Evidence of meeting #37 for Foreign Affairs and International Development in the 41st Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was countries.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

  • Fraser Reilly-King  Policy Analyst, Aid & International Co-operation, Canadian Council for International Co-operation
  • Toby A.A. Heaps  Chief Executive Officer and Co-Founder, Corporate Knights Inc.
  • Paul Romer  Professor, Stern School of Business, New York University, As an Individual

4:35 p.m.

Conservative

The Chair Dean Allison

Let's get started with our second hour.

I'd like to welcome Mr. Romer here today to talk to us a little bit about some of the things he's been working on. Mr. Romer is with the Stern School of Business in New York City. I know that he's done some work with the Macdonald-Laurier Institute here in Ottawa.

I'm just going to turn it over to you, sir. We'll give you 10 minutes or so to make your opening presentation, and then we'll go around the room and maybe follow it up with some questions.

Once again, thank you for coming up here today and spending some time with us. We look forward to hearing what you have to say.

May 28th, 2012 / 4:35 p.m.

Dr. Paul Romer Professor, Stern School of Business, New York University, As an Individual

Mr. Chairman and members of the committee, it's a great pleasure to be asked to come to testify here.

There is one part of my career you didn't mention, and maybe you don't know. I spent the middle year of my graduate education at Queen's University in Kingston. It was actually the most productive year of my graduate career, so I have a special fondness for Canada.

I want to start by saying that I'm here to describe an initiative of the government in Honduras that I've been advising on. The President of Honduras sent a letter, which will be available in the original Spanish, with an English and French translation, indicating how much he appreciates the interest expressed by Parliament in this experiment Honduras is undertaking and how much he values Canada as a potential partner as this project goes forward.

To step back and motivate what they're doing, let me describe for you a more familiar context of domestic unemployment. Suppose you saw massive amounts of persistent unemployment in your society. A natural impulse to deal with that would be the charitable impulse to try to put people on what we used to call the dole, or welfare, to provide income support for people who aren't working. If that's a pervasive problem, it will, of course, be a very expensive program for a government to maintain. And it's actually one that we now know can be quite harmful, since the additional disincentives to work that those kinds of charitable grants can offer can actually end up keeping people out of the labour force, which reduces their skills and reduces their sense of accomplishment and dignity.

In a case like that, we know that instead of that expensive and harmful solution, there's another very low-cost solution, which is to identify the impediment that is preventing people from working, to recognize that every human has the capacity for creating value and being productive, and to remove that impediment so that all those people who were idle can become productive. We get the benefits of their labour, but especially, they get the benefits of the extra skill and the hope and the dignity that come from work.

In the national domestic context, it seems obvious to us that the role of the government is to remove those impediments and to then let people produce as they can. It's not generally the role of the government to provide assistance or replacement income.

We have worked our way in North America through that kind of line of logic in recent decades, but we haven't yet gone through a comparable transition in our thinking about development assistance. When we look at people in poor countries, we still reach too quickly for the solution that involves the gift, the charity, or the aid. There are clearly some circumstances in which this is appropriate. Humanitarian aid in times of crisis can be the difference between life and death, and is something we should certainly stand ready to provide. But it's not the solution when we see chronic, persistent poverty in poor countries, and we see people who are not productive and who are not acquiring skills.

The other thing that is revealing is that this is not something that represents a flaw of the people. For example, when someone from Honduras who was idle or who was working at a very low wage in Honduras moves to Canada or to the United States, the person comes to a new environment and earns much more immediately on arrival. So we don't need to look inside the people for the immediate impediment. We have to ask what it is about the environment that's holding everyone back.

The jargon economists use for the potential impediments is “institutions”. I don't like that language, because I think it obscures. I think the right language to use here is “rules”. Every society, every group of people, follows a set of rules that structure how people interact with each other.

Those rules are partly codified in law, but they're also instantiated in our norms about right and wrong.

The rules that a Honduran can get access to if she moves to Canada involve both the legal requirements for honesty, but also the prevalent social norms about honesty and about trust. The challenge in a country like Honduras that wants to reform is that it can copy the laws of Canada easily enough, but it can't copy the norms of Canada, at least instantly.

Even if people in Honduras know they would all rather live in a society with high levels of trust, where people are more honest and where trade can take place much more easily because of that trust and honesty, they're looking for a mechanism to escape from a set of rules that were bequeathed to them by a history of colonial imposition of near-feudalism in the early stages in Honduras and of persistent fear of opportunism and violence—fear by peasants of landholders who might take advantage of them, might repress them, and fear by landholders of peasants who might engage in land invasions and takings.

What the leadership in Honduras has concluded is that in that kind of circumstance, if the key is to develop norms of, for example, trust and honesty, sometimes a neutral third party can come in as the trusted arbiter and can help create the conditions of safety, which they can then use to build honesty and trust and engage in the process of rapid development, which they know they're capable of. The government has amended their constitution and passed a law to create the potential for what they're calling a reform zone, where in that zone, foreigners could come in and undertake some of these key conditions—create these key conditions that help establish trust and safety and help evolve the norms of honesty.

To go back to the point in the beginning, this is something that doesn't cost the foreigners anything. If anything, I think any foreign government that wants to be helpful in this project should immediately.... Someone asked earlier today: what can donor nations do to help? I said don't be donor nations. Don't think about giving money. That's not what's relevant. We heard in the testimony before that the money here is just a pittance compared to the value that can be created, but things like providing the seed of trust, from which broader social trust can grow, can be enormously valuable.

I'll give you one specific example of how this is playing out, and then perhaps we could turn it over to more general discussion.

The legislation providing for this special reform zone says that courts will be created in this new zone. Right now in Honduras the courts and the police are not trusted, and for good reason. Many of the police and courts and lawyers engage in bribes and do not enforce the law honestly. A lawyer told me once that when he is in a proceeding and the judge doesn't ask for the bribe, he knows he's in trouble because the other side has already bribed the judge and won the case.

So how can you escape from conditions where everyone knows this is wrong, but it's so prevalent and so pervasive and no one knows whom they can trust? One provision in this new reform zone is that it will have its own courts. The judges who staff these courts can be appointed from anywhere in the world, but Mauritius has agreed that its supreme court will act as a court of appeal for the new courts in this zone in Honduras. The informal agreement at this point is that the zone will compensate the supreme court through filing fees or whatever mechanism they work out, so that this doesn't impose any net costs on Mauritius.

But what Mauritius can do then is provide the neutrality and credibility of its legal system as the anchor, through the appeals process, of a new judiciary that can be put in place immediately in this new zone.

You might ask, why implement this just in a special zone? Why not do this for all of Honduras? The answer is that this kind of participation by a foreign body would be objectionable to some people in Honduras. Rather than say this is a measure that will be forced on all people of Honduras, what the government has said is that it will create a new place where this will be available to people, and if you as a Honduran citizen feel comfortable going into that zone and getting matched with an employer who might come and hire people in that zone—you might use infrastructure that is funded by investors looking for a return on their investment in the airport, port, or power system—you are free to go operate in this new environment, but it's not forced on anyone.

That possibility of choice in opting in is important not just for initial acceptability of this kind of change, but also because it means that these new norms and these new rules have a legitimacy that comes from universal assent to those norms that they never would have had if they were imposed on some people who didn't want them—not just norms but legal arrangements. The idea is to create the space and use the resources, which don't really cost anything but which can provide so much as the nucleus for creating the kind of opportunities that people have to move to North America to get now. Create that in the zone, and then as it succeeds, find a mechanism to let that system, if it is judged to be attractive to the rest of Honduras, spread throughout the country and hope it is a model for the rest of the world about how social reform can take place. And incidentally, how we can provide urban environments and opportunity for the billions of people who want to move into urban areas.

That is the venture. The example of what Mauritius has done is an indication of the new style of development assistance that a country like Canada could provide. With that hint of the possibility that things could be very different from what we are used to, perhaps I should turn it over to the members of the committee for questions.

4:45 p.m.

Conservative

The Chair Dean Allison

Thank you very much.

We're going to start with the opposition.

Mr. Saganash, please, for seven minutes.

4:45 p.m.

NDP

Romeo Saganash Abitibi—Baie-James—Nunavik—Eeyou, QC

Thank you, Mr. Chair. Thank you for your presentation. I appreciate that.

I have to tell you that I was sent the link just before the weekend, before leaving for the bush for fishing back in northern Quebec, and I watched you on video and the example you gave about Hong Kong. It was quite amusing having to watch you way up north in northern Quebec over the weekend.

First I have a very quick question. Is this idea of charter cities applicable to Canada and first nations in a first nations setting? How does it differ from the third party management policy we have in this country for first nations communities?

4:50 p.m.

Professor, Stern School of Business, New York University, As an Individual

Dr. Paul Romer

That is a very good question, and it's one that comes up in the U.S. context as well.

There are several elements in play here. One is the notion of autonomy, and giving some geographic space an autonomous system of government. We see things that more or less are like that with various first nation arrangements in North America.

The other element in this proposal, though, is the purely economic imperative of urbanization as the path to opportunity. Almost everything people do is more productive in a dense urban area. The only exceptions are things like farming or mineral extraction, which require lots of land.

The key here is not just to provide conditions of trust and opportunity and employment, but also all the benefits that come from a dense urban productive environment and living environment.

This zone in Honduras will be open to migration from all of Central America and Latin America—even all of the world. For example before 2008, a million people a year left Central America and Latin America to come to the United States. At a flow of a million people a year, this zone could get to the size of a city of 10 million people within about 10 years.

The difference in the legal environment in Canada, I'm sure, and the United States is that no one right now is willing to contemplate letting millions of people who want to move into cities come as landed immigrants or permanent residents in our countries. For a variety of reasons, we're not ready to contemplate that kind of inflow.

You could create a special autonomous region in Canada or the United States, but it wouldn't have a viable chance to become a city of 10 million people that is a global hub that can compete for the best talent of the future.

4:50 p.m.

NDP

Romeo Saganash Abitibi—Baie-James—Nunavik—Eeyou, QC

The assumption, Mr. Chair, is that the model of cities is the ideal development model for this idea—so therefore it assumes that rural areas, and small communities are not—and that if you want prosperity you need to move to a big city to get it.

Here in Canada we hear this argument all the time. It is aimed at people who are living in rural areas, on reserves, like most of my people. As someone who was born in the bush and has lived off the land and partakes in the traditional way of life of my people, the idea that I should abandon that connection to the land and home is not one I see as respectful of who I am as an aboriginal person in this country.

Would you agree that most of the social development problems that exist in rural communities, such as poverty, poor diets, substance abuse, and crime, also exist in cities?

4:50 p.m.

Professor, Stern School of Business, New York University, As an Individual

Dr. Paul Romer

We see all of those problems in both high-density and low-density environments. To be sure, we should always respect traditions and individual preferences that can lead to many different choices. But the challenge I see when I look around the world is that something like three billion to five billion people will want to move into cities in this century. That is more people than have moved into cities in all of human history. Without making a judgment about whether they're right or wrong, I think policy-makers around the world have to accept the fact that these billions of people want to move to cities. If that's what they want, the imperative is to try to create the conditions where they can do so in safety and health, and with opportunity, inclusion, and dignity.

There will always be people who work in agriculture, minerals, and traditional lifestyles, and live in less-dense areas. People may move back and forth. These are not lifetime commitments. Someone might spend a period of time in a dense area saving money, and then use it to move back to a less-dense area. But around the world as a whole, the reality is that there is a tsunami of urbanization coming.

That gives us the chance to create a number of entirely new communities under these new conditions, and to use that as a chance for reform and progress we wouldn't have if we didn't have the chance to create new communities.

This proposal does not have any immediate easy answers for problems we see in some rural communities. That is its own problem that deserves its own attention. But it is a proposal that can get us out of thinking about aid as charity and into thinking of aid as the costless facilitation of the development of these new norms that support modern, dense social life. Enormous benefit around the world will come from that kind of facilitation—benefit for people from the developing world who can take advantage of it, but also benefit for the people from the developed world who can finance things like infrastructure, outsource the manufacturing activities, and trade productively with these growing centres around the world.

4:55 p.m.

Conservative

The Chair Dean Allison

Thank you very much. That's all the time we have.

Mr. Williamson, you have seven minutes.

4:55 p.m.

Conservative

John Williamson New Brunswick Southwest, NB

Thank you.

I find your ideas interesting, but can you explain on a practical level where, if anywhere, these ideas have been put into place? I just heard about Hong Kong, but has China tried this, or other parts of Asia? Give us some practical ideas to bring it home and take it out of the world of theory a little bit.

4:55 p.m.

Professor, Stern School of Business, New York University, As an Individual

Dr. Paul Romer

Mauritius is a country few people know. I first started studying Mauritius because they used a zone like this to get out of the trap of extremely high barriers to trade and to open the economy up. The way they did it was that they created something they called a zone. All you had to do to be in the zone was self-identify and say that this firm was in the zone. If you said that you were in the export processing zone, what that meant was that you could freely import any goods with no limits, no quotas, and no tariffs, but you had to export all of your output. That was the one restriction. You couldn't sell anything domestically.

You could also operate under different labour law restrictions from in the rest of the economy. No firm was required to join this zone, and no worker was required to work in the zone. A number of firms entered the zone, so to speak. A number of workers, especially women, who had never had access to the labour market, got jobs in these firms that came in from overseas. Then eventually, some of these women became entrepreneurs and started their own local firms. As the Mauritian economy saw how beneficial trade could be for the people who engaged in it, they eventually lowered the trade barriers throughout the entire island.

It is a case of reform that people can opt into, which then gets accepted within the society as a whole as legitimate, because nobody feels that it was forced on them. This is why I first started studying the history of Mauritius.

The more relevant example would be Shenzhen, which is one of the four special economic zones Deng Xiaoping started, with the same view that he wanted to create places where foreign firms could be matched with Chinese workers. Rather than force that on any city or Chinese worker, he created some places where this could be done.

The president, Hu Jintao, recently referred to Shenzhen as a miracle, because it went, in about 20 years, from total GDP in the order of $10 million to a GDP of more than $100 billion a year.

It's the success of the Shenzhen model, both on its own terms and in terms of persuading the rest of China to adopt the market model and let foreign firms come in, that I think has persuaded developing countries around the world to look at special zones as the way forward.

4:55 p.m.

Conservative

John Williamson New Brunswick Southwest, NB

I agree with you.

You were saying that it was done not to force it on others in China. I'm not sure that the Chinese government has ever been fearful of forcing any of its reforms on its people. Was it not done, these four regions, as kind of a test case? The results have been, as you said, spectacular. The growth of wealth in China, as well as population, has occurred in these areas. Elsewhere, is it fair to say that there's been very little growth, or has it just not been nearly as dramatic as it has been in these areas?

5 p.m.

Professor, Stern School of Business, New York University, As an Individual

Dr. Paul Romer

What's happened is that the success that happened first in the special zones quickly migrated to other parts of China. They kept adding more zones, and then even some of the interior cities started to copy the arrangements in the zones. So now we've seen rapid growth throughout all of China, but following a model that was pioneered first in—

5 p.m.

Conservative

John Williamson New Brunswick Southwest, NB

Are there six zones now? How many zones are there?

5 p.m.

Professor, Stern School of Business, New York University, As an Individual

Dr. Paul Romer

They've quickly expanded to 14, and now it's hard to count.

5 p.m.

Conservative

John Williamson New Brunswick Southwest, NB

I appreciate hearing about some real examples that have worked.

I appreciate what you're saying about institutions and the reference to rules or norms. I'm curious, though. I think one of the challenges for countries like Canada is to work with nations around the world that are putting in place these rules and norms that are beneficial to growth and development. Is it Canada's role to encourage countries to embark on these zones, if you like, or these charter cities? Or is it really up to the home nations to decide on their own if they want to go in that direction?