COLLEGE PARK, Md., September 28, 2013 — There can be no envying the task that Kevyn Orr has before him as Detroit’s emergency manager. Among other excruciations in his job description, he is playing traffic cop for all sides weighing in on the recent Federal intervention. However, these discussions about Federal intervention are just a sideshow to the main attraction.
Whether or not the Feds come through this particular time, there surely will be a need for further and greater intervention unless a permanent solution is found.
Unfortunately, Mr. Orr does not have the luxury of temporary fixes. He needs a Doug Flutie-like Hail Mary play. Fortunately, there does exist a very good model for him to emulate. Some thirty years ago, there was a not just a city but an entire country that was perched on the brink of ruin. Think current Detroit to the hundredth power and you’ll be in the approximate ballpark.
That was the People’s Republic of China in the late 1970s. If you think Detroit has it bad now, that’s nothing compared to China after three decades of Mao’s Great Leap Forward style of communism. With no options left to him, new Chinese leader Deng Xiaoping jolted the Chinese economy with his own metaphorical Hail Mary play.
And 30 years later, just look at the results.
There was nothing pre-ordained about China’s current status as an economic powerhouse. Someone wishing to bet on China’s rise back in 1978 would have found few bookmakers favoring the odds. However, Deng was nothing if not a practical man. And unlike Detroit’s leaders, he had the advantage of a very, very rich next-door neighbor to envy. That neighbor was British-run Hong Kong, the most prosperous example of free-market capitalism the world has ever seen.
When Deng looked across the border and saw a wonderful model for emulation, ideology went out the window. On the advisement of Singapore Prime Minister Lee Kuan Yew, he might have immediately instituted capitalism all over China. But Deng was not El Supremo yet, so he had to set his sights a little lower. But even those lesser reform steps he did undertake conveniently provide us with the perfect model for rescuing current day Detroit.
Just across the border from Hong Kong, on a piece of land remarkably close in size to Detroit, Deng created the Shenzhen Special Economic Zone. Its success was so great that Special Economic Zones immediately sprouted across China like McDonalds’ franchises.
There actually was no great secret to the success of China’s SEZs. The government butts out of the action to incent private capital in. That’s pretty much it. Of course, the withdrawal of pervasive government also includes lowering or, even better, eliminating taxes. For this, Mr. Orr must be prepared to endure a barrage of artillery fire from the usual redistributionist suspects. But without tax advantaging, no one will be adequately incented to plant new capital now in Detroit. And without that new capital, even a Federal lifeline would be no more than a band-aid measure.
Detroit has nothing to lose in trying something new. Unfortunately, this is not just a figure of speech. Detroit, in fact, has literally nothing left to lose. But with all due respect to those eminent British economists John Lennon and Paul McCartney, just because something can’t get no worse is no reason why it must get better. Detroit might stay down for the count permanently if something drastic is not enacted and enacted soon.
In exchange for bankruptcy protection from creditors, Mr. Orr should offer the creation of the Detroit Special Economic Zone, the whole free market shebang. Come one, come all, just like in Shenzhen. Detroit gives nothing but full opportunity. But as has been constantly proven, that’s enough in and of itself. You make a buck in the Detroit Special Economic Zone, you keep it all. That’s a mighty fine incentive for someone to consider when contemplating a first investment or hiring a first employee in Detroit.
Deng Xiaoping could not have enacted his magnificent capitalist experiment until the situation in China had reached the point where it was as bleak as Aragorn’s in “Lord of the Rings.” Mr. Orr has the same “golden opportunity” today. Detroit’s ruinous former mayors Coleman Young and Kwame Kilpatrick would never have considered this route. But paradoxically, precisely because of the tragic legacy that those two men left behind, by adopting a Shenzhen-style strategy now, the shattered city of Detroit, in just a few years, could become the very model for renewing and rebuilding the rest of metropolitan America.
Michael Justin Lee from the faculty of finance and the Center for East Asian Studies at the University of Maryland, teaches, speaks and writes at the intersection of global finance and matters Chinese (with occasional tangents off on one or the other). He is the author of “The Chinese Way to Wealth and Prosperity” (McGraw-Hill, 2012). A veteran Chartered Financial Analyst, he served as Financial Markets Expert-in-Residence in the U.S. Department of Labor. He can be followed at www.michaeljustinlee.com
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