Paul Romer’s Charter Cities – A well grounded concept?
By Johannes Schmidt*
This essay deals with Paul Romer’s concept of charter cities. First the concept is introduced and later, on a closer scrutiny, it is evaluated.
The concept of cities which are governed by their own charter document instead of a state is not new. In fact it is frequently employed nowadays and furthermore already used as far back in time as the late 12th century. The most repeatedly mentioned example of one of the first cities that received a charter is Lübeck, which was later to become the heart of the Hanseatic League.
Driven by the idea to control the most important trade routes in the Baltic region at his time, Henry the Lion limited taxes, weakened trade restrictions, granted protection and promised fair treatment before the law to attract foreign merchants to settle down in Lübeck. The rights in place he then sent out messengers to Norway, Sweden, Denmark and Novgorod in Russia to offer custom free trade and to introduce the fertile grounds for merchants in Lübeck. Not long after, the city grew to being one of the most flourishing and populated cities in Northern Europe with an increasingly influential and copied constituent: its charter. – Numerous examples for modern charter cities can be found for instant in California. As of 2010 over 100 cities in California are governed by a charter which grants them supreme authority concerning municipal affairs. Other examples, however more relating to regions instead of cities, can be subsumed under the concepts of special economic zones (SEZ) and special administrative regions (SAR) mainly found in China, India, Brazil, North Korea, Pakistan, Russia among others. The common element of all SARs or SEZs is that they enjoy a high degree of constitutionally given autonomy which allows them to implement laws and regulations that are more free-market oriented than those in the rest of the country. Hence, the core concept is that of a city or region, given a set of rules different from the one in the rest of the mainland for the broad reason of economic development. Romer’s concept
In 2009 Paul Romer, a former professor at Stanford University and father of the neo-classical endogenous growth theory1, introduced his concept of charter cities2. To a certain extent and as already indicated above the concept is not new at all, however, it was not less controversial and highly discussed when Romer reintroduced it.
At the core of his concept Romer places rules. He suggests the leader of any developing country could pick a rather uninhabited and unoccupied piece of land and introduce a new set of rules in form of a charter within. The rules to be introduced should have proven good and are of course those of enlightened developed countries. First the good rules will attract people and firms that are going to build the city’s infrastructure. Residents and other firms willing to try out this new environment will follow. As to the administration of the city Romer suggests either the Shezhen model with a city manager given a wide mandate but in the end accountable to Chinese leaders or doing it like it has been done in Hong Kong. The Hong Kong model allows for a partnership with developed countries (like between British and the Chinese for Hong Kong just on a voluntary basis) which would provide the charter and its enforcement. The strong partners leading the city could then pursue long-term commitments much easier than the less credible governments of the developing country could. The benefits of Romer’s charter cities are obvious. Laggard economies with dysfunctional administrations and low credibility for long-term infrastructural projects are given the chance to change the gear to catch up growth. The charter city would offer legal certainty and attract capital and investments, create jobs, abandon foreign aid and above all address poverty and improve the quality of life. On the whole, attracting investors with stable rules to engage in large infrastructure projects would ultimately bring along externalities or spillovers (within the city but also in the rest of the country) crucial for the transformation from a precarious agricultural subsistence to a manufacturer and service economy. Additionally, by building a city from scratch environmental problems resulting from harmful over-cultivation and over-harvesting could be addressed.
The bedrock of Romer’s charter city is his understanding of catch-up growth in a globalized world.3 Together with Charles I. Jones he argues that the driver for globalization is the reuse of ideas and the gains that come along.4 This is certainly not a new view and in depth dealt with elsewhere.5 However, Romer’s focus as opposed to The Other Canon perspective is more on the question what makes ideas flow smoothly instead of what are the right ideas or technologies to emulate. His emphasis is therefore more on the institutional side and not so much activity specific. Yet, it is fair to say that Romer recognizes the potential of copying technologies for economic growth. He argues the spread and sharing of technologies and ideas with more people in the context of international trade would ultimately lead to more discoveries.6 His main point, however, is to say that rules can be copied as well. Rules are as essential for development as technologies. Even further, rules change as technologies change and therefore often need to be replaced by new and better ones. Better rules are those that give incentives for technology flows and increase productivity. The crucial point where his idea of charter cities comes in is the fact that systems of rule are often very stable and hard to change.7 In fact, the default process of changing rules for an entire country from within, particularly by using political mechanisms that are already in place, is costly, time consuming, coordination intensive and involves coercion. Charter Cities, on the other hand, would offer a place with a different set of rules within a country. People are not forced to live under the new rules in the new city but they have the choice to. In fact, offering people the choice to opt-in is a crucial point for Romer in response to many of his critics accusing him for neo-colonialism. Giving people the possibility to opt-in also allows both developing and developed countries to better experiment with the new rules without the disadvantageous change from within and by that to improve their governance. Conversely, if life is not satisfying for the citizens who opted in, exiting is a feasible option. Investors on the other hand, who committed long-term engagements, cannot exit the charter city that easy.
Hence, Romer’s pivotal idea is the focus on meta-rules that enable “people to transition from an existing set of rules to better ones that that have been shown to work elsewhere”8. His concept of charter cities exemplifies such a meta-rule. It offers, as Romer claims, the possibility for a smooth and fast transition from a place with bad rules to a place with good rules and by that speeds up the process of development.
The concept on a closer scrutiny
Romer’s concept can be evaluated in different ways. One can either look at the details and judge its feasibility thereof or one can screen the underlying idea of the concept. I have decided to primarily pursue the latter and only spend little space for the former.
Romer argues that rules make the difference for economic development. If good rules, and by good rules he refers to rules that have proved to work elsewhere, are implemented and enforced, all it takes are human, material and financial resources. The three latter, however, will be flooding in almost automatically, driven by the great ambition to work together under good rules. What Romer implies is that economic growth will follow once the right rules are in place. Rules in form of legal or social norms are nothing else but comprised in the term institution. With this in mind not the charter city itself but the underlying idea of getting the institutions right is the first weak point of Romer’s idea, unfortunately it is also the core of his idea. Making good rules and by that good institutions a prerequisite for economic growth is problematic for three reasons. Imposing institutions in a way such as drastic as Romer proposes firstly lacks the understanding that rules evolve in a process which has a cultural dimension, secondly neglects the understanding that institutions co-evolve with economic activity and thirdly is alarmingly reminiscent of colonialism, in fact it is a form of neo-colonialist imperialism.
The cultural dimension
Romer correctly examines that rules structure human living most efficiently when they are of the status of social norms and therefore require no enforcement.9 Social norms, however, are the hardest to change. The default way of changing them, as mentioned above, is via the political system. Charter cities that provide the choice to opt-in present a quick alternative to everlasting democratic processes. Questionable, however, besides the inevitable question of legitimacy, which will be dealt with at a later point, is that the people decided to opt-in see themselves faced with new rules, maybe even new social norms, from one day to another. This way of jumping in at the deep end totally disregards the nature of any rule or even rule of law which is that norms are embedded in social custom. Legal systems are thus never pre-fabricated or labeled “made in Canada” or “manufactured in Germany”. On the contrary legal and social norms are subject to continuous, often incremental change and evolve out of a process. Consequently, if one wants to change rules as Romer intents it certainly cannot be done in a sink or swim way but requires a different touch. Ha-Joon Chang and Peter Evans argue for a more culturalist perspective when talking about the evolutions of institutions: “…institutional change [also] depends on a combination of interest-based and cultural/ideological projects (in which worldview may shape interests as well as vice versa). Simply put, changing institutions requires changing the worldviews that inevitably underlie institutional frames.”10
Institutions and economic activity
As Erik Reinert puts it, today’s discussion about emerging institutions as demand-pull or supply-push can with no trouble lead to a chicken-and-egg loop.11 This has not always been the case. Economic history delivers many examples of how institutions were perceived earlier. Reinert points out that early mercantilist institutions were not perceived external to the economy but very much dependant on the productive system, thus institutions and by that also rules co-evolve with economic activities.12 In fact, “history shows that only societies that have achieved a certain level of manufacturing and/or other increasing return activities have ever achieved the ʻrightʼ institutions or any degree of ʻcompetitivenessʼ.”13 The Bretton Woods institutions, on the other hand, saw the reason for underdevelopment in a lack of institutions. This view is also reflected in the credo of Good Governance because it “demands the creation of institutions and structures before economic development, while all wealthy countries of the “West” established them only afterwards.”14
Therefore, arguing from an evolutionary perspective, the concept of charter cities with its mere focus on good rules suffers from neglecting the insight that economic activities are at the heart of any development. What charter cities are providing is a place under for instance Canadian rules offering legal certainty for those that are familiar with the rules. Canadian and other western investors will be attracted to work under the good old and familiar rules notwithstanding if they are actually building capacity in the developed country of if they just exploit cheap labor and take home the profits. In fact, the concept lacks a very essential ingredient for economic growth. The role of the state or government is not clear except that the rules used are those of another well functioning state. Planning and delivery however seems to be undertaken by the private sector. This leads to the assessment that the focus on rules and only rules in Romer’s concept is without substance for economic growth.
Neo-colonialism
When Romer talks about good rules he means rules that work in developed countries. The concept of good, however, as the debate about Good Governance shows, cannot be considered as good in any general way.15 If rules are good or bad is highly context specific. This insight together with the above mentioned issue of legitimacy that results when rules are imposed instead of democratically changed hints at a form of neo-colonialism. Not only there is no substance behind his concept that would only roughly consider economic activities, above all there is not even the slightest element of choice for the residents when it comes to influencing political decision because there are no elections in charter cities. Residents are free to vote with their feet if they want to but that is all the influence they have. – Romer, when he opposes his critics, says that emotions can get in the way of seeing the true value in his concept.
No wonder he is able to burst out sentences like this: “In a sense, Britain inadvertently did more to reduce world poverty than all the aid programs that weʼve undertaken in the last century.”16 Romer said this when talking about his prime example for charter cities, Hong Kong. He claims that importing British rules made Hong Kong where it is today. Of course the main difference is that China did not enter the agreement with the British about Hong Kong voluntarily but developing countries would very well sign the contract for a charter city voluntarily. Still, the aftertaste remains bitter as Romer’s concepts neglects time. Even when talking about Hong Kong he does not mention how long it took for the legal system to fully evolve and how long it took to correctly enforce it.
No wonder he is able to burst out sentences like this: “In a sense, Britain inadvertently did more to reduce world poverty than all the aid programs that weʼve undertaken in the last century.”16 Romer said this when talking about his prime example for charter cities, Hong Kong. He claims that importing British rules made Hong Kong where it is today. Of course the main difference is that China did not enter the agreement with the British about Hong Kong voluntarily but developing countries would very well sign the contract for a charter city voluntarily. Still, the aftertaste remains bitter as Romer’s concepts neglects time. Even when talking about Hong Kong he does not mention how long it took for the legal system to fully evolve and how long it took to correctly enforce it.
Conclusion
Apart from the concept and the underlying assumptions which I have analyzed so far, one can generally question the feasibility of charter cities as Romer suggests them. Certainly the city of Lübeck seems to be a success story and also SEZs and SARs have worked in the past, especially when they were part of a national development plan and made sense therein. Building charter cities from scratch, however, is confronted with more risks and dangers than Romer indicates. Not only is there a danger to build up the city independently from the context of the general stage of development the country is situated in, the city will also bear the risks of the downsides of urbanization. Some of those risks, especially in connection with Romer’s concept, are just too obvious to disregard: How would the city cope with a flood of immigrants? How can one prevent townships around the core city? How much of a choice is left if a family decides to opt-in but cannot go back because what they left behind will not be theirs any longer? How can one prevent a process of segregation if the builders of the city are foreign investors? Given the massive amount of private investments, how can one prevent the outflow of profit, leaving little behind for the host society? How will a case of miserable failure be treated in the host country but also in the giver country, will they be just too big to fail? Those are just a selection of question that one can raise to the concept. – The main criticism, however, the concept has to bear is that it is essentially not new. It sounds like very much in line with standard canon development economics that primarily focuses on foreign direct investments. Romer’s concept ignores activity specificity, it neglects time as a crucial ingredient for the process how rules evolve and above all, it would not necessarily tackle the problem of economic development even if it was implemented somewhere because, as it is now, it is clearly biased towards uncontrolled foreign direct investments. In that sense it leaves a very bitter taste of “getting the institutions right” and by is that reminiscent of colonialism.
1 Romer (1990) Endogenous Technological Change.
2 Romer (2010) Technologies, Rules, and Progress: The Case of Charter Cities.
3 Romer (2010) Which Parts of Globalization Matter for Catch-up Growth?
4 Charles & Romer (2010) The New Kaldor Facts: Ideas, Institutions, Population, and Human Capital.
5 Reinert (2009) Emulation versus Comparative Advantage: Competing and Complementary Principles in the
History of Economic Policy.
6 Romer (2010) Which Parts of Globalization Matter for Catch-up Growth?
7 Romer (2010) Technologies, Rules, and Progress: The Case of Charter Cities, p. 7.
8 Romer (2010) Which Parts of Globalization Matter for Catch-up Growth? p. 14. Mistakes are taken over in citation
9 Romer (2010) Technologies, Rules, and Progress: The Case of Charter Cities, p. 7.
10 Chang & Evans (200) The Role of Institutions in Economic Change, p. 5.
11 Reinert (2004) Mercantilism and Economic Development: Schumpeterian Dynamics, Institution Building and International Benchmarking, p. 8.
12 Ibid.
13 Ibid.
14 Drechsler (2005) The Rise and Demise of the New Public Management.
15 Drechsler (2005) The Rise and Demise of the New Public Management.
16 Romer (2009) TED talk.
* Student of Technology Governance at the Tallinn University of Technology. This article is published under the Creative Commons conditions 1) Attribution — You must attribute the work in the manner specified by the author or licensor (but not in any way that suggests that they endorse you or your use of the work), and 2)Noncommercial — You may not use this work for commercial purposes.
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