In light of approval in Honduras for three new charter cities (REDs), much has been written recently on their potential to improve economic development. Economist Paul Romer makes a compelling case for the potential of charter cities, asserting that countries with institutions that impede economic growth can benefit by designating small areas with rules that permit free trade.
Despite the promise of REDs, designating new areas for urban economic zones may pose some challenges that haven’t been addressed elsewhere. Cities almost always grow through spontaneous orders in locations that emerge through human migration. Cities are a product of human action, not of human design. Older cities grew through their accessibility to trade and natural resources. More recently, towns have become cities as they have become centers for specific industries. This process happens not with top-down planning, but rather as the market process leads individuals to move to specific places, resulting in the urbanization patterns that we see. In the case of Honduras’ REDs, however, the locations were selected by the state.
Unlike the approved sites for REDs in Honduras, Hong Kong and Singapore (models of charter cities) were not greenfields before they became charter cities. Since becoming models of charter cities, both islands’ populations have exploded, but some level of development existed before British rule, and the British did not set out to create large cities. Rather than being planned, the success of these two islands was an accident, in which good institutions in fortunate locations have facilitated enormous economic growth. In contrast, all of the infrastructure and design for the REDs will be built from scratch, at first by one company, MKG, until other investors and individuals move to the city. In a sense, city construction may have to begin before there is demand for it. MKG has pledged $15 million to begin building infrastructure, a small amount in the scheme of city-building, but as of now it’s unclear where future investment will come from, and whether it will be centralized within a few large firms or dispersed.
Greenfield development for charter cities is absolutely key; otherwise, they would coerce people to adopt new rules, eliminating the choice and voluntarism that Paul Romer explains is essential for charter cities to succeed, not to mention potentially leading to violent conflicts. However one firm starting a city in a greenfield will face enormous knowledge problems in beginning to build a city from scratch. The magnitude of this challenge will depend on how much development is required of the few initial, large investors before attracting significant numbers of entrepreneurs. I don’t think either the investors or Paul Romer support top-down city design, but this is a necessary aspect of starting a new city in a government-designated location.
Some towns have been started with charters in greenfields previously, in the American colonies, for example, but none of these were founded with the intent of becoming large cities. Those that grew did so spontaneously because of their advantages over other cities. I don’t think that a state-selected greenfield location will prevent success in REDs or other charter cities, but I do think it bears acknowedgment that starting a city from the top down will create an added challenge. Assuming success, however, REDs will provide a fascinating case study in modern urban development under free markets. Here’s hoping the charter doesn’t include height limits or parking requirements.