Unlocking Prosperity Through Charter Cities

September 25, 2018 — The Big Picture

China’s lifting of 800 million people out of poverty is the greatest humanitarian miracle of the post-war era. A combination of urbanization and special economic zones was responsible for China’s success. Shenzhen, for example, was a fishing village with 30,000 residents in 1980 when it was declared one of the country’s first special economic zones. Today, it is the manufacturing capital of the world and boasts a population of 12 million.

Unfortunately, to date, no one has figured out how to replicate the Chinese success. Much of sub-Saharan Africa, for example, experienced urbanization without industrialization. Registering a business is also out of reach for most, since doing so requires 50 percent of per capita income. It doesn’t take an economist to understand the negative impacts of such a hindrance on entrepreneurship. As a result, major urban centers like Kinshasa aren’t producing value. Instead, most people are merely living off the scraps of rents extracted from natural resources. This is a lost opportunity, not just for the residents of these cities who live in poverty, but for those in the rest of the world who are unable to fully benefit from their talents.

Luckily, this is changing. Across the world, a community is emerging to fully capture the benefits of urbanization focused on creating semi-autonomous cities (or charter cities). A charter city is a business, a political project, and social improvement policy all rolled into one. Charter cities must be financially viable for success, as they require billions of dollars of investment. They also require political support, as the host country must pass legislation granting legal autonomy. Lastly, charter cities must create (or import) their own legal system, requiring a nuanced understanding of social organization as well as conditions on the ground that can sustain the rule of law.

Following China’s success, charter cities combine new urban centers with improved governance. With legal autonomy, a charter city is able to improve governance, creating a legal environment with a level playing field of individuals and firms, rule of law, and secure investments. This will attract investment, create jobs, and enterprise residents. Most importantly, if executed correctly, charter cities will not only improve the lives of residents but can serve as a shining city on a hill for the host country and surrounding region, illustrating how good governance can improve lives.

The charter cities community is still in its infancy. However, the interest in them is growing by the day. Several Silicon Valley titans are interested in building cities. I’ve spoken with multiple unicorn founders who tell me, “I’m building a war chest so when I exit I can build a city”. Many development economists are also sympathetic to charter cities as a tool for governance reform.

Even more promising, mega real estate developers building new cities are beginning to explore governance improvements. Governments and citizens are also interested. Dubai is starting to think about how to export their free zone model. The European humanitarian community is actively exploring refugee cities.

Each of the aforementioned communities approaches charter cities from different angles. However, no group will be able to go alone. Coordination is necessary. Silicon Valley has the entrepreneurial spirit to build charter cities, but lacks crucial knowledge about politics and real estate. Economists understand the technicalities of governance and special economic zones, but aren’t businessmen. Mega real estate developers can build city infrastructure, but often lack governance expertise.

The charter city community needs to become an ecosystem. Knowledge about past projects, both successful and unsuccessful must be effectively transmitted. Best practices must be developed. Groups must learn from each other. But together, it is possible to build charter cities.

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