Friday, February 12, 2010

Charter Cities

Paul Romer argues that developing nations with severe economic and political problems (such as Haiti) should invite developed nations to operate charter cities within their borders. The developed nations would enforce laws that both nations had agreed to in advance.

Romer believes charter cities would help developing nations more than does foreign aid, which provides a benefit in the short-run as a one-time transfer, but which does not help the developing nation get out of poverty in the long-run. What is needed to get developing nations on the path to prosperity are better governmental institutions, and who better to provide those than nations which have already succeeded in doing so within their own territories.

This is a clever idea, but it is not clear that charter cities would fare any better than have charter schools. The problem is (at least in part) one of incentives. What is to guarantee that the government of the host nation will ask for the right kind of laws to be enforced? Do the interests of the governors of developing nations in fact represent the interests of the people as a whole? What is to guarantee that the government of the guest nation will live up to its side of the bargain? What incentive will either side have to improve the quality of government services and lower the costs of such services?

Don't let worries about developing nations' sovereignty or about neo-imperialism distract you from the even deeper problems regarding incentives. Charter cities might work, but there is plenty of reason to be skeptical.
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