All Commentary
Tuesday, April 20, 2010

Are “Charter Cities” a Solution?

An interesting, yet troubling idea.

Stanford economist Paul Romer has proposed an intriguing concept: the “charter city.”  A charter city is a newly created city governed by a country other than the one within whose borders it exists. Its residents would remain citizens of the home country.

Romer offers Hong Kong as an example when it was a British colony.

According to the Charter Cities website:

The two prerequisites for a charter city are uninhabited land and a charter granted and enforced by an existing government or collection of governments. With the right rules, a city will naturally grow as residents arrive, employers start firms, and investors build infrastructure and buildings.

What makes a charter city attractive is the prospect of rapidly instituting rules consistent with economic development in an area that might otherwise take decades to do so, offering almost overnight the chance of a better life for the citizens of a impoverished country for whom long-distance immigration is too costly.

Thus Romer has suggested that a charter city be established in Haiti for Haitians left homeless by the recent earthquake and who have little hope of help from an ineffective and otherwise corrupt Haitian government.  (The Charter Cities site, however, says the time is not right for this option.)

While I find myself largely sympathetic to the concept, two things bother me about it.

Incentive Problems

The first is whether it can overcome the Public Choice problem.

Although the Hong Kong example is persuasive, I wonder whether the host country would really permit the guest country to bypass enough of its political and bureaucratic interests to establish an effective rule of law, free exchange, and other things necessary for long-term economic development.  And once established, would the host permit enough free immigration from its own jurisdiction and the loss of long-established political bases to let the thing work?  As people and wealth move into successful charter cities, the host country’s government might worry that liberalizing forces would threaten the position of its power elites.

Also, what would prevent the host country from seizing the city’s immovable assets once foreign investors have created them?  It’s happened before.  How does the host make a credible commitment?  The tension between the host’s economic interest in maintaining a source of tax or rental revenue and its short-term political incentives is potentially highly destabilizing.  Would the threat of military intervention by the guest government be a necessary condition?  The latter gives the project the odor of colonialism.

Would Charter Cities Be Vital?

I can see why it might be desirable to build a charter city on an “unoccupied piece of land.”  For one thing, trying to impose a new regime on an established physical and social infrastructure means having to fight entrenched interests.  But building a new city from scratch has tremendous challenges of its own.  Which brings us to the second issue.

Romer writes:

Urbanization is the key to the predictable transformation from an economy where most people earn a precarious living in subsistence agriculture (doing great harm to the environment in the process) to one in which most people work in manufacturing and services.

Yes, urbanization is crucial for economic development, as it always has been (despite the radio, the telephone, the car, and now the Internet).  But there is a disturbing lack of appreciation, at least on the official website, of how the design of public spaces impinges on city life and economic activity, especially via the formation of social networks that facilitate entrepreneurial discovery.  There is a certain “if you build it they will come” faith in the charter-city rhetoric that seems to discount what scholars such as Henri Pirenne and, more recently, Jane Jacobs have taught us about the evolutionary and emergent character of vital cities throughout history.  It’s no more possible to construct a living city than it is to construct a living language, and for the same reasons.

I worry that, even if the Public Choice problems could be overcome (a big “if”), the kinds of physical infrastructure that guest governments would likely build in a charter city – and recent experience shows that the temptation for governments to subsidize megaprojects in open land would be almost irresistible – would actually obstruct the formation of those social networks.  When governments construct cities on large unoccupied pieces of land the result is more likely to be a Brasilia than a Venice.  Instead of real cities, you get glorified housing projects.  In that case, how long would it be before charter cities become no better than the slums the poor left behind?

Addressing these concerns would mean effectively limiting the interventions into charter cities by the governments that created them.

I’m not sure we know how to do that.

  • Sanford Ikeda is a Professor and the Coordinator of the Economics Program at Purchase College of the State University of New York and a Visiting Scholar and Research Associate at New York University. He is a member of the FEE Faculty Network.