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Future Cities Need to Hand Over the Keys

Author: Sebastian Mallaby, Paul A. Volcker Senior Fellow for International Economics and Director of the Maurice R. Greenberg Center for Geoeconomic Studies
February 3, 2011
Financial Times

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Paul Romer wants to defeat global poverty. He wants to dynamite conventional groupthink about development. And thanks to one small country, his big idea is gaining ground.

The big idea grows out of an earlier Romer revolution, launched from the economics faculty at Stanford. In a series of papers in the late 1980s and early 1990s, Mr Romer created what came to be known as “new growth theory”, which emphasised that familiar inputs such as labour and capital may matter less for an economy's growth rate than what he termed “ideas”. By that, he meant more than new technologies or business processes – Intel's latest semiconductor or Walmart's supply chain. He meant the rules and norms that govern a society: press freedom, business regulation, bankruptcy law and so on.

Romer's theory has implications for development, as most mainstream aid organisations were quick to recognise. In many poor countries, bad rules stifle growth disastrously. Price caps on electricity destroy incentives for utilities to hook up new customers, forcing families and businesses to buy costly batteries and generators. The failure to grant property rights to slum dwellers prevents water companies from laying pipes to them, forcing the poor to pay above the odds for water brought by donkey. Thanks in part to Mr Romer, the World Bank and the wider development profession have come to emphasise the importance of good governance.

But if governance matters, how best to improve it? The World Bank's approach is to serve up a glossy report on the perversities of capped electricity prices and hope that political pressure will force reform. But this can be a wishful strategy. The most influential citizens are already hooked up to the grid and artificially low prices suit them just perfectly. In Ouagadougou as in Washington, moneyed elites frustrate change.

Enter Mr Romer. Rather than push for reform within a political system, he suggests starting afresh from the outside. In business, after all, new ideas are often championed by insurgent start-ups rather than by incumbents – IBM, master of the ancient mainframe, never championed the PC; Microsoft, hegemon of the hard drive, came late to cloud computing. Likewise in government, free entry and competition may trump reform from within the establishment. American mayors, frustrated in their attempts to shake up incumbent education systems, have encouraged experimental charter schools.

And so, starting in 2008, Mr Romer has preached the case for “charter cities” – new urban developments that operate outside the dysfunctional tangle of a country's existing rules. To ensure that these start-ups escape the clutch of vested interests, he has committed himself to something seemingly outrageous. In mild professorial language, he declares that poor countries should hand control of these new cities to foreign governments, which should appoint technocratic viceroys. The better to banish politics, there must be no city elections.

Of course, this proposal has been branded neocolonialist and his fondness for invoking British-run Hong Kong as a model charter city does not discourage this attack. But the colonised themselves may agree with Mr Romer. Last year, Madagascar came close to backing the idea of a charter city. And, last month, the Congress of Honduras voted, almost unanimously, for a constitutional amendment that paves the way for such a plan.

Besides, the more you think about Mr Romer's proposal, the less wacky it appears. How shocking is it to suggest that a country compromise its sovereignty? Well, countries do this whenever they invite in election monitors, sign treaties or peg their currencies. And how outrageous is it to insist that there be no city elections? Well, the residents of charter cities will have chosen to move there.

Romer is correct that rules drive development. What's more, he is correct in his key insight, which is that the opportunity to opt in to and out of a political system can be at least as valuable as the conventional package of democratic rights. Already, some 214m migrants have chosen to live outside their countries; all implicitly voted with their feet. If poor countries aspire to give their citizens the chance to migrate internally to charter cities, western anti-colonialists must step forward and assume the responsibilities of trusteeship.

The writer is director of the Maurice R. Greenberg Center for Geoeconomic Studies at the Council on Foreign Relations

This article appears in full on CFR.org by permission of its original publisher. It was originally available here.

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