Caplan’s Case for Charter Cities

Wednesday, March 23rd, 2011

The Bill and Melinda Gates Foundation has an interesting accountability mechanism, Bryan Caplan notes. After they make a major funding decision, they solicit memos on “roads not taken” — like Caplan’s memo on charter cities.

I largely agree with his case, but, since this is the blogosphere, I must pick nits:

At first glance, increasing production seems extremely slow and difficult, requiring decades of investment in education, infrastructure, political reform, and who knows what else. But there turns out to be one foolproof way for people from the Third World to drastically increase their production overnight: move to the First World.

“The Place Premium,” an important paper by the Center for Global Development’s Michael Clemens, Claudio Montenegro, and Lant Pritchett, offers the most precise estimates of the benefits of migration. They find that the effect of country of residence on income dwarfs the combined effects of poor education, poor health, poor work habits, and all the other defects commonly ascribed to Third World labor. Holding workers’ traits fixed, moving a Haitian from Haiti to the United States increases his wage about ten times — a gain of 900%. The lesson: Third World workers are less productive than First World workers largely because they live in the dysfunctional countries.

The first-best solution to global poverty, therefore, is for the First World to allow much higher levels of immigration. Unfortunately, despite its low absolute level (annual U.S. immigration is well under 1% of its population), immigration is already extremely unpopular. For the foreseeable future, significantly more open borders — not to mention truly open borders — seem politically impossible.

Doesn’t this present a pretty obvious scalability problem? A few Third World workers come to the First World and become dramatically more productive. Multitudes of Third World workers come to the First World and it becomes a new Third World, doesn’t it? It’s not like Japan is Japan because of its physical capital.

Back to the topic of charter cities:

In principle, Third World countries could put nationalistic prejudice aside and “import” the written and unwritten rules that have made the West rich. But this is extremely difficult. Intense populist opposition aside, it is hard to graft one country’s institutions on to another’s — especially when entrenched interests fight you every step of the way. This is true in the business world as well. Competitors often try and fail to adopt leading firms’ “best practices.” Corporate culture is notoriously stubborn. In both business and politics, success often requires a clean slate. It is easier to open a new WalMart than to make the Kmart chain better. Advocates of charter cities argue that is also easier to bring in “outside management” to make a new city that works than to reform existing countries that don’t.

Corporate culture is notoriously stubborn. So is national culture. But I digress.

The challenge seems to be to find a politically feasible way to introduce a charter city where the current regime doesn’t want — or can’t find a way — to introduce business-friendly laws and institutions.

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