Experiments In Better Governance: Charter Cities

By 2050, cities in Asia and Africa will add another 2 billion people to their already increasing population. But in many of these developing nations, the rapid population growth is not matched by a corresponding economic growth. Millions of people still lack basic infrastructure, decent living conditions, and job opportunities. Charter cities might be an innovative solution that brings multiple partners to the table to help lift millions out of poverty.

What Is a Charter City?

The concept of a charter city was introduced by Nobel laureate economist Paul Romer in 2009. He defines a charter city as “a city-scale administrative zone in a developing nation that will be administered by a guarantor nation.” Thus, the city will not be under the administration of the host nation anymore. Initially, Romer had suggested that the city will be administered by the guarantor nation; over time, however, proponents have moved away from this necessity. They now propose a new administration that is independent and autonomous from the city’s preexisting institutions. 

The guarantor nation can still play a big part in creating and maintaining the administration. These new reforms can be designed to boost economic growth and create new jobs. Thus a charter city will benefit the host nation and its people, while also providing investment opportunities for businesses and other nations. Charter cities are international collaborative projects.

Two widely celebrated examples of charter cities are Singapore and Shenzhen. For political and historical reasons, Hong Kong was a small piece of Chinese territory administered by the British. A different economic and political system was adopted there than that which prevailed in mainland China. It was more capitalistic with low taxation and minimal government market intervention. These policies rapidly increased the gross domestic product of this small city, which grew to 180 times its former size between 1961 and 1997. 

Inspired by this growth, the Chinese government created its first special economic zone in the neighboring village of Shenzhen in 1980. They replicated a similar free-market model with a different set of policies than applied in the rest of the country. These reforms helped Shenzhen grow its GDP by about 20 percent annually for the last 40 years

The proponents of charter cities argue that we can use this model to adopt the best practices of proven policies to other cities. This can help raise the living standards of millions of people in developing economies. And it’s a positive sum game where developed economies will also have major advantages. Fast developing charter cities provide great investment opportunities. Most developed countries grow at 1-2 percent per year while a charter city can potentially grow at 20-25 percent per year. Moreover, they can experiment with new reforms and policies in the charter city. When successful, these can be reimported back into their own system to provide an economic boost.

Starting a City On a Blank Canvas 

There are four key components for a charter city.

Land: The host nation provides the physical land to build the city. This land is ideally undeveloped and sparsely populated, as introducing new reforms to already existing communities always poses a major challenge. Some pioneering companies are even suggesting building sustainable floating cities on the ocean.

Capital investment: A plan for a charter city on undeveloped land is like a business proposal for real estate investment. This investment is key in the initial stages to develop the infrastructure for the future city such as roads, industrial parks, residential complexes, etc. It may come from other nations, real estate developers, or private organizations. Investors would be ready to invest in this infrastructure development if they believe the barren piece of land may one day be a sprawling city. 

The investments may directly finance the real estate projects to sell these units in the future. Affordable housing, schools, hospitals, shopping malls, and commercial districts may be astute investments. The investment may also be capital expenditure to set up industries with the promise of future tax exemptions. The cities can even experiment with the venture capital- type equity model wherein ownership of certain projects is shared with the investors. These investments and their contracts can be protected by the new charter.

Inhabitants: The third ingredient is the inhabitants. We have multiple cautionary tales of ghost cities in China—cities with infrastructure but without people. The residents for the new charter city may come from the host nation or international communities. In an increasingly digital and global world, cities will have to compete for talent. So people will have the freedom to decide where they want to move and live. The legal and citizenship status of these new residents may differ for each charter city. For example, citizens with permanent resident status in Hong Kong are guaranteed most rights such as the right to vote in local elections. They cannot stand for office or get a Hong Kong territorial passport, however. In the case of Shenzhen, you cannot become a Shenzhen permanent resident unless you become a Chinese permanent resident.You can, however, get a temporary permit to work, live, or do business. 

Próspera, the proposed charter city in Honduras, tackles this problem differently. You can get residency for $1,300 annually as a foreign national, and for $260 as a Honduran. All residents are required to sign an “Agreement of Coexistence,” a legally binding contract between Próspera and the resident. They are also required to buy general liability insurance which will ensure themselves against both civil and criminal liability. An independent body, Próspera arbitration centre (PAC), will resolve any future disputes.

Charter: The main differentiating characteristic of a charter city, however, is the charter. This charter guarantees that the geographical area will come under a special jurisdiction, independent of the governance system of the host nation. This governance system may be “imported” from a guarantor nation. For example, the Singapore model of development might be adopted in a new charter city. Or the multiple private-public partnerships can together design attractive policy reforms to incentivize investments, businesses, and talent into the city. The new system can be built from scratch incorporating the best practices from around the world.

Charter Cities are Like a Startup Experiment

Countries with low per capita income and high population levels would benefit the most from being host nations. These countries tend to have low “ease of doing business” ratings. This can be due to corruption, dysfunctional government, bureaucratic red tape, complicated reforms, and protectionist economic policies. These bad laws and regulations prevent businesses from investing in the country. There are fewer job opportunities. This leads to higher unemployment rates and the “brain drain” of talent. 

Even after identifying these shortfalls, ruling governments always face a challenge in enacting new rules. It is easy to point out problems but much more difficult to provide solutions. Especially at the scale of the entire nation with millions of citizens. Most developing nations are too big and diverse to make sure the same rules benefit everyone. Nigeria, for example, has over 250 ethnic groups with more than 500 languages. This diversity may increase polarization, which can lead to competitive rent-seeking by different groups and impede agreement on the provision of public goods. In fact, research suggests that ethnic diversity alone accounts for about 28 percent of the growth differential between Africa and East Asia. Moreover, no rules are universally “good.” Each change comes with its pros and cons. For example, making it easier to buy land for industrial development helps attract businesses. But it may also undermine environmental concerns and face opposition from the local people. 

Charter cities provide an innovative solution to this conundrum. The host nation, along with partner nations and organizations, can experiment to undertake bold innovative reforms that are difficult to carry out for the size of a nation. A city is just the perfect size to implement the right set of rules. No two cities are alike. Hence each experimental reform will have cultural, historical, and economic interpretations for the local community. But that’s what makes charter cities better. It is easier to quickly adapt to changing times and feedback in a startup city than in a big multinational country. 

Thus, charter cities need to have the necessary frameworks to quickly modify their administration to get the desired benefits. This will require time and present multiple challenges. But once this prototype government system is shown to work, some of these new reforms can be scaled throughout the host nation. For example, the Shenzhen success model was adopted by 14 more coastal cities in China. This helped turn China into an economic powerhouse.

Charter Cities Can Lift Millions Out of Poverty

The charter city can provide tax incentives, simplified labor laws, and streamlined business regulations. This will attract major businesses into the region that the host nation’s old inefficient rules may not have been able to get otherwise. Rich nations and real estate developers may choose to invest in the promise of higher returns with lower downside risk. This may also bring in more investments in infrastructure development than previously possible. 

The host nation could also benefit from a share of future tax revenue from the businesses and residents that move in. Better infrastructure, an efficient legal system, and favorable policies will attract businesses to open offices in the city. Businesses will also get access to an untapped talent pool of locals from the host nation. Access to basic infrastructure and more job opportunities will attract talent. These new inhabitants may come from the host nation or other countries in the world. 

Thus, the new inhabitants benefit from better opportunities and a higher standard of living. Singapore, Shenzhen, and Hong Kong are all examples of cities that lifted millions of its inhabitants out of poverty in the last two or three decades. So charter cities have the potential to benefit all the involved parties.

The development of charter cities is not without challenges, however. Some people argue this might become a form of neo-colonization if the host nation loses sovereignty over their land. Thus, there have to be checks and balances to involve all parties in the decision making. The local country and the city’s people should also be beneficiaries of these new charter cities. The other issue is that it is really difficult to change old rules that benefit the few on top. 

In 2012, ambitious plans were chalked out to turn part of Honduras into a sprawling new charter city. But the project came to a halt as most outside advisors and investors were bogged down by the inherent corruption and exploitive interests of the Honduran government. Now there are renewed attempts in Próspera. In Madagascar, similar enthusiastic plans were met with fierce and violent local opposition against foreign investment. Thus, the concept of charter cities may still need some rethinking about how to better align the interests of the local government and people.

The Future of Cities 

To understand the future of cities, we need to understand how cities have evolved throughout history. For the vast majority of our history, humans were nomadic hunter-gatherers. We lived in temporary settlements with a small tribe. But technological innovations in the neolithic age—such as agriculture, specialized tools, and domestication of animals—allowed humans to settle in one place. By 3000 B.C., the first cities were formed along fertile river valleys of ancient civilizations. But an important factor that made these settlements possible was ensuring collective security.

Agriculture enabled surplus food production, which allowed some humans to specialize in other non-agricultural professions such as pottery, toolmaking, weaving, fighting etc. Living together in cities enabled easy access to this market to both buy and sell products. Physical proximity reduced the transportation costs of goods and people. It also created economies of scale. 

With the concentration of people came the concentration of power and wealth. Cities became political units that could provide the dire need of safety and security. They did this by making laws and regulations to protect the interests of their inhabitants. These administrative units could also invest in sanitation, healthcare, and education. 

Thus, cities were formed to provide easier access to talent, essential goods and services, and a market for selling what is produced. They also provided access to a better and safer lifestyle for their inhabitants. Moreover, they allowed the administration to provide collective security. 

The digital revolution has transformed our society. We no longer need physical proximity to get access to a market. Remote work is on the rise, too, which is allowing people to leave crowded cities. But they still need access to essential services and basic infrastructure. They still demand collective security for their lives, property, and rights. 

Our concept of a city will need to evolve. What will these future dispute-resolution mechanisms look like? Charter cities give us a chance to perform experiments with futuristic concepts of what our cities could look like. 

We can try something new like Próspera arbitration centre (PAC). Or we can try the time-tested Shenzhen model, where the host country protects the sovereignty of the city. Or Hong Kong’s “one country, two systems” model where the city is in charge of internal affairs and external relations, while the host country is responsible for defense. We can also experiment with Romer’s suggestion that a separate guarantor nation ensures the security and sovereignty of the city and its citizens. These are critical issues that any plan for a charter city will need to address. 

Tech venture capitalist Balaji Srinivasan proposes that communities for new charter cities can form online even before the physical land is available. As our interactions increasingly have become more digital, we will have online “cities” in the cloud. These cities may revolve around a particular community of people who have similar interests or share common principles. Few Silicon Valley technocrats are already looking into creating such semi-autonomous cities in international waters. Charter city projects, such as “refuge cities,” may even provide a sustainable solution to the refugee crisis by creating small free independent zones in countries such as Sweden. Another geo-political issue that may find a solution in charter cities is the Hong Kong protests. Some influential groups in Hong Kong are exploring the option to build an international charter city where the Hong Kong people can move to. Thus, charter cities might be critical in the future of cities and indeed the world.

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About Aditya Khanduri

Aditya Khanduri is an entrepreneur, freelance content strategist, and an aspiring polymath. He writes on new technologies and how they can shape our future.

Photo: Malte Mueller/Getty Images

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