Paul Romer, a senior fellow at Stanford University, has spent the better part of the past year pushing for the creation of Hong Kong-like charter cities. Charter cities would be special zones within developing countries with better rules and institutions.
According to Romer, charter cities “offer a truly win-win solution. These cities address global poverty by giving people the chance to escape from precarious and harmful subsistence agriculture or dangerous urban slums. Charter cities let people move to a place with rules that provide security, economic opportunity, and improved quality of life.”
The most important contribution Romer makes is his acknowledgement of and emphasis on the importance of rules. Without the right set of rules which are enforced by government and supported by the public, markets do not function well and the economy stagnates. If the rules are not perceived to produce fair outcomes (and fair is in the eyes of the beholder), public support will be lacking, and the pressures for change will intensify.
Neo-conservative critics of government would be well advised to recognize this critical role of government, and to structure their positions to incorporate what they believe are the best set of rules. They also should be concerned with the income distribution consequences (the perceived fairness) of the rules if they care about gaining public support.
The global debates over reform of the financial system also should take into account the importance of good rules and the perception of fairness. There is not likely to be any single set of rules which will prevent future or mitigate future problems. But there are better rules and worse rules, and the ones in place now are more likely to be worse rules.
Romer also differs with his economist colleagues who “tend to assume that societies will naturally adopt the good rules.” Romer believes that the “evidence suggests to the contrary that many societies are stuck with bad rules.”
Implicit in Romer’s charter cities proposal is that rules in place in countries such as the U.S., Canada, the U.K., Australia, Germany and France (all well developed democracies) are superior to the ones in place in most countries, especially the less developed ones. Western rules which are respected and enforced are needed to pull many countries out of poverty and underdevelopment.
While Romer does not deal with countries such as Russia and China directly, his arguments suggest that neither country will achieve its potential until the rules and openness of their societies change. transparency and trust are critical for long-term growth and development. However, change will have to come from within these and other countries. Romer’s Utopian vision of “an alternative process in which people can migrate from a society with bad rules to another society with better rules” is unlikely to materialize.
The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.