A Charter City in Honduras

Paul Romer  has a big idea about how to encourage development in poor nations.    The government of Honduras  may be willing to test his core thesis.  As I understand it, the host nation would pre-commit to change its “rules of the game”.   It would set aside some of its land for a new city.   The new city would be governed by a new set of rules and laws agreed to by the host nation and international investors.     People in Honduras would be free to migrate to this new “enterprize zone”.  How this migration would take place remains a work in progress.  International capital would flow to this new city because of the high marginal return on investment and safe property rights.  People in Honduras would invest more in their education as the opportunity to move to  this new city would create a high return to skill.  Economic growth would ensue and improve overall well being.  The basic micro economic logic behind Paul’s idea makes perfect sense and I’m very hopeful that this could work.

Author: Matthew E. Kahn

Professor of Economics at UCLA.

6 thoughts on “A Charter City in Honduras”

  1. I think the tricky part would be in getting both the initial inhabitants as well as migrants to adopt the externally set laws. They’ll probably try and take power away from the international rule-setters over time, assuming they aren’t distorted immediately by facts on the ground.

  2. I won’t bother arguing about the idea itself, though for the record I’m strongly opposed. But do you honestly think a military dictatorship is the right place to do this type of experiment? If you think it is a good idea, you might try to persuade a democratic nation to test it.

  3. So let me see if I get this right.
    – We’ll set up an enclave in a sovereign state under its own laws, drafted by tenured economics professors.
    – We know the laws are sound because they’re based on theoretical models that have been approved for publication in top-ranked, peer-reviewed journals.
    – International capital will flow in, again because, at least in theory, international capital responds instantaneously to investment opportunities offered in an economy based on ideas that have been developed in top-ranked, peer-reviewed journals.
    – The state from which the enclave is to be carved out will accept this arrangement because it recognises that these laws are so much better than its own. It hasn’t adopted these much better laws in the rest of the country yet because of political economy factors (strength of entrenched oligarchy etc) which will, by assumption, not operate in the new city-state.
    – All of the factors that drive the growth of cities – economies of scale, agglomeration effects, evolved specialization etc – will not apply to the new city. By assumption. Instead it will start with high marginal returns to capital and labor, in what was formerly a tropical rain forest, right from the get-go.
    – The model wouldn’t be the same as the special economic zone (SEZ) model that has been generally successful in Asia, in that the new city would be totally new rather than based on an existing industrial/exporting area, and the host economy wouldn’t be expected to make any contribution of its own in terms of investments in infrastructure, public education etc.

    Actually I guess I don’t understand your point, Matthew. Could you elaborate?

  4. Not wishing to be overly cranky on a Monday morning, and I know academic writing is traditionally awful, but how is “pre-commit” different from “commit”? Can you commit after the fact?

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