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In this video, we describe a speculative but promising idea to boost economic growth: giving cities the ability to write some of their own laws and design their own institutions, independently from their parent countries.   Jackson Wagner, the first author of this post, has written the script.  Writer, the second author, has given feedback.

Below, you can find the script of the video.


Introduction

When you think about ways to help people in developing countries, you probably think of international aid -- providing medical supplies, or coordinating disaster relief, or even just giving cash, like we discussed in our recent video about global poverty.  These things are great, and this kind of charitable aid saves lives every day.  But there’s something a little curious here, because these interventions AREN’T what helped the world’s most prosperous countries succeed in the first place.

Up until the 1700s, essentially the entire population of the planet lived in poverty.  That started to change during the industrial revolution, when humanity developed more efficient, mechanized ways of producing goods and capturing energy.  Hundreds of millions of people were able to live better lives thanks to economic growth -- learning to use technology to more efficiently grow food, make clothes, and get from place to place.

The overwhelming importance of economic development remains true in modern times -- by far the greatest ongoing reductions in poverty and suffering are coming not from international aid projects, but from development, as low-income countries find new ways to do things more efficiently  and climb the ladder of technological advancement.

For example, in the year 1960, Singapore was a poor and undeveloped country, producing only $428 per citizen.  Today, Singapore’s economy has grown by many times, to around $83,000 per person.  Concurrently, Singaporeans’ life expectancy has climbed from 65 years to 85 years, and the literacy rate has jumped from 57% to 97%.  That’s an incredible amount of progress within a single lifetime.

Almost every country on earth has made some economic progress over the past few decades, but unfortunately only a few have succeeded as spectacularly as economic-development superstars like Singapore, or South Korea.  There are hundreds of millions of people still living on just a few dollars per day, like Singaporeans in 1960.  So, why do some countries grow more quickly than others?

One important factor is the quality of a country’s institutions: Can the local court system make fair and speedy decisions, or do cases take years to resolve while working through a system mired in corruption?  Can the local government efficiently build infrastructure for electricity, roads, and public transit?  Are elections trustworthy?  Can people be confident that their savings and investments are secure?

Trying to improve a nation’s existing institutions can thus be a powerful way to boost development and reduce poverty, but it can also be very difficult.  When a system has been around for a long time, there will always be a lot of entrenched interests who benefit from the status quo and like things the way they are.  But if you want to reform a broken institution, there’s no avoiding this kind of long, arduous political struggle, right?

The idea of charter cities, and the town of Itana

Well, in 2009, nobel-prize-winning economist Paul Romer proposed a new strategy.  He argued that going through the painstaking process of fighting for incremental changes from within the existing system might not always be a country’s best choice.  Sometimes, it might be easier to start from scratch, developing an entirely new city with a new legal code and new institutions, inspired by the best international examples.

Charter cities, Romer said, would be like a nation within a nation.  They’ll still need to follow their mother country’s constitution, criminal code, and international treaties, but should otherwise be given the freedom to design their own legal code to encourage the growth of new industries -- setting their own immigration rules, tax codes, business regulations, civil court systems, and more.  The way that the city holds elections, the structure of its government, and the way it provides public services could all be designed based on the playbook of success stories like Singapore.

There aren’t many charter cities that exist today, but for a real-world example, let’s look at “Itana”, a small charter city project being spearheaded by the Nigerian entrepreneur Iyinolowa Aboyeji.  Itana is a town being built near Lagos, designed to attract talented tech workers from across Africa to found their own new companies or work remotely for employers overseas.  Of course, in order to realize that dream, Itana is going to need a stable supply of electricity and a strong internet connection.  But that’s difficult in Nigeria, which has struggled for decades with electrical blackouts and grid collapses, only managing to provide power for less than eight hours out of each day.  One of the many obstacles to better service is that the government insists power be provided very cheaply.  It’s a vote-winning policy, but it makes power companies reluctant to transmit electricity that they’re forced to buy at a high price and sell at a loss.  This is one reason Itana wants the ability to write its own business regulations -- if Itana could choose to pay a higher price for more consistent power, that could set the stage for a brighter future.

Furthermore, in order to attract talented people from across all of Africa, it would be great if Itana could write its own, town-specific immigration rules, granting visas quickly instead of having them go through an arduous, months-long process.  And for similar reasons, it’s planning to make it as easy as possible for entrepreneurs to quickly register a new business.

Objection: why whole new cities?

Now, some of you might be thinking -- this sounds nice, but isn’t it overkill to build an ENTIRE NEW CITY, just to test out some better business regulations?  Who would want to be the first to move there?  It’s true that this might seem drastic in places like the United states, where no new large cities have been built in the last hundred years.  But across Latin America, Africa, and Asia, millions of people move from the countryside to urban areas each year, with the United Nations expecting 2.5 billion new city-dwellers by 2050.  Urbanization in many countries is happening so fast that it’s outpacing the ability of existing cities to build supporting infrastructure -- leading to problems with providing clean water, electricity, and other basic servicesso on.  Lagos, for instance, is one of the fastest-growing cities in the world, doubling in size over the past twenty years from eight million to sixteen million people.  Building out infrastructure for new charter cities would help channel the power of this urbanization to create healthy, productive engines of long-term growth, rather than stressing existing megacities with continuing haphazard, unplanned sprawl.

Objection: isn't this politically intractable?

A bigger problem is political feasibility.  The whole point of giving a city the ability to write its own rules is to make reform easier, but in order to get that ball rolling, you first need to find a nation willing to give away lots of their own regulation-writing authority in order to enable your charter city project.  This isn’t completely unheard of -- in many ways, charter cities are just a bigger and bolder version of “Special Economic Zones”, where a port might be granted lower tariffs or streamlined permitting for the sake of spurring industrial development.  Nevertheless, asking for broad autonomy to create an entire city is a tall order.

Indeed, Paul Romer was originally involved in efforts to create charter cities in Madagascar and Honduras, but later abandoned both projects.  Despite being invited by each country’s president, the idea became politically controversial in both nations, and the project in Madagascar fell apart when the president’s party was voted out of power.  In Honduras, a law authorizing charter cities was passed after years of political wrangling, but Paul Romer distanced himself from the result, saying that Honduran corporate special interests had corrupted his original vision.

Wider benefits: inspiration, competition, and experimentation

So, charter cities are difficult to get off the ground, and since most of today’s projects are still in early stages, we don’t know for sure how effectively they’ll boost growth.  But these uncertainties should be weighed against the immense potential benefit -- the chance to lift millions of residents out of poverty through improved governance and sustainable economic growth.  

And, it gets even better, because it’s likely that the growth-boosting benefits of charter cities could spread to far more people than just the residents who move there.  There are three main ways this could happen: inspiration, competition, and experimentation.

First, seeing legal reforms work well on a small scale could inspire larger national changes.  For example, Hong Kong’s economic policies during the 20th century didn’t just help the city of Hong Kong itself grow into a thriving metropolis of several million people.  Provinces in mainland China were also inspired to imitate Hong Kong’s success, and this economic liberalization eventually lifted hundreds of millions of people out of poverty.

Second, is the idea that charter cities could spur “governance competition”.  If you give people lots of options about where and how to live, people will naturally flock to the places that offer them the most freedom, safety, and prosperity.  Unfortunately, right now, lots of people don’t have many good options, and that makes it easier for governments to restrict people’s rights or otherwise exploit their citizens.  In a world with lots of charter cities, fewer people will have to put up with that kind of abuse, and would-be exploitative governments will be pressured to start treating their citizens better, lest they start losing all their best people to the city next door.

Finally, experimenting with totally new types of law could bring huge benefits.  What about going beyond just imitating the best practices of developed countries, and instead trying to do even better?  Since charter cities are building whole new laws and institutions from a clean slate, it’ll also be easier for them to experiment with radically new concepts which, if successful, could become leading examples for the whole world.

For example, Prospera is a charter city that’s currently operating within a special economic zone in Honduras. They've implemented a completely novel legal framework that enables rapid innovation across industries. Alongside benefits for areas like finance and biotech, Próspera's legal platform enables architects to design modern, eco-friendly buildings connected by parks and walking paths, in a way that wouldn’t be possible under the zoning rules of most American cities.

There are all kinds of new policy ideas that charter cities could potentially explore.  The new-city project of Telosa is planning to base its economic system around the philosophy of “Georgism”, taxing land in a way that will help fund city services while eliminating economic distortions around land use.  A city could also try out improved ways of voting, like “liquid democracy” where there’s no strict distinction between ordinary voters and elected representatives, or they could take inspiration from a previous video of ours, and have the city government use prediction markets to help inform important public decisions.  All of these ideas would be considered huge, fundamental reforms to the status quo of today’s rich countries.  Trying them out on a small scale in a charter city would be much easier.

Conclusion

The idea of building charter cities with new legal systems to boost economic growth is strange and untested.  Today’s projects are small, with uncertain prospects.  But consider this: two hundred and fifty years ago, the United States was small and uncertain.  It was experimenting with a bizarre, Classical-era style of government called “democracy”, and nobody knew if it would really work.  But over time, democracy proved so successful that countless nations around the world made the switch -- and this new system led to greater peace, faster economic growth, and more human freedom.

If some of today’s charter cities are successful, then maybe the idea of semi-autonomous cities could spread across the world just like democracy did.  A century from now, maybe the idea that promoting governance competition leads to faster growth and greater liberty, will seem just as obvious as the idea that an elected president usually provides better leadership than a dictator or a king.  Charter cities today are focused on making life better for the people who choose to move there.  But if we’re lucky, they might also help make our entire civilization wiser, richer, fairer, and better able to navigate future challenges.

Call-To-Action

If you loved this video, consider checking out the website of the Charter Cities Institute to learn more.  The Charter Cities Institute does research to understand the detailed legal frameworks and governmental best-practices that new cities can use to set themselves up for success.  They also consult with interested governments and city developers, spreading the word about the charter cities idea and helping new projects get off the ground.

On their website, you can read their research and learn the history of development superstars like Dubai and Shenzhen.  You can also listen to podcast interviews with the people involved in some of today’s most exciting new city projects.

Another fun resource is the “Startup Cities Map”, where you can learn about dozens of innovative special economic zones and ambitious new-city projects underway across the developing world.

And as always, we have detailed links in this video’s description, so if you want to read all about Prospera Honduras’s 3D voxel-based property rights, or watch the original TED talk where Paul Romer first introduced the idea of charter cities, you can check out those links!

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Sorted by Click to highlight new comments since: Today at 5:59 AM

You raise some minor objections but I think the biggest problem with charter cities (apart from the lack of empirical evidence of their effectiveness[1]) is the free-rider problem. Society uses taxes to invest in common goods such as education, healthcare, research... If rich people use these common goods to generate their wealth, but then once it's time to start paying their taxes, opt to create a tax haven charter city instead, we will have an underinvestment in these public goods and we'll get a race to the bottom. For an eventual endpoint of this race you can look at the old company towns, or worse, slave plantations.

Similarly, while this system disincentivizes creating common goods, it also incentivizes destroying certain common goods. For example, we already have great difficulty getting existing countries to act on climate change. Imagine that rich people could just create a new city without any laws against pollution/greenhouse gases; you'd get another race to the bottom. You can construct a similar scenario for any type of negative externality.

Of course this is only what would happened were they able to be freely created. In reality they will probably never even get to the stage where they can do much of anything, including damage, because even starting one is fraught with political problems. (For more information, see the linked rethink priorities report).

  1. ^

There are definitely a lot of examples of places where some rich people wanted to try to create a kinda dumb, socially-useless tax haven, and then they accomplished that goal, and then the resulting entity had either negative impact or close-to-zero impact on the surrounding area. (I don't know much about Monaco or the Cayman Islands, but these seem like potentially good examples?)  But there have also been times when political leaders have set out to create sustained, long-term, positive-sum economic growth, and this has also occasionally been achieved!  (Dubai, South Korea, Guangzhou... I'm not as familiar with the stories of places like Rwanda or Botswana or Bangladesh, but there are a lot of countries which are trying pretty hard to follow a kind of best-practices economic development playbook, and often seeing decent results.)

Both these phenomena predate the "charter cities" concept... as I understand it, the goal of orgs like the Charter Cities Institute is not to blindly cheerlead the creation of new cities of all kinds (as we mention in the video, lots of new cities are being built already, across the rapidly-urbanizing global South), but rather to encourage a specific model of development that looks more like the Dubai / South Korea / etc story, rather than simply building more cities as relatively useless tax-havens, or small and limited SEZs that won't be able to build their own economic momentum, or as mere infrastructure projects with no economic/legal reform aspect.

I could definitely see myself agreeing with a criticism like "Sure, charter cities advocates do a LITTLE bit of work to avoid accidentally letting their ideas get used as an excuse to actually create useless tax havens, but actually they need to do a LOT MORE work to guard against this failure mode".  Right now I guess I feel like I don't know enough about the status of specific projects to confidently identify what exact mistakes various charter-city groups are making.  But we did try to allude to this failure mode in the video when we talked about Paul Romer's complaints about the Honduras charter cities law.

 

Re: the idea that creating more competition can lead to more good things, but also makes it harder to coordinate to prevent negative externalties -- yup, this is definitely something that I think about.  I tend to think that since there are already almost 200 countries in the world, coordination on the most important topics -- stuff like nuclear nonproliferation, the ongoing global moratorium on slavery, international agreements about climate or potentially soon about AI -- already has to deal with lots of competing stakeholders, and hopefully won't be impeded too much by adding some charter cities to the mix.  (This is one area where it definitely helps that, at the end of the day, charter cities ultimately lack top-level national sovereignty!)  I think charter cities in particular have a lot of potential benefits that could even help with these risks, namely by helping pioneer new styles of governance / regulation / institutions that could find better ways of dealing with some of these problems.  Nevertheless, I agree it's a real trade-off... we're actually working on a draft script about "risks of stable totalitarianism" at RationalAnimations, and in that video we're planning to spend a lot more time talking about a similar tradeoff space.  It's obviously extremely helpful to have global coordination / relatively unified world governance to solve important problems, so the best ways of reducing stable totalitarianism risk are things like differential technological development, or maybe influencing cultural norms or etc, not just decentralizing stuff, since blindly decentralizing stuff makes coordination harder!

I think that's an interesting and very open-minded reply. But I think the problem with the proposed model in practice isn't just that competition limits the ability to coordinate to prevent negative externalities, it's that the specific type of competition that "charter cities" are designed to stimulate (making undeveloped land in a poor country with severe governance problems into an attractive opportunity for business investment) is naturally geared towards lower taxes than elsewhere because it's one of the few things they can credibly commit to. Pretty much everyone agrees that "better institutions" matter to economic development, but good institutions are composed of people and culture and stability, and a startup entity with no existing infrastructure, limited sovereignty and a problematic parent country doesn't have any of that. What it can offer is "really low taxes". This also tends to be the carrot for the governments setting up the zones (the Honduran government doesn't really have an interest in demonstrating that it's doing a terrible job of regulating, but Prospera's plans to pay them a very small percentage of some expat millionaires' income sounded like a good deal at the time. Same logic as the tax havens). So the "race to the bottom" dynamics would exist even if the intellectual and financial core of the movement was considerably less libertarian.

I agree there's plenty of potential value for humanity in studying what went well in Singapore and Dubai and the Guangdong SEZs that might actually be replicable, but one thing they definitely don't have in common is being set up by foreigners as greenfield projects to explore the regulations and city planning that most suit them. In that respect, Itana as a project set up by Nigerians with the stated goal of boosting Nigeria might be more interesting, but a quick glance suggests that generous tax exemptions are the real draw there too. And Prospera's low and regressive tax rates and corporate appointees' veto over elected candidates' decisions don't really seem like evidence-based development hypotheses for the Honduras worth testing. Having some wealthy foreigners around will create some local jobs, as in all the other "socially-useless tax havens" and generic holiday resorts and it looks really pretty but it's notable that the regulations its founders are publicly critiquing aren't Honduran ones (apart from the tax). The reason the rest of the Honduras isn't characterised by "modern, eco-friendly" Zahra Hadid-designed architecture has nothing to do with US-style zoning laws which aren't present in the rest of the Honduras or most of the rest of the world.

Admittedly Romer only proposed charter cities in 2009, but the relative abundance of "socially useless" tax havens and SEZs and primarily extractive colonies set up by foreign investors throughout history isn't coincidental; its the default model. And having Prospera Inc as an example is particularly unhelpful as it doesn't really seem to be deviating from that: having lost the support of Romer, local people and the national government it's currently threatening to sue them for around the total annual Honduran govt budget based on theoretical profits its investors are supposed to make if it continues. Hard to imagine anything less altruistic (or likely to inspire a resolution to the endemic corruption in the Honduras) than foreign investors threatening to bankrupt a developing country for attempting to repeal their sweetheart tax deal a predecessor forced through after kicking four objectors off the Supreme Court. 

Executive summary: Charter cities are semi-autonomous urban areas designed from scratch with new rules and institutions modeled on successful developed countries. They aim to boost economic growth and could inspire wider reforms.

Key points:

  1. Economic growth has lifted billions out of poverty, but developing countries often struggle with poor institutions.
  2. Charter cities are designed and governed independently within a country to have business-friendly rules.
  3. They face political obstacles, but could drive growth and inspire national reforms.
  4. Benefits include governance competition, policy experimentation, and spreading best practices.
  5. If charter cities succeed, the model could spread like democracy did centuries ago.

 

 

This comment was auto-generated by the EA Forum Team. Feel free to point out issues with this summary by replying to the comment, and contact us if you have feedback.

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