[Originally written in 2011].
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:
An uninhabited piece of city-sized land, provided voluntarily by a host government.
A charter that specifies the rules that will govern the new city.
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
The post appeared first on Econlib.
Great line: "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."
I like the case of HK as an argument for charter cities. But that arrangement was as a result of the Opium War. I don’t know how plausible it is to recreate such a set of circumstances, esp at scale, in 2026.
As for open borders, the end state is physically clearing out all third world nations, and relocating all third world inhabitants to first world countries. Just as a tiny real world example, take a look at what’s happening in Europe. This infatuation of yours has no practical application that doesn’t ruin destination countries.