Charter Cities: Why?

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Freakonomics blog interviews Paul Romer, head of the Charter Cities project — which argues that cities like Hong Kong, with good rules and institutions, can be replicated all over the world:

Q. You have argued that new cities can speed up growth in the developing world. Aren’t the cities that the world needs springing up naturally? Why do we need the construct of a charter city to encourage faster or better urbanization?

A. Economists tend to assume that societies will naturally adopt good rules. If that were true, societies would put in place the rules needed to get the gains from a city and well-run cities would indeed spring up.

The evidence suggests to the contrary that many societies are stuck with bad rules. Moving from bad rules to better ones may be much harder than most economists have allowed. The construct of a charter city is a suggestion about how we can change the dynamics of rules. It is a way to speed up the rate of improvement in the rules.

There is an analogy that may be helpful here. Large corporations operate according to an internal set of rules that we sometimes call a corporate culture. A natural question to ask is what mechanisms lead to improvement in the rule-sets that prevail in all the corporations in an industry. If you think of an industry like computing, it is immediately evident that much of the change comes from the entry of new organizations. They have new rule-sets that attract resources away from the existing ones.

IBM had good internal rules for working with big corporations and data centers, but they didn’t work as well for working with small businesses and individual consumers. If IBM had been the only company allowed to be in the computer business, it would have taken a very long time to get where we are now, with networked computers in our pockets. The entry of new organizations like Digital, Intel, and Apple that operated under very different internal sets of rules sped up change in the industry.

Charter cities are a way to bring the power of entry and choice to the dynamics of the rules for cities.

Rules and social norms are tremendously important. But can they be dropped from the sky? Hong Kong suggests yes. But the whiff of imperialism could queer the whole concept.