Event Report Paul Romer and Charter Cities: A Solution to Global Poverty

APRIL 20, 2010

In April, Columbia Business Schools Jerome A. Chazen Institute of International Business, Social Enterprise Program and International Development Club co-sponsored an event featuring Paul Romer, senior fellow for the Stanford Center for International Development and the Stanford Institute for Economic Policy Research. Dr. Romer has done foundational work on economic growth and outlines his current initiative, Charter Cities, which entails a new mechanism said to lie somewhere on the fine line between revolutionary and crazy to improve lives in the developing world. Paul Romer believes that a critical lesson of todays world is that it is not enough to have a set of rules that work now, but there must be a dynamic that lets the rule of law change over time in response to the circumstances. Those in the Western world would argue that the appropriate model for rule of law is democracy: Voting empowers us to change the rules of the game. Dr. Romer, however, argued that other mechanisms have proven successful in adapting the law to changing circumstances. An important historical example is King Charles IIs use of the charter in 17th-century England. King Charles II believed that, contrary to prevailing aristocratic sentiment, the Crown should not be able to dictate religion. He attempted to enact proclamations enhancing the rights of religious minorities, but the incipient democracy represented by Parliament overturned these proclamations. King Charles II gave Pennsylvania as a dominion to William Penn, a well-known Quaker, who was then free to write his own charter that guaranteed complete freedom of religion for its citizens. As a result of these religious freedoms, Pennsylvanias immigration and

CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS

www.gsb.columbia.edu/chazen/webjournal

Paul Romer and Charter Cities: A Solution to Global Poverty

economic growth outpaced that of colonies like Massachusetts and Virginia, which had more stringent religious restrictions. These colonies eventually followed Pennsylvanias example, and ultimately the U.S. Bill of Rights incorporated this freedom of religion nationwide. Thus, it was not democratic decision-making that led to more religious tolerance in England, but rather the example set by the charter. Dr. Romer drew similarities between the potential ability of the charter mechanism in politics and the start-up mechanism in economics to change the status quo rule of law. Early 20thcentury retailing was dominated by the mail-order model. Soon, however, the internal processes and logistical norms of catalog retailing were simply no match for emerging discount retailers. An early trendsetter in discount retailing was Target, which started as an entity independent of its department store parent, Dayton-Hudson. Target eventually became more successful than its parent by hiring managers outside of Dayton-Hudson and subsequently deviating from the parent company norms the corporate equivalent of King Charles IIs Pennsylvania. Making the leap to a new model of discount retailing did not entail Dayton-Hudsons modifying its entrenched infrastructure; on the contrary, change came about through the Target start-up. Dr. Romer contended that on the level of industry, we are familiar with start-ups as mechanisms to create new rules and norms that effectively supplant the old system, but we are not familiar with this concept on the level of nations. Following this logic, Dr. Romer raised the question: Could we have something like new start-up politics new start-up nations? This revolutionary idea is so pressing because much of the world today lives in places with bad rules that are difficult to change. Dr. Romer evoked an image of African schoolchildren who routinely study under streetlights because their homes lack electricity. These students families could afford electricity prices in a free market, but not in a market under government control. What keeps the students studying under streetlights, Dr. Romer asserted, is a government that imposes rules prohibiting outside firms capable of generating cheap electricity from selling it and citizens from buying it. Unfortunately, mechanisms are not in place to efficiently change these existing rules, and the schoolchildren suffer the consequences. Rather than assuming the daunting challenge of changing the existing system of bad laws, Romer advocated creating a new place a charter city where people like these schoolchildren and their families could move. Hong Kong provides a recent successful example of the charter city model. Hong Kong was at one time a new political entity enforced upon the

CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS

www.gsb.columbia.edu/chazen/webjournal

Paul Romer and Charter Cities: A Solution to Global Poverty

Chinese by the British government because of Britains desire for a strategic seaport. Hong Kong was situated in a largely unpopulated area in which new rules of British law were established. Over time, millions of Chinese were allowed to opt in to the Hong Kong system; as a result, by the 1950s, Hong Kong had grown into a bustling urban area built on a thriving manufacturing industry. Dr. Romer asked an essential question: Couldnt we do this again? Couldnt we create some other places where rules that allowed safety, electricity, jobs, mobilitya place where those students stuck under the streetlights could go? Dr. Romers charter city entails the use of unoccupied land and establishment of a charter similar to that of colonial Pennsylvania outlining the rule of law. Dr. Romer outlined a hypothetical scenario in which a charter city is established in and administered by Australia, populated by Indonesian citizens, and financed by Abu Dhabi. The incentives for these parties to participate are clear. Australias immense northern stretches of underutilized desert coastline and desire for economic development in the region make it an ideal location for the charter city. Indonesias leaders recognize that its citizens could raise their standards of living by working in the manufacturing and service sectors, but Indonesia lacks the appropriate urban infrastructure. While financing a charter citys infrastructure development certainly presents a high return opportunity, it requires rule of law stability (guarantees against expropriation, contract infringements, etc.) that the Indonesian government cannot guarantee, but Abu Dhabis sovereign wealth fund could. The solution would be a special zone carved out of Australian territory through a treaty with Indonesia. Australia provides administrative services while Abu Dhabis sovereign wealth fund finances the infrastructure build-out. As millions of Indonesians move in, this charter city would become one of several key economic nodes driving Indonesias economic progression. Granted, concerns in Australia will emerge surrounding complicated issues such as immigration controls and shared governance, but the potential benefits for Australia, Indonesia, and third-party investors are evident. According to Dr. Romer, the key to the success of the Charter Cities initiative is the ability of a sponsor such as Great Britain in the case of Hong Kong or Australia in the hypothetical case above to build upon the local successes of the charter city and scale it globally. More urbanization will occur during this century than in all of human history. Three to five billion people are expected to migrate to the cities. The Charter Cities initiative will enable the world to meet its tremendous urbanization demands going forward, while offering core benefits that people in developed countries often take for granted benefits like safety, choice and economic

CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS

www.gsb.columbia.edu/chazen/webjournal

Paul Romer and Charter Cities: A Solution to Global Poverty

opportunity to entire populations. Just as the start-up represents the most efficient way to create a new system of rules within firms and industries, the charter city is an opportunity to give people choices about living under new systems of more effective rules. Dr. Romer concluded: Through this unfamiliar political mechanism, we can potentially change the face of Earth and the course of history. It takes an unfamiliar mechanism to do it, but the gains are large enough that I hope we consider it.

ADRIAN ALMAZAN MBA 10 Columbia Business School

CHAZEN WEB JOURNAL OF INTERNATIONAL BUSINESS

www.gsb.columbia.edu/chazen/webjournal