Chris Blattman has concerns about Charter Cities. Admittedly, those concerns were published seven years ago. Nevertheless, with Paul Romer’s appointment as Chief Economist of the World Bank the concept of Charter Cities has resurfaced, and with it, the concerns.
Blattman’s concerns are as follows; 1) the sum of good rules is not necessarily a good system, 2) moving out of a failing city is high cost, especially for the marginalized, 3) Charter Cities will likely be too big to fail, 4) Political constraints limit potential of Charter Cities. These are all valid critiques.
First, with regard to Charter Cities, we know that the sum of good rules is a good system because of evidence from the country administering the Charter City. Denmark, for example, has good institutions. That being said, it is possible, though low probability, that applying Danish rules to Madagascar, for example, would not work as well as in Denmark.
Second, exit alone is unlikely to be a sufficient constraint on Charter Cities. The cost of exit is very high for some. That being said, Charter Cities would have to initially attract these residents. That means that Charter Cities would have to offer substantive improvements over existing conditions to attract residents. There is a long term risk that the quality of the Charter City falters. However, given the initial standard of the Charter City, it is hard to imagine the risk of the Charter City faltering is greater than the risk of the host country faltering.
Third, that the administering country might be pressured to give citizenship to residents of a faltering Charter City is a concern. However, this risk would improve the governance of the Charter City to mitigate such a risk.
Fourth, political constraints do limit Charter Cities. Nevertheless, it is impossible to escape the political process. Opt-in reforms, like Charter Cities, are likely to offer better improvements than traditional legislation which directly affects many interest groups.
More generally, the value of Charter Cities lies in improving institutions. The administration of a developed country is merely a means toward improving institutions. There are other ways of administering new cities which can lead to improved institutions.
What I call proprietary cities are one such alternative. It is important to note that Romer is not a fan. Proprietary cities are private cities where the developer retains land ownership and influences the legal and regulatory system. According to the World Bank, best practices for special economic zones include private development of physical infrastructure. By owning the land, the developer internalizes externalities. Infrastructure increases the value of the land; therefore, the developer is incentivized to provide it.
The same logic applies to legal systems. A good legal system would increase the value of the land. As such, a city developer has an incentive to provide a good legal system. There are numerous multi-billion-dollar new city projects worldwide. Hiring a British judge and implementing common law could add a great deal of value to such projects.
Proprietary cities face different obstacles than Charter Cities. For example, Blattman’s third objection would not apply. At the same time, private companies can be more resistant to public pressure increasing the likelihood of legal abuses.
Of course, there are numerous alternatives beside Charter Cities and proprietary cities. A new city could be administered of a board of representatives from the host country, business community, and World Bank. Nevertheless, broadly speaking, I believe the potential benefits of free cities (my umbrella term) far outweigh the risk.