Holding workers’ traits fixed, moving a Haitian from Haiti to the United States increases his wage about ten times – a gain of 900%. The lesson: Third World workers are less productive than First World workers largely because they live in the dysfunctional countries. — Bryan Caplan’s summary of the Place Premium [PDF].
The Gates Foundation asked Bryan to write a memo on Charter Cities.
It would be wonderful if the implementation of the first charter cities could be accelerated with cash. But it’s not clear to me how a big investment in the Charter Cities project would be effective. Brandon Fuller at Charter Cities wrote a nice post interpreting the Caplan memo — including this clarification — they were not looking for money:
Though we’ve had good discussions with people at the Gates Foundation about urbanization in general and the charter cities proposal in particular, we have not asked for their financial support.
Here’s an excerpt from Bryan’s post on Econlog:
The Bill and Melinda Gates Foundation has an interesting accountability mechanism. After they make a major funding decision, they solicit pro and con memos on “roads not taken” – other ways they could have spent their money. Since the Gates Foundation recently decided not to back charter cities to help reduce global poverty, they asked me to write a memo to explain why they made a mistake. Here’s the full text of my memo, reprinted with permission:
To: The Bill and Melinda Gates Foundation
From: Prof. Bryan Caplan
Re: The Case for Charter Cities
Anyone serious about reducing world poverty must come to grips with a single key fact: Redistribution from rich to poor has not and cannot solve more than a tiny fraction of the problem. Even if you could perfectly equalize income in Third World nations with zero effect on production, the citizens of Third World countries would remain mired in poverty. Take Bangladesh. With a GDP of $256B and a population of 164M, equalization would at best give each citizen an income of $1561 per year – about $4 a day. Countries do not overcome poverty by sharing production more equally. They overcome poverty by increasing production – what economists call “economic growth.”
At first glance, increasing production seems extremely slow and difficult, requiring decades of investment in education, infrastructure, political reform, and who knows what else. But there turns out to be one foolproof way for people from the Third World to drastically increase their production overnight: move to the First World. “The Place Premium,” an important paper by the Center for Global Development’s Michael Clemens, Claudio Montenegro, and Lant Pritchett, offers the most precise estimates of the benefits of migration. They find that the effect of country of residence on income dwarfs the combined effects of poor education, poor health, poor work habits, and all the other defects commonly ascribed to Third World labor. Holding workers’ traits fixed, moving a Haitian from Haiti to the United States increases his wage about ten times – a gain of 900%. The lesson: Third World workers are less productive than First World workers largely because they live in the dysfunctional countries.
The first-best solution to global poverty, therefore, is for the First World to allow much higher levels of immigration. Unfortunately, despite its low absolute level (annual U.S. immigration is well under 1% of its population), immigration is already extremely unpopular. For the foreseeable future, significantly more open borders – not to mention truly open borders – seem politically impossible. The challenge, then, is to figure out a close substitute for free migration from the Third World to the First. This is the challenge that Paul Romer’s increasingly influential “charter cities” proposal tries to meet.
Another upside of charter cities is that there is virtually no downside. A charter city begins on empty land. It can only grow by voluntary migration of workers and investors. If no one chooses to relocate, they’re no worse off than they would have been if the charter city had never existed. If efforts to start charter cities fail, at least they won’t harm the very people they’re intended to help.