Reuben Abraham : SEZs could help drive development in the provinces

The CEO of the IDFC institute and Advocata adviser Dr Reuben Abraham says  that special zones that allows for rules of the economy to be experimented with may provide the way for rapid regional development in places like Hambantota and the North and East of Sri Lanka.  He was speaking to Advocata Institute’s inaugural podcast series titled Advocata Radio.

Following are excerpts from the podcast as published on the Daily Mirror.

Dr Reuben Abraham is the CEO of IDFC Institute, a mumbai based think and do tank working on the political economy of public policy and reform. He is also part of a number of influential think tanks and Institutes around the world including New York University, Legatum Institute and Council for Foreign relations. Dr Abraham spoke to Advocata Institute’s monthly podcast on the challenge of urbanization in the developing world as well as ideas on how to think about Sri Lanka’s megapolis plans. 

Q You said your institute works on the political economy of public policy, explain to us what that is.

Our underlying premise for that is most of what is to be done is either well known or with enough smart people in this room it’s quite easy to figure out. The problem with public policy, often times is that we just don’t know how to implement, how to execute what we know. So in that sense we are trying to shift the focus away from a technical discussion of public policy to a political economy discussion on public policy. A shift away from the ‘WHAT’ of public policy to the ‘HOW’ of public policy.  For each instance you have to take a completely different approach based on your analysis of political economy of a given situation. So where are the benefits? Who loses? You need to figure that out.

Q:We are currently at a stage in the world, where roughly half the population is living in urban settings. We are seeing rapid urbanization taking place particularly in our region and in China. What are the key issues to consider, when we think of urbanization?

I think it’s important to look at the long run trends. If you look at 10 000 years’ worth of history you will discover very quickly that mankind has primarily been a rural species. Now in 2007/2008 something dramatic happened which a lot of attention was paid to mainly that the world became over 50% urban. And for the majority of history up until about 1800 the percentage of people living in urban areas was basically 3% or less. And now since 2007/ 2008 it has gone over 50% and it is expected to climb to about 80%. This is the trajectory we are on. We are basically marking the movement of the species from being a primarily rural species to a primarily urban species. The real challenge here for all our countries is that almost all the urbanization you are going to see in the next 30-40 years is going to be in developing countries but, very specifically in south Asia, China and Africa. That is challenge number one and challenge number two is that is the time frame you have because this is not a reversible process. It’s not like you can command people to go back into the villages because many people from the Chinese onwards  have tried that but it has never worked. It is basically an irreversible of humanity’s journey of being a rural species to an urban species and there is a limited window in which something could be done.

That is why there is urgency and that is why all of our countries need to pay way more attention to this problem than they have and if they don’t look at it from a historical point of perspective you have to look at it from a job-generation and poverty reduction standpoint. 

Ultimately all non-agricultural jobs are generated in cities and productivity growth of any economy demands that people will move out of agriculture and into other sectors and all of the jobs in those sectors are almost entirely created in cities. Cities are where poverty goes away. If you look at the most recent numbers out of China you would see that less than 2% of china’s urban population is actually poor. Which means that almost all of China’s poverty is now rural.   

Q: There is also the complaint that rural development is getting ignored in all this talk of urbanization. How would you respond to that? 

I’m not a huge believer in this sharp dichotomy between rural and urban because, what you typically see is that when a country grows is that they begin to fold into each other. Keep in mind the fact that when I say urban I don’t mean Colombo or Bombay I mean depending on the definition you use could be as little as 5000 agglomerating together. The key is you need economies of scope, economies of scale and economies of agglomeration. Those are created at these sort of population levels, that’s the primary argument. In many ways rural development to a very large extent depends on urban development so, I don’t necessarily see the dichotomy between the two. I think if you develop your urban areas then by definition you also develop your rural areas.

Q: Sri Lanka is pursuing this grand idea of a western province megapolis, but when we talk about urbanization in Sri Lanka we tend to talk about physical infrastructure development, transport, and zoning and not enough is spoken about the overall rules of the economy which has an impact on urbanization. What would your advice be for Sri Lanka’s megapolis plans?

Yes this is a classic problem not necessarily in Sri Lanka, its everywhere. When we talk about urbanization we are talking about the urbanization of people not the urbanization of places that is where the central dichotomy lies.

However, the underlying logic of the the Western province megapolis is a fairly decent one simply because close to 70% of global GDP just comes from about 40 urban mega regions of the world.  Mega regions are areas that have more than 100 billion dollars of GDP. The biggest mega region in the world still remains in North Eastern corridor of the United States which is the Boston to Washington corridor going through New York and the tri-state areas through to Silicon Valley, the eastern seaboard of China all of these are examples of large urban clusters. I suspect that this is the underlying logic of what is going on in Sri Lanka.

I think the problem in all of this is people are making an assumption that the rules don’t matter. That somehow in Boston all you needed to do was basically create an announce of policy that you were going to generate this huge corridor between Boston and Washington and suddenly economic activity would take off. That is not the point, the point is actually you need the change of rules in the first place.

This is an argument that I’ve always made when people talk about smart cities using Singapore as a paragon for instance. But how did Singapore get to be a prosperous place or how did Switzerland get to be a prosperous place before the advent of the internet. Clearly it has nothing to do with the internet, obviously technology helps but, it is not the reason why something happened. Something happened because the rules were fundamentally changed. Coming up with a megapolis idea absent of changing the rules is not going to help any. There needs to be a change in the rules.

If one thinks about is as a special zone where one can basically change the rules then that idea has more legs, though if that is the model the government wants to follow I would argue that Colombo is exactly the wrong place to try it in because there are massive interests already in Colombo who are going to oppose every change of rules that any ruling entity can come up with.

Sri Lanka is experimenting with in a limited way with a special zone for rules change with Colombo Port City, at the doorstep of Colombo.   Why wouldn’t Colombo be a good starting point?

Let’s use the analogy of software operating systems in computers. What we are basically talking about is that say Windows NT is a broken OS and say a Solaris is much better and a much more robust software – it’s a much better Operating System.  The easy way out here is to replace the broken software with a better piece of software.

But Anybody who has worked in an office knows just convincing people in a department – let alone a city – to move from what they are familiar with to an unfamiliar operating system is a very hard task.

So changing  the operating system has to necessarily have two conditions in my opinion. First is they have to have meaningful scale, it cannot be done at village level, it has to be done at least at city level. The change that you get is meaningful that is number one.

Number two is the unit that you’ve picked, whatever scale that you’ve picked it has to have the political economy that works in your favor. For instance if you look at the Chinese example keep in mind the fact that the easy solution for the Chinese would have been to import the operating system of Hong Kong and reboot the entire country. That was clearly not feasible even in a commanding and controlled economy like China.

Keep in mind they did not try to change the rules in Beijing or Shanghai. Instead of that what Deng Xiaoping and his colleagues decided to do was that, they found this little town on the pearl river delta called Shenzhen and they demarcated a certain area and they changed the rules there. And then once Shenzhen became successful the rest of the country wanted the same rule change.

Q: This is about Special Economic Zones or Free Economic Zones. Port City is billed as a place where a Dubai Financial centre style arrangement is going to be experimented on.  But if you want a city outside of Colombo, we do have an opportunity in Hambantota, where lot of unused infrastructure already exist.  

I don’t think the Dubai financial center is the right example to pick simply because, there is not enough scale there. Of course Dubai can afford to do it because it’s a city on it’s own. So it does not have to worry about the massive spillovers that can get generated from a big city etc. but, if you are talking about countries with those concerns then I would certainly argue that the scale has to be bigger.

Perhaps Hambantota is a good model to look at assuming that there is genuine thought given to wholesale reform and not just have it as a tax give away. That is the other problem you see in a lot of these other places that a lot of the reform tends to be in the form of tax give away which is I will give you all these concessions if you come here.

And I don’t think that’s right model to use. Paul Romer the NYU economist has an extraordinary two part test to test whether something is a concession or a reform and suspect that you can subject Hambantota port project to exactly the same test. The first part of the test is can you basically give this immortality what I mean by this is that, the reform that you have undertaken there , does it need to be a time bound reform or can it basically be given immortality, can it be given to run forever.

For instance a 10 year tax holiday is by definition a simple concession it’s not a reform, it’s not genuine reform. The second test is geographical which the reform that you’re trying out, or the little change of rules that you’re trying out, does it need to be restricted to this particular area that you’re trying out in or can it be expanded to the rest of the country? And if it turns out that you need to restrict it to just that area then chances are it’s a concession and it’s not a reform. Whereas if it could be taken to the whole of Sri Lanka then it’s clearly a reform.

That is the test one would basically use and I actually think there is another candidate for this sort of special zone in Sri Lanka which I haven’t heard been debated at all which is the northern provinces. Because the Northern provinces badly and desperately need economic development so the government can be seen as making a huge concession towards the people in the north who have been suffering for quite some time and so on. Then use this change of rules in the Northern area and use the proximity to India as a catalyst to basically drive the change. In my opinion that is an extraordinary possibility that I don’t see much conversation about. Obviously I don’t know the internal political economy situation well enough to comment but, it would seem to me at least as a technical point it’s something that should be discussed.

Q: Related to this, economist Paul Romer introduced the idea of Charter cities, where he advocated a wholesale import of a rule set. He argued that if potential foreign investors could have rules that they can trust that would be the driving force of investment?

On charter cities one needs to be very careful on how one thinks about it. If you are a small country then it becomes easier to make the first argument that Paul was making which was the argument that an external sovereign will guarantee the rules of the country. Which is an easier sell if you are a small and very poor country. 

But for most countries I think it becomes much harder to invoke this idea of outsourcing sovereignty to a third entity. Therefore I think a much better solution would be to employ a domestic version of the charter which pretty much what I’m describing.

To create these zones inside of a country guaranteed by the sovereign of the country. It’s basically the difference from a Hong Kong and a Shenzhen. Basically Hong Kong had an external sovereign guaranteeing the rules of the game and Shenzhen had internal sovereign guaranteeing the rules of the game. I think the right approach is to have the Shenzhen model which is to have an internal sovereign guaranteeing the rules of the game.

Q: What is your sense of Sri Lanka’s place in the global development community. Sri Lanka has long being talked up as a place with enormous potential, yet FDIs doesn’t seem to come through to the levels expected.  Are we expecting things  too much, too fast?

Not really, I mean you are right keep in mind the fact that when Lee Kuwan Yew took over Singapore, Sri Lanka was the model and he wanted Singapore to be like Sri Lanka. There is no question that Sri Lanka has lost an enormous amount of time while trying to figure it’s internal politics out.

Sri Lanka doesn’t register much in the international development community for two reasons. One is it’s too small and the other is it’s too rich. Its that very interesting combination because if Sri Lanka was actually very poor then a lot of people would take notice but, Sri Lanka is not very poor. Sri Lanka is well into middle income territory. I think it’s the combination of lacking size to be of interest to big investors

These are disadvantages that exist there is nothing you can do about it. But, I think the way to think about it is if Singapore being a backwater swamp that nobody wanted, could turn itself around to what it is today, I don’t see why Sri Lanka should be any different.

I think it’s fundamentally a question of the rules and I think it’s a lot easier to change the rules in Sri Lanka than say, in India. One must pay a lot of attention to changing the rules how to change the rules.

In the ‘How question’ I think these ideas around the western mega polis, special zones around the Hambantota area and even the idea I threw out which was the Northern & Eastern territories of Sri Lanka also should be considered because those are the ways in which you could change the rules because I suspect changing the rules in all of Sri Lanka is going to be a lot harder.                       

This article is part of a series of interviews with Public Policy experts hosted by Advocata Institute, a public policy think tank based in Colombo.  The longer version of these interviews are available in podcast form on www.advocata.org/radio