Urbanization without development

Author: Mark Lutter on May 11, 2017 at 3:41 pm | Africa

The largest French speaking city in the world is in Kinshasa, the capital of the Democratic Republic of Congo, with a population over 11 million. For reference, that would make Kinshasa the third largest metropolitan area in the US, after Los Angeles, and before Chicago.

Despite its size, few people have heard of Kinshasa. Perhaps for good reason, as it only has 11 daily international flights. Kinshasa is the result of urbanization without globalization.

In most countries, cities are drivers of productivity. People move to cities to find opportunity, to give themselves and their children a better chance at life.

Paul Romer, now Chief Economist at the World Bank, considers urbanization a key driver of development. He applies the Pritchett test, finding urbanization passes.

  1. Developed countries are more urbanized.
  2. Rapidly urbanizing countries tend to increase their standards of living.
  3. Historically successful countries urbanized early in their history.
  4. Rates of urbanization are correlated with rates of economic growth.

Kinshasa, and sub-Saharan Africa more generally, present a puzzle. Everywhere else urbanization has been accompanied by economic development.

Journalist Daniel Knowles proposes that African cities are designed for consumption of natural resources. Kinshasa has great nightlife. The elite get rich through rents on the natural resources in the country while everyone else survives on the scraps.

Eyerusalem Siba, Jeremy Barofsky, and Jonathan Grabinsky at Brookings propose a slightly more sophisticated version. Dictatorships tend to have larger capital cities, which combined with the health benefits from city life draw rural workers.

Another major factor in the lack of African city development is the same thing which has held back African development more generally, poor governance. On virtually every governance index, Doing Business, Economic Freedom, Failed States, Africa scores near the bottom. African cities can hardly be expected to thrive if registering a business takes 54% of per capita income.

The solution is improved governance. Luckily, rapid urbanization provides a tool for improving governance. By creating multi-use, broad based special economic zones in the suburbs of cities, African countries can pilot reforms which can later be expanded to the rest of the country. These low risk projects can be rapidly populated because of the growing urbanization.

Eko Atlantic is an example of a project which could benefit from governance improvements. It is a planned satellite city of Lagos Nigeria being built for 250,000 residents. Governance improvements in Eko Atlantic would benefit the developers by increasing property values, as well as showcasing to Nigeria the importance of governance in economic growth.

The types of governance reforms which could be piloted surrounding cities are as follows.

  1. Improve dispute resolution: Simplify and expedite commercial cases. Civil law countries could hire common law judges for additional credibility.
  2. Reduce barriers to businesses: Make it cheap and easy to start a business. It should be a one stop shop, possibly online, which costs under 5% of per capita GDP.
  3. Liberalize the labor market: It should be easy to hire and fire employees.
  4. Reduce corruption: The civil service staffing the new jurisdiction should be separate from the civil service of the country as a whole. There should be stiff penalties for corruption.
  5. Land rights: Land rights should be clearly assigned and easily transferable.
  6. Reduce and simplify taxes and tariffs: It should be low cost and simple to pay taxes and ship goods across borders.

By implementing the above recommendations, Africa can turn her cities into centers of productivity, unleashing humanity’s ultimate resource.

 

New Chinese City

Author: Mark Lutter on April 17, 2017 at 4:30 pm |

China is embarking on the most ambitious planned city ever. They are investing $290 billion over 15 years in Xiongan New Area. Located two hours south of Beijing, the proposed investment dwarfs the second largest new city project of which I’m aware, King Abdullah Economic City (KAEC). KAEC has an estimated budget of $100 billion.

Xiongan is twice the size of New York City, and is made up primarily of farmland and villages. Per capita income in Xiongan lags behind China. The goal is to turn Xiongan into a commuter city to Beijing, accessible by a two hour train ride. Additionally Xiongan will relieve some of the over crowding of Beijing.

Unfortunately, though Chinese media is lauding the project as a new version of Shenzhen. Other media reports that China is creating a special economic zone for the new city. However, there is little detail on the regulatory advantages of the special economic zone.

 

New Special Economic Zone Book

Author: Mark Lutter on April 10, 2017 at 8:32 pm | Special Economic Zones

Lotta Moberg published a book on The Political Economy of Special Economic Zones. Here‘s the Amazon link. The book is about

This book examines SEZs from a political economy perspective, both to dissect the incentives of governments, zone developers, and exporters, and to uncover both the hidden costs and untapped potential of zone policies. Costs include misallocated resources, the encouragement of rent-seeking, and distraction of policy-makers from more effective reforms. However, the zones also have several unappreciated benefits. They can change the politics of a country, by generating a transition from a system of rent-seeking to one of liberalized open markets. In revealing the hidden promise of SEZs, this book shows how the SEZ model of development can succeed in the future.

Applying frameworks from various schools of political economy, this volume places SEZs in the context of their mixed past and promising future. It is essential reading for anyone with an interest in international economics, development economics, and political economy, including practitioners and consultants of SEZ policies.

She also has an op-ed in the Daily Caller applying her research on SEZs to the US. If you are interested in SEZs, I strongly recommend Lotta’s book.

Introduction to Prosperity Cities

Author: Mark Lutter on April 6, 2017 at 3:01 pm | Business Politics

Around half the world’s population live on $2.50 a day or less. Over seventy percent of the world’s population live on $10 a day or less. Despite great strides over the last few decades, poverty remains one of the most pressing problems facing humanity.

Poor governance is a primary cause of poverty. Many governments make it difficult start a business, invest, register property, or trade across borders. The result is low living standards and economic stagnation.

NeWAY is taking advantage of two trends to create a powerful anti-poverty tool, Prosperity Cities. The two trends are urbanization and the proliferation of special economic zones.

The UN estimates that there will be an additional 2.5 billion urban residents by 2050. Existing cities must be expanded and new cities must be built to accommodate the rising urban population. Yet these must be prosperous, safe, clean, and pleasant spaces if we seek to protect future generations or urban residents.

The second trend is the proliferation of special economic zones (SEZs). There are over 4000 SEZs worldwide, several of which played a key role in China’s economic miracle. Unfortunately, the results of SEZs outside of China has been mixed.

Prosperity Cities are new cities with world-class legal and regulatory institutions. Urbanization ensures a ready supply of residents and SEZs have created the precedent for territorial improvement of legal systems. Prosperity Cities combine the trends with deep zonal reforms on greenfield sites, which can host a growing urban population.

Prosperity Cities are inspired by Hong Kong and Singapore. Hong Kong grew from a per capita GNI of $570 in 1963 to $41,000 today. Singapore grew from a per capita GNI of $490 in 1962 to $52,090 today.[1] Their success is replicable. The main challenge is attaining political support for the deep economic reforms necessary to jumpstart economic growth.

NeWAY partners with interested host governments to help create the best legal and regulatory special jurisdiction possible to house the Prosperity Cities. Conceptually, this means crafting a legal and regulatory system from the ground up, rather than negotiating for specific areas of reform. Instead of benefitting specific industries, this complete approach ensures that private interests cannot be privileged and plants the seeds for long run growth.

The signature aspect of Prosperity Cities is their legal and regulatory framework. Prosperity Cities have the maximum politically feasible improvement on governance quality to create world class legal and regulatory institutions. Prosperity City’s governance framework is inspired by accepted indices including The World Bank’s Doing Business Index, The Fraser Institute’s Economic Freedom Index, and the World Justice Project’s Rule of Law Index.

The legal and regulatory system in Prosperity Cities protect property rights to create an environment which attracts capital and increases productivity. By lowering barriers to trade, investment, job creation, and innovation, Prosperity Cities will grow rapidly, increasing the wellbeing of their residents and becoming examples of success for the host country to reform other parts of its territory if it chooses to.

Prosperity Cities are privately financed and managed. They require no investment from the host country. Returns on invested capital are accrued through the increase in real estate values that occurs as the city develops. Revenues generated by Prosperity Cities are shared with the host country, which results in shared upside with the host country’s population.

To diversify the risk of any Prosperity City project, NeWAY follows a portfolio investment approach. Through the deployment of assets at strategic times for different Prosperity City projects, NeWAY is able to reduce randomness effects, get in on the ground floor, and ensure that the legal and regulatory environment is structured to maximize success.

[1] Both values are inflation adjusted