Charter Cities: Overcoming the Commitment Problem

Previous posts covered the basics behind the concept of a charter city and how countries can use charter cities to augment the process of reform by consensus.

This post examines how a country can use a charter city to overcome a different challenge in economic development, that of long term commitment. The commitment challenge arises when governments cannot reliably commit to the long term security of investors and residents. In order to overcome this challenge, a country can charter a new city that leverages the institutional credibility of partner governments.

Even in cases where reform-minded leaders have the political clout to change rules, they may not be able to credibly commit their countries to long term adherence to the new rules. For example, a leader who opens a special economic zone to foreign direct investment may not be able to convince would-be investors that their investments, especially those with long time horizons, will be safe from expropriation or renegotiation. Even if foreign firms trust the current leadership, uncertainty about future governance may generate a level of political risk that prevents investment and undermines growth. Similarly, potential residents will not want to move their families to a new place unless they see the opportunity for a long term future there. In both cases, leaders might do well to partner with allies that can make credible commitments to the security of residents and investors in a charter city.

Suppose leaders in a country like Kenya considered the option of chartering a new coastal city. Kenya could fill the roles of host and source, providing a city-sized piece of uninhabited land and giving its citizens — and possibly those from neighboring countries — the option to move to the charter city.

Given the recent political turmoil in Kenya, the country’s leaders might find that they are unable to attract sufficient investment in the new city on their own. But they may find that they can attract investors if they opt to partner with a group of governments that can act as guarantors. Mauritius, an African country with a durable democracy and experience managing special export zones of its own, is one possible partner government.

The guarantor countries would ensure that the rules in the newly chartered city are respected and enforced. The external assurance would help to keep people safe, eliminate graft, stop political violence, and remove the threat of expropriation or renegotiation of the terms of any long term contract. Guarantor countries can offer the promise of objective, neutral enforcement of contracts between Kenyans and foreign investors. This enforcement would be an essential part of any plan for rapid urbanization that is facilitated by foreign investment in infrastructure.

Keep in mind that the countries that provide the guarantee for the city charter needn’t provide their own citizens to conduct day to day administration in the zone. Most of the positions in the city’s courts, police, and other civil services could be filled by Kenyans or citizens of other nearby countries who choose to move there. The existing system of shared governance in the Mauritian court system illustrates this point. The judges in Mauritian courts are citizens of Mauritius, but the court of final appeal for Mauritius is the privy council in the United Kingdom. This provides an important degree of assurance that no matter what the electoral outcomes might be in Mauritius, elected officials there will not be able to quietly subvert its judicial system. Yet this protection requires no British officials on the ground in Mauritius.

By bringing in other countries like Mauritius, officials in Kenya could substantially reduce the political risk facing any potential investor. This would let leaders in Kenya generate higher levels of investment and offer more economic opportunities for their citizens.

After a time, the charter city residents might vote on whether to return the city to the control of the Kenyan government. They might even stipulate that the city’s charter remain in effect, much as the Joint Declaration did when control of Hong Kong passed from the United Kingdom to China. There are many possible ways to resolve the details, but the initial role for guarantors would lay the groundwork for a successful charter city. A third party who can compel all sides — host government, investors, and residents — to live up to the terms of any long term agreement can make everyone better off.

Tile image by Joachim S. Müller.