Is Economic History Relevant?

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Inequality Across the Globe

By:Alyssa Dizoglio and Franziska Meinherz.

According to the article “For richer, for poorer” in The Economist, socioeconomic inequality is one of the largest growing problems of our time. Unfortunately, is not a problem that will easily go away. The inevitability of inequality is more evident than ever. Comparing the first American Gilded age to the second, it would seem that inequality had diminished instead of increased. During the first Gilded Age, the wealthiest Americans, like George Vanderbilt II, had estates that were 300 times larger than the average American dwelling. However by the second Gilded Age, the gap had narrowed, and even some of the wealthiest individuals’, like Bill Gates, homes are only a mere 30 times larger than the average modern American home. However the improved living standards of the middle and working classes masks the dramatic concentrations of wealth held by the top 1% in America, a figure that has only increased over the past 30 years; the share of national income held by the richest 1% has doubled since 1980. Furthermore, the share of income going to the top .01% has quadrupled. It is hard to look at these figures and not see the inevitability of inequality.

While the concentration of wealth at the top is certainly staggering in America and many countries across the world, this does not mean that the entire world has become more unequal in the past 30 years. In fact, global inequality has begun to fall recently as poorer countries converge (catch up) with richer ones. In the 19th and 20th century, global inequality increased as richer countries industrialized, allowing them to grow faster than poorer countries. More recently though, that pattern has shifted and global inequality has started to fall despite the fact that inequality within many countries has only risen.

When inequality first started to rise after industrialization, people weren’t all too worried about it. Simon Kuznet suggested an inverse U shaped correlation, known as Kuznet’s Curve between economic growth and inequality saying that inequality first rises with the beginning of industrialization, but that it then starts to decrease because society wants social policies to be implemented. Kuznet’s prediction seemed to hold until about the 1980’s when inequality started to rise again. Despite the rise in inequality, politicians, economists and the general society remained largely unconcerned with the issue. Only around 2001 with the dotcom bubble and subsequent recession did inequality become a top political issue perceived as potentially dangerous. Not only did fairness become an important concept, but the possibility that inequality leads to political instability became obvious. This had already been proved in earlier decades in Latin America, which had long been the most unequal continent, and which also experienced much political turmoil throughout its history.

While some societies are more concerned about the potential of increasing inequality than others, the reality is that increasing inequality is inevitable without some sort of government intervention. The article suggests that the problem can be solved by prohibiting abuse of financial resources through cronyism, which is certainly true in areas such as Latin America. However, not even in these countries would this policy be enough to keep inequality from rising further on a global scale nor would it serve to lift the poorest of society up from the rest, especially when considering that in many countries, the US included, nepotism and other forms of corruption are not the main cause of inequality. It is very unlikely that without government policies regarding income distribution the problem of inequality can be solved.

Is America the Greatest Country in the World?

By: Luke Rebecchi and Jacob Beck.

“It’s not the greatest country in the world.” These words, spoken by WIll McAvoy, a newscaster played by Jeff Daniels on The Newsroom, could not have been more controversial. While Mr. McAvoy was trying to make a point that America has changed over the last few centuries, he took it a step further and essentially said that America sucks.

But is he wrong? Is this fictional big-wig news broadcaster incorrect when he questions the greatness of America? First, let’s start with what makes a country great, let alone the greatest. These factors will change country to country, mainly because people grow up in different places with different beliefs, leading to a different equation. Additionally, there is an inherent affinity to your homeland and for you, as a citizen, to believe that you live in the greatest country. For this task though, we looked at America in 5 different categories, to determine if it is, in fact, the greatest country: Democracy, Social Mobility, Children, Protection and Jobs.

Is America Democratic? Absolutely. Almost too democratic. Americans have an equal say in everything. Our lobbying system is one of the best around. People go to congress, say what they want, and either watch it happen or not, but we have the ABILITY to do that, and that is what matters. In a day and age where social media is the norm, people can start a message or a campaign in Florida and it could be in Oregon the next minute. We can start a movement and end a movement with the press of an “enter” key. Just look at this past election for example. The amount of people influenced by a clever meme or funny gif regarding one of the candidates was insanely high, but that is the day in which we live.

Key to the ‘bootstrap individualism’ that defines America’s ‘exceptionalism’ is the ability for those born in misery to attain great wealth, and those born in great wealth to lose it all. People in America, as it goes, succeed by the virtue and magnitude of their sweat and toil. The folksy ‘American Dream’ codifies the acceptance of and adherence to these principles. But, in light of income inequality reminiscent of the Robber Baron era, has America’s meritocracy been corrupted? In short, yes. Confirming much of the literature our class discussed recently, the work of the Georgetown University Center on Education and the Workforce consistently shows the return of a college education far exceeds a high school diploma. Further, amongst the most prestigious American institutions of higher education, only 3% of the student body come from families situated in the bottom income quartile, in contrast to a 74% representation of the top quartile. These elite, Tier-1 institutions pump out high earners that fill positions of power and prestige, but their composition shatters dreams of intergenerational social mobility. Wealthy adults regularly produce successful offspring, and vice versa for the poor. Only those fast asleep would view this as an ‘American Dream’. Furthermore, does the ‘American Dream’ include people struggling to find jobs? Probably not.

While Will McAvoy mentions America is 4th in the labor force, that is not necessarily a good thing. The only thing that says is that America is willing to work. We have people who are actively searching for jobs, awesome. The fact is, though, that many of Americans are unemployed. While we look forward to the day where unemployment will hover around 5%, we don’t know if that day is upon us. Sure, America has made strides since the beginning of the 1900s, now that we allow many more people to enter the labor force and encourage their participation. The desire to succeed has always been a bright spot for America, whether immigrants or not. People have a desire to work hard, keep a business running, and succeed, but right now, working in America sucks. One facet of America that isn’t too bad right now, however, is that of safety.

Though rarely a victim of foreign attacks (9/11 being the first foreign attack on American soil since the War of 1812), the American people pride themselves on their uncontested military power. With a military budget rivalling all other states combined, the U.S. regularly projects its hard power throughout the world, and does so with much enthusiasm from policymakers and (through outright deception?) the general public. In the words of former Secretary of State Madeleine Albright, “What's the point of having this superb military that you're always talking about if we can't use it?” Defining a country as great for its ability to project military power internationally is quite contestable. A number of empires throughout history have utilized force to attain strategic objectives, though we would certainly not consider Nazi Germany or the Soviet Russia as great. Greatness rests in utilizing that capacity wisely to protect American citizens domestically, and in accordance with, and for the protection of, basic human rights internationally. That the United States has not seen terror attacks in over 11 years speaks to our ability to protect our own. Quite conversely, the details of our most recent escapades in Iraq, Afghanistan, Yemen, and Pakistan question very seriously our commitment to international human rights.

Fiscal responsibility, is perhaps the most recurring theme in American politics. Beyond the simple extension of the frugal individual to the government as whole (a composition fallacy I will let slide), fiscal responsibility rests upon a moral argument that our children deserve a livable world. In this past election, both presidential candidates spoke often of sacrificing today for the well-being of our children and grandchildren tomorrow. So, extending the baseline indefinitely, how does the American child’s future appear? For one, he/she will live in a country that owes a bit of money. On first glance, a large debt frightens. More important than the size however, is the price of debt. Interest rates, the price of debt, are at historic lows, so it makes economic sense to purchase more. Hopefully, if and when interest rates rise, our policymakers will have the wisdom to change accordingly.

Beyond just debt, America’s children will have to adjust to a warmer and less inhabitable world, a stupid-expensive health-care system, and the rise of other states that challenge America’s preeminence. Each generation inherits a mess from the former, and only a fraction of it has been mentioned here. America has not quite abandoned its children, but her political intransigence will make their lives more historic.

Inequality and Future Growth (or lack thereof)

By: Jonathan Burns and Kyle Peabody.
Edited by: Nick Tourville.

Income inequality has been growing in America for decades now. For years, it was something people were aware of, but beyond the fact that “the rich are getting richer,” not much was known about the phenomenon. Now, new evidence is emerging that the level of inequality in the United States has reached a point where it could begin to hinder future growth (if it hasn’t already).

According to the International Monetary Fund, job creation and economic growth could be slowed by as much as a third due to the growing inequality in the United States. For years, many saw the growing inequality as a result of preferential tax treatment to income vehicles that “the rich” frequently benefit from, such as investments. Now that research suggests that the inequality that we have amassed could stunt growth, organizations such as the International Monetary Fund and Organization for Economic Cooperation and Development are lobbying for both changes to tax structure and spending programs to reverse the disparity of income.

Large differences in income can have many problems for nations, such as political unrest – be it violent uprisings in the Middle East or movements such as the Tea Party or Occupy Wall Street in the United States. Most economists – and both Presidential candidates Mitt Romney and Barack Obama – agree that a strong middle class is an important part of a healthy economy and drives economic growth. At the same time, most recognize that the growing inequality is coming mainly at the expense of the middle class. Without corrective policy measures, such as more fairness in the tax and spending code including reductions in loopholes and subsidies, there is likely to be slower job and economic growth in the United States, which coupled with the inequality itself, could spill over into social issues as well.

Indeed, while much of recent literature on the issue of income inequality has been negative, one must not forget that there is another side to the coin. Some economists have maintained that this inequality is not necessarily as bad as it seems. First, some analysts have questioned the actual data used. They argue that it omits in-kind benefits, nonsalary benefits, and taxes, which are disproportionately borne by higher-income families. Thus, they argue that the data is skewed and shows more inequality than there is actually is. Second, there is the argument that while acknowledging the growing inequality, the large increases at the top will benefit the rest of society as a whole. These benefits would include improved living conditions, technology development, and overall growth of the economy. Essentially, while the poor would remain poor, their lives would be better off than they were before. In reference to these rapidly growing incomes of the top 1% and the stationary incomes of the 99%, some appeal to the saying “a rising tide lifts all boats”. However, as described earlier, new research suggests this inequality has the potential to stunt growth, if it hasn’t already. With this stunted growth, there would not be any “rising tide to lift all the boats”. Rather, with the “tide” unchanged (or perhaps even lower), a small portion of boats would just become much bigger boats.

Lowrey, Annie. "Income Inequality May Take Toll on Growth." New York Times: October 16, 2012.
Harbin, Christine. "Income Inequality is Not a Problem: The Free Market is Making All Americans Richer (Debate)." PolicyMic.

What’s the Issue with American Schools?

By: Ryan Santana and Benjamin Virkus.

It comes as no surprise that American educational institutions are ranked poorly amongst the American public. Education reforms from the past decade have all fallen short of their goals: Quality schools are still not accessible and affordable, and America is still falling behind in the education department. There have been attempts made by the Obama administration, such as Race to the Top, to help the faltering states and schools; There have been promises made by Mitt Romney, such as slashing the federal education budget and using a voucher system, to help states and schools. Although it is unclear whether or not any policy has the ability to turn around American schools, what is clear is that America needs to revamp its educational system, and fast.

Obama’s Race to the Top has made education a competition. While the intentions of the policy are good, the results are far from that. Poor schools and states made up of largely poor school districts have found it hard to compete for the extra federal funding. Teachers have found an increased incentive to falsify test scores, and essentially cheat for their students. Another supposed remedy for education is charter schools. Charters schools are good in theory, but they fail to serve the larger needs of the community. Students who attend charter schools only perform marginally, if at all, better than their public school counterparts. Federal intervention and funding seems to be key to providing students from all walks of life equal educational opportunities.

What about Romney’s proposed plan? Romney would like to cut federal intervention to schools and provide vouchers to parents. A couple of states already have voucher programs and those states do not outperform or provide an above average education. Vouchers would only cover a fraction of what needs to be done. But why should the Government not be involved in education? Without Government intervention, schools might still be segregated. Government funding, while good natured, might not be the best option. Still, the extra funding might be able to keep impoverished school districts at the same level as their better-funded counterparts. Cutting the education budget and funneling funds elsewhere is definitely not the answer.

American schools are falling behind their international counterparts. America used to be home to some of the world’s most progressive institutions of learning, but now school is either too expensive or offers subpar education. Education is in need of massive reform and policy makers have yet to find a solution. No matter which side wins this election, Obama or Romney need to put pressure on states and schools to start providing for their citizens. America can lead again, we just need a push in the right direction.

Race Against the Machine: What You Should Know!

By: Nick Tourville.
Edited by: Wenqing Zhang.

The words of John Maynard Keynes, “’we are being afflicted with a new disease…(called) technological employment,’” refer to a new phase of human society, in which less people have to produce goods and services. According to the book, Eric Brynjolfsson explains why the rapid improvements in technology displace human labor, just like John Maynard Keynes predicted. There is nothing new. The 19th and 20th centuries were marked by waves of automation that drove us from a primarily agricultural economy to an industrial economy. Machines such as the plough and steam engine displaced jobs in certain sectors, but there were plenty of new sectors that were coming into existence that gave new jobs. Today, we are at another transition in society where automation may help us discover the 3rd industrial revolution, or it will just continue to displace jobs.

Technological progress, in particular the computer age, has such a high rate improve progress; therefore our skills, institutions, policies, and schools cannot keep up. New technologies substituted normal routine tasks that were originally occupied by humans. For example, virtual assistants and self-service machines are decreasing the need for human occupancy in assistant and clerk-like jobs. Additionally, computers perform the tasks that people in sales, logistics, and analytics used to do. One electronics company called Foxconn has even purchased 1 million robots to replace much of its workforce. Routine jobs originally performed by humans at this company, such as welding, basic assembly of parts and spraying paint, are now being accomplished by these robots. Additionally, computers may still be in an infant stage as evidence suggests that this exponential increase in computing power may continue for much longer. This could pose even greater problems because a growing population and fewer jobs mean a faltering economy.

While productivity continues and wealth increases at the rate which is greater than at any point before, the average worker is not doing as well as they should. The replacement of jobs is consequently causing real median income to fall; the last decade proved the first real drop in real median income. Furthermore, Real GDP Per Capita is growing much faster than real median income. This proves that the wealth is being allocated to the richest people in the country, but not allocated in average. Historically, increased output has been correlated with increased employment, but now the two are diverging (employment is not rising with GDP), as digital technology is becoming much more prominent.

Technological improvements are causing a widening gap in inequality some reasons. First of all, many industries tend to favor only a few individuals to get the largest proportion of wealth. Athletes, entrepreneurs, CEOs, TV stars, and financial executives have been able to take advantage of digital technologies and leverage their skills across the globalizing world. In fact, the average CEO in 2005 got 300 times more than the average worker is paid, which is an increase from 1990 when a CEO only made 70 times more. In addition, as automation substitutes routine tasks, the demand for skilled labor is increasing. This is causing an even greater gap between the educated and the least educated. Now, people are forced to be educated or they will loss their opportunity to compete with others; however, the people who are in the lowest level on the totem pole are in a terrible position to pay for educating. Furthermore, technology causes a great shift from labor to capital, which rewards the capitalists. The richest capitalists capture a greater share of income. Since the laborers spend a greater proportion of their income than the capitalists (capitalists have a propensity to save more of each marginal dollar than laborers), money is not being circulated through the system and creating greater inequality.
The unemployment rate is rising and the future that people are facing is not much better with technology. The core of the problem is that the skills of institutions, organizations and people have lagged behind the increasing technological change. As a solution to these problems, humans and machines have to work together to create even better ideas. Innovation is essential right now. The author of this book, Erik Brynjolfsson, recommends creative entrepreneurship as being the viable solution for everyone. Everyone can become an entrepreneur and creates small businesses everywhere around the world. Hopefully, the ingenuity of the human race will create the 3rd industrial revolution and jobs will be created. If not, technology will continue to displace jobs, and major shocks in the economy are to come over the next few decades. There needs to be a new plan to adapt to the changes that are taking place in our world either way.

On Education

By: Luc Shay and Fiona Maguire.
Edited by: Michael Kopelman.

A recent article in The Economist, “How Will the Candidates Tackle Schools and Colleges?” ties back to our studies on education. Until the 1970’s, the United States was a world leader in education, but has since fallen. Government policy, societal changes, and the way we value education has evolved. These changes have warped the system we have today.
The US began by building an educational system focusing on children. In the mid-1800s, the Common School movement emphasized the basics of education and led way in the early 1900’s for the focus of education to move from common schools to high schools. This is where students poured in seeking skills that would benefit them in their jobs. During this movement, the US surpassed Europe in education by allowing their system to be open for all. After World War II, higher education expanded to include college as soldiers returning home competed for skilled jobs. College became popular as people realized better education equaled an increase in yearly income at a skilled job.

Sixty years later, students still attend college with the goal of getting educated to obtain a higher paying job. However, in education today, not only are the students more competitive, but so are the schools. Now, schools are focusing more their reputation rather than educating their students.

With the expansion of the system, the government should have the power to redirect schools to focus on their students’ education. However, due to the government size and amount of money it deals with, they are unable to focus on specific issues like education. In the article, both Barack Obama and Mitt Romney discuss their views on how education should be reformed. Even though they stress the importance of education It is likely that the government will not address this issue. This is because of more demanding issues, leaving education an unresolved problem.
Government involvement has the potential to improve the quality of education in America, but has in the past created problems in the system. The government’s role in education has changed drastically over time. The government’s size, power, and involvement has created many improvements, but has also weakened other areas.

The government has hurt education through its prevalent approach of setting up laws and regulations that protect bad teachers. Many teachers are inadequate to begin with and continuously diminish the profession because government makes it difficult for them to be fired. Previously it was much easier to replace a bad teacher, but due to these increased laws this is becoming harder and harder to accomplish.
Likewise, where laws protect bad teachers, they also protect bad students. In the past, some people were discriminated against and not allowed into educational institutions. Today, the power of government has been used in reverse, as institutions must admit people based on their background. Extending education to more people is an improvement, but has become counter-productive in terms of creating a better educational system, as people are admitted to create diversity rather than on the student’s abilities.

The government’s efforts to make education more affordable may actually achieve the opposite. When the government helps pay for education, institutions have no incentive to keep costs low and instead raise prices, knowing that government will pay.

In many cases the road to bad education has been paved with good intentions. This article describes ways in which each candidate may improve the system. However we believe that maybe the best thing would be for them to simply back off. If the government was able to get out if the way, then America could regain its position as an educational leader. By strangling the nation with laws, regulations, and big government education is in a constant decline.

Has Government Intervention Been Good for China?

By Wenqing Zhang and Yannai Shmerer.

In Tyler Cowen’s August 2012 New York Times article, he describes the current issues with China’s economy and two differing economic views on what kind of economic fluctuations China may see in the near future. The two views he presents are that of Keynesian economists (those who follow the economic thought of John Maynard Keynes) and the Austrian field of economic thought created by Ludwig von Mises and Friedrich Hayak. Cowen explains that Keynesian economics are based on the idea that government activity helps create a certain level of stability within an economy while Austrian thought says that government intrusion often only complicates matters and does little in the way of creating stability.

The argument essentially boils down to whether or not governmental policy is beneficial or detrimental to economies. However, there isn’t one correct answer to this argument because every country’s economy is uniquely intricate and each possesses its own driving factors. The driving factor for China’s economy during the last half century (during which China has seen phenomenal growth) has been investment. Investment comes in several different forms, but the two that have helped China become a massive economic powerhouse have been government subsidies for certain businesses and subsidies for building infrastructure. These two forms of subsidies have enabled massive economic growth for China, but as Cowen points out, the return on these “over subsidized investments” becomes smaller and smaller, and China’s economy will slowly grind to a halt.

Keynesian economists argue that the Chinese government has the tools to fix this looming issue, by adjusting interest rates, changing state lending levels, etc. However, Austrian thought says that this will only create more havoc, and is not really a solution but a temporary fix if anything. It’s a similar argument that those against Ben Bernanke’s quantitative easing use. On the flip side, Austrian economists don’t really offer their own solution, merely an explanation of what they believe will happen if the current trend continues.

There is a common belief that the more balanced an economy is, the less likely it is to see massive highs and lows in its output. If one sector struggles for some reason, there are other sectors to keep the economy out of trouble. It seems that China’s economy is way too focused on one sector and it needs to branch out and branch out quickly. Perhaps an investment in social programs would help stimulate the soon-to-be-stagnant economy and keep consumption at a reasonable level. Except, the only issue there is the Chinese government’s notorious relationship with its people.

Introduction to the Resource Curse

Image credit: "The Lighter Side: Government Reform"

By: Jonathan Burns and Ryan Patel.
Edited by: Adrian Nardella.

Surprisingly, the growth of resource-rich countries often is more stagnant than of countries without an abundance of resources. This situation is referred to by economists as the “resource curse” or “paradox of plenty”. Essentially, it is a situation in which countries with a significant amount of resources experience stunted growth and sometimes even contraction. This ironic situation transpires when the resource-rich country begins to focus all of its energies on a particular industry. In overspecializing on one industry, a country often chooses not to devote as much of an interest into other sectors of its economy. In addition, the lack of economic growth is exacerbated by the volatility and swing of commodity markets. Furthermore, without a sound political structure, the dispersion of wealth fails to reach the areas of the economy that benefit long-term growth.

In the article, “Resource Rich, Cash Poor”, Joseph Stiglitz highlights this problem in reference to the new discoveries of natural resources in Ghana, Uganda, Tanzania, and Mozambique. Stiglitz offers potential solutions that these countries would need to avoid this “resource curse”. Among the solutions he argues for are: ensuring transparency between the government and the citizens, renegotiating contracts that give a disproportionate share of the resources’ value to foreign companies, and using revenues from the resources to reinvest in weak sectors of the economy. Specifically, a government ought to focus in on the idea of reinvesting in one’s own economy. While a particular “resource-rich” country is fortunate to have a comparative advantage in a specific resource, Stiglitz argued that this is not enough. What these countries need is a dynamic advantage, or as Stiglitz referred to it, “a comparative advantage in the long run”. South Korea and its comparative advantage of rice can be used as a compelling example. Indeed, had South Korea only stuck to their agricultural strengths, they would probably not have the strong infrastructure and technology seen today.

Although, Stiglitz accurately identified a couple solutions for resource-rich counties, one ought to realize it is easier said than done. How exactly can we convince a poor country, such as Ghana, who has recently discovered natural resources, not to fully invest everything into that resource and then reinvest the revenues to further maximize profits? Even if there is great transparency, and even if the citizens have a say, what is to say that they too wouldn’t want to reap all revenues from that fortunate resource. Intuitively this seems like it could be a problem as it is basic self-interest to always want more and fully maximize an opportunity. With this said, one potential practical solution was identified in the New York Times article, “Poor Countries, Rich Resources”. The article highlighted the actions taken by the World Bank in Chad. According to the CIA World Factbook, the agricultural industry employs roughly 80% of Chad’s labor force, contributing over 50% to the country’s GDP. In order to disperse wealth to other areas of the economy, the World Bank developed a plan (that Chad’s dictator agreed to) in which revenues are to be directly spent on health, education, and infrastructure programs. The plan is to be overseen by the World Bank and a committee of citizens; not those who hold power in the agricultural sector.

Perhaps an additional solution could be applied to the concept of “charter cities” recently discussed in class. With a charter city and the potential for future growth to spread from the city to the host country, foreign investors may be inclined to invest in the surrounding areas outside the county. Further, and perhaps most importantly, the host country would be more likely to reinvest some of its own revenues from the natural resources to other areas of the country to make the country more appealing to other industries and capitalize on the potential spillover effect from the charter city. In all, resource-rich countries need to consider potential solutions and how to practically apply them in order to savor and capitalize and their fortunate resource advantages.

Deliberative Democracy: A Feasible Solution for Reforming Societies

By: Nikki-Lynn Marshall and Luc Shay.
Edited by: Alyssa Dizoglio.

Gianpalo Baiocchi’s paper ‘The Porto Alegre Experiment and Deliberative Democracy’ discusses the political theory of Deliberative Democracy and its proven success in the city of Porto Alegre, the capital city of Rio Grande do Sol. Deliberative Democracy, a concept first introduced by Joseph Besette, is a modern form of democracy based on public collaboration and deliberation. It differs from traditional democracy through its use of consensus-decision making and majority rule. Although this alternative political system boasts numerous advantages, many of which were seen by Porto Alegre, it is important to note that the success of such a radical system of government is limited to small cities and towns as a result the many practical issues that would arise if the model were to be implemented into a large city or nation.

Porto Alegre presents a model of how deliberative democracy can work if it is implemented properly. The city adopted the new political system in 1989 under a 10-year plan. Successful aspects of this implementation included both neighborhood-based deliberation and a parallel organization set up to operate alongside a municipal council. The system was found to produce significantly superior outcomes in comparison to traditional democracy. For example, allowing citizens to participate in political decisions lead to more fair and rational decision-making. The dispersion of political power lead to progress that reflected the public’s desires rather than those of a small group of people who maintained all of the power. Including common citizens in political decision-making led the government to discuss critical issues that may have never been discussed if it were not for including the common voice. For example, during the 10-year plan, sewer and water connections in the city increased from 75% to 98%. Similarly, the number of schools in Porto Alegre has quadrupled since 1986 (World Bank). By giving a voice to the people that are most affected by government decisions, critical issues are resolved in a way that benefits these people, as opposed to having the same issues influenced by political corruption or ploys for power. The biggest proof of success however is that, since the completion of the plan in 1999, 100 other Brazilian cities have now adopted similar political systems.

While there are many advantages of deliberative democracy, the system works best within certain parameters. If the model were implemented, for example in a much larger city or even a nation, many problems would likely arise. One problem is that the large number of opinions would make the whole deliberation process less efficient. A second problem is the issue of expertise. In traditional democracies professionals understand the realm of politics in which they must operate, they understand the different laws, regulations, and workings of the political system, and thus can at times get things done more effectively. Lastly, a disadvantage that Baiocchi points out is that, even though deliberative democracy helps to create beneficial institutions, there is no quality assurance once they have been created.

Despite the few practical disadvantages of this model, in the correct environment the system would benefit society as a whole, as well as create a more efficient, modern way of government, as has been the case in Porto Alegre. As Porto Alegre’s government continues to operate under a system of deliberative democracy it will be interesting to track the long-term results of such a system in contrast to traditional democracy as well as in contrast to other new age development theories such as charter cities.

See Also:
‘The Porto Alegre Experiment and Deliberative Democracy’- Gianpalo Baiocchi
‘New Ways of Deepening Democracy: The Deliberative Democracy’- Carmen Sacho
‘Daring democracy -- Porto Alegre, Brazil’- Rebecca Abers

Are Charter Cities a Good Idea?

Image credit: Tim Marrs, published Dec 10th 2011 "Hong Kong in Honduras" The Economist.

This blog post was co-written by the entire class in an hour and a half in Google Document on September 13, 2012.

Economist Paul Romer, in his TED talk, presents how countries create necessary opportunities for economic development without radical change through his concept of charter cities. Charter cities offer an innovative vision for addressing poverty in developing areas by creating a foundation for improved access to jobs, education and necessities.  To change these societies, we must change their institutions.  Institutions are the formal and informal enforcement of laws, customs and norms that govern how a society works. A charter city would be developed on uninhabited land, governed by its own rules that set a precedent for international partnerships to explore investments and provide housing for foreign and native people.

Benefits of charter cities will be realized by both the host country and its investors. The host country will benefit from the development of infrastructure and decreased emigration, while investors will benefit from a new market (these investors will likely be private, since countries would not want to be viewed as imperialistic). The rules of the relationship between the host country and investors would be set forth in a treaty. In theory, this would lead to efficiency and sustainability along with minimal conflicts between governments and citizens. This could be the next step to improving the quality of living worldwide, as it allows a great choice for people everywhere and includes positive aspects of globalization.

Charter cities may reduce poverty in the long-run if they are able to overcome many practical issues. Conflicts of interest can create problems. Foreign investors, interested in their own profit, would build the infrastructure.  Will they create the correct public goods necessary for agreeable living space? Or will they only be interested in extraction of resources? Centralized urban planning is notorious for its inability to create vibrant cities; it is essential to balance quality civic amenities and commercial space to create attractive infrastructure and institutions. How will charter cities take local cultures and customs of the native people into consideration? Will these clash with the foreign immigrants who would move into a successful city?

Romer intends to create cities for emigrants from poor countries, but by multiplying the destinations, the problem of “brain-drain” isn’t solved.  Romer claims that the first immigrants will not get rich but that their children will have the opportunity to succeed through education. These cities may or may not actually offer the promised improvements.

Any place that promises investors quick growth is subject to the problems of abandoning failed ideas. Batam, an island near Singapore is filled with half-built hotels and other unfinished infrastructure since investors left when they ran out of money to finish their projects. Thus, Batam has become poverty-stricken without hope of future development. In many developing countries, like Honduras, governments are unstable and cannot provide security to foreign investors. A coup might end the special development zone, therefore chasing all investors out of the country.

Other factors that might hold a city back include its design, location, and relative industry.

On September 4, 2012 Honduras signed an agreement for a public-private partnership with several investors including the U.S. development firm MKG Group to start work on a city within 6 months.  This, thus is about to become the first planned site of a charter city. Will it live up to Romer’s hopes? Or will it become yet another impoverished urban area?

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