This post is a response to Tyler Cowen’s recent post on the topic of charter cities and extraterritoriality, prompted by the recent charter city experiment in Honduras (more background on immigration and charter cities here). Cowen is sympathetic to the idea of charter cities, but he has some concerns. Cowen:

It would be a mistake to equate charter cities with extraterritoriality.  For one thing, a charter city has its own laws and governance, possibly enforced by overseas courts, rather than imposing foreign courts upon domestic governance, a’la Shanghai through the early 20th century.  Still, the history of extraterritoriality gives us some sense of what it looks like to have foreign courts operating outside their usual domestic environment.

The problem with extraterritoriality, as I read the literature, is not the Chinese courts had a superior system of commercial or criminal law which was tragically pushed out by inferior Western ideas.  The problem was that the foreign courts were not supported by comparably strong domestic interest groups and there was a clash between the foreign courts, national symbols, fairness perceptions, domestic rents and the like, all in a manner which led to eventual talk of foreign devils and violent overreaction against the influence of outsiders.

The history of extraterritoriality focuses one’s attention on the question of who has an incentive to support the external system of law, when such a system is transplanted abroad.  This question does seem relevant to charter cities and related concepts.

Hong Kong worked because the UK and USA were able to exert enough control at a distance, at least for a long while, and because China was weak.

One vision is that a charter city works because a dominant hegemon — perhaps at a distance — supports the external system of law.

A second vision is that a charter city works because the external system of law serves up some new and especially tasty rents to domestic interest groups.  In the meantime, avoid Tongans.

A related question is what it means for the external legal system to be “invited” in, and how much such an invitation constitutes prima facie evidence of real domestic support.

I would like to see these topics receive more discussion.

Happy to oblige!

“Having its own laws and governance, possibly enforced by overseas courts” vs. “imposing foreign courts upon domestic governance”? I’m not sure the distinction here is perfectly clear, though I guess it means that a charter city would have more autonomy.

Cowen’s rejection of the possibility that “the Chinese courts had a superior system of commercial or criminal law which was tragically pushed out by inferior Western ideas” seems to be a deliberate understatement (perhaps for the sake of political correctness). The flourishing of Shanghai under a regime of foreign extraterritoriality, compared to the rest of China at least, which is reflected even today in its commercial leadership within China, suggests that foreign extraterritorial rule offered some advantages. Of course, a comparison of Hong Kong with China over the past fifty years supports that point much more strongly.

Cowen is right that there was a nationalist reaction in China against extraterritorial rule. But let’s add some context. First of all, extraterritoriality in Shanghai was established at a time when the Europe was globally dominant and had been rather aggressively expansionist, more or less, for some time. Second, racism and feelings of racial superiority were normal and acceptable at the time. Third, the reaction against extraterritoriality in China was strongest in the early 20th century, when the collectivist ideologies of nationalism, socialism, national socialism, socialism-in-one-country, etc. were at the peak of their influence. Fourth, the world at that time, though more globalized in terms of labor mobility, was culturally less globalized than today. There was no internet; no Hollywood (or at least, less of it); no hegemony of English; blue jeans and rock music and democracy as a normative ideal hadn’t gained the near-universality they have today. All of these factors have changed.

First, charter cities are being proposed now at a time when the West is less globally dominant in the past, and most of the West (America and Britain are arguably exceptions) is not at all aggressive. The West is not rising, if anything it is in relative retreat. It is still the world’s richest and most powerful region, but its share of global population and GDP is falling and will probably keep doing so for decades to come. A Western-led charter city is less likely to be perceived as a threat than in the past.

Second, racism has largely been purged from the West, especially in the US, to a lesser extent in Europe. Many Americans probably have a bit of half-conscious racism left, and there is some open racism in Europe, but non-racism is definitely normative and normal. So one source of alienation is removed. That said, the whole premise of charter cities is that some countries’ institutions (whatever that means) are better than others, and if foreign staffers involved in setting up and running a charter city didn’t get frustrated with the locals’ lack of professionalism sometimes and behave in ways that ruffled feathers as they make those working for them rise to a new standard, they wouldn’t be doing their job. But they wouldn’t consider themselves superior by nature to locals, and they would have no inclination to allocate jobs and responsibilities and favors on the basis of racial prejudice rather than merit.

Third, collectivist ideologies have been in retreat for some time. The nation-state model, forged in 19th-century collectivisms, is still the dominant model of society, but the nationalist and/or socialist ideologies that made that model normative have been largely discredited. I would almost go out on a limb and say that today’s nation-states are like European royalty in the 19th century: they were still in office and sometimes even in power, often held in great affection and usually taken for granted, yet the roots of their legitimacy had quietly disappeared. Custom remained a powerful prop and most of them were not immediately threatened, yet I suppose few serious thinkers in, say, 1880, if asked to design a template for good governance for a society without traditions, would even have thought of including a king in their plan. In the same way, while many seem to presume that a world of nation-states is some sort of logical necessity, it seems unlikely that a political theorist designing a template for good governance from the ground up for a world without traditions would go out looking for nations to organize into states. Nationalism and racism were two sides of the same coin, and now that we have anathematized racism, we can hardly make sense of the notion of nationality, once it is called into question. The European Union represents a reaction against nationalism, and it has gone a long way towards making the nation-state model obsolete in Europe. Of course, that has led to difficulties and there is some buyer’s remorse, but it is still indicative of the climate of the times. A charter city might face some of the same ideological resistances that extraterritoriality provoked, but such resistances would be rather retrograde today. It would not have the ideological wind at its back.

Fourth, I think the foreign administrators of a charter city would seem less foreign today than the Europeans were in China. They would have cell phones and use Facebook. If they came from the US, people would know a lot about their homeland from the movies. An English-speaking elite wouldn’t feel colonial, since everyone know that English is the global lingua franca now.

I don’t think Cowen’s idea of a “dominant hegemon” is the best way to run a charter city now. It could work, but Western governments are rather inward-looking and vulnerable to lobbyists. My favorite candidate to run charter cities is the World Bank, but NGOs, foundations, and maybe a certain special kind of private corporation might do it, too. The key is that you’d need some kind of agency that cares about justice, which is why I am skeptical of the notion of “private cities.” It’s logically possible that a private corporation might be committed to doing the right thing, and not just maximizing profits for shareholders. I’m not sure it’s even terribly unlikely. But it is contrary to the nature of a private corporation to do this. An important feature of free societies is that the public/private distinction, the distinction between businessmen, who can sell their services to the highest bidder but cannot use force, and judges, who can use force but cannot sell their services to the highest bidder, is quite clear. There might be a lot of different ways to develop a ruling set (i.e., an organizational structure empowered to use force) with a self-sustaining culture of justice, but the paradigm of free-market economics, with the price system orchestrating self-interest to give rise to optimally efficient solution, doesn’t cross-apply very well. I think there are better ways to do it than to have a foreign dominant hegemon.

What does all this have to do with open borders? Well, some of us hope that charter cities might be one key to unlocking global labor mobility. But at the level of ideas, charter cities decouple the scope of labor mobility from the scope of jurisdiction. Today, and in general since the 1920s or so, it is normal for the territory in which a set of people have the right to move and work to be co-extensive with the jurisdiction of some sovereign government. That hasn’t usually been the case in history, and there’s no reason in principle that it has to. If a charter city is established in Honduras, it is no longer under the ordinary jurisdiction of the Honduran government, but it is still space that Honduran people have access to. Honduran people are given a new choice of which regime to live under. In general, open borders advocates want to give people a lot more choice about what regime to live under. We want to decouple the scope of labor mobility from the scope of jurisdiction. In that sense, charter cities are related to the open borders cause, quite apart from what their actual immigration policies turn out to be. That said, the big payoff to charter cities for human freedom and global economic growth would likely come from their liberal immigration policies.

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.

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