Charter Cities, Implementation Attempts

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An irrational voter does not hurt only himself. He also hurts everyone who is, as a result of his irrationality, more likely to live under misguided policies. Since most of the cost of voter irrationality is external — paid for by other people, why not indulge? If enough voters think this way, socially injurious policies win by popular demand.Put bluntly, rule by demagogues is not an aberration. It is the natural condition of democracy. Demagoguery is the winning strategy as long as the electorate is prejudiced and credulous. Indeed, while demagogue normally connotes insincerity, this is hardly necessary. “Religious” voters encourage politicians to change their behavior by feigning devotion to popular prejudices, but also prompt entry by the honestly prejudiced into the political arena.

Bryan Caplan «The myth of the rational voter»

The first article of our series about Paul Romer’s “Charter City” model was devoted to the general theory and future perspectives. We described the main idea, some aspects of practical implementation, and the potential advantages gained from it. Today we’ll talk about the reasons Romer’s idea failed on numerous occasions. Paul RomerSo far, there had been two attempts to create a charter city. The first dates back to 2008, when the president of Madagascar, Marc Ravalomanana, agreed to the experiment. Ravalomanana is a businessman, an owner and creator of the Tiko Group. Tiko Group once controlled a significant segment of the nation’s food (dairy products and juices) and resource markets. He supported Romer’s project and even designated an area on the sparsely populated south-western coast for it, but before the construction could begin, Ravalomanana was overthrown in a putsch preceded by mass protests. His shops and warehouses were looted by a rampaging mob and in the end he had to flee the country. Obviously, the construction of the charter city was canceled. No one would invest in a highly unstable region. The second try was somewhat more successful. At least the idea saw some serious debate and attempts were made to pass a corresponding law. In 2009, Honduran left-wing president Manuel Zelaya was removed from power for trying to hold an unconstitutional referendum. He was succeeded by Roberto Micheletti, a “crisis manager”, and the 2010 election was won by a young technocrat Porfirio Lobo. He immediately began to clean up the corrupt law enforcement and financial ministries. Apart from hundreds of cops with ties to drug mafia, Lobo fired the finance minister, Hector Guillen, and a number of other prominent officials. Despite that, Honduras still remains a relatively poor country, always open for unorthodox and radical opportunities to solve its financial problems. Romer traveled to Honduras and met with Lobo. The president was interested in a charter city project, and he began to break the ground for its implementation. The project received initial approval of Honduran government in 2011, and an amendment was made in Honduran constitution, concerning Regiones Especiales de Desarrollo (RED), special economic zones that were in effect future charter cities. The government even began to assemble a committee that was to maintain the transparency of the financial schemes, oversee construction and govern the city. Two countries that once went through a somewhat similar period, Singapore and South Korea, supported the idea of creating a Honduran “futuropolis” and agreed to participate in the project. The Supreme Court of Mauritius was to become an arbiter in all dealings between the city and the outside world. The plan was to create several independent “Hong-Kongs” in Honduran territory and turn them into havens for those of the intellectual and professional elite all over South America that were dissatisfied by their native countries, but were not ready to emigrate to USA, Canada or Europe. Unfortunately, Romer failed to take into account the so-called rational ignorance, a major factor in most developing countries. People affected by this behavior are reluctant to renounce the false beliefs they once acquired but never had a chance to test; even people who might seem completely rational in mundane circumstances are subject to this malady. A classic example would be a belief (deeply entrenched among the Russians) that freedom is only possible through powerful government. Tsarism and communist totalitarianism had little effected – generation after generation votes for strong-arm regimes that destroy civic liberties and create a rapidly degenerating system. Eventually the system falls apart, and still Russians demand a “strong hand”. A single Russian citizen, at the same time, appears to be quite rational and educated. A similar situation can be witnessed in Argentine. A substantial number of Argentinians believes the price of national currency, artificially heightened by various government measures (including a ban on free circulation of euro and US dollar), to be just and based on the real market value, while notably lower foreign exchange rates are perceived as artificially lowered by the enemies of the Argentinian state. Having no real understanding of how economy works and living under the anti-intellectual dictatorship of the Justisialist party that was created by Juan Peron, they are quite convinced that all of the outside world is involved in a conspiracy to crush the independent Argentine. However, when it comes to common sense and mundane tasks, your average Argentinian generally turns out to be rational person. In the end, the difference between a rationally ignorant man and a merely uninformed one amounts to the former defending his delusions at any cost, while the latter is mostly open to new information and ready to adjust his worldview according to it. It’s not hard to guess that a strength of belief in a “strong hand” among the Russians or in the “conspiracy” among the Argentinians grows in reverse proportion to the level of education. The most poor and uneducated citizens are the most patriotic and susceptible to any political myth; the most educated are at least capable of understanding how the system works. The former often constitute the majority in the developing countries. Low wages, poverty and low quality education are not exactly an ideal breeding ground for the thinkers. Even the most enlightened politicians in such countries have to ignore their consciences in order to get the support of their audiences. In the end the country is locked in a vicious circle of poverty and populism – the poorer the country, the more populism is needed for a politician to take power, until, finally, entire third world governments begin to consist solely of populist politicians who cater to the most uneducated and unsophisticated kind of voter and merely imitate politics instead of creating it. Honduras is a very poor country. A single president, no matter how energetic and educated, having at his disposal only a small team of technocrats, cannot change that, even with the help of a renowned economist and intellectual. The government began to oppose the idea of “seceding a part of the country to foreigners”, the Constitutional court declared the initial project endangering the sovereignty of the state and therefore illegal. In the end, after much debate, it was decided to transform the charter cities into something called ZEDE, free trade zones of sorts. These zones bore little resemblance to the initial RED concept. The land was still for rent, but the city was to be governed by a council, appointed directly by Honduran presidents. 90% of residents had to be Hondurans by quota, and the legal system was to remain Honduran as well. The cities were also saddled with minimum wage laws, and are supposed to be created based on existing municipalities after a local referendum. Romer refused to participate in the project, citing “serious transparency problems” as his reason; transparency, along with the emphasis on intellectual resources, being the two most important aspects of his idea. If we review carefully the reasons for the failure of Romer’s projects, we will notice this important issue: they were always political, or, to be precise, populist in nature. Romer should have included the inevitable social, legal and economic corruption of the developing countries in his calculations. Another factor that has to be taken into account is the inherently erroneous practice of appeasing the rational ignorance of the population: integral for any state, and especially widespread in the poor countries. The state is interested in keeping the number of highly educated and intellectually honest citizens down, to avoid the danger of them shaking its foundations. The ignorant voter will aggressively defend the state as long as it indulges the lower classes’ beliefs. Hence, along with controlling the numbers of the thinkers, the state is interested in promoting the ignorance of the majority who prefers the malicious but familiar policies to the potentially beneficial but untried ones. For decades Honduras, and the other third-world countries, had been marching along to this tune. Since the 1950s the country was perceived as an “agrarian and territorial complement” of the more developed El Salvador. The stronger regional players viewed Honduras as nothing more than a training base for the mercenaries and a drug trade hub, making all effort to keep it this way. The populace under the artificial and systematical cultivation of ignorance, became a populist haven and a stronghold of familiar (though ineffective) social mechanisms. Thus, Romer’s project was destined to fail. Still, these conditions are but an established “tradition” that allows the interested parties to uphold the status quo. Tradition is not necessarily a good thing, especially in the poor developing countries, where it often becomes a justification for widespread poverty and the lack of basic goods and services. Such “tradition” needs to be shaken up regularly. The positive examples of Singapore, Hong-Kong, Chile, Panama and many other countries prove this. There are ways to avoid the typical mistakes that often happen when bringing innovation to conservative and backwards societies. This will be the topic of our next article. Kitty Sanders, 2014 You can also read this article here: RLN.FM

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