Paul Romer: Why the world needs charter cities
July 22, 2009
How can a struggling country break out of poverty if it's trapped in a system of bad rules? Economist Paul Romer unveils a bold idea: "charter cities," city-scale administrative zones governed by a coalition of nations. (Could Guantánamo Bay become the next Hong Kong?)Paul Romer
- New-growth economist
Paul Romer is developing a radical new model of growth and governance, which calls for the establishment of city-scale special administrative zones. Full bio
Double-click the English subtitles below to play the video.
Take a look at this picture.
It poses a very fascinating puzzle for us.
These African students are doing their homework
under streetlights at the airport in the capital city
because they don't have any electricity at home.
Now, I haven't met these particular students,
but I've met students like them.
Let's just pick one -- for example, the one in the green shirt.
Let's give him a name, too: Nelson.
I'll bet Nelson has a cellphone.
So here is the puzzle.
Why is it that Nelson has access
to a cutting-edge technology, like the cellphone,
but doesn't have access to a 100-year-old technology
for generating electric light in the home?
Now, in a word, the answer is "rules."
Bad rules can prevent the kind of win-win solution that's available
when people can bring new technologies in
and make them available to someone like Nelson.
What kinds of rules?
The electric company in this nation
operates under a rule, which says that it has to sell
electricity at a very low, subsidized price --
in fact, a price that is so low it loses money on every unit that it sells.
So it has neither the resources, nor the incentives,
to hook up many other users.
The president wanted to change this rule.
He's seen that it's possible to have a different set of rules,
rules where businesses earn a small profit,
so they have an incentive to sign up more customers.
That's the kind of rules that the cellphone company
that Nelson purchases his telephony from operates under.
The president has seen how those rules worked well.
So he tried to change the rules for pricing on electricity,
but ran into a firestorm of protest
from businesses and consumers
who wanted to preserve the existing subsidized rates.
So he was stuck with rules that prevented him
from letting the win-win solution help his country.
And Nelson is stuck studying under the streetlights.
The real challenge then, is to try to figure out
how we can change rules.
Are there some rules we can develop for changing rules?
I want to argue that there is a general abstract insight
that we can make practical,
which is that, if we can give more choices to people,
and more choices to leaders --
who, in many countries, are also people.
But, it's useful to present the opposition between these two.
Because the kind of choice you might want to give to a leader,
a choice like giving the president the choice
to raise prices on electricity,
takes away a choice that people in the economy want.
They want the choice to be able to continue consuming
subsidized electric power.
So if you give just to one side or the other,
you'll have tension or friction.
But if we can find ways to give more choices to both,
that will give us a set of rules
for changing rules that get us out of traps.
Now, Nelson also has access to the Internet.
And he says that if you want to see
the damaging effects of rules,
the ways that rules can keep people in the dark,
look at the pictures from NASA of the earth at night.
In particular check out Asia.
If you zoom in here,
you can see North Korea, in outline here,
which is like a black hole compared to its neighbors.
Now, you won't be surprised to learn
that the rules in North Korea
keep people there in the dark.
But it is important to recognize
that North Korea and South Korea
started out with identical sets of rules
in both the sense of laws and regulations,
but also in the deeper senses of understandings,
norms, culture, values and beliefs.
When they separated, they made choices
that led to very divergent paths
for their sets of rules.
So we can change -- we as humans can change the rules
that we use to interact with each other,
for better, or for worse.
Now let's look at another region, the Caribbean.
Zoom in on Haiti,
in outline here.
Haiti is also dark,
compared to its neighbor here, the Dominican Republic,
which has about the same number of residents.
Both of these countries are dark compared to Puerto Rico,
which has half as many residents
as either Haiti or the Dominican Republic.
What Haiti warns us is that
rules can be bad because governments are weak.
It's not just that the rules are bad because
the government is too strong and oppressive, as in North Korea.
So that if we want to create environments with good rules,
we can't just tear down.
We've got to find ways to build up, as well.
Now, China dramatically demonstrates
both the potential and the challenges
of working with rules.
Back in the beginning of the data presented in this chart,
China was the world's high-technology leader.
Chinese had pioneered technologies like steel, printing, gunpowder.
But the Chinese never adopted, at least in that period,
effective rules for encouraging the spread of those ideas --
a profit motive that could have encouraged the spread.
And they soon adopted rules which
slowed down innovation
and cut China off from the rest of the world.
So as other countries in the world innovated,
in the sense both of developing
but also developing newer rules,
the Chinese were cut off from those advances.
Income there stayed stagnant,
as it zoomed ahead in the rest of the world.
This next chart looks at more recent data.
It plots income, average income in China
as a percentage of average income in the United States.
In the '50s and '60s you can see that it was hovering at about three percent.
But then in the late '70s something changed.
Growth took off in China. The Chinese started catching up
very quickly with the United States.
If you go back to the map at night, you can get a clue
to the process that lead to the dramatic change in rules in China.
The brightest spot in China,
which you can see on the edge of the outline here,
is Hong Kong.
Hong Kong was a small bit of China
that, for most of the 20th century,
operated under a very different set of rules
than the rest of mainland China --
rules that were copied
from working market economies of the time,
and administered by the British.
In the 1950s, Hong Kong was a place where
millions of people could go, from the mainland,
to start in jobs like sewing shirts, making toys.
But, to get on a process of increasing income,
led to very rapid growth there.
Hong Kong was also the model
which leaders like Deng Xiaoping
could copy, when they decided to move
all of the mainland towards the market model.
But Deng Xiaoping instinctively understood
the importance of offering choices to his people.
So instead of forcing everyone in China
to shift immediately to the market model,
they proceeded by creating some special zones
that could do, in a sense, what Britain did:
make the opportunity to go work with the market rules
available to the people who wanted to opt in there.
So they created four special economic zones around Hong Kong:
zones where Chinese could come and work,
and cities grew up very rapidly there;
also zones where foreign firms could come in
and make things.
One of the zones next to Hong Kong has a city called Shenzhen.
In that city there is a Taiwanese firm
that made the iPhone that many of you have,
and they made it with labor from Chinese
who moved there to Shenzhen.
So after the four special zones,
there were 14 coastal cites
that were open in the same sense,
and eventually demonstrated successes
in these places that people could opt in to,
that they flocked to because of the advantages they offered.
Demonstrated successes there led to a consensus for
a move toward the market model for the entire economy.
Now the Chinese example shows us several points.
One is: preserve choices for people.
Two: operate on the right scale.
If you try to change the rules in a village, you could do that,
but a village would be too small
to get the kinds of benefits you can get if you have millions of people
all working under good rules.
On the other hand, the nation is too big.
If you try to change the rules in the nation,
you can't give some people a chance
to hold back, see how things turn out,
and let others zoom ahead and try the new rules.
But cities give you this opportunity
to create new places,
with new rules that people can opt in to.
And they're large enough
to get all of the benefits that we can have
when millions of us work together under good rules.
So the proposal is that we
conceive of something called a charter city.
We start with a charter that specifies
all the rules required
to attract the people who we'll need to build the city.
We'll need to attract the investors
who will build out the infrastructure --
the power system, the roads, the port, the airport, the buildings.
You'll need to attract firms,
who will come hire the people who move there first.
And you'll need to attract families,
the residents who will come and live there permanently,
raise their children, get an education for their children,
and get their first job.
With that charter, people will move there.
The city can be built.
And we can scale this model.
We can go do it over and over again.
To make it work, we need good rules. We've already discussed that.
Those are captured in the charter.
We also need the choices for people.
That's really built into the model
if we allow for the possibility of building cities
on uninhabited land.
You start from uninhabited territory.
People can come live under the new charter,
but no one is forced to live under it.
The final thing we need are choices for leaders.
And, to achieve the kind of choices we want for leaders
we need to allow for the potential for partnerships between nations:
cases where nations work together,
in effect, de facto,
the way China and Britain worked together
to build, first a little enclave of the market model,
and then scale it throughout China.
In a sense, Britain, inadvertently,
through its actions in Hong Kong,
did more to reduce world poverty
than all the aid programs that we've undertaken
in the last century.
So if we allow for these kind of partnerships
to replicate this again,
we can get those kinds of benefits scaled throughout the world.
In some cases this will involve a delegation of responsibility,
a delegation of control from one country to another
to take over certain kinds of administrative responsibilities.
Now, when I say that,
some of you are starting to think,
"Well, is this just bringing back colonialism?"
It's not. But it's important to recognize that the kind of emotions
that come up when we start to think about these things,
can get in the way, can make us pull back,
can shut down our ability,
and our interest in trying to explore new ideas.
Why is this not like colonialism?
The thing that was bad about colonialism,
and the thing which is residually bad in some of our aid programs,
is that it involved elements of
coercion and condescension.
This model is all about choices,
both for leaders and for the people who will live in these new places.
And, choice is the antidote to coercion and condescension.
So let's talk about how this could play out in practice.
Let's take a particular leader, Raul Castro, who is the leader of Cuba.
It must have occurred to Castro
that he has the chance to do for Cuba
what Deng Xiaoping did for China,
but he doesn't have a Hong Kong there on the island in Cuba.
He does, though, have a little bit of light down in the south
that has a very special status.
There is a zone there, around Guantanamo Bay,
where a treaty gives the United States
for a piece of land that's about twice the size of Manhattan.
Castro goes to the prime minister of Canada
and says, "Look, the Yankees have a terrible PR problem.
They want to get out.
Why don't you, Canada, take over?
Build -- run a special administrative zone.
Allow a new city to be built up there.
Allow many people to come in.
Let us have a Hong Kong nearby.
Some of my citizens will move into that city as well.
Others will hold back. But this will be
the gateway that will connect
the modern economy and the modern world
to my country."
Now, where else might this model be tried?
Well, Africa. I've talked with leaders in Africa.
Many of them totally get the notion of a special zone
that people can opt into as a rule.
It's a rule for changing rules.
It's a way to create new rules, and let people opt-in
without coercion, and the opposition that coercion can force.
They also totally get the idea that in some instances
they can make more credible promises to long-term investors --
the kind of investors who will come build the port,
build the roads, in a new city --
they can make more credible promises
if they do it along with a partner nation.
Perhaps even in some arrangement
that's a little bit like an escrow account,
where you put land in the escrow account
and the partner nation takes responsibility for it.
There is also lots of land in Africa
where new cities could be built.
This is a picture I took when I was flying along the coast.
There are immense stretches of land like this --
land where hundreds of millions of people could live.
Now, if we generalize this and think about
not just one or two charter cites, but dozens --
cities that will help create places for the
many hundreds of millions, perhaps billions of people
who will move to cities in the coming century --
is there enough land for them?
Well, throughout the world, if we look at the lights at night,
the one thing that's misleading is that, visually, it looks
like most of the world is already built out.
So let me show you why that's wrong.
Take this representation of all of the land.
Turn it into a square that stands for
all the arable land on Earth.
And let these dots represent the land that's already taken up
by the cities that three billion people now live in.
If you move the dots down to the bottom of the rectangle
you can see that the cities for the existing three billion urban residents
take up only three percent of the arable land on earth.
So if we wanted to build cities for another billion people,
they would be dots like this.
We'd go from three percent of the arable land, to four percent.
We'd dramatically reduce the human footprint on Earth
by building more cities that people can move to.
And if these are cities governed by good rules,
they can be cities where people are safe from crime,
safe from disease and bad sanitation,
where people have a chance to get a job.
They can get basic utilities like electricity.
Their kids can get an education.
So what will it take to get started
building the first charter cities,
scaling this so we build many more?
It would help to have a manual.
What university professors could do
is write some details that might go into this manual.
You wouldn't want to let us run the cities,
go out and design them.
You wouldn't let academics out in the wild. (Laughter)
But, you could set us to work thinking about questions like,
suppose it isn't just Canada
that does the deal with Raul Castro.
Perhaps Brazil comes in as a participant,
and Spain as well. And perhaps Cuba wants to be
one of the partners in a four-way joint venture.
How would we write the treaty to do that?
There is less precedent for that, but that could easily be worked out.
How would we finance this?
Turns out Singapore and Hong Kong
are cities that made huge gains
on the value of the land that they owned when they got started.
You could use the gains on the value of the land
to pay for things like the police, the courts,
but the school system and the health care system too,
which make this a more attractive place to live,
makes this a place where people have higher incomes --
which, incidentally, makes the land more valuable.
So the incentives for the people helping to construct this zone
and build it, and set up the basic rules,
go very much in the right direction.
So there are many other details like this.
How could we have buildings that are
low cost and affordable for people who work
in a first job, assembling something like an iPhone,
but make those buildings energy efficient,
and make sure that they are safe, so they don't fall down
in an earthquake or a hurricane.
Many technical details to be worked out,
but those of us who are already starting to pursue these things
can already tell that there is no roadblock,
there's no impediment, other than a failure of imagination,
that will keep us from delivering on
a truly global win-win solution.
Let me conclude with this picture.
The reason we can be so well off,
even though there is so many people on earth,
is because of the power of ideas.
We can share ideas with other people,
and when they discover them, they share with us.
It's not like scarce objects,
where sharing means we each get less.
When we share ideas we all get more.
When we think about ideas in that way,
we usually think about technologies.
But there is another class of ideas:
the rules that govern how we interact with each other;
rules like, let's have a tax system
that supports a research university
that gives away certain kinds of knowledge for free.
Let's have a system where we have ownership of land
that is registered in a government office,
that people can pledge as collateral.
If we can keep innovating on our space of rules,
and particularly innovate in the sense
of coming up with rules for changing rules,
so we don't get stuck with bad rules,
then we can keep moving progress forward
and truly make the world a better place,
so that people like Nelson and his friends
don't have to study any longer under the streetlights. Thank you.
- New-growth economist
Paul Romer is developing a radical new model of growth and governance, which calls for the establishment of city-scale special administrative zones.Why you should listen
Stanford economist Paul Romer believes in the power of ideas. He first studied how to speed up the discovery and implementation of new technologies. But to address the big problems we'll face this century -- insecurity, harm to the environment, global poverty -- new technologies will not be enough. We must also speed up the discovery and implementation of new rules, of new ideas about how people interact.
Throughout human history, big improvements in systems of rules took place when new governments entered the scene. In today's world, this process has been largely shut down. To bring it back to life, Romer proposes that we create new cities where people can go to escape from bad rules and opt in to new and better ones. With better rules, people can be safe, self-interest can protect the environment, and investment can bring families all the resources that the modern world has to offer.
The original video is available on TED.com