Urbanization is among the most pressing challenges the world faces today. The UN estimates that each year cities across the world will gain more than 72 million new residents. The new urban residents are concentrated in emerging markets where governments can struggle to provide the essential public services and basic infrastructure necessary for rapidly urbanizing populations.
India, for example, will be home to 7 cities with populations greater than 10 million residents by 2050. India’s Economic Survey estimates India will face a $526 billion infrastructure investment gap by 2040. China is one of urbanizations success stories. India isn’t handling urbanization as well as China did but is doing better than sub-Saharan Africa which faces similar urbanization challenges.
Historically, urbanization has led to improvements in productivity and economic growth, but regions such as sub-Saharan Africa, though rapidly urbanizing, are yet to experience these gains. Soon, countries across the subcontinent will have to face the growing possibility that their cities will urbanize without also industrializing, a threat to critical poverty alleviation efforts. For instance, projections show that Kinshasa, the capital of the Democratic Republic of Congo, will reach 35 million residents by 2050. Without the productivity gains that typically accompany urbanization, the residents will likely remain in impoverished slums.
Charter cities offer a promising solution to the challenges of poorly managed urbanization and poverty. Charter cities are new cities with special jurisdiction that grants them (the city and the economic participants within it) a blank slate in commercial law. These cities are developed on greenfield sites (untouched land with no current residents) which enables deep governance reforms to be enacted with minimal interference or resistance. Furthermore, because charter cities are cities, provide a firm foundation for sustained economic development for the city and the wider ecosystem around it, as well as being at sufficiently localized level at which to introduce reforms. These two essential ingredients provide a firm foundation for sustained economic development.
Localized reforms, particularly on greenfield sites, are more likely to succeed because they do not affect the rents of existing interest groups. Institutional reforms often do not proceed because of the logic of collective action. While reforms might be net beneficial for society as a whole, special interest groups that bear the brunt of the costs can block them. By focusing on greenfield sites with few, if any, special interest groups, the political and path dependency related barriers are limited, creating the possibility for the deep reforms necessary to build a charter city.
In essence, charter cities provide institutional reforms that set the stage for successive generations of economic development. The goal of charter cities is to raise the per capita income of its residents by two or more percentage points annually over several decades. Ideally, the success of a charter city will also inspire the host country and surrounding region to adopt similar reforms. For instance, China lifted 850 million people out of poverty with a strategy of special economic zones combined with urbanization, which was prompted by the success of the Shenzhen Special Economic Zone. Charter cities provide an opportunity for equally aspirational countries and regions to achieve similar success.
This essay provides a framework for thinking about charter cities. First, it compares charter cities to special economic zones, identifying their key similarities and differences. Second, it reviews new city developments around the world. Then, it defines the key aspects of charter cities, identifying the relevant factors in making charter cities replicable. Penultimately, it outlines the constraints facing the construction of charter cities and a strategy to overcome them. Finally, it conclude with a reaffirmation of the ability of charter cities to best deal with one the most pressing global threats of the 21st century: rapid urbanization combined with unrelenting poverty. Indeed, the central thesis of this essay is that charter cities have the potential to transform this global threat into an unprecedented opportunity for the world's poorest to break out of poverty.
Charter cities can be thought of as the next generation of special economic zone. Both charter cities and special economic zones are legal reforms that apply to a limited geographic area. However, charter cities include key elements that ensure they have a larger impact on economic growth than most special economic zones have had.
Special Economic Zones (SEZ) improve commercial law on the margins. SEZs take the existing legal framework for granted, by seeking to modify the existing laws of the area into commercially friendly ones. Charter cities, on the other hand, begin with a different framing, by looking to create a blank slate in commercial law. This deeper reform allows charter cities to create the conditions for long-term economic development.
Moreover, special economic zones often have a limited geographic area and focus on single industries. This limits their ability to expand and scale. While they might become successful in attracting foreign direct investment and creating jobs in that industry, their wider economic impact is limited. Charter cities, on the other hand, have a large geographic area that includes industrial, commercial, and residential areas. The increased size and variety and dynamism of economic activity ensure that the seeds necessary for long-term economic development exist.
Consequently, Shenzhen is closer to a charter city than a special economic zone under this definition. The reforms undertaken in Shenzhen were quite extensive, as it was the first Chinese city to allow foreign direct investment, have a foreign bank, a land market, a labor market, and the second Chinese city to have a stock exchange. The initial special special jurisdiction was also 320 square kilometers, ensuring ample room for growth.
The table below compares typical features of special economic zones to those of charter cities. It is important to note that charter cities exist on a continuum with special economic zones, as such there will also be debate about the edge cases. However, the features outlined below are important as they define key elements necessary to create the agglomeration effects which are crucial for developing and sustaining economic communities.
One of the primary challenges of building a charter city is the construction of physical infrastructure. However, the rapid pace of urbanization around the world has spurred the creation of dozens of new city developments and master-planned communities.
These new city developments have several important things in common. First, they include at least tens of thousands of residents. Second, they are not merely residential suburbs, they include industrial or commercial districts, often both. Third, they are often led by public-private partnerships.
In addition, it is important to note that these new city developments are not charter cities.
Nkwashi is a planned city a 40 minute drive outside of Lusaka, Zambia built on 3100 acres by Thebe Investment Management. When completed, it will be home to 100,000 residents a university, and a commercial district. In 2020 the first residents will move in.
Palava is a planned satellite city of Mumbai, India built by the Lodha Group, one of India’s biggest real estate developers, on 4500 acres. The first phase of 18,000 residential units is complete. When finished, it will house 100,000 families and create approximately 350,000 jobs in its central business district and other commercial developments.
Tatu City is a new city development built by Rendeavour, the largest urban real estate developer in Africa. It is a 5000-acre development being built outside Nairobi. When completed it will house 150,000 residents and including a shopping district, medical center, and an industrial park.
Rendeavour has seven projects in five countries, including Kenya, Ghana, Zambia, Nigeria, and the Democratic Republic of Congo. Six of their developments are new city projects.
Not simply a new city development, Neom is best described as a $500 billion regional development plan for a 10,000-square-mile area. Phase I is planned for completion by 2020. According to the Saudi government, Neom will feature a governance system designed to improve the business environment.
New Cairo is a 70,000-acre satellite city of Cairo located 25 kilometers from Maadi, a popular Cairo neighborhood. When completed, it could house as many as 5 million residents. In 2016, the Egyptian government inaugurated its new Ministry of Interior headquarters, a 560,000-square-foot building, in New Cairo.
Eko Atlantic is a privately developed satellite city in Lagos built on 2800 acres of reclaimed land from the Atlantic Ocean. When completed, it will house 250,000 residents and have a daily flow of 150,000 commuters. Its first residential tower was unveiled in 2016.
Forest City is a $100 billion new city development which will house 700,000 residents when completed. Forest City is a 5600 acre development, including four artificial islands, bordering Singapore.
Songdo is arguably the most successful master planned city in modern history. It is a $35 billion commercial business district, including residential areas, outside of Incheon on 1500 acres of land reclaimed from the Incheon’s waterfront and is currently home to 100,000 residents.
Lavasa is a private new city development outside of Pune, India. It is bringing new urbanism to India, prioritizing walkability and sustainability. It is being built on 100 square kilometers and will house 100,000 residents when complete.
Panama Pacifico is a master-planned city development in Panama and a special economic zone. Begun in 2007, it is 15 minutes outside of Panama City on the 3450-acre former Howard Airforce Base. Final plans for Panama Pacifico include 1,000,000 square meters of office space and 20,000 homes and apartments. There are already eight Fortune 500 companies located in Panama Pacifico.
Charter cities apply the fundamentals of new city construction and expand upon them, blending lessons from SEZs that were successful in spurring long-run economic development. However, several ideas require further explanations.
There are four key elements to include in charter cities legislation: 1) a greenfield city, 2) a new administration, 3) a blank slate in commercial law, and 4) a separate dispute resolution mechanism for commercial law. Each of these components is individually important. However, the purpose of charter cities is not merely to have a successful real estate project or attract foreign direct investment, it is to create an institutional framework that can generate decades of sustained economic growth.
It is important for private developers to build charter cities on uninhabited land. Doing so allows them to evade the political fights that tend to prevent the passage of deep reforms. Furthermore, private developers building the city with private capital allow for a nimbler building process that is responsive to market conditions. Most importantly, by building on a greenfield site the first generation of residents and businesses in the charter city must voluntarily choose to live there.
Often it is easier to start new organizations than change existing ones. A new administration in commercial law allows for a charter city to escape the organizational challenges and volatile political climate of the host country while not upsetting the political balance. The public-private partnership between the government and the developer would help ensure that the incentives of the charter city are aligned for long term success.
Wide-ranging legal authority
A new administration can only be successful if it has a wide degree of freedom to pursue good policies. For charter cities this means a wide-ranging legal authority, including discretion on business registration, labor, property registration, education, transportation, environment, energy, banking, finance, healthcare, public service, building codes, permitting, and tax administration. With wide-ranging authority in commercial law a charter city’s administration can adopt best practices from around the world, instantly becoming a competitive place to do business.
In addition to a blank slate in commercial law for charter cities it is important to have a trustworthy dispute resolution system, namely, a court system for commercial disputes. An independent judiciary makes it less likely that the administration of the charter city will act wantonly.
Given the immense resources required to build a single charter city, it is essential to develop a model that allows one to begin construction on a charter city without billions of dollars, then scale over time.
Hence, this paper proposes the idea of charter cities in a box: a scalable, replicable model of charter cities.. Once each aspect of a charter city is simplified, they each must be solved in a manner which allows the model to be replicated dozens of times.
Y Combinator and its experiences provide a case study of challenging conventional norms by creating simple scalable models. When Y Combinator was founded in 2005, fourteen years ago, common knowledge was that it was impossible to mass produce startups. Each market was too unique, each founder was special, etc. That common knowledge was wrong as the success of Y Combinator now shows.
Y Combinator has become one of most renowned institutions in Silicon Valley. Numerous successful companies, including AirBnB, Stripe, DropBox, and Reddit, have graduated Y Combinator. Y Combinator has become a startup factory with a repeatable, scalable model for taking small teams with an idea and helping them develop into thriving companies.
Of course, developing a ‘factory’ for charter cities requires different challenges than creating one for startups. Nevertheless, Y Combinator offers a useful illustration of how seemingly intractable tasks can be broken down and developed into a process. The first step to developing such a process is understanding the relevant challenges as listed below.
● New city
a. Location identification: An important part of building a new city is choosing the location. There are several important factors in location selection.
i. Urbanization rate: What is the urbanization rate of the host country? High urbanization rates mean demand for new cities
ii. Trade patterns: What are the trade patterns in the region? Can you bet on growth in trade? If so, what industries will that growth be in?
iii. Satellite city vs. new city: A satellite city is a city built in the growth path of an existing city. The advantage is access to the labor market and infrastructure of the existing city. The disadvantage is higher land costs. A new city is built without connection to existing infrastructure. Construction costs are higher, but land is cheaper
b. Land acquisition: How can investors acquire sufficiently large tracts of land to justify the infrastructure investments of building a city? There are several approaches:
i. Buying: Buying is capital intensive but ensures that the founders’ vision can be implemented
ii. Joint venture: Doing a joint venture with local owners reduces capital requirements for land acquisition but limits the upside of the company building the charter city
iii. Options to buy: Acquiring options to buy that investors can exercise over several years minimizes capital requirements while still allowing full ownership
iv. REIT: A real-estate investment trust allows control of the land with minimum capital expenditures; however, many low-income countries are unfamiliar with REITs which could make negotiations difficult
c. Phased approach: How can building charter cities be phased, to demonstrate viability while minimizing initial capital investment outlay? What is the minimum viable charter city?
i. Phase 1/anchor tenant: There is a coordination problem in attracting the first businesses and residents to the charter city. Overcoming this requires identifying an anchor tenant and attracting them. Examples of an anchor tenant include, an industrial park, a university, or a business park.
ii. Phase 2: After you identify and attract the anchor tenant, how do you scale? What are the secondary and tertiary industries you attract, and how do you ensure backward and forward linkages?
d. Financing: Real estate projects are typically debt financed. However, charter cities have longer time horizons and in the early stage do not have assets on which to perform due diligence. Further, many countries which stand to gain the most from charter cities have significant currency risk, raising the difficulty of securing debt financing.
i. Early stage: How is early stage financing obtained to pay for the master plan and due diligence?
ii. Middle stage: How is the capital acquired to build out the first phase/anchor tenant location? What are the terms of the capital?
iii. Late stage: After establishing a track record, how are the later stages of the charter city financed? Late stage charter cities require billion-dollar investments.
iv. Currency risk: How can investors limit foreign exchange risk in countries with unstable currencies?
a. Legislation: Charter cities have a legal framework which gives them a blank slate in commercial law.
i. Passing legislation: How should you work with governments and other stakeholders to pass legislation which creates the legal framework for charter cities?
ii. Continued support: How can you ensure that the government continues to respect the legislation in the future? Are there any legal mechanisms which can tie the government’s hands regarding future expropriation?
b. Multilateral organizations: Multilateral organizations, e.g. the UN, World Bank, African Development Bank, can support charter cities in a variety of ways.
i. Tacit support: At a minimum multilateral organizations can tacitly support charter cities by speaking at related events, making charter cities a priority, etc. This is important because it serves to legitimize the idea of charter cities in potential host countries.
ii. Technical support: Multilateral organizations could also offer technical support in implementing charter cities, from drafting legislation to creating the governance framework.
iii. Investing: Development Finance Institutions could finance or underwrite loans to charter city developers.
c. New governance structure: What does it mean in practice to create a governance system in commercial law from scratch?
i. Incentives: What is the proper incentive structure for the governing body? To whom are they responsive?
ii. Legislation: How are new laws proposed and enacted?
iii. Phased approach: What is the minimum viable governance system for commercial law that serves as proof of concept?
iv. Labor/business registry/etc.: What does it mean to create a commercial legal system from scratch? How are labor laws, a business registry, a new tax administration, etc., implemented?
v. Standardization: To what extent is it possible to make scalable and replicable aspects of the new governance structure?
Humanity faces numerous challenges in the 21st century. Two of the biggest challenges are urbanization and global poverty. Charter cities are an opportunity to use urbanization to create legal frameworks which spread the adoption of best practices in commercial law. Because of the rapidly increasing urban population, it is possible to use new urban settlements to implement governance reforms which otherwise would not have been possible.
Charter cities are new cities with a special jurisdiction which allows them to adopt the best practices in commercial law. More importantly, charter cities are a type of governance reform which sets the stage for 50+ years of economic success. This paper defines what those reforms look like in practice, the constraints those reforms face, and a strategy to implement them.
As Julian Simon noted, humans are the ultimate resource. Fully tapping human potential, however, requires a legal environment which allows them to participate in the global economy, creating a global equality of opportunity. Charter cities have the potential to lift tens of millions of people out of poverty. It is time to take them seriously as a development strategy.