Special jurisdictions and charter cities: what the evidence shows

Special jurisdictions are among the most visible ways in which states try out alternative rules without changing the whole country. Some, like Shenzhen, were the opening move in a national reform programme. Some are legal enclaves, like the common-law courts of the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM). Others go further and propose new cities whose rules are written largely from scratch, as Paul Romer's charter cities and Honduras' ZEDEs (Zonas de Empleo y Desarrollo Económico) did. This study puts the evidence on these designs side by side. It asks three questions: what the econometric record shows about special economic zones (SEZs) in general, what the few high-profile successes and failures show about governance, and why projects that look similar on paper have had very different political fates. We find that the average zone is unremarkable, that the strongest results come from zones embedded in a national reform drive, and that legal enclaves can work when they are narrow, supported by the host state and aimed at a clear group of users. The most ambitious version, a privately governed city with its own legal system, has so far failed the test of domestic legitimacy in every country where it has been tried.

Key findings

• The number of zones has grown fast: UNCTAD counted nearly 5,400 SEZs in 2019, up from about 4,000 five years earlier, with more than 500 more planned. Growth in numbers is not evidence of performance.
• In a World Bank-linked study of 346 zones in 22 countries, the average zone's night-light growth between 2007 and 2012 roughly matched its national economy (average ratio 0.98). Only 65 zones grew considerably faster than the national average.
• In that sample, zone growth fades as zones age. Larger zones and zones close to the country's main city do better. Whether the operator is public or private does not appear to matter.
• China's early SEZs are the strongest positive case: municipal and city-panel studies associate state-level zones with higher foreign investment and a higher GDP level (about 20% in one estimate), but not with a permanently faster growth path.
• Legal enclaves such as the DIFC Courts (from 2004) and ADGM (from 2013, English common law applied directly from 2015) show that a host state can import a foreign legal tradition for a defined commercial community without altering the rest of its legal order.
• Charter-city projects that sought deep autonomy failed politically in Madagascar (2009) and twice in Honduras: the 2011 RED scheme was struck down in 2012, and the 2013 ZEDE framework was repealed by Congress in 2022 and declared unconstitutional by the Supreme Court in 2024.
• The Próspera dispute shows how such projects can move from domestic politics to investment arbitration. In March 2026 the ICSID tribunal refused to split off Honduras' jurisdictional objections, so the merits phase continues.

Research question and scope

The question is not whether SEZs "work" in the abstract. It is narrower and more useful for institution design: under what conditions does a territorially bounded set of special rules produce lasting benefits, and under what conditions does it produce a captured enclave, a political backlash or both?

We look at three families of special jurisdiction:

1. Economic zones: export processing zones, free trade zones and broader SEZs that offer tax, customs, land and regulatory privileges inside a defined area. Shenzhen and the other early Chinese zones are the reference case.
2. Legal enclaves: zones whose main product is a different body of law and a separate court system for commercial matters. The DIFC and ADGM in the United Arab Emirates are the main examples.
3. Charter cities and governance zones: proposals for new urban jurisdictions with a separate constitution-like charter, their own administration and, in the strongest versions, their own courts and regulators. Romer's charter-city proposal and the Honduran RED and ZEDE laws are the main cases, with Próspera on the island of Roatán as the most developed project.

We leave out offshore financial centres that are whole states or territories (such as the Cayman Islands), purely fiscal regimes without a territorial element, and the large literature on industrial parks in high-income countries. We also leave out network-state and seasteading proposals, which the atlas covers elsewhere, except where they draw directly on the charter-city model.

Background

Free zones are old. Free ports and customs enclaves existed long before modern states began to legislate for them. What changed after the 1960s was scale. Export processing zones spread through East Asia and Latin America as governments tried to join global manufacturing chains without first liberalising their whole economies. The International Labour Office database cited by the World Bank counted 176 zones in 47 countries in 1986 and about 3,500 zones in 130 countries in 2006. By 2019 UNCTAD reported nearly 5,400 zones in more than 145 economies, and observed that for every success story there were several zones that had not attracted the investors expected.

China gave the model its political glamour. On 26 August 1980 the Standing Committee of the National People's Congress approved the regulations for special economic zones in Guangdong province, the founding act for Shenzhen, Zhuhai and Shantou; Xiamen in Fujian joined the first group. Bao'an county, on the border with Hong Kong, had been renamed Shenzhen city in 1979. The popular story of a "fishing village" that became a megacity is too simple. Population figures for 1979 vary with the boundaries used, and the contributors to Learning from Shenzhen stress that the zone was built on an existing settlement system and on decades of state planning. Even so, the change was enormous. The city government reports that GDP rose from 270 million yuan in 1980 to 2.7 trillion yuan in 2019. The 2020 census counted 17.56 million permanent residents.

The legal-enclave model came later and grew out of finance rather than manufacturing. The UAE's Financial Free Zones Law (Federal Law No. 8 of 2004) allowed emirates to create zones exempt from federal civil and commercial law. Dubai then created the DIFC (Dubai Law No. 9 of 2004) and its courts (Dubai Law No. 12 of 2004). Abu Dhabi followed with ADGM under Abu Dhabi Law No. 4 of 2013.

Paul Romer's charter-city proposal, set out in a 2009 TED talk and a 2010 Center for Global Development essay, joined these strands into a single idea. Romer argued that the main constraint on rising living standards was not technology or resources but the ability to find and adopt better rules. He proposed new cities, founded on unoccupied land, whose rules would be written by a charter and could be guaranteed, in some versions, by a foreign partner government. Hong Kong and Shenzhen were his examples. The idea attracted interest from governments in Madagascar and Honduras.

Method and sources

This study is a structured review, not new data analysis. We use four kinds of evidence:

• Cross-country quantitative studies of SEZs, especially Frick, Rodríguez-Pose and Wong (2019) and Frick and Rodríguez-Pose (2019), which use satellite night-light data for zones in emerging economies, together with the World Bank's 2017 operational review and Farole's 2011 study of African zones.
• Quasi-experimental studies of China's zones: Wang (2013), which compares municipalities that received zones in different waves, and Alder, Shao and Zilibotti (2016), a difference-in-differences study of 276 cities over 1988–2010.
• Primary legal documents: the founding laws of the DIFC and ADGM as described by their own courts, ICSID communiqués and procedural orders in Honduras Próspera Inc. v. Republic of Honduras (ICSID Case No. ARB/23/2), and filings published by the case-law service italaw.
• Case histories and commentary on the charter-city episodes, including Romer's own essay, contemporary reporting and policy analysis.

Night-light data deserve a warning. They capture visible economic activity well in poor and middle-income settings, but they cannot see a move to higher-value production that does not change electricity use. The authors acknowledge this, and Shenzhen is their own example of upgrading that lights would miss. Court filings by parties to a dispute are also partisan. Where we rely on them for a fact, such as the vote in the Honduran Supreme Court, we say so.

Finding 1: the average zone is ordinary

What the large samples show

The most useful cross-country evidence comes from a dataset built with the World Bank's Trade and Competitiveness practice. It covers 346 zones in 22 countries, mostly in the developing world plus South Korea, and uses night-light growth as a proxy for zone performance in 2007–2012.

The descriptive results are sobering. Average growth in lights across all zones was 14.7% over the whole period, but the median was only 2.8% and the spread was large (standard deviation 28%). Relative to their national economies, zones on average grew at about the same speed (mean ratio 0.98, median 0.95). Of the 346 zones, 33 shrank, 150 were stable and 163 grew. Only 65 grew considerably faster than their national economies, and about one zone in four grew well below the national average. Only in Pakistan did zones on average shrink in absolute terms, but in most countries zones grew more slowly than the country as a whole, even where absolute zone growth was strong, as in Kenya, Turkey and Ghana. In Vietnam and Russia zones outgrew the national average, but the country average ratio never exceeded 1.06.

These numbers do not show that zones are useless. They show that the typical zone is not an engine of transformation. It is often a relocated or modestly expanded piece of the national economy.

What predicts better zones

The regressions in the same study point to a handful of factors:

• Age. The number of years a zone had been operating was consistently and significantly associated with slower growth. Zone dynamism peaks early and fades.
• Size. Larger zones grew faster.
• Location. Distance to the country's largest city was consistently associated with weaker performance. Proximity to other large cities or to ports did not show a consistent effect.
• Technology targets. Zones aimed at high-technology sectors did not grow faster, and in three of four specifications grew more slowly, than low-cost manufacturing zones, though the authors caution that lights may miss technological upgrading.
• Operator. There was no sign that privately operated zones outperform publicly operated ones, or the reverse, a result consistent with Farole's earlier African study.
• Incentives. Fiscal incentives and other programme features were highly context-specific and not structurally associated with performance.

The companion study of spillovers, by Frick and Rodríguez-Pose in UNCTAD's journal Transnational Corporations, finds that zones do raise activity in surrounding areas, but the effect weakens steadily with distance and fades out at about 50 km. Zones in remote locations have less effect on their neighbours.

Farole's 2011 World Bank study of African zones, based on surveys and case studies in ten developing countries, reached a compatible conclusion: many zones fail to meet their goals, others contribute meaningfully to investment, exports and jobs, and the difference lies more in the investment climate, infrastructure and links to the domestic economy than in the size of tax breaks.

Why this matters for design

For an institution designer, the lesson is that a zone is an amplifier, not a substitute. It can concentrate infrastructure, simplify procedures and signal commitment. It cannot easily create markets, skills or agglomeration where they do not exist nearby. A remote, small zone offering tax holidays to high-tech firms combines most of the features the evidence associates with weak performance.

Finding 2: China's zones worked as part of a national reform, not as islands

The evidence on early Chinese zones

Studies of China find larger effects than the cross-country samples. Wang (2013), using municipal data and comparing places that received zones earlier with those that received them later, reports that the programme raised foreign direct investment, not merely by moving firms from elsewhere, and did not crowd out domestic investment. Where investment was dense, the zones generated agglomeration economies and wage gains greater than the rise in local living costs. Later zones produced smaller benefits and larger distortions in firm location than early ones.

Alder, Shao and Zilibotti (2016), using a panel of 276 Chinese cities and prefectures over 1988–2010, find that the establishment of a state-level zone is associated with an increase in the level of GDP of about 20%. The effect worked mainly through physical capital accumulation, with some evidence of productivity and human capital gains, and was not associated with a permanently steeper growth path.

What made Shenzhen different

Three features of the Chinese case are hard to copy. First, the zones were a political instrument of the central leadership, which used them to test policies that were later extended to the rest of the country. Their success was measured by the diffusion of their rules, not by their separateness. Second, Shenzhen sat next to Hong Kong, then a British-administered city with capital, managers, legal services and access to world markets. Third, the zones did not have political autonomy in the democratic sense. Their administration was delegated by, and answerable to, a one-party state that could reverse or extend their powers at will.

That last point cuts both ways. It made policy credible to investors who trusted the central leadership's commitment, and it meant that there was no domestic veto player able to repeal the zone. It also means that Shenzhen is not evidence that a self-governing city with its own constitution can thrive inside a democracy.

The model keeps evolving

China continues to use territorial experimentation. On 18 December 2025 the Hainan Free Trade Port began island-wide special customs operations, under a system officials describe as freer access at the "first line" (between Hainan and places outside China's customs territory) and regulated access at the "second line" (between Hainan and the mainland). It is too early to evaluate, but it shows that the zone remains a tool of central policy rather than a step towards local sovereignty.

Finding 3: legal enclaves can import a legal system, within limits

The DIFC and ADGM designs

The UAE's financial free zones are the clearest test of whether a state can import a foreign legal tradition for part of its territory. The DIFC Courts describe themselves as an independent English-language common-law judiciary, complementary to the Arabic-language civil-law courts of the UAE. Their founding statute, Dubai Law No. 12 of 2004, originally limited their jurisdiction to the DIFC. Dubai Law No. 16 of 2011, signed on 31 October 2011, allowed parties with no connection to the DIFC to agree in writing to use the courts.

ADGM went further. Its Application of English Law Regulations 2015 make English common law, including the rules of equity, directly applicable in ADGM, together with a list of English statutes. ADGM's courts are not part of the English court system and there is no appeal to UK courts. The regulations sit beneath the UAE Constitution and the federal laws that apply in the zone. A 2023 decision of the ADGM Court of Appeal confirmed that its judges are bound to apply the rule set by the regulations.

What they show and do not show

These enclaves show that a host state can create a credible, specialised commercial legal order if four conditions hold: the enclave has the host state's full political backing, its jurisdiction is limited to civil and commercial matters, it serves a distinct community of users (financial firms and their counterparties) and it can borrow a mature legal tradition rather than invent one. Criminal law, immigration, security and sovereignty stay with the state.

They do not show that a self-contained legal order can govern a resident population. The DIFC and ADGM govern firms and contracts, not the political life of citizens. Their success is also hard to separate from the wider economic strategy of the UAE, its fiscal capacity and its location between Europe, Africa and Asia.

Finding 4: charter cities have failed the legitimacy test so far

Madagascar, 2008–2009

Romer's first serious partner was the government of Marc Ravalomanana in Madagascar, which discussed hosting charter-city projects. Journalist Sebastian Mallaby's 2010 account in The Atlantic describes the government as open to unusual deals, ready to lease a tract of land the size of Connecticut to the South Korean firm Daewoo for 99 years. Ravalomanana's government fell in March 2009 after protests and an armed revolt in which the land deal, seen as a threat to national sovereignty, played a part. Romer, in Mallaby's account, attributed the fall mainly to other political rivalries. Either way, no charter city went ahead.

Honduras I: the RED scheme, 2011–2012

In February 2011 Honduras amended its constitution, by 126 votes to 1, to allow "special development regions" (Regiones Especiales de Desarrollo, RED); an enabling statute followed in July 2011, and Romer was named to chair a transparency commission overseeing the regions. The relationship broke down in September 2012, when Romer and the other commission members resigned after learning that the government had signed an agreement with a private developer without consulting them. In October 2012 the constitutional chamber of the Supreme Court declared the RED reform unconstitutional by 4 votes to 1, chiefly on grounds of sovereignty and territorial integrity; the Charter Cities Institute reports that the full court confirmed this by 13 to 1. On 12 December 2012 Congress removed the same four justices after they had also struck down a police-reform law; contemporary observers saw that ruling as the proximate cause, with the RED decision in the background. A new constitutional amendment for ZEDEs was adopted in January 2013 and an organic law in September 2013.

Honduras II: the ZEDEs and Próspera, 2013–2026

The 2013 framework allowed ZEDEs with their own administration, rules and, in some versions, courts. Three were established: Próspera on the island of Roatán, Ciudad Morazán near Choloma and Orquídea near San Marcos de Colón. Próspera, with a private operator and its own regulatory system, became the best-known attempt to build a governance zone from scratch.

The political ground shifted with the 2021 election. In April 2022 the new Congress voted unanimously to repeal the ZEDE law. Decree 32-2022, removing the constitutional provisions, was published on 21 April 2022 and Decree 33-2022, repealing the organic law, on 26 April 2022. The constitutionally required confirmation of the constitutional repeal in the following legislative session did not take place, leaving the legal position uncertain. The Supreme Court's constitutional chamber declared the regime unconstitutional on 7 February 2024. On 20 September 2024 the full Supreme Court declared the ZEDE constitutional amendment (Decree 236-2012) and the organic law (Decree 120-2013) unconstitutional with effect from their origin; the ruling was published in the official gazette, La Gaceta, in November 2024. Accounts of the vote differ: the Próspera claimants, citing a judiciary press release, give 8 votes to 7; the Associated Press reported a majority decision; and El Heraldo described the vote as unanimous, noting that six substitute justices had been brought in.

From politics to arbitration

Three Próspera companies requested ICSID arbitration on 19 December 2022 under the Dominican Republic–Central America Free Trade Agreement (CAFTA-DR) and a legal stability agreement, initially claiming US$10.775 billion. Honduras gave notice of its withdrawal from the ICSID Convention on 24 February 2024, effective on 25 August 2024. Because the case was registered earlier, it continued. On 26 February 2025 the tribunal rejected Honduras' objection that local remedies had not been exhausted. In their memorial of 15 October 2025, the claimants asked the tribunal either to order restitution of their assets or to award damages of US$1,630 million. On 7 January 2026 Honduras asked the tribunal to hear certain jurisdictional objections separately and first. In Procedural Order No. 6 of 19 March 2026, the tribunal rejected that request, reasoning that bifurcation would not dispose of all the claims and would delay the case, and ordered the arbitration to continue on the merits.

The political cycle then turned again. After a change of government, Honduras deposited a new instrument of ratification of the ICSID Convention on 17 July 2026, and the Convention entered into force for it again on 16 August 2026. Rejoining does not by itself decide anything about the ZEDEs. It does show that a governance zone's fate is tied to wider questions of investment policy and international law.

Comparison of cases

Finding 5: legitimacy is the binding constraint

Consent of whom?

Charter-city advocates usually justify their projects by voluntary entry: nobody is forced to move to a new city, so its rules are consented to by those who live under them. This argument has force for residents, but it leaves out three other constituencies whose consent matters:

• The national electorate, which must accept a permanent transfer of public authority over part of the territory. In Honduras, a later Congress and Supreme Court treated the ZEDE regime as an unconstitutional alienation of sovereignty.
• Neighbouring and pre-existing communities, whose land, water and access to public goods may be affected even if they never join. Opposition from local, indigenous and civil-society groups was a recurring part of the Honduran story, according to commentators such as the Due Process of Law Foundation.
• Future governments, which inherit legal stability guarantees they did not negotiate. When those guarantees are enforced through investment treaties, the cost of changing course can be very large, which itself becomes a political argument against the project.

Credibility through foreign guarantees

Romer's proposal tried to solve the credibility problem by bringing in a foreign partner that would administer or guarantee the charter, as Britain did in Hong Kong. Critics, including the CGD's Justin Sandefur writing in 2012, welcomed the idea as a way of extending good institutions and migration opportunities but warned that it faced significant challenges in winning the partners and public support it needed. Mallaby's account described the proposal as neo-colonial in form, even if voluntary. The Honduran projects dropped the foreign-government element and replaced it with private operators and legal stability contracts. That made them easier to launch but no easier to defend.

Exit and voice

The atlas's broader framework on exit and voice is useful here. Special jurisdictions offer exit: investors and residents can choose a different rule set without leaving the country. But they reduce the voice of the wider population over that territory. Zones that last appear to balance this by keeping their scope narrow (DIFC, ADGM), by remaining clearly subordinate to national policy (Shenzhen, Hainan) or by delivering visible benefits to the country as a whole. Projects that combine broad autonomy with private control and thin domestic support have not lasted.

What the evidence does not show

• It does not show that charter cities cannot work. There have been very few attempts and none has reached a mature stage. The Honduran projects were cut short by politics, not by a failure of their internal governance that can be measured. Equally, there is no evidence that they would have succeeded.
• It does not isolate the effect of rules from the effect of location. The best-performing zones are near large cities and major markets. Shenzhen's neighbour was Hong Kong. Separating the contribution of special rules from the contribution of geography is hard.
• Night-light studies do not measure welfare. They do not capture wages, working conditions, environmental costs, displacement or tax revenue forgone. A zone can grow brightly while imposing costs on its workers or neighbours.
• The UAE enclaves are not tests of political self-government. They show that commercial law can be imported. They say nothing about democratic legitimacy, rights protection for residents or the governance of a whole city.
• The arbitration record is not a verdict on the merits. The ICSID decisions so far concern admissibility and procedure. They do not establish that Honduras breached its treaty obligations, or that it did not.
• Several historical details are contested. The vote counts of the 2012 Honduran court decisions come mainly from secondary accounts, and reports of the 20 September 2024 plenary vote range from 8–7 to unanimous.

Implications for institution design

1. Start narrow. The enclaves with the best record define a limited jurisdiction (commercial law, customs, a financial market) and leave criminal law, citizenship and security with the state. Broad autonomy multiplies the number of people whose consent is needed.
2. Borrow, do not invent. ADGM's direct application of English common law and the DIFC's common-law courts reduce uncertainty for users. A wholly new legal code imposes learning costs and invites suspicion.
3. Choose location over incentives. The evidence favours large zones near major cities and existing industrial capacity. Tax holidays are weakly related to performance and can become rents.
4. Plan for ageing. Zone dynamism fades. A design should include review dates, performance criteria and a path for rules that work to be extended beyond the zone, as China did.
5. Build cross-party and local consent before building. A governance zone that depends on one government's legislative majority is exposed to the next election. Constitutional entrenchment does not help if courts or later legislatures regard the transfer of authority as illegitimate.
6. Include neighbours. Benefit-sharing, land-rights safeguards and independent grievance mechanisms for adjacent communities are not optional extras. They are part of the project's legitimacy.
7. Price the exit. Long legal stability guarantees backed by investment treaties make a project harder to reverse, but they also make it a target. Designers should decide in advance how a host state can change course and at what cost.

Open questions

• Can a charter city be designed so that its legitimacy grows with its population, for example through elected local institutions that gradually take over from the founding operator?
• Are there forms of foreign or international guarantee that do not look like a return of colonial administration?
• How should spillovers to surrounding areas, which fade within about 50 km in the evidence reviewed here, be counted when deciding whether a zone is worth its fiscal cost?
• Will the outcome of the Próspera arbitration change how governments write legal stability agreements for special jurisdictions?
• What happens to specialised legal enclaves like the DIFC and ADGM if the host state's wider politics or economic strategy changes?

Sources

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