Charter Cities: Responding to Rapid Change

A previous post lays out the essentials behind the concept of a charter city. Countries can use charter cities to address two potential obstacles to development: the challenge of consensus building and the challenge of commitment. The challenge of consensus building, the focus of this post, arises when people attempt to improve the rules through collective agreement. Charter cities can complement efforts to reform by consensus, quickening progress toward the better rules that allow people to improve their lives.

The struggle to manage something as well understood as traffic congestion illustrates the challenge of reform by consensus. Cities can use congestion charges to eliminate inefficiencies from traffic jams and expand access to mass transit, dramatically improving the experiences of all commuters in the process. Known traffic rules can make everyone better off. To date, Stockholm is the only city in the world to adopt congestion pricing through popular referendum. Cleverly, Stockholm’s leaders gave the residents a chance to try the proposed traffic rules for seven months before holding the referendum. Stockholm aside, the residents in many other urban areas have voted down or strongly opposed congestion pricing proposals, even though many of them would happily move to move to a city like London or Stockholm where congestion tolls are already in place.

At times, the need to build consensus acts as a useful brake on unnecessary change. But, as the experience with congestion pricing shows, the process of reform by consensus can also hold back adjustments to the rules that would benefit everyone. In many of the world’s cities, this process leaves people stuck in traffic. But in developing countries, the same process can leave people stuck in poverty. A more responsive process for changing the rules would be helpful.

Charter cities offer a complementary approach to reform by consensus—a way to quickly adopt new rules at a city-scale. They achieve legitimate changes in the rules at the outset through choice rather than consensus. The people who want to move to a new charter city opt into its new rules without disrupting the usual consensus based process that prevails in the rest of the country. The people who are unsure of the new rules in a charter city could observe the city’s development from afar and opt in at a later date if they like what they see.

Millions of people in the developing world want to move to cities. This pressure for rapid urbanization is the kind of shock that may require a new way to change rules. The UN estimates that India’s urban population will grow by nearly 600 million in the next 40 years. The existing process of consensus building slows the pace of urbanization and deprives many poor rural residents of access to the social, educational, and economic benefits that can come from city life. Many of those who do migrate to cities will end up informally housed in dangerous slums where services are either not provided or obtained illegally. The people of India can use charter cities to let new urban areas emerge where the people can access formal economic opportunities and live within the law.

To accomplish this, India could use a method similar to the one that China used in establishing the special zone around Shenzhen — a city that in just 25 years grew from a tiny village into a metropolis of more than 10 million people. In so doing, India can take on all three of the national roles required for a charter city: guarantor, host, and source.

The central government could pass legislation specifying the charter that would apply in any city developed in a special type of centrally administered zone. As host, the central government could offer substantial incentives that would induce different states to compete to create such a zone. In response, states would have to assemble city-sized tracts of uninhabited land and pass local enabling legislation. As guarantor, the central government could offer effective protection for private infrastructure investments. As source, it could guarantee the right of entry and exit for all Indians.

In the new cities that India might charter, many rules like those for pricing electricity, managing traffic, or enforcing the rights of tenants and landlords could be very different from those in the rest of the country. Because charter cities must attract a diverse group of new residents, the rules would be guided by forward looking concern for mutual gain. The people who move there adopt the rules by choice, the process does not give any individual or group a veto that lets them hold-up gains for everyone else.

To be sure, this approach pushes the process of reform by consensus back one level, without making it go away. It will not be easy for any state to assemble large tracts of land, but the problem is not insufficient quantity of land. At the density of settlement in Hong Kong, the entire Indian population could live on about 6% of its surface area. Given appropriate incentives, local officials can find a way to free up some land for new cities that can generate the kind of rapid and inclusive growth needed to further reduce poverty and inequality in India.