Charter cities are a tool that can help countries improve governance, the key determinant of long-run economic outcomes. A charter city is a new city development granted special jurisdiction with the freedom to make deep reforms aimed at improving economic competitiveness in a country.
Charter cities are built and largely financed by an in-country city developer on greenfield land and are administered through a public-private partnership between the developer and the government.
Developers recoup their billions invested through rising land values as the city’s economy grows, so their incentives are aligned with the long-term success of the city.
Implementing innovative policies on previously unoccupied land frees city leaders from the difficulty of introducing substantive reforms in existing cities, where special interests and bureaucracies generally stifle reforms that can deliver broad-based growth.
Take business regulation, for starters. Compared to high-income countries, developing countries tend to rank poorly on indices, like the World Bank’s Doing Business Report, that measure the ease of doing business.
When it takes several months and a large share of an individual’s income just to register a business, only those already well-off can easily thrive. Starting from a blank slate, a charter city can develop a new regulatory framework, which is attractive to both local entrepreneurs and major investors.
Limiting the cost and time required to register a business and simplifying the tax system, which charter cities have the freedom to do, can make the formal economy accessible to ordinary people.
Charter cities also establish independent arbitration and dedicated commercial courts, which can bolster investor confidence in developing markets by easing fears about arbitrary expropriation of their investments, leading to more growth-creating ventures in areas like manufacturing.
And depending on the terms of the public-private partnership, charter cities would also possess the authority over areas like energy, health, education, and others. Reforms of this scale reach far beyond typical special economic zone reforms or what is possible in existing cities.