Paul Romer on charter cities and what we’ve learned since

Paul Romer, along with William Nordhaus, just won the Nobel Prize in economics for his work on endogenous growth theory.

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Paul Romer, along with William Nordhaus, just won the Nobel Prize in economics for his work on endogenous growth theory. As usual, Tyler Cowen has the best summary of Romer’s ideas. I would like to use this as an opportunity to give a comprehensive overview of Romer’s public works on charter cities and to discuss what we’ve learned since Romer’s charter cities TED Talk.

Romer’s involvement in charter cities began with his now famous TED talk. His initial charter cities proposal has a guarantor country, maybe two combined, act to import good institutions to a host country. For example, Canada (or Canada and Denmark) could act as a guarantor to a charter city in Honduras.

His first involvement on the ground was in Madagascar, which was chronicled in this Atlantic article. Romer got the president of Madagascar excited about charter cities. However, the president was soon deposed after his guards fired upon protestors, who were protesting against selling land to a foreign company, Daewoo. The protests do not appear to have been directly linked to Romer’s charter city proposal. I haven’t seen any other original sources regarding Romer’s time in Madagascar, though I haven’t looked extensively.

Romer’s next involvement was in Honduras. He helped craft charter city legislation, as he details in this follow up TED talk. He left the Honduras project a year later, accusing the government of a lack of transparency in this post. As a side note, Honduran charter city projects are still ongoing and I am hearing most positive rumors than any time within the last four years.

Other times Romer has commented on charter cities include this paper, where he appears to move away from the necessity of a guarantor country. Here he, writing with Brandon Fuller, place charter cities in the context of urbanization and Chinese special economic zones. Here is an interview he did on charter cities. Here he proposes charter cities as a mechanism to help with the refugee crisis. Unfortunately, he didn’t, or was unable, to use his time as Chief Economist of the World Bank to promote charter cities.

There have been two major geopolitical developments with charter cities implications since Romer gave his original TED talk. The first is China’s One Belt One Road. The second is the refugee crisis.

One Belt One Road is China’s attempt to export their industrialization model, combining urbanization with special economic zones. With Chinese money and influence, this is changing norms regarding territorial autonomy. China, for example, via debt, has got Sri Lanka to give control of a key port to a Chinese state owned enterprise. Such changing norms removes one of the key barriers to implanting charter cities. It becomes easier to frame them in the wider geopolitical context as merely the next evolution in existing projects.

The refugee crisis is the other important geo-political event with charter city implications. Romer comments on it here. A few organizations have formed with similar goals, including refugee cities and refugee nation. Several prominent individuals, including Kilian Kleinschmidt, former ‘mayor’ of the Za’atari refugee camp, and Joachim Rucker, former President of the UN Human Rights Council have been working on special development zones, a concept similar to charter cities.

There are three lessons to learn from Romer’s pioneering work on charter cities, politics, real estate, and staging.

Romer was very successful at one aspect of politics, bringing excitement about charter cities to change the Overton window. His TED talk led to legislation getting passed in Honduras, and he was close to getting legislation passed in Madagascar. However, subsequent events demonstrated that high level political engagement is not sufficient for the legislative change necessary for charter cities. In addition to engaging the president, it is necessary to engage key ministries, the opposition party, etc.

Charter cities are real estate ventures. As such, it is important to bring in real estate companies from an early stage. The infrastructure is the primary cost of a charter city, and must be financially viable to attract investment.

Lastly, staging is important. Raising $5 billion for an untested concept is unlikely. Instead, the money should be raised in stages. The first stage might be an industrial park, then adding residential. Or maybe the first stage includes industry, commerce, and residential, then can be scaled. Either way, charter cities must figure out a minimum viable product that can serve as proof of concept for attracting billions of dollars in investment.  

For further strategic thoughts, see here.