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Paul Romer update
David Warsh reports that Romer has resigned from Stanford and he has a plan to change the world:
...[he has] a scheme to persuade nations around the world to adopt “special administrative zones,” managed in many cases by foreign governments, based on the model of Hong Kong, which, for 150 years, was administered from afar by Britain. “Hong Kong was the most successful economic development in history,” says Romer. The rules developed there over time were codified, copied and installed by the Chinese government in four special zones along the coast in the 1980s; the experiment worked so well that the system was adopted country wide.
Romer presented a rehearsal version of his ideas at a seminar in May at San Francisco’s Long Now Foundation. You can watch Romer’s A Theory of History, With an Application online (or just this five-minute snippet), or read Long Now co-founder Stewart Brand’s summary of the talk. It costs $995 to watch in real-time, along with all the rest of the proceedings, the 18-minute version that Romer plans to deliver this week in England. But presumably the talk will be available online soon enough; the TED forum bills itself as offering “riveting talks by remarkable people, free to the world.” And, according to Brand, Romer plans to open an Institute with a website this summer.
I'm all for this idea (how would the Swiss do in Nigeria?), but I fear that Hong Kong is a cautionary tale in the other direction. Due mostly to the pressures of nationalism, the world's most successful development experiment was ended without a second thought. And its initiation was backed by brute colonial force. Which country is most likely to allow another country to manage part of its territory in a new experiment?
Posted by Tyler Cowen on July 20, 2009 at 02:40 PM in Economics | Permalink
Comments
Another factor to remember about Hong Kong - nearly 100% of the population was there because they or their ancestors had chosen to live in a British colony. Yes, there had been a few hundred farmers on the island before it was given to the British (plus pirates used it periodically), but the land was virtually undeveloped before the British came.
The selection bias in terms of who came to the colony probably played a role in its development, even though part of the 'selection bias' was those who were able to escape with their lives during the Cultural Revolution or other upheavals in the mainland - it wasn't that they wanted to live in a colony so much as that they wanted to live, i.e. get out of China.
Posted by: Ann at Jul 20, 2009 3:04:27 PM
Which country is most likely to allow another country to manage part of its territory in a new experiment?
Madagascar? Oh, wait.
Posted by: Blackadder at Jul 20, 2009 3:05:29 PM
On the Handover, it's not clear that China would have forced the issue if they'd been allowed to continue to look the other way. China's stance from the beginning was that that the 'unequal treaties' were irrelevant, so what difference did it make when one expired?
The problem began with the banks, which stopped being willing to make standard 15 year mortgage loans on property in the New Territories once 15 years would have taken the deal past the 1997 lease expiration. This problem forced the British to look for a new arrangement. And, once the issue was forced on the Chinese Communist Party, the only politically acceptable arrangement for them was to exert the exercise of their sovereignty.
On the overall idea - I don't know if countries such as Nigeria could be convinced to go along with this, but it would probably be great for them if they would. Economic, legal and political systems should be seen as technology, and countries should try to adopt cutting-edge systems rather than continuing to use antiquated equipment. It takes time to develop your own institutions, so why not import the latest technology from a market leader while your own system is being modernized?
Posted by: Ann at Jul 20, 2009 3:16:12 PM
"Without a second thought" Or to put it another way fulfilling a historical commitment to the Chinese people from the original 1847 Treaty.
Posted by: Chris P at Jul 20, 2009 3:17:02 PM
"Which country is most likely to allow another country to manage part of its territory in a new experiment?"
Interesting thought coming after the prior post on federalism. I'd rephrase the question to ask about what state in the US would allow another to manage a part of it (say, like allowing some other state to manage us here in Western, NY)?
Posted by: wintercow20 at Jul 20, 2009 3:43:30 PM
Apparently, Singapore manages industrial parks in India, China, the Philippines, and Indonesia, and has offered to manage a nearby Indonesian island called Bintan.
Posted by: C at Jul 20, 2009 3:49:45 PM
How about giving the Chinese Detroit?
Posted by: anonymous at Jul 20, 2009 4:08:25 PM
How about handing our healthcare system over to the French?
Posted by: Diana at Jul 20, 2009 4:38:21 PM
How would the Nigerians do in Switzerland?
Posted by: eddie at Jul 20, 2009 4:54:36 PM
Also, would EuroDisney count?
Posted by: eddie at Jul 20, 2009 4:59:22 PM
Part of the reason this approach worked in China is that the authorities there have often been willing to look the other way (temporarily at least) when someone breaks the rules. If the result is a success, it can be more widely adopted and eventually codified by new regulations; if it's a failure, they can just arrest and execute the guy. This blithely "flexible" approach may be essential to making the whole thing work.
The trouble is, this sort of thing is probably wholly incompatible with, you know, strict rule of law and contracts and comprehensive regulatory oversight right down to minutiae, as favored by the European Union and USA, but which in practice often lead to widespread gaming of the system, loopholes and technicalities, perverse incentives, the "law of unintended consequences", and a hypertrophied parasitical litigation and lobbying sector.
To borrow a corporate analogy, a special administrative zone probably requires an improvisational "skunkworks" approach, not a cumbersome by-the-book ISO 9001 methodology. It is very hard to see how any democratic Western government could deliver this; the UK in 2009 is not the UK of 1842. And in any case, they would surely see bestowing Western-style rule of law and contract law as being precisely their mission, rather than an impediment to it. But in fact, rule of law is not a prerequisite for, but rather a byproduct of, economic progress, which it serves to consolidate.
There are other reasons why it might be very hard to make this work in practice. There is often some intangible "secret sauce" that cannot be readily duplicated, that makes one region a success and others not. How many other countries have tried in vain to duplicate Silicon Valley, for instance? And an even bigger barrier would be the still-twitching anticolonialist reflexes in the very countries that might benefit the most. Western countries would probably be wholly unacceptable; perhaps only Dubai and Singapore could persuasively offer a "we did it and so can you" pitch.
Still, I doubt that "we're from a foreign government and we're here to help" will go over well in most places, no matter who it's coming from and however good the intentions.
Posted by: anonymous at Jul 20, 2009 5:32:16 PM
"To borrow a corporate analogy, a special administrative zone probably requires an improvisational "skunkworks" approach, not a cumbersome by-the-book ISO 9001 methodology."
This comment seems to assume that Hong Kong's success has come primarily as a Special Administrative Region since the handover, rather than as a British colony before the handover. That's clearly not true.
China's "let a thousand flowers bloom" (and then kill anyone stupid enough to say something you don't like, no matter how true and relevant it was) approach hasn't been all that successful. It has been doing better as it has been slowly moving away from giving absolute discretion to Party members.
Posted by: Ann at Jul 20, 2009 5:47:33 PM
Handing part of your country over to another government to run would likely get you shot for treason.
Posted by: Steve Sailer at Jul 20, 2009 5:54:03 PM
Tyler says:
I'm all for this idea (how would the Swiss do in Nigeria?)
Well, how did the British do in Nigeria?
Apparently, not as well as the British did in Hong Kong.
The reason for this disparity between the British experience in Hong Kong and the British experience in Nigeria must be some incredibly obscure detail, considering that famous economists can't figure it out for the life of them.
Posted by: Steve Sailer at Jul 20, 2009 5:58:32 PM
I'm all for this idea (how would the Swiss do in Nigeria?)
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Posted by: anonymous at Jul 20, 2009 6:08:50 PM
One problem is that most western countries have minimum wage & tax requirements that are incompatible with poor countries.
Something like this would likely happen: The Fair Minimum Wage Act of 2007 (Public Law 110-28) now sets minimum wage rates within American Samoa and provides for additional increases in the minimum wage of $0.50 per hour each year on May 25, until reaching the minimum wage generally applicable in the United States.
So what happens: "Businesses involved with American Samoa’s tuna industry are being urged to work together to support Congressman Faleomavaega Eni Hunkin’s proposal to save the industry...Mr Butler says with cost pressures, excess in world-wide capacity and the federally mandated minimum wage increases, canneries are at risk."
http://www.rnzi.com/pages/news.php?op=read&id=47773
“We’ve probably lost something between 25 and 30 percent of the support of the local industry, We’re going to have masses of people unemployed as a result. It’s vital that we try to hang on to Star Kist by whatever means we can, whilst we’re in the process of developing other industries that are going to support our economy.”
http://www.rnzi.com/pages/news.php?op=read&id=47769
"A campaign is to be launched in American Samoa to collect as many signatures as possible for a petition to be sent to President Barack Obama over the minimum wage increases."
http://www.rnzi.com/pages/news.php?op=read&id=47409
Posted by: Mr. Econotarian at Jul 20, 2009 6:14:58 PM
Age of Milton Friedman, New Age of Andrei Shleifer, or is it Romer's turn...? I think he should order the book by Huang (2008): Capitalism with Chinese Character before running into conclusions a la Friedman and Shleifer and reconsider the extend of state interventions (see Stiglitz).
Posted by: MBS84 - Dutch Economist Blog at Jul 20, 2009 6:15:09 PM
Let's bribe the leaders of Togo and Benin and we'll let Tyler and Brad DeLong run their economies. Some sensible bid based controls on outside investment to prevent cheatting.
Posted by: Steko at Jul 20, 2009 6:43:48 PM
First, I don't read anonymous posters.
Second, Sailer if you watch the Romer presentation, it is clear that it was due to city-state sized administrative zones. Country-wide admin zones get swamped out by the former rules; take Russia, Iraq, Afghanistan, take your pick.
Posted by: R. Pointer at Jul 20, 2009 7:22:10 PM
Isn't this already happening in Sudan?
Posted by: J. Stinson at Jul 20, 2009 7:29:59 PM
This has happened in other countries, too. Case in point is the United Emirates.
Posted by: Jonah Hunt at Jul 20, 2009 7:53:34 PM
Romer's analysis of the current financial crisis offers some insight into the possible success of his proposal. He divides economic policy analysts into fundamentalists and realists. The fundamentalists thought the best approach to the crisis was no bailouts and let bankruptcies (if necessary) proceed. Realists felt bailouts were essential to prevent "meltdown." After the failure of Lehman Bros. revealed the weakness of AIG, Merril Lynch, et. al. Romer became a realist. Of course like any good "politician" Romer's definition of realist is to ignore the reality of poor business decisions and throw tax payer money at the problem.
My first reaction to reading about Romers suggestion to duplicate the Hong Kong experience was that if it was a good idea some enterprising group was probably already trying it. And sure enough according to C's comment, Singapore has tried this with marginal financial success,"...the returns on the clones have been paltry considering the money Singapore put into them, says Alex Pereira of Singapore's National University."
The only thing Romer might bring to the project is that if it fails bail it out with tax dollars. Very appealing to politicians and tax payer supported professors. Not so appealing to people trying to make an honest living.
Posted by: Brian at Jul 20, 2009 8:10:41 PM
First, I don't read anonymous posters.
@ "R. Pointer"
Do you mean posters who sign as "anonymous", or posters who don't sign with a fully identifiable real-life identity, which includes just about everyone here including yourself?
Posted by: anonymous at Jul 20, 2009 10:49:29 PM
Hong Kong is a pretty unique success story. Even Singapore was only really a success story after independence. Macau was mostly a corrupt backwater until local officials had the idea of making it a Chinese Las Vegas. Then again, Macau was Portuguese rather than British. And there were plenty of other colonial outposts throughout South and Southeast Asia that either withered away due to non-viability or else didn't do much better than surrounding areas.
In short, it's not being ruled by another country that helps with economic development as much as keeping the influence of predatory governments on potentially high-growth cities to a minimum.
Posted by: Ricardo at Jul 20, 2009 10:53:04 PM
How can any state be ok with being "ruled" by another country? I think this idea is quite ridiculous.
Posted by: Megan at Jul 20, 2009 11:40:25 PM
