Bryan Caplan  

A Quick Case for Charter Cities: Memo to the Gates Foundation

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The Bill and Melinda Gates Foundation has an interesting accountability mechanism.  After they make a major funding decision, they solicit pro and con memos on "roads not taken" - other ways they could have spent their money.  Since the Gates Foundation recently decided not to back charter cities to help reduce global poverty, they asked me to write a memo to explain why they made a mistake.  Here's the full text of my memo, reprinted with permission:
To: The Bill and Melinda Gates Foundation

From: Prof. Bryan Caplan

Re: The Case for Charter Cities

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."

At first glance, increasing production seems extremely slow and difficult, requiring decades of investment in education, infrastructure, political reform, and who knows what else.  But there turns out to be one foolproof way for people from the Third World to drastically increase their production overnight: move to the First World.  "The Place Premium," an important paper by the Center for Global Development's Michael Clemens, Claudio Montenegro, and Lant Pritchett[1], offers the most precise estimates of the benefits of migration.  They find that the effect of country of residence on income dwarfs the combined effects of poor education, poor health, poor work habits, and all the other defects commonly ascribed to Third World labor.  Holding workers' traits fixed, moving a Haitian from Haiti to the United States increases his wage about ten times - a gain of  900%.  The lesson:  Third World workers are less productive than First World workers largely because they live in the dysfunctional 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.  For the foreseeable future, significantly more open borders - not to mention truly open borders - seem politically impossible.  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.

The point of charter cities is to peacefully create pockets of high-quality First World governance in the heart of the Third World.  How?  By persuading Third World governments to create new self-governing cities exempt from most existing laws.  These new cities could be governed by foreign law, and administered by foreign governments - or even a for-profit corporation.  While the specifics are intentionally flexible, there are three core building blocks of any charter city:

  1. An uninhabited piece of city-sized land, provided voluntarily by a host government.
  2. A charter that specifies the rules that will govern the new city.
  3. The freedom for would-be charter city residents, investors, and employers to move in or out.[2]

The success of Hong Kong is a key inspiration.  At the dawn of British rule, the land area that is now Hong Kong was sparsely inhabited.  But it had one blessing denied to the rest of China: British rules - written and unwritten, sheltered by a 99-year treaty with the Chinese government.  While the rest of China suffered through cycles of chaos and tyranny, Hong Kong enjoyed stable, pro-growth rules.  Foreign investors rightly judged it a secure and fruitful place to invest.  Ambitious Chinese rightly judged it an inviting place to live and work.  And thanks to that 99-year treaty, even erratic Communist dictator Mao Zedong reluctantly tolerated Hong Kong's independence.  By the time Hong Kong reverted to mainland rule, it was not only a First World country, but a model for the rest of China to emulate.

In principle, Third World countries could put nationalistic prejudice aside and "import" the written and unwritten rules that have made the West rich.  But this is extremely difficult.  Intense populist opposition aside, it is hard to graft one country's institutions on to another's - especially when entrenched interests fight you every step of the way.  This is true in the business world as well.  Competitors often try and fail to adopt leading firms' "best practices."  Corporate culture is notoriously stubborn.  In both business and politics, success often requires a clean slate.  It is easier to open a new WalMart than to make the Kmart chain better.  Advocates of charter cities argue that is also easier to bring in "outside management" to make a new city that works than to reform existing countries that don't.

As the example of Hong Kong suggests, charter cities have both direct and indirect benefits. 

Directly, each charter city would allow millions of people to better their lives by integration with the world economy.  While critics often belittle this achievement as mere "cream-skimming," the sad truth is that much if not most of the world's cream now curdles in backwards farms and dysfunctional slums.  If the native entrepreneurs who built Hong Kong had been trapped in mainland China, most would have wasted their lives in dead-end jobs on Maoist communes or joined the Communist elite.  Hong Kong gave them opportunities to use talents that otherwise would have gone to waste. 

Indirectly, each charter city is a beacon of enlightenment.  Hong Kong shined brightly enough to convince even dogmatic Chinese Communist elites that private property, foreign investment, and economic integration with the world economy were the way to go.  Charter cities would be laboratories of development.  Successful models could be "copied and pasted" in a matter of years, not decades.  And ultimately they might even shame their own national governments into embracing transparent pro-growth policies.

The charter cities concept is ideal for support by the Gates Foundation.  Any philanthropy that seeks to overcome global poverty should give charter cities a fair hearing, but the Gates Foundation is more than just another philanthropy.  The Gates Foundation stands for innovation, entrepreneurship, and evidence-based policy.  Several of its Guiding Principles create a natural affinity with the charter cities concept - especially Principle #5 ("Our focus... prioritizes some of the most neglected issues."), #6 ("We identify a specific point of intervention and apply our efforts against a theory of change"), #7 ("We take risks, make big bets, and move with urgency. We are in it for the long haul."), and #11 ("Delivering results with the resources we have been given is of the utmost importance--and we seek and share information about those results.")  Charter cities is one of the few intellectually serious proposals on the table for drastically reducing world poverty.  A "big bet" of Gates funding and credibility on this "neglected issue" could easily jump start a virtuous circle of progress.

Another upside of charter cities is that there is virtually no downside.  A charter city begins on empty land.  It can only grow by voluntary migration of workers and investors.  If no one chooses to relocate, they're no worse off than they would have been if the charter city had never existed.  If efforts to start charter cities fail, at least they won't harm the very people they're intended to help.

In contrast, the paths the Gates Foundation currently intends to pursue sound worse than doing nothing.  "Build capacity of organizations working on-the-ground with the urban poor" and "Integrate the voice of the poor into the planning process" sound compassionate.  But they could easily further retard the only poverty-reduction process that really works: economic growth.  My first book, The Myth of the Rational Voter: Why Democracies Choose Bad Policies (Princeton University Press 2007) finds that economic illiteracy is especially pronounced among the least educated.  They are especially likely to misperceive the economy as a zero-sum game, to fear economic interaction with foreigners, and to naively focus on employment rather than production.  Frankly, voices like this need less influence on policy, not more. 

If you really want to learn what benefits the world's poor, don't ask them to become amateur social scientists.  See how they vote with their feet.  Build charter cities, and the world's poor will come.

Bryan Caplan

Professor of Economics

Mercatus Center

George Mason University


Further Reading

Paul Romer.  September 28, 2009.  "Can 'Charter Cities' Change the World?  A Q&A With Paul Romer."  Freakonomics Blog.

Paul Romer.  January 27, 2010 "For Richer, For Poorer."  Prospect Magazine.



[1] http://www.cgdev.org/files/16352_file_CMP_place_premium_148.pdf

[2] http://www.chartercities.org/faq




COMMENTS (18 to date)
Dan S writes:

Is the idea to bribe foreign governments into allowing charter cities to be created? If so, how much money would it take to pull something like that off?

Philo writes:

"Frankly, voices like this need less influence on policy, not more." Doubtful. In the poor countries, the voices that *have* been influencing policy have produced . . . *poverty*! The voice of the people might not push the government toward improvement, but why think it would make things *worse*?

Philo writes:

"[T]he paths the Gates Foundation currently intends to pursue sound worse than doing nothing." It's sad to see Gates's and Buffett's billions wasted, when the former might have funded promising technological start-ups and the latter profitable non-technology companies. If only these men had resisted the philanthropic temptation--the temptation to cast themselves as Great White Fathers.

Jameson Burt writes:

To emulate the success of Hong Kong by New-City,
prevent the adjacent country from exporting to anywhere but New-City,
so the New-City population leverages 5 million people to 1 billion people.
If India could be prevented from increasing exports
except through New-City, then any increased product of India's
1 billion people funneled through New-City;
surprise, New-City becomes a success that we can ascribe
to whatever political/economic system runs New-City.

Macao, China, ran independently rather like Hong Kong,
though for a few more years,
reducing itself to gambling and cheap food to quickly spit out,
so no-one touts Hong Kong's sister Macau as successful.

I find the more limited success of Singapore quintessential.
Singapore seeks better government,
so it gets many technocrats from other countries.
It's government discusses enterprise categories to support.
The single city of Singapore even has a better military
than nearby countries.

But really.
Look at successful businesses throughout southeast Asia
and parts of Africa.
Increase Chinese immigration to any city
in these places (Malaysia, Indonesia, Africa)
and magically the city increases in prosperity.
The Chinese immigrant's success is so great that
their host country often handicaps them;
eg, Singapore limits their entrance to colleges.

To really increase the success
of Biloxi, Mississippi,
do as Mississippi did to 1 million of its residents 50 years ago
-- expel them,
but now replace them with Chinese: walla, a prosperous town.

Saracen writes:

Strong piece. Bryan predictably omits the biggest reason for open borders' unpopularity--the empirical fact that we don't know how to prevent it from trashing First World living standards, if LA is any guide--but this fact only strengthens the case for charter cities, raising it from second-best to first-best solution.

Maniel writes:

Nice idea! Do you think it would work in the USA? No public-sector unions allowed, of course.

Blake writes:

Who would pay for and set up sewage, roads, law enforcement, courts, etc? Doesn't this assume anarcho-capitalism is a viable system?

fender writes:

I want to point on something a little bit of the topic, about which you mentioned here and what was recently written here:
http://mises.pl/blog/2011/03/21/wisniewski-metafora-zniszczonej-elektrowni/ - namely, that according to vulgar experience, there is virtually no relationship between economic literacy and advocating for the market. The author from the link illustrates this by the common fallacy of the broken window made by economists writing in the context of recent Japan catastrophe, that it would stimulate economic growth. We can imagine that common people don't think so (unless they heard a bad economist...).

Michael Strong writes:

Superb letter, Bryan.

Tom West writes:

Unfortunately, I think a prime factor for HK's success was the presumed British willingness to go to war for it.

I suspect that unless the Bill Gates bought an aircraft carrier and threatened to obliterate the country that broke their "charter city" agreement, no charter city would have the security that is needed for long term prosperity.

After all, how many of us would voluntarily cede all jurisdiction over one part of our house, no matter how unused. And how likely, once that ceded portion became valuable, would our descendants be willing to voluntarily keep their hands off of it, when all law indicates that it is their's to dispose of as they wish.

Evan writes:
Strong piece. Bryan predictably omits the biggest reason for open borders' unpopularity--the empirical fact that we don't know how to prevent it from trashing First World living standards, if LA is any guide--but this fact only strengthens the case for charter cities, raising it from second-best to first-best solution.
The market solved this problem decades ago through a device called "property values." This system makes it more expensive to live in some places in others, automatically segregating poor low-IQ people from middle-class high-IQ people by making it too expensive for them to live in the same place.

As an example, I live in a nice area only fifty miles from a large city inhabited by the sort of people that, if they lived in another country, closed borders types would want to keep out at all costs. These people are citizens of the same country I am, so they are free to move where they wish. If I thought the same way closed border types did, I would be terrified that they will move to my area and start committing crimes and doing all the other undesirable stuff. However, the free market naturally prevents them from coming to the area because it is too expensive to live and commute from there, so I'm not worried at all.

So yeah, immigration is still best, but charter cities really seem worth a try too.

Unfortunately, I think a prime factor for HK's success was the presumed British willingness to go to war for it....... After all, how many of us would voluntarily cede all jurisdiction over one part of our house, no matter how unused. And how likely, once that ceded portion became valuable, would our descendants be willing to voluntarily keep their hands off of it, when all law indicates that it is their's to dispose of as they wish.
That's an excellent point, but the housing metaphor you use is kind of inappropriate. Isn't ceding jurisdiction over part of your house called "renting it out?" Aren't the heirs of landlords bound by rental agreements?

However, your larger point stands, because being a citizen or leader of a country isn't really much like being owner of a house. I could see some popular movement to loot a charter city, but I can also see a few ways to counter it:
-Make charter cities essential to the operation of powerful business interests that have influence in other parts of the country as well. Then they'll lobby against looting it.
-I assume the city would still pay some taxes to the host country, if it makes enough money maybe the taxes will be profitable enough that it will be a "kill the goose" scenario.

Tom West writes:

Isn't ceding jurisdiction over part of your house called "renting it out?" Aren't the heirs of landlords bound by rental agreements?

What I was trying to convey is that there is no higher authority than a country with respect to its own internal affairs (at least until it starts killing large numbers of its own citizens). i.e. there is no higher authority for a charter city to appeal to if a country decides to revoke its charter.

The example I had in mind was more of letting your friend have a decrepit room in your house. Years later your friend has really fixed up the room, but all your son, who now owns the place after your demise, sees is someone staying in the nicest room in the house for free. It's not a situation that's going to last long...

Your ideas for trying to avoid that are about a charter city's best hope. The other thing is that a successful charter city is a *threat* to the continued reign of a kleptocrat. You'll have to give him a good reason to allow something that could cost him his job (or life) to continue to exist.

Daniel Klein writes:

Outstanding.

Saracen writes:

As an example, I live in a nice area only fifty miles from a large city inhabited by the sort of people that, if they lived in another country, closed borders types would want to keep out at all costs. These people are citizens of the same country I am, so they are free to move where they wish. If I thought the same way closed border types did, I would be terrified that they will move to my area and start committing crimes and doing all the other undesirable stuff. However, the free market naturally prevents them from coming to the area because it is too expensive to live and commute from there, so I'm not worried at all.

Ever heard of "white flight"? I don't see how you can argue that all the affected families wouldn't have been happier if the influx of poor low-IQ people that compelled them to move didn't happen. Granted, slavery rather than low-IQ immigration was the original source of this problem; but there is no good reason to make the problem even worse.

Yes, you can pay more and more to insulate yourself, and it'll usually work. But what happens if a disaster strikes--would you rather be in a rich part of New Orleans, or a poor part of northern Japan? Your system is brittle in numerous ways that are not reflected in the mathematical model you're implicitly using. (See e.g. Robert Putnam's work on diversity.)

By the way, I say this as a nonwhite immigrant. I accept a risk of expulsion in the event of nativist overreaction, since your favored policy of overshooting in the other direction is nearly guaranteed to make this country not worth living in any more.

Giuseppe writes:

Great letter. The lessons of Hong Kong and Singapore have not been effectively incorporated into development thinking and it is great to see the Charter Cities project trying to build upon their experience. Do you know if Gates Foundation releases any information on why they chose to pass up an opportunity? I would be very interested to hear the counter arguments.

EclectEcon writes:

I recommend that the Gates Foundation buy up sizable chunks of Detroit and build a charter city there. The population of Detroit has dwindled to pre-1910 levels and there are blocks and blocks that are abandoned.

Usems writes:

Powerful case. Thanks Prof Caplan.

D Carnes writes:

The example I had in mind was more of letting your friend have a decrepit room in your house. Years later your friend has really fixed up the room, but all your son, who now owns the place after your demise, sees is someone staying in the nicest room in the house for free. It's not a situation that's going to last long...

If you read through the Charter Cities website, Paul Romer actually does address this very real threat by noting that a country or group of countries would have to agree to protect the Charter City. Hong Kong had the British umbrella; a new city could have Canada, the UN, the EU, etc (he argues the US wouldn't be a good choice - too much geopolitical baggage).

I think the Gates Foundation is one of the few entities that could actually get a CC formed - they seem to have the money, the connections, the media, and the know-how to get it done right.

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