private cities

Why private cities?

I have been interested in the creation of private cities for some time. A recent email exchange with Paul Romer (who I want to say was kind and clearly communicated with me which I very much appreciate as I have been critical of his work and he is a person whose time is very valuable) has led me to realize that I should write up a 15-minute pitch explaining my beliefs.

First, why care about laws at all? Romer’s TED talk is still probably the best introduction. Basically, rich countries are rich because they have good governments, poor countries are poor because they have predatory governments. A good government is one that allows private property, contract, exchange, rule of law, and organization. A bad government is one that prevents those things. With private property, contract, exchange, rule of law, and organization people learn to produce wealth, trade and have a higher standard of living. This is not just my opinion, it has become close to a consensus among economists who study the issue (see here for the best introduction, here, here, and here for econometrics, and here for a more advanced “why” analysis).

So basically, laws, or institutions, which can be thought of as the power structures which determine laws, determine the wealth or poverty of nations. So, why care about institutionally autonomous cities, institutional autonomy meaning having substantively different laws from the rest of the country? Basically, institutional change is very hard. British Prime Minister Gordon Brown has been known to quip that “the hardest part about building rule of law is the first 500 years.” In other words, getting the institutions right is very difficult.

The fall of the Soviet Union offers a useful example. A lot of well-intentioned economists tried to “fix” the former Soviet Republics. There are some success stories, Poland for example, but overall most of the countries failed to perform as anticipated. The economists were more focused on getting the prices right, than ensuring the courts were free and fair and the bureaucracy wasn’t corrupt. Another example is both Iraq and Afghanistan. The US poured hundreds of billions of dollars and thousands of lives into both, and the result is less evil governments than before, but hardly a substantive change in living standards for most of the population.

Institutional change is difficult because it first requires asking the institutions, to admit they do not function well, and second, to reform. These problems are only necessary because the institutions do not function in the first place. If a government was capable of doing so they would likely have already done it. In some sense, it is like asking coal to squeeze itself into a diamond.

Institutionally autonomous cities offer a way around this difficulty. By being built in rural land with no strong interest groups, they do not disrupt the status quo. Second, by being opt in, the acquire more legitimacy. They are not an outside body imposing new laws on an unwilling populace, but rather a new option for people trying to make a better life for themselves. Simply put, because they are regional instead of national, institutionally autonomous cities offer an easier path to institutional change.

So, I have focused my studies and energies on institutionally autonomous cities because I believe they offer the best option for institutional change, economic development, and improving the lives of the least well off humans.

Of course, there are different visions for the ideal institutionally autonomous cities. The visions can be distinguished by the governance body for the cities.

The best known advocate for institutionally autonomous cities is Paul Romer. His vision is Charter Cities. The governance body in a Charter City would be a first world country, Denmark for example. In that sense it would directly import first world institutions to third world countries. Instead of Indians or Zimbabweans needing to move to Denmark, Danish law and the opportunities and economic growth that comes with it could be brought to this country.

However, Charter Cities are not the only option. I think private institutionally autonomous cities, administered by Google for example, could produce better results more quickly than Charter Cities. However, before I discuss why I would like to say I pretty much entirely agree with the Charter Cities project. I think building a Charter City would likely be an enormous success. It would generate a great deal of wealth and improve the lives of people in the host country. In this sense, my quibbles are relatively minor. A Charter City would be a huge leap forward from the existing world, and a private autonomous city could be a small step beyond a Charter City.

So, why do I prefer a private city. The primary reason is adaptability. Building a new city is a megaproject. Private companies would be more responsive to changing conditions, new information, and unforeseen challenges.  However, before going into more depth, I would like to take a second to explain how a private autonomous city would function.

A private autonomous city would begin by buying a large area of relatively uninhabited land. They would also negotiate for institutional autonomy, basically a special economic zone. For this essay I will assume a private city state, for complete autonomy, but the arguments I make will also apply to a private city with more limited autonomy.

The business model would be similar to that of a mall. The proprietor of the land would pay for improvements, then rent out the space at a higher value because of those improvements. In this scenario, the improvements would be traditional public goods, roads, lights, water, sewage, electricity, as well as non-traditional public goods, police and courts.

The general argument is that the land proprietor would have a long term interest in the economic success of the city because such success would increase the value of the land and therefore the rents of the proprietor.

For this essay I will focus on the non-traditional public goods, police and courts, and conclude with my argument that private autonomous cities would be more adaptable. Traditional public goods are often supplied by private contractors to governments, suggesting it would be easy for a private city to contract with similar companies, if not do it themselves. Further, to the best of my knowledge, no one has argued against private cities on the grounds of higher utility costs.

The strongest argument against a private criminal and civil justice system is that it would favor the powerful. A private city, especially a small one, would likely have a small number of large employers. Several big companies would pay a disproportionate share of the city’s budget, and the city would be somewhat beholden to them. Combined with the more direct link between rent and profit this could lead to a criminal and civil justice system that favors the powerful. Especially because residents in a private city would not have the same sense of ownership as they might in a democratic city. Rather than citizens, they would be more akin to customers, which could embolden the city to favor the powerful and delegitimize the voice of the residents.

This argument applies to civil justice, police, and criminal justice. I will discuss them in that order. However, first I will make several general arguments which apply to all three.

First, all cities will have some companies which pay a disproportionate amount of taxes. The specific claim against private cities, is that private cities will be more likely to favor the powerful than other types of city governance. It is not obvious that private cities will necessarily be worse in this regard. Reputation will be very important to a private city hoping to convince residents and companies to locate there. A perception of injustice, either in the civil system, police, or criminal system, could hurt them in the long run.

As an example, many companies, Amazon, MasterCard, Geico, and Ebay for example, likely have a small number of sellers which account for a disproportionate amount of revenue. However, there companies are generally perceived as fair in their dispute resolutions. Few people are going to buy car insurance from a company that favors large clients, or use the credit cards of a company that has unfair dispute resolution mechanisms.

Second, such critiques of private autonomous cities often underestimate how bad civil justice, police, and criminal justice is in undeveloped countries. For a quick sense skim the World Justice Project’s report on the Rule of Law. For example, 21%, 23%, and 24% of Nigerians believe that police, follow the law, respect the basic rights of suspects, and are punished for breaking the law respectively. As a personal anecdote, several Honduran friends have told me they fear the police more than they do the gangs, even though Honduras is the murder capital of the world. More generally, it is common knowledge that justice systems in the undeveloped world rarely deliver justice. Unfortunately, that knowledge is often forgotten or ignored when considering the possibility of a private replacement.

There is strong evidence that private civil justice mechanisms can perform as well, if not better than public civil justice mechanisms. The best book on this is “Private Governance”, by Edward Stringham. One particularly telling example is the emergence of the Dutch stock exchange. Not only was short selling not enforced, it the Dutch government actually banned it. Nevertheless, people continued to write short contracts and they continued to be paid. Those who refused to pay contracts, even ones that were technically illegal, were simply banned from future participation in the stock market.

In a more modern example, international trade is often “lawless.” Companies frequently specify that contracts be settled under private adjudication for both speed and accuracy, as government courts sometimes fail to keep up with complex commercial contracts. The prevalence of international arbitration is reflected in detailed guides to drafting contracts, exemplified here, and here. Such contracts show private dispute resolution is often better equipped to handle complex contracts.

To some extent, international arbitration clauses can be said to exist in the shadow of the state. The New York Convention ensures participating governments enforce private arbitration agreements and rulings made in other countries. However, Peter Leeson found that state enforcement only accounted for 15-38% of international trade, a substantial amount, but not nearly enough to suggest private mechanisms were not working.

There is less evidence that private police can perform as well as public police. This is not to suggest there is suggesting private police would be worse than public police, merely that there is relatively little evidence regarding private police at all.

Edward Stringham has an article about private police in San Francisco. When people and businesses who hired the private police force were asked why they did not use the free public one, responses ranged from, “they take too long to arrive” to “they scare me”. The best response was “that’s a joke right? I have little confidence in SFDP”.

The best argument for private police is the general untrustworthiness of public police in the undeveloped world. I think most honest well-traveled people would admit they trust security guards at restaurants or hotels more than the local police. Unfortunately, improving on public police in the undeveloped world is not a very high bar.

The last, most controversial point, and the one with the least evidence to support privatization is criminal courts. This would be an extreme example, as it is highly unlikely that a private city would gain sovereignty. If a private city did manage to gain some autonomy, the criminal courts would likely be the last thing a host country would abdicate control over. While there is very little evidence on this point, I would like to make several overarching statement.

First, there are lots of examples of private actors acting badly in criminal justice, honor killings, feuds etc. However, I think these examples have as much bearing on a private city as the Saudi Arabia beheading teenagers has on arguments for social democracy. While they are in some ways the same, private criminal justice, and the actions of a state, they strip out the context that makes them different. Saudi Arabia is still a primitive state and honor killings are a primitive form of private justice. If Google were to build a city it is hard to believe it would try to build the honor killing, teenager beheading, primitive criminal justice system.

Second, a private city could remove sovereign immunity. Wrongful actions taken against citizens, including in the criminal justice sphere, would penalize the city.

Of course, that private cities could provide better civil justice, police, and criminal justice than undeveloped countries does not mean they would do a better job than a Charter City, merely that they would be better than the status quo. A Charter City, assuming it is implemented well, would provide civil justice, police, and criminal justice, at a level consistent with the Charter country. In other words, a Charter City would have low variance of its justice system.

A private city on the other hand, would have high variance. It could outperform a Charter City, but it could also greatly underperform a Charter City. Compared to a Charter City, a private city would have a slightly higher ceiling, but a much lower floor.

So, given the expected value of a private city based on civil justice, police, and criminal justice, is lower than a Charter City, why prefer a private city? The answer is adaptability, the ability to respond quickly to rapidly changing on the ground circumstances.

Cities, especially institutionally autonomous cities, are complex. The problems they have at 10,000 people are not the same problems they face at 1,000,000. Difficulties faced by the developer will not scale linearly. This requires a decision making body that is equipped to respond rapidly and effectively to such problems. Simply put, that body is not government.

One illustration of the difficulty of complex systems is massive multiplayer online games. Some of the more popular online games have millions of players trading with each other. While companies can test the games with thousands, even tens of thousands, of players before release, the dynamics will fundamentally change with millions of players. Often times the initial release is followed by several months of trying to rapidly respond to consumer feedback about the game. For comparison, take the difficulty state governments have had in establishing Obamacare exchanges online. Hawaii spent $205 million dollars developing a website far simpler than most big budget modern games, and it doesn’t even work.

Another example is the refugee crisis in Europe. Naguib Sawiris, an Egyptian Billionaire, is actively trying to buy a Greek island to house refugees. The EU, which has the resources, as well as the political clout to create a refugee city on a Greek island is standing on the sidelines.

For another thought experiment, think of a major institution of the US government that can respond quickly and effectively to new problems, the FDA, the Department of Homeland Security, the Department of Energy? The Department of Homeland Security is the newest cabinet level department created in the US. It’s most visible program, TSA, is widely considered a failure. It was recently revealed that they had a 95% failure rate in a test, failing to detect 67 out of 70 people trying to sneak fake bombs and guns on a plane. Is the political body that created the TSA really going to create an organization capable of building a Charter City, especially as the problem faced by the TSA is far simpler than problems faced by a Charter City. In this sense it is possible for a Charter City to end up a large boondoggle, a new Brasilia built but mismanaged to the point of vastly underperforming expectations.

In a Charter City there is the added problem that the decision making body would not necessarily be close to conditions on the ground. If Denmark, for example, is the Charter Country, would we expect all the Danish workers to move to sub-Saharan Africa? Requiring them to move would likely eliminate many married or elderly workers. If they are not required to move, they will be out of tune with the local conditions.

That being said, there are historical examples of public cities rapidly growing, Shenzhen being the most prominent example. However, these cities had different institutional arrangements than what is likely to arise in a Charter City.

To conclude I’d like to reiterate my main points. Institutionally autonomous cities are currently one of the best ways to improve the lives of the world’s poorest. The two competing visions of institutionally autonomous cities are Charter Cities and private cities. The primary advantage of Charter Cities is low variance and better provision of justice systems. The disadvantage is adaptability. The advantage of private cities is adaptability. The disadvantage is the low floor for the justice systems (though even a low floor would likely be an improvement in many undeveloped countries).

Ultimately, the success of a Charter City or a private city will depend on the organization with decision making authority. It is certainly possible, though unlikely, that business, growth oriented organization can emerge from negotiations between two governments to build a Charter City. Similarly, it is possible that a business with few ethical scruples can take advantage of a country granting institutional autonomy, preying on those who move there. The potential success of either project will depend the governing body, and those of us interested in such a project should do what we can to ensure the process for choosing the governing body is fair, open, and transparent.

Response to Romer on private cities

Paul Romer has commented skeptically on private cities in two recent interviews. Having written on private cities I thought I would take a second to respond.

First, in his own words “And my rule is that I will not support any public policy initiative for a new city if it is not the kind of place that I would be willing to go live or where I would want my children and grandchildren to live.”

I think this is the wrong criteria for judging public policy initiatives. A better way to judge public policy initiatives is whether they improve the lives of those who are targeted by the initiatives. There are many cities throughout the world that I doubt Paul Romer or his offspring would want to live in. However, those cities are inhabited by hundreds of millions of people who want better lives for themselves and their children.

Romer does argue for experimentation and does not seem wedded to a particular organizational structure of a Charter City. I agree that openness and experimentation is necessary in creating new cities. Unfortunately, Romer specifically contrasts his vision to that of private cities, suggesting private cities should not be allowed. Before specifically answering Romer’s critique I will offer a few comments defending private cities.

The basic argument is that profit encourages the effective provision of goods and services. A private city that fails to provide those goods and services would quickly go out of business. Romer correctly notes that this analogy is somewhat lacking. Moving to a new city is high cost. As such, exit in governance terms is always more costly than exiting a grocery store, as new grocery stores are easier to substitute.

One advantage of private cities is that the initial construction of a city is very costly. A private city would mean the cost of infrastructure would be provided privately, possibly saving a government billions of dollars.

Another advantage is the distinct organizational structure. One of the primary benefits of a new city, be it Charter or private, would be to create a new bureaucracy to escape corruption in the home country. A private city would have a strong incentive ensure the bureaucracy is entirely separated. Old bureaucratic influence would be more likely in a public vs. private partnership.

Romer’s primary critique comes down to police. I will quote him in full.

The track record of private police forces and private judicial proceedings is very bad. We have some of these in the United States run by private, but non-profit, universities. If the university has a sports program that generates lots of revenue and prestige, the university tends to protect athletes, typically men, who commit sexual violence, typically against woman. They do not offer anything like “equal protection under the law.” It is a telling illustration of how police and judicial proceedings can be bent to support the mission of the organization, even one like a university that we usually think of as being well intentioned, and fail to protect the people it is responsible for.

First, I think it is odd that in critiquing private, for profit cities, he uses the example of non-profit universities. However, I agree his point stands and must be thought about. Many informal sources I have read suggest similar things happen at hotels, petty crimes by wealthy patrons are somewhat ignored. That being said, I think Romer overestimates the police, in first world countries and especially in the developing world.

As the events of Ferguson and Baltimore illustrate, police have rarely lived up to the ideal of equal protection under the law. Freddie Gray likely died because of a nickel ride, a procedure where police do not strap a suspect in a police van and then drive recklessly. Chicago PD had a black site, and before that they literally tortured people. Stop and frisk, done by several major cities, but most prominently by New York City, is essentially the continual harassment of minority males. I would recommend Radley Balko’s excellent book if Romer is interested in modern policing in America.

However, Charter Cities and private cities can do the most good in the developing world. Unfortunately I am unaware of much literature on law enforcement in the developing world. That being said, it is assuredly worse than in America. Some friends from Honduras, which is the murder capital of the world, have told me stories which illustrate how bad law enforcement can get. I heard from several people that they fear the police more than they do the maras, the gang members. Other people have told me that women being arrested are usually sexually assaulted, if not raped.

Now, given the level of violence in Honduras, I imagine the police force there is more corrupt than average. However, when thinking about how to improve the world it is important to understand the world as it exists. And the world is currently filled with terrible poverty and predatory institutions. Private cities seem like they could reasonably be better than many of those institutions.

Romer then comments, “Unless someone is willing to specify whether there is a local police chief and how he/she is appointed and held accountable, any suggestion they make about private cities can be dismissed as frivolous.”

This question does not strike me as particularly difficult. The obvious answer is the police chief would be appointed by the owner of the city, though I imagine Romer would consider that a frivolous response. They would then be accountable to the owner of the city, who would be accountable to the residents to the extent the owner would want to maximize revenue.

There are a number of other mechanisms which could be used for police. First, the police can be controlled by a non-profit. The board can be controlled by a mix of the owners, politicians, and other prominent individuals.

Another scenario, if there is a proliferation of private cities, is to unbundle the goods provided by each. Perhaps a firm dedicated to policing services will arise, and be contracted by the city itself. It has happened in Sandy Springs Georgia, among other places.

Another possible scenario is for an accreditation body to emerge which would rank various police departments. They would only give high scores to those police departments which taught best practices.

A private city would also likely lack sovereign immunity. It would be subject to lawsuits if it broke it’s founding charter. The charter could specify equal application of the law and due process procedures. Failing to follow these procedures would guarantee a loss in revenue.

Ultimately, I don’t know whether a private city would provide these goods and services or whether it would devolve into a corporate dystopia. I suspect Romer does not know either. Given our collective ignorance I would recommend, as Romer does, creating a set of meta rules for changing institutions on a local level. I would not limit the institutional experimentation, so long as the experimentation is not imposed on anyone. I would hope that Romer would not either.

Private cities and state capacity

Last summer I took a bus from Honduras to El Salvador. The bus left at 6:00 AM because, I was told, if it left later it would cross the border in the dark and risk being robbed by highway bandits. A few years ago, I took a bus from Lima to Pulcalpa, both in Peru. In the Amazon we stopped and a man in army fatigues with a rifle strung over his shoulder boarded and asked for “donations.”

I bring these stories up to illustrate the importance of state capacity, which can simply be defined as the ability of a state to exercise its power. In the above situations state power would ensure I wouldn’t be robbed or asked for “donations” by men with guns. One tyrant is often better than many. State capacity also means the ability of the state to complete certain tasks, build a road, effectively tax subjects, etc.

The recent Ebola crisis offered a useful perspective on state capacity vs. private city capacity. An 80,000 person rubber plantation run by Firestone successfully stopped Ebola, despite having no prior experience with such diseases. Instead they simply used common sense and extensive googling to figure out how to best respond. The whole article is worth reading if you haven’t already.

Garcia’s team first tried to find a hospital in the capital to care for the woman. “Unfortunately, at that time, there was no facility that could accommodate her,” he says. “So we quickly realized that we had to handle the situation ourselves.”

The case was detected on a Sunday. Garcia and a medical team from the company hospital spent Monday setting up an Ebola ward. Tuesday the woman was placed in isolation.

“None of us had any Ebola experience,” he says. They scoured the Internet for information about how to treat Ebola. They cleared out a building on the hospital grounds and set up an isolation ward. They grabbed a bunch of hazmat suits for dealing with chemical spills at the rubber factory and gave them to the hospital staff. The suits worked just as well for Ebola cases.

The lesson which should be learned is that though institutional change is hard on a whole, institutional subcontracting can work. Trying to better Liberian institutions could take decades for such results. On the other hand, a private city with an interest in the well being of its residents can deal with a deadly epidemic better than most governments. It can probably do other things better too.