At a recent talk in London, Chris Blattman asked if a charter city could fail in the same way that public housing failed in Chicago. After the seminar and in his follow up post, we started a discussion of the deeper issue: What kind of dynamics would be desirable in the space of rules?
To frame the discussion, it helps to have some vocabulary. A rule set is a large collection of rules that are tightly linked. Rule sets can improve through what I will call an evolutionary dynamic based on small, incremental changes or through a new-system dynamic in which an entirely new rule set enters and competes with an existing one.
Chris and I agree that an evolutionary dynamic can lead a vibrant neighborhood but that it can also lead to a dangerous slum with no roads, sewers, safe water, electricity or other utilities.
We also agree that there is a risk associated with new systems. Sometimes they don’t work, as the public housing projects in Chicago demonstrate. Sometimes they work remarkably well. Architecturally similar high-rise buildings in Hong Kong and Singapore provided livable housing for large numbers of working poor in the 1960s and 1970s. (As an aside, Chris and I seem to agree that the key difference between these cases lay not in the hardware or architecture but rather in the supporting rules, particularly those related to crime.)
The challenge that Chris posed to me, one that several others have also suggested, but not as precisely, is how to assess the tradeoff between faster growth and higher risk that the new-system dynamic seems to offer. A related question is who bears that risk. These are important questions. Here are some provisional answers.
Start with the distinction between catch-up growth and frontier growth. Catch-up growth is based on copying existing ideas. Frontier growth involves the discovery and implementation of new ideas.
In catch-up growth, the new-system dynamic can be used to copy existing rule sets. This allows faster growth without the additional risk that comes from using the new-system dynamic at the frontier.
An analogy with firms might be helpful. Amazon.com and Webvan were both new systems that involved innovation at the frontier. Amazon worked. Webvan failed. New systems that are innovative do involve risk.
Contrast this with the process that lead to the spread of modern retailing in the United States. In principle, the ideas and rules developed at Wal-Mart could have been scaled through an evolutionary dynamic that patched and tweaked operations at stores operated by such traditional retailers as Montgomery Wards. In practice, the technologies developed by Wal-Mart spread geographically because new systems – entirely new buildings, with new sets of employees – arose in many different locations. This is an instance of catch-up growth based on the new-system dynamic. Building new Wal-Marts is not as risky as creating a new web-retailing model.
The concept of a charter city does rely on the new-system dynamic, but in the context of economic development, charter cities can adopt a new rule set made up of rules that are known to work well. It can accelerate catch-up growth with little of the risk associated with the development of new systems at the frontier.
A charter city could be also used, perhaps in the United States, to encourage innovation at the frontier of urban living. An entirely new city could introduce changes to transportation systems or energy systems that are improbable along an evolutionary path. This would be like trying to invent Amazon and Webvan. It might be worth doing for the same reasons that it is worth encouraging new start-up firms, to speed up growth at the frontier. But in this case, faster growth would involve more risk.
It is important to recognize that new systems typically need evolutionary improvement after they are introduced. As existing charter cities compete with each other, they will evolve in precisely this sense. Moreover, the new-system approach at one conceptual level (the legal, administrative, and institutional level) does not have to imply a new-system approach at a different level such as neighborhood structure. A charter city could have neighborhoods that evolve according to the kind of evolutionary processes advocated by Jane Jacobs
A new city could still fail, just as Detroit is failing in the United States. The risk of a failure falls primarily on the owners of the fixed assets that can’t leave, not on the labor income of workers who can leave. This seems like just the right allocation for incentives and risk sharing. If the development authority with administrative responsibility for the city owns the land and collects revenue as rent on long-term leases, it has a strong incentive to get the rules right early on and to help the rules evolve in the right direction thereafter. So too do the diversified private investors in infrastructure and buildings.
An arrangement with many cities that compete with each other is present today in China. Many new or rapidly growing cities compete for residents and investors. Local officials receive a substantial portion of their revenue from gains in the value of land that they own. To my knowledge, none of the new or rapidly growing cities in China has failed to the degree that public housing failed in the United States.
Finally, it is worth noting that roughly 3 billion people will move to cities in the next 50 years. If this growth takes place by an evolutionary dynamic that expands existing cities, many of these cities will fail as badly as the public housing projects did in Chicago. In fact, many of them already do.
The right question to ask is not whether the new-system dynamic, as applied by charter cities, is subject to some risk. Rather, it is whether the risk of failure in charter cities is any greater than along the status quo path. Because charter cities use the new-system dynamic to copy best practice and create strong competitive pressures for rapid evolutionary improvement after they are built, I’m convinced that they offer the prospect of both faster growth and less risk.
About
I think your charter city idea may be very powerful. It’s quite analogous to another idea that’s very powerful and successful, franchising.
I wrote a post on this in May, “McHongKong”, at:
http://richardhserlin.blogspot.com/search?q=mchongkong
— Richard H. Serlin · Oct 3, 12:12 AM · #
Hmm…so would Charter Cities be a valid development concept in, say, Afghanistan?
— Steve Bannister · Oct 3, 08:18 AM · #
Prof Romer, let me play the devil’s advocate on charter cities. sorry for the longish post
Presumably, the main objective of the Charter Cities would be to bring about a faster pace of development (by more effective administration with a set rules outlined in a charter) to areas within or adjoining developing countries by leveraging resources from across the world and the administrative efficiency of certain neighbouring national governments with a creditable track record for delivering on economic and social development.
It would be less of an attraction for many of the developed countries, since their governments already have a competence in effective administration. Further, their private sectors can be incentivized to leverage the local resource strengths and deliver of even frontier growth with a new-system dynamic.
This effectively means that Charter cities are a collaborative experiment between one or more developed and developing countries, which seeks to incentivize developed country governments to participate in a joint development effort (with a developing country) with the attraction of the profit opportunities that exist in such co-operation. I am not willing to countenance any arguement that would bring in attributes like altruism and internationalism into the motivations as driving national governments.
In view of the aforementioned, let me play the devils advocate on charter cities with the following observations.
1. Charter cities lay great faith in the ability and commitment of national governments to formulate charters and enforce them. However, there is little evidence nor sufficient enough economic or political rationale for reposing such huge faith in governments, especially foreign governments to administer and enforce a charter that also benefits another country and its citizens.
Further, there exists the real possibility that the foreign administrators could end up skimming off the cream and a disproportionate share of the benefits of development. No charter, however comprehensively framed to pre-empt all such possibilities, can prevent such an eventuality, should the government of the administering country (or the establishment that controls it) so wish. The possibility of Colonialism 2.0 becomes very real.
2. There is the very strong possibility that charter cities set up beside the poorer countries would end up cherry-picking the skilled human resources and investible capital away from the mainland (of the developing country). It is natural that the skilled professionals – doctors, scientists, teachers, engineers etc – and investors would gravitate towards these new areas, further impoverishing the poor country.
This would be something similar to the new townships (or “gated communities”) or satellite towns that are proliferating in the suburbs of many of the metropolitan cities in countries like India, which act as a magnet in attracting the rich and skilled and the major share of investments in institutions relating to education, health care and other services.
Alternatively, the proximity to the under-developed and poorer areas can also have the effect of keeping away private investors, wary of the political repurcussions of events in the mainland and the possibility of spill-over or contagion from disturbances there.
3. The examples of the numerous world-class Chinese cities that have developed in the last two decades is misleading. They are more closer to being examples of catch-up growth cities with an evolutionary dynamic, albeit a break-neck pace of evolution during recent years, than catch-up growth following a new-system dynamic as suggested by Prof Romer. None of these cities emerged from thin air, but were the result of focussed government policies and driven by specific growth engines that catapulted the originally existing small to middling cities into a much higher growth trajectory.
4. There is something disconcerting about the fact that charter cities would need more than economic incentives to ensure its success. As mentioned earlier, it is unrealistic and not borne out by historical evidence to place such faith in a foreign government’s commitment to the charter and its outcomes. A more practical model would be a partnership with private investors.
In recent years, there have been a growing number of cities similar to the aforementioned charter cities, most notable being the spectacular Palm Islands in Dubai and the grandiose New Songdo City in South Korea. However, both these, and other similar developments, have been done by private investors with enabling policies set in place by governments. There is nothing mis-aligned about incentives in the development of such cities. Private developers who sense a profit opportunity leverage investments from investors looking for attractive long term returns, and governments benefit by the economic development and tax revenues (and also the rents by way of contracts).
The Special Economic Zones, Technology Parks and so on, that are part of economic development promotion policies in many countries, seek to build on precisely such partnerships with private investors and developers to develop and promote economic growth and development.
5. And finally, there is the issue of political acceptability that will come in the way of charter cities even if all the aforementioned challenges are surmounted. For example, a charter city in India administered by one state government will surely come up against local politics, in its various dimensions (for simplicity assume a city located in one state and being administered by another, with both states belonging to two opposing political parties). The possible incentive distortions that can derail such projects are manifold.
the full blog post is available here
http://gulzar05.blogspot.com/2009/10/why-charter-cities-may-not-take-off.html
— Gulzar · Oct 3, 11:55 AM · #
I’m not sure that the idea that “workers can leave” really makes sense. Otherwise, cities wouldn’t really be “failing.” They would be “failed.”
It’s not like the people who had no resources and couldn’t get out so they drowned in New Orleans were property owners.
— Michael · Oct 4, 08:13 AM · #
Why would a sovereign country surrender a piece of land on which another country — or a coalition thereof — would assert its sovereignty? This question needs to be answered in very precise terms.
My suggestion: tax avoidance/evasion.
I suggest that a sovereign country run by something less than an ideal democracy (that is just about any country in the world) would be able to engineer a political consensus to organize a tradeoff between surrendering sovereignty over an old rock versus the right for its ruling elite to channel tax-avoiding funds to the rock.
And that means that if any US citizen is to participate in this charter-tax-haven adventure, the charter-haven would have to make a credible promise not to communicate financial information to the US treasury.
Switzerland needs a replacement. Now.
— pat toche · Oct 14, 01:59 AM · #