Think of a start-up. Most likely this thought experiment will result in associations of anarchy, innovation, and a fast-paced culture. In a rudimentary sense, this seems to be the blueprint for every modern-day newly founded enterprise – the Silicon Valley model. Now what if we applied that blueprint to a complete city? The outcome would be a so-called charter city, a brainchild of Paul Romer, a renowned economist at the World Bank. Does a charter city have financial potential?
What do Hong Kong, Shenzhen, and Silicon Valley have in common? They can all be classified as charter cities, and as such, each of them has accrued significant wealth. Legally, the charter that applies to the city prevents it from having to comply with state, regional, or national laws. Hong Kong, for instance, was exempted from the Chinese rule that prevented local companies working together with foreigners. As such, they could attract foreign knowledge – and, more importantly perhaps, foreign capital.
What do Hong Kong, Shenzhen, and Silicon Valley have in common? They can all be classified as charter cities, and as such, each of them has accrued significant wealth.
The potential target start-up cities are located in the developing world. Searching for the so valuable bags containing billions of dollars of developed countries, they are willing to set up favorable rules – often favorable to the developed countries – in designated cities in order to stimulate growth. Exactly this is what causes friction. Paul Romer has been in advanced talks with Madagascar to lease a large area – one-third of the size of the Netherlands – to a South-Korean multinational. The mission failed. The local population chose not to relive colonialism and their protests led to riots, with 28 people being killed.
Not surprisingly is the neo-colonialism argument the most prevailing one in blocking attempts to install charter cities in the world. It is, therefore, perhaps wisest if the urge to change comes from within the country. Doing so can have brilliant financial results. Moving from Madagascar back to Hong Kong, it is clear the country is thriving. As a colony ruled by the English, it did not have to adhere to Chinese laws. Over the last half-century, Hong Kong has become the fourth largest financial center in the world and boasted over US$180 trillion (!) in foreign direct investment (FDI) last year.
Over the last half-century, Hong Kong has become the fourth largest financial center in the world and boasted over US$180 trillion (!) in foreign direct investment (FDI) last year.
The right preconditions were present in Hong Kong. A 99-year lasting treaty gave the imperial power United Kingdom legal power to set up its own, beneficial rules in the country – even respected by Mao Zedong. The long British experience with setting up institutions led to the foundation of investment banks in Hong Kong, and trade and capital liberalization gave way to significant foreign investment. Stability, experience, and openness seemed to be three fundamental pillars in the rise of Hong Kong as charter city.
Stability, experience, and openness seemed to be three fundamental pillars in the rise of Hong Kong as charter city.
True, the list of charter cities in the world is not excessively extensive. But the common denominator of those few cities (e.g. Shenzhen and Silicon Valley) is that they have become extremely successful. All cities have grown to become powerhouses in the financial world, both in the financial stocks and options market and as an investment center. Especially for the developing world, with its untapped enormous potential, the long-term economic benefits can outweigh the short-term frustrations becoming a charter city almost inevitably brings.
Hong Kong is the living example a charter city works if executed correctly. Which city will follow its success?
The urge to change should therefore come from within the developing countries, who should retain a controlling influence over the operation. The recent government proposal in poor Honduras is hence interesting.Honduran government officials suggested the country designates a charter city, as Romer suggested. The prosperity it brings could be significant. The Madagascar experience, though, has shown it is paramount local and national sovereignty is retained to curtail (fear for) colonialist movements – although foreign assistance is an almost necessary component of the success of the city. Hong Kong is the living example a charter city works if executed correctly. Which city will follow its success?