Tuesday 27 March 2012

Game-changing recipe: A quick and easy city?


Paul Romer, the father of endogenous growth theory, thinks that he can whip up a city in a foreign country in a matter of years, with all the established institutions and rule of law that took most countries hundreds of years to develop. An ambitious recipe, no?

Ingrediants
  • A charter – good rules, a legal system with;
  • Choice’s for people
  • Choice’s for leaders
  • Uninhabited land, 1,000 km2 at least
  • Managers/leaders
  • Designers and builders
  • Financing
  • Citizens




This recipe is based on the perhaps unsurprising statistic that right now 700 million people around the globe say they’d like to live somewhere else. Why don’t they have this option? Paul Romer is hoping to teach government, business and academics how to concoct cities for them to live in.

The basis for this recipe is ‘choice’ but being a rather too abstract notion for a recipe it can be boiled down to a charter, which allows for the operation of quasi-independent city-states. This charter effectively opens up two types of choice; a choice for people and a choice for leaders. The choice for people comes, of course, from the option to live and work in the city, voting with their feet on the institutions and rules put in place by an independent legislative body. The choice for leaders is less obvious. Effectively it is the choice to set up a governing system free from the special interest groups and elites which so often dominate the politics of a developing country. By appointing outside experts to oversee the rules and rights of the charter city, it can distance itself from the predatory practices of the home government, attracting new citizens and foreign investment.

To this document you must add some of those traditional factors of production economists are so fond of. Let’s start with natural resources in the form of land; Mr. Romer estimates that nothing less than 1,000 km2 will do. To this, we add labour, specifically the mangers and designer who will design and run the city. These parties will consist of both residents and leaders of the country as well as foreign experts and governments. This latter group is there to ensure that independent and effective institutions are constructed and maintained in the new city, acting as referee if necessary. Then for good measure we need to add some physical capital in the form of international financing. If the previous ingredients come together successfully, the addition of international financing should not be too tricky as investors will be tempted there by light-touch regulation and an effective rule of law. Finally, add a liberal sprinkling of citizens, keen to live and work under the foreign institutions they were previously willing to migrate so far for. They will finish off the dish nicely. 

As shocking as this recipe might seem, it’s is actually not all that crazy as in some sense charter cities have existed before. You only have to look at Hong Kong; a Chinese city but effectively run with rules adopted from the British. Indeed Romer credits Hong Kong’s success to the British; “The British did more to reduce world poverty in Hong Kong than all its aid programmes put together”.  Deng Xiaoping, for one, recognised this and created four special economic zones in China. Following their success 14 coastal cities were given this privilege. In this way he did not force a market economy on the Chinese people but effectively gave people the choice to move to these “charter cities”.

Indeed when Romer says “our new goal should be that when every family thinks about where they want to live and work they should be able to chose between at least a dozen different cities who are all competing to attract new residents” he makes no mention of its historical precedence. In medieval Europe something like this actually existed. Power was so fragmented across the continent, that there was little centralization and instead free cities and principalities competed against each other for citizens.  

Despite this seeming precedence however, political chefs need to tread carefully. While it is indeed true that at one time Europe was dominated by something like charter cities, these cities were a natural evolution; the result of European geography and culture failing to leave one group strong enough to dominate the rest. For Europe this development took hundreds of years and did not last nearly as long, as the power of centralizing monarchies grew. What Paul Romer is describing, is an attempt to short cut the evolution responsible for complex and independent societies in the hope that academics and foreign governments can override natural socio-economic development.

While I think that the above is the greatest caveat, Romer is far more likely to face criticism from those who will deem his charter cities a new form of colonialism. Romer acknowledges this and is eager to demonstrate that by giving citizens and leaders choices about their city, he is overcoming the condescension and coercion which came to epitomize colonialism. Unlike colonialism, citizens choose to submit to a different way of living. Indeed in the very place you’d expect people to be suspicious, Africa, many of the leaders are keen on this new idea, seeing it as a way round the institutional sclerosis that too often occurs.  They see it as a place to encourage investments, when many investors are wary of investing in Africa precisely because of the weakness of institutions, like property rights.

However it is Latin America which will be the first continent to see a charter city, rendering this recipe is no longer merely theoretical. Romer and the government of Honduras are working together to rustle up a skyline, in 1,000 km of uninhabited land in Trujillo, Honduras. The Honduran government agreed to it partly because they are fed up of watching 75,000 of their citizens, often the best and the brightest, leave Honduras annually to seek a better life in the US. They Hondurans have already started adding to their uninhabited land by mixing in the city building expertise of Singapore and South Korea, both of whom are interested in the charter city idea.

In fact, despite my aforementioned criticism I am impressed by Mr. Romer’s vision and ambition. After all, with his recipe for a city, is he not trying to do what all development economist dream of; overcoming the trials and tribulations of an underdeveloped state to bring wealth and prosperity to its people? Even if he fails, he has highlighted the role of institutions and government in economic development, which should be applauded. Please feel free to comment if anyone disagrees! 
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Wednesday 7 March 2012

Italian slow-cooking: A tale of two tyrannies

Italian recipes are always popular so I thought it was be a great way to start my new economic/political cookbook. Buon appetito!
Ingredients
For your base, the ‘tyranny of the majority’:
·         An ageing demographic
·         Article 45 of the Treaty of the Functioning of the European Union (which allows for the free movement of people)

For the ‘tyranny of the minorities’:
·         Ineffective government
·         A culture of guilds and cartels
·         A widespread dislike competition (witness the platforms of the People of Freedom and the Northern League).
As Alexis De Tocqueville toured America, he remarked on the dangerous ‘tyranny of the majority’ that he believed would “render the law unstable”. However, the recent Euro debt crisis has shown us that it is not just the tyranny of the majority that is dangerous; it is when this majority combined with a ‘tyranny of the minorities‘. This set-up renders not only governments unstable (ciao Berlusconi!) but the country’s economy too.
The way the debt crisis has recently been reported in the media would leave one believing that the recipe behind the disaster has been a quick pan-to-plate job with a befuddling variety of ingredients; a global recession, a single currency, high sovereign debt, lax consideration of the growth and stability pact, etc. However, I believe an authentic Italian crisis requires a much longer cooking time and yet a simpler set of ingredients. Indeed, while the rapidity may surprise some, others have wondered how Italy has lasted so long without meeting financial difficulty. Its growth rate between 2000 and 2010 has averaged at 0.25% a year; a figure so low it was only surpassed by Haiti and Zimbabwe. Not ideal neighbours for the country of Caesar and Garibaldi. Furthermore, productivity only grew by 0.1% between 2001 and 2005 and actually shrank by 0.8% between 2006 and 2009.  
What do you need to create this kind of economic sclerosis? I would say the base of this recipe requires an ageing demographic. In Italy, the birth rate has fallen much faster than in other European countries, to 1.3 children per family. Thus while the number of those over the age of 65 has markedly increased, by 10.4%, the number of those up to the age of 14 has only grown by 1.9% (2001-2006) . With age often comes seniority and as in most countries, Italy’s businesses, large and small, are owned and run by the boomer generation. However, their hold has become entrenched and to the detriment of meritocracy in Italy. Often the younger generation find they are too young to be promoted or that their superiors will take the lion’s share of their success, financial or otherwise. As a result, large numbers of ambitious young Italians leave the country every year in search of greater opportunities. In fact, Italy is the only rich European country to be a net exporter of graduates.  The old rule the roost, and the potentially productive youth flee to other European countries to advance their careers. However, well-entrenched this age bias is in business, it is further fortified by the government. Italy spends 14% of its GDP on pensioners, more than any other European country. In 1994 Berlusconi came to power in Italy promising pension reform; 17 years on they have never happened.
To this base you need to mix in a variety of what I have termed ‘tyranny of the minorities’. This is really just a sprinkling of different cartels and entrenched business interests which stop Italy’s economy from working in a productive manner. In fact, almost every industry in Italy has their own lobby group and set of protections. An example of this, (highlighted in the Economist’s special report on Italy last summer) is taxi drivers. In Milan, it is near impossible to find a taxi. This is odd given that Milan is probably Italy’s most dynamic and wealthy city; surely demand is high enough? The reason is a classic constriction of supply; taxi drivers in Milan must pay a large amount of money for a taxi licence (€200,000 in 2003) which thus limits the number of cabs driving around.
In this way privileges are confined to the lucky few, at the expense of a taxed majority. However, it particularly hurts Italy’s youthful minority who suffer disproportionately high levels of unemployment. In November of 2011, Italian youth unemployment was at 30.1%, well above the 22% Euro zone average. The protectionist measures adopted by government which enshrine these hard-to-get/hard-to-lose jobs in guilds and cartels ensure that the young are kept out of various professions. Indeed almost the only way to get a job in Italy these days it through raccomandazioni, a series of family connections within the labour market.
There you have it, hopefully a rich but simple entrĂ©e; an Italian crisis. I’d be interest to hear if anyone has a recipe for the solution!
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