Urban Development in Charter Cities

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.

  • http://twitter.com/hamilt0n Michael Joseph

    Perhaps they can harness market forces by creating the types of rules outlined by Hayek in Law, Legislation, and Liberty: general rules of just conduct of universal application.

  • Charlie G.

    Perhaps calling the economic success of Hong Kong an “accident” does a disservice to the underlhying power of individuals aspirations to organize and develop independently of a “plan”. We in America should hope for more “accidents” of this type; however, there are few who seek power that are willing to stand by and “do nothing”. Scientism and a profound lack of humility are a curse.
    A good article on Hong Kong from the Economist (“End of an Experiment” 7/15/2010):
    “Free-market faith reached its apogee in 1961-71, when Sir John Cowperthwaite was the colony’s financial secretary. Defending his first budget, Cowperthwaite rejected subsidies for start-ups (“an infant industry, if coddled, tends to remain an infant industry”); cheap land for strategic businesses (anything but an auction “leads to an inefficient use of our resources”) and most of all, industrial policy (“better…to rely on the…hidden hand than trust the clumsy bureaucratic fingers”).”

  • Emily Washington

    You’re very right about Hong Kong. I meant it was an accident from the British perspective, in the sense that their colonialism wasn’t intended to facilitate economic development in the way that those who support charter cities today see them as planned development strategies.

  • http://www.facebook.com/jbswetnam Joseph Swetnam

    Another question is whether the government of Honduras will remain benevolently uninvolved. Any prosperity generated in these free zones will look like a big juicy steak to corrupt politicians.

  • frankweiss

    One has to start somewhere, and as long as the single or the few initial investors stand to lose their shirts, it’s OK. Central planning within competing units is efficient, or there would not be firms. Important in this context is only whether the Honduran government will keep its hands to itself in case of success or failure. We may see.

  • http://www.facebook.com/profile.php?id=37528238 Adam Perdue

    Hong Kong essentially was a greenfield (especially compared to its current place in the world) when it came under British rule and still was when it came under the modern “good institutions”. (seeing your comment below) The fact that it was an accidental charter city, in British eyes, improves the case that the rise of Hong Kong had to do with the “good institutions” and not planning, or predicting, on Britains part.

    I think it is useful to think of these charter cities as equivalent to Planned communities (I only know Houston ones; Woodlands, Clear Lake, Kingwood) in unincorporated regions of this country. In the Houston region these planned communities tend to do quite well (they are feeding off Houston, with positive feedback), even without the benefit of better institutions than the surrounding areas. The developers seem to have a pretty good idea as to what people want.

    I haven’t quite gotten to understand how much “planning” there is going to be with these charter cities, and my understanding of charter cities doesn’t require planning. Can’t it be just ceding jurisdiction over a region to “good institutions” without the necessity to plan(beyond the basic initial infrastructure and initial platting).

    In Honduras all you need to do is select a large site with a port and relatively flat land. If you can establish “good institutions” you will have a successful city. If it is really that easy to establish “good institutions”(you know, without an army), or maintain them, I don’t think we would need charter cities.