An Open Letter to Effective Altruists: Economic Growth and Free Cities

As I’m attending the effective altruism conference currently I thought I’d share an essay I wrote, originally published on Medium, on why effective altruists should support free cities.

Effective altruism has done a great deal of good. The use of the scientific method in evaluating charities has clarified the primary causes of human suffering, while the research into existential threats illuminates the most urgent threats to civilization, if not humanity. However, effective altruists have missed the middle ground between alleviating immediate suffering and defending humanity against catastrophes, economic growth.

In this essay I argue that thinking about the causes and consequences of economic growth is a valuable use of time for effective altruists. More specifically, I argue that effective altruists should advocate for free cities as a mechanism to improve governance and promote economic growth. A free city is a city with substantial institutional autonomy from the host country, for example Hong Kong.

It is difficult to overstate the importance of sustained economic growth. Humanity, for most of its history, has lived in poverty. Images which are now associated with rural sub-Saharan Africa were the norm for most of our ancestors. It was only recently, the industrial revolution, when humanity began to escape the Malthusian trap.

Economic growth did not instantly translate into economic development, but it did slowly improve the lives of those experiencing it. The wealth created by economic growth then translated into vaccines, universal literacy, safe childbirth (for both the mother and the infant), clean water, electricity, and virtually all the benefits people currently take for granted.

Economic growth is also responsible for the greatest humanitarian story since the World War II, the rise of China. The World Bank estimates that Chinese growth lifted 500 million people out of poverty. This accounts for a far greater reduction in suffering than all Western aid efforts.

Not only is economic growth responsible for the standard of living people have today, economists have a fairly good idea about the necessary conditions to for growth, private property rights, rule of law, and the provision of public goods. Countries with private property rights, the rule of law, and that provide public goods can rapidly grow, escaping poverty in a generation, and becoming part of the developed world within two. Singapore and Hong Kong, for example, grew from impoverished islands with per capita GDP of less than $500 in 1960 to become world class cities today.

The rise of East Asian tigers illustrates the difference between growth and level effects. Eliminating malaria, for example, would save millions of lives and greatly reduce suffering, a worthy goal. However, eliminating malaria would not lead to catch up growth. Per capita GDP might double, or even triple, but sub-Saharan Africa would still remain poor by modern standards. Economic growth, on the other hand, would close the income gap, as well as ultimately helping to reduce malaria and other dangerous diseases. Europe eliminated their diseases, smallpox and polio, after they got rich, not before.

Unfortunately, few, if any, effective altruists are even discussing economic growth. Instead the focus is on one time impacts reducing human suffering, malarial nets for example, and reducing the probability of existential threats to humanity. These are both worthy causes, but should not encompass the entirety of effective altruism efforts.

An old joke about economists also explains why effective altruism chose these causes. An economist, Smith, loses his key in a dark alley. Adam, his friend, finds him there, searching under the one street light. Adam asks Smith, “did you lose your key here?” Smith responds, “no.” Adam then asks, “why are searching here, if you lost your key elsewhere in the alley?” Smith responds, “this is where the light is.”

The joke illustrates that economists, and I believe effective altruists as well, tend to focus on problems that are easy to measure. Calculating disability-adjusted life years for one time interventions is relatively simple. If malarial prevention works, there are X fewer dead children and Y fewer sick children. This can be compared to a different charity, building houses for the homeless in America. Getting the homeless off the street might save Z lives a year. If $100,000 saves 500 children from malaria, but only 5 homeless people, malarial prevention is more cost effective at reducing human suffering.

Existential threats are similarly easy to quantify. Ignoring future populations, an existential threat would kill 7 billion people. Even if the probability of the existential threat is .1, reducing the probability to 0 saves the equivalent of 7 million lives.

Jump-starting economic growth, on the other hand, is far more difficult to quantify. What are the benefits of an anti-corruption campaign? The short term effects, more efficient use of government resources, can be quantified. But what about the long term effects. What if the anti-corruption campaign increases trust in government, which in turn increases the investment in public goods, which opens markets and spurs economic growth. The causal chain is difficult enough establish, let alone quantify.

Similarly, imagine a country reduces barriers to entry for new businesses. The new businesses will increase productivity. However, the established businesses which previously had a monopoly might react by undermining the government. The outcome is difficult enough to rationalize ex post, let alone predict. The dynamics of most countries governance are sufficiently complex attempts to quantify them are close to meaningless.

This, of course, does not mean no attention should be paid to issues of governance. However, it is important to recognize that not all problems are explicable through randomized control trials or simple thought experiments. If anything, the added complexity of issues surrounding governance implies more attention should be paid to it, not less.

With that in mind, I would like to argue that free cities are one of the best mechanisms for improving governance, and by implication, jumpstarting economic growth. Most economists would accept the previously made claims, they are relatively uncontroversial. The following arguments, on the other hand, are not widely accepted. Nevertheless, I believe the creation of free cities is one of the most important, and underappreciated, ways of reducing poverty and human suffering.

A free city is a city with substantial institutional autonomy from the host country. Institutional autonomy includes independent commercial courts and an independent regulatory system. The closest modern example is Hong Kong, which is ruled under a different system than mainland China. Free cities are a way to rapidly improve governance in parts of poorly governed countries.

As previously mentioned, Hong Kong and Singapore both experienced rapid economic growth over the last 50 years. Shenzhen is a similar example, growing from a fishing village of 30,000 people to a metropolitan area of over 18 million. Its growth was largely due to its initial designation as a special economic zone, legalizing foreign direct investment in China for the first time in the modern era. Thirty years ago Dubai was a desert. Now it is a booming metropolis because it created a governance system which encourages economic investment and growth.

However, improving governance is difficult. One reason is governance quality exists for a reason. For example, attempting to reduce the power of a monopoly will cause the monopolist to retaliate. Another reason is asking a countries government to improve itself is like asking coal to turn itself into a diamond. A country with no history of good governance will be unable to commit itself to good governance in the future.

While people usually think of governments as a single entity, it is more analytically useful to consider governments as a complex network between various special interest groups (including government bureaucracies). These special interest groups support the existing government in return for rents, for example, monopoly privileges, handouts, and the restriction of competition. Improving governance by removing these rents will cause the interest group which receives them to fight back. For example, Mexican teachers went on strike when a law was passed to ban them from selling their teaching positions.

Even if we assume no special interest groups want to block governance improvements, there remains the problem of the implementation. For example, if a new agency is created to fight corruption, who will police that agency? Los Zetas, a Mexican cartel, were originally commandos from the Mexican Army. In the 90’s Los Zetas decided the cartels paid better and defected, joining the Gulf Cartel.

Free cities can help overcome both of the above difficulties of improving governance. First, by building on unoccupied land, a free city can avoid battles with special interest groups. Second, by bringing in a group dedicated to economic growth, a free city can ensure fast and efficient implementation.

There are two types of free cities, charter cities and proprietary cities. Charter cities are the brainchild of Paul Romer and governed by developed countries. Proprietary cities is a term I use to describe private cities with institutional autonomy. The two ideas are similar in that both are a mechanism to introduce good governance to jump-start economic growth. The ideas differ in which body would be responsible for governance.

Developed countries have histories of good governance, making them a trustworthy steward of governance. Private companies, on the other hand, have less history, but if they own the land on which the city is built they will have an incentive to promote economic development to increase the value of the land. Private governance is also more widespread than commonly realized, dominated international trade dispute resolution for example.

One of the advantages of free cities over alternative effective altruism causes is that free cities, once started, can pay for themselves. Building a free city would not be charity, rather it would be investment. The taxes raised in a successful free city would easily cover the initial investment.

Further, free cities can improve governance in their host country outside the city itself. China, after seeing the success of Hong Kong, created four special economic zones. After those zones were successful, more were created. Hong Kong and then Shenzhen not only lifted their residents out of poverty. They showed the rest of China the impact governance improvement could have. Those governance improvements were then adapted by the rest of China, creating the Chinese economy we know today.

Lastly, free cities are viable today. The primary barrier is not technological, but rather political. Countries are unwilling to give up authority. Even though free cities would be built on uninhabited land. Choosing to live in a free city would be strictly voluntary.

Luckily, political barriers are slowly falling. Madagascar seriously considered building a charter city. However, Marc Ravalomanana, the president was ousted from power before Romer’s vision could be implemented. Honduras created the legal framework to create free cities, calling them ZEDEs (zonas de empleo y desarollo economico). However, implementation of the legal framework has stalled.

Private capital also exists for the construction of a free city. King Abdullah Economic City, Saudi Arabia, the first city to be listed on a stock exchange is estimated to cost $86 billion. Songdo International Business District, Korea, cost an estimated $40 billion.

Of course it is possible free cities will fail, any number of things could go wrong. On the other hand, sustained economic growth is the best anti-poverty tool humans have ever known. Free cities could lift tens of millions, if not hundreds of millions, of people out of poverty in the next century by improving governance. For this reason, I believe effective altruists should add free cities to their pantheon of causes.

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