Friday, May 1, 2015

Charter Cities and Economic Zones

Paul Romer makes the distinction between economic zones and charter cities, with a smell test (which can be applied to pretty much all reforms),
Charter City should be a Reform Zone, not a Concession Zone. Most zones are created to offer concessions to firms, not to implement reforms. The goal of a Charter City is reform, not giving out concessions, so in this sense, the motivation for a Charter City is totally different from the motivation behind most special zones. 
Here are my two tests for whether a policy is a reform or a concession: Would you be happy if this policy lasts forever? Would you be happy if this policy spread to the entire country? If the answer to both questions is yes, it is a reform. If not, it is almost surely a concession, a gift to some special interest. A reform zone is a zone that implements one or more fundamental reforms.
The Special Economic Zones (SEZs) promoted in countries like India are essentially concession zones, which crowd-in investment from elsewhere in the neighborhood. To this extent, they are a form of beggar-thy-neighbor policy. As to how much real economic activity they create on their own, as against being displaced from elsewhere, very little analysis has been made. But information available from the CAG's Performance Audit of SEZs, especially with respect to the predominance of IT/ITES, appears to lend credence to the economic activity displacement hypothesis. 

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