Refugee Cities

Pieter Cleppe has a good article about refugee cities. Hopefully, it can restart some of the discussion. It is excerpted below.

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. This idea is very similar to the concept of “startup cities” or “private cities”, whereby cities would be created by private investors from scratch in a bid to create a much nicer place to live than in existing cities and to provide a more beneficial investment climate by offering a much stronger protection of property rights than elsewhere.

I have written on refugee cities as well, making similar points. However, the news cycle has focused on the US election, Brexit, and the wave of terror attacks, rather than refugees. Further, the Turkey deal seems to have slowed the flow of refugees.

That being said, the refugee crisis is unlikely to slow in the near future. The causes, political instability in the Middle East and Africa, are likely to get worse before they get better.

Luckily, I think refugee cities are a viable solution. The barrier to refugee cities is largely political. And refugee cities align well with political interests. Refugees are threatening the political fabric of Europe, but there remains a strong humanitarian impulse to allow them entry. Refugee cities allow them access to the best parts of Europe while limiting the nativist backlash.

Further, a number of prominent thinkers have supported the idea, albeit weakly. The list includes George Soros, Ann-Marie Slaughter, Paul Collier, Reiham Salam, and Paul Romer. The current difficulty is that no one has taken ownership over the issue. If someone were able to play a coordinating role, bringing together those who support the idea to create a coalition, it would be possible to start work on a refugee city. A conference would be the first step, bringing together those who support refugee cities to establish the strategy for pushing them forward.

A response to Chris Blattman’s critique of Charter Cities

Chris Blattman has concerns about Charter Cities. Admittedly, those concerns were published seven years ago. Nevertheless, with Paul Romer’s appointment as Chief Economist of the World Bank the concept of Charter Cities has resurfaced, and with it, the concerns.

Blattman’s concerns are as follows; 1) the sum of good rules is not necessarily a good system, 2) moving out of a failing city is high cost, especially for the marginalized, 3) Charter Cities will likely be too big to fail, 4) Political constraints limit potential of Charter Cities. These are all valid critiques.

First, with regard to Charter Cities, we know that the sum of good rules is a good system because of evidence from the country administering the Charter City. Denmark, for example, has good institutions. That being said, it is possible, though low probability, that applying Danish rules to Madagascar, for example, would not work as well as in Denmark.

Second, exit alone is unlikely to be a sufficient constraint on Charter Cities. The cost of exit is very high for some. That being said, Charter Cities would have to initially attract these residents. That means that Charter Cities would have to offer substantive improvements over existing conditions to attract residents. There is a long term risk that the quality of the Charter City falters. However, given the initial standard of the Charter City, it is hard to imagine the risk of the Charter City faltering is greater than the risk of the host country faltering.

Third, that the administering country might be pressured to give citizenship to residents of a faltering Charter City is a concern. However, this risk would improve the governance of the Charter City to mitigate such a risk.

Fourth, political constraints do limit Charter Cities. Nevertheless, it is impossible to escape the political process. Opt-in reforms, like Charter Cities, are likely to offer better improvements than traditional legislation which directly affects many interest groups.

More generally, the value of Charter Cities lies in improving institutions. The administration of a developed country is merely a means toward improving institutions. There are other ways of administering new cities which can lead to improved institutions.

What I call proprietary cities are one such alternative. It is important to note that Romer is not a fan. Proprietary cities are private cities where the developer retains land ownership and influences the legal and regulatory system. According to the World Bank, best practices for special economic zones include private development of physical infrastructure. By owning the land, the developer internalizes externalities. Infrastructure increases the value of the land; therefore, the developer is incentivized to provide it.

The same logic applies to legal systems. A good legal system would increase the value of the land. As such, a city developer has an incentive to provide a good legal system. There are numerous multi-billion-dollar new city projects worldwide. Hiring a British judge and implementing common law could add a great deal of value to such projects.

Proprietary cities face different obstacles than Charter Cities. For example, Blattman’s third objection would not apply. At the same time, private companies can be more resistant to public pressure increasing the likelihood of legal abuses.

Of course, there are numerous alternatives beside Charter Cities and proprietary cities. A new city could be administered of a board of representatives from the host country, business community, and World Bank. Nevertheless, broadly speaking, I believe the potential benefits of free cities (my umbrella term) far outweigh the risk.

 

Free Cities: The Road to Growth

Introduction

Market competition is one of the most successful institutions ever developed by humankind. It is largely responsible for two of the greatest events in human history: The Industrial Revolution and the postwar reduction in international poverty. Poverty, once the natural condition of mankind, continues to exist solely because some states have not adopted market competition.

Unfortunately, there remain substantial barriers to the introduction of market competition in these states. In fact, competition in a certain crucial industry continues to be suppressed. If that industry is poorly run, a country remains impoverished. If improved, rapid economic growth quickly follows.

The industry is territorial governance. Political scientists and economists typically assume the state the be the sole provider. However, history shows a wide variety of types of territorial governance, from the corporate governance of the Dutch East India Company to Puritans, Quakers, and later Mormons establishing religious colonies. The current dominant model of statehood, while successful in some respects, has failed in others. Competition in territorial governance can remedy those failures.

I propose free cities as a mechanism for competition in territorial governance. A free city is an autonomous or semi-autonomous city. It can opt out of some or all of the legal and regulatory system of its host country. Recent examples include Hong Kong, Singapore, Shenzhen, and Dubai. I believe their success can be replicated throughout the world, accelerating economic growth and alleviating poverty.

Free cities matter for three reasons: territorial governance in the developing world, the rapid urbanization of the developing world, and technological innovation in the developed world.

Most developing countries are poorly governed. These countries lack rule of law, property rights, and state capacity, often leading to economic stagnation. Improving governance at the national level is typically difficult and slow. Free cities allow for rapid institutional improvements at the local level.

The developing world is also rapidly urbanizing. The UN estimates there will be an additional 2.5 billion urban residents by 2050. Accommodating these new residents requires not only building new infrastructure, but ensuring residents can trade, contract, and contribute to the global economy. Free cities make that possible.

Technological development drives economic growth in developed countries. However, overregulation has caused certain industries to stagnate. Alphabet, the parent company of Google, for example, is limiting its investment in health care in developed countries because of onerous regulations. Free cities in the developed world can opt out of harmful regulation, unleashing our best and brightest to address humanity’s most pressing problems.

The rest of this essay is split into four parts. First, I further develop the idea of free cities. Second, I offer suggestions on why and where we most need free cities, and how they will likely will work. Third, I review the evidence suggesting that free cities are viable. Lastly, I conclude.

Free Cities

Free cities is a catchall name for any city with substantial or complete autonomy. Free cities cover a range including Paul Romer’s charter cities, Shenzhen’s special economic zone, independent Singapore, and private, semi-autonomous cities. All allow the city to independently develop much of its legal and regulatory system.

To think about a free city, start by assuming it has complete sovereignty. Then consider what parts of the host country’s legal and regulatory system the free city would be likely to keep. Criminal law, for example, is probably at the top of the list. This differs from the typical thinking on special economic zones.[1] Most special economic zones begin by thinking about which laws and regulations to simplify or eliminate. Free cities, on the other hand, think about what laws or regulations to keep.

The primary advantage of free cities is their ability to rapidly adopt institutional improvements. Past free cities were typically built in sparsely populated areas, a trend that is likely to continue. By building in localities with few special interests, it is possible to institute more radical changes than would be accepted at the national level.

A secondary advantage of free cities is their ability to experiment with different types of governance. Innovations in governance tend to be slow. For example, most police departments in the United States are unable to receive or respond to texts. However, by introducing competition in territorial governance, we can more clearly observe which types of governance and policies create jobs and attract residents. This discovery process has spillover effects and thus benefits us all.

A tertiary advantage of free cities is their ability to improve governance of the host country. Competition works, even among states. Historically such competition has often been driven by war. However, free cities can drive competition through commerce. A successful free city spawns copycats, as well as calls for the host country to improve its governance. For example, China’s initial special economic zones and their later imitations were both largely influenced by Hong Kong.

Why, Where, and How

Different countries might allow the creation of free cities for different reasons: some to spur economic development, some to build needed infrastructure for urbanization, some to accelerate technological innovation, and others to create a sanctuary for refugees. In this section I detail some of the reasons to build free cities and the form those free cities might take.

In sub-Saharan Africa and Southern Asia, free cities can help with urbanization and improve governance. Both are among the least urbanized and worst governed. Free cities built in sub-Saharan Africa or Southern Asia in the near future could mirror the rise of Shenzhen, which grew from a fishing village of 30,000 people in 1980 to the greater metropolitan area having 16 million residents today, albeit likely on a smaller scale. Such cities would be built to accommodate a largely uneducated populace from rural areas. With low wages and economic freedom, these cities would likely become manufacturing hubs.

Developed countries have different needs. Europe and North America are both urbanized. There is no readily available population for a free city to draw from. Free cities could, however, offer centers for technological innovation. Marc Andreessen, a well-known Silicon Valley venture capitalist, argued in a Politico article, “Turn Detroit into Drone Valley,” that cities in the Rust Belt should opt out of onerous regulations and encourage technological experimentation. A free city could test driverless cars, drone delivery, and medical innovation.

Latin America is largely urbanized, but still suffers from poor governance. Free cities in Latin America might be closer to free suburbs. These free suburbs would be built close to existing cities and would be large enough to benefit from the rule of law and property rights. They would compete with the city, offering to reduce red tape for entrepreneurs and established companies.

Free cities could help alleviate the refugee crisis. One could be built on a Greek or Italian island. By creating a territory with laws and regulations conducive to economic growth, a free city could attract Syrian, Afghan, and Iraqi refugees. This is especially important as recent trends suggest Europe is unlikely to tolerate many more refugees.

While the particular reasons for building free cities might differ, they will likely adopt similar policies. Free cities should offer the rule of law, private property rights, and economic freedom. Starting a business should be cheap and easy. Enforcing contracts should be inexpensive and timely. And the government should be quick and responsive to people’s needs.

Delineating what these abstract notions mean in practice is tricky. However, generally free cities should import a legal system known to promote commerce—namely, common law. They should create their own system for registering businesses, perhaps copying Estonia. They should opt out of regulations regarding construction permits, labor, and environmental surveys. In place of such regulations, free cities should borrow financial regulation from Dubai, public services from Switzerland, and labor regulations from America.

Free cities can be self-supporting. They can finance themselves through a land-value tax. Land-value taxes, unlike other forms of taxation, do not increase deadweight loss. The supply of land cannot decrease, nor can it be hidden in offshore accounts. Further, as institutions are an important determinant of the value of land, improving institutions should allow the free city to quickly generate revenue to pay for initial investments in infrastructure. This ensures free cities can be self-sustaining, not dependent on subsidies.

Viability

Even if we acknowledge that free cities could improve territorial governance, a question remains. Are free cities viable? Where do the billions of dollars necessary to build a city come from, and would a country grant the type of autonomy necessary to jumpstart economic growth? How new cities are funded suggest financing free cities will not be a problem. Trends involving the creation of semi-autonomous zones suggest political norms on autonomy are changing.

The New Cities Foundation (2015, 7) writes, “If new cities of the past were spearheaded by the public sector, private stakeholders are the undisputed driving forces behind current projects.” Surveying current city projects, it becomes clear the New Cities Foundation is correct. Lavasa and King Abdullah Economic City both demonstrate that private capital is able and willing to fund the construction of new cities at the scale of tens of billions of dollars.

The spread of special economic zones suggests countries are becoming increasingly likely to grant autonomy. Over the last thirty years, the number of SEZs has exploded. Ireland founded the first one in 1959. For the next twenty years, growth in the number of SEZs was relatively slow. However, in the ’80s and ’90s, growth accelerated. Currently over 4,000 SEZs worldwide have been established.

Special economic zones are, however, not free cities. They typically lack both the autonomy and the scale to qualify.

We have seen, however, several encouraging signs. Honduras passed a law that allows for developers to create zonas de empleo y desarollo economico. These zones can opt out of Honduran regulatory law and import a legal system more conducive to development.

Meanwhile, Paul Romer engaged in in-depth talks with Madagascar to build a charter city. Unfortunately, after a coup, the project stalled.

More hopefully, King Abdullah Economic City is arguably a free city. The New York Times reported it was being built in part to allow Millennial Saudi women more freedom. The city’s website states it offer “privileged regulations” and that it is Saudi Arabia’s “most business friendly city.”

Given this evidence I not only believe that free cities are viable, I believe they are inevitable. Questions remain regarding their size and the scope of their autonomy. However, barring an unpredictable reversal in current trends, free cities are coming.

Conclusion

Poverty continues to exist, but largely because markets are closed. Unfortunately, increasing economic freedom at the national level is often difficult. Efforts frequently stall, and plans can take decades to implement even when successful. Free cities offer a shortcut to increasing economic freedom.

By using land inhabited by few special interests, free cities can rapidly improve institutions without the usual political battles. Additional competition in governance can not only improve the lives of the residents of the free city, but likely also the governance, and therefore the standard of living, of the entire host country.

Given the centrality of governance in economic development, it is especially important to focus on how to improve it. Free cities are among the better mechanisms. It is for this reason I believe Hayek’s lessons are best applied to free cities.

Bibliography

New Cities Foundation (2015). “New Cities and Concepts of Value: Planning, Building, and Responding to New Urban Realities – Reflection and Analysis of Themes Emerging from Cityquest – KAEC Forum 2015.”

[1] I consider Shenzhen to be a free city because the SEZ which led to its growth granted a wide degree of autonomy.

How to Accelerate the Fourth Industrial Revolution

Since World War II the world has focused on efficiency gains. The low-hanging fruit had been plucked and the world was optimizing production, ignoring innovation (with the exception of IT which has had a relatively small impact on productivity).

The focus on efficiency had policy implications. Standardization and uniformity were stressed along with lowering barriers to trade. Such policies have had tremendously beneficial impacts, drastically lowering poverty over the past 30 years.

However, there appears to be imminent innovation on the horizon which requires rethinking regulatory systems. The fourth industrial revolution, which refers to “emerging technology breakthroughs in fields such as artificial intelligence, robotics, the Internet of Things, autonomous vehicles, 3-D printing, nanotechnology, biotechnology, materials science, energy storage, and quantum computing”, is coming.

The fourth industrial revolution is not about efficiency gains; it is about innovation. The benefits from the fourth industrial revolution will not come from international trade, they will come small groups of dedicated people working hard. The fourth industrial revolution is a return to tinkerers, away from multinational corporations, and a new regulatory structure is needed for it.

Families with diabetic kids are building home-made insulin pumps because the FDA is unable to improve them. 23andMe saw their user rate drop by 50% when the FDA banned them from giving disease profiles, slowing down the era of personalized medicine. Amazon moved their drone program to Canada because the FAA was too slow to issue drone regulations.

With the rapid pace of innovation, a one size fits all policy becomes a hindrance. The stifling of innovation begins to outweigh the benefits of consumer protection. Standardization and uniformity must give way to adaptability.

In practice this means localizing regulatory policies. Different cities and localities have different tolerances for risk. Detroit, for example, might want to innovate drone policy to attract jobs and residents. San Francisco could allow for innovative medical procedures to attract investment from Alphabet, formerly Google.

More generally, policy makers don’t know what the ideal regulatory system is. Innovation requires experimentation and discovery. Regulatory systems need to reflect this. Cities are more responsive to local needs and able to act more quickly than national governments. Preparing for the future means understanding trends to fully take advantage of them. Allowing cities to take the lead in regulatory policies will undoubtedly lead to some mistakes. However, the long term outcome will be more dynamism, more creativity, and further technological advances.

Paul Romer is the Incoming Chief Economist at the World Bank

The Wall Street Journal recently reported that Paul Romer is the incoming Chief Economist at the World Bank. Romer’s comments on the new position here. Romer is the leading advocate for Charter Cities, making this great news for those who believe in free cities. Of course, it remains to be seen to what extent his new role will allow him to advocate for Charter Cities.

There are several ways to view the impact of this announcement on Charter Cities. First, the status of the primary advocate, and therefor the idea, is raised. This raises the probability of success for Charter Cities. Second, the time of the primary advocate is more limited, lowering the probability for success.

It is unlikely the World Bank will directly advocate for Charter Cities, but on the margin they will be more amenable to the idea. A Charter City for refugees could be politically palatable enough to justify public support from the World Bank. Being built on a Greek or Italian island, it would lower refugee flows to Europe, alleviating some of the political crisis, as well as benefiting the refugees. I humbly recommend to Romer that he pursue such an avenue.

More generally, Romer’s appointment is very positive for free cities. The primary barrier to free cities is political and Romer being appointed will lower political barriers, even if he does not directly advocate for Charter Cities.

Why did the Orlando Police Department wait for hours before entering Pulse and stopping Omar Mateen?

Why did the Orlando Police Department wait for hours before entering Pulse and stopping Omar Mateen? Of course, there are numerous elements at play. However, one important one is a lack of information. Most police departments are unable to receive text messages. As such, the Orlando Police Department lacked a clear channel of communication which would have made them aware that Omar Mateen was systematically murdering survivors of the initial assault.

To put it bluntly, it is pathetic and unconscionable that police departments across the country are unable to read and respond to text messages. The technology is fifteen years old and has numerous obvious applications. Such technology could have saved dozens of lives in Orlando.

How many police departments allow the victims of crimes to check the status of the investigation online, or to even email with the detective leading the investigation. When I was assaulted in Washington DC, there was no follow up. I was never contacted by the detective, despite the assault being captured on camera. I was unable to follow up myself as I was in the process of moving to a new city. However, it should not be incumbent on the victim of a crime to navigate a complex bureaucracy to understand how the investigation into the wrong-doers is occurring.

How many police departments use apps? A private entrepreneur in New Orleans created an app using off duty police in the French Quarter. Response times were drastically reduced. A simple Uber like system to see where police are and where calls are coming from can reduce response times and increase trust in police.

The failure of police to integrate technology is symptomatic of a broader failure of city governance to respond to technological innovation. How many readers can find the zoning codes of their neighborhood in ten minutes? I can’t even find out what day trash pickup in a nearby neighborhood is.

The internet has greatly simplified communication, and cities are failing to take advantage of it. To this end, cities should focus on the user experience of their residents. Contacting officials should be easy and straightforward. All relevant information should be online and easily searchable. Luckily, cities are beginning to realize this. A rising trend in cities is to have a Chief Technology Officer. Hopefully this trend can lead to improvements in the user experience of residents. Time will tell.

What is the Right Level of City Planning?

Adam Hengels of Market Urbanism recently published a critique of city planning. Hengels writes,

However, in the pursuit of designing “new” cities from a “blank slate” they have begun their quest with one fatally flawed premise, that wise technocrats can master-build entirely new cities catering to the infinitely diverse set of needs and desires of yet-to-be-identified citizens.

While I am largely in agreement with this critique, I believe Hengels overstates the case. The traditional libertarian approach to planning is to condemn government planning and praise private sector planning. Government plans tend to fail because government lacks knowledge and incentives. Private planning tends to succeed because it must follow the market. Firms are islands of socialism in a sea of markets.

New city projects, even when done by private firms, appear to be a planning overreach, and many are. It is foolish to try to plan where the finance district, entertainment district, industrial district, commercial district, and residential districts are located. Nevertheless, some planning is good. Hengels writes,

The focus should be on issues of governance, culture, and institutions instead of a top-down, build-from-scratch mindset.

I agree, but would take the level of planning slightly further. A city plan should not just include governance, but also public spaces, roads and parks being the most prominent. A recent Economist article illustrates the dangers of too little planning.

The scene around Ms Mwaitulo’s house in Mikwambe is chaotic. Houses are rising higgledy-piggledy. Many are half-finished and look abandoned, although they are not: one has no floor and a tree growing inside. What appears to be a small village square turns out to be a plot on which the owner has not yet got around to building. The neighbourhood has only one paved road, no central water supply and no sewer. It is a kind of bourgeois shanty town.

I am not suggesting new cities build roads, sewage, and parks prior to the creation of housing developments. However, cities should, at least, clarify where the public areas are and enforce them against encroachments from the private sector. New York City, for example, in 1811 famously mapped a grid of streets and lots to allow for the (mostly) orderly construction of Manhattan. The grid ensured streets wide enough for traffic and provided clarity for private developers wanting to build on lots.

Urban planning currently focuses too much on planning. However, it is a mistake to replace too much planning with insufficient planning. Like Goldilocks, we should strive to understand what the optimal level of planning is, and my humble suggestion is to follow New York City’s lead.