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Can Importing Well-Run Cities Into Poorly Run Countries Lift The World From Poverty?

That’s what Paul Romer thinks. His idea of charter cities—autonomous, technocratic economic hubs based on the model of Hong Kong—that would be founded in developing nations is revolutionary. But would it work?

On a bright November morning in Manhattan, several hundred luxury goods executives filed into the basement auditorium of the Morgan Library expecting to hear Paul Romer speak about China and innovation. Courtly, earnest and reserved, Romer is an academic economist by training, and it shows. Before the crowd’s caffeine could kick in, he offered a modest proposal: Rather than start the next Louis Vuitton, we should knock off Hong Kong. Cities can be startups too, he said. "We can build new ones much faster than people think."

That’s what China’s paramount leader Deng Xiaoping thought in 1979 when he designated Shenzhen as the country’s first special economic zone. In less than 30 years, Romer explained, the fishing village across the border from Hong Kong had become a capitalist enclave larger and more populous than New York. Shenzhen, in turn, kicked off China’s transformation from a rural backwater to an export-driven powerhouse. Hong Kong and its copies, Romer likes to say, have done more to eliminate poverty than all the foreign aid put together, and he may be right. China lifted 660 million of its citizens out of absolute poverty between 1981 and 2008—more than the rest of the world combined.

"Hong Kong and its copies, Romer likes to say, have done more to eliminate poverty than all the foreign aid put together." Photo by Flickr user thinboyfatter.

Romer’s appearance that morning was a favor to the hosts, his new colleagues at New York University’s Stern School of Business. A year ago, Stern lured the eminent economist back to academia with a $10 million gift for the Urbanization Project, a personal think tank devoted to creating new "charter" cities and massively expanding existing ones, thus planting the school’s flag in what dean Peter Henry believes will be a $20 trillion market in financing urbanization—and the next line of work for Stern graduates.

"We will do more urbanization in this century than we’ve done in all of history," Romer said from the stage. "Whatever we do will establish the pattern that will last forever." Expecting a day of social media tips and fireside chats with CEOs, the audience sat stunned—who decides that what the world needs now are mega-cities built from scratch in the its poorest places?

If Romer had logged a career at the World Bank, that would be one thing, but he made his name 20 years ago by proving how technology and innovation underlie economic growth. After another decade spent expounding on his theory at Stanford University, he put it into practice, starting his own online education company in 2000, just as the market for online education was shaping up. A few years later he uttered the catchphrase Rahm Emanuel would make famous during the early days of the Obama administration—"a crisis is a terrible thing to waste." These days, the crisis Romer obsesses over is an urban one: How do you absorb another 3.5 billion residents in the coming decades without consigning them to slums?

The tale of two cities Romer told his audience that sunny morning in November is a cautionary one. Colonial Hong Kong was carved from China at gunpoint following the first Opium War, while its modern shape and form was defined by being an island both literally and figuratively—as a refuge for millions fleeing Mao Zedong. Later, Shenzhen grew so fast it absorbed hundreds of villages where they stood, along with an illegal "floating" population of rural migrants who man the most dangerous factories.

Romer acknowledges their origins of blood and sweat, and argues we could do better if we designed a city from the bottom up. "The opportunity is to create a number of cities," he told the audience, "startups like Shenzhen." These startups, which he calls charter cities, are new enclaves granted their own laws, immigrants and investors. They’re laboratories for testing competing forms of governance, erected on what in theory are clean urban slates. He went public with the idea in 2009 with a TED talk that quickly went viral in the international aid community while puzzling urban planners—because Romer isn’t one himself.

"The opportunity is to create a number of cities. Startups like Shenzhen." Photo by Flickr user 11x16 Design Studio.

In fact, his lack of urban experience—let alone in designing cities ex nihilo—is seen by allies as a plus. "It was a big idea—a really, really big idea," said Peter Henry. "There’s a joke that the really hard part of institutional development is the first couple of centuries—after that, it’s a piece of cake. The idea is, can you leapfrog some of these steps? Do countries really have to wait 200 years?"

Romer’s biggest idea is the importance of "rules." Rules are, he, believes, the core DNA of any successful city—not sidewalks, not small blocks, not the width or layout of city streets. New ideas don’t need old buildings; they need strong patent and bankruptcy laws. Good rules explain why Nogales, Ariz., is roughly three times as rich as its sister city across the Mexican border. Instead of over-thinking urban form through rigid codes and top-down planning—the approach favored by modernists and New Urbanists alike—Romer and his partners refuse to plan at all, preferring to search for a minimum set of rules from which order can emerge. But what does it mean to build cities from scratch when the city itself is an afterthought?

Importing Rules

That Romer should be the one picking up where Deng Xiaoping left off makes little sense unless you stop to consider how cities have been the proof of his theories all along. In 1985, economist Robert Lucas asked why they exist at all. "If we postulate only the usual list of economic forces, cities should fly apart," he said in a now-famous speech at Cambridge University. "A city is simply a collection of factors of production—capital, people, and land—and land is always far cheaper outside cities than inside." So how do you explain sky-high Manhattan rents?

Lucas looked to Jane Jacobs for the answer. In her book The Economy of Cities, Jacobs defined cities as places where "new work" is added to the old, and where new ideas combine to create (and destroy) industries. We can see the value of ideas reflected in those rents, Lucas said—smart people pay to live and work near other smart people.

But it would fall to Romer, in a landmark paper published five years later, to define "ideas" as the fourth and perhaps most powerful factor of production. Unlike the others, ideas can be shared, and the more they are, the more potent they become—the effect known as increasing returns to scale. Cities, as Jacobs would tell you, are where scaling happens. Romer’s insights underpin such bestsellers as Edward Glaeser’s Triumph of the City and Jonah Lehrer’s Imagine: How Creativity Works, explaining why dense cities get better as they grow bigger, as documented by the physicist Geoffrey West.

Romer didn’t think about cities for years, however, until after he had left academia to start and then sell an online education startup named Aplia, which pioneered putting college coursework online. By then his focus had changed from technology to rules. In the absence of good rules, he points out, "when you teach a man to fish, you destroy an aquatic ecosystem." Laws and institutions turn out to influence growth as much as innovation—and without them, the latter doesn’t happen. How else to explain the stark divergence of North and South Korea? Before the war, the North was the more technologically advanced of the two.

Now—and this is where Romer diverges from his peers—if rules are ideas, and ideas can freely be shared, then tax codes, anti-trust laws and independent judges should be shareable as well. And if cities are the places where new ideas take root and grow to scale, well, we should be building more Hong Kongs—and we should be able to build them anywhere. By transplanting rules from well-run nations to poorly governed ones, we can close the development gap between them, just as China has done. That, in a nutshell, is the rationale for charter cities.

At heart, they are a development scheme, an attempt to lure private investors to replace foreign aid, which study after study suggests does as much harm to developing countries as good. But investors are understandably reluctant to pay for infrastructure and relocate factories to basket-case nations making only a token effort at upholding the rule of law. What Romer is ultimately selling is trust—trust in the rules and regulations of a wildly successful entrepot such as Hong Kong, and trust in the idea that the personality of a Hong Kong can be grafted onto another place.

If only it were that easy, say his critics. James Robinson, a professor of government at Harvard and co-author of Why Nations Fail, agrees that rules and institutions determine cities’ success or failure. But he dismisses the idea Hong Kong could be the model for a charter city outside China, or that social norms can be transplanted wholesale to other cultures. "We understand very well what it would take to make Sierra Leone a rich country," he says. "What we don’t know is how to turn it into South Korea." In other words, culture still matters—and it can often be the enemy of progress.

Romer discovered this for himself when he began crisscrossing Africa and buttonholing government officials. At one point, Madagascar’s president was prepared to give him not one city, but two—but was overthrown before he could put it in writing. Another coup, this time in Central America, would provide Romer with an opening.

Click here for part two.

This article was first published in Next American City.