There’s been a bit of content at this site previously about charter cities. See my posts “Open Borders and Derrida’s Cities of Refuge” and “Hong Kong: City of Immigrants,” as well as this page, with a Bryan Caplan video and several more links. Here’s Bryan Caplan’s open letter to the Gates Foundation on the topic. It also links to this brilliant Michael Strong post, “Gated Communities and Nation States: The Cartel Responsible for Global Poverty.” The same blog (different writer) links to this Guardian article about the project in Honduras. I had heard about this project before, but I thought they were of limited relevance, because I didn’t realize that:

The “model cities” will have their own judiciary, laws, governments and police forces. They also will be empowered to sign international agreements on trade and investment and set their own immigration policy. (my emphasis)

Well, now, that makes things even more interesting. Or shall we say, more relevant, closer to my thinking. Three cheers! Sure, it’s risky, it’s a long shot– but very worthwhile! We should all wish it the utmost success. And while there are plenty of failure scenarios, what’s really striking is that some of the success scenarios are really big success scenarios, and they’re remarkably plausible. As Paul Romer… but let me stop a moment and introduce Paul Romer, because he’s a big player in all this. Here’s Paul Romer in a recent interview. Romer is one of the leading thinkers, possibly the leading thinker, on economic development in the world. His academic work elucidated the way technological innovation adds new non-rival ideas to the endowment of mankind, thus driving long-run economic growth, since ideas accumulate. For the past few years, Romer has been championing the idea of charter cities. The idea of charter cities isn’t, as I see it, directly related to Romer’s distinctive contributions to growth. Romer is, in effect, deferring to the institutionalists here, and attributing development mainly to laws, norms, and social infrastructure. He wants to export good institutions.

Immigration policy is the key. Social infrastructure depends on, among other things, having the right people. One needs complex networks of specialization, and it’s unlikely that all the people to fill those niches are now living in Honduras. But if you can let people come in from all over the world, you have huge networks of people to draw on, and you should be able to thrive. Of course, just because you’re able to let them in, doesn’t mean they’ll want to come, even if– a big if– you can offer them good money. There are a lot of local non-tradable or public goods that will be hard to reproduce in a new city being built from scratch, and the absence of which will deter people from coming. Still, the world has a very large population, and even if a lot of them don’t want to move, and many more don’t like Honduras’s climate, and others aren’t adventurous enough to go to such a novel and experimental kind of place, you can probably still find a lot of people willing to come. In many parts of the world there are people that Amy Chua, in her book World on Fire, called “market-dominant minorities.” When I was working for the World Bank in Africa, I saw this phenomenon vividly. Every business in the city operating out of a proper building was run by some kind of foreigner. There were four main groups: Europeans, Chinese, Indians, and Arabs. People from civilizations, as V.S. Naipaul puts it in his book A Bend in the River. Of course, some of these minorities had lived in Africa for two or three generations, so in a sense they could have called themselves “natives,” but they were not at all assimilated to the black Africans they lived among. They didn’t want to be, mostly, but probably couldn’t have even if they tried. The government, meanwhile, was run by black Africans. The market-dominant minorities lived fairly well, at levels comparable to Westerners, albeit with a very different mix of consumption goods. They couldn’t go down the street to the hardward store and buy something they needed: they had to know how make it themselves. On the other hand, they could hire as much labor as they liked for next to nothing, and land was cheap, too. Now, I think it would be easy for a charter city to attract these kinds of people. They know the value of good laws, and they know the nuts-and-bolts of how to get from primitive point A to developed point B. Later on, you could attract Western do-gooders, NGO types, out-of-work academics, and a variety of talented people who fall through the cracks of the global visa regime. You might get Romeo-and-Juliet types, tragically separated by visa regimes, willing to try an adventure in a new place to be together. Maybe you could be a magnet for deportees from the United States. Clever Indians might come too. Missionaries. Dissidents. One can’t really predict it exactly: the idea is too new. And there’s a hugely important expectations game here: early arrivals would be banking on success. There are “multiple equilibria” here, with a vengeance. People like to be around other people, and that gives the whole game an all-or-nothing dynamic. But it could work.

Let me adopt the mode of giving advice to Michael Strong, or whoever the decision-maker is, maybe the first governor of one of the privately-run cities. Even I wouldn’t be so bold as to advocate immediate open borders, or even open-borders-with-migration-taxes. I advocate that for the United States because the US has huge reserves of stability and could manage the flow to its advantage, and because it’s so large that it can buffer some uncertainty in the scale and nature of global for migration that an open borders policy would reveal. Even then I wouldn’t mind the change being gradualized somewhat. In the case of a charter city, I’d recommend a visa policy that is quick and transparent but initially with some room for discretion. Later, you would try to develop rules, and at some point, you might move to a full-fledged open-borders-with-migration-taxes policy.

An early step might be to outsource some visa issuance. That is, you might make deals with corporations that set up shop in the charter city, authorizing them to issue visas. Let’s say Nestle wants to establish a major production facility. You could say, “OK, Nestle, if you invest $20 million and show us plans that will create 6,000 jobs, you can recruit anywhere in the world you want to, and issue visas to whomever you recruit. Just collect a bit of data on them and let us know who you’re letting in.” Or again, I think it would be a great idea to encourage some US universities to set up satellite campuses in the new cities. You could tell them, “Anyone you admit to your Honduras campus, you can write a visa for.” You’d eliminate a lot of uncertainty. You might actually create the only place in the world where certain kinds of teams could be put together quickly and without any risk of adverse visa decisions disrupting your plans. Now, if there were enough demand for migration to the charter cities, agencies might actually have an incentive to seek visa-issuance authorization and then just sell visas. That might be fine: the visa distributers would become a revenue source. Or it might be better to set up a visas-for-taxes scheme and run it through the government.

My guess is that there will initially be a big role for the governor in negotiating with private businesses, building confidence, coordinating. Some businesses might want to invest only if others did. Thus, Verizon might be willing to set up a cell phone network if a garment manufacturer is going to build a factory, so that there will be sufficient demand. There’s a snowball effect here, or positive externalities if you prefer. You might assemble a portfolio of provisional deals, and then sign them all when it is clear you have critical mass. One important business to establish early, I think, is university campuses. This is the age of human capital. Education pays like never before. Institutionally, it’s one of the hardest things to replicate. So I would go after US universities early, and encourage them to set up satellite campuses in Honduras. Why would a US university want to risk its reputation on a campus in Honduras? Well, for one thing, even if most wouldn’t, there are a lot of US universities, so some might. Universities might have a charitable motive, to try to promote global development. But from a business point of view, it allows them to recruit globally. They do that anyway, but student visas can be a headache. There are a lot of students who might not come because they can’t get visas, others who don’t apply because they’re not sure they can get visas, others who don’t come because even if they can get visas, their family members can’t, or they can get student visas but can’t work. University satellite campuses would attract crucial high-quality personnel. You could probably find a lot of unemployed American academics who would go to Honduras for the sake of an academic position. Of course, Hondurans will have automatic access to the charter cities, which should hopefully allay their concerns about ceding sovereignty.

Nathan Smith

Nathan Smith is an assistant professor of economics at Fresno Pacific University. He did his Ph.D. in economics from George Mason University and has also worked for the World Bank. Smith proposed Don’t Restrict Immigration, Tax It, one of the more comprehensive keyhole solution proposals to address concerns surrounding open borders.

See also:

Page about Nathan Smith on Open Borders
All blog posts by Nathan Smith