Refugee Cities Roundup

Over the last few months there has been a flurry of interest in refugee cities. Factscoexist recently published my piece arguing for refugee cities. Here’s an excerpt.

The key to refugee cities is a legal environment conducive to economic development. The baseline is ensuring refugees have the right to work and own land. More radically, refugee cities could import good institutions. A refugee city with rule of law, property rights, and economic freedom would become a beacon for refugees everywhere.

Paul Romer explicitly called for refugee cities during a recent interview.

It is important then that this free zone shall be counted as an independent unit, with its own laws and rules – not as part of Sweden. Those who live there will not be Swedish citizens, but to live his life completely separate from the rest of society, says Paul Romer.

Gordon Brown, former Prime Minister of Great Britain called for special economic zones for refugees.

Economic zones should be created in Lebanon, Jordan and Turkey as part of a job-creation initiative that will help both refugees and locals.

Viktor Orban, the Hungarian Prime Minister called on the EU to create a refugee city in Libya.

The European Union should build a “giant refugee city” on the Libyan coast to process the asylum claims of refugees arriving there from elsewhere in Africa, the Hungarian Prime Minister has proposed.

Jordan is experimenting with a plan to give refugees currently in a camp work permits. Ethiopia is building industrial parks to give jobs to refugees. I wouldn’t describe either plan as a refugee city as there does not appear to be any intent to ensure the rights of refugees to own land and property.

Pieter Cleppe of Open Europe called for the creation of refugee cities.

I propose to create what I call “free havens”, which really are newly created cities, governed by officials from countries with a high level of rule of law, and where any refugee could go to.

The more recent calls for refugee cities join previous calls which I list here. Those who have argued for refugee cities or special economic zones for refugees include George Soros, Anne-Marie Slaughter, and Peter Sutherland. There are also two organizations, Refugee Cities and Refugee Nation, which advocate the creation of new jurisdictions for refugees. I think refugee cities are near a tipping point and with coordinated action we could see refugee cities being built soon.

 

How much does it cost for a city to maintain a legal and regulatory system?

I often argue that new cities should negotiate legal autonomy to create or import legal systems more conducive to economic growth. I do so based on the assumption that the cost of creating and maintaining a legal system is less than the benefits of having such a legal system. In this post I quantify those costs.

I take Hong Kong as the prototype. As it retains legal autonomy from China, it is responsible for its own legal and regulatory system. More importantly, it has a budget that makes it reasonably easy to differentiate legal and regulatory costs from other types of costs. Hong Kong spends around 20% of her budget on her legal and regulatory system.

First, some demographic information. Hong Kong occupies about 400 square miles of land and has a population of 7.2 million with per income (PPP) of $56,000. Her annual budget is just under $50 billion. All dollar values are American where the exchange rate is 1 Hong Kong dollar to .13 United States dollars.

Hong Kong is not a perfect analogy for new cities. First, I cannot estimate the cost of the creation or importation of new legal systems. Second, Hong Kong has a far greater population and per capita income than the projection for most new city projects. Nevertheless, Hong Kong’s numbers serve as a rough approximation for the cost of a city having a separate legal and regulatory system.

Hong Kong’s budget specifies expenditures by 83 departments. To estimate the cost of maintaining her legal and regulatory system I read brief explanations of each of the departments to determine whether they had a role in maintaining the legal and regulatory system. I purposefully excluded the criminal justice system. It is extremely unlikely a host country would allow a city autonomy with regards to criminal justice.

After reading about each department I was left with 11 that contributed to Hong Kong’s legal and regulatory system. I purposefully included departments where even a small percentage of their budget related to legal and regulatory aspects. As such, the real cost of the legal and regulatory system is likely far lower than my estimate.

On the other hand, I did not include departments related to administration more generally, for example the pension. I figure these departments will exist in new cities anyway, and the cost of expanding them to cover a larger civil service is relatively low. A new city could also want to provide for disaster relief planning or other administrative tasks. This is not included in my estimate. Nor did I include departments related to architecture. While such departments implement zoning rules, because zoning is typically decided on a city level, I assume new cities will implement zoning regardless of whether they have legal autonomy or not.

The departments which contribute to Hong Kong’s legal and regulatory system are, Chief Executive Office, Census and Statistics Department, Civil Aviation Department, Department of Health, Electrical and Mechanical Services Department, Food and Environmental Hygiene Department, Government Laboratory, Government Secretariat: Financial Services and the Treasury Bureau (Financial Services Bureau), Government Secretariat: Food and Health Bureau (Food Branch), Government Secretariat: Food and Health Bureau (Health Branch), and Government Secretariat: Labour and Welfare Bureau.

The total cost of the departments is just under $10 billion, or 20% of Hon Kong’s budget. Of those, only three cost more than a $500 million annually, the Department of Health at $1 billion, the Food and Hygiene Department at $800 million, and Government Secretariat: Food and Health Bureau (Health Branch) at $6.7 billion.

Of those three departments, the amount spent on the legal and regulatory system is a fraction of their budgets. The Department of Health has seven listed functions; preventing spread of infectious diseases, ensuring the safety, quality and efficacy of pharmaceutical products through product registration and licensing control, promoting and protecting the health of radiation workers and minimising public exposure to radiation hazards, providing secretariat support to the various boards and councils responsible for the registration and regulation of healthcare professionals and healthcare institutions, licensing of healthcare institutions, providing services in forensic medicine and operating public mortuaries, and enforcing laws on tobacco control. Of those, only three relate to making and enforcing regulations.

The Food and Hygiene Department has twelve listed functions. Only two, conducting inspections and tests on live food animals at licensed slaughterhouses and providing meat inspection services at licensed slaughterhouses refer to their role as a regulatory.

Government Secretariat: Food and Health Bureau (Health Branch) is responsible for over half Hong Kong’s spending on her legal and regulatory system. However, further granularity reveals the lion’s share of the spending is not related to laws or regulations. Unlike the other departments mentioned, the brief descriptions are too short to judge whether they involve the legal and regulatory system. There is, however, a list of 24 matters which require special attention in 2016-17. Of those, eight are related to the legal and regulatory system.

To reiterate, a high estimate of Hong Kong’s annual legal and regulatory cost is $10 billion, about 20% of her annual budget. That being said, a new city could lower those costs with regulatory arbitrage. Take, for example, the regulation of pharmaceuticals. A new city could simply outsource their regulation. It could allow for the use of any pharmaceuticals which have been approved by the Food and Drug Administration or the European Medicines Agency. Of course, a new city would still have to enforce regulations even regulatory standards were outsourced.

To conclude, even on a city level, maintaining a legal and regulatory system is relatively cheap. Given the tremendous potential gains of a good legal and regulatory system, it is only a matter of time before new city projects begin focusing on laws and regulations more seriously.

The Evolution of Special Economic Zones

Special economic zones (SEZs) are areas where some laws which apply to the rest of the country do not apply. The first modern SEZ is generally considered to be Shannon, Ireland, created in 1959. As plane technology improved, trans-Atlantic flights no longer needed to stop at the Shannon airport. To ensure the continued vitality of the airport as well as the town, Ireland lowered taxes and reduced tariffs in Shannon.

Over the next  two decades the growth in SEZs was slow. The next major step in the evolution of SEZs was China. In 1980, China created four SEZs, Shenzhen being the most prominent. Chinese SEZs were similar to Shannon on many margins. They were created primarily to attract foreign direct investment to areas which otherwise would not have received it.

That being said, Chinese SEZs were also substantially different. The primary difference is they were not set up as a tax haven to attract corporate headquarters. Instead, Chinese SEZs were created to attract factories. Rather than targeting a small, highly skilled workforce, Chinese SEZs wanted to create jobs for a large, unskilled workforce.

The result has been an astounding success. The first year of the existence of the SEZ, Shenzhen attracted over 50% of all foreign direct investment in all of China. Over the long run, Shenzhen grew from a fishing village of 30,000 people to a booming metropolis of 16 million.

China recognized the success of their SEZs, copying them throughout the country. By 2005, there were 210 national development zones and 1,346 provincial development zones. Chinese SEZs have played a major role in China’s economic growth and lifting hundreds of millions of people out of poverty.

The creation of the Dubai International Financial Centre (DIFC) in 2004 was the next evolutionary phase of SEZs. Traditionally SEZs have simply cut around the edges of the laws of a host country. A typical SEZ will lower offer lower taxes, expedited customs, and maybe simplified business registration. Dubai changed that. Instead of asking what to cut, they asked what to build.

The result is that in just over 10 years the DIFC has become one of the leading financial centers in the world. It accomplished this by importing a financial legal system everyone trusted. It hired a British judge, a common law is generally considered better for development.

Unfortunately, since the DIFC the evolution of SEZs has largely stalled. Everyone learned the wrong lesson from Dubai. They saw the magnificent architecture and believed the architecture was the cause of Dubai’s success, rather than the consequence. I do not know of any other financial center which has imported common law.

The evidence supporting SEZs is also mixed. While China was a great success, there are many other attempts which have failed. The failures can relate to infrastructure, governance, or simply because an SEZ was a handout to a politically connected business.

More importantly, the low hanging SEZ fruit has already been picked. There were only a few countries where the marginal changes that SEZs bring were enough to jumpstart growth. In most countries, governance problems are deep seated, so that simply lowering taxes or expedited customs will have a limited effect.

Luckily, trends still point in a positive direction. SEZs are being rethought. The next stage in SEZs is the importation or creation of new legal systems. Instead of cutting away at the edges of a legal system, start from a blank slate. These more radical changes can create the framework necessary for sustained economic growth.

In practice this means using common law. Dubai imported common law for their DIFC. The next step is to use common law for a new town or city. Of course, changes will need to be made on the margin to ensure the legal system accords with the norms of the local population. However, common law will remain the base and different SEZs will simply make different alterations to it.

The most prominent voice advocating for the importation of successful legal systems is Paul Romer, now the Chief Economist at the World Bank. He advocated for Charter Cities. A Charter City would be built in a developing country, and administered by a developed country. This would allow the importation of good institutions to areas which currently lack them. Instead of the Band-Aid approach of SEZs, Charter Cities would import environments known to be conducive to growth.

A project in a similar vein is the zonas de empleo y desarollo economico (ZEDEs) in Honduras. ZEDEs create a blank slate which can import a successful legal system to accelerate economic growth. Unfortunately, though the ZEDE legislation passed, the project has been stalled for several years.

There has been a marked increase of interest in ensuring new cities have good legal systems. If current trends continue, I expect to see the first successful free city in ten years.

Free City Predictions

Yesterday I spoke with Tyler Cowen about my offer to bet that free cities would lead to growth miracles. So, here are the terms.

I bet Tyler Cowen $5 that within 40 years a free city, defined as a city which imports or creates a legal system distinct from the host country, will average 10% per capita GDP growth over 20 years.

Here are some of my other predictions. I expect the first free city to be announced within 3 years. I expect the first free city to reach 100,000 residents within 12 years. I expect there to be at least 5 free cities with populations over 100,000 in 20 years. Each of these predictions I hold with around 60% certainty.

Cowen also has an excellent article in Bloomberg View. He argues that “Nations can be Startups.”

Israel, Taiwan, Hong Kong, Cayman Islands, Estonia, and South Korea could also be thought of as startup nations. Most emerged from war, civil war, the evolution or dissolution of a prior imperial or colonial relationship, or some combination of those factors. In each case there was a chance to start anew and to have founders impose a distinct vision on a new political unit. Just as we doubt that Bill Gates could have founded and grown Microsoft within the confines of the older IBM, so did the success of Estonia require freedom from the Soviet Union and Russia.

Cowen does mention special economic zones and political decentralization, though he focuses his argument on new sovereign nations. I would reverse the focus. Startup political units are likely to consist primarily of semi-autonomous cities, with only a few new nations.

The Exportation of Chinese Special Economic Zones

The rise of China is the greatest humanitarian success story since the World War II. Over 700 million people were lifted out of poverty. Much of China’s success is due to special economic zones (SEZs). SEZs allowed China to improve their legal system on a local level, without threatening the political equilibrium.

China is exporting their SEZ model. In 2006 the Chinese government indicated its plans to expand the SEZ model worldwide. They wanted to create 50 SEZs. Deborah Brautigam and Tang Xiaoyang published a paper in 2011 on China’s SEZs in Africa, where Chinese SEZs abroad are proceeding most rapidly. This video by the Economist gives a more recent look.

There are currently six open Chinese SEZs in Africa. They are located in Egypt, Ethiopia, Mauritius, Nigeria (two), and Zambia. They focus on a variety of industries, from copper processing in Zambia to textiles in Egypt. Some are completely owned by Chinese companies while others are joint ventures. Chinese companies lead the projects, with help in negotiations by Chinese embassies. Some host governments or companies have ownership shares, but Chinese companies remain the main actors.

I was unable to find much discussion of what the SEZs actually entail. Given the lack of discussion as well as the connection to China I suspect they are traditional SEZs. This means they likely have a one of more of the following; tax incentives, simplified business registration, and expedited customs.

Recent reports suggest the SEZs are not having their expected impact. The zone in Mauritius, for example, remains empty today, a decade after it was announced. Initial problems involved a group of farmers living in the zone who refused a buyout offer. Basic infrastructure for the zone was completed around 2011, but was insufficient to attract companies.

Another example of an Chinese companies investing in SEZs abroad is in Georgia. A Chinese real estate developer, Hualing, refurbished an old Soviet factory and was granted a Free Industrial Zone (FTZ). FTZs in Georgia benefit from several forms of tax exemption. Unlike Africa, this Hualing has been successful in developing their FTZ. That being said, it remains unclear whether the FTZ is part of Chinese strategy, or if a Chinese company merely took advantage of pre-existing FTZ legislation.

Hualing is also building a new city in Georgia. Currently 1,000 families live in the new city. It does not appear to have any SEZ status.

Broadly speaking China’s exportation of their SEZ model is positive, but insufficient. The SEZs have had limited success, certainly not comparable to the success of SEZs in China.

Free cities, legally autonomous cities, can improve on the missteps of the SEZs. Free cities import successful legal systems. Charter Cities are the best known version, but free cities can be privately administered as well.

Free cities offer two potential solutions which SEZs are unable to address. First, free cities can offer a home to the world’s rapidly urbanizing population. Second, free cities can improve governance in the developing world.

The UN estimates there will be an additional 2.5 billion urban residents by 2050. While many of these residents will live in existing cities. Many will turn small villages and rural lands into the cities of tomorrow. Shenzhen, for example, grew from a fishing village of 30,000 people to have 16 million residents in the greater metropolitan area.

The developing world is plagued by governance issues. SEZs tend to improve governance on the margin. However, having a blank slate to import best governance practices would lead to more investment, more job creation, and faster growth. For example, a new city in sub-Saharan Africa which uses common law would have one of the best legal systems on the continent, becoming a destination for the youthful and the ambitious.

SEZs improve things at the margin. However, the relative failure of SEZs in Africa, both Chinese and otherwise, shows bolder thinking is needed. Free cities can rapidly improve governance while providing residential areas to the new urban population. Free cities are a viable next step in the evolution of SEZs.

Free Cities Will Create Growth Miracles

Tyler Cowen recently argued there are no more growth miracles. He writes,

The East Asian growth model, for all its wonders, belongs to history. Slow and steady may be the only option left. For whatever reasons, few countries have been able to scale up their educational successes as rapidly as the East Asian tigers. Trade growth, which exceeded overall output growth in the late 20th century, now seems stagnant. Many export industries are automated and hence don’t create as many middle-class jobs as they used to.

Cowen is mistaken. Most of the growth miracles, with the possible exception of China, were based on institutions. Singapore and Hong Kong, for example, grew rapidly. Both city states used common law and as a result escaped poverty.

To argue there are no more growth miracles implies no country or region will rapidly improve their institutions. On a national level this might be the case. Countries with the capacity to rapidly improve their institutions could have done so. However, countries can contract out institutions on the local level.

Charter Cities are an example of this. By taking land where no one lives and importing successful institutions, rapid economic growth can be achieved. More likely than Charter Cities, however, are proprietary cities, autonomous, privately governed cities.

There are over 100 new city projects worldwide. These new city projects are, slowly, realizing the importance of institutions to attracting businesses and residents. Barring an unexpected event, this trend will continue. As such, the new city projects will continue to learn the importance of institutions, gaining greater autonomy, and increasing economic growth.

I would be happy to bet Tyler that over the next thirty years at least one new city will use common law and achieve economic growth over 5% per annum for a ten-year period.

Free Cities in the Middle East

Omar Al-Ubaydli wrote an article arguing the Middle East should embrace Charter Cities. He sees Paul Romer’s appointment as Chief Economist of the World Bank as an opportunity to pursue more radical reforms than otherwise available. Omar is right about the need for the Middle East to pursue autonomous cities, but they are likely to be administered privately, rather than by a developed country.

The Middle East has the largest concentration of new city projects. Dubai was the first and most successful. More recent examples include Masdar and King Abdullah Economic City. The new city projects tend to be built privately, like King Abdullah Economic City, or through public private partnerships.

Unfortunately, most of the new city projects took the wrong lessons from Dubai. They saw Dubai’s magnificent architecture and thought, “to build a new Dubai we just need to build amazing buildings.” What they fail to realize is that Dubai’s buildings did no cause its success, but are rather a consequence of it. Dubai became successful by creating special economic zones to attract investment. Their financial center, for example, runs under common law.

The future of free cities in the Middle East most likely lies with proprietary cities, private autonomous cities. The new city projects will learn, hopefully not too slowly, the importance of institutions in development. Privately financed projects are unlikely to abdicate administrative authority to a developed country. Rather they can simply hire a judge and adopt the institutions, retaining control while importing the best aspects of institutions of developed countries.

Free cities as Moonshots

Wired has an article on moonshots, schemes that can potentially have big impacts on humanity. Unfortunately, Wired’s vision is constrained. The moonshots listed are technological feats, build an engine that can get to mars, create AI, reduce malaria. By focusing on technology, Wired misses how changing the rules of human interaction with free cities can have monumental effects.

Below are the criteria listed for the moonshot.

In February 2016, Teller laid out the principles of the philosophy. A moon- shot, he said, should be firstly about solving “a huge problem in the world that affects many millions of people.” That could cover solving the energy crisis, cutting road deaths or halting global warming. Second, a moonshot should not settle for half-baked measures: it has to provide a “radical solution” that can do away with the problem for good. The last criterion, Teller explained, is the reasonable expectation that technology can actually solve the problem. Moonshots should be as much about pragmatism as they are about dreaming.

Free cities fit this description. First, urbanization and poor governance cause poverty which affects billions of people. Free cities can alleviate that poverty. If special economic zones (SEZs) in China accounted for only 10%, a conservative estimate, of China’s economic growth, then SEZs are responsible for lifting 70 million people out of poverty.

Second, technology is the driver of long run economic growth. If free cities can even slightly accelerate technological innovation, they can improve the lives of billions of people.

Third, free cities are both radical and practical. They are radical in the sense that such devolution of power is difficult to achieve political. They are practical as free cities such as Hong Kong and Singapore have already shown it is possible to lift millions of people out of poverty.

Free cities are a moonshot, but a moonshot worth investing considerable time and energy in. I hope Wired considers free cities projects the next time they write about moonshots.

Reflections on the Effective Altruism Conference

This past weekend I attended the EAGlobal, the annual effective altruism conference. I came largely to promote the idea of free cities, as I think free cities are one of the best poverty alleviation tools.

First, some sociological notes. Effective altruists, broadly speaking, fit into three camps; existential risk, animal welfare, and anti-poverty. Existential risk seems to be primarily concerned with AI. Animal welfare with factory farming. And anti-poverty with malarial nets and deworming. While there is overlap between the groups, most people I talked to tended to strongly identify with one cause.

What surprised me was the lack of interest, or even awareness in economic growth. Economic growth is the best anti-poverty tool the world has ever seen. Anti-poverty discussions in EAGlobal tended to focus on tools that had level effects, not growth effects. Deworming and malarial nets are great, but long term economic growth is better. I suspect the lack of focus on economic growth is the difficulty in measuring the impact of various ‘interventions’ on economic growth as well as the more ideological nature of the inquiry.

I got the impression there was more discussion of policy this year than in previous years. Unfortunately, much of the policy discussions involved speakers from government or think tanks, standard mainstream stuff. For example, one speaker said they were looking for solutions to eliminate the kidney shortage. Of course, there is an easy but politically unacceptable solution, legalize kidney sales. Given the willingness of effective altruists to tackle problems involving existential risk, I was disappointed to see such unimaginative policy discussions.

On the positive side, there did seem to be an interest in free cities. Most people I talked to seemed aware of the idea, or at least similar ideas like Seasteading. There was less hesitancy in discussing the idea than in a Brookings event, for example. Several of the people in leadership roles demonstrated knowledge in free cities, which makes me wonder why no speakers were invited to opine on the topic.

In sum, I think the lack of awareness of the impact of economic growth on poverty is the primary barrier to effective altruists showing more interest in free cities. Until economic growth is adopted as a primary motivator of effective altruists, I doubt they will embrace free cities.