Yesterday was an interesting day for development economics

The government of Honduras has signed a deal with private investors for the construction of three privately run cities with their own legal and tax systems.The memorandum of agreement signed Tuesday is part of a controversial experiment meant to bring badly needed economic growth to this small Central American country.

Here is a bit more, and for the pointer I thank M.

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'The government of Honduras has signed a deal with private investors for the construction of three privately run cities with their own legal and tax systems.'

And here I was, thinking that Honduras was already being run by people who considered it their own privately managed country, with a legal and tax system for them.

But I wonder - will the private investors outsource their death squads, or run their own?

From wikipedia's article on death squads -
'Honduras had death squads active through the 1980s, the most notorious of which was Battalion 3–16. Hundreds of people, teachers, politicians, and union bosses were assassinated by government-backed forces. Battalion 316 received substantial support and training from the United States Central Intelligence Agency.[58] At least 19 members were School of the Americas graduates.[59][60] Seven members, including Billy Joya, later played important roles in the administration of President Manuel Zelaya as of mid-2006.[61] Following the 2009 coup d'état, former Battalion 3–16 member Nelson Willy Mejía Mejía became Director-General of Immigration[62][63] and Billy Joya was de facto President Roberto Micheletti's security advisor.[64] Another former Battalion 3–16 member, Napoleón Nassar Herrera,[61][65] was high Commissioner of Police for the north-west region under Zelaya and under Micheletti, and also became a Secretary of Security spokesperson "for dialogue" under Micheletti.[66][67] Zelaya claimed that Joya had reactivated the death squad, with dozens of government opponents having been murdered since the ascent of the Michiletti and Lobo governments.'

Do note that last sentence - 'dozens of government opponents having been murdered since the ascent of the Michiletti and Lobo governments.' Nothing like a return to the 1980s and its various dreams of a better future for those with the wherewithal, talents, and connections to make it happen.

And Honduras just had a coup d'état three years ago. Arguably, if these cities succeed, they will serve to justify subsequent coups in Latin America (like the recent one in Paraguay). I do not believe they will, however.

This is a bad joke. You can do your charter city thing, but at least select a country with the faintest semblance of political legitimacy.

Or, continuing in the vein of illegitimate states, and in light of the the DNC convention riding rough-shod over its delegates, we could convert Jerusalem to a charter city.

Be careful PA, you may have just said too much. In the US, we often call these private cities "plants" or "business buildings" or "Super Wal-Mart."

Are these supposed to be nefarious? How about "your home" or "gated communities" or "Amish country." Compare them to "housing projects" under purely public control.

The only land in the US not subject to all State & Federal law are reserves governed by Native Americans or bases operated by the Armed Forces (which are subject to US Military law).

IIRC the model for this project is Hong Kong. The surrounding state of China had very little political legitimacy as Hong Kong grew from a backwater to a titan.

right. so all these cities need is an economy with 1.3 billion people they can serve as a port to and as financial hub for some money laundering. Well, Hondurs is on its way to prosperity!

Well it did better than all the other port locations that have just as easy access to the Chinese market.

Why was that? What made Hong Kong more successful than any other port in the region? Are there no other ports on the 9000 miles of Chinese coast line?

"Why was that? What made Hong Kong more successful than any other port in the region?"

British colonial government?

1.3 billion very poor people.

The thesis of this project spins that British colonial government, while far from ideal, nonetheless made much of the difference because it had strong institutions.

The first principle of development economics would appear to be "let somebody else run the place."

Exciting! I hope these cities succeed wildly and the model is copied by other countries. I like the social democratic system, but given the widespread problems with debt and entrepreneurial stagnation (as popularized here), I'm convinced it would be healthy for us to try something else instead of putting all of our eggs in that basket. If these cities are a success, maybe they can play a larger role in the long run and help to overcome some of these problems.

There are many potential pitfalls to the Charter City project, but the selection of a country with problems of political legitimacy (but relative stability, as with China vis a vis Hong Kong) is the whole point of the project.

Since this is a simple rebranding of colonialism, I'm quite a bit curious what kind of investor thinks he will be able to keep running his so-called "charter city" once the local mob demands "democracy".

Libertarians?

Probably the same kind of investor that thinks he will be able to keep running his unincorporated master planned community in the United States. I would be more worried about the Central government taking control when your city does well. Just like Clear Lake and Kingwood should have been worried about annexation by The City of Houston. And, the Woodlands is worried about the same. The local mobs fought (or are fighting) like hell to keep this from happening. If it does well and/or better than the surrounding region why would the mob fight for that to change?

Are the inhabitants going to be restricted to the citizens of the host country of Honduras, or is the plan to bring in a lot of hard-working Asians?

As we all should have noticed by now, moderate differences in institutions (e.g., Singapore v. Hong Kong v. Taiwan v. South Korea v. Japan v. China) don't matter all that much if you have a whole bunch of North East Asians. Only complete wacko differences (North Korea) seem to incapacitate North East Asians.

It's like a college basketball coach being praised for his X's and O's when he's really winning by scouring the slums for basketball talent that other colleges won't touch due to test scores, grades, and police record.

When you have a hammer, everything looks like a nail.

Didn't the American intellectual William Walker try something like this in Honduras in the 1850s? How'd that work out for him?

William Walker was involved with Nicaragua, and it was a coup by a mercenary force under hire of one of the political factions in Nicaragua.

You may recall the Micronesia scandal involving Congressman Bob Delay and lobbyist Jack Abramoff. The U.S. government declared Micronesia inside the U.S. tariff zone but independent in immigration policy. So, Micronesia's rich and powerful set up sweatshops behind barbed wire and brought in poor southeast Asian women to do the work.

Yeah that kind of thing never happens in Asia proper. /s

It wasn't that long ago that Chinese were setting up sweatshops inside the US itself. It took an atomic bomb to get those high-IQ Japanese to stop forcing Korean women to act as concubines.

Steve,
Here are the 2011 figures for GDP per capita (PPP adjusted) from CIA World Factbook for the countries you listed.
Singapore: $60,500
Hong Kong: $49,800
Taiwan: $38,200
S. Korea: $32,100
Japan: $35,200
China: $8,500
(Also N. Korea: $1,800)

Now, you might think the difference between $8500 and $60,500 a year doesn't matter that much, but I think there are probably a lot of Chinese that would beg to differ. Your example illustrates well how moderate differences in institutional design lead to quite profound differences in economic outcome, even when the countries in question are similarly stocked with industrious East Asians.

China had North Korean-style institutions from 1949-1978, except when they had the most insane institutions in modern history (backyard steel furnaces in 1958-1962 and the cultural revolution from 1965-1975). Since Deng started introducing non-lunatic institutions a third of a century ago, China has been catching up to other North East Asian countries at a rate faster than perhaps any other country in history.

Also, FWIW, the GDP's per capita of Nepal and Burma, fully stocked with industrious Asians (although not of the NE vintage, admittedly), hover at $1300. Would your conclusion be that Nepalese and Burmese are therefore 3 times as lazy/stupid as Indians ($3700) and 45 times lazier/stupider than the Singaporeans, genetically speaking?

Eric- this line of reasoning will quickly get bogged down in a blaze of post hoc explanations from everyone's favorite amateur anthropologist- Steve Sailer

Nepal and Burma were autocratically run countries until recently. Democracies like India better reflect the average characteristics of the general population. With dictatorships, the average characteristics of the ruling class matter more. Lee Kuan Yew probably is a lot smarter than most democratically elected rulers of India, while the king of Nepal and his acolytes probably weren't all that bright (or sane for that matter, given that the next-to-last king went berserk and actually murdered most of his family).

Northeast Asians have a track record, both in multiple countries in Asia and overseas. Southeast Asians have less of a track record.

The point, of course, is that if Paul Romer is going to restrict himself to Hondurans, then God bless him. Hondurans need better institutions. If, instead, he's going to open his charter cities up to foreigners, then he's like a new high school football coach who largely ignores the boys in the actual student body who might like to learn how to play football better and goes out and recruits Pop Warner superstars from far away.

Recruiting talent is a lot easier than training talent.

In development, it's possible for immigrants to thrive, while at the same time domestic workers thrive. The basketball team analogy is not a good one. In an economy, everyone can play at the same time. Granted, I think its clear that if the cities grew, but without making the inhabitants better off, then it would not be a development success.

Amy Chua's 2003 book "World on Fire" has much interesting material about how Overseas Chinese, like her family from Fujian, China, run much of the economy of Southeast Asia, which leaves the locals alienated, and occasionally murderous, as in Indonesia in 1998.

History suggests that, in the very long run, you are better off developing your own middle class (e.g., England) than in importing one (e.g., Russia importing Germans).

Steve - it's interesting how the Honduran president appears predominantly Meso-American. His predecessor looks more Iberian.

Snide comments aside, this is increasingly the way things will track. I have family members who work in the Emirates. You cannot imagine how different it is when a single family of the natus literally owns the whole place. But they looked at how much American family's have to spend chasing good school districts with low time-preference neighbors and opted for the Emirates. Socially disruptive people don't last long in the Emirates.

The democratic states are going bankrupt and will cede power to non-state institutions by hook or by crook. These institutions will increasingly provide 'public' goods formerly controlled by the State. Over time, these institutions will take on a hereditary character.

There is nothing new under the sun. Neo-feudalism, and it will happen whether the liberals, conservatives, and even the an-caps themselves over at mises.org are ready for it or not.

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