Charter City Optimism: Additional Thoughts on the Rethink Priorities Report

Charter cities are not some theoretical, pie in the sky idea; there is real, tangible traction happening that can be accelerated with additional funding.

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The effective altruism (EA) movement dedicates minimal resources to studying the lessons, let alone attempting to replicate, the greatest poverty alleviation in living memory. Since 1980, Chinese economic growth has lifted over 800 million people out of poverty. This is among the greatest humanitarian feats in the post-war era[i], yet it remains largely ignored by EA organizations.[ii]

Chinese economic growth was the result of special economic zones (SEZ) and urbanization. China’s special economic zones were much closer to charter cities than the typical SEZ. Shenzhen, for example, was over 320 sq km and had substantial autonomy. “Except for the railway, post and telecommunications, banking, civil aviation, and national defense, all other management authority was delegated to the provincial government.” These new governance structures, combined with rapid urbanization, created economic growth rates previously unseen in world history, averaging 10% annually from 1980 to 2010.

There is substantial literature that delves into the mechanics of governance, urbanization, and economic growth in China. Ronald Coase and Ning Wang write about the bottom-up development of policies. Yuen Yuen Ang explores how decentralized local political units in China freely experimented with policy to identify the most effective ways of attracting foreign direct investment. In an edited volume, Siqi Zheng and Zhengzhen Tan discuss how industrial parks and new cities played a key role in economic development. Juan Du offers the best history of Shenzhen.

This is not to say it is possible to replicate the growth success of China in other countries today. It isn’t. China was more economically repressive than most low-income countries today. China forcibly prevented urbanization prior to the 1980s, leading to pent up demand. Shenzhen had useful proximity to Hong Kong, allowing for knowledge transfer and investment. And China had a large internal market which made it attractive for trade. China was starting from a lower baseline than most countries today. However, even if the impact of a similar contemporary effort is an order of magnitude smaller than Chinese growth, that still means lifting 80 million people out of poverty. My personal estimate is that it is possible to replicate 20% to 30% of China’s success.

The most recent contribution to this debate is a Rethink Priorities report on charter cities by David Bernard and Jason Schukraft. The report does a good job of summarizing the arguments for and the state of the charter cities space. David and Jason offered me the opportunity to comment prior to publication and took those comments seriously. However, their estimates of the impact on growth generated by a charter city are still too pessimistic.

The fastest growth in human history over a decade or more is 10%. China grew at ~10% from 1980 to 2010. An under-discussed performance is Laos, which grew over 7% annually from 2005 to 2016. However, the most impressive growth stories are typically found at the city, rather than the national, level.  From 1980 to 2008, Shenzhen grew at an annual rate of 26%. Over the same time period, per capita income in Shenzhen increased from $122.43 to $13,196.21 From 1966 to 1973 Singapore grew at over 10% annually.

The Rethink Priorities report used a 2017 World Bank article on special economic zones as the reference point for potential growth rates for charter cities. The World Bank report concludes, “rather than catalyzing economic development, in the aggregate, most zones’ performance has resembled their national average.” The Rethink Priorities report ends up taking a similarly pessimistic conclusion on charter cities, in part driven by the findings of the World Bank report.

I find the intuition of charter cities more useful than models which have arbitrary assumptions that have substantial implications on the outcome. However, even though David and Jason acknowledged the limitations of their model, it seems as though lots of folks are taking it as the primary implication of the paper! I think this is misguided.

The question remains, what is the right growth baseline to assume for charter cities compared to their host country? In CCI’s original paper, we had three scenarios, a pessimistic, neutral, and optimistic scenario, ranging from 0.5% to 2.5% above the growth rates of the host country. This range is too small.

On the pessimistic side, a 0% increase in the growth rate is certainly possible. Some charter cities will fail. David and Jason argue that it’s possible for charter cities to have a negative growth effect, though it’s hard to imagine how that’s possible under the CCI model public private partnership model for charter cities, which has private investors footing the bill for infrastructure. The worst-case scenario is those investors, who in most cases will be foreign, will lose money. That is unlikely to impact country-wide growth.

In the optimistic scenario, we could imagine the growth rate in a charter city approaching Shenzhen-level growth, much higher than that of the host country. However, as David and Jason note, Shenzhen is an extreme outlier. A very optimistic (p=.05) scenario could see growth rates exceeding 10 percentage points higher than the host country. A more realistic optimistic (p=.20) scenario might see the charter city growing at approximately 6 percentage points higher than the host country.

Under this scenario, if the host country was growing at 2%, the charter city would be growing at 8%. The growth rate of the charter city in this scenario is below the peak growth rate experienced by a handful of countries, and substantially below the peak growth rate experienced by cities.

Imagine a charter city is created on 200+ sq km, with good ocean access, and can attract initial infrastructure investment over $1b in a country that averages under 2% growth. Is it really outside the realm of possibility that the charter city could grow over 8% annually? This impact doesn’t even include the indirect effects of a charter city.

Of course, there are a multitude of factors affecting city growth rates. They include location, regional trade networks, human capital of residents, effectiveness of administration, and more. However, I don’t think my estimates of growth are substantially different from the average economist. Even Esther Duflo and Abhijit Bannerjee, economists known for their support of RCTs, positively reference charter cities in their recent book.

The second part of David and Jason’s critique involves tractability. They write, “the initial failures in Madagascar and Honduras illustrate the difficulty of establishing genuine charter cities, though these attempts may not be representative of future efforts.” I have the opposite read. The failures in Madagascar and Honduras represent the relatively low cost of charter cities. Romer was acting pretty much alone in both scenarios. On the power of a TED talk and his personality, he was able to make substantive strides in Madagascar and lay the foundation for the charter towns, hopefully soon to be cities, that currently exist in Honduras.

At a minimum, EAs should update their priors. Just 18 months ago, there were no charter cities. Honduras had 2013 legislation on their books, but no charter cities had been approved. Today three Honduran ZEDEs have been approved, Prospera, Ciudad Morazan, and Orqueida. Though these are more charter towns, as none have the population to be considered cities. It’s possible that they will grow to become cities in the next 10-20 years.

Mind you, this progress was made with the total historical philanthropic spending in the charter cities movement under $10m over 15 years, and likely under $5m (I am guessing about Romer’s budget). The first piece of enacted legislation is always the hardest. Now there is a model that can be drawn upon for proof of concept. There are other projects under development that cannot be shared publicly at this time. (If you are a funder, please contact me, I’d be happy to share the details privately.)

Furthermore, cities are hot. Akon is building Akon City. South Africa is building Lanseria. Journalist Wade Shepard estimates there are over 200 planned cities being built today. Positioned correctly, cities draw a lot of political support. With a bit of elbow grease, we can refocus the new city discussion to charter cities, leveraging the political support of new cities to implement a set of policies that can meaningfully contribute to long term growth. Given what has been accomplished so far on relatively shoestring budgets and limited institutional backing, additional funding could go a long way in advancing the charter cities space.

To quote extensively from an EA forum post supporting the current EA allocation of funds, “Global health and development is still arguably the most popular EA cause. For example, payouts from the Global Health and Development EA Fund comprise 45 percent of the total amount of money granted from EA Funds. Almost all of this spending supports so-called “randomista”-type development: direct interventions that have strong experimental evidence of effectiveness.”

Dustin Moskowitz has a net worth of ~$20b which he plans to donate “almost all of” to Open Philanthropy. Founders Pledge has $5.7b pledged, of which $600m is committed. Therefore, the total funding assets of the two largest EA philanthropic organizations is ~$25b. Private foundations must give 5% of their endowment annually, meaning EA orgs are giving $1.25b annually. Admittedly this is an oversimplification as Founders Pledge requirements are probably based on the committed, not pledged, amount.

If we assume half the donations are for long-termism, that leaves $625m for near-termism or global health and well-being. Again, let’s assume half of that goes to animal welfare, leaving $312m for human related causes. 1% of $312m would increase the Charter Cities Institute (CCI) annual budget by 150%.

This is not just abstract, there are concrete examples of how we could help develop charter cities. Here are some examples.

  • Lobby Nigeria to pass charter cities legislation. Nigeria is expected pass India to house the highest absolute number of people living in extreme poverty. CCI has been working with Enyimba Economic City, a 9500-ha new city development in Abia State. The city has special economic zone status, and while Nigeria’s special economic zone regime is good, it doesn’t grant the necessary authority for sustained economic growth.
  • Work with Latin American governments. CCI has been approached by civil society with strong government relations in two Latin American countries. They are interested in learning from Honduras’ experience. In one country we are drafting legislation, in the other country we expect to start drafting such legislation soon.
  • Approach embassies and other influential institutions. CCI has recently begun engaging ambassadors of African countries, some of whom have expressed interest in charter cities. We plan to expand our engagement to organizations including the World Bank, UN, and African Union.
  • Improve Berbera’s governance. Dubai Ports World recently built a $400m port in Berbera, Somaliland. Along with the port is a free zone, modeled on the Jebel Ali Free Zone, one of the better free zones. What if this investment was designed to be more expansive, allowing for integrated urban development and with a stronger focus on generating regional supply chain linkages? CCI is currently working with Somaliland civil society to engage the government about the charter city concept.
  •  Lobby US policy makers. The US, under both the Trump and Biden administrations, has invested substantial amounts of money in the Northern Triangle (Honduras, Ecuador, and El Salvador) to stem migration. Some of that money could be invested in charter cities which could stimulate economic growth.
  • Lobby European policy makers. Refugee cities and similar concepts have been discussed in Europe for the better part of a decade. A concentrated lobbying effort could unlock substantial investment in charter cities to offer refugees and migrants additional options.

I would like to be clear: charter cities are not some theoretical, pie in the sky idea. There is real, tangible traction happening that can be accelerated with additional funding.