Charter Cities: A Tool to Address the Failures of Government?

By Anonymous

When public resources are limited, governments can use public-private partnerships (PPP) to solve their largest problems, while minimizing the use of public assets. However, what if the government and its policies are the problem? In places like the Dharavi slum of Mumbai, the government has failed for decades to enforce property rights and laws, provide basic sanitation or foster prosperous economic conditions. Solutions that do not address the failures of such governments are tantamount to treating the symptoms of a chronic medical condition instead of curing the disease; they are wasteful and only prolong the underlying issue. An optimal solution needs to address root problems with such a government; posing the question, can a PPP provide safety, security, sanitation and pro-growth economic conditions? In other words, can a PPP be leveraged to provide even the most basic public goods traditionally provided by the government?

Professor Paul Romer of NYU’s Stern School of business believes that PPPs can accomplish such goals in through the charter city concept. A charter city would create a special economic zone (SEZ) that would be administered by a semi-independent government, unrestricted by economic policies of the sovereign nation and funded by external investors. Residents could choose to live or work in the SEZ or to remain in their current conditions. Under such a system, the SEZ’s government could develop its own laws and electoral practices, provide its own services and create conditions amenable to economic growth. The sovereign state would receive tax revenue from the charter city for use of the land. In order to succeed, the SEZ would have to earn the trust of the residents by providing services superior to those of the sovereign nation. If successful, the practice could be scaled or better yet emulated by the sovereign government. Such a solution would address the root causes that lead to slums in Dharavi and provide the investment and incentives to both the residents and government to redevelop these areas.

Of course, Romer’s concept can be criticized due to the additional implementation challenges it faces. First, convincing a government to fire itself and outsource its sovereignty is a hurdle beyond the traditional challenges of development projects. In fact, political gridlock ultimately blocked Romer’s attempt to execute this model in Honduras. Furthermore, the concept can be interpreted as a privatized regression to colonialism, a model that would be met with deep suspicion in a country like India, which recently gained independence from its colonizers. However, with adequate protection of rights and enough transparency to demonstrate the fairness of system to all stakeholders, such challenges could be overcome.

However, as demonstrated by previous redevelopment efforts in Dharavi, PPP solutions are not effective if they do not address the problem underlying the need for development. In extreme cases like Dharavi, where the government is the problem, if implemented correctly, charter cities can provide the requisite change to provide sanitation, safety and opportunity to those whom have not received it from their governments.

One thought on “Charter Cities: A Tool to Address the Failures of Government?

  1. By Anonymous

    The concept of “charter cities” presents quite the novel approach to solving the problem of ineffective and inefficient government. Yes, the problem of inefficient government could certainly be fixed by eliminating government and allowing the free-market to take unfettered control of the economy (and thus society). However, Romer and the post’s author seem to overlook one simple fact about modern governments (mainly democracies) – government is designed to achieve an optimal balance between economic and social objectives. Unfortunately for many hard-line free-marketers, social objectives sometime come at a cost of economic growth, and it is the government’s job to weigh the costs and benefits of each decision.

    There are three superficially positive things about the charter cities concept. One, it presents a novel solution to inefficient and ineffective governments. The point I will concede is that the charter city would provide some best practices that could be exported to other governments around the world (but, then again, other governments around the world also best practices that can be exported as well). Two, it offers a vision of a society in which the “semi-independent government,” presumably influenced heavily by the “external investors,” would be focused on the single-handed pursuit of economic growth (economic growth is always a good thing, right?). Third, it presents an appealing political vision in which only those who are willing to live under a set of rules will choose to move to the cities.

    The fundamental flaw in the entire premise of “charter cities” is that the role of government is grossly misunderstood. Government is not as efficient as the private markets precisely because government must make tradeoffs between economic and social objectives. Because society is composed of a heterogeneous grouping of individuals with different and at times conflicting economic and social philosophies, governments must broker compromises within society. The private sector does not have this burden – the private, capitalist system is focused on the simple pursuit of profit. Compromise is not inherent to its nature.

    The hurdle facing implementation of such a unique concept is not simply “convincing a government to fire itself and outsource its sovereignty.” The post’s author pointedly points out the more pressing and challenging obstacle – devising a system “with adequate protection of rights and enough transparency to demonstrate the fairness of system to all stakeholders.” By vesting a “semi-independent” body with this task, one is simply asking for one government (likely elected by the people) focused on ensuring fairness to be fired for another government (likely, in this case, to be elected or at the least heavily influenced by external investors) focused on ensuring fairness. If one admits that free markets require certain levels of restriction to prevent excess and the trampling of the rights of vulnerable segments, economic growth will subsequently be lower than its maximum potential.

    Finally, the role of government is, in many instances, to protect people from themselves and each other. Just as a price war can lead to negative effects for all firms involved, an absolutely free market would unleash a wage war that would lead to below-living wage levels (especially in many countries facing massive unemployment) until one victor is left standing. Throughout the evolution of capitalism, we have seen people subject others and themselves to inhumane conditions in the name of economic growth. For this reason, slavery was outlawed, child labor laws enacted, minimum wages enforced, and safety and environmental regulations were imposed. Even at Harvard Business School, one of capitalism’s strongest advocates, we cannot ignore the historical facts that unencumbered capitalism sometimes leads to undesirable outcomes and it is the role of government to limit the occurrences of these outcomes (I’m phrasing this too tenderly!).

    Now, it would be hard to argue against statements that inefficient and ineffective governments could be helped by closer partnerships with the private sector, the sharing of best practices from both the public and private sectors around the world, and, in some cases, a more intense focus on creating policies to foster economic growth. But, charter cities do not advance these arguments; the argument for charter cities is essentially an argument for an unencumbered free market economy. The likely result would be that the rich and powerful come to dominate the “semi-independent government” in place to foster economic growth while those on the margins supplying the labor to fuel the economic machine are left behind (sounds way too familiar to what many say the problem is with “developed” governments).


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