Charter City and its “Birthplace” - Hong Kong: Do Charter Cities Worsen Inequality Instead of Alleviating Poverty?

Chester Chau Abstract

Ever since Paul Romer’s idea of charter cities was introduced in 2009, there have been a lot of discussions in both academia and among the general public. While most of the discussions revolve around issues of its political legitimacy or its actual economic outcome, little is being mentioned about its implication on inequality. By studying the high land-price policy in Hong Kong and its impacts on inequality, I examine how charter cities would only worsen inequality mainly due to Romer’s proposal of adopting a high land-price policy for the charter cities and the impracticality of transitioning to liberal democracy in the host country through charter cities.

Keywords: Charter City; New Cities; Inequality; Poverty; Hong Kong; SEZ; Housing; High Land Price; Democracy.

Introduction

First discussed among a small group of individuals in 2008, the concept of charter cities was officially launched by Nobel Laureate and economist Paul Romer in his 2009 TED Talk. Using the dynamics between Hong Kong and China as his prime example, he argues that the poverty problem in low- to middle-income countries could be addressed by establishing charter cities that operate under a different set of rules from the host country itself. While there are already other types of special jurisdictions related to charter cities, like special economic zones (SEZs), what makes charter cities stand out is that each would be administered by a high-income, third-party country rather than the host country itself, just like Hong Kong during British rule.1 He also mentioned that the primary source of capital for the initiation of the city would be from the land sale, for which he believes a high land-price policy like the one in Hong Kong would be adopted.2

The concept received both positive and negative feedback. Some criticised the idea as neo-colonial since charter cities require less developed countries to concede their sovereignty to more developed countries, often Western countries with colonial histories.3 The governing of the cities would also potentially be undemocratic to the residents of the cities. The government would need to be more centralised, or even authoritarian, in order to run charter cities successfully.4 While many scholars see the shortcomings associated with charter cities, some of them believe charter cities are still the “second best” option to promote development and alleviate poverty, albeit with some limitations.5

Literature Review

Bernard, D. R. (2021, July 9). Intervention report: Charter cities. Rethink Priorities. Retrieved March 28, 2022.

2 Paul Romer, “Why the World Needs Charter Cities,” filmed July 2009, TED video, https://www.ted.com/talks/ paul_romer_why_the_world_needs_charter_cities

3 Sagar, R. (2016). Are charter cities legitimate? Journal of Political Philosophy 24(4), 509–529.

4 Milton, A. (2020, May 13). Why charter cities won’t lead to Decentralized Government. Palladium. Retrieved March 28, 2022.

5 Freiman, C. (2013). Cosmopolitanism within borders: On behalf of Charter Cities.

6 Human Development Report 2020. (2020). (rep.). Hong Kong, China (SAR) - Human Development Reports. Retrieved March 28, 2022.

7 Central Intelligence Agency. (n.d.). Country ComparisonsGini index Coefficient - distribution of family income. Central Intelligence Agency. Retrieved March 28, 2022.

8 hkeconomy.gov.hk. (n.d.). Hong Kong’s Gini coefficient compared with other economies. Retrieved March 28, 2022.

While Romer has mentioned that Hong Kong is the very inspiration of charter cities on several occasions, it is also ironic to see that Hong Kong is cited as an example of successful poverty alleviation. Although it is true that Hong Kong had the fourthhighest Human Development Index (HDI) value in the world in 2019, which put Hong Kong in the “very high human development” category, it is also true that Hong Kong’s inequality problem is one of the worst in the world.6 A widely recognised index, the Gini coefficient measures the inequality within a nation or a social group. The coefficient can also be expressed as a percentage, with a percentage of 50% or higher indicating “considerable disparity”. According to the CIA World Factbook, Hong Kong had a Gini percentage of 53.9% in 2016, making it the eighth-highest in the world and the highest in the developed world.7 It is evident that Hong Kong has a serious problem with income inequality, and it has no signs of going down either as the gap has been widening over the past decades8 (hkeconomy.gov.hk, n.d.). This shows Hong Kong is not the best example for reducing economic inequality, and any development model that is based on Hong Kong without significant alteration would be doomed to follow the same trajectory. By examining the effect of the high land price policy on inequality in Hong Kong, the “birthplace” of charter cities, and the possibility of having liberal democracy in charter cities in general, this paper aims to study how the economic and political structure of charter cities would affect inequality in charter cities.

Ranging from scholarly articles to newspaper editorials and think tank reports, a wide variety of literature related to charter cities is available, and a majority of the literature focuses on both the benefits and shortcomings of charter cities in terms of economic outcomes or political legitimacy. By running various economic models on different SEZs - the nearest existing empirical analogue to charter cities - the intervention report published by the research organisation Rethink Priorities argues that charter cities may not be able to achieve the economic goals that others would have expected. SEZs in general do not seem to grow faster on average than their host country, and there seem to be no policy and regulation features that correlate with the high level of growth. The successful stories that charter city advocates often quote might also be hard to replicate as other factors, such as proximity to trading partners and highly skilled labour migration, also played a big role in the development of those cities.9

Meanwhile, the scholarship by Ebner & Peck (2021) focuses on the political shortcoming of charter cities, with a particular emphasis on the repeating history of governmental corruption, corporate opportunism, and banana republicanism. The magazine article written by Milton (2018) also discussed why charter cities would not lead to decentralised government and, to an extent, democratic government.

On the other hand, Freiman (2013) is more optimistic about charter cities. Although he acknowledges the controversies regarding charter cities, he still believes that charter cities are the “second best” option to alleviate poverty. Compared to foreign aid, charter cities are more cost-efficient since they promote labour mobility. Sagar (2016), while believing that charter cities could be politically legitimate, is more cautious and sceptical than Freiman. Even though moral challenges regarding political legitimacy are resolvable, the practical challenges involved are less tractable, and resolving them by having a higher level of international engagement could, in turn, undermine the legitimacy of charter cities. Both authors recognise the debate around charter cities but diverge in their level of optimism about their potential benefits.

Overall, most of the discussions revolve around the economic and political aspects of charter cities, with relatively little attention paid to the social impacts, especially inequality. Therefore, based on the findings, this paper further elaborates on the potential socio-economic implications of the economic and political structure of charter cities.

WHAT ARE CHARTER CITIES?

As mentioned above, charter cities essentially extend the concept of SEZs by increasing their size and expanding the scope of their reforms. Rather than only reforming rules that purely relate to economic policies, charter cities require reforms of all the rules needed to structure interactions in a well-run city and to support market exchange. Thus, it allows for government partnerships that facilitate the transfer of rules from the partner country to the new locations.10 While the governance structure of each charter city could differ, Fuller & Romer believes that all charter cities are based on four common elements: first, a piece of undeveloped land, ideally along the coast; second, a charter that pre-specifies the broad rules; third, a commitment to choices that are backed by both voluntary entry and free exit for all residents, employers, and investors; and fourth, equal treatment to all residents under the law.11 By emphasising his commitment to voluntary choice for both the residents and the host country, he emphasises that charter cities are not neo-colonial in nature. Only countries that want to create a charter city would offer the land, and only residents who want to move in would move in, meaning that no coercion is involved.12

9 Bernard, 2021.

10 Fuller, B., Romer, P., & Macdonald-Laurier Institute for Public Policy. (2012). Success and the city : how charter cities could transform the developing world (Ser. Macdonald-laurier institute publication). Macdonald-Laurier Institute for Public Policy.

11 Fuller and Romer, 2012.

Nonetheless, the scale of infrastructure and policies required to materialise such cities is unprecedented. Therefore, it is not surprising that none of the potential charter city projects have actually materialised. Ever since Romer released his grand idea, two countries had expressed their interest in the idea - Madagascar and Honduras. However, the projects did not progress as expected. The reformist president of Madagascar, Marc Ravalomanana, was interested in establishing two charter cities to boost the economy of the country, but it was immediately called off as soon as Ravalomanana lost his presidency in 2009 in a coup d’état.13 Incidentally, in Honduras, charter cities were made possible because of a coup. The hard-right administration rose to power in the 2009 coup, and this allowed Romer to negotiate for the establishment of charter cities in the country. However, Romer resigned from the project in 2012 after various scandals related to the Honduran project. He also seemed to lose interest in charter cities.14 Although the project is still progressing in the absence of Romer, academics are sceptical about it. The factors that led to the failure of the planning in the early stage of the Honduran project still persist: secretive negotiation with the administration; absence of community involvement; heavy-handed and violet expropriations; backing from a cabal of foreign speculators and libertarian activists.15

HIGH LAND-PRICE POLICY, LIMITED DEMOCRACY & INEQUALITY

Although the concept of charter cities itself has also undergone significant changes ever since its launch in 2009, the discussion on how to finance them has been relatively unchanged.16 In Romer’s TED talk in 2009, he proposed that Hong Kong and Singapore’s high land-price policy could be used to finance the charter cities at the beginning stage. By selling the land at a high price, charter cities could use the surplus value from the land sale to establish various infrastructures such as the police, courts, school system, and healthcare system. These infrastructures could make the city a place where people would have higher incomes, which, in turn, makes the land more valuable and thus attracts even more investments. Besides his initial TED talk, Romer also published works in which he spoke about how allowing foreign governments to oversee the charter city would attract more foreign investment. However, no details were given in terms of how they would attract such investments in practice, especially at the beginning stage.17 Based on the current literature, the arguments in this paper have been developed on the assumption that a high land-price policy is the primary structure of the economy in charter cities.

HIGH LAND PRICES IN HONG KONG & THEIR IMPLICATION

sales, and real estate-related tax incomes have constituted more than half of the government revenue.19 After the Sino-British Joint Declaration was made in the 1980s, land sales were also under strict control for a brief period. Until 1997, the year when Hong Kong was handed over to China, the annual land release was restricted to a mere 50 acres.20 The government would also ensure that the housing market remained relatively stable by regulating the supply of new public housing.21 This shows that a de facto high land-price policy does exist in Hong Kong.

As a result, property price in Hong Kong remains high and has continued to grow in the past decades. This not only leads to unaffordability of housing but also inequality between those who live in public and private housing. Over the course of 35 years, tenants in public housing in Hong Kong have only become poorer, while those in the private housing sector are now much wealthier.22 This also signifies the problem of a shrinking middle class. Although the problem is not unique to Hong Kong, its effects there are particularly prominent. Income and wealth inequality for the shrinking middle class is especially driven by rising property prices, and Hong Kong’s high baseline property prices only magnify the effects.23

LIMITED DEMOCRACY IN CHARTER CITIES & ITS IMPLICATIONS

While the discussion above mainly revolves around the relationship between inequality and the high land price policy in Hong Kong, such a relationship could also be equally applied to charter cities if they insist on adopting the Hongkongese model. The good news is that the issue of inequality could potentially be resolved if liberal democracy is possible in charter cities. As Hong Kong is not a full-fledged democracy, citizens of Hong Kong can only influence the government’s policies in limited ways. Thus, the government only has to satisfy the demand of those who are important to the administration, in this case, the real estate industry. However, if citizens had greater influence over the government, through elections, then the government would have more incentives to listen to the demands of the citizens, which includes keeping the property price at an affordable level.

12 Paul Romer, “Why the World Needs Charter Cities,” filmed July 2009, TED video, https://www.ted.com/talks/paul_romer_why_ the_world_needs_charter_cities

13 Ebner, N., & Peck, J. (2021). Fantasy Island : Paul Romer and the multiplication of Hong Kong. International Journal of Urban and Regional Research 46(1), 26–49.

14 Fuller and Romer, 2012.

15 Ebner and Peck, 2021.

16 Bernard and Schukraft, 2021.

17 Fuller and Romer, 2021.

18 Wong, R. Y. C. (2015). Hong Kong land for Hong Kong people: Fixing the failures of our housing policy Hong Kong University Press.

While there is no evidence that proves the Hong Kong government has officially adopted a high land-price policy, various historical events and policies show that the government has no incentive to lower the land price in Hong Kong.18 Together with other profit taxes paid by property developers, such as transaction-based stamp duties and other costs involved in construction, land

The phenomenon could be explained by the lack of upward social mobility under such a land regime. Wong (2017:165) found that children who grew up in families that owned their homes had significant schooling attainment advantages over those who rented private units, in terms of years of schooling received. Together with the fact that public housing estates tend to have more divorced families, neighbourhoods with weak communities – in the forms of both public housing and private rental housing –generally provide less motivation for children to pursue higher aspirations, which is detrimental to upward social mobility and, in turn, social equality.24

Therefore, the real question here is whether democracy is actually possible in charter cities. Even though Romer claims that the door is always open for charter cities to transition to liberal democracy, it is unlikely that this would happen at the early stage of the establishment. As a charter city requires prudent and stable leadership, important features of democracy, like frequent elections, would become detrimental to the leadership. Thus, the prolonged divergence of charter cities from liberal democracy would likely be the norm.25 Moreover, host countries would probably not allow their charter cities to be liberal democracies since they often use charter cities as a tool to legitimise their regime and further tighten their grip on the country. Taking Saudi Arabia’s NEOM project as an example, instead of decentralising the government and democratising the country, the Saudi government hopes that a successful NEOM will allow them to deepen their long-term resilience in the existing power structure by increasing legitimacy via economic growth and creating testing spaces for reforms with minimal country-wide disruption.26 If the charter cities in Honduras ever succeed, the cities may just end up becoming vehicles for the central Honduran elites to expand territorial control rather than build institutions.27

112–120.

20 Wong et al., 2011.

21 Wong et al., 2011.

22 Wong, R. Y. C. (2017). Fixing inequality in Hong Kong. Hong Kong University Press.

23 Wong, 2017.

24 Wong, 2017.

In reality, there are essentially no incentives for the host country to allow democratisation to happen in charter cities. Democratisation could potentially threaten their own regime if the movement ever becomes national in the host country. Thus, with the absence of liberal democracies in charter cities, a Hong Kong-based model for charter cities would be doomed to follow the same trajectory where citizens suffer from the inequality caused by high land prices with no democratic channels for change.

Conclusion

The unique role of Hong Kong within the pan-Chinese economy has no doubt allowed Hongkongers’ wages to be greatly increased, which helped Hong Kong become part of the developed world in the 1980s.28 However, as time goes by, the problem of inequality has also become more and more prominent, with no signs of being reduced either in the past decades or in the near future. The rich continue to become richer, the poor continue to become poorer, and the middle class begins to sink because of the polarisation of the economic classes in the city caused by the high land price. Upward social mobility is limited as well. Without democracy, the voice of the poor and the shrinking middle class cannot be properly heard and addressed by the government, making society even more skewed toward the rich and worsening social inequality. Therefore, it is no surprise to see that the gap between housing prices and construction costs in Hong Kong started to widen in the 1980s, which coincided with the boom that came after China opened up its economy in 1979.29

If time could be stopped, just like when Romer was in his flashback to mid-century Hong Kong in his TED talk, then it would be possible for charter cities to alleviate poverty without causing significant social inequality. Unfortunately, this is not the way the world works. If charter cities are going to be run based on the Hongkongese economic model with no significant alteration, meaning an economy based on a high land-price policy with limited democracy, it will eventually run into walls. By that time, it might already be too late to fix the problems that arose from charter cities, particularly inequality problems caused by housing problems.

References

Bernard, D. R. (2021, July 9). Intervention report: Charter cities. Rethink Priorities. Retrieved March 28, 2022, from https://rethinkpriorities.org/publications/ intervention-report-charter-cities.

Central Intelligence Agency. (n.d.). Country Comparisons - Gini index Coefficient - distribution of family income. Central Intelligence Agency. Retrieved March 28, 2022, from https:// www.cia.gov/the-world-factbook/field/gini-index-coefficient-distribution-of-family-income/ country-comparison

Ebner, N., & Peck, J. (2021). Fantasy Island : Paul Romer and the multiplication of Hong Kong. International Journal of Urban and Regional Research, 46(1), 26–49. https://doi. org/10.1111/1468-2427.13060.

Freiman, C. (2013). Cosmopolitanism within borders: On behalf of Charter Cities. Journal of Applied Philosophy, 30(1), 40–52. https://doi.org/10.1111/japp.12008.

Fuller, B., Romer, P., & Macdonald-Laurier Institute for Public Policy. (2012). Success and the city : how charter cities could transform the developing world (Ser. Macdonald-laurier institute publication). Macdonald-Laurier Institute for Public Policy. Retrieved March 28, 2022, from https://www-deslibris-ca.proxy3.library.mcgill.ca/ID/233634 hkeconomy.gov.hk. (n.d.). Hong Kong’s Gini coefficient compared with other economies. Retrieved March 28, 2022, from https://www.hkeconomy.gov.hk/en/pdf/wp/gini_comparison.pdf

Human Development Report 2020. (2020). (rep.). Hong Kong, China (SAR) - Human Development Reports. Retrieved March 28, 2022, from https://hdr.undp.org/sites/default/files/ Country-Profiles/HKG.pdf.

Milton, A. (2020, May 13). Why charter cities won’t lead to Decentralized Government. Palladium. Retrieved March 28, 2022, from https://palladiummag.com/2018/10/08/ why-charter-cities-wont-lead-to-decentralized-government/.

25 Sagar, 2016.

26 Milton, 2018.

27 Milton, 2018.

28 Ng,

29 Wong, 2015.

While this paper puts a heavy emphasis on how the high land-price policy in Hong Kong exacerbates existing inequality in society, literature on the political structure and legitimacy of charter cities was mainly used to study how liberal democracy would be impractical to be implemented in charter cities as a tool to address inequality. However, little analysis was done on how limited democracy in charter cities would impact the inequality situation directly. More research on this topic should be conducted in the future to give a full picture of the relationship between limited democracy and inequality in charter cities.

Ng, M. K., Lau, Y. T., Chen, H., & He, S. (2021). Dual land regime, income inequalities and multifaceted socio-economic and spatial segregation in Hong Kong. The Urban Book Series, 113–133. https://doi.org/10.1007/978-3-030-64569-4_6

Sagar, R. (2016). Are charter cities legitimate? Journal of Political Philosophy, 24(4), 509–529. https://doi.org/10.1111/jopp.12089

Wong, F. W., Chan, E. H., & Yu, A. T. (2011). Property developers’ major cost concerns arising from planning regulations under a high land-price policy. Journal of Urban Planning and Development, 137(2), 112–120. https://doi.org/10.1061/(asce)up.1943-5444.0000046.

Wong, R. Y. C. (2015). Hong Kong land for Hong Kong people: Fixing the failures of our housing policy. Hong Kong University Press.

Wong, R. Y. C. (2017). Fixing inequality in Hong Kong. Hong Kong University Press.