience has been that foundations are rather risk averse when it comes to an idea as different as charter cities. This was particularly true when the idea of a charter city was just a hypothetical possibility. With a new city taking shape in Honduras, some in the foundation community have engaged because they now sense real opportunities for development.
Thanks to Bryan Caplan and the Gates Foundation for furthering the thoughtful discussion about charter cities.