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Dr. Paul Romer is an economist. He made his initial reputation in the economics of technology. At least, that's where I first heard of him. Some years ago, I read David Warsh's book "Knowledge and the Wealth of Nations" where he explained Romer's idea that the classic fundamentals of production - labor, capital, and natural resources - were insufficient to explain what was clearly happening in the world. Romer's seminal 1990 paper showed that knowledge or technology is also a fundamental of production and so the pantheon should be labor, capital, resources, and technology, which makes a great deal of sense to people who lived through the internet era. We must take Dr. Romer with a grain of salt, however, as he is from the Chicago School of Economics, home of Milton Friedman and monetarism, also known as "trickle-down economics," or as George H.W. Bush so famously characterized it, "voodoo economics." For those who skipped class that day, monetarism doesn't work. That said, Romer does not appear to be a monetarist. Romer's project With a critical frame of mind, let us take a look at Dr. Romer's newest project, Charter Cities. What, you may ask, is a "charter city?" To quote wikipedia, a charter city is a city in which the governing system is defined by the city's own charter document rather than by state, provincial, regional or national laws. This is the key. A new set of rules that are not related to the current rule-set in the host country where the city is physically located. Keep this in mind; it's important. Economies of cities Let me point you to some related reading. Jane Jacobs' little book "The Economy of Cities." This is the best explanation I have seen on how economies develop organically and why. This also ties in nicely with Romer's adding technology to the list of fundamentals of production. Ms. Jacobs points out that if we have a critical mass of firms in a single city working in a single industry, it is possible to create what I've learned to call a "center of excellence." Think Silicon Valley during the '80s and '90s. Think Pittsburgh during the rise of the steel industry. Think Detroit and the rise of the automotive industry. Think Rochester and the rise of the optics industry (at least until the advent of Kodak) How rules go bad The Rochester example is telling. Prior to Kodak, workers were free to move from firm to firm, taking their experience and skills with them, and they were free to set up their own shops when they had an innovation and backers. Kodak, of course, ended all this with non-compete clauses and long, bitter law suits against those who left Kodak to set up their own shops. George Eastman, the CEO of Kodak, changed the rules to benefit himself and Rochester became just another small city not unlike many others. Rules are sticky Rules in cities tend to be sticky. I.e., they aren't easily changed once implemented. With any set of rules there are those who benefit and those who don't. Usually those who don't are subsidizing those who do. There are any number of ways this happens: subsidized electricity, monopolies on services (like cabs to airports instead of mass transportation), zoning issues, or using billions of public tax dollars to prop up private investment banks. As with George Eastman's law suits against his former employees, once the genie is out of the bottle, it is unbelievably difficult to put it back. The damage is done, and it is usually permanent. City rule set by design The key thing to remember is that the rules in cities—some enshrined in law, others in culture—were not developed for a city, necessarily. Some rules we have in cities are left-overs from when it was a town, or a village. For example, in some cities, people still urinate against the walls of buildings (Paris actually has a branch of the police to enforce the laws against such behavior). Romer's idea is that we develop an initial set of rules that works for a city, thereby bypassing the usual organic development of a city's rules with all the problems that are a normal outcome of such a process. This is a very interesting idea, and may even work. Why build charter cities? Why bother, you may ask? There are a host of reasons, and Romer goes into many of them in his two TED talks (Romer also has a website [Tim, could I get an embedded link here? http://www.chartercities.org/]). There are reasons why this would be a good idea for a host country, including providing employment and a host of services for citizens. It makes perfect sense. There are also reasons why this would be a good idea for the investors. Huge profits. As Romer points out in his talks, a city is worth a great deal more economically that it costs to build. That all by itself is a huge new idea. TED Talks Let me digress a moment. TED is an organization with an awesome website (www.ted.com). TED is an acronym for Technology, Entertainment, Design. The tagline is “Ideas worth spreading.” TED is like a conference where the presenter gets up to twenty minutes to make their pitch and the videos of these presentations are collected on the site. Brilliant people making brilliant presentations. This really is an idea worth spreading. If we had a think tank, I would want something like this us. Design for success Unfortunately, you can't just build a city anywhere and have it be successful; there are certain requirements for financial success, and without a very good chance at financial success, there are no backers, no investors, no money. Fortunately, cities with the right mix of rules and the fundamentals of production go through a phase of explosive growth where value is being generated at a huge rate, often faster than the usual organic systems of finance and infrastructure construction can handle. The way to take advantage of this is to design for it. So, if Romer's charter cities work the way he says they will, and the systems are put in place to take advantage of that behavior, these new cities will be enormously profitable for everyone involved. And since they are all greenfield designs, there is no old infrastructure to interfere with the finest new designs that embrace greenness, and provide great places to live and work for everyone. Historical precedents While no one has built a charter city the way Romer describes it (though Honduras may well be the first), there are historical precedents. If we go back far enough, city-states like those in Classical Greece--Athens, Sparta, etc--are exemplars of the type. They each had their own set of laws, rules, and customs. And don't think city-states died out with the Roman conquest. We still have them. Think Singapore. Think Monaco. Or, going back to the Interwar years, Danzig. Further back, we find the German Free Cities and yes, even the Hansa League. A related structure is called a special administration zone, or special economic zone, or economic development zone. There are historical precedents for that, too. Hong Kong and Macau, for example, and a number of special economic development zones along the coast of Communist China. Some might argue that we have special economic development zones within cities, too, but those are a different creature. For Romer's idea to work, it has to have the proper scale, that of a city. Charter cities need airports The reason I want to talk about Dr. Romer and his charter cities idea is that every single one of those cities will need an airport. All of them. Without exception. Moreover, the airport will have to be built very early on and it will have to service business aviation before it services commercial airlines since there are a huge number of people who by the nature of their jobs have to see the actual site: architects, engineers of various sorts, city and regional planners, investors, auditors, sales and marketing folks, to say nothing of random diplomats and local officials. The list is long, but distinguished. Is that airport going to be designed for business aviation? Almost certainly not. Most likely, it will be designed to facilitate commercial air transportation. If they are very smart, a lot of attention will be paid to the air freight side, but there are no guarantees. And once commercial service begins, we get the back of the bus, the "other side" of the field. This is nuts. The entire point of a charter city is business. Not spas, not vacation time-shares, not Eco-tourism, business. Which means a lot of business aviation in and out. These charter cities are not going to be built next door to London, Tokyo, or New York. They will be built in uninhabited areas. There are pithy phrases that aptly express the remoteness of such places. My point is that there is no way that there will be easy access from a neighboring city's airport, no fast rail service, no superhighways, at least, not at first. The airport will be crucial for development - along with the harbor and port - and our industry, the one most concerned with hauling business people around, will get second chair if someone remembers to work really hard. Again, this is insane. Cue the dead equine There are companies out there who develop airports. That is their primary business. I'm sure they do a fine job. This isn't about them. This is about a lack within the industry as a whole. We have no research arm. We have no NACA, no NASA, no nothing. Whatever the people in the firm who got the contract can think of is what we will get. No matter how brilliant they may be as individuals, they still cannot encompass all that is known on the subject, nor will the firm support a great deal of R&D on the subject. The best we can hope for is that the NBAA will lobby for significant business aviation infrastructure, but we can't even provide them with good data to use on our behalf. We need a think tank that can do these things. We need people with ties to industry and academia who can do credible research to help decision-makers understand the economic impact of business aviation on airport design and community development. We need a structure for everyone in the industry to use, one that supports the industry as a whole. So, what's at stake? Assuming the construction of a charter city, what we have at stake are billions of dollars. Literally. They may not be visible right now, but I can guarantee that billions would be spent over the next decade on business aviation infrastructure, a decent international airport is over half a billion dollars all by itself. I can guarantee that billions will be spent on aircraft operations, shuttling hundreds of thousands of business people around the world. I can guarantee that billions will be spent on additional airframes, interiors, maintenance, catering, fuel, crews, and avionics to service this new market. Guaranteed. There is not one whiff of doubt about it. And none of this takes into account business aerospace. These new charter cities are perfect locations for the kind of service that can have an executive back in his office the same day, no matter where that office is. So, really, we are talking tens of billions of dollars, maybe hundreds of billions (if I had a think tank nearby, someone could tell me for sure what the number is). How much gets wasted and how efficient those expenditures can be depends to a large extent on the rules the new cities adopt which will directly impact what services will be offered and what infrastructure gets built. A seat at the table What we do not appear to have is a seat at the table. No one is asking us as an industry what we need, what we recommend, what makes the most sense to do now and what should be deferred for later. In essence, we have no input into the creation of the rule set for aviation in the new city. Of course, other than the NBAA, who is there to ask? Who speaks for us as an industry? Without an organization that provides us with a unified voice, it is rather difficult to be invited to the table. Seriously. Who would you ask? An airframer? An operations guy? A maintenance guy? An airport developer? The airport developer is probably the best choice currently available, but really, who do they represent? It certainly isn't the industry as a whole, nor should it be. That isn't in their charter. Scale Romer's charter cities are large. He is asking for 1,000 square kilometers of land for each charter city. That's a bit more than 380 square miles, or about the size of Indianapolis, Indiana. Now, Indianapolis is a fair sized city of about 800,000 people with a GDP of about $5bn per year, but Romer is talking about a fully developed city of around 5,000,000 at maturity, about the population of Singapore (but with more land), which has a nominal GDP of about $200,000,000,000. That's $200bn. Per year. And Romer is talking dozens to hundreds of these charter cities. Let's take 50 as a reasonable number and that gives us 250 million people creating $10 trillion in value every year. If we had 75 such cities, we would create as much value as the US or the EU. In free trade zones. That is certainly worth looking at. Dead conventional Now, that first charter city, and maybe the second one, too, will be dead conventional. No question that anyone is going to take any huge risks with an investment of this size with so many different people having control over the capital. We all like what we know and understand. Besides, we already know how to analyze it, which reduces risk. It gets better But, if we are studying what happens as these cities develop, with a particular eye to our chunk of it - the airport - we can make a better input for rules in the follow-on cities; we can improve the rules; we can improve the infrastructure designs, making them less costly and more profitable. This is an idea worth spreading. Terry Drinkard is currently consulting on an aviation start-up. His interests and desire are being involved in cool developments around airplanes and in the aviation industry. Usually working as a contract heavy structures engineer, he has held positions with Boeing and Gulfstream Aerospace and has years of experience in the MRO world. Terry’s areas of specialty are aircraft design, development, manufacturing, maintenance, and modification; lean manufacturing; Six-sigma; worker-directed teams; project management; organization development and start-ups. Terry welcomes your comments, questions or feedback. You may contact him via terry.drinkard@blueskynews.aero Other recent articles by Terry Drinkard:
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