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the right charter city analogy

Chris Blattman and Paul Romer provide a productive back-and-forth on Romer’s charter cities idea. Blattman posted a question of particular interest, “How is this different than Chicago’s notorious housing authority, and the failure that was Cabrini-Green?” He later adds, “Singapore stumbled upon a successful model, Chicago did not. Ex-ante, I think it may have been hard to predict which would succeed.

“A trial-and-error process would, without doubt, produce dozens of successful charter cities around the world. But the error and trial could have a very heavy human cost. A half century after its birth, Cabrini-Green and the Robert Taylor homes have been razed.”

I found Romer’s response a bit odd:

[Blattman and I] also agree that there is a risk associated with new systems. Sometimes they don’t work, as the public housing projects in Chicago demonstrate. Sometimes they work remarkably well. Architecturally similar high-rise buildings in Hong Kong and Singapore provided livable housing for large numbers of working poor in the 1960s and 1970s. (As an aside, Blattman and I seem to agree that the key difference between these cases lay not in the hardware or architecture but rather in the supporting rules, particularly those related to crime.)

From my understanding of the charter city concept, the parallel with the Chicago slums is false. The public housing movement failed due to its utopian central planning by elite technocrats playing god. They were given plots of land to work their magic with poor “consumers” without real means of exit – not much different than public schools.

If I understand properly, the charter city lessor would have quite different incentives. The charter city is more comparable to Facebook, which needs to convince both individuals to populate their site and web developers to develop relevant applications to increase its attractiveness to consumers.  Of course, the risk of failure that concerns Blattman is still present: businesses do fail. However, the incentives for smart, responsive management are far better than the public housing analogy would suggest.

In this context, the rest of Romer’s response makes far more sense. As a blog commenter noted, another appropriate analogy for the charter city is the franchise. A newly-opened McDonald’s isn’t guaranteed to succeed, but obviously its odds of success are far better than a new business and way beyond a public housing project. Another good analogy might be the University of California school system (if we insist on a public sector parallel): the UC Berkeley folks created additional franchises based on the same principles (adapted to the respective markets) and competed (albeit subsidized) for students. In all of these analogies, as Romer notes, “the risk of a failure falls primarily on the owners of the fixed assets that can’t leave, not on the labor income of workers who can leave.”

My lesson from the public housing project is that de facto restrictions on exit are bad for the consumer. Public housing dictated to a trapped consumer, charter cities would need to entice the interested but skeptical, indeed expanding the opportunities for many, including some of those otherwise trapped. The charter city concept is attractive because it resurrects the frontier. Neighborhoods are gentrified as more and more individuals share faith in the health of the neighborhood; the first gentrifiers (the frontiersmen) are able to get a great deal. The charter city holds the same potential, but for the world’s poor, not just yuppies.

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