A Quick Case for Charter Cities: Memo to the Gates Foundation By Bryan Caplan

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.

investors, and employers to move in or out. 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.