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.