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?  


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.

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?

"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)?

How about giving the Chinese Detroit?

How would the Nigerians do in Switzerland?

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.

Handing part of your country over to another government to run would likely get you shot for treason.

I'm all for this idea (how would the Swiss do in Nigeria?)

Dear Switzerland,

I am certain you will be surprised to receive this mail from me, indeed, I sincerely apologize for the embarrassment this might cause you. However, I wish to state, that it is sincerely necessitated by my present plight and I pray you will readily be of tremendous assistance.

It is my pleasure to contact you for a business venture which I intend you to establish in our country. Though I have not met with you before, one has to risk confiding in someone in order to succeed in life.

There is this amount of FIFTEEN Million US acres which my Father set aside before he was deposed and arrested, for carrying out an undertaking of great advantage, but nobody to know what it is...

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).

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.

This has happened in other countries, too. Case in point is the United Emirates.

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?

How can any state be ok with being "ruled" by another country? I think this idea is quite ridiculous.

Singapore's government-linked firms (owned by Temasek, it's SWF) have been running industrial parks in Indonesia, Vietnam, China, etc since the late 1980s. Even though the financial returns may not have been much, other way's it has benefited include:
a) gaining influence among local politicians
b) helping Singapore SMEs enter new markets
c) getting name recognition ("improving its brand") among the citizens of the countries where it has its parks, which may attract them to move to Singapore for work or study

China gained from Singapore's 1st major park (in Suzhou)- the local politicians opened an exact copy within a few years of Singapore's across the river and garnered more tenants by offering cheaper rent!

I suspect the idea will be more welcome the bigger the basket case a country is. In about 2003 Sierra Leonians were polled about whether they would like the country to be run by the British until it got back on its feet. Some 80% said yes. (You need to rememeber that the British army had put an end to what was a brutal civil war at this time).

Some people commenting here seem to think there is an enormous loss of sovereignty involved in this scheme. I wonder if they're aware of just how tiny Hong Kong is.

Regarding Tyler's comment that Hong Kong was given back without a second thought, that's not really accurate. It was a very painful episode but one that the British government ultimately saw as unavoidable. The lease ran out and starting a territorial dispute with China is not a brilliant idea, especially when the British knew they didn't have a leg to stand on. In any case, as it happens our worst fears about Hong Kong havent been realised.

I second J. Stinson's link

It's apparently already happening in South Sudan.

So you are pro-colonialism? Good for you. BTW, the rise of nationalism had more to do with changes in the colonizing countries than some pent up nationalist rage. The nationalists were fairly quiet until they gained a supporting faction in the colonizers democratic government. People had been conquering one another for a long time before the 20th century.

As someone who is intrigued but pessimistic regarding the notion of seasteading (, these 'special administrative zones' seem like a more realistic option.

Resign from Stanford? Maybe he has Toxoplasma gondii?

I think we have 4000 Hong Kongs spread around the USA; you can find them by looking for the blue Wal-Mart sign.

They aren't democracies. Profit through trade is the mandate. And no taxes are levied to pay for defense, health care, old age.

And collectively, all the Wal-Mart colonies have a larger GDP than Hong Kong.

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