How 'charter cities' could lift the global economy

If you took a stretch of unused land in a troubled, developing nation like Honduras, set it up as a largely independent jurisdiction with the kind of rules-based governance that Canadians are used to, could that new system take hold? Could it rub off on other parts of the country and, over time, transform entire regions?

To Paul Romer, an expert on urbanization based out of New York University's Stern School of Business, the answer to all three questions is, most likely, yes. And he says the potential gains for the global economy, as billions of people get a shot at living more comfortable and secure lives, make it a no-brainer for rich countries like Canada to help him find out.

Prof. Romer was in Ottawa Wednesday pushing his concept of " charter cities," essentially locales created from scratch in the developing world where reform-minded people could migrate and be governed under a broad set of evenly applied rules that, in theory, could remake norms across the country. If it worked, the "political risk" that is the chief impediment to foreign investment in so many poor countries would be significantly reduced, paving the way for money to pour in. Also, in theory, similar charter cities would start to pop up as people see what's gone on in the first one and want to replicate it. Eventually, entire regions could be adopting new rules and norms established in the initial charter cities, dramatically improving the quality of more and more people's lives.

Honduras is embarking on just such an experiment, having created one of these zones. And in an intriguing paper for the Macdonald-Laurier Institute, Prof. Romer and NYU colleague Brandon Fuller say Canada is ideally positioned to help the charter city-in-the-making establish "institutional credibility" – for instance, by appointing a Canadian to a multilateral board that would help shape how the charter city is governed, or by the RCMP helping to create an "honest and efficient" police force.

"Such a partnership can do what traditional aid cannot," the academics write in their paper, "offer people a chance to live and work in a safe and well-run city, a city that provides economic opportunities for Canadians and Hondurans alike, and a city that has the potential to inspire reform in Honduras and throughout the Americas."

The authors back up their arguments with research, such as a statistic that people who move to places with better rules than in the ones they've left behind can earn wages which are three to seven times higher. Multiply that by billions of people, they say, and the increase in global economic activity would be big enough to pay for building the new cities, and more, they write.

"To put this gain in context, consider that, by most estimates, further reductions in barriers to trade would increase worldwide income by less than a few percentage points," they write. "The estimated gain from letting all people move to places with good rules? An increase in worldwide income of 50 to 150 per cent."

Cynics might dismiss the whole concept as a starry-eyed mix of idealism, paternalism, even imperialism.

But as Prof. Romer explained in a lunchtime presentation in Ottawa, evidence shows that by using this sort of outside-in approach, "norms can change, despite our intuitions," with long-lasting benefits.

The term "charter city," in fact, comes from William Penn's charter for Pennsylvania, which legally guaranteed the freedom of religion and conscience to anyone living there. The establishment of that new norm, and its broad appeal at a time when religious tolerance was hard to find in Europe or elsewhere in America, formed the backbone of a legal separation between church and state. Further afield, and more relevant to the notion that this model can be used successfully in the developing world, the NYU professors argue that Hong Kong's evolution and wild economic success while under British control helped to inspire change as well as development all over China.

And there is a strong argument in the 'enlightened self-interest' category, aside from Prof. Romer's projections about the impact on global output, or the potential windfall for the Canadian companies that might build some of the infrastructure for the new cities or, eventually, have billions more overseas customers who can afford to buy their products. Namely, Canada and all advanced economies have a stake in ensuring the massive urbanization occurring this century actually makes people's lives better instead of creating giant new filthy, chaotic, overcrowded, lawless slums.

Aid spending, once projected to grow by 8 per cent each year and already frozen in 2010, is being cut by 7.5 per cent over the next three years, according to the latest federal budget. But Canadians are proud of their internationalist credentials, and Prof. Romer's proposal could be a template for doing good work abroad that has lasting effect, and that gets the most bang for our buck.

As the Harper government crafts a strategy for Latin America, the charter cities concept is worth a look.