Why Charter Cities Won’t Lead To Decentralized Government

Alex Knight/Shibuya-ku, Japan

When it comes to innovation in the structure of government, few topics have generated as much conversation in the last decade as charter cities. The debate kicked off with economist Paul Romer’s famous TED talk in 2009, which presented the idea to a mass audience. Advocates noted two key obstacles in economically developing countries: the lack of stable and trustworthy institutions and the lack of strategies to reform existing ones. Romer and others noticed that a proven strategy was the use of small autonomous regions which could test reforms that might spur investment and later expand to the rest of the country. Prominently cited are the special administrative regions (SAR) and special economic zones (SEZ) used by China during its reform period. The regions of Dubai and Abu Dhabi in the United Arab Emirates are also common examples.

Proponents of charter cities promote SARs and SEZs for more general use. In addition to testing policies, governments are even able to bring in foreign expertise. They can import institutional structures and personnel or potentially outsource certain parts of government to private actors or foreign states. One example is Hong Kong’s final court of appeal, which uses judges who have served in several Commonwealth countries. Voices in the libertarian community, as well as those more broadly interested in liberal free market policies and decentralizing government, have been prominent in advocating for this concept.

In recent years, this area of conversation has shifted from a focus on the charter city concept to the broader one of “innovative governance.” The Center for Innovative Governance Research (CIGR), an organization promoting this updated concept, has ties to libertarian and free market oriented scholars and institutions. It is directed by Mark Lutter, an economist who has researched the charter cities concept at George Mason University, and includes a variety of collaborators such as fellow George Mason economist Tyler Cowen. The organization’s site lists several development concepts in addition to charter cities, including refugee cities, special economic zones, and technology zones.

On its face, the libertarian connection and the rhetoric of decentralization and autonomy all make sense. The projects proposed are unfailingly geared toward spurring investment and creating business-friendly environments. Some even see the opportunity for ostensibly de-politicized government providing administration as a profitable service. Small-scale experimental government based on voluntary association has been a project of several groups, such as the Seasteading Institute. One commission previously set up by the Honduran government to advise on such a project included former Cato Institute senior fellow Richard Rahn, anti-tax activist Grover Norquist, and former Reagan speechwriter Mark Klugmann. The Cato Unbound project hosted several essays on the topic in 2018.

However, this interest is counter-intuitive when considering the inspirations for charter cities. The strategic roles of Hong Kong, Macau, and the SEZs for testing reforms are ultimately directed by the Chinese Communist Party. The United Arab Emirates is a federation of Islamic monarchies. In this light, the tie between the charter city idea and decentralized market liberalism is not at all obvious. A major feature in the success of each of these projects is the backing by a single established host government, able to guarantee institutions and reap the strategic benefits of the project.

This should be significant for anyone thinking about global development. What if the control of these projects by strong host governments is an essential feature of their success, not just a historical accident that can be abstracted out in the future? If so, this would present a contradiction between the libertarian ideals of many charter city advocates and the state power actually driving this wave of city and economic zone construction. Charter cities would not weaken and decentralize nation-state governments, but in fact secure and strengthen them. Charter cities and similar projects provide platforms for policy and economic innovation with low political risk, among other benefits. This being so, it seems likely that these projects will only be undertaken in cases where the controlling state interest expects the project to strengthen its position.

But if such a contradiction presents an ideological problem, it doesn’t undermine the logic of the projects themselves. There are much more concrete pressures than idealism driving the surge of interest in building cities and special economic zones. A major trend cited by Romer and others is the world’s rapid urbanization. A recent Forbes article reported on numerous city building projects across Asia, the Middle East, and Sub-Saharan Africa. UN projections see urbanization spiking as the global population increases, with 68% of the population potentially living in cities by 2050. This means that countries must deal with a population movement involving hundreds of millions at the global level. With developed countries already challenged by migration issues, governments will face demand to decrease pressure on their borders. One strategy for diminishing this pressure is through investments abroad. Countries with less developed economies and growing populations will likely have to deal with overwhelmed institutions and a young, mobile demographic. If best practices for quickly creating new cities can be honed in the coming years, the consequences of this population shift can be mitigated and its opportunities better pursued.

On a more immediate level, many countries are aware that reputations for bad institutions have effectively blocked off opportunities for wealth creation. Companies are unwilling to enter countries where they have no guarantees of law or norms of doing business. This impacts not only the broader population but also local political elites. Since Romer popularized the idea, Honduras has received by far the most attention of any country explicitly pursuing charter city-inspired projects. As a country, Honduras has historically experienced high rates of violence and corruption. Thousands of Hondurans attempt to leave the country each year for the United States.

The government of Honduras has developed a constitutional outline for “employment and economic development zones” (ZEDE). This framework has been fleshed out into a more detailed theoretical structure, involving an administrative secretary, required to be a Honduran citizen who reports to an independent commission, as well as a court system which allows for involvement from foreign jurisdictions. With a number of projects under consideration, the proposal has continued to be at the fore of Honduran electoral politics, thanks to advocacy by President Juan Orlando Hernández.

Despite enthusiasm, many aspects of the project have stalled. Paul Romer, who had been asked to chair a transparency committee, ended his relationship with the project when the committee never met. In a Hong Kong interview in 2015, he stated concerns that the commissions would be captured by elite stakeholders and used to thwart independent electoral safeguards of the project’s integrity. A 2018 feature in The Economist reported concerns from local officials in the areas to be developed that the ZEDEs may become a vehicle for expanding territorial control by the central Honduran elite, rather than institution-building. In addition, locals have been worried about the fact that only a few sections of the constitutions are explicitly required to apply in ZEDE areas.

The Honduras project has to date been the project most widely associated with involvement from charter cities advocates. Why has it progressed so slowly? Mark Klugmann, a member of the original independent commission, has explicitly tied the slow implementation of the project to resistance among current members of the Honduran status quo who are not themselves project stakeholders. A BBC report on the project included his comments that the slow implementation would be inexplicable if Honduran decision-makers were unified in the initiative. This implies that it may in fact be viewed as a threat by at least some of the Honduran elite. For those benefiting from corruption and fragile institutions, there is little reason to support reforms when they have no personal stake in their success.

If Klugmann’s observations are correct, this implies a vicious cycle. The unreliable institutions in the country are themselves undermining the possibilities for improvement. Nor is the influence of Western partners enough to counteract this. This observation in and of itself is consistent with the observations of charter city advocates. But we can draw a further conclusion from the possibility of internal opposition or suspicion. The mere existence of political opposition doesn’t explain why reforms desired by the leadership aren’t occurring. Opposition is present in the face of nearly all reform projects. Nevertheless, some governments are able to move forward in spite of opposition and with confidence that they can reap the potential rewards of success, while others aren’t.

If those officials supporting the project are unable to move forward, this implies that either there is significant obstruction in the government itself or else the government feels it may lose power to political opponents. The possibility of corruption is also a factor. If different parts of the political leadership are unable to trust each other because of conflicting private commitments, then they will be less able to cooperate. This threatens to undermine the goal of these zones as a whole from the point of view of Romer and others, because they depend on rule-based institutions which investors trust will not be open to abuse.

With no reason to assume that those officials promoting the idea are being dishonest in their support, Klugmann’s observation implies that they are not confident enough in their ability to both move forward and retain their position. The political leadership is unable to actually exercise governing power over some proportion of the stakeholders involved. Securing that position is a prerequisite to moving forward.

The challenges faced by the Honduras project imply that more unified and secure governments may face fewer internal obstacles to establishing charter cities and other politically risky projects. This helps to explain our earlier observation that autonomous cities like Hong Kong and Dubai, Romer’s inspirations for the Honduras project, tend to be products of strong governments. In this light, it’s unsurprising that Hong Kong and Dubai are functional, whereas the Honduras project is not.

Secure governments have more ability to reap the long-term rewards of politically risky development, can better transfer wealth and resources to the rest of the country, have a better negotiating position to motivate stakeholders to cooperate with the project, and have fewer worries about the project threatening the security of their position.

Charter city advocates seem to be recognizing this in their discourse, as well. The CIGR discussion blog has noted the growing economic literature on state capacity as a prerequisite to economic success, as well as the phenomenon of city establishment occurring in “autocratic” countries.

However, there seems to be little discussion as yet relating these facts to the core assumptions of Western liberalism or free market ideology. Economic policy convergence is now much less associated with political convergence than in the 20th century, as we’ve seen with the Chinese use of markets to develop a state-oriented economy. If this growth is occurring without either the logistical expertise of charter city consultants or their ideological foundations, it raises the question as to what value the charter city concept provides apart from popular discussion of a global trend. 

It helps to consider the major roles any country or partnering corporation would play in a charter city or equivalent project. The first role is that of providing territory for the project, a role which can currently only be fulfilled by a state. The second role is that of providing institutional investment in terms of codes of law and government, and the personnel to carry them out. In practice, this has been mostly done by states, but theoretically a corporation could supply some of these services. The third role is economic and business investment, which can be accomplished by states and businesses alike and requires that partners have confidence in those who have filled the first two roles.

In the case of China’s special economic zones like Shenzhen, the host country provided the territory and also created the institutional framework, while in the SARs of Hong Kong and Macau the framework was inherited from a different state. Once a territorial and institutional framework exists, international participation in economic and business development can occur.

But would the project have moved forward had the Chinese Communist Party leadership felt less secure in its position, say, because the second role was being filled solely by foreign powers? At best, it would have been more hesitant and faced more internal opposition. The established nature of the central government also allowed them to bypass the mid-level governors whose failings the projects were ultimately intended to reform. Similarly, projects pursued by the UAE have evidently not affected their political structures or Western relationships, and have even given them autonomy from the nearer rival of Saudi Arabia.

The tie between state capacity and successful city and development zone projects seems to hold for other examples. The Forbes article by Wade Shepard mentions projects in Indonesia, Morocco, Kuwait, Oman, and South Korea, among others. The main exception is the Rawabi project in Palestine, which is being built with Qatari backing. However, this project is still under construction and depends on cooperation from the IDF forces, whose actions impact its access to water and other utilities. Nearly all the projects mentioned are occurring under the patronage of established states with positions secure enough that returns on investment are likely.

A particularly prominent example is a Saudi initiative to create a new 26,500 square-kilometer industrial zone called NEOM. The $500 billion dollar investment project is intended to include Saudi Arabia, Egypt, and Jordan. Although the project has not seen public involvement by the professional advocates of charter cities, it matches the description in important ways. The zone is designed to spur investment, with the project’s leadership receiving direction from the Saudi crown prince Mohammad bin Salman.

There are many factors motivating the Saudi state to take such a risk. In addition to the general incentives described above, Saudi Arabia has faced pressure to diversify its economy away from oil and integrate its young population into a productive labor force, rather than funding more public sector make-work jobs. With bin Salman having used his position to remove rivals and crack down on corruption (often at the same time), it appears that the power structure feels secure and stable enough to implement controlled reform. Rather than decentralizing government, a successful NEOM will allow the Saudi power structure to deepen its long-term resilience, both increasing legitimacy via economic growth and creating spaces to test reforms with minimal country-wide disruption.

The major exception to the rule of host countries needing secure states seems to be occurring under the Chinese strategy on the African continent. Unlike Western countries, the Chinese approach toward city building and development is based on a broad, state-driven strategy in which the business community plays an important role. An example from a more stable country is the Chinese role in building up Ethiopian capital Addis Ababa. But particularly interesting is China’s approach in less secure regions. China has shown a willingness to invest heavily in special economic zones in areas many consider risky, such as the area surrounding the Nigerian capital of Lagos. These zones allow Chinese investors to build up an economy and infrastructure which can serve as a base for the broader city and region. The walled-off zone near Lagos has a massive level of autonomy from the city proper, with plans for a separate harbor, grid, and police force. The housing and infrastructure projects which China has promoted across Africa provide a valuable negotiating chip in establishing such zones.

While charter city initiatives have been plagued by accusations of neocolonialism, the Chinese approach openly promotes soft power. Chinese media sources are becoming more widely available across Africa due to its economic projects. The ability of the Chinese state to guarantee investment and security in development projects contrasts with the Western role, where this has largely been left to the private and NGO sectors.

In countries where the state is weak and lacks governing capacity, the implication is that stronger states and developed countries will gain influence. However, the direct ties on which these relationships are built on may incentivize longer-term planning and investment. A similar dynamic played out during the Western colonial period itself. As with modern states, the secure position of colonial powers at the time of their dominance led them to see their territories as assets and develop them to varying extents. While some territories suffered under destructive policies, others experienced growing populations and immigration from within their region.

By way of contrast, much of Western involvement in these regions today takes the form of expensive but ineffective aid programs. What exists of grand strategy or long-term thinking is often at the mercy of entrenched special interests or think-tanks focused on election cycles. However, accusations of neocolonialism undermine attempts by Western countries to develop a better-planned and comprehensive approach. Ironically, this prevents Western investment from producing real results and addressing the needs of people in developing economies. The consequence of this has been the displacement of Western influence by that of China and other growing powers.

This displacement is not limited to governments. It also impacts charter city advocates and other development strategists, who tend to operate via think-tanks, NGOs, and consulting practices. A striking feature of the global wave of urbanization and development is its independence from Western political narratives. Almost none of the projects which have met success engage in the discourse of decentralization, reform, or political liberalization. Instead, projects tap into the brand of development and opportunity. The NEOM website features images of renewable energy, beautiful vistas, and cities springing up from the desert. Given that the project’s whole point is the development and economic security of the Saudi state, rhetoric about removing tired, inefficient government from the economic prosperity of free people would be counterproductive at best.

China goes even further, since its political leaders are intensely aware that their policy innovations have fed a Western narrative that it is now “state-capitalist.” Their media devotes resources to attacking this narrative and placing market-oriented policy innovation squarely within Chinese socialism and the “Chinese path of development.” Given these trends, the Western role seems increasingly restricted only to corporate involvement. Mere corporate involvement is insufficient for any Western grand strategy.

Nevertheless, the innovation and activity of this city-building wave should be seen as a positive opportunity. The crises which charter cities and their equivalents are designed to tackle are real ones. If carried out correctly, they will allow hundreds of millions to avoid the displacement and poverty which can dissolve regions into conflict. As we have seen, it is such positions of security which seem to best motivate the negotiations and investments needed to make the projects work. Success will breed success, while initial failures could compound into greater crisis. Moreover, the actual spaces being created have the potential to be engines of innovation and development. If strategic, transferable blueprints for economic zones and startup cities can be created, they will become vital tools in dealing with the root causes of the global migration crisis and future urbanization.

If the strong association between successful projects and secure governments with state capacity continues, a reborn and decentralizing market liberalism is unlikely to spring up. The ideological commitment which distinguishes many Western charter city advocates from their pragmatic Chinese or Middle Eastern counterparts makes them a liability. If Western countries are to maintain influence in these regions, it will instead be on the basis of their comparative advantage in logistics, investment capital, and human capital. It would also require more long-term strategic planning on the parts of Western governments and explicit attention to geopolitical concerns in development.

Some governments are already thinking in this direction. In mid-2018, Italy’s populist coalition government announced plans to promote Chinese-Italian economic partnerships. In particular, the announcement referred to both the Belt and Road initiative and partnerships in Africa specifically intended to decrease migration pressures. Likewise, France’s government has taken a more active role in the North Africa region in recent years, including political assistance to Libya and Mali.

The opportunities of this development strategy are massive. Countries which manage to successfully contribute to initial schemes could become partners of choice later on, gaining a first-mover advantage. This is particularly true for countries with the resources to train personnel in institutional development, in addition to the obvious economic investments. As such, it is important that the political impact of such projects is accurately assessed. Past years of charter city excitement have been guided by the ideological agendas of tech sector visionaries and libertarian policy advocates, but future successful projects seem more likely to be guided by hard-nosed, state-oriented geopolitical and developmental concerns.

The state-oriented political realities of the charter city type projects that actually happen contradict a discourse of decentralization where market power is replacing state power. Charter cities are not the engines of decentralization that libertarians hoped them to be. Instead, these projects will strengthen the legitimacy and resiliency of those states able to provide a secure platform and the will to carry them out. Governments launch charter cities projects in cases where those cities will be subordinate to state objectives and will achieve economic or policy innovation gains that further strengthen the state. Likewise, foreign partner states will approach these projects as a way to project influence and strengthen their global position. A more diverse environment of markets and governance structures will likely occur, as regimes take the opportunity to experiment with policy and reform. However, this has to be understood as powerful states finding ways to innovate and be more nimble, rather than the market finding ways to route around slow legacy governments.

The exciting question here is not how Western liberal governments can export their successful legal and economic systems with charter city type projects. Rather, once this trend of innovative new city development gets going and best practices are established, the question is whether liberal governments, known for their gridlocked lack of agility, will even be able to keep up at all.

Ash Milton is a market analyst and managing editor at Palladium Magazine.