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Amy Chua’s World on Fire and Free Economic Zones

April 27, 2009

But of course democracy lends some voice to those who have legitimate grievances. It is undeniable that, in a large number of obvious cases, democratic politics have provided a check for a nation’s citizens against the depredations of a small ruling elite. True—but it is also indisputable that in many poor nations democratic reforms have led, not to prosperity and stability, but to violence and plunder, particuarly when governments grafted these reforms on to an economy already dominated by plutocrats and their cronies.  That is the compelling thesis of Chua’s 2003 book, World On Fire, a somewhat rambling academic investigation into the ethnonationalist movements that came into power across the developing world during the 1990s. The outcome of these movements is a grim nut: capital flight, increasing poverty, famine, rape, mutilation, pillage, murder, tyranny, a record that would even make Stalin blink. In this, Zimbabwe, Rwanda, Indonesia, and Serbia are in the vanguard—and all of their horrors, Chua emphasizes, were born from majority rule.  I’m late coming to the book–I only read it last week–but it ought to give pause to those advocating for establishing free economic zones in the developing world. Here, as in the cases Chua mentions, the institutions of democracy may in the end threaten prosperity. Once established, any success in a free zone will remain vulnerable to the democratic means of plunder. Resentment, demagogues, economic success–my guess, with a lot of ins and outs and what-have-yous, is that democracy creates an unhealthy dose of regime uncertainty for a fledgling zone.  Only Mohammed bin Rashid Al Maktoum could plant the seeds for Dubai. But we shall see. 

Chua identifies three conditions that have catalyzed this democratically motivated plunder in the past: (i) crony-based markets controlled by a disproportionately prosperous ethnic minority, (ii) an impoverished, and therefore resentful indigenous majority, and lastly (iii) a political marketplace for demagogues to shill their vengeful policy.

Land-loving free economic zones, beware the demos.  

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3 Comments
  1. April 27, 2009 11:32 pm

    Indeed, this is a difficulty I alluded to but did not explicitly mention in my comment on the aforementioned post.

    But yeah, a FEZ *cannot* work unless you have strong contract law — i.e. you *can* make that 30-50 year lease.

  2. May 2, 2009 11:15 pm

    In support of your point, there was a political backlash against the privately-developed 200+ sq mile Freeport venture in Grand Bahama. This venture, launched in 1956 in the waning days of the colonial era, flourished throughout the 1960s. Yet the success provoked resentment and animosity. The project was seen as an enclave of privilege for foreigners, and some of the freedoms granted the developer were taken back when a more populist government took power.

    A success-sharing approach to free zone development can ensure different outcomes. In cases where government-owned lands are put up to bid for private free zone development, the terms of the concession can provide for build-operate-transfer (BOT) conveyance of the developed area over an agreed time to local stakeholders (including voucher funds for the surrounding community, and enhanced pension funds for the workers). BOT concessions have been used for free zone development in Turkey as well as for large scale infrastructure projects (power plants, roads and airports) in many countries around the world. They are a tested way to align the incentives of international investors and influential local interests in ways that greatly lower political risks.

    Openworld (www.openworld.com) has been active in promoting such projects and in developing “quickstart” scenarios for success-sharing zones that lead to skills and job creation in areas now suffering from misrule. This helps ensure a final form of insurance for land-based free economic zones — the more such zones exist, the greater is the competition to ensure safe and liberal business climates.

    Best,

    Mark Frazier
    President
    Openworld
    “Awakening assets for good”
    @openworld (twitter)

  3. Mike Gibson permalink*
    May 5, 2009 7:13 pm

    Very insightful thoughts Mr. Frazier. Thanks for sharing them. I suppose it’s the problem of regime uncertainty applied to economic free zones, demonstrating how important trust is for this kind of market to develop. Your approach has great appeal, and I’d like to investigate it further. Thanks again.

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