Economic Development, One City at a Time

Over the past half-century, foreign aid programs have typically focused either on massive, nationwide reform or on micro-targeted, individual empowerment initiatives. Yet despite billions of dollars in directed invest- ments from governments and NGOs, the material wellbeing of much of the third world has stagnated.

Programs aiming to strengthen rule of law through fundamental institutional reform, for example, often suffer from limited transparency and can even strengthen existing political cultures by fueling the rise of corrupt political elites. At the other end of the spectrum, targeted programs such as microloans and village education initiatives suffer from lack of organization and often misread the true needs of nations. While many programs aimed at individual empower- ment show signs of progress, they have not yet proven replicable enough to benefit large populations.

Still, economists argue that the problem does not lie with underlying economic theory. To Paul Romer of New York University’s Stern School of Business, the solution is clear — the charter city.

Romer, who has spent his career studying the determinants of long and short-term economic growth, argues that the single most influential factor in effective economic development is good rules. This is where charter cities come in. The charter city model seeks to identify uninhabited regions in underdeveloped nations and build new, structured cities from scratch. These cities would operate under autonomous charters that would offer clean and efficient political and economic rules that cannot be found in most underdeveloped nations. They would also be administered jointly between two nations. The host nation would provide the land and open access to its citizens, while a developed nation, such as Canada or the U.S., would serve as the “guarantor” of the city’s institutional reforms.

Economists and political scientists have long recognized the need for fair, straightforward rules in the development of prosperous nations. These rules can explain the economic inequality between culturally identical nations such as North and South Korea. In Romer’s vision, charter cities would allow for free entry and exit, legal equality, and a largely unregulated market economy. By building upon large areas of land, charter cities would accommodate the arrival of millions of immigrants seeking greater political and economic stability.

In many ways, the charter city concept is modeled after the remarkable success of Hong Kong. Hong Kong was open to Chinese immigrants, but British colonial leaders administered its political and economic institutions for over 150 years. In that time Hong Kong transformed from an underdeveloped fishing village into a global center for international trade and finance. Fol- lowing his rise to power, Deng Xiaoping recognized Hong Kong’s remarkable economic success, and emulated it by designating four cities as “Special Economic Zones” in 1980. These municipalities adopted radical free market reforms and were allowed to experiment with extensive economic freedom, inde- pendent of the rest of the country.

These cities proved so economically successful that within a decade the entire country began the transformation to a more open economic system. As Romer put it in a 2009 TED talk, through its actions in Hong Kong, “Britain inadvertently did more to reduce world poverty than all the aid programs that we’ve undertaken in the last century.”

Yet while the strength of the Chinese political machine made economic reforms possible, political instability poses a major challenge to the creation of charter cities in the developing world. Honduras made headlines in 2011 when it passed a constitutional amendment allowing for the creation of a new special development zone (known by the Span- ish acronym “RED”). This zone was given extensive political autonomy, but was to be administered by a president-appointed governor and an apolitical Transparency Commission. In 2011, Romer joined the Commission and established a nonprofit organization, “Charter Cities,” to provide pro bono economic advice.

Shenzhen, a charter city success story

In September of 2012, however, Romer withdrew from the initiative, citing political instability and a lack of transparency. In his statement to the news media, Romer declared that Honduran government contracts with private companies over the handling of the project represented “a departure from the standards of transparency that the administration had led me to expect.” This sentiment was echoed by Brandon Fuller, the Director of Charter Cities and a research scholar at the Urbanization Institute at NYU Stern. He explained in an interview with The Politic that “the organization was not getting the information we needed to give good advice.”

Much of the current confusion with the Honduran project — which is scheduled to continue — is due to apparent government violations of its commitment to transparency, as well as an ongoing constitutional challenge to the RED. Tellingly, the Honduran government that instituted these reforms only came to power two years ago through a military coup. This situation is indicative of the biggest challenge facing the Romer’s vision of charter cities: the question of political stability.

Dean Karlan, a Yale University developmental economist who studies the effectiveness of aid programs, noted that “good governance can help focus people on effective decision-making in terms of evaluating what programs work.” Karlan underscored the importance of anti-corruption programs, adding that the “deep sad irony” of initiatives aimed at larger scale systemic reform is that the countries in the most need of help may suffer from the least transparent governments.

Government transparency, both to its people and to the international community, is a necessary component of a strong charter city, but this precondition is indeed difficult to meet in much of the underdeveloped world. Many prospective host countries have unstable political regimes that could preclude the establishment of charter cities. While the charter city model is firmly based in the principle of economic freedom, the questions of political freedom and accountability are not clearly addressed. Said Fuller, “we see this charter city structure as highly flexible.” Some countries may seek to adopt political models similar to those in East Asia, in which authoritarian political rule is coupled with liberal economic policies. Independent observers, however, warn that by imposing free market reforms but not respecting civil liberties, the charter city program may simply empower a series of increasingly authoritarian regimes. They fear that by serving as a “guarantor” of the city, developed nations may further destabilize the nation.

Yet as Fuller noted, “You can look at models like Hong Kong and Singapore as significant improvements in government transparency. [In the] aspirational vision, the [charter city] pro- cess will lead to the rise of democratic institutions, but that might not be the case in all countries.”

And according to Romer, the charter city model is notable for its commitment to individual freedom of mobility and economic choice. To him, this liberty distinguishes charter cities from colonialism and even some contemporary foreign aid programs. Indeed, if political instability can be overcome, charter cities can perhaps overcome the logistical barriers that have long inhib- ited true economic development, and provide a basis for lasting, nation-wide economic reform.

Dimitri Halikias is a freshman in Ezra Stiles College.

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  1. I am particularly interested in this article’s discussion of Paul Romer’s involvement with the proposed charter city in Honduras. However, your portrayal of the current Honduran government is inaccurate in my opinion, particularly your claim that “…the Honduran government that instituted these reforms only came to power two years ago through a military coup. This situation is indicative of the biggest challenge facing the Romer’s vision of charter cities: the question of political stability.”

    The current administration was elected by an internationally-monitored national election following the removal of former president Zelaya. The former interim de facto President Micheletti was appointed according to Honduran constitutional provisions which name the President of the National Congress as President following the removal of an acting president. On the 29 of November 2009, a national election was held and Porfirio Lobo Sosa was elected as the new president of Honduras.

    The order to remove Zelaya from office was issued by the Supreme Court after the Attorney General officially charged him with violations of the constitution, law and other court orders. The Congress unanimously voted to remove Zelaya from office and the military was ordered to carry out the sentence.

    Zelaya was arrested and given the option of being prosecuted in Honduras or being exiled to Costa Rica. He chose the latter in the face of overwhelming evidence of his guilt on multiple charges of corruption among others.

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