Can ‘Charter Cities’ Create Opportunity?

Each year about 75,000 Hondurans try to reach the United States to seek economic opportunity. A new plan, however, would try to bring opportunity to Hondurans rather than the other way around.

Honduras recently amended its constitution to allow the creation of “special development regions” or “charter cities.” Charter cities are the brainchild of American economist Paul Romer, who is known for his attention to the ways in which ideas, laws and informal conventions drive economic growth.

A charter city would operate under its own rules and tax structures, designed to encourage enterprise. This is supposed to entice entrepreneurs and investors to create commercial and industrial hotspots. As an example, Romer cites Hong Kong, which has been part of China since 1999, but whose government system is largely a holdover from British colonialism.

This colonial model is no coincidence. Within the charter city concept, countries can play three distinct roles: host, source and guarantor. The host country provides the land, which generally must be undeveloped, so no one is supposed to be forced to participate in the charter city experiment. Source countries provide the residents. Guarantor countries, in a role reminiscent of colonial powers, ensure that the charter is enforced.

A single country could conceivably play all three roles, as China has done in the Shenzhen region and in its other Special Economic Zones. These zones operate under distinct rules, but are still fully under China’s control. There is no external guarantor, and China could choose to adjust or do away with the special rules at any time.

Romer’s model, however, stresses the importance of foreign governments lending both their tested methods of encouraging growth and their credibility to these cities. In the arrangement he imagines, the land and the residents come from underdeveloped countries struggling with poverty, while developed nations take complete control of governance matters, to the point of potentially defending the charter against attacks from the host country. Romer suggests, for example, that if the U.S. closed down its military operations in Guantanamo Bay, Cuba’s government might turn the area over to Canada for operation as a charter city. Romer imagines Raul Castro saying to Canadian Prime Minister Stephen Harper: “Look, the Yankees have a terrible PR problem. They want to get out. Why don’t you, Canada, take over? Run a special administrative zone. Allow a new city to be built up there. Some of my citizens will move into that city. Others will hold back.”

Not surprisingly, while several countries have reached such a point of desperation that they’ve expressed some interest in effectively being colonized, Romer has had far less success finding anyone willing to play the role of 21st century imperial power. A top official at one of Europe’s aid agencies told the Atlantic, “Since we are responsible for our remaining overseas territories, I can tell you there is much grief in running these things. I would be surprised if Romer gets any takers.” The U.S. had its own experience with running a charter-city-like exclave during its 80-year control of the Panama Canal Zone, which eventually resulted in the U.S. being seen as a colonizer.

Romer envisions sponsorship of charter cities as an alternative to monetary aid, allowing developed nations to play a Good Samaritan role in ending poverty. But unless Romer can adjust his model to significantly increase the benefits to guarantors, without advocating the exploitation of host countries, the idea is unlikely to ever cross the line from interesting concept to practical guide.

Yet, while I don’t see much chance of Romerian neo-colonialism happening, I do agree with Romer’s basic premise that good government, including limited regulations and a business-friendly tax structure, is what drives growth. Israel and Singapore both prove that, by drawing on the power of ideas, even land- and resource- poor nations can find economic success relative to less-well-governed neighbors. Singapore is by no means a model of democratic freedom, but compared to local alternatives, it offers a relatively uncorrupt government, as well as functioning commercial courts and respect for private property rights. As a result, it has attracted workers and businesses.

The charter city model may be useful to developing nations, but only if they are willing to commit to it themselves, rather than relying on an external power to magically generate stability and prosperity for them. If Honduras wants a charter city, it is going to have to earn the credibility to write its own charter and to convince potential residents and investors, both Honduran and foreign, that the charter will be respected.

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About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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1 Comment on Can ‘Charter Cities’ Create Opportunity?

  1. I believe that Honduras is absolutely committed to making the ‘Charter Cities’ concept work. Their legislature has already passed a bill to that effect. Hopefully, the source residents will be mostly Hondurans, as any other solution would be viewed as invasion. I can see the need for some additional technical advisors, engineers, etc at least for the outset. A team of countries, such as the U.S., Canada, and I was going to say Japan (before the recent tragedy), should serve as gaurantors. The U. S. wouldn’t want to go it alone, no doubt with our PR problems. Canada already has significant investment in the area, but must correct their environmental missteps. Who else has the strength right now to participate? Israel? South Korea?

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