Replicating Hong Kong

Several years ago, Paul Romer, an economics professor at New York University, was struggling with a very basic question: why it is that some areas develop and reduce poverty, while others languish? His conclusion—embraced by private sector specialists in development organizations worldwide—is that the key factor in successful poverty reduction is good governance, or as he puts it: people in poor countries around the world suffer from “bad rules” that hinder their development.

“Instead of focusing on poor nations and how to change their rules, we should focus on poor people and how they can move somewhere with better rules,” he wrote in 2009. “One way to do this is with dozens, perhaps hundreds, of new “charter cities,” where developed countries frame the rules and hundreds of millions of poor families could become residents.

Hong Kong, a tiny enclave of good governance that grew faster than its neighbors for decades, is often cited as an example of the charter city concept.

Romer’s Concept

“My idea is to build dozens, perhaps hundreds, of cities, each run by a new partnership between a rich country and a poor country. The poor country would give up some land for the city, while a developed country like Britain or Canada could contribute a credible judicial system that anchors the rule of law,” he wrote in The Sunday Times in January 2010.

“With clear legal protections, private investors will build the buildings and plants and grid. Access to the sea is the only real necessity—as long as a charter city can ship goods back and forth on container ships, it can thrive even if its neighbors turn hostile or unstable. And any administrative costs can be recouped from a special tax on the huge rise in land values that happens as a large well-run city develops.”

These cities, ideally, would be roughly the size of Hong Kong and Singapore, or about 1,000 square kilometers—enough to house 10 million people in a population density of 10,000 per square kilometer, He stresses that his concept is very flexible. The three components in a charter city—the host country, the source country of the people, and the guarantor—could be played by the host government in various combinations.

“Because these roles can be played by a single nation or by several countries working together as partners, there are many potential arrangements,” he states on the Charter Cities website, which he set up to promote the concept.

One of the variations is to allow a government to assume all three roles in underwriting a charter city, simultaneously playing the host, source of people, and guarantor, “much as China did in establishing the special economic zone where the new city of Shenzhen emerged,” or even India’s recent initiative to create 24 new cities on greenfield sites based on what Romer describes as “innovative governance structures and public–private partnership.”

Romer’s template invokes a sanitized version of Hong Kong stripped of its historical and colonial complications. He identifies such cities as having four basic elements: a vacant piece of land large enough for an entire city; a charter that specifies in advance the broad rules that will apply there; a commitment to choice, backed by voluntary entry and free exit for all residents; and the equal application of all rules to all residents.

He also seeks to embody in the charter cities the very best business practices of a global economy—from rules of law and transparency, to equality for all residents—capping these with trade-friendly efficient infrastructure, all at no cost to the host country as long as land can be successfully leased out, not sold, to private operators—exactly like in Hong Kong, China.

Controversial Proposal

The charter cities concept has been attacked for being neocolonial, as it suggests that the poor host country should give up sovereignty in exchange for the developed country government’s assurance that it would act as guarantor to ensure the city’s charter was respected and enforced. Romer rejects this. “It was the absence of voluntary choice that doomed most colonial ventures,” he said. “The commitment to voluntary choice is what distinguishes this new project.”

Supporters of Romer’s controversial proposal, such as Voxi Heinrich Amavilah, an adjunct professor of Economics at Glendale College, Arizona, see it as an innovative means of hastening the economic growth of developing countries. Others recall similar successes in history, such as the 12th century founding of the German city of Lübeck, the Republic of Korea’s ultra high-tech Incheon smart city, and Turkey’s low-tax and manufacturing focused “organized industrial zones.”

Critics, meanwhile, point to the danger of flirting with the birth of a city without regard for political and social consequences, and fret about the “hollowing-out” effect of such cities as they sap top-end human resources and undermine a government’s ability to launch national projects for development. Others worry about a repeat of the People’s Republic of China’s humiliation in the early 20th Century when many big cities, top among them Shanghai, ceded areas to foreign powers as charter zones.

Chris Blattman, an assistant professor of political science and economics at Yale University, warns against the potential costs involved.

“A trial-and-error process would, without doubt, produce dozens of successful charter cities around the world. But the error and trial could have a very heavy human cost.”

At least two developing countries signed on to a tailored version of the proposal. Madagascar, eager to tap foreign investment, was considering the possibility of building two charter cities in January 2009, though plans were derailed by the ousting of then-President Marc Ravalomanana by the military.

Honduras succeeded in amending its constitution in December 2011 to set up two charter cities after a fact-finding trip to Asia earlier the same year by President Porfirio Lobo. He visited Singapore and Incheon. The government enlisted Romer’s help as it found his idea to be in close alignment with their own plans to set up free trade zones. Efforts to establish Honduran charter cities continue.

The Shenzhen Example

For those acquainted with Asia’s recent economic history, charter cities might sound familiar, especially in China, where success in setting up special economic zones has impressed not only Romer, but also an endless parade of visitors paying tribute each year.

Shenzhen is a showcase charter city touted by Romber. Once a fishing village of 30,000 people, Shenzhen has grown to become a vibrant metropolis of close to more than 13 million, all within three decades of being put on a path to economic liberalization as a special economic zone and laboratory to break the shackles of a decaying planned economy and lure foreign investment.

Shenzhen may have appeared like the poster child of new cities, but its path to glory was strewn with high-stakes politics, power struggles, trial and error, and plenty of failures. It was one of three special economic zones that were created at the same time, close to major cities, and intended as an economic buffer with nearby, more advanced Hong Kong, Macau, and Taipei. Not all of them were successful.

For the first several years after its creation as a special economic zone in 1981 on a site about one-tenth of its current size, Shenzhen acted as a border trading area, but was held back by real estate speculation, lack of foreign investment and rampant smuggling of foreign into the PRC, fueled by the zone’s lower tariffs.

“Although the central government had laid down the direction for the special economic zone, it was so vague that Shenzhen did not have a clear idea of what [it] was going to be, but they needed to do something. Initially, there was an investment boom focusing on real estate and smuggling. The booming of the city drained the resources out of China and they had to change because it ran against the national interest,” says Thomas M. H. Chan, head of the China Business Centre, Hong Kong Polytechnic University, who criticized Shenzhen’s failings in a famous article that prompted a rethink by Chinese policy makers.

Shenzhen resurrected itself as a low-cost, low-tax industrial park in the mid-1980s to tap foreign investment, anchored by newly created, state-linked local companies such as Huawei and ZTE, and fueled by a rush of relocation by Hong Kong and Taipei companies escaping high prices at home. Thus began Shenzhen’s rollercoaster ride that continues to this day. More than anything, “the biggest advantage of Shenzhen is its convenient location at the junction of [the People’s Republic of] China’s domestic and foreign markets,” says Zhong Jian, a professor at Shenzhen University’s School of Economics who specializes in the development of economic zones.

Chan thinks it’s not possible for other developing countries to duplicate the Shenzhen experience because of the PRC’s dominance in the new global trade order. “Nowadays, because of the ‘China factor,’ there’s not much room for expansion of other countries to export. The rules of the game have changed, not just because of China’s low prices, but because [it] has developed a very efficient system, infrastructure. It’s almost impossible for other countries to compete,” he says.

Struggling with the Chinese Approach

India, for one, tried to set up PRC-styled economic zones and failed. Back in 2005, the government passed the Special Economic Zones Act to attract foreign investment, generate export revenues, and create manufacturing jobs. The plan went nowhere, sabotaged by difficulties in acquiring land to set up the zones amid outcry that the policy would increase manufacturing employment and investment at the expense of the livelihoods of millions of farmers, who were the landowners. There were also suspicions about government involvement in land transactions between private landowners and developers.

Even the PRC itself has had difficulty in creating another zone as big and successful as Shenzhen. Still, there’s no doubt as to its catalytic effect in stimulating a cocktail of wider economic reforms across the country.

A mishmash of copycat zones has sprouted up since the mid-1980s, each meeting its own destiny, including 89 high-tech parks, 13 bonded zones, 16 border trade cooperative zones, 65 export processing zones, 10 special logistics parks, 13 bonded ports, and 18 comprehensive preferential tax zones. The PRC’s strategy has been to develop separate pockets of special zones and connect the surviving dots to form a strategic line and even a geographical block, according to Zhong.

Other than the PRC approach, what else can developing countries do to create charter-city-like zones as proposed by Romer?

Chan suggests governments must be prepared for the high costs associated with infrastructure building, from ports, highways, and railways, to utilities. They should also curtail their global ambitions and focus on the domestic or regional market, and take the time to cultivate various institutions overseeing the city.

“You cannot guarantee to have the market. You cannot guarantee everything will go according to your wishes. And there are institutions that go beyond the control of capital. All these institutions will not be recreated easily. In Hong Kong they have evolved over a long time,” Chan advises. “The investment will be very expensive. The idea of building a city in a remote area is more like a plantation economy model in the early stage of colonialism, in America and Southeast Asia, using slave labor for other markets. Special economic zones used cheap labor which is no longer possible in [the People’s Republic of] China. Without Hong Kong’s] infrastructure and industrial relocation from Hong Kong, Shenzhen would not be able to build up its export-oriented industries so easily. It’s not so much about the model, but about how to solve the practical problems,” Chan adds.

Maybe a less costly approach is to start with what Oxfam International‘s Duncan Green calls “charter villages.” “The approach has some success like in some special economic zones in China,” says Green, head of research at the United Kingdom office of the aid and development charity. “You create a little experiment; if it works, then you scale it up; if it doesn’t work, you ditch it. If you come up with one big idea, like charter cities, it could turn into a complete disaster. If you do small experiments, then you would be more like venture capitalists. If one of them succeeds, it will help pay the bills. You can experiment, but I think you should have small experiments, rather than big plans. Small is better than big. You have to be able to fail without destroying the system.”

The government of the PRC apparently thinks it is possible to create offshore satellites of its special zones on a miniature scale. It has stepped outside its borders to spread the word and underwrite the establishment of special economic zones in various African countries and Vietnam. But others remain skeptical. Hajoon Chang, a development economics professor at the University of Cambridge observes, “It is one thing for a country that is already well run to create experimental pockets run by a foreign body (although even that I doubt), but it is quite another for a poorly run country to leave it to outsiders to run the most important places.”

(Reprinted courtesy of Development Asia magazine)