Saturday, June 26, 2010

Paul Romer’s Charter Cities: not medieval enough

I am very much in favour of (intelligently) looking at the medieval period for insights into the modern age. Not merely because Western civilisation grew out of the Dark Age alliance of (mostly Germanic) warlords with the Christian Church—so the institutional origins of Western civilisation are far more medieval than Classical. But because some of the issues grappled with back then—how to create a stable-yet-adaptable institutional order, particularly in a post-imperial setting—are ones that large parts of the world are still grappling with.

As I pointed out in a recent post, even the surge in economic liberalising reforms in recent decades has revealing medieval precedents.

Probably the most dramatic suggested use of medieval precedents to deal with modern problems is economic Paul Romer’s notion of Charter cities, which he blogs about here. The notion is that foreign companies or corporations run an enclave with pro-economic activity rules: rules which will have credibility by not being run by the incumbent government and its political processes.

A recent piece in The Atlantic on Paul Romer and his Charter cities ideas provides the archetypal medieval example for this idea:
HALFWAY THROUGH THE 12TH CENTURY, and a long time before economists began pondering how to turn poor places into rich ones, the Germanic prince Henry the Lion set out to create a merchant’s mecca on the lawless Baltic coast. It was an ambitious project, a bit like trying to build a new Chicago in modern Congo or Iraq. Northern Germany was plagued by what today’s development gurus might delicately call a “bad-governance equilibrium,” its townships frequently sacked by Slavic marauders such as the formidable pirate Niclot the Obotrite. But Henry was not a mouse. He seized control of a fledgling town called Lübeck, had Niclot beheaded on the battlefield, and arranged for Lübeck to become the seat of a diocese. A grand rectangular market was laid out at the center of the town; all that was missing was the merchants.

To attract that missing ingredient to his city, Henry hit on an idea that has enjoyed a sort of comeback lately. He devised a charter for Lübeck, a set of “most honorable civic rights,” calculating that a city with light regulation and fair laws would attract investment easily. The stultifying feudal hierarchy was cast aside; an autonomous council of local burgesses would govern Lübeck. Onerous taxes and trade restrictions were ruled out; merchants who settled in Lübeck would be exempt from duties and customs throughout Henry the Lion’s lands, which stretched south as far as Bavaria. The residents of Lübeck were promised fair treatment before the law and an independent mint that would shelter them from confiscatory inflation. With this bill of rights in place, Henry dispatched messengers to Russia, Denmark, Norway, and Sweden. Merchants who liked the sound of his charter were invited to migrate to Lübeck.

The plan worked. Immigrants soon began arriving in force, and Lübeck became the leading entrepôt for the budding Baltic Sea trade route, which eventually extended as far west as London and Bruges and as far east as Novgorod, in Russia. Hundreds of oaken cogs—ships powered by a single square sail—entered Lübeck’s harbor every year, their hulls bursting with Flemish cloth, Russian fur, and German salt. In less than a century, Lübeck went from a backwater to the most populous and prosperous town in northern Europe. “In medieval urban history there is hardly another example of a success so sudden and so brilliant,” writes the historian Philippe Dollinger.

Perhaps the only thing more remarkable than Lübeck’s wealth was the influence of its charter. As trade routes lengthened, new cities mushroomed all along the Baltic shore, and rather than develop a legal code from scratch, the next wave of city fathers copied Lübeck’s charter, importing its political and economic liberties. The early imitators included the nearby cities of Rostock and Danzig, but the charter was eventually adopted as far afield as Riga and Tallinn, the capitals of modern Latvia and Estonia. The medieval world had stumbled upon a formula for creating order out of chaos and prosperity amid backwardness. Lübeck ultimately became the seat of the Hanseatic League, an economic alliance of 200 cities that lasted nearly half a millennium.
So, far so good.

Romer even has a dramatic modern example—Hong Kong:
WHEN ROMER EXPLAINS charter cities, he likes to invoke Hong Kong. For much of the 20th century, Hong Kong’s economy left mainland China’s in the dust, proving that enlightened rules can make a world of difference. By an accident of history, Hong Kong essentially had its own charter—a set of laws and institutions imposed by its British colonial overseers—and the charter served as a magnet for go-getters. At a time when much of East Asia was ruled by nationalist or Communist strongmen, Hong Kong’s colonial authorities put in place low taxes, minimal regulation, and legal protections for property rights and contracts; between 1913 and 1980, the city’s inflation-adjusted output per person jumped more than eightfold, making the average Hong Kong resident 10 times as rich as the average mainland Chinese, and about four-fifths as rich as the average Briton. Then, beginning around 1980, Hong Kong’s example inspired the mainland’s rulers to create copycat enclaves. Starting in Shenzhen City, adjacent to Hong Kong, and then curling west and north around the Pacific shore, China created a series of special economic zones that followed Hong Kong’s model. Pretty soon, one of history’s greatest export booms was under way, and between 1987 and 1998, an estimated 100 million Chinese rose above the $1-a-day income that defines abject poverty. The success of the special economic zones eventually drove China’s rulers to embrace the export-driven, pro-business model for the whole country. “In a sense, Britain inadvertently, through its actions in Hong Kong, did more to reduce world poverty than all the aid programs that we’ve undertaken in the last century,” Romer observes drily.
The sticking point in Romer’s example, is not merely that it is neo-medieval, it is that it is neo-colonial:
Of course, versions of China’s special economic zones have existed elsewhere, especially in Asia. But Romer is not just arguing for enclaves; he is arguing for enclaves that are run by foreign governments. To Romer, the fact that Hong Kong was a colonial experiment, imposed upon a humiliated China by means of a treaty signed aboard a British warship, is not just an embarrassing detail. On the contrary, British rule was central to the city’s success in persuading capitalists of all stripes to flock to it.
Romer sees being foreign-run as being the solution to the credibility problem. But being foreign-run has an inherent insult problem that has scuppered attempts to put his idea into practice. As, for example, in Madagascar:
Even as Romer was meeting with Ravalomanana, the president’s main political opponent was sniping at the proposed lease of farmland to Daewoo, and the idea of giving up vast swaths of territory to foreigners was growing increasingly unpopular. The arrangement was denounced as treason, and public protests gathered momentum, eventually turning violent. In late January 2009, protesters tossed homemade grenades at radio and TV stations that Ravalomanana owned; looters ransacked his chain of supermarkets. In February, guards opened fire on marchers in front of the presidential palace, killing 28 civilians. At this, units of the army mutinied. Soon, Ravalomanana was forced out of office.
It also has the problem of why would Western governments (for example) embrace onerous obligations which are, however way you slice it up, neo-colonial.

Romer’s problem is that he is too hung-up on the example of Hong Kong on its own and not enough on either how it had its effect or the medieval examples. What made Hong Kong successful in the way Romer wants it to be—a widening example that economically transformed an entire country—was not Hong Kong, but that the People’s Republic copied it. British rule in Hong Kong may have been the starter, but it is not the element that made the example able to be repeated.

Nor was it what made the medieval examples work. Medieval charter cities were not examples of foreign rule but of entrenched local rule. There was no way a ruler such as Henry the Lion was going to let some foreign ruler run an enclave. But he was willing to guarantee prosperous locals (even if imported locals) that they could do so.

The notion that modern rulers, or modern electorates, are going to be anymore favourable to leased-out foreign rule is equally nonsense. Hong Kong was forced on Imperial China at gunboat-point. Romer is either being betrayed by a bias in favour of Westerners per se or by a liberal academic’s impatience with borders and particularist loyalties (or both) in not seeing how foreign rule will not work in the way he wants it to.

A structure of entrenched local rule (where ‘local’ includes free movement to the enclave) does not insult local politics, citizens or loyalties. On the contrary, it gives aspiring locals something to aim for and be part of. That was how medieval charter cities got much of their economic “zing”: by attracting formerly rural folk willing to have a go. Indeed—given that medieval cities had death rates higher than their birth rates—attracting such inflow was necessary to maintain population, let alone increase it.

Paul Romer needs to see the Hong Kong example fully—that only outside imposition made it happen in the first place, that repeatability sans foreign rule is what gave it transformative power—and go for the full medieval package of entrenched local rule. Harness particularist loyalty, not work against it.

What he needs is a modernised Lübeck Charter, creating lots of new Lübecks, not this self-frustrating, other-insulting pining for new Hong Kongs. Neo-medievalism for real, not bastardised by alienating and just-too-hard neo-colonialism.


  1. I agree that the world needs Lubeck-style Chartered Cities. Maybe Engineering firms may be the only ones who might engineer it. With the expected migrations due to Climate Change a network of Charter cities built along the lines suggested in Gleeson's Lifeboat Cities might be timely.

  2. Good stuff. I love it when people know their history. Love the story about Madagascar. I'm amazed when I see something as badly researched as "Charter Cities" gets press from HBR and

    It seems it's a matter of who you know, not what you know.

  3. David: Glad you like it. Yes, us medievalists are often frustrated by the failure to consider that a thousand years of history, with a wide range of institutional innovation, is so often regarded as a "dead zone" with "nothing to see here". Hence Romer does not get asked the right questions.

  4. Great post. I just watched Romer in a TED talk and felt that he missed some major political points.

    Is it just me or is his proposal simply to outsource government? He talks about foreign courts taking responsibility for the charter in this talk

    If it is so great, why not just adopt the charter for the whole country? Why be a country at all? Couldn't a struggling country simply say "Hey, US (insert wealthy country here), want our country. We are doing a s%#t job so we want to be part of yours. Can we please be the 51st state?"

  5. Cameron: thanks. Yes, it is outsourcing government. As for why not outsource the whole lot, the point is about trial-and-error: to explore what works or not in particular contexts.

    On the joining up: well, lots of people do vote with their feet (and more would if they could). The trouble is typically the ruling elite is threatened by good government.

  6. Actually I dont think thats right - its not outsourcing government if you look into the proposal. its getting a coalition of nations (not companies) to sponsor the development of a new city, and rather than reinvent the rules that took centuries for them to develop, copy the ones that work. Critically though its a new city. if you dont like it dont move there. its about creating a new choice. Also think about the expansion of the EU which is wildly popular with new countries bending over backwards to adopt the rules of a successful bloc of nations, because inventing your own takes centuries and often fails. why not give your citizens the choice to leap forward without emigrating - if they want to?

  7. Anon: Imposing rules different from those generally applying in a particular country is outsourcing government, even if only in that particular precinct.

    As for moving to the new city: yes, that is fine for ordinary folk. The problem is the dysfunctional political order being undermined: joining the EU gives the political class a range of benefits. The "upstaging city run by other folk" merely discredits them the more successful is it.