Charter cities as the guarantee of the national security (Ukrainian illustration)

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One of the most debated topics in the world today is that of Ukraine’s security and guarantees thereto. USA and EU are threatening Russia with sanctions, many countries have professed support for the new Ukrainian democracy and, all in all, it seems that it will be made safe from Russian aggression – tactically speaking, that is.

Let’s not forget, however, that USA, EU and all the other partners are not very eager to start or escalate a situation which has no direct bearing on their financial stability. That is especially so when the other side has nuclear capability and is headed by a dictator who has “lost contact with reality”. How, then, would it be possible to provide strategic security to Ukraine – or, for that matter, to any fresh, inexperienced, barely starting on a democratic way country, which does not have strong and equal economic and political connections with the West? In my opinion, the answer is fairly simple: it can be done by tying the interests of American, British and other European corporations directly with the Ukrainian economy.

The Crimean issue will be a difficult one to resolve. It is too important for Russia to just let it go, and too fundamental for Ukraine to show resolve in face of military aggression. On the other hand, Crimea is an autonomy and will use this status to milk all the involved sides (Russia, Ukraine, Europe) for all their worth, similar to what Viktor Yanukovich tried to do with Russia and EU. The solution to this problem – as well as to the whole Ukrainian question raised above – is offered by a renowned young economist Paul Romer. He is working on a concept of charter cities. Harvard Business Review – a leading American journal on Management – called this concept “one of the top-ten breakthrough ideas of 2010”. The title of the article, “Building New Hong Kongs”, really says it all.
Paul Romer
The basis for the idea is this: an economic crisis of the country is usually the fault of its government. This is especially true if the crisis continues for many years: it means the government is the main problem of its country, because it is surely corrupt, its bureaucracy bloated, it interferes with economics and business and takes too high a cut for itself. In order to boost the development of cities in the not-yet-developed countries, and especially in those with young democracies in the throes of national liberation, the governments should take up the policy of long-term non-interference. A charter city is a solution to the ungainly, meddling government. It will also solve the problem of migration of people from the Third World into the countries of the First (USA, EU and Canada). This migration is quite problematic for these people in many aspects, from getting visas to breaking up the families, not to mention the low wages. Instead, Paul Romer suggests cutting a piece of land (at least 1000 sq. km. in his opinion) and building a city there, giving it a special legal status. These enclaves will have their own police, courts, taxation and sets of laws. British legal model can be used as a model, with either Britain herself or a non-interested country with British legal model (such as Mauritius) acting as the legal guardian. The city will offer comfortable housing, offices of many corporations and factories producing and/or assembling technological gadget and similar stuff for the export. The city will be financed by foreign corporations, international organization, and it will be governed by a board of directors – in short, it will be a meta-corporation in and of itself. The rights of the citizens will be guaranteed by a neutral party – Romer suggests that Switzerland, with her reputation for low level of corruption, can be such a sponsor and an overseer of this board.
The main value of the idea is that such charter city can function in any country, however undeveloped its economic and political system, however unstable or interfering its government, even if it changes the political course every few years or holds on to some glorious past. It will be an enclave of the First World of sorts, which will benefit the developing country greatly. It will improve its legal system, its ecology, develop the hitherto unused lands, attract investors and specialists. In addition, there is the influx of hard cash in the form of rent and taxes. The city will have universities, thus improving the levels of education; increase the index of standards of living; bring it the international interest, for the civilized community will greatly benefit from the building of such “new Hong Kong”. Specifically for Ukraine, it will give a guarantee of safety, for Russia would never send troops or even act threateningly towards a country heavily invested with international corporations, organizations and media. Imagine anyone threatening Singapore! The reaction to an aggression towards the world’s banking and corporations’ headquarters would be immediate and harsh. In addition, such a charter city would eliminate the possibility of secessions and creeping occupation: these games are possible against a newly instated government, not against corporations which, one hand, have strong ties to Western governments and, on another, are capable of supporting elite security forces. The guarantees in the other direction, that is to say, lawfulness and peaceful intentions towards the host state, are given by the same international observers and authorities.
How would one go about introducing market economy structures into a country which has for years lived with their direct opposites? Reforming the whole country is naturally opposed by the corrupted officials who have no wish to lose their cushy jobs, on one hand, and by the existing, outdated but interlocked into the government interests, industries. Therefore, even with the political will towards the change, the reforms come slowly, painfully and inconsistently. The results are sometimes hollow, the gains appear too slowly to make the changes irreversible, and the reforms are bogged down. Imagine, however, what would happen if the new economic and legal techniques could be introduced directly, from scratch, and took form of a city. This is Paul Romer’s idea.
The main criticism raised by his opponents is that of creating a precedent for an additional legal system. Let’s try and show why it is important. What is the most important first step in building such a city? It is making the politicians of the host country impotent to interfere, and to guarantee its citizens the rules will not be suddenly changed in the future. Nobody will believe a promise to build a city which promises the supremacy of the law and offers guarantees to the investors if such promises are constantly broken by the state’s legal system. How, then this charter city will be protected from the state’s interference and attempts at changing the rules? Take a look at Hong Kong: the guarantee was renting that piece of land by Chinese government to Great Britain for 99 years. I have already mentioned the idea of foreign guarantees, when the legal system is not created from scratch but is instead copied from a working one, and a third party, a neutral country, becomes is legal guardian and ensures the transparency of its workings. In an attempt to build a charter city in Honduras, Mauritius became its legal guardian; and Mauritius has its legal system based in the British law.
The idea should be very attractive to a poor country: it rents its land for a certain period of time and gets back a fully developed modern city. When Hong Kong was returned to China in 1997 it was a strong international financial hub with fully developed legal and banking systems. It is probably the best example to date of a successfully created charter city.
Of late, more and more countries are giving this idea a go. For example, in 2012 the government of Honduras signed an agreement with foreign investors for building three such cities. It was an attempt to create employment, develop Honduras and its infrastructure and reduce its horrifying crime levels. The crime mortality rate in Honduras is about 60 times that of Europe; the country is completely corrupt and poor – more than 65% of its people are living below the poverty line. Unfortunately, in 2013 this plan was aborted by the state. However, during the preparations stage, the countries that underwent the similar processes, at least partly, in their own past (Singapore and South Korea) became interested in this experiment. They decided to support Romer’s ideas and stated their intent to participate in the project. Another example is the Iskandar project in Malaysia.
Starting 2006, it included the building of Educity, an administrative center, an airport, industrial zones, three seaports a medical center, financial center and so on. The neighboring Singapore is a major participant in the project.
The idea has its roots in the success of Shenzhen which grew near Hong Kong. In 1980 Shenzhen was a sleepy backwater town. By creating the first free economy zone, China allowed it to grow into a vast metropolis with population of several millions and become a world-class financial center.
To sum up: the project of charter cities seem to be shaping as an interesting, promising idea for many developing countries suffering long crises and ruled by unpredictable, capricious governments. They offer the state high level of security, influx of cash and a status of a world-class innovative business-center. I believe Ukrainians should consider this idea seriously, for it could help them solve their many systemic problems.

Kitty Sanders, 2014

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