May 6th, 2011
09:40 AM ET

How "charter cities" can change the world

Editor's Note: The following is an edited transcript of Amar Bakshi's interview with Paul Romer. Romer is a Senior Fellow at the Stanford Center for International Development. Fareed Zakaria will interview Romer about the future of innovation for a GPS special to air on Sunday, June 5 at 8pm ET/PT.

The first charter city: Philadelphia

The term “charter” comes from the document that William Penn wrote when he created the colony of Pennsylvania. It was called a charter at that time rather than a constitution. And Philadelphia, which grew up inside Pennsylvania, is in many ways the best historical example of a charter city. It’s a city that started with a very specific charter that had some very specific rules, some of which were unique in the world.

Penn offered a guarantee of freedom of religion or “freedom of conscience” as they called it in this location. What that meant was that people who believed in freedom of religion were attracted to Philadelphia and then Philadelphia became the prototype - the demonstration - that it was possible to have a separation of church and state.

And part of what’s so interesting about this story is that Charles II, who was the King of England, had tried to bring religious tolerance to England but faced very stiff opposition from members of parliament and the citizens in Britain. Freedom of religion was an extremely controversial idea. Wars had been fought over religion. The King’s father had been killed over religious differences.

So Charles II had this truly inspired insight that instead of trying to force the change on people in England who were not sure they were ready for it and were frightened by it, he would say, “Well, let’s go create a place that has a different set of rules and then people can opt in.  If they believe in those rules they can live there, but no one is forced to accept that kind of a change.”

So you can think of a charter city in that sense as a mechanism for making an important step forward in the rules that govern social, political and economic life.  It’s a mechanism that sidesteps the resistance that often prevents us from making changes.

Charter cities today: the Honduran example

In today’s world, charter cities could look very much like they looked when William Penn created Pennsylvania.

For example, the government of Honduras has amended its constitution to say that different pieces of land in Honduras can be exempted from all of the existing rules, regulations and institutions - something completely different can be built up there.

They’re planning to then designate a site that’s about 1,000 square kilometers - bigger than Hong Kong or Singapore - and say, “In this geographical area where no one lives right now and where the government owns the land, we’ll create a very different set of rules and then Hondurans and people from throughout Central America can opt in and participate in those new rules.”

This lets the people of Honduras do something that they want to do. They want to change their society and change their rules to get beyond things like high levels of crime and high levels of youth unemployment.

This is a mechanism that lets them do it quicker. It also lets them avoid delays associated with coercion.  Any change you make throughout Honduras would force everyone to accept the change. Those element of coercion mean that it takes much longer to get consensus and there’s always resistance to any proposed change.

The idea here is to take an area where you just put in place a certain set of rules like Penn did and then say, “Who wants to come in?” And if some people don’t want those rules, they certainly don’t have to go there. But if others are attracted to those rules then they’re free to go in.

In the Honduran case, the place is large enough to host a city of 10 million people.  You can tell from that figure that it’s also designed to be very open in terms of immigration.

Honduras has a total population of 8 million.  There are a million Hondurans living in the United States but even if all of them moved into the city you wouldn’t get the 10 million. This city can have a different set of rules even about immigration and residency so people from all throughout Central America, Latin America and the world can go live there if they choose.

So it’s larger than a special economic zone and it’s residential.  You're changing rules about patterns of residence, not just patterns of production. But it is very similar in spirit to the most successful special economic zones.

The importance of rules

The new rules that are most important to Hondurans right now are ones that guarantee safety from violence. That involves both a strong police force that can protect innocent people from some very dangerous actors in the region and some drug gangs that are moving in from other areas, but it also requires a system of accountability so that a strong police force can't be used to repress individual freedom and can't be used to entrench the power of some leader or some elite.

So the thing that matters most would be both the security that a strong police force can offer and then the accountability that makes sure that that police force does what it’s supposed to do and doesn’t do the things that could be harmful.

Right now Hondurans who seek opportunity in jobs that are one step above, say, garment assembly (which is an area where a number of Hondurans have gotten jobs), go to the United States.  This charter city could be a place where instead of going to the U.S. for jobs, U.S. firms could come to this new location and Hondurans could go right next door for work. They could go with their families; they could be permanent residents; they could have legal status. It would be a much more humane way to give Hondurans and anybody else from the region opportunity instead of having them come live illegally in the United States.

Firms would want to go to the charter city, not for tax reasons, but because of its culture. One of the mistakes in trying to build these special economic zones is you attract firms that are interested in getting tax breaks.

What Penn did was attract people who would build a culture that was the kind of culture, norms and values that you’d really want to live with.

So instead of attracting the firms that are worldwide scam artists in terms of gaming the system to have the absolutely minimum tax payments, what you want to do is you want to attract the firms that can build a better mouse trap, that can take a worker and train him or her, produce something much more valuable, sell a new good in the market, become a success.  You want those kinds of firms. You don’t want the tax-break firms.

But these firms aren't going to go someplace where they’re going to worry that their employees are going to get kidnapped. That is why, in the case of Honduras, the rules of the new charter city would focus on improving security so that prosperity can follow.

Next week, Paul Romer will post on the future of international development on the Global Public Square.

Topics: Development • Global • Innovation • Latin America • Law • Security

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soundoff (31 Responses)
  1. MUIN

    America is forcing successfully or unsuccessfully to change the world since world war2. However, it's piling up problems back home and swimming in debt. I find that hard to believe.

    May 6, 2011 at 11:04 am | Reply
  2. pulkit soni

    while it seems to be a fine idea, but as always the Q is who should be entrusted with forming a charter? Should charters be exclusive to that city to avoid conflicts of city identities? Where would you begin the process in the current complexity of political systems?

    May 6, 2011 at 11:27 am | Reply
    • j. von hettlingen

      It's more difficult to creat a "charter city" described above than to create a tax haven. Any small municpaliity has the perequisites of being one if it adopts a laissez-faire policy¨.

      May 8, 2011 at 12:11 pm | Reply
  3. Que pas a marico

    Very libertarian...

    F finally.

    When are you guys going to realize that civil libertarianism and limited government that stresses choice, will mean a competition in the market place of ideas that will yield best systems through natural selection. Coupled with lower barriers to trade, but currency actual value (manipulation settles itself in time though anyway), you eventually get economic competition and get the perfect market. Which functionally, is essentially socialism, without any divisive taxes imposed by a state due to entitlements. It would be organic.

    We need to ice the states more choice. And the federal goverment more discretion when it operated with large institutions like bp. Taxes should decrease, broadenig the base, while going after large companies like exxon.

    You guys gotta learn from ron Paul. Geez.

    May 7, 2011 at 2:16 am | Reply
    • Bianca

      Souds like utopia, but it can and will turn into nightmare. The hunta that took over Honduran government is being slick. Set up cities with the feudal lords running safe estates for corporations to use. Unless THE PEOPLE are running these cities, FOR THE PEOPLE AND BY THE PEOPLE, this is nothing more then a clever way to run sweat shops. Having gotten rid of the President that wanted to give power to the Assembly thereby limiting the rule of landlords, this government is letting landlords run their new feudal estates. William Penn did not do anything of the sort.
      As for libertarians, please chill. We are all for the limit of federal government, and for MORE rights to States, if for no other reason, to increase DIVERSITY and COMPETION. But I want to know the SMALL PRINT. And it looks like, the corporations would like to run cities, schools, health care, and all that with MY MONEY, while choosing to give me peanuts. We are already LOOSING ALL THE ACCOUNTABILITY FOR OUR MONEY THAT FEDS SPEND. Do we want MORE OF THE SAME? Why cannot we try some old fashioned CAPITALISM, and not go back to kids-stay-at-home-school feudalism? Why cannot we DEMAND that OUR MONEY and ASSETS that are so lavishly being bestowed on corporations with nothing in return, be treated as CAPITAL. Good old fashioned way. We give money in "contracts' we demand share of profits into our (now empty) treasury. And our CORPORATE CITIZENS, that are so eager to get rights to fund politicians, are nothing more then ILLEGAL ALIENS. How so? They hide money accross various islands and islets, paying no taxes. In fact, recently, EXXON had compained about the taxes they paid last year, and in that number THEY INCLUDED PAYROLL TAX, AND GASOLINE TAX. Of course, these are "taxes" they they just pass through, having collected them from their employees and customers. Nice people, we should trust them with running the country???

      May 7, 2011 at 7:34 pm | Reply
  4. Que pas a marico

    I think locales in states should allow "all legal zones" wherremprostitution drugs and gsmbling are legalized. It only makes sense. We should save money onvthe prison system and on the war on drugs and use it form our needs...like medicare. Worst immorality is waste.

    We should have "charter zones" like amsterdam.

    May 7, 2011 at 2:19 am | Reply
  5. Que pas a marico

    Common, the girls in prositutuin do it anyway.

    You give them representation they are legally protected loll any other business...

    Trafffickers receive the death penality and permits are not given to underaged or illegal immigrants.

    Give moremvisas to the talented. Create a guest worker program, but then make it a felony to hire illegal Immigrants.

    May 7, 2011 at 2:21 am | Reply
    • Bianca

      This is precisely why you cannot be trusted? And who are you, prey, that you can so liberally dispose with the life and dignity of a human being? And that our children are worth to you no more then animals in a pound? If WE the people have no right to say how things will be run, FORGET IT. Look at CHARTER SCHOOLS. Dismal failures, all of them, except the weathy ones. The kids in others cannot read or write. But hey, unlike public schools, they do not have to sit for the same State exams. When misfortune (like fired parents who can no longer pay for the private schooling) sends this kids back to PUBLIC schools, it is easy to see how poorly educated they are. Some of the private schools in rich Washington suburbs charge insane money per year, and many kids out of there cannot measure up with PUBLIC SCHOOLS. Let's get REAL, and test the libertarian/liberal urges before they hurt more then they have already done.

      May 7, 2011 at 7:59 pm | Reply
    • Que pas a marico

      Im pretty sure the free market will be muxh better when it comes to schools. For poor kids, I guess money could be provided. The money is not the issue. That could be provided just as in public schools. The difference is that teachers will be able to be fired based on performance, and there wont be any teacher unions. The old model is based on a half a centruys old set of conditions that no longer exist. Fact is, teachers now have to have a different mindset and different schedules. We should even encourage online classrooms.

      This is good, it forces us tocreevaluate our piss poor system and create a new one that uses to the fullest extent our technology.

      May 7, 2011 at 11:19 pm | Reply
  6. Que pas a marico

    Choice brings out competetive evolution...

    Libertarianism is the future because it is the utilitarian order, and hence naturally meritocratic. Anyone that tries it will outcompete everyone else. And so in order to compete, others will have to adopt the system also.

    You are so on the right track on this one.

    Good job man.

    May 7, 2011 at 2:23 am | Reply
    • Bianca

      I prefer seeing the fine print before trusting anyone with my political rights, freedoms, and control over taxpayers assets. I prefer knowing how will essential services be provided to population, before giving away anything. Freedom for some can mean slavery to others - and with no recourse. No, no. Unless something is tried in a limited fashion for a good amount of time to see sucess or failure, no experimentation on the backs of people. This all sounds like Stalinism and his great ideas what is best for people. May be Libertarians need to insure first that their bright ideas are not harmfull. First do no harm.

      May 7, 2011 at 7:41 pm | Reply
    • Que pas a marico

      All im advocating for is for choice. Chill.

      If you want to be socialist, set up your own charter city, that operates in a network of xities with the swme charter, and then let that charter be socialism.......you'll get enough people for universal health care, trust me. You see, the beautiful thing about choice is that it allows everyone to choose, and hence its compliant with all ideologies.

      Onlynthe system grid is libertarian, with police and firefighters and so forth, you opt in to societies that have more standards for the envirionment and health.

      This is not mutually incompatible. You should nit have the ability to control the choices of others. That's oppression, that's mob rule...

      That exists in statist socialism, in statist religious extremism, in fascist statist capitalism, and in anarchy,

      Force does not solve problems. Only more arguement, gridlock, and more problems.

      Only reason does. Choice allows people to get politics out of the government and a concentration on policy and competitiincfor best utilitarian outcomes,

      May 7, 2011 at 11:10 pm | Reply
  7. Que pas a marico

    Basically this is making goverment as streamlined as the private sector.

    You are allowing people to vote with their wallets their ideology like they do so for things like the iPhone. Many geniuses before you have speculated on such an era...

    This is powerful stuff if it can be allowed to execute....parasites in the government and bussiness world were long frightened of this concept...

    Powerful powerful stuff...

    You would be unleashing the true socialism. So many problems to realize it though. But you do have a high enough profile, who knows....cynicism or not, you now witness the golden egg,

    May 7, 2011 at 2:27 am | Reply
  8. Que pas a marico

    This also reminds me of the Greek philosophy of skepticism. If we go there...with our current technology(we have backpedalled culturally), i think theres pretty much nothing hay can stop us.

    By having govern t by choice, you qre essentially allowing meritocracy....because nice everyone agrees on basic principles then all that remains is policy....then competition between zones and evolution to the utilitarian optimum..you are using everything that works in government and evening that works incthenprivate sector and combining it.

    This would be very powefuk indeed. No more gridlock in dc....that's for sure....

    May 7, 2011 at 2:33 am | Reply
  9. Michael

    Fascinating to encounter intelligent people who begin a discourse with absolutely erroneous historical facts. Charters of towns, colonies and companies had been necessary in England long before Penn was born, Charles I was executed for duplicity (to over-simplify), and to describe Charles II as sweetly advocating toleration is a sad misreading of the man and his times. Such shaky facts make it difficult to take the rest of the argument seriously. If you would like a more exact precedent for the type of development envisioned in Honduras, check the "Townships" created in Carolina for refugees from religious persecution in France and Germany.

    May 7, 2011 at 9:52 am | Reply
  10. Margaret Bartley

    This doesn't pass the Sniff Test. Since when do corporations invest their billions because they like the cultural climate? Corporations invest where they can most cheaply and easily exploit the workers and taxpayers.

    "..in the case of Honduras, the rules of the new charter city would focus on improving security so that prosperity can follow."

    In other words, total surveillance. No "outside agitators" like union representatives or civil liberties or good government types welcome.

    Haven't we learned to be skeptical about these kinds of flim-flammery yet?

    Corporations and their political lackeys cannot be trusted. This is just another race-to-the-bottom, but this time, legally locked in. The Overlords' dream machine.

    If they were really serious about making this a better place to live and work, a LOT more discussion would be put on what would be required for a good place to live, work, and play? They would be talking a lot more about what kind of systems of accountability and transparency would last and provide the protection we need. But this is not the discussion, because they already know what they want, and it has nothing to do with making it a better place for the workers and citizens.

    May 8, 2011 at 5:44 am | Reply
  11. fundsfromustoyou

    You said because of George Bush's policy, democracy was introduced in the middleeast. When he was in office, they burned the American flag in the Middle East and hated Americans. All they did was protest. Now when Obama spoke in Turkey and Cairo, there was an introduction of freedom and democracy over there. So it was not George Bush that got this started, but it was President Obama and he should be given credit.

    May 8, 2011 at 1:09 pm | Reply
  12. educatedguess

    America is the outcome of this simplistic libertarian experiment. why turn the clock back and try the same thing, unless you like what you have right now?

    May 8, 2011 at 2:02 pm | Reply
  13. MannyHM

    You don't have to think very hard in making this idea happen. 1. Study how Singapore was formed. 2. Hire some retired Singaporean government official as consultants on this project. It's nothing new to them.
    I think it's a very good idea. Go for it.

    May 9, 2011 at 5:16 pm | Reply

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