Charter Cities: An Introduction to Entrepreneurial Governance

In 2009, economist Paul Romer popularised the idea of charter cities in a famous TED talk. The concept is easy to understand. Sustained economic growth is a proven method for alleviating poverty, and a key factor in achieving economic growth is good governance. Many developing economies lack strong institutions to help achieve sustainable economic growth and development. Charter cities—special jurisdictional zones where nations can create new governance systems—can help fix that. Think of them as a blank slate. They are an opportunity for governments to experiment with political, economic and regulatory reforms while causing minimal nationwide disruption. And innovative governance is neither a buzzword nor an academic abstraction. Since the 20th century, innovative governance has shown its ability to transform nations and the lives of billions.

Take Singapore for example. In 1965, the city-state’s nominal GDP per capita was USD$500, similar to Mexico and South Africa. As of 2019, its GDP per capita stood at around USD$65,000, in line with the US. Much of Singapore’s early economic growth is attributed to Lee Kuan Yew, the city-state’s Prime Minister from 1959 to 1990. Lee oversaw major economic and structural reforms in the country. Under his tenure, the Economic Development Board (EDB) was established in 1961 to make Singapore an attractive destination for foreign investors. It made investments to grow the country’s manufacturing and financial services sectors, as well as launching various programmes to aid industrial development. For example, during the 1960s, the EDB began to offer free advice to entrepreneurs and manufacturers in key electrical industries, simplifying the process of acquiring land for industrial development. It also began to operate as an industrial bank, offering loans to manufacturing businesses at reasonable rates. 

Today, Singapore is consistently ranked as one of the best places in the world to do business, has bustling financial services, technology and manufacturing sectors, and is one of the richest cities in the world. Singapore demonstrates the potential good governance and market-oriented reforms have to spur economic growth, in a way that decades of development aid to developing nations have been unable to replicate. Despite its small size, the city-state’s development model has inspired similar development models in several nations in South East Asia. Countries like Vietnam, Thailand and China have all undergone periods of economic liberalisation, with each nation implementing and executing policies designed to grow key industries and increase the competitiveness of their export-oriented economies.

[Caption] Supertree Grove in Singapore. Credit: Hu Chen/Unsplash.

Link:https://unsplash.com/photos/5O6c_pLziXs 

The success of Singapore and other experiments in innovative governance like Hong Kong and Dubai demonstrate the potential of good governance in creating wealth and alleviating poverty. An important issue within the development debate is what would be the best way of achieving economic ‘miracles’ like Shenzhen in China or Singapore? The answer, for charter city advocates, is simple. Decentralise development by building charter cities. 

How would charter cities work?

Charter cities, as proposed by Paul Romer, would involve a developed country acting as a guarantor, helping a developing host country build a city from scratch at a greenfield site – an uninhabited location that has not been previously built upon. The developed nation would provide administrative expertise and help to set up the city. Private investors would partner with the host nation to finance the construction of the city’s infrastructure by purchasing land at a greenfield site, and subsequently building the infrastructure. 

“Charter cities are simultaneously political projects and business proposals.” – Mark Lutter, Founder and Executive Director at the Charter Cities Institute 

For the city’s day-to-day administration, the host government and the private developer jointly appoint a city council, with seats reserved for local community leaders and/or third-party auditors. This council would be responsible for drafting the rules and regulations of the city. The developer sublets the land to incoming residents and businesses. Investors receive a return on their investment when the value of the properties they lease rise. The prospect of a healthy return on their investment will ensure that investors are committed to ensuring that the charter city would succeed. Therefore, its representatives on the city council are incentivised to pass legislation that facilitates economic growth. 

Since these cities would be semi-autonomous both economically and politically; they would have their own independent judicial systems, with judges from other jurisdictions, and operate with business-friendly regulation. This is not a novel concept per se. Singapore has a highly reputable commercial court that features both Singaporean judges as well as justices from other Commonwealth jurisdictions.

Over time, these (not so) miniature projects could be blueprints for future economic growth for government officials in other developing countries/regions. Through charter cities, millions could be lifted out of poverty, benefiting humanity as a whole. One of the best examples of innovative governance in action is the tale of the Chinese city of Shenzhen. A small fishing town of around 30,000, the city has enjoyed decades of economic growth since the Chinese government designated a 300 square kilometre special economic zone (SEZ) around it. 

The SEZ acted as a sandbox, enabling the Chinese Communist Party (CCP) to experiment with various market-oriented economic reforms. The CCP amended the region’s tax system, made it easier for investors to buy land and introduced incentives for foreign investors setting up businesses and joint ventures in the SEZ. These reforms worked to great effect. Now a global city, Shenzhen is one of the world’s centres for electronics and telecommunications manufacturing. In 1980, the average yearly income in Shenzhen was USD$137. In 2017, that rose to approximately USD$14,000. 

[Caption] Lianhuashan Park in Shenzhen, China. Credit Darmau Lee/Unsplash. Link:https://unsplash.com/photos/oewW6C664gw 

Shenzhen provided the CCP with an arena to experiment with market-oriented reforms to encourage foreign investment. The Chinese government used the city as a model for economic reforms elsewhere in the Communist state. SEZs and cities like Shenzhen were crucial in lifting over 800 million Chinese citizens out of poverty. So, could charter cities do the same for other developing nations?

Charter cities: An idea worth realising? 

To be fair to Paul Romer and other charter city advocates, there are very few examples of charter cities in existence today for a comprehensive evaluation of their effectiveness. Since Romer began to advocate for charter cities, only two countries have at some point been seriously interested in his idea; Honduras and Madagascar. Marc Ravalomanana, the then Madagascan president, met Romer in 2008 to discuss the possibility of setting up charter cities in his nation. Ravalomanana considered creating two charter cities, but this was discontinued when he was removed from power in 2009.  

Although the economic success stories of Singapore, Shenzhen, Dubai and others are encouraging, they are not charter cities. Similar iterations of ‘start-up’ cities have begun to appear around the world. In the US, Telosa, a utopian planned city has been proposed by American billionaire Marc Lore. It aims to set a “global standard” for urban living and sustainability. In Saudi Arabia, NEOM has been proposed as a smart city aiming to run entirely on renewable energy, with the construction of the city to be initiated with a USD$500 billion investment from the Public Investment Fund of Saudi Arabia and private investors.

But, as commentators such as Ash Milton note, the use of Singapore, Shenzhen, Dubai or even proposed cities like NEOM as examples of the promise of charter cities seems to contradict some of the core principles their biggest advocates espoused–economic and political liberalism. Singapore’s Lee Kuan Yew, though lauded for his role in the city-state’s economic development, was known for his autocratic tendencies. Dubai and the Chinese SEZ in Shenzhen both have strong, autocratic governments with a monopoly on power. Arguably, the strength of the aforementioned governments enabled their experiments with innovative governance to succeed. The CCP controlled the shape of the development of the market economy in Shenzhen; the monarchy that rules the Emirate of Dubai has full control over the city’s development; Lee’s stronghold over Singapore provided the state with the political stability it needed to be an attractive destination for foreign investment. This is in stark contrast to Romer’s and other charter city advocates’ target audience, developing countries. 

Developing nations suffer from a lack of good governance, stable political structures and business-friendly regulatory regimes, key factors needed for sustained economic growth. If the most successful attempts at entrepreneurial governance involve nations that have strong, autocratic but effective host governments, then this suggests that charter cities might not be the (democratic) panacea to the developing world’s economic troubles. Further, if one of the goals of charter cities is to encourage decentralisation, reduce the role of government in economies and increase efficiency, this ignores structural issues that trouble developing nations. Although corruption and poor governance are a drag on developing nations, they do benefit small classes of elites in these countries. And as the Honduran experiment shows, opposition, cunning or sabotage can prove to be a stumbling block in the realisation of the charter city dream.   

Charter Cities in Action: A Honduran (mis)adventure

After Romer’s famous TED talk on charter cities in 2009, Honduras’ government embraced his idea. For Romer, Honduras seemed like the perfect fit; an impoverished nation with high crime and low levels of foreign investment. It was the perfect platform to demonstrate the promise of charter cities and innovative governance. However, Honduras’ experimentation with charter cities came at a time of immense social and political upheaval. In June 2009, their leftist president Manuel Zelaya was deposed in a coup d’état. His successor, Porfirio Lobo Sosa and his government came to power through a controversial election boycotted by members of Honduras’ opposition, with various regional presidents and prime ministers refusing to recognise the new Honduran government. However, to Romer’s benefit, Lobo Sosa’s administration was seriously interested in setting up a charter city in the nation. 

“How [can] you build brand new, principled institutions in partnership with a government so plagued by corruption?”–Arthur Phillips for openDemocracy

Despite Honduras’ political troubles, the nation went ahead with its ambitions to construct a charter city called Prospera, albeit with a different model from the one proposed by Romer in his TED talk. There would be no developed nation acting as a guarantor. The Honduran government refused to hand over sovereignty of the charter city’s courts to foreign powers. Instead, it established an external court of appeal and transparency commission, with Romer as its chairman. Romer eventually stepped down from the commission when the Honduran government entered into a contract with a group of foreign investors in relation to the charter city. Romer had learned of the deal when he read about it in a newspaper. When he asked for details and was denied information by the Honduran government, he stepped down from his role as chairman and distanced himself from the project. 

[Caption] Hondurans protest against charter city legislation. Translation: “Coup d’état: Economic crisis + model [charter] cities”. Credit: Black Fraternal Organisation of Honduras (OFRANEH)

Additionally, Prospera has faced opposition from working Hondurans. Many see the project as a vehicle for the country’s elite to hoard off wealth in secretive deals with little to no oversight. Commentators such as Rosemary Joyce, a professor of Anthropology at the University of California, Berkeley, argue that charter cities,

“…[presume] that certain places in the world are too backward to be allowed the luxury of normal aspects of democratic governance, such as self-determination through elections…” 

Despite their economic promise, charter cities do represent challenges from a democratic perspective. Key stakeholders are often ignored or pushed to the sidelines when embarking on massive infrastructure projects such as charter cities. This, in nations such as Honduras, can mean that the property rights and dignity of indigenous peoples are not properly respected. Ensuring that all relevant stakeholders are consulted throughout the process will help create development projects that are inclusive and democratically legitimate. But whether charter cities can even be properly established remains to be seen. 

What next for charter cities?

Although charter cities have experienced what could be described as a rocky start, the underlying concept is arguably still compelling. Structural reform for developing nations is difficult. The social, health and economic fallout stemming from the pandemic, as well as unequal recoveries will only make the long walk to economic prosperity that much harder for poorer countries. To create a world where no human being suffers from crippling poverty, we must utilise every tool in our arsenal to help developing nations grow their economies and lift millions out of poverty. Charter cities may not be the panacea, but they can be a useful tool, given the right circumstances.   

For those still holding onto Paul Romer’s vision of an entrepreneurial approach to international development, there’s still hope. In Zambia, for example, Nkwashi City – a new, master-planned city outside of the country’s capital Lusaka, which will be home to over 100,000 residents. It will include nearly 10,000 residential plots, host multiple schools and be home to an American-style university. In February 2020, the Zambia Development Agency signed a memorandum of understanding with the Charter Cities Institute (CCI), a non-profit dedicated to helping build ecosystems for charter cities to thrive. CCI will assist the Zambian government with creating legal frameworks to allow for charter cities to operate in Zambia. This could lead to Nkwashi being transformed into southern Africa’s first charter city. A (somewhat) similar project is being tried in Nigeria, such as the development of Talent City, a sustainable city in Nigeria aimed at boosting the country’s technology sector.

Regardless of whether charter cities turn out to be successful, it’s undeniable that the concept of innovative governance provides nations with a variety of opportunities to spark economic growth. Giving government officials more power at the local level will help equip them with the authority they need to govern and experiment. They may provide blueprints for economic growth. For now, Paul Romer’s vision for dozens of start-up cities revolutionising international development has not been realised. Time will tell if charter cities are merely an abstract fad to be confined in the realm of academia, or a practical blueprint for nations to implement regulatory reform.