Sustainable Paths to Economic Prosperity – Charter Cities

By John Clayton

The Phu My Hung class seemed to present several disheartening takeaways. Of the last several cases we’ve examined, Phu My Hung was objectively considered to be the most “successful” master-planned development. And yet, our conversation highlighted many issues that confronted this successful development: the long time horizon for invested capital and foregone returns from alternate investments, the unique (and likely non-replicable) circumstances involving land acquisition and government support, and the disproportionate level of demand catered towards expats with 10x per capita income levels – i.e. the wealthy. If this development could only work under this limited set of circumstances, with evident tradeoffs, and only for the wealthy, then how can we possibly expect to reasonably accommodate an urbanizing wave of 3 billion mostly poor people in the coming decades?

Enter the charter city – a city that’s designed, developed, managed and handled by a business or external entity.

Charter cities function something like this: an emerging market country leases a greenfield portion of its land to an outside developer, usually a country or a consortium of businesses (i.e. a tech cluster). This external party leverages their expertise to develop the land, build out the urban infrastructure, and incentivize business and labor (both domestic and international) to move to the city and build an employment base. For example, Mozambique offers a tract of coastal land to Singapore; Singapore then leverages its urban development expertise and trade connections to build out a city cluster that attracts Mozambicans (and expat talent), as well as businesses looking African market access or lower-cost labor. This concept is particularly conducive to emerging market countries facing significant resource constraints, high population growth rates, and a lack of financing and technical expertise to develop a city themselves.

Who benefits? Everyone does. The local country benefits from targeted economic development, external urban infrastructure expertise, master planned cities, and an escape valve for its increasingly crowded existing urban areas. The investor country benefits from development and construction work for its companies, quasi-sovereign governmental jurisdiction (a key constraint we’ve seen to successful development), and recognition within the global community. Businesses benefit from access to lower-cost labor, new markets, and lower-risk operating environments (similar to Singapore’s involvement in the Sino-Singapore Tianjin Eco-City Project). Most importantly, poorer populations benefit from increased economic opportunities (in a word, jobs) and access to a well-constructed urban environment.

Now for the numbers – how would these charter cities be financed? Funding for city infrastructures could come from several sources: (1) similar to KAEC or Phu My Hung, cities could benefit from build-operate-transfer contracts for critical infrastructure components – water, electricity, roads; (2) increasing land values; (3) taxes or payments derived from economic activity; or (4) initial subsidies provided by international development organizations or donor countries.  Partial risk guarantees from either developed states or multilateral financial institutions such as the World Bank could lower risk profiles and underwrite private-sector investment opportunities, further reducing investment costs.

Charter cities are by no means a novel idea – history is littered with previous examples of companies developing urban landscapes, from the East India Company outposts of the seventeenth century to the 20th century textile mill towns that dot the North Carolina landscape. Modern-day Singapore now leases several islands from Malaysia to accommodate its growing population and economic activity. Of course, charter cities are not without their critics – detractors complain that such systems reduce sovereignty and are disguised forms of neo-colonialism. Still, though, could this be a novel multilateral way of accommodating the next wave of urban inhabitants in emerging markets in a sustainable and economically cost-effective manner?

2 thoughts on “Sustainable Paths to Economic Prosperity – Charter Cities

  1. While I find the charter city idea to be an innovative solution to development, I worry about its ability to endure in emerging market environments. The “obsolescing bargain” theory describes a phenomenon in which developing country governments initially grant favorable terms to MNCs setting up shop in their country but over time begin to renege on the favorable terms that brought the MNC to the country in the first place. The theory holds that a given developing country has the power to do this once an MNC has planted more and more fixed assets in a country and is more strongly affixed to the environment.

    I worry this tendency towards the obsolescing bargain will be further accentuated if the cluster an MNC introduces into a country does not translate into economic opportunities for its citizens. I know John (Clayton) stated jobs for the poor to be one of the benefits of charter cities but I don’t think it’s a guaranteed outcome. In the case a cluster fails to translate into economic opportunity for the population of a developing nation, the temptation will be even higher to extract value from an MNC to appease citizens.

    I’d have more faith in the charter city concept if these agreements could be brokered by a third party with a real capability to enforce. John mentioned the benefits of having a third party offer partial risk guarantees; I think a third party needs to have a more active role, bearing witness to the terms of the agreement and collecting a premium from developing countries that offers insurance to MNCs in the case of contract default.

    In short, the charter city concept holds some promise but it needs to be adapted to be sustainable in environments with weaker legal institutions and higher incentives to renege on economically valuable contracts.

  2. By John Macomber

    Charter cities are a very compelling idea. Paul Romer is probably the best known proponent.

    It would make sense to add a module to the course expanding on this idea…and how to make it happen. A risk is that it amounts to educated people like us telling other people what is good for them…

    The Economist ran a piece last July about disappointments so far in promulgating this concept. The article concluded, “…the sort of places that most need charter cities may also be where founding them is trickiest.”

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