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Give Charter Cities a Second Look

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from the magazine

Give Charter Cities a Second Look

In a rapidly urbanizing world, an innovative idea seems more relevant than ever. Summer 2019
Economy, finance, and budgets

Ten years ago, in a TED talk, economist Paul Romer introduced the concept of charter cities, newly created municipalities governed by a nation other than the one in which its borders are contained. Writing in City Journal, Romer and Brandon Fuller described how charter cities would be set up: “A host country would provide land; a source country would provide residents; and a guarantor country would provide the assurance that the new city’s charter would be respected and enforced.” These cities, the theory held, could serve as models of good governance and wealth creation for their often poorly run host countries.

The innovative idea had promising prospects. Romer created a nonprofit and worked with Madagascar and Honduras to advance it, but soon ran into local political opposition. The charter-city projects stalled, and Romer moved on, directing New York University’s Marron Institute, becoming the World Bank’s chief economist, and earning a Nobel Prize in economics. Charter cities remain an idea without any success stories. Yet the need for something like them has only intensified.

After all, cities add 70 million new residents annually, but rapid urbanization has resulted in anemic productivity and limited economic development in regions like sub-Saharan Africa, which is experiencing growth without industrialization. In numerous developing-world cities, urban residents have little hope for substantially improving their lives. Consider Kinshasa, capital of the Democratic Republic of Congo. It is now the world’s largest French-speaking city, with 12 million residents; by 2050, its population is projected to swell to 35 million. But the city’s rapid growth has gone in tandem with crumbling infrastructure, with all its attendant dangers—fallen utility lines, for example, can electrify puddles, occasionally electrocuting children. Khartoum, capital of Sudan, is projected to grow from its current population of 1.9 million to 16 million by 2050. Kabul, Afghanistan’s capital and largest city, will grow from 4.5 million to 17 million over the same period. This population explosion, without corresponding economic opportunities, portends a future of more slums, high infant-mortality rates, low life expectancy, and limited literacy among suffering residents.

Scant opportunity for young urban populations will further destabilize troubled regions, and outmigration will intensify. Western governments, particularly in Europe, already struggle with current immigration levels from the developing world—what will happen when migrant pressures grow?

In this context, charter cities deserve another look. But entrusting a high-income country as guarantor of a developing city smacks of neocolonialism, as opponents of the original charter project charged. Instituting charter cities instead as public-private partnerships, between city developers and host countries, could achieve better results—setting up a governance structure that doesn’t infringe on sovereignty but that still prioritizes economic and governance success.

Charter cities could spearhead a second generation of special economic zones, areas subject to growth-boosting economic regulations that differ from those in adjacent regions; such zones typically feature lower taxes, streamlined business regulation, and expedited customs, in order to spur economic development. Charter cities take the concept of special economic zones a step further. While most zones are limited in size and industrial scope, charter cities would produce a more diverse economic base. Charter cities would begin with a blank slate in commercial law, enabling them to adopt the best global practices for doing business. They could, say, establish registration procedures that reduce the time required to start a business to minutes.

Such reforms can be achieved within most countries’ existing political framework. A charter city, understood in this sense, would remain subject to the constitution, international treaties, and criminal laws of the host country—the special jurisdiction would apply only to commercial law, helping the charter attract foreign investment, create jobs, and generate economic growth. Flourishing charter cities, though, could inspire national reforms, in the same way that Hong Kong and then Shenzhen’s dramatic success helped lead China to implement market-oriented reforms that have lifted 800 million people out of poverty.

The lessons from China are instructive. The twin miracles of Hong Kong and Shenzhen on the mainland show how governance decisions at the city level can ignite economic growth. Shenzhen, in fact, resembles a charter city more than a typical special economic zone. Its jurisdiction is much larger than that of most special economic zones. The city’s reforms spurred markets in land and labor and helped bring foreign direct investment to China for the first time. Other cities in China went on to replicate Shenzhen’s success. In 1984, 14 additional coastal cities opened to foreign direct investment. By 1988, border areas, the Yangtze River, and inland areas were opened as well. The strategy of special economic zones, combined with urbanization, helped turn China into an economic powerhouse.

Applying such an approach to charter cities requires partnerships with real-estate developers. Many low-income countries today, particularly in Africa, lack state capacity, and bringing in developers lets the private sector provide the infrastructure-building capacity that many governments lack. China’s growth also shows the importance of developing local institutions. Charter cities shouldn’t be a political project that developed countries impose on developing countries, in other words. Instead, charter cities must embrace indigenous institutional development.

No single group or institution can build a charter city. Coordination among multiple parties is necessary, including developers who can build infrastructure, investors who can finance it, policy experts who can create the legal framework, and governments that can create the new jurisdiction. Once a model is developed and shown to work, it can then be rolled out in places that need it most—and, as some promising examples show, can help lift millions out of poverty.

Photo: Li-Zhou/iStock

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