Romesh Vaitilingam interviews Paul Romer for Vox

June 2011

Transcription of a VoxEU audio interview [http://www.voxeu.org/index.php?q=node/6630] 

Romesh Vaitilingam:  Welcome to Vox Talks, a series of audio interviews with leading economists from around the world. My name is Romesh Vaitilingam and today's interview is with Professor Paul Romer from New York University's Stern School of Business. Paul and I met in London in June 2011 at a conference on development policy‑making organized by the Centre for Competitive Advantage in the Global Economy. Paul was giving a presentation on his idea of charter cities and I began by asking him to lay out what exactly was the problem to which charter cities are the solution.

Paul Romer:  The broad conceptual framework here is that progress comes from improvements in both technologies and rules. The challenge in the developing countries which are not catching up is how to improve the local quality of their rules. Because with the right rules we now understand that they can import technologies that exist around the world and catch up quickly. So, the question is what's the process whereby a society can escape from a trap with a system of rules that's stable, but not one that gives them the kind of opportunity that they would like to have?

Romesh:  OK. Exactly what does charter city looks like? What is the basic concept?

Paul:  The concept derives from an analogy between thinking about technologies and rules that we now all accept: that if there are better technologies around the world, we should find a way to bring those into a country. There's no reason to reinvent the wheel. That same logic suggests that if there are countries that have effective systems of rules, rules that citizens in developing countries would like access to, that they would readily move to if they were allowed to as migrants., is there not some way to leverage the existing rules and make them accessible nearby just as we bring in technology?

So you think can of the charter city as just being a vehicle for matching people who would like access to more efficient systems of rules and the modern market economy, a way to match them up with these systems of rules through a partner arrangement between the government that hosts a new city on a piece of land and partner governments who bring in and make available some of their rule systems.

Romesh:  You've talked about some of the models from history that we might draw on. You mentioned export‑processing zones in certain developing countries. You mentioned Hong Kong. You mentioned the state of Pennsylvania in the US. What can we learn from those lessons from history and where might there be some change in the way things have been set up in the past?

Paul:  Sure. If you think of cities as startups, Hong Kong shows us that it's quite possible to bring British law, British systems of administration, match that up with citizens from mainland China on a piece of land on the edge of China and develop a very successful economy. And then have the successes of that economy influence the course of reform in the rest of the country. So, this is a case where the startup city acts as a mechanism for cloning existing rules.

The story of Philadelphia inside Pennsylvania is a slightly more interesting one where a startup was actually used to help push the frontier in the space of rules, to innovate in our rules. The context was that Charles II could not get any agreement in Britain on even tolerance for Protestant dissidents. But by giving the land of Pennsylvania to William Penn, who was a notorious Quaker dissident and telling Penn and giving it as a dominion and saying to Penn he could write his own charter, he set in motion a process where Penn wrote a charter, which guaranteed freedom of religion.

This attracted to Philadelphia large numbers of people who wanted freedom of religion. It became the new equilibrium and was a critical step in the development of freedom of religion in North America and then the rest of the Western world.

What's interesting about this story is that the startup avoids all of the contention and war that came up whenever there were discussions about religion before. If you say, "We're going to do things differently here, but we're going to allow in people who want to operate under those rules. And no one is required to come if they don't want to."

You can just bypass all of the usual sources of opposition, even violent opposition, and take a step which ultimately turns out to be beneficial for everybody.

Romesh:  How do you envision the process of working exactly? I know you want to find a plot of land somewhere in the world, ideally on a coast, ideally big enough to host a city of up to 10 million people. How do you go from that scrap of land to that city?

Paul:  One essential that many people have trouble with at first is that it has to be a true green field site. This isn't the solution to say, "How do we revitalize Detroit in the United States?" You have to go to a green field site. And then say this will be the charter that applies in this place, just like what Penn did. And have that charter be the kind of charter that attracts people who want to engage in a modern rule-of-law‑based system. Then as more people are attracted to this place because of its economic advantages, they get socialized into a modern rule‑based life.

Romesh:  You've been talking about the idea to governments around the world, governments that might act as a host and governments that might act as a source of people to populate the city a nd also the governments of the advanced world who might be guarantors. Can you give some feel about how that process has been going?

Paul:  Well, the development in the last six months is that government of Honduras decided to pursue this strategy. It amended its constitution to create what they call a Special Development Region. They're now considering legislation, enabling legislation that would create the first of these regions. The constitutional amendment makes it possible for this region to operate autonomously from the rest of the government in Honduras and have its own very independent systems, including its own judiciary.

So Honduras is committed to provide the land, to set the legal framework for a place like this. People can come from Honduras and from other countries in the region. The conversations now are with countries, including Britain about things like, "Could your existing judicial committee of the Privy Council act as the court of final appeal for the new judiciary that will be set up in this zone?"

If you did that, what it would give is this judiciary a degree of independence from whatever executive branch is set up in that zone. And give it a degree of credibility in the eyes of especially of investors that rule of law, not just now, but decades in the future, can be assured.

Romesh:  Setting these things up has to be a pretty much top-down thing done by governments, but ideally you want a vibrant, decentralized, innovative economy. How do you see that balance working out between the government and market?

Paul:  I think that's actually pretty easy. Think again about Philadelphia. Penn established certain key commitments that influenced who came there, like guaranteed freedom of religion. But then on all the many dimensions where creative, ambitious, clever people can innovate and experiment, you turn them loose. So, you can create the legal framework in an environment where, for example, foreign investors could come in and invest in substantial infrastructure projects, which will be essential for any successful city. But you could still let it be one characterized by lots of trial and error, lots of experimentation, that messy complicated market‑like process that builds the somewhat hectic but exciting cities of the world, rather than the ones that are like the centrally planned economies, sterile and not very attractive.

Romesh:  In the context of Honduras that you're exploring with the government here and presumably trying to get the interest from other governments around the world, talk a little bit about how you see this would directly affect the people of Honduras, the kind of people that are facing a rather lawless country and want to escape to opportunities perhaps in richer parts of the world. How might this play out for them?

Paul:  Well, unfortunately, Honduras is now under increasing threat from the drug gangs, which have been migrating towards Central America from both Mexico and Colombia. They're facing a worsening security situation. For many years, Hondurans who wanted to live and work in a big city did so by moving to the United States. Honduras doesn't have something like a Los Angeles where you could live and work. Big cities are the opportunity zones especially for the working poor.

Right now, they take huge risks to go through Mexico to get to the United States. One of the things this system would do would be to create a place that could have those kinds of opportunities, but would be right next door, be a place where you could take your whole family. It could be a place where you could have permanent legal residence compared to the United States where most Hondurans have no legal residency rights.

So, it could be a huge boon to the people who feel that their best option is to try to go to the United States. And it could be a boon for Honduras and for the region to have all of that talent and all of that activity happening right close by, rather than a thousand miles away.

Romesh:  Final question, Paul. How confident are you of seeing some move towards the realization of your vision over the next decade or two?

Paul:  Oh, I'm very confident on the two‑decade scale that we're going to see activity like this. There's a number of players all over the world who have finally recognized that. If you just think about building an entire city of 10 million people as a real estate development, the potential gains for society and for the developers in that kind of real estate development are just staggeringly large. So, lots of entities are thinking about how to pursue those gains.

The Charter Cities initiative is one which says, "We could use those gains to get rule of law, modern governance and opportunity for the working poor, for the people who are getting their first wage‑paying job." It's an instant city, not like Dubai, which caters to the rich, but like Hong Kong of the 1950s.

Whether there will be new cities that respond to this enormous demand to move into urban areas, I'm sure there will be new cities. Whether they use this opportunity to push forward a progressive poverty reduction agenda remains to be seen.

I'm still very optimistic that this will happen. As part of that, what we'll recognize is that the least important thing that rich countries of the world can do is give charity to poor countries and poor people, to just give financial resources.

What the poor of the world would love to have is, "If you aren't going to let us move to LA, if you aren't going to let us move to London, why don't you just help us create a London and an LA someplace else, and we'll move there."

It wouldn't cost the US or it wouldn't cost Britain anything to do this because the cost of building a new LA or a new London or a new Hong Kong, is so much less than what that would be worth once it was built. But it can be done in a way where nobody has to give any charity.

Romesh:  Paul Romer, thank you very much.

Paul:  Thanks.