Points I made about charter cities and free cities

I do favor experimentation in these directions, but often at Liberty Fund conferences, and indeed more generally, I play the role of contrarian.  I am not supposed to report the comments of others, but here are a few of the points I made in the discussions over the weekend:

1. It is striking that charter cities — a partial unpacking of nation-states — are proposed for a region, namely Central America, where Central American unification has been an ongoing proposal for hundreds of years.  Could it be that Central American nation-states were not optimally carved up in the first place?  Are cross-national unification and charter “unpacking” really polar opposites as proposals, or do they have more in common than it might at first appear?

2. Under what conditions would, in equilibrium, landowners capture most of the value created by a charter or free city?  Well-governed land would seem to be very scarce.

3. To what extent do charter cities require the active support or at least implicit support of a major hegemon?  Great Britain and then the U.S. backed Hong Kong and Singapore.  The U.S. took over Puerto Rico.  Yet Portuguese Goa and French Pondicherry are no longer real entities in part because no powerful government stood behind them.

4. To what extent are landlocked charter cities viable, or will their rents get swallowed up by larger and adjacent neighbors, much as India gives Nepal somewhat of a raw deal on transport?  Are successful charter and free cities more likely to be on the water?

5. Are the most likely countries to approve charter cities those which plan to use them as “special purpose vehicles” to keep offshore oil and gas revenues out of the hands of the legislature or other domestic “interest groups”?

6. More generally, what kind of selection process will rule which charter cities are approved and which wither on the vine?  How much will this selection process make the original idea worse (or better)?

7. When it comes to local land rights and the like, to what extent can the new legal authority of a charter or free city operate independently of the original legal system?  Or must the new legal authority defer to the documents, maps, and other decisions of the previous authority?  How many of the new legal decisions can in fact be disembedded from the previous legal authority?

8. Are charter and free cities likely to work better or worse with free or restricted immigration?  Which are they likely to evolve?


TC asks and I answer.
#1 - Could be. This is Jarad Diamond's thesis, that Latin America does not really flow "north-south" as Europe does "east-west"
#2 - Henry George would have a ready answer to that: high property taxes will 'cure' such rent seekers
#3 - Good point. Perhaps the United Nations will be the hegemon? Boutros-Boutros Ghali to the rescue.
#4 - Yes, water is traditionally the cheapest way to move bulk goods so a necessity. No major city state lacked access to water.
#5 - Probably not. China tried this with "free trade zones". Separate issue.
#6 - An academic point. That which succeeds, by definition is a success. That which fails, fails. No telling in advance which is which.
#7 - see #6. This is somewhat trivial an issue. Obviously you need to avoid the Honduras fiasco.
#8 - I think free migration at first, to get the ball rolling. On the other hand, you want some quality control on who gets in, or it will become like the Silver River region in South America--a haven for free trade and shady types, see: http://www.1902encyclopedia.com/P/PLA/river-plate.html

I agree with #4; although a landlocked location might still work if it was next to a major border, as with Mexico's maquiladoras. For a charter city to thrive, it has to trade goods. If it's located in the middle of some dysfunctional country, good luck with that. But if it's located someplace with ocean access, then it in theory can trade with the rest of the world.

Speaking of charter cities, one's been proposed for Belle Isle in Detroit. http://www.detroitnews.com/article/20130112/BIZ/301120319

They should get RoboCop to provide security.

Another approach is for a coalition of philanthropists and global good causes to make designation of free cities a scarce good, with sites chosen via a competitive process.

Early small free zones chosen as recipients would reap quickstart benefits (microscholarships for learning, vouchers for eHealthcare, bundled offers of telework opportunities via online free markets markets) immediately benefiting the grassroots.

Then, higher levels of benefits would be offered as expansion areas for full scale charter cities are activated adjacent to the initial quickstart zones. Workers and residents of the surrounding country can be vested as direct stakeholders in free zone land trusts, to the degree that global groups such as Transparency International confirm the continued presence of of Hong Kong/Singapore levels of business climate transparency. The coalition of catalytic global philanthropies could also receive a share of the land lease revenues, to fund increased flows of benefits - and create and asset base to extend further catalytic offers to expand the free areas. More on this approach – and Build-Operate-Transfer concessions, by which private developers convey assets to the land trusts – is at http://is.gd/princetontalk.

We could call it the OECD, or the UN Security Council.

(1) cf. European devolution and federalization as not-exactly opposites. There is always a role for local governance. There is usually also a role for Leviathan.

Regarding landlocked charter cities: if you squint, Switzerland is a good example of a successful inland charter city. This in turn suggests that while charter cities may not need ocean access, they should be located on an international border (preferably a three- or four- nation junction) so that no one neighboring state can coerce it.

Check out Strasbourg (or Strasburg) as another example.

The main problem I see are in establishing any kind of working charter city with a foreign country as a partner or guarantor is political.

I can only imagine the contention arising from another country running a city in the host country, sure, everyone in the host country can come and go as they please, but any transgression of the perceived fairness of the guarantor country would paint a political bullseye on the charter city and I think it would be unrealistic to assume that people of the host country would only vote with their feet and leave. They would be extraordinarily rational actors if that was the case.

If the host country acts as a guarantor you end up in a similar situation but with the people from he source country.

Even in countries where only the country itself has been involved, SEZs have often as not been politically contentious, especially if they fail to draw in foreign investment and instead divert local investment.

Shenzhen is one of the succesful SEZs, but it is uniquely located next to an existing hub, Hong Kong, and carries its own very special circumstances.

The thing most like a charter city I can find would be China's SEZs in developing countries around the world. I don't have a clear overview of what the outcome of those zones has been so far or how they've been managed, just a biased assumption that they often seem shady and don't really encourage a better regulatory system but merely inject more money into the existing system for a while. So if anyone has a paper looking at these I'd be interested.

Here's a good one on zones in Africa:
Brautigam, Xiaoyang 2011: African Shenzhen: China’s special economic zones in Africa

Charter city idea is stupid. If the host sovereign can appropriate the gains, it will. If it can't, it's not sovereign there anymore. That's called imperialism, which I personally have nothing against; but this is not a view that even a single proponent of charter cities will cop to, because Everyone Knows™ that imperialism is bad. The worst part about this idea is how seductive it is to well-meaning libertarians.

Some people saw the "Honduras fiasco" coming a million miles away.

Well, it's only imperialism if the third party sponsoring the charter city is appropriating the gains. If by in large those gains are staying within the city, surely its something else.

That doesn't make sense. Point of charter city is to bring managerial talent from abroad to a place that lacks it. That will be administrators taking care of formal "government" functions (roads,sewers,etc) as well as managers managing the productive/commercial enterprises within the charter zone. It will also involve foreign capital of other forms being brought in—tractors or centrifuges or whatever. If the host state already had these things then there would be no need to discuss charters there. But of course the capital and the managerial talent are not going to be "donated" as in traditional (failed) development aid model; charter city proponents themselves are saying that this "ain't you momma's foreign aid." Therefore much of the returns from increased productivity in the zone will accrue to (foreign) holders of managerial talent and capital. (Not all, though. More capital and a better state means higher labor MP means higher wages for the people who live there. That plus the benefit of the residents of having a safe, well-governed place to live.)

Again, there is an old and widely-known word for this arrangement: imperialism.

I wouldn't use that term--if, as you say, you approve of imperialism--it's loaded. It reminds me of some legal briefs I've seen in my days as expert--the one side, the plaintiffs, will call an entity "Group Of Orderly Disposition" (hereinafter, GOOD); while the defendants will call the same entity "Team Under Remedial Disposition" (hereinafter, TURD). Needless to say certain judges don't look kindly upon this practice.

Hong Kong under the British is a classic "charter city" case. China, the "host", was not sovereign, despite its protests to the contrary. The British could, and did, appropriate *some* of the gains, but despite its ability to do so, left most of the gains to stay within the city.

So Laddereff's statement "If the host sovereign can appropriate the gains, it will." is disproven by counterexample. (Chinese sovereignty over Hong Kong is a partial counterexample, as well.) However, contra Mavery, British rule over Hong Kong was naked imperialism; among other things, the existence of Hong Kong increased the ability of the Royal Navy to project power.

You acknowledge that China did not have sovereignty over Hong Kong, so I don't see how it can be cited as a evidence of what a country that retains sovereignty over the charter zone would do.

Look, the problem is simple. Suppose the courts in Honduras let this thing go ahead, and fifteen years from now we have a humming, thriving Romerville on the Caribbean. But then the people and politics of Honduras proper would like to know, what good has this arrangement done them? The sovereign state of Honduras has provided the land and the legal legitimacy for the charter city, hasn't it, and isn't it right and proper that all Hondurans benefit from the results? They may demand a greater "say" in what goes on in the charter zone, or else just a plain ol' kickback. At that point the question of who holds true sovereignty over the charter zone comes to a head. Either that question is resolved in favor of the imperial power, in which case charter city-ism was just imperialism in drag, or else it is resolved in favor of Honduras (more likely since the West, tragically, no longer has the stomach for real imperialism), in which case it was nothing at all.

In my opinion the court in Honduras was right: it's been a few months since I read a translation of that opinion, but the gist was that the charter city either violates Honduran sovereignty or else it does nothing (since Honduras already has the option of calling in foreign capital and administrators if it wants to).

Probably something like the tri-border area where your government can blame the guys across the border rather than admitting to failings.

Can the history of the free imperial cities of the Holy Roman Empire be of any interest in that matter? ( http://en.wikipedia.org/wiki/Free_imperial_city )

Or the Italian Renaissance city states, or the Greek city states, or the Mesopotamian city states, or the Harappa city states, or the Chinese Warring Kingdom city states or the Meso-American city states. Ah, the good old days...they were terrible?

Those city states were as far as I see in fact real states that did not belong to an encompassing unity. So they wouldn't work as examples for charter cities, would they?

As far a sthe good old days go: At least the Italian city states were a tremendous success for a while and laid the groundwork for the immensely wealthy Italian north today.

"Under what conditions would, in equilibrium, landowners capture most of the value created by a charter or free city?"

Exactly! The answer is, under the condition that you don't impose a high land value tax. The solution is ancient, and it's tiresome to repeat it, but it's especially obvious in the current circumstance.

I think you missed the point of #6. Far from being academic, this is a question of bringing realism to an academic discussion.

An idealized concept of a charter city might be a great idea, but will it work in the real world? That depends first of all on why kind of project can actually get approved. And the incentives of the people doing the approving might mean that the kind of project that gets approved is far from the ideal. In fact it might be worse than doing nothing.

Charter cities are seen as a way to escape government dysfunction, but the same dysfunctional governments are the ones that have to approve the idea. Can that work?

Reply to first comment above.

To point #1: There are many regions of the world where nation-state boundaries are suboptimal. The world developed some bizzarre conservatism about borders after world war II (a relic of the cold war?). So you have multi-ethnic, multi-religious states in Africa and the Middle East that don't seem ideal for long-term stability.

Heck, look at Iraq.

The "conservatism" you refer to seems to me to be a reaction to the ethnic cleansing and genocide that characterized the first half of the 20th century in Europe. Once you say Group A should get its own state, there will then be some members of Group A who want to push the state's borders further out to include more land but also more people who don't belong to Group A. After a certain point, limits have to be placed on ethnic nationalism to avoid never-ending border squabbles and the sorts of horrific violence and ethnic cleansing that can erupt when two groups start fighting over the same plot of land.

This is to say that borders will probably always be "suboptimal." But what is also suboptimal is endless bickering over borders and which groups get the right to self-determination. Countries like India, Malaysia and Indonesia show that it is at least sometimes possible to get people to tolerate living in a multi-ethnic state.

I don't think a charter city is impossible, but it's success in the initial stages would probably depend upon their being some charismatic personality who could persuade those in charge that they would directly benefit from such a city. One obvious paradox is that any country which has political and legal structures developed enough to make this work also has little interest in surrendering sovereignty. In countries where an autocrat or dictator is in charge the last thing he or she wants to do, generally, is set up responsible people in positions of authority.

Even so, I've thought the best candidate for this scheme is India -- in theory. If a charter city could get off the ground and really offer foreign companies a chance to operate free from the usual political and logistical problems, I have no doubt it could become like Hong Kong in ten years. Indians are understandably hostile to any scheme which smacks of imperialism, however, and elites within India, almost certainly, would go for the short-term profit and ruin it quickly.

For a charter city scheme to get off the ground, therefore, I'd advise its charismatic champion to sell as radical a vision as possible. Eg., such a city should be open to anyone who comes. Free visas for everyone. If locals had some sense that wealthy and influential people were bringing in new money they might keep their hands off long enough for the project to take root (though I'd bet against it).

Cecil Rhodes. Or Ian Smith.

Also, wealthy and influential people don't like living where just anybody who shows up can live. What good is all that wealth and influence if you can't use it to set your family up in a nice neighborhood?

If the point of a charter city is to keep foreign government hands off income and earnings you earn in other jurisdictions, those days may be coming to an end as national governments are putting into place much more extensive information exchange. See, http://www.treasury.gov/press-center/press-releases/Pages/tg1653.aspx and as they are focusing on foreign tax shelter and tax haven abuse: See, Report of the Senate Permanant Investigation Subcommittee on Multinational Tax Havens.

As to governance, I suggest that in order to get practice in running a charter city

that you first try to play Sim City and see how well you do.

It's not as easy as you think.

Whilst my economist trained head assures me otherwise, there is a little nagging voice in me that draws my attention to various real and literary efforts at carving out an "ideal" city from the mess that is humanity. From Plato to thomas more to various Utopias of both the left and right (often in Sth America), I just sense we are riffing on a well worn theme. A little like 12 bar blues.

Btw I lived in Honduras in the 80s. The people then as now, were desperate to be something else.

If what's holding Hondurans back is their corrupt governors, then why don't libertarian philanthropists learn military tactics and organize some revolts? Of course, William Walker already tried this.

Like the commenter mentioned above, if the local sovereign is ceding territory in exchange for payola, then it's already slipping into anarchy and the settlers will need to give serious thought to defense of the civil order. Were there any Blackwater reps on this panel, or was it all just pudgy, middle-aged economists?

Regarding importing institutions as a justification for charter cities.

I don't quite understand the strength of this argument as well since businesses and their counterparties (customers, vendors, investors) find ways to use foreign institutions that are friendly to them before they undertake a transaction.

So, for example, an international contract with a company in country A uses an arbitration clause adopting the laws of country B, and conducts the arbitration in jurisdiction C using arbitrators from country C and D. So too with investment: foreign companies seek to register their stock in the US and seek SEC regulation as a way of increasing the value of their shares because there is regulatory oversight by the SEC, even though regulatory oversight is weak in the domicile country. It would seem to me that only if the value added were created in the charter city would there be an argument, but even then it might be a weak one.

Are we really talking about creating a real business in these charters, or are they just depository shells.

I still like the Bahamas.

The Curse of the Network Effect is obvious enough in real estate that there is an entire school of political economy geared toward a single tax on land value -- a school most identified with the 19th century political economics author, Henry George.

The Network Effect is often praised because value increases for each user the more users are connected to a platform, but the problem is that it shifts rewards from being good to being merely big. This is the origin of the MS-DOS/Microsoft tragedy. It is also the origin of the Facebook tragedy. There are many other examples, probably the biggest tragedy of all being the Federal Reserve currency being the international reserve currency. It's bad enough when you have something like the QWERTY (rather than the Dvorak) keyboard creating lock-in to a standard but at least when you have an open standard into which people are locked by the network effect, no one is becoming a Bill Gates or Carlos Slim. It's when the network effect is turned into a business model that the really nasty effects on the society start working their dark magic.

The solution is to stop taxing economic activity (capital gains, income, sales, value added, etc) and instead tax market-assessed liquid value of assets.

Of course, not many people are going to really understand this idea so it must be demonstrated by those who do get it.

That's why we need Sortocracy: Sorting proponents of social theories into governments that test them. Sortocracy provides the following:

1) It protects people from the political imposition on them of bad social theories.

2) It teaches people with bad social theories the consequences of those theories.

3) It demonstrates the efficacy of good social theories so that progress in the social sciences is practical.

It's a myth that Dvorak is better than QWERTY.

Stop the endless war of words leading ever downward and begin the conversation with Sortocracy: Sorting proponents of social theories into governments that test them.

Relatively pure consent is actually compatible with acquiring measurable results that are meaningful even in the face of "correlation doesn't imply causation".

Once consent is genuinely respected and the data are genuinely meaningful, conversation rather than war is possible in the social sciences.

The intriguing comments about the Holy Roman Empire and those about sovereignty point to something else: Experiments have been made when the original Sovereign was weak, pace Hing Kong. Experiments could be made if the Sovereign were wise. Apparently a Darwinian process, with no pre-determined outcome.

But best of luck to innovators in the political sphere, too!

The rationale for charter cities as I understand it, is that these Latin American countries are too corrupt and too bureaucratic to enact reforms on a national scale. The hope is that with a charter city, it could function as a social science laboratory which could export its "best practices" first to other charter cities, and then to the country as a whole.

The obvious question that comes to my mind is, what keeps the charter city from becoming corrupted? It would seem to be that "dark forces" would invade at the get-go.

Are these charter cities to be new cities carved out of the jungle? Why would this be a good place to start a city? Cities are located where they offer trade, natural resources, or defense. I am going to assume that the founders of the charter city do not fear invasion from their host. If there were natural features that fostered trade, or natural resources, the cities would have already been founded. This make me think that the greatest opportunity for these charter cities lies in exploiting the corruption, bureaucracy and inefficiency of its host nation. That is, their greatest possibility lies in behaving as an Indian reservation. The can sell cheap booze, cigarettes, gasoline and other highly taxed items to "tourists" from the host country. They can also offer access to other prohibited activities such as casino gambling.

What will these locations achieve is these are their economic drivers? how long will their hosts allow them to operate free from influence? and can these charter cities resist corruption?

William Walker, executed by a Honduran firing squad in 1859, was just a little ahead of his time. Today, he'd be giving TED talks about his vision for Honduras.

The difference now is that the President and legislature of Honduras actually endorsed it (before the Supreme Court nixed it), and when they got tired of the American (Paul Romer) they just started ignoring him and leaving him out of the loop.

Charter cities were pretty common in Europe, especially in Holland and Germany, and the charters contained many of the liberties that survived into modern society. I think the first "charter" entrusted to/won by a city was Magdeburg. A look there might offer some answers, with all the weaknesses and strengths of real world examples

Just recreate the economic, social and political milieu of medieval Europe, and we're good to go.

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