Yeah, I think trying to account for the dynamic effects of a significant natural resource endowment is not always easy, and neither is successfully making the transition from exporting unprocessed resources to doing more processing and other activities further up the value chain domestically.
That being said, I do think the China-West decoupling is an opportunity for some countries to start making that transition, especially places rich in critical minerals. And the same can be said with regard to the nearshoring/friendlyshoring trend in manufacturing.
Great post, thanks for taking the time to put this together.
One thing I would add on to your argument in Section 4 is the work of Gollin, Jedwab, and Vollrath (blog, paper) on "urbanization without industrialization." What they document is that there are essentially two types of urbanization -- resource-led and industrialization-led. In the former, you see a higher share of the population going into low value-added services, what they call "consumption cities". This is especially true in much of Sub-Saharan Africa, with the result being rapidly growing cities without the historically observed rise in living standards or productivity. There's also a related story here with work by Gelb, Meyer, Ramachandran, and Wadhwa on African labor costs and manufacturing, which argues that there's been limited manufacturing in the continent, outside of Ethiopia, in part because labor costs are already too high to compete with SE Asia and elsewhere.
You mention India and China -- I think comparing the two provides about as close as you can get to a natural experiment comparing manufacturing-led growth and services-led growth. Starting from a similar baseline in 1990 (which itself is instructive in just how bad the License Raj was given the Great Leap Forward and Cultural Revolution, but that's a separate point), the divergence in GDP per capita is stunning. Bangladesh overtaking India and Pakistan over the past decade is also I think an instructive case in the value of an effective manufacturing-led growth strategy.
CCI's recommendation for charter cities is that it would be best to develop the initial infrastructure buildout of a charter city with private capital rather than with public resources, the idea being that a private developer will be more responsive to market forces and take a long-term view of their investment. So this is one type of cost, let's call them infrastructure costs.
The second set of costs are the resources dedicated to creating and implementing the governance innovation. This is drafting and negotiating legislation or a concession agreement, determining institutional arrangements, identifying governing officials, and so on. Let's call these governance costs.
I think you can discount the infrastructure costs because this is private capital that would go into a variety of other projects, presumably a large chunk of it in real estate, in the absence of the charter city project. And since we're talking about lower income countries, those alternative investments are probably not creating much social value, or are going somewhere else entirely. If the charter city is successful, the costs are recouped by the developer through the increase in land value brought on by economic activity. If the charter city does not take off, the capital is lost, which is bad, but seems like this consideration should be relatively unimportant from an EA point of view. And even if the charter city doesn't take off, a power plant built for the charter city, for example, could obviously continue to function for the surrounding region. Note that if there was government financing involved in this first area, then I think the calculation changes because the state is then being forced to make tradeoffs with more obvious implications for social cost.
So if you're willing to accept that we can discount those infrastructure costs for the reasons outlined above, you're left with the governance costs. The value proposition then becomes: for the governance costs outlined above, a successful charter city creates a sustained high-growth environment that reduces poverty and leads to broader reform. I think that for a few million dollars (with some variance in either direction from case to case) you can get most of the elements mentioned above in place. From the point of view of an EA looking to direct resources, these are the only set of costs they're going to interact with.
Charter cities are certainly high-risk and high-uncertainty, but the return from even just one successful charter city is quite large. And after there's a direct proof of concept rather than various linkages to similar examples from the recent past (Shenzhen, etc), the risk and uncertainty decline. I appreciate that this calculated bet won't be attractive to a lot of EAs, but I think it's worth exploring. Recreating just a fraction of the successes of China, the Asian Tigers, Botswana, Vietnam, etc in countries still seeing low or highly variable growth is a better counterfactual than the path these countries are on now and EAs should be trying to do something about it, charter cities or otherwise. I think this fits into a larger discussion about calcification within EA, but that's a topic for another thread.
It's interesting to me that your takeaway is that pushing for governance innovation is cheaper in existing polities rather than newly created polities. If your definition of "cheaper" factors in the cost of building new cities, then I get your point. I think there are good reasons to discount that cost that are discussed in the report, but regardless, do you think there is something unique about German institutional arrangements that allows for cities to better overcome collective action problems?
Cities in the US and most (all?) developing countries seem to really struggle with overcoming the collective action problems that stand in the way of achieving anything that isn't extremely marginal. For example, it seems as though if there were significant public support for infrastructure project X or major policy reform Y in <pick an African megacity> that it's pretty unlikely that the project can be attempted, let alone successfully completed.
Maybe it's a function of state capacity? High capacity states (I think of Germany as having greater state capacity than the US, for instance) are better equipped to overcome collective action problems than low capacity states because they can credibly commit to a course of action and then efficiently execute on that vision.
Anyway, glad to hear you're interested in charter cities!
Yeah, I think trying to account for the dynamic effects of a significant natural resource endowment is not always easy, and neither is successfully making the transition from exporting unprocessed resources to doing more processing and other activities further up the value chain domestically.
That being said, I do think the China-West decoupling is an opportunity for some countries to start making that transition, especially places rich in critical minerals. And the same can be said with regard to the nearshoring/friendlyshoring trend in manufacturing.
Great post, thanks for taking the time to put this together.
One thing I would add on to your argument in Section 4 is the work of Gollin, Jedwab, and Vollrath (blog, paper) on "urbanization without industrialization." What they document is that there are essentially two types of urbanization -- resource-led and industrialization-led. In the former, you see a higher share of the population going into low value-added services, what they call "consumption cities". This is especially true in much of Sub-Saharan Africa, with the result being rapidly growing cities without the historically observed rise in living standards or productivity. There's also a related story here with work by Gelb, Meyer, Ramachandran, and Wadhwa on African labor costs and manufacturing, which argues that there's been limited manufacturing in the continent, outside of Ethiopia, in part because labor costs are already too high to compete with SE Asia and elsewhere.
You mention India and China -- I think comparing the two provides about as close as you can get to a natural experiment comparing manufacturing-led growth and services-led growth. Starting from a similar baseline in 1990 (which itself is instructive in just how bad the License Raj was given the Great Leap Forward and Cultural Revolution, but that's a separate point), the divergence in GDP per capita is stunning. Bangladesh overtaking India and Pakistan over the past decade is also I think an instructive case in the value of an effective manufacturing-led growth strategy.
Here's a corrective: https://twitter.com/JeffJMason/status/1511663114701484035?t=MoQZV653AZ_K1f2-WVJl7g&s=19
Unfortunately I can't do anything about where it shows up. Elon needs to get working on that edit button.
CCI's recommendation for charter cities is that it would be best to develop the initial infrastructure buildout of a charter city with private capital rather than with public resources, the idea being that a private developer will be more responsive to market forces and take a long-term view of their investment. So this is one type of cost, let's call them infrastructure costs.
The second set of costs are the resources dedicated to creating and implementing the governance innovation. This is drafting and negotiating legislation or a concession agreement, determining institutional arrangements, identifying governing officials, and so on. Let's call these governance costs.
I think you can discount the infrastructure costs because this is private capital that would go into a variety of other projects, presumably a large chunk of it in real estate, in the absence of the charter city project. And since we're talking about lower income countries, those alternative investments are probably not creating much social value, or are going somewhere else entirely. If the charter city is successful, the costs are recouped by the developer through the increase in land value brought on by economic activity. If the charter city does not take off, the capital is lost, which is bad, but seems like this consideration should be relatively unimportant from an EA point of view. And even if the charter city doesn't take off, a power plant built for the charter city, for example, could obviously continue to function for the surrounding region. Note that if there was government financing involved in this first area, then I think the calculation changes because the state is then being forced to make tradeoffs with more obvious implications for social cost.
So if you're willing to accept that we can discount those infrastructure costs for the reasons outlined above, you're left with the governance costs. The value proposition then becomes: for the governance costs outlined above, a successful charter city creates a sustained high-growth environment that reduces poverty and leads to broader reform. I think that for a few million dollars (with some variance in either direction from case to case) you can get most of the elements mentioned above in place. From the point of view of an EA looking to direct resources, these are the only set of costs they're going to interact with.
Charter cities are certainly high-risk and high-uncertainty, but the return from even just one successful charter city is quite large. And after there's a direct proof of concept rather than various linkages to similar examples from the recent past (Shenzhen, etc), the risk and uncertainty decline. I appreciate that this calculated bet won't be attractive to a lot of EAs, but I think it's worth exploring. Recreating just a fraction of the successes of China, the Asian Tigers, Botswana, Vietnam, etc in countries still seeing low or highly variable growth is a better counterfactual than the path these countries are on now and EAs should be trying to do something about it, charter cities or otherwise. I think this fits into a larger discussion about calcification within EA, but that's a topic for another thread.
It's interesting to me that your takeaway is that pushing for governance innovation is cheaper in existing polities rather than newly created polities. If your definition of "cheaper" factors in the cost of building new cities, then I get your point. I think there are good reasons to discount that cost that are discussed in the report, but regardless, do you think there is something unique about German institutional arrangements that allows for cities to better overcome collective action problems?
Cities in the US and most (all?) developing countries seem to really struggle with overcoming the collective action problems that stand in the way of achieving anything that isn't extremely marginal. For example, it seems as though if there were significant public support for infrastructure project X or major policy reform Y in <pick an African megacity> that it's pretty unlikely that the project can be attempted, let alone successfully completed.
Maybe it's a function of state capacity? High capacity states (I think of Germany as having greater state capacity than the US, for instance) are better equipped to overcome collective action problems than low capacity states because they can credibly commit to a course of action and then efficiently execute on that vision.
Anyway, glad to hear you're interested in charter cities!