The New York Times ran an article about Lazika, the planned city near Zugdidi, on the Black Sea coast. It’s not the only attempt to build a new city from the scratch in the South Caucasus, as Azerbaijan has similar plans. While these plans sound like pipe dreams of overambitious and overconfident politicians and planners a few positive things can be said about Lazika. Maybe, after all, it is not such a crazy idea. In particular, this quote in the New York Times caught my attention (and I have to admit, it speaks for Mr. Vashadze to be open to new ideas, even if they are not well-thought-out in the end): 

“Mr. Vashadze said he was browsing on the Internet when he came across the idea of a charter city, with distinct regulatory and judicial systems that could attract foreign investors to build factories.”

Popularized by Paul Romer, charter cities are special reform zones that try to overcome the pervasive problem of weak institutions in developing countries. The developing country provides the land for the charter city but not the institutions. Instead, the institutions will be guaranteed by a third country. Typically this is a developed country with strong and credible institutions as for example Norway or Canada.

Is this what Georgia needs? It is unclear. Arguably Georgia is not suffering from too much bureaucracy or too much regulation. On the other side, the rule of law and property rights are not yet highly developed in Georgia.  A credible guarantor third country for Lazika might help overcome foreign and domestic investors and workers’ doubts about the rule of law and property rights in Georgia. But likewise, one can have doubts that a charter city that ultimately is on Georgian land will be truly immune to these doubts.

This is not all we can say about Lazika and Azerbaijan’s new town. Both countries have an unusually large share of their population living in rural areas. At the same time, there is a strong relationship between economic growth and urbanization, and a negative relationship between poverty and urbanization. While the causality runs in both directions a policy of promoting urbanization has a good chance to contribute to economic growth and poverty reduction. But whether this is best achieved by investing in existing or by building new cities is an open question, with no simple answers.