Paul Romer and his Charter City

People always think that the unfamiliar is impossible. Many times, all that holds us back is a failure of imagination.” --- Paul Romer.


Half the world now lives in a city, for the first time in history — and the intellectuals are finally catching up with that fact. There’s New Yorker journalist David Owen, who points out that city living is environmentally friendly: the elevator is a far more efficient way to move people than the car. Ed Glaeser, a Harvard economist, uses a new book, The Triumph of the City, to argue that cities are the driving force of innovation and economic growth. And Black Swan author Nassim Taleb predicted recently that nation states would be supplanted by city states by 2036.


The true radical of the field, however, is Paul Romer. Both a highly influential academic economist and a successful entrepreneur, he turned down the job of chief economist of the World Bank to champion his alternative approach to ending global poverty: so-called ‘charter cities’.


Romer’s plan calls for the establishment of Hong Kong-like “charter cities,” special zones within developing countries with better rules and institutions. A well-run city lets millions of people come together and enjoy the benefit they can get from working together and trading with each other. The benefits per person increase with the total number of people; this is why big cities are more productive than small cities or villages. Of course, none of this is new. Adam Smith was referring to the power of exchange and the importance of increasing returns when he wrote that, “the division of labor is limited by the extent of the market.


There are many signs of the value created by all the exchange that takes place in a city. He saw it in productivity and wage data. He also saw it in the increase in the value of the land. Millions of people are willing to pay high rents just to live and work around millions of other people who are also paying high rents to get the benefits that comes from exchange and interaction with so many others.


In the developing world, most people don’t yet live in big well-run cities. Given the chance to move to one, hundreds of millions of people would go there to get a job, get an education for their children, and live in a place that is clean, safe, and healthy. Other people will make a profit by hiring them or supplying them with infrastructure and other services. If the rules let this happen, everyone can be better off. It doesn’t take any charity to build well-run cities.


Rules about public sanitation are a simple and familiar example. Without them, a city can’t be a healthy place to live; but these rules don’t just happen. The rules for a city are different from the ones for a village, but as a village slowly gets bigger, a city may be stuck with the rules of the village.


In a village, it might be alright to rule that anyone can urinate anyplace they want. In a modern city, it is better to have a rule saying that people have to urinate into toilets connected to the sewer system. The city government in Paris is having trouble enforcing this rule. They have special police units that give tickets to men who urinate against walls. So when we speak of rules, we must understand both rules on paper and an effective system of enforcement.


In many cities in poor countries, health is bad because governments don’t enforce basic rules about sanitation. The crime rate is appallingly high because the government doesn’t enforce rules that prohibit theft and violence. Traffic fatalities and congestion are both high because they don’t have good traffic rules or if they do, they don’t enforce them. The fact that people still flock to cities with such bad rules tells us something about how big the other benefits from living in a city must be. But given the choice, they would surely rather go to a city with good rules instead of one with bad rules.

"What’s going on here is a kind of self-censoring. Economists seem to think that we should propose things that are acceptable and that political systems will pursue, but that we should avoid proposing or even discussing things that are controversial or politically incorrect.”


Others thought it was colonialism. For Romer, that "kind of emotion . . . can get in the way" (see what he did there? You have emotions; the elite economist has evidence). Sure, the poor people living and working in these new charter cities wouldn't necessarily have any democratic privileges such as the right to vote, but they could vote with their feet. And in the meantime, the Africans or the Asians would get the undoubted benefit of all this huge western expertise.
The Philippines has always been in amidst of fiscal crisis as what we always heard from the daily news and even on statistics. We were already bombarded with issues on poverty, crimes, graft and corruption, etc. Most of us are aware of what is happening around, much more of those who were comfortably sat on their “precious positions”, but hey, what are you waiting for? It’s about time that we must do our share for the betterment of our country and for the future of our children’s children. If we could just adopt Paul Romer’s radical idea, then it might be a big help to eradicate poverty by turning over a piece of land to a rich country and let them manage it for sometime until we can figure out signs of progress. It could also be a great relief to stop others from including us to the third world countries.

Paul Romer's Charter City: A Way to Improve Life?

HISTORY

Henry the Lion
German prince Henry the Lion became duke of Saxony and Bavaria in the middle of the 12th century. Holding territory in both Germany and Italy, Henry was a powerful figure. His power, however, brought him into conflict with German king Frederick I, who deprived Henry of his lands in 1180.

According to an article written by Sebastian Mallaby, Paul Romer is the would-be-heir of Henry the Lion. Consider this following statements of German history:

Halfway through the 12th century, and a long time before economists began pondering how to turn poor places into rich ones, the Germanic prince Henry the Lion set out to create a merchant’s mecca on the lawless Baltic coast. It was an ambitious project, a bit like trying to build a new Chicago in modern Congo or Iraq. Northern Germany was plagued by what today’s development gurus might delicately call a “bad-governance equilibrium,” its townships frequently sacked by Slavic marauders such as the formidable pirate Niclot the Obotrite. But Henry was not a mouse. He seized control of a fledgling town called Lübeck, had Niclot beheaded on the battlefield, and arranged for Lübeck to become the seat of a diocese. A grand rectangular market was laid out at the center of the town; all that was missing was the merchants.

Lübeck, Germany
The city of Lübeck was an important center of trade during the Middle Ages. Lübeck contains some of Europe’s finest examples of medieval Gothic architecture

To attract that missing ingredient to his city, Henry hit on an idea that has enjoyed a sort of comeback lately. He devised a charter for Lübeck, a set of “most honorable civic rights,” calculating that a city with light regulation and fair laws would attract investment easily. The stultifying feudal hierarchy was cast aside; an autonomous council of local burgesses would govern Lübeck. Onerous taxes and trade restrictions were ruled out; merchants who settled in Lübeck would be exempt from duties and customs throughout Henry the Lion’s lands, which stretched south as far as Bavaria. The residents of Lübeck were promised fair treatment before the law and an independent mint that would shelter them from confiscatory inflation. With this bill of rights in place, Henry dispatched messengers to Russia, Denmark, Norway, and Sweden. Merchants who liked the sound of his charter were invited to migrate to Lübeck.

Immigrants soon began arriving in force

The plan worked. Immigrants soon began arriving in force, and Lübeck became the leading entrepôt for the budding Baltic Sea trade route, which eventually extended as far west as London and Bruges and as far east as Novgorod, in Russia. Hundreds of oaken cogs—ships powered by a single square sail—entered Lübeck’s harbor every year, their hulls bursting with Flemish cloth, Russian fur, and German salt. In less than a century, Lübeck went from a backwater to the most populous and prosperous town in northern Europe. “In medieval urban history there is hardly another example of a success so sudden and so brilliant,” writes the historian Philippe Dollinger.

Perhaps the only thing more remarkable than Lübeck’s wealth was the influence of its charter. As trade routes lengthened, new cities mushroomed all along the Baltic shore, and rather than develop a legal code from scratch, the next wave of city fathers copied Lübeck’s charter, importing its political and economic liberties. The early imitators included the nearby cities of Rostock and Danzig, but the charter was eventually adopted as far afield as Riga and Tallinn, the capitals of modern Latvia and Estonia. The medieval world had stumbled upon a formula for creating order out of chaos and prosperity amid backwardness. Lübeck ultimately became the seat of the Hanseatic League, an economic alliance of 200 cities that lasted nearly half a millennium.

BIOGRAPHY

Paul Romer

Paul Romer is the primary developer of New Growth Theory, which provides a fresh foundation for how businesses and governments think about wealth creation. He is also the president and founder of Charter Cities, a research non-profit focused on the interplay of rules, urbanization, and development. For his work on charter cities, Paul was chosen for Foreign Policy’s Top 100 Global Thinkers of 2010.

Paul’s research addresses one of the oldest questions in economics: What sustains economic growth in a physical world characterized by diminishing returns and scarcity?

The answer: the way societies deal with advances in technology.

Economic growth is driven by the co-evolution of two sets of ideas, technologies and rules. Governments can increase the rate of growth—in ways that benefit all citizens—by creating systems of rules that are both encouraging of and responsive to new technologies.

Romer is an expert on how rules, both formal laws and informal social norms, affect innovation and growth. For a developing country, the most important rules are those that determine the rate of technology transfer from the rest of the world. For an advanced economy, the most important rules may be the ones that influence the rate of technological innovation in the private sector.

Dr. Romer’s current research focuses on the concept of charter cities —
"We will not understand the deep dynamics of technological ideas until we understand the dynamics of. . . the rules that people follow. The patent system is a set of rules that encourages the discovery of new technologies. So is our system of open science. Rules that limit direct foreign investment can keep ideas from spreading to poor countries. So can rules (and systems of enforcement) that allow high levels of crime. As we interact with more people, the rules become more important and more complicated.
"In my current work on rules, I’m starting with a pressing policy concern: How can people living in places like Haiti, the Democratic Republic of the Congo, or Cuba get access to rules that protect them and let them engage in mutually beneficial exchange with others from all over the world?"

To create better options for people in the developing world, Romer advocates building charter cities — special reform zones that allow governments to quickly adopt innovative systems of rules that can differ markedly from those in the surrounding area. Charter cities give government leaders more options for improving governance, give investors more opportunities to finance socially beneficial infrastructure projects, and give people more opportunities to improve the quality of their lives.

Paul M. Romer is an entrepreneur who has successfully applied technology to
higher education —
He founded Aplia, Inc. in 2000, which offers a web-based technology for changing the way we teach by requiring from students the effort necessary for them to succeed while raising the productivity of instructors.

For his work in New Growth Theory, he is the fourth recipient of the prestigious Horst Claus Recktenwald Prize in Economics for outstanding achievement and contributions to the field of economics and to the improvement of society as a whole.

He is the author of dozens of articles, including several popular articles describing the role of technology in growth.

On Economic Growth

"Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable. A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. History teaches us, however, that economic growth springs from better recipes, not just from more cooking. New recipes generally produce fewer unpleasant side effects and generate more economic value per unit of raw material.

Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered. And every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered. Possibilities do not add up. They multiply."

Credentials & Honors

Henry Kaufman Visiting Professor, NYU Stern School of Business
Senior Fellow, Institute for Economic Policy Research, Stanford
Senior Fellow, Stanford Center for International Development
Foreign Policy’s Top 100 Global Thinkers 2010
Former Professor of Economics, Stanford Graduate School of Business
Former Senior research fellow, Hoover Institution
Ralph Landau Senior Fellow, Center for Economic Policy Research, Stanford
Fellow, American Academy of Arts and Sciences, Econometric Society, the Canadian Institute for Advanced Research, and the Center for Advanced Study in the Behavioral Sciences
Research Associate, National Bureau of Economic Research
Member, Executive Council of the American Economics Association.
Member, National Research Council Panel on Criteria for Federal Support of Research and Development
Co-chair, MacArthur Foundation Research Network on Preferences
Recipient, Distinguished Teaching Award, Stanford Business School
Sloan Foundation Fellowship
Former faculty member, Berkeley, Chicago and Rochester
B.A. and Ph.D., University of Chicago
Contributor to numerous scholarly and popular publications, including American Economic Review, European Economic Review, Journal of Political Economy, The Economist, Forbes and The Fortune Encyclopedia of Economics

A charter city is a city in which the governing system is defined by the city's own charterdocument rather than by state, provincial, regional or national laws. In locations where city charters are allowed by law, a city can adopt or modify its organizing charter by decision of its administration by the way established in the charter. These cities may be administered predominantly by citizens or through a third-party management structure, because a charter gives a city the flexibility to choose novel types of government structure. Charter cities are similar in administrative structure to special administrative regions.

Application of Charter City:

The success of a city depends on its environment. Creating a city anywhere, even with a great set of rules does not guarantee that it will flourish and attain success. It is true then that the right set of rules will help success because it is quite easier to design an applicable set of rules over a small territory with a small population compared to an entire country. But it is very significant to take into account that the environment is primordial, and a city needs it to draw value and riches from its surroundings. If the environment is poor, the city will never flourish. If it's the rules that need to be changed that has to start within the Country first. Even 'good' rules cannot stop injustice and tension between people, there will always be the factor of human nature. It is also unbelievable that any government is so totally selfless that it will only create laws that are good for the community. Charter cities don't have to design their rules from scratch. They can and will borrow successful laws, institutions and even personnel from existing societies, perhaps tentatively adapting them here and there to their specific needs. The charter cities that do this well will grow and multiply, and the charter cities that botch the job will lose their customers.

People will be miserable living in a place where wise political institutions have largely suppressed crime, tyranny and war; where they are well poised to enrich themselves through voluntary cooperation and peaceful exchange; and where they have access to all the social and spiritual advantages of a civilized urban life. If the charter city full of rich people is a bad place for poor people to live, poor people won't move there. They'll either stay home or they'll go to a better charter city. , the Charter Cities concept is an example of how urban and economic theorists are disconnected, as it disregards the impact of geographic location, and ecosystems on urban development and vice-versa.

In an ideal world, a monopolist charter city developer could earn what is known as "excess profit" by furnishing its residents with a standard of life that's only infinitesimally better than the one they now suffer at home.

There are a few reasons why that won't happen:

1. He wouldn't be a monopolist for very long. When a firm earns excess profit by selling its goods for more than it costs to make them (including interest and compensation for risk), other firms will quickly set up shop and and sell their own goods at a somewhat lower price, and pretty soon nobody is earning excess profit any more - goods are then sold at about what it costs to make them, and the only way to get hold of an excess profit is to figure out how to make the same goods more cheaply or how to make better goods (that can be sold for a higher price) at the same cost.

So that's what would also happen in the market for charter cities. The excess profits would be gobbled up by ruthless competition. At that point, there would still be quality differences among different cities, but they would simply reflect market demand: some workers would be willing to put up with a somewhat noisy and crowded city if it means that they get to pay a lower rent, while others will be happy to pay a higher rent in exchange for an especially pleasant city, and others yet will be somewhere in the middle.

2. Moving to a charter city is not free. If the standard of life in the first (monopoly) charter city were only slightly better than your present standard of life, moving there would probably not be worth the cost and the hassle.

3. If the standard of life in a charter city is not significantly better than that available elsewhere, it may not be able to convince its would-be customers that it really is, in fact, better. A truly good charter city would speak for itself.

4. The first charter cities may have a hard time getting permission to start if their conditions can be expected to be shabby and uninspiring.

Romer uses new words and builds a new exiting model, but the main idea is not so old or radical. It actually resembles the city-states of ancient Greek. In those days the nation-under-king was not the only basis of strong society, but also city-sized states like Athens and Sparta thrived. Often the rules were set by vote inside democratic elites of free men.--MAE