Fighting Poverty in Developing Countries? Building New Cities From Scratch May Be the Best Strategy

By Mark Lutter and Jeffrey Mason

Humanity is undergoing a massive urbanization, with 2.5 billion new urban residents estimated by 2050 concentrated in Africa and Asia. Historically, urbanization has been a key driving force behind rising incomes, living standards and innovation. However, in the rapidly growing cities of today, this trend is breaking down, with troubling implications for the hundreds of millions of people who call these cities home.

In expanding megacities from Kinshasa to Kabul, governments are struggling to provide the legal and physical infrastructure needed to support economic growth. Poor governance limits economic development. As measured by the World Bank’s Doing Business index, the business environment in most countries facing rapid urbanization is poor. Navigating the bureaucracies responsible for business registration, dispute resolution, permitting and licensing, utility connections and tax collection is an almost universally lengthy, expensive and complex process. And this is just the official regulatory environment, before even considering the predominance of the informal sector and the pervasiveness of corruption. Governments have certainly provided few incentives to encourage entrepreneurs to leave the informal economy.

Another deterrent: Roads, electricity, telecommunications, water and other areas of critical infrastructure are woefully inadequate. The estimated annual shortfalls in financing infrastructure in Africa ($68-108 billion) and Asia ($330 billion), together with the rising urbanization rates, offer a troubling outlook for the success of cities in developing countries.

In large part because of poor governance and limited infrastructure, developing countries are failing to industrialize. Many countries facing rapid urbanization have simply relied on the rents from natural resource extraction, which have not generated the productivity-enhancing effects that lead to long-term growth and industrialization. Spurring a wave of industrialization that can fuel growth like that seen in China, Taiwan, South Korea and elsewhere in the 20^th century is imperative for the world’s rapidly urbanizing nations.

Charter cities are one tool that can help channel rapid urbanization more effectively than most development interventions. Charter cities are new cities with new rules. More specifically, charter cities are built on greenfield sites and enjoy significant authority over most areas of policy and administration that affect economic outcomes. Taking a similar approach to China’s wildly successful special economic zones, most notably Shenzhen, charter cities can overcome significant obstacles to reform and growth that plague other cities.

Build Before They Come

Building new cities comes with three advantages. First, building on unoccupied land allows for deeper reforms than possible at a national level because special interests haven’t yet taken root.  Second, this approach ensures that residence and employment are entirely voluntary. Third, creating new cities allows key infrastructure to be built and better urban planning practices to be employed before residents arrive, which can significantly improve the efficiency of and lower the cost of providing public services.

A blank slate approach to governance offers an opportunity to build new administrative and regulatory structures from scratch, without importing the cumbersome bureaucratic cultures and policies of existing institutions. A flexible administration governing a limited geographic area that can quickly respond to changing conditions would be much better equipped to develop market-supporting institutions and policies than established municipal or national governments.

Although there are many ways to develop and run a charter city, the Charter Cities Institute recommends a public-private partnership in which a developer is responsible for acquiring land and building infrastructure, while the city is governed cooperatively by the developer and the national and/or local government. Under this model, the developer is incentivized to invest in infrastructure and attract additional outside investment in order to increase the value of the city’s land.

The remarkable story of Shenzhen represents the best example of what could be called a “proto-charter city.” Introduced as one of China’s first four special economic zones under Deng Xiaoping, Shenzhen imparts key lessons for charter cities. When a more than 320-square-kilometer SEZ was declared in 1980, Shenzhen was just a collection of poor fishing villages home to 100,000 people across the border from Hong Kong. Today, Shenzhen is a wealthy metropolis of more than 20 million and the “hardware capital of the world.”

The liberalization that led to China’s economic development largely originated from experimentation in Shenzhen. Local officials established China’s first land and labor markets, while also providing the first gateway into the country for foreign investment. Officials in Shenzhen were “crossing the river by feeling the stones,” as Deng famously described. Rather than following a prescriptive list of policies to implement or institutions to develop, local officials embarked on a process of trial and error.

This autonomy and experimentation were allowed in part because Shenzhen was a backwater, far from the centers of power. The extraordinarily successful reforms pioneered in Shenzhen were then introduced to the rest of China over the following two decades. Thanks to the city’s entrepreneurial governing officials, along with Deng’s 1992 Southern Tour to preserve the reforms of the previous decade, more than 850 million people were lifted out of extreme poverty within two generations.

The potential for devolved administrative and regulatory authority, combined with new urban development, represents a massive opportunity to alleviate poverty, lessens the infrastructure burden on existing cities and provides a model for reform in developing countries throughout the world.

It Began with a TED Talk

Nobel laureate Paul Romer launched discussions of charter cities in his 2009 TED Talk. He proposed that a high-income country considered well governed, such as Canada, could administer – and thereby import its higher-quality institutions – a charter city in a low-income country, such as Haiti. Following his popular TED Talk, Romer pursued charter cities in Madagascar and Honduras, but both efforts were ultimately unsuccessful. When he took a step back, the charter cities movement, already lacking buy-in from major development institutions, went quiet.

Over the past few years there has been a resurgence of interest in charter cities. In addition to the Charter Cities Institute, there is a venture capital fund, Pronomos Capital, dedicated to charter cities, and two charter cities (or perhaps charter towns) in Honduras, Ciudad Morazán and Próspera. The former is focused on light manufacturing and logistics, with residential development for Hondurans, while the latter is largely a hub for remote work.

Charter city-like projects have also emerged in sub-Saharan Africa, including Enyimba Economic City and Talent City in Nigeria and Nkwashi in Zambia. Enyimba, a joint effort between a private development team and the Abia state government, aims to attract 1.5 million residents and become an industrial and trade hub for West Africa. Nkwashi, in contrast, is outside Lusaka and is being developed around a new university focused on science and technology education that will help Zambians tap into the growing presence of tech firms in Africa. Talent City, similar to Nkwashi, seeks to replace Lagos as Nigeria’s principal tech hub. Several of these new projects expect residents to move in within the next year.

There are dozens, if not hundreds, of other new city developments throughout Africa, Asia and Latin America that share common elements with charter cities as envisioned by the institute. Some have delegated authority, but not expansively enough to qualify as a full charter city. The developments in Honduras, while having authority, lack the scale to qualify as cities.

One of the challenges of building a charter city is governance. While there are firms with expertise in urban planning, funds that invest in large infrastructure and engineering companies to build the physical structures, outfits with experience in creating governance systems from scratch are rare. Charter cities are in part public policy projects, and figuring out policy is key to their success. Entrepreneurs without a deep understanding of governance will struggle to create new systems, given the lack of standardized, accessible knowledge about what it involves.

To help demystify the challenge of creating governance systems, the institute is publishing a governance handbook, a step-by-step guide to create a new legal system from scratch. This handbook provides a roadmap for charter city governments to build administrative structures and set policy in 16 critical areas, including business registration, dispute resolution, environmental regulation, taxation and more. We believe that giving stakeholders important tools can help accelerate the growth of the charter cities ecosystem.

Charter cities won’t be a silver bullet for all the challenges facing developing countries brought on by rapid urbanization, poor governance and a lack of industrialization. The work of aid agencies, development-finance agencies, domestic reformers and other institutions must continue. But sustained economic growth will always be the world’s best antipoverty measure and charter cities will be a powerful tool for building on the success of the greatest development story in human history.