Reaction to “New Cities and Concepts of Value”

The New Cities Foundation recently released a report, “New Cities and Concepts of Value: Planning, Building, and Responding to New Urban Realities.” The report summarizes themes emerging from a conference held in King Abdullah Economic City last fall. It is notable primarily for mentioning the legal and regulatory environment when building a new city.

Semi-autonomous private cities are a coming trend in urban governance in the developing world. Private cites are being constructed throughout the world. New special economic zones are also being created throughout the world. However, until now there was a disconnect between the two trends. No major stakeholders had realized that laws and regulations were important for attracting businesses and residents to new cities.

The new report changes that. Creating a regulatory environment friendly to entrepreneurs and investors is mentioned. As is reducing the cost of risk taking through bankruptcy laws and regulations regarding starting and closing businesses. These two aspects are important because they are the first mention of improving the legal and regulatory structure of a private city by a major stakeholder.

With this in mind, I would like to offer a few further thoughts on how private cities might approach legal and regulatory autonomy. First, it is important to distinguish between two aspects of autonomy. The first is autonomy itself. Private cities must get legal permission to opt out of certain aspects of the legal and regulatory environment. Second s the construction of alternatives. After opting out, private cities must create a new legal and regulatory environment. In practice, the two steps will likely be related. Countries will be unlikely to grant autonomy without seeing plans for the replacement of their legal and regulatory environment.

The next question is the areas of autonomy and their relative importance, though it should be noted that the particulars of this ranking are highly dependent on the host country. Ease of doing business is important, bankruptcy laws less so. However, the most important area of autonomy is the commercial legal system. Investors in the city must be assured that their contracts will be enforced justly be a court of law. Unfortunately, such assurances cannot be made by many developing countries.

Dubai, for example, solved this problem in their financial center by hiring a British judge. Singapore relied on the British Privy council to reassure investors their contracts would be kept.

After commercial law, ease of doing business is most important. Ensuring it is easy and cheap to start businesses is a necessary element of a vibrant entrepreneurial culture. Starting a business should take a day or two and less than one percent of residents per capita GDP.

Third most important is labor laws. It must be easy to hire and fire residents. A dynamic economy requires an open labor market, something that is unfortunately lacking in many developing countries.

The final important element is taxes. Taxes should be low and simple. A land value tax is especially good, as it does not cause deadweight loss.

I am happy to see the New Cities Foundation is beginning to focus on the legal and regulatory aspects of building a new city. I hope they continue to pay attention to the issue, as I believe it is crucial to the success of new cities.