I won't get into the many details of this that are misleading, because the general picture is correct. Charter cities where the merchant rulers made their own laws and managed their own affairs were a key part of medieval economic growth. Paul Romer's plan is to jump start economic growth in poor countries by establishing charter cities in them, places where business growth would be protected from civil war and local corruption. On the model of Hong Kong, he suggests that these cities be administered by foreign governments, i.e., that they be old-fashioned colonies.
Halfway through the 12th century, and a long time before economists began pondering how to turn poor places into rich ones, the Germanic prince Henry the Lion set out to create a merchant’s mecca on the lawless Baltic coast. . . . Henry seized control of a fledgling town called Lübeck . . . and arranged for Lübeck to become the seat of a diocese. A grand rectangular market was laid out at the center of the town; all that was missing was the merchants.
To attract that missing ingredient to his city, Henry hit on an idea that has enjoyed a sort of comeback lately. He devised a charter for Lübeck, a set of “most honorable civic rights,” calculating that a city with light regulation and fair laws would attract investment easily. The stultifying feudal hierarchy was cast aside; an autonomous council of local burgesses would govern Lübeck. Onerous taxes and trade restrictions were ruled out; merchants who settled in Lübeck would be exempt from duties and customs throughout Henry the Lion’s lands, which stretched south as far as Bavaria. The residents of Lübeck were promised fair treatment before the law and an independent mint that would shelter them from confiscatory inflation. With this bill of rights in place, Henry dispatched messengers to Russia, Denmark, Norway, and Sweden. Merchants who liked the sound of his charter were invited to migrate to Lübeck.The plan worked. Immigrants soon began arriving in force, and Lübeck became the leading entrepôt for the budding Baltic Sea trade route, which eventually extended as far west as London and Bruges and as far east as Novgorod, in Russia. Hundreds of oaken cogs—ships powered by a single square sail—entered Lübeck’s harbor every year, their hulls bursting with Flemish cloth, Russian fur, and German salt. In less than a century, Lübeck went from a backwater to the most populous and prosperous town in northern Europe.
Some reasons why this is unlikely to work:
1) Modern governments change policies much more readily and quickly than medieval governments did. A medieval ruler, having granted a charter, found it very difficult to revoke it, but a modern government's position on such an issue could change overnight. Businessmen know this, and are not likely to invest heavily in a place just because it has a charter of liberties.
2) Colonialism is hated across most of the world, and even if some desperate country agreed to host such a scheme, that government would come under attack by demagogues or revolutionaries proclaiming national sovereignty.
3) Western publics also have no great fondness for colonies, so they would not have any interest in sending their soldiers to defend such a charter city. Hence the colonial power could be forced out by any warlord who could muster a battalion of soldiers.
As things stand in the world, nation states hold the power, and they will continue to do so. All development schemes must work with the national framework. If a country can be persuaded to set up its own development zone, as China did, that might work, but in the long run national governments must improve, because there is no way around them.