I certainly do not envy the job that Kevyn Orr has before him as Detroit’s emergency manager. I doubt anyone does. Among other excruciations is the task of playing traffic cop for all sides weighing in about 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 has not the luxury of temporary fixes. He needs a Doug Flutie-like Hail Mary play. Fortunately, there does exist a very good model for emulation. Some thirty years ago, there was a not just a city but an entire country that was 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 1970’s. You think Detroit has it bad now? Brother, that’s nothing compared to China after three decades of Mao’s communism. With no options left to him, new Chinese leader Deng Xiaoping gave the Chinese economy that metaphorical Hail Mary play. And thirty years later, just look at the results.
There was nothing pre-ordained about China’s current economic power. Someone wishing to bet on China’s rise back in 1978 would have found few bookmakers. 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, at that time the most prosperous example of free-market capitalism the world had ever seen.
When Deng looked across the border and saw a wonderful model for emulation, ideology went out the window. I suspect that on the advisement of Singapore Prime Minister Lee Kuan Yew, he would have immediately instituted capitalism all over China. But he was not El Supremo yet so he had to set his sights a little lower. And the specific measure he did undertake provides us with the perfect model for current day Detroit.
That’s because just across the border from Hong Kong, on a piece of land very remarkably just about the size of Detroit, Deng created the Shenzhen Special Economic Zone. Its success was so great that Special Economic Zones immediately sprouted throughout China like McDonalds franchises.
There actually was no great secret to the success of China’s SEZs. The government butts out to incent private capital in. That’s pretty much it. Of course, government butting out includes lowering or even better, eliminating, taxes so Mr. Orr must expect a barrage of artillery fire. But without tax advantaging, no one would 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. 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 economists Lennon and McCartney, just because something can’t get no worse is no reason why it must get better. Detroit might stay down permanently if something drastic is not enacted.
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 that’s enough. You make a buck in the Detroit Special Economic Zone, you keep it all. That’s a mighty fine incentive for someone to consider making 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 was as bleak as Aragorn’s in the Lord of the Rings. Mr. Orr has the same “golden opportunity.” 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, in a few years Detroit could be the very model for emulation for the rest of metropolitan America.
Michael Justin Lee is a lecturer in the University of Maryland’s Center for East Asian Studies and the Department of Finance. A veteran Chartered Financial Analyst, he served as Financial Markets Expert-in-Residence in the U.S. Department of Labor from 2003 to 2005. He is the author of “The Chinese Way to Wealth and Prosperity” (McGraw-Hill, 2012). His email is email@example.com.