Poverty, misery, economic disparity and inequality are the salient characteristic of the modern world. These problems are one of the main concerns of the almost everybody and I was no exception to the rule. Though poverty sometimes seems to have a geographic pattern, in my view the problem of poverty is not directly related to geography, but it is closely related to the human capital of the people living within a "politically defined" territories which have been evolved through the ages of ebbs and flows of war and peace.
A quick look at the geopolitics and economics of poverty and development shows that the poverty and misery usually is confined in these political entities. In some instances, it can be seen that two states roughly within the same geography have two absolutely different standards of living. The bottom-line is that the poverty is not a natural or geographic phenomenon, but it is a human problem caused by humanity itself and could be dealt with human intervention. It seems that it is the cooperation and coordination failure which creates such problems or at least cannot prevent them from happening. Why is it so? And what can be done about it? What role legal and economic theory can play in dealing with these grave human problems?
In this short note, I see the status quo in international law and generally acknowledged theory of the state as the first culprit for having such a situation in place. The current system of international law is the debris of tumultuous history of wars. The suboptimal Nash equilibriua generated by the failure of cooperation and coordination along with innumerable prisoners' dilemma the humanity has been trapped into, in Westphalia in 1648, caused states to adopt the principle of sovereignty which normatively fortified states, isolated them and used the international law as a tool to reinforce their territorial sovereignty.
In this new geopolitical order states are defined firstly by their territories and secondly by the people. This is the territory which determined what laws should be applicable to the individuals. The policies and institutions of non-intervention and absolute sovereignty and territorial integrity are clear evidences for this claim. The peace treaty of Westphalia gave birth to the territorial integrity which afterwards made its way into the Charter of the United Nations. Within these territories each country has an absolute sovereignty, of which the governments tend to present a quite generous interpretation.
This abusive construction of the principle of territorial integrity has its roots in the double-degree agency problems the statesmen have in their international missions. The diplomatic mission participating in an international convention or meeting thinks of his own interest how to perpetuate his position and job in the career and forgets about the interest of the government he or she is representing and on the other hand, the government who chooses the agent/diplomat to send to the international conferences, thinks of its own interest how to perpetuate the government and his party in power; the forgotten man is the nation.
Though the states wanted to territorially define themselves and isolate themselves, the point is that many of the human problems cannot confine and accord themselves to the political borders, and they increasingly become global. On the other hand, Decentralized knowledge and the impossibility of central planning are among the biggest concerns of the economists from almost the outset of the modern economic thinking. In this paper, I want to analyze the implications of dispersed and decentralized knowledge for the size and structure of the state to see how the policy makers can take advantage of this local and decentralized knowledge to make a difference in the development studies.
The line of reasoning will be as follows: Economic misery has its roots in human mismanagement and misadministration. The optimal way of dealing with this problem is establishing knowledge-based economies. Since the human knowledge is dispersed, mechanisms that can involve everybody (free entry and exit) to voluntarily contribute to the public policy are the optimal ways of dealing with those problems. This model is a model which should be based on the free market for ideas. I will argue that one of the mechanisms to give the opportunity to citizens to engage and share his knowledge in the public policy is localism and creating strong networks among people. Given the flaws (coercion/involuntariness) and the problems of localism, one might take the idea of charter cities as an alternative way toward development; it might be considered as an alternative or a complementary way of the existing model toward development, as a constant and steady growth over a considerable period of time. The problem with this alternative idea is that it challenges the exiting conservative structure of international law.
Localism as a Mechanism of Exploitation of the Dispersed Knowledge
Let me start with the history to see how the dispersed knowledge in administering the territory caused even the greatest empires and states to abide by the special governance rules and structures. By a quick overview of history, we can see that even the most potent of empires of the world were restricted by the geographic and economic realities which played a very delicate role in their size and structure. Indeed, local governments have their roots in the long history of civilization and the rules of governance in large scale empires. As historians demonstrate; Cyrus, the Emperor of Persia, appointed the local officials for governing every region within the Empire. According to Herodotus, after conquering Lydia, Cyrus decided to appoint the ex-king of Lydia, Croesus, who was defeated by Cyrus as the governor of Lydia within the Persian Empire. Thereafter, Darius, the Persian king, did the same and appointed the local officials for the administration of the then Persian territories which at that time were constituted of about 20 provinces called “satrapies”. Though there might be a host of reasons behind these appointments, ex-post, it seems that one of the reasons was the difficulty of getting involved in the management of those vast and diverse territories without having a proper local knowledge.
As the above example shows, many of the empires who conquered a vast territory appointed the local governors for the administration of those occupied territories. This became a tradition in governance at least in the Middle East and the Minor Asia in ancient times. For instance, when Alexander conquered Persia, he made use of such a policy as well. The conquerors like Teymour Khan and Chingis Khan followed suit (again ex-post) partly because of the expertise problem and partly the common sense and intuitively known idea of the diseconomies of scale arising from such a big territory under administration, decentralized nature of the knowledge which made central planning impossible for them and would have frustrating effects on their territories and their strength of traditional sovereignty.
This continued tradition had its special advantages and economic justifications for those emperors. Although many of the ancient empires officially claimed that they had a universal sovereignty, save King Canute, they were well aware of the limits of their power. Van Creveled puts it this way, [because of] “the problems of time and distance as well as the limits of the information at their disposal, many emperors preferred to deal with entire communities – tribes, chiefdoms, villages, cities, even client-kings – rather than with individuals”. This insightful phrase is the gist of what I am going to say and almost perfectly shows how the case for local governments was established. This comment also shows that almost from the advent of urban life and civilization, how great empires with vast territories severely suffered from the transaction costs, agency problems and diseconomies of scale. Add to the scope of the country the problems arising from the lack of means of communication that the industrial revolution partly solved for their modern counterparts. These limits imposed multilevel or multilayer system of governance even to those ancient empires. The insightful lesson that we can take from history is that decentralized knowledge breeds decentralized government, unless you live in a body politic in which "La République n'a pas besoin de savants" (the Republic does not need the erudite).
Theoretically speaking, localism can promote the use of local and dispersed knowledge and contribute to the socio-economic development. Many of the adherents of localism argue that smaller governments provide a better context in which the citizens can have a better sense of community. Some of these proponents go farther and argue that the constitutional and legal rights should be context sensitive. These advocates of localism believe in a broader decentralized constitutionalism. They argue that the courts should respect the “geographical variations of constitutional requirements in the aid of community”. In addition, the existence of large number of local governments who are much more familiar with the needs of the special communities and certain localities, with the amount of services and consumption which is usually limited to their own jurisdiction increases the economic efficiency in the provision of public goods and certain utilities.
Localism can promote economic efficiency by taking account of the differences in preferences and cost differentials in the locally needed public goods. Therefore, it appears that the efficient level of output in local public goods seems to be variable in the local jurisdictions and likewise governments provide the better allocation of local services in a decentralized structure. Other economic adherents of localism argue that the very existence of the localities brings about plurality of localities and extend the opportunities of the citizens to move into better localities which provide the better allocation of services and taxes and eventually serves the economic efficiency. Tiebout was the first theorist who elaborated the idea of the “voting with the feet”. However, it seems that he overlooked some costs affiliated with his idea such as tremendous migration costs, externalities and asymmetric information, which adversely affect the outcome of the theory. All in all, these local governments play an extremely important role as a channel through which local knowledge channels into the federal level and makes planning in a central level a bit less onerous.
Unfortunately there were inefficiencies in the localism as well which could not bring about the desired result we might have expected to reach. But why do we see inefficiencies even with having local governments in place for centuries? The answer is in the inefficiencies embedded in the localism. Inefficiencies resulting from the diseconomies of scale, high costs of communications among many local governments, duplication of efforts and the forgone opportunities of network economic effect in a sub-optimally organized networks of local governments, existence of the commons in the regions, free riding problem, and problems arising from the taxation, transactions costs and hold-out problems hindered the local governments from flourishing and the long fought battle between home rule and Dillon's rule was resolved in favor of the latter.
Let's have a quick look at the history to see why this form of government could not be efficient enough. With the gradual evolution of urban life, consciously or unconsciously, some other problems and thereafter concepts came into existence; the concepts similar to annexation and incorporation in the history of urban life. The rising of these phenomena signaled that the network economic effects (having bigger entities with lots of individual components) prevailed over the benefits of the having small local governments.
First let's see why would people like to migrate and live in prosperous places rather than the isolated underdeveloped places? The answer lies in a concept known as network externality. Network externalities appear when greater numbers of users join to a network. This theory assumes that “the utility that a given user derives from a good depends upon the number of other users who are in the same “network” as is he or she.” This network can appear for example when the municipalities join together in a unified network to share their resources. Although this fact may generate some unintended consequences like diseconomies of scale, but it seems that taking the size and number into a serious consideration and not letting them grow more than necessary, this will increase the positive externalities of networking.
One of the best historical examples of network effects which caused some cities to grow immensely, is the city of Baghdad at the time of Abbasid Caliphate (Rome might be a good approximate to a western mind). At that time, the city of Baghdad had a position in the world comparable to world cities of today. Ibn-e-Khaldun describes the City of Baghdad as follows:
“[T]he town will extend farther and farther. Eventually, the layout of the town will cover a wide area, and the town will extend so far and wide as to be almost beyond measurement. This happened in Baghdad and similar cities. Baghdad included over forty of the adjacent neighboring towns and cities. It was not just one town surrounded by one wall. Its population was much too large for that, the same was the case with al-Qayrawan, Cordoba, and al-Mahdiyah in Islamic times. It is the case with . . . Cairo at this time, so we are told.” (Badi, 1988, p. 86)
This discussion of the growth of large cities such as Baghdad is similar in essence to what is referred today as the process of suburbanization, a phenomenon that in turn causes sprawl. With the growing number of districts within a country or a city, other problems come into being as well, i.e., coordination problem embedded in the decentralized and (more recently) separated power structure of the state. So from the above examples and economic history indications, one can see that neither large nor small sizes are optimal for the states/cities.
The further complication is that the size of the population of societies does not remain constant and increasingly changes with the fluctuations in the labor, capital and technologies, while the supply of the land almost remains constant. Furthermore, there exists an optimal size for the states. But who knows what that optimal size is? Therefore, the restructuring of the state will not mitigate the problems and if it does, further problems will arise (coordination problem & the like). As above examples show, many of the problems could not be dealt with either by centralization or decentralization. There must be a way out.
International Law and the Exchange of Authority: Towards Creation of Charter Cities
The idea of comparative advantage based on the division of labor and ensuing expertise simply states that each country can be good in producing or providing some special goods or services, and they can enter into a contract to exchange goods and services that can create new economic value for both sides of a transaction. Based on this theory and upon the demise of the zero-sum fallacy, rise of the marginalism, and new theory of economic value, we almost see the end to the beggar thy neighbor policies that the states pursued in the pre-modern era by waging extremely costly wars against their neighbors or rivals. These theoretical transformations gave birth to the new theory of international law, i.e., the economic theory of international law, the goal of which is to let the states to achieve their preferences with better and greater efficiency through exchanges of authority and transactions in Jurisdiction. This is a very good point to set the stages to establish our argument for charter cities. This approach to international law can explain how a metamorphosis in international law; i.e., from sovereignty based international law to market based international law can contribute to the economic prosperity and development of the nations.
Although, the economic approach to international law states that the states can do more efficiently by exchanges of authority and transactions in jurisdictions, we can push the argument one step further in the sense that nation-states exchange their sovereignty over the defined pieces of territory. This model proposes that to enhance efficiency, nations should bargain on their territories and hence this model supports the creation of a market for the national territories (specially barren and undeveloped national territories) so that the territories will go to their most valued use. This is roughly what the idea of "charter city" proposed by Paul Romer is.
First let's see what a charter city essentially is. The concept of charter city, as formulated by Paul Romer, is a city which is composed of three elements: host state, source state and the guarantor. The host country provides undeveloped lands, the source country or countries provide the residents and guarantor ensures that the charter of the city (which is essentially the constitution of the city) is enforced. The host country is supposed to ensure that it will not apply his internal rules and regulations on that specified undeveloped land and the charter will ensure that the basic requirements of rule of law will be in place. Notice that each of these countries has comparative advantage in goods, capital and services they provide for the Charter city.
Successful historical examples of charter cities are Lübeck in twelfth century, Pennsylvania/Philadelphia in the 17th century, and Hong Kong in the 20th Century, each with different stories which in this paper, for the sake of brevity is forgone. The argument is that if these models of the charter city achieve success, other countries will follow suit as other states and countries did in case of Pennsylvania and Hong Kong.
The difference between localism and the charter city mechanism is that localism is an attempt to involve everybody by creating incentives and increasing differential value of voting to increase the marginal value of voting to make it attractive for voter to become involved in the elections. Charter city is an attempt to provide an alternative pattern to the existing patterns of democracy and development to make the environment and context more dynamic. Charter city is an attempt to involve those who see it in their interest to involve and those who will.
Unfortunately, the principle of territorial integrity in international law was abusively construed by national authorities not to let nations to enter into a bargain on their territories while history documented several transactions transferring national lands such as Louisiana and Alaska purchase. The biggest problem in the way of such an idea is the double-degree agency problem in international law. As stated above, the government or the diplomats who are negotiating such a deal might have conflict of interest with the nation they are representing. Though the mechanism of checks and balances can mitigate this problem to a considerable extent, it can never eliminate it. And maybe this is the reason why many countries in their constitutions do not allow any negotiations on their territories.
The requirements of the modern complicated world with its extreme problems imposed on the isolated fortified states, requires more cooperation, coordination of the efforts and contribution of the capacities in which every individual state might have comparative advantage, to solve the problems of global magnitude.
The status quo is that there are many underdeveloped countries with vast territories under their rule and simultaneously there exists geographically small countries with almost fully-developed lands and in need of more lands. A salient example of an inefficiency caused by the "sacred", fortified boundaries is the example of Japan and Russia. Large population of Japan living on a bunch of small vulnerable islands while vast pieces of lands remains underdeveloped in Russia. It might be said that those lands are not inhabitable, but evidence shows that people even can make use of the swamps to live in if they do not have any better choice.
There is certainly tremendous amount of deadweight loss negatively affecting the lives of millions just because we drew some lines around us and made a lot of taboos around it, murdered and were murdered because of those usually fictive lines.
I know that the history of international law was a very sad one. And this history of wars which gave rise to the present extremely conservative international legal system, but the increasing realities may not wait for that conservatism of international law to vanish gradually. The population growth and the interconnectedness of this population will impose greater challenges on the international law than the immigration and other present environmental challenges. This time the target will be the very principles of international law.
As the last point, It should be noted that though the idea of charter city seems unrealistic and utopian, given the growing rate of obsolescence of ideas due to the accumulation of dispersed knowledge of the people through the virtual networks which connect the individuals from all over the globe, it will not be too far that everybody will see the flourishing of ideas which were considered too unlikely and unfamiliar. What seems à la mode today, will be obsolete tomorrow, special thanks and tribute to fiber optics, microchips/processors, satellite and internet.
