'Clean slate' cities

Honduras is setting up a ‘charter city’ – starting a city from scratch to encourage new investment and innovation. Matthew Partridge looks at how it will work.

What is a charter city'?

The concept of the charter' city is the brainchild of urbanisation expert and New York University economics professor Paul Romer. Wondering why some countries remain poor even when they can access the same technology as wealthy nations, Romer concluded that the problem is that they are "saddled with laws and, crucially, customs that prevent new ideas from taking shape", as Adam Davidson puts it in The New York Times.

Solving this problem isn't easy. As The Economist points out, "insider interests and institutional inertia make reforming an entire country excruciatingly slow". Romer's solution is to start an entire city from scratch. "A clean slate allows government authorities to experiment with laws and governance or copy those that have worked elsewhere," he says.

And to avoid corruption and maximise growth, developed countries should "oversee the administration of charter cities, in particular the judicial system and the police". This "would avoid a common problem in poor countries: that elected leaders, once in office, abuse their power to entrench their rule and enrich themselves".

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Has anyone signed up for the idea?

Yes. Honduras, one of the world's poorest, most heavily indebted nations, has been persuaded to set up a 'charter city', says Jeremy Torobin in the Canadian Globe and Mail. The idea is that "reform-minded people could migrate and be governed under a broad set of evenly applied rules that, in theory, could remake norms across the entire country".

The aim is to improve the quality of life for its inhabitants and encourage foreign investment. Although still a part of Honduras, outsiders would have a major role in "shaping how the charter city is governed" and ensuring the law is respected.

Although no developed country has agreed to take part yet, Roomer has been lobbying Canada's government to get involved, and it has expressed an interest in helping out.

Has this ever been tried elsewhere?

The idea is not new, notes Shu-Ching Jean Chen in the magazine Development Asia. Indeed, supporters "recall similar successes in history, such as the 12th century founding of the German city of Lbeck, the Republic of Korea's ultra high-tech Incheon smart city, and Turkey's low-tax and manufacturing-focused organised industrial zones".

But perhaps the best-known model is Hong Kong. Not only did it boom during British rule, but it continues to prosper under the "one country, two systems" agreement. Under this deal, it has kept its legal and economic structure even though it is now part of China again. Another example is the province of Shenzhen in the Chinese mainland (see below). And developed countries such as Britain have experimented with tax and planning benefits for poorer areas.

So does it always work so well?

Not all experiments with charter cities have ended successfully, Chen admits. "India tried to set up (Chinese-style) economic zones and failed". It was "sabotaged by difficulties in acquiring land to set up the zones amid outcry that the policy would increase manufacturing employment at the expense of the livelihoods of millions of farmers".

George Monibot, writing in The Guardian, agrees. "With a bit more history, Romer might acknowledge that mainland China had other areas that were so dominated by foreigners they too might be described as charter cities. Shanghai in the early 20th century had signs reading: No Dogs, No Chinese and yet it didn't boom like Hong Kong did."

Are there other objections?

Romer's scheme has generated plenty of criticism. Writing in The Independent, Suzy Dean notes that the "unelected commission will govern the new city, until they decide that the population is ready' for democracy; only then will new councils be set up".

This is "problematic": democracy "is a prerequisite to a functioning society, not a barrier". Indeed, Dean worries that this is part of a global trend "whereby technocracy is usurping popular rule". The Economist also worries that "the new entity may suck tax revenues and talent away from the rest of the country". Also, it "may prove more like Macau than Hong Kong: easy prey for gangsters, money-launderers and other shady characters".

Fred Blaser in the Globe and Mail argues that even the scheme's architect is vague on the detail. "Professor Romer's own website consists of a brief document, just four pages long, that doesn't explain how you might set up a government, which makes rules on everything from salaries to sales tax and housing to homicide, or how your city could eventually evolve into a democratic state." So the Honduras experiment will be watched with interest.

How it has worked in practice

Shenzhen illustrates both the advantages and potential pitfalls of the charter city concept. According to Chen, "once a fishing

village of 30,000 people, Shenzhen has grown to become a vibrant metropolis of close to more than 13 million, all within three decades of being put on a path of economic liberalisation as a special economic zone".

However, "its path to glory was strewn with high-stakes politics, power struggles, trial and error, and plenty of failures". Initially it was held back by real estate speculation, a lack of foreign investment, and rampant smuggling of foreign imports fuelled by the zone's lower tariffs.

But after a barrage of criticism it "resurrected itself as a lowcost, low-tax industrial park in the mid-1980s to tap foreign investment, anchored by newly-created, state-linked local companies such as Huawei and ZTE".

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri