Foreign Affairs Committee on May 9th, 2012

[Romeo Saganash, NDP, 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?

[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.

[The Chair, Conservative, Dean Allison]

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

Mr. Williamson, you have seven minutes.

[John Williamson, Conservative, 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.

[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.

[John Williamson, Conservative, 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?

[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—

[John Williamson, Conservative, New Brunswick Southwest, NB]

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

[Dr. Paul Romer]

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

[John Williamson, Conservative, 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?

[Dr. Paul Romer]

I think the initiative should always come from the developing economy, not from Canada or anyone like Canada or Mauritius. It has to be under conditions where this is a voluntary act by the developing economy, because again, the legitimacy is the central element in this strategy.

If in 10 or 15 years someone says this arrangement was not legitimate, that it was imposed, that it was a taking of some sort, then you could lose all of the potential benefits that are contemplated here. Instead of having the trust and respect for the law that comes from legitimacy, instead you'll get opposition and potentially even violence.

To anticipate a question that often comes up, I've been asked many times whether we create a zone like this within Haiti. My answer is that it would be very beneficial for many Haitians if they could move into a zone where conditions of trust could be ensured by something like the mechanisms that I'm describing, but right now the Haitian government is really subject to a military occupation. It's a humanitarian military occupation, but the government is totally dependent on security forces controlled by other governments.

It's hard to argue that any decision the Haitian government took right now to, say, create a special zone with special arrangement was a truly voluntary arrangement. Unfortunately, sadly, I just don't think this arrangement could be proposed in Haiti now, but it could be proposed perhaps in the future once there is a government in Haiti that has the power to do so.

[John Williamson, Conservative, New Brunswick Southwest, NB]

I'm curious to quickly get your thoughts on what the minimum requirements are. The government wouldn't even be democratic, but it would have to, for example, have a commitment to the property rights, rule of law, free trade....

What other elements do you think are vital to this growth model?

[The Chair, Conservative, Dean Allison]

If you could, just give a quick response.

[Dr. Paul Romer]

Sure.

I think one of the reasons why it would be good if Canada or nations like Canada, like other nations, participate in this is that they could set some standards and expectations. One that I would argue very strongly for is the notion of inclusion in the sense of equal treatment under the law. I think we should not tolerate places where, on a permanent basis, you have second- and third-class citizens with different legal rights.

[The Chair, Conservative, Dean Allison]

Thanks.

We're going to move back over for the last question of the first round.

Ms. Murray.

[Joyce Murray, Liberal, Vancouver Quadra, BC]

Thank you.

Thanks for coming to help us understand about this opportunity.

On a personal note, I want to congratulate the Stern School of Business at NYU for your commitment to the offbeat and the innovative. My son, Baba Brinkman, was commissioned to do The Rap Guide to Business by NYU, and spent some time with members of your faculty and your students.

I have two questions. One of them has to do with creating the space for opportunities and special development zones. That goes hand in hand with what Michaëlle Jean said would help in Haiti; it's really working with the government and not creating an über-government network of NGO and development money. I think this sounds like an exciting prospect, offbeat and innovative, maybe.

However, we also heard earlier from witnesses that the key is that some of the intangibles, some of the things that money can't buy.... We heard that Canada's help, if it's international development interest, should be about equitable growth and job creation, and not income-unequal job creation. It should be within a sustainable development framework, a total accounting approach.

Could you comment on how Canada can respect the sovereignty of a country like Honduras, which may not have a big commitment or capacity on those things, but still be making that a criterion of our assistance. That's one question, and I'll just put the second one out now also.

In terms of providing the seed of trust, I do have to comment that there are some things that Canada is eroding in terms of being an international beacon of trust and honesty. You may not be aware of it, but there is a big investigation by Elections Canada on potential systemic election fraud in the last federal election. There are other issues. The Auditor General publicly and the Parliamentary Budget Officer were talking about two sets of books, information not disclosed—

[Lois Brown, Conservative, Newmarket—Aurora, ON]

I have a point or order, Mr. Chair.

There have never been two sets of books, and the Auditor General said there are not two sets of books.

[The Chair, Conservative, Dean Allison]

I don't think it's a point of order anyway.

Continue, Ms. Murray.

[Joyce Murray, Liberal, Vancouver Quadra, BC]

This is about trust, and the Parliamentary Budget Officer did say that, so it's a concern that....

The scale at which we're seeing this in Canada, I want your comment as to whether that would affect Canada helping develop the norms for trust and honesty.

Lastly, if there's time, Haiti is developing a zone on the north coast like you're describing and potentially thousands of jobs. I'm wondering why you're saying that country might not be ready. If they are developing that, would it not be helpful to have some help with capacity-building on institutions and democracy?

Thanks.

[Dr. Paul Romer]

Like it or not, Canada is still a beacon of good governance and trust around the world. A sign of what's so admirable is the self-criticism and the investigations. Complacency about good governance would be a very bad sign, but rigorous attention to this is what it takes to maintain it.

In Haiti, the zone that's being proposed is not large enough to develop a major urban metropolis and may suffer, therefore, from the limits in scale and the degree to which it's really more of a private effort rather than an effort with a strong government that provides services that governments should provide.

The criteria are an interesting question. I think this assistance and legitimacy and moral authority that Canada could bring to help establish some new environment, some new effort, is something that shouldn't be granted carelessly. It's appropriate for Canada to set some criteria about inclusion, for example; that I think is so important. You won't participate if there's not a commitment to some of those things. But on the other hand, one also has to allow that ultimate decisions about how it wants to move forward have to come from the developing country.

So a country like Honduras can make a proposal for how it wants to develop, and then Canada could evaluate it seriously with an open mind, but then decide that perhaps this isn't one you want to participate in. But if not that one, there will certainly be others.

[The Chair, Conservative, Dean Allison]

Thank you very much.

That completes our first round. We'll start into our second round, five-minute rounds of questions and answers.

We'll start with Mr. Dechert, five minutes, please.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

Thank you, Mr. Chair.

Thank you, Professor Romer, for your appearance here today. This information is very interesting.

I was very struck by your description of the legal system in the special zone in Honduras that's mentioned in the letter you provided to us.

We've certainly heard from a number of witnesses through this study about the problems that developing countries have with their legal systems. Corruption in the legal systems tends to hold back the development of their economies. It seems as if you found a solution here.

First, how was the Honduran government convinced to go along with this, to essentially cede sovereignty over the legal system in a specific area of the country to judges and a court of appeal from another country?

Second, with respect to Haiti, we've heard a lot that one of the most significant problems in continuing the recovery from the earthquake and developing the economy is that there is a significant problem with the land title system in Haiti. I wonder if something like this could be a solution to that problem. Could you have an outside organization take over the land title registry system in Haiti and sort it out, so that business can begin to raise money based on mortgages on those properties?

I understand that part of the problem today is that, for every piece of land in Haiti, there are two or three or five people claiming title to it, and that retards the economy because people can't use that as leverage for capital to make investments in business. Maybe you could comment on those things.

[Dr. Paul Romer]

On the question of how, this arrangement was imagined, proposed, and put forward by Hondurans themselves. They sought me out because they could see I had been thinking about something similar, so they asked me to help them. But they saw this as a way out of the kind of trap they had been in, especially after this traumatic episode of a coup with the previous president, Zelaya. So there is a new administration that is committed to reconciliation and asking the hard questions about how to rebuild trust.

To be clear, they have in no sense ceded sovereignty of this land to any other kind of government.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

The judicial system...?

[Dr. Paul Romer]

Importing government services, so to speak, is not the same as granting sovereign status of Mauritius within this zone. It's just leveraging the credibility of their courts to help them solve problems in their judicial system.

It is possible that a similar arrangement could be tried in a place like Haiti. Honduras also has this problem. Many developing countries have the problem of lack of clarity in title. If people fear that the decisions about ownership are influenced by bribes, they will be very hesitant about allowing the judicial system to come to a final decision, and they'll be very fearful about attempts to resolve these questions. Delay might be safer than a resolution.

The key in Haiti, as well as in Honduras, is for it to be a body that is trusted and clearly neutral—honest and not influenced by any of the affected parties.

The other challenge is that in Honduras people will voluntarily opt into this arrangement. In Haiti, if you impose this as the dispute resolution mechanism for all the land in an area you want to try to use for industrialization, many people might become emotionally very opposed to the process because it's imposed on them and they feel it's illegitimate.

It's a very important point that the same person who would voluntarily move to Canada, if they were free to do so, might violently resist an attempt to impose Canadian systems on his or her community. It's just the reality of the way humans work that a choice to opt in has a moral significance that completely changes things, compared to the imposition of something against one's will. My fear about Haiti is that you'd have problems with legitimacy and violent opposition if it were imposed.