Exponents Magazine: A Beginner's Guide to Building New Cities

In Exponents Magazine, Executive Director Mark Lutter demystifies the process of building a charter city from scratch.

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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 the urbanization’s 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.

There is a solution to this problem. 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 a 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 the 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, reviews new city developments around the world. Then, 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 concludes 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 vs. special economic zones

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 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.[1] 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 a 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.

Emerging cities

One of the primary challenges of building a charter city is the construction of physical infrastructure. The rapid pace of urbanization around the world has spurred the creation of dozens of new city developments and master-planned communities. I list many of them below.

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.

But, it is important to note that these new city developments are not charter cities.

The charter city model

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.

Charter cities in a box

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, each must be solved in a manner that 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 the 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.

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 that 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 that 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 that allows them to participate in the global economy, creating 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.

[1] China, particularly Shenzhen, is an important exception to this trend