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Can ‘Charter Cities’ Create Opportunity?

Each year about 75,000 Hondurans try to reach the United States to seek economic opportunity. A new plan, however, would try to bring opportunity to Hondurans rather than the other way around.

Honduras recently amended its constitution to allow the creation of “special development regions” or “charter cities.” Charter cities are the brainchild of American economist Paul Romer, who is known for his attention to the ways in which ideas, laws and informal conventions drive economic growth.

A charter city would operate under its own rules and tax structures, designed to encourage enterprise. This is supposed to entice entrepreneurs and investors to create commercial and industrial hotspots. As an example, Romer cites Hong Kong, which has been part of China since 1999, but whose government system is largely a holdover from British colonialism.

This colonial model is no coincidence. Within the charter city concept, countries can play three distinct roles: host, source and guarantor. The host country provides the land, which generally must be undeveloped, so no one is supposed to be forced to participate in the charter city experiment. Source countries provide the residents. Guarantor countries, in a role reminiscent of colonial powers, ensure that the charter is enforced.

A single country could conceivably play all three roles, as China has done in the Shenzhen region and in its other Special Economic Zones. These zones operate under distinct rules, but are still fully under China’s control. There is no external guarantor, and China could choose to adjust or do away with the special rules at any time.

Romer’s model, however, stresses the importance of foreign governments lending both their tested methods of encouraging growth and their credibility to these cities. In the arrangement he imagines, the land and the residents come from underdeveloped countries struggling with poverty, while developed nations take complete control of governance matters, to the point of potentially defending the charter against attacks from the host country. Romer suggests, for example, that if the U.S. closed down its military operations in Guantanamo Bay, Cuba’s government might turn the area over to Canada for operation as a charter city. Romer imagines Raul Castro saying to Canadian Prime Minister Stephen Harper: “Look, the Yankees have a terrible PR problem. They want to get out. Why don’t you, Canada, take over? Run a special administrative zone. Allow a new city to be built up there. Some of my citizens will move into that city. Others will hold back.”

Not surprisingly, while several countries have reached such a point of desperation that they’ve expressed some interest in effectively being colonized, Romer has had far less success finding anyone willing to play the role of 21st century imperial power. A top official at one of Europe’s aid agencies told the Atlantic, “Since we are responsible for our remaining overseas territories, I can tell you there is much grief in running these things. I would be surprised if Romer gets any takers.” The U.S. had its own experience with running a charter-city-like exclave during its 80-year control of the Panama Canal Zone, which eventually resulted in the U.S. being seen as a colonizer.

Romer envisions sponsorship of charter cities as an alternative to monetary aid, allowing developed nations to play a Good Samaritan role in ending poverty. But unless Romer can adjust his model to significantly increase the benefits to guarantors, without advocating the exploitation of host countries, the idea is unlikely to ever cross the line from interesting concept to practical guide.

Yet, while I don’t see much chance of Romerian neo-colonialism happening, I do agree with Romer’s basic premise that good government, including limited regulations and a business-friendly tax structure, is what drives growth. Israel and Singapore both prove that, by drawing on the power of ideas, even land- and resource- poor nations can find economic success relative to less-well-governed neighbors. Singapore is by no means a model of democratic freedom, but compared to local alternatives, it offers a relatively uncorrupt government, as well as functioning commercial courts and respect for private property rights. As a result, it has attracted workers and businesses.

The charter city model may be useful to developing nations, but only if they are willing to commit to it themselves, rather than relying on an external power to magically generate stability and prosperity for them. If Honduras wants a charter city, it is going to have to earn the credibility to write its own charter and to convince potential residents and investors, both Honduran and foreign, that the charter will be respected.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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