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

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.