Philosophers since Plato have known that some choice about urban planning can only be made once — at a city’s founding. Getting the founding right therefore matters a great deal for a city’s success. Locking in favorable decisions about individual liberty and voluntary cooperation may require steps that begin before any city has been built at all.

Nor is this just utopian speculation. Special economic zones have played a key role in China’s economic liberalization, and they are arguably one reason why China has prospered so much in recent decades. Can this model be replicated elsewhere? Our lead essayist this month, Dr. Mark Lutter, says yes, and he calls on governments worldwide to embrace regional and local experiments in liberalization. Not everyone is so optimistic, however. The inherently inegalitarian nature of these projects may be of potential concern to almost anyone, and a special economic or legal regime may even represent a worsening of local conditions in absolute terms. To discuss these questions, we have recruited Dr. Lant Pritchett of Harvard’s Kennedy School of Government; Prof. Sarah Moser of McGill University; and Prof. Tom W. Bell of Chapman University. Each will write a response to Lutter, and all will participate in a conversation through the end of the month. Comments are open as well, and we welcome readers’ feedback.

By Tom W. Bell
Response Essays

Tom W. Bell says that in special economic zones, the secret to success is competition in governance. There’s no magic to being a special economic zone; zones may be governed either better or worse than other areas. But when the zones have to compete for residents and businesses, they will have to answer some tough questions about what sorts of legal and public service options the public really wants. And there is an incentive to improve.

How can we make governments better?

 

That question drives much of what the Cato Institute does. The answers it generates, through policy papers, public presentations, op-eds, and the like, tend to have very broad reach. A Cato publication might call for a more efficient federal tax code, for instance, or for free trade among all nations. You could call this approach to government reform “a mile wide and an inch deep.”

Mark Lutter, author of the lead essay in this Cato Unbound and founder of the Center for Innovative Governance Research (CIGR), also evidently wants to make governments better. Like others in a new generation of reformers, however, he advocates trying radical reforms in small special jurisdictions. His essay trumpets that “hundreds of millions of people can be lifted out of poverty through a strategy of zone-based economic reforms,” and his CIGR calls for “new, semi-autonomous jurisdictions which can be used to rapidly improve governance in poorly governed areas … .” In contrast to the more typical approach, pursued by the Cato Institute and indeed almost every other think tank or policy group, Lutter seeks reforms that run, one might say, “an inch wide and a mile deep.”

Given that I used to work at the Cato Institute—as Director of Technology and Telecommunications back in the Clinton-Gingrich era—I am not about to criticize its general approach to government reform. It does well to focus on broad themes, given that its pro-liberty message has fans everywhere. When it comes to actually putting policies into practice, however, the approach followed by Lutter and other advocates of special jurisdictions might work better.

Changing the tax code for a whole country cannot help but rouse a swarm of objections. Changing the tax code for a single building, though? Easy. In fact, the United States has already turned that kind of reform into a standard operating procedure in its Foreign Trade Zones (FTZs). Hundreds of FTZs, scattered across the country, lie outside the reach federal customs, procedures, duties, or excise taxes, as well as non-federal ad valorem taxes on tangible personal property.

As documented in my just-published book, Your Next Government? From the Nation State to Stateless Nations (Cambridge University Press 2018), FTZs and other special jurisdictions have exploded in number, size, and diversity in recent decades. Though sometimes little more than over-planned boondoggles, convenient vehicles for corruption, or the vanity projects of megalomaniacal politicians, special jurisdictions, if done right, have the power to radically improve governments. How? Through competition.

From Little Jurisdictions, Big Reforms

Special jurisdictions offer governments a relatively easy way to try out reforms too risky to implement everywhere, all at once. China’s transformation from masochistic Maoist communism to hypocritical but comfortable capitalism owes much to this effect. First Hong Kong—itself a type of special jurisdiction—set an example for what free markets could do for the Chinese people. Next, the government of China allowed a few tentative reforms in nearby Shenzhen. After those experiments succeeded, the reforms spread. Today, perhaps ironically but at all events fortunately, more Chinese people live within so-called “special” zones than live outside of them.

Better government does not follow automatically simply from having lots of special jurisdictions, however. Those jurisdictions have to face incentives to improve. Economist Bryan Caplan recently put the problem this way:

Imagine a world with a thousand sovereign countries of equal size. This is far more decentralized than the status quo, right? Suppose further, however, that there is zero mobility between these countries. Labor can’t move; capital can’t move. In this scenario, each country seems perfectly able to pursue its policies free of competitive pressure. Why should we expect such policies to promote liberty, prosperity, or anything else?

The Chinese used special jurisdictions to find their way to better government not simply by having a lot of them, but by pitting them against each other in a race to encourage economic growth. Ronald Coase and Ning Wang describe the internal incentives for better local government in their excellent book, How China Became Capitalist (Palgrave Macmillan 2012).

Special jurisdictions alone do can little. If they do no more than create local privileges and fracture the rule of law, they might even do harm. If jurisdictions have to compete for free-flowing labor and capital, in contrast, they can help us discover new and better rules and institutions. According to Lotta Moberg’s pioneering book, The Political Economy of Special Economic Zones: Concentrating Economic Development (Routledge Studies in the Modern World Economy 2017), special economic zones (SEZs) promote the public interest best when they inspire broader adoption of locally successful reforms.

The best way to government reform? More competition among governments. And the best way to more competition? Special jurisdictions.

These observations encouraged the Startup Societies Foundation to create the Institute for Competitive Governance (ICG). As its Academic Director, I encourage research and development on how special jurisdictions can lead to more general reforms. ICG’s working theory: competition can offer a better way to better government.
 

Special Jurisdictions in Realpolitik

As Sarah Moser’s observes in her comments on Lutter’s piece, China, having turned itself into a nation of SEZs, has begun using them as a tool of foreign policy. Consider what happened in Sri Lanka. In 2008, it launched joint venture with China to build a deep-water port at Hambantota. After Sri Lanka defaulted on the loan for project, China relieved it of further liability—in exchange for a 99-year lease to use the port, which—surprise, surprise—could prove strategically valuable to a certain giant country’s growing navy. A similar scenario now looms in Kyaukpyu, Myanmar, where the Chinese government plans to finance and build a deep sea port and industrial zone.

China is not alone in using special jurisdictions to extend its reach. Thanks to its colonizing lawyers, England’s common law has won a foothold in both Dubai’s International Financial Centre and Abu Dhabi’s Global Market. Through such subtle but deep influences the City of London qua financial capital extends its reach and increases its revenue.

And where is the United States in this Great Game, special jurisdiction version? Remarkably, for a country that began, developed, and remains a collection of special jurisdictions: Nowhere. The United States does not lack for military presence abroad, of course. But parachuting in self-contained fortresses has a distinctly different effect than would building public infrastructure, investing in local commerce, and encouraging the rule of law. Though they arose by accident rather than design, perhaps the new SEZs arising in Afghanistan, on airfields left by departing U.S. military forces, offer a new model for winning influence abroad: less by building bases and more by building U.S.S. jurisdictions (for “United States Special,” of course).

Special Jurisdictions in the Real World

A closing point: Moser’s comment observes that some of the world’s most advanced special jurisdictions have arisen in, to put it nicely, some of the world’s not so advanced countries. Nobody should blame special jurisdictions for that, though. It turns out that the kinds of countries that summarily eject untitled residents from construction sites and hold the passports of immigrant laborers commit even worse atrocities as a matter of routine policy.

Just as sick people seek a doctor’s care, sick countries sometimes seek aid in special jurisdictions. Neither reformers nor their instruments have the luxury of working only with morally pure nation states (supposing such political unicorns to exist). Instead of faulting special jurisdictions for their inevitable association with troubled countries, Moser and others who hope for better should celebrate the potential of special jurisdictions to discover better ways to better government.

By Sarah Moser
Response Essays

Prof. Sarah Moser is skeptical of libertarian interest in special economic zones, startup cities, and seasteads. She notes that many of these projects as undertaken in the real world are being run by untrustworthy and illiberal regimes. It is therefore doubtful that they offer prospects for better governance in the long term. And it is unseemly for the self-described advocates of liberty to go begging favors from such regimes. The success of China’s Special Economic Zones is unlikely to transfer elsewhere, owing to demographic and geographic features unique to China and to certain of its regions.

In Mark Lutter’s lead essay, “Local Governments Are Changing the World,” he provides an interesting and timely overview of a wide array of innovative urban ideas and projects built from scratch, including special economic zones, charter cities, seasteading, new cities, and other jurisdictions with varying degrees of autonomy.

His essay chronicles decades of libertarian failure to get projects off the ground, which reads as a forceful indictment against the capacity of grass roots libertarians to become city-builders. As Lutter points out, startup societies have a unique knack of getting kicked out of the places where they are trying to build and have struggled to apply a Burning Man / Silicon Valley / libertarian ethos to real-world contexts in their city-building endeavors.

As Lutter outlines, projects from Operation Atlantis, seasteading, and charter cities, to attempts in Madagascar, Honduras, and French Polynesia have failed to materialize. He neglects to mention that some of the luminaries pulled momentarily into the orbit of the startup cities world have since departed, notably Peter Thiel and Paul Romer.

In stark contrast, Lutter goes on to summarize some of the innovative urban spaces underway in China, Saudi Arabia, and the United Arab Emirates. The main difference is that the projects materializing are driven by strong, authoritarian states and corporations who have the connections, financial backing, negotiating skills, technical expertise, and organizational capacity to pull off engineering feats and governance innovations that were unimaginable ten years ago, and that remain far out of reach for American startup cities movements.

The new types of city building, governance, and urbanization of the ocean that startup societies describe are already underway. For better or for worse, government regulations are being dismantled or circumvented in specialized zones in dozens of countries at an unprecedented scale. Autonomous and semi-autonomous zones to which host states have largely conceded sovereignty are popping up in such places as east Africa, the Arab peninsula, and southeast Asia.

The American startup cities crowd is dreaming about a future that is already here.

So why are startup cities folks not talking about these projects? The invisibility of these projects is partly due to the fact that they are very new and are located far from the United States, largely in non-English-speaking places. But they are perhaps also invisible due to the unfamiliar faces at the helm. It is not American men at the forefront of this radical experimentation – current projects are conceived, financed, and executed by Chinese and other Asians, Arabs, and Africans.

What needs further teasing apart among startup cities advocates is how they philosophically align with the proliferation of these new autonomous zones. Lutter does not make any distinction between or hierarchy among projects he surveys, perhaps because the brief format did not allow for this level of elaboration.

However, aside from the many failed startup city projects, there is a wide range of negative impacts that deserve careful study. There is growing evidence that the collateral damage produced by many projects is severe and unacceptable to many: there are ecological disasters; many have demonstrated little respect for human rights, dignity, or lives; they are not accountable to any public, and they are sites of unprecedented corruption. There is a consistent disregard for legally protected tribal and indigenous land. They are certainly zones of experimentation with new forms of governance and unique levels of autonomy, but at what cost and to whom?

If the libertarian position is that you can’t make a startup city omelette without breaking a few human rights and ecology eggs, their projects may continue to be thwarted by angry and rightfully suspicious citizens.

The pockets of autonomous zones are proliferating, yet like any utopian idea their fortunes and fates are still tied to the rest of the world. They rely on governments to invest in research, telecommunications, transportation networks, security, and stable financial markets.

Lutter is right to point out that startup cities are inherently both political and business endeavors. Startup city advocates tend to gloss over politics and the troubling colonial dimension of their projects. Libertarians may not feel like colonial entities, yet it sends a disturbing message to accept tracts of land from the corrupt and undemocratic leadership of other countries, and then proceed to reject their laws and social norms. This type of acquisition of foreign territory, also called “land grabbing,” is broadly perceived as a provocation that will continue to enrage and mobilize citizens around the world.

Chinese companies and the Chinese state have been the most high profile in acquiring land and sea rights in foreign countries where they construct strategically located (semi-)autonomous zones. Forest City, the largest Chinese investment outside of China, is a new private enclave being built by a Chinese company for 700,000 on four artificial islands in the territorial waters of Malaysia. The company has negotiated major concessions of sovereignty: no Malaysian police or military are allowed, freehold property can be sold, and Malaysian law does not apply. It has faced sharp criticism by the former leader of the opposition-turned-Prime Minister, who attacked the selling of land to foreigners, arguing it was a form of colonialism.

Other experimental urban enclaves are being created in Saudi Arabia, Zanzibar, Ecuador, Oman, and more. These projects have varying levels of autonomy and special incentives and more liberal rules on personal freedom than the rest of the country, often governed not by national law but by a city charter.

It is a wild west out there without any semblance of the checks and balances, regulations, and moderating effects that responsible government provides.

China: A Flawed Model for Startup Cities

In his essay, Lutter points to China as the greatest economic and humanitarian miracle in the post–World War II era. He attributes this success to China’s Special Economic Zones (SEZ), and proceeds to connect China’s success to the libertarian dream of creating new cities from scratch.

Lutter states that the particular reasons why China’s special economic zone success has never been replicated elsewhere is “beyond the scope of this essay.” I suggest that if they are to be claimed as a model for startup cities, China’s SEZs require careful and rigorous study by libertarians, seasteaders, advocates of charter cities, and by anyone else looking to China for inspiration.

While not to deny China’s extraordinary economic growth since the reforms of 1979, looking to China as a model is cherry picking of the highest order, and flawed for a number of reasons.

First, context matters, and the success of Chinese SEZs cannot be celebrated in isolation from broader demographic factors and economic history. China has controlled between 25% and 35% of the global economy for much of recorded history, except for a brief period roughly between the Opium Wars and Deng Xiaoping’s economic reforms.

Second, after China shut its doors in 1949, the capitalist world was eager for access to the world’s largest market. The United States was so desperate to establish ties with China that it swallowed its pride and ended its diplomatic relationship with Taiwan, a democracy that it had supported since China’s communist revolution ended in 1949. This external demand for trade is unique to China.

Third, Lutter refers to the location of Shenzhen, China’s first SEZ, as a “relative backwater.” China’s population has always been extremely unevenly distributed, and the coast has long been the economic heart of the country and where the vast majority of the population is concentrated. The Pearl River Delta, where Shenzhen is located, has historically been a trade entrepot for southern China that had sustained contact with other countries through emigrants, and via neighboring Hong Kong and Macau. Shenzhen’s economic success as a space of liberal experimentation in a country stifled by top-heavy and unrealistic policies is not easily replicable in areas with low populations.

In analyzing the winners and losers of experiments in governance, applying lessons learned from China’s experience with SEZs may not provide the economic rocket fuel startup cities advocates imagine in truly isolated “backwaters” with small populations, such as French Polynesia.

Can “Total Freedom” Be Achieved on Leased Land?

Various startup city advocates Lutter references generally seek to escape what they feel are the suffocating constraints of government. Ironically, seasteaders, formally the most ideologically pure libertarian advocates of startup cities, are now approaching governments around the world cap in hand and trying to negotiate the lease of land and SEZ status for their floating city scheme. They yearn for freedom yet align themselves with charter cities.

As conceptualized by Paul Romer, charter cities are not a rejection of government, but are intended as a way to encourage government reform to take place. According to Romer, charter cities should have “electoral accountability for the people who run the zone” and a government:

Any sensible reform zone will still have government, some type of government. It will be accountable in the way that governments around the world are accountable. We give government special powers, like the ability to put people in jail, but we also impose special mechanisms of accountability to make sure that those powers are not abused.

Far from being bastions of freedom on the high seas as conceptualized by Patri Friedman, startup societies are embarking on a journey of being free from the United States government, only to be embedded in the legal system and economy of a possibly corrupt or undemocratic host country with some degree of negotiated autonomy on leased land.

In essence they are trying to do in Honduras and French Polynesia what various Chinese players are already doing in Malaysia, Sri Lanka, Pakistan, Oman, and more, yet without China’s political clout, financial strength, technical skills, or negotiating leverage. As such, China and startup cities advocates have similar instincts for sniffing out corrupt and institutionally weak host countries that are desperate for foreign investment. This is not a recipe for an equal or stable partnership.

Herein lies an important question: how “libertarian” or radical are the visions of American startup cities advocates when their ambitions align with projects like Forest City? How much can pure libertarian visions of “autonomous ocean communities” be compromised by working with corrupt and dysfunctional states to acquire leased land, until nothing remains except the impulse to dodge tax obligations and seek out pockets of deregulation?

Few regulations, tax-free zones, and varying levels of autonomy can readily be found in recent zones created by China, Saudi Arabia, and other wealthy and powerful states and corporations to support their geopolitical, economic, and social interests. In contrast, startup cities advocates are vying to be consultants and middlemen in the birthing of SEZs, seasteads, and other libertarian-inspired endeavors, while also seeking to permanently be in charge of running them. Lacking financing and land, they have very little skin in the game, little to offer, nothing to lose, and everything to gain.

In the crowded marketplace of schemes vying to attract investors, this is a tough sell.

By Mark Lutter
Lead Essay

Mark Lutter points to the success of China’s Shenzhen Special Economic Zone, and of many others like it, as a model for the extension of economic liberalization elsewhere in the world. While economic reforms could not happen nationwide, their demonstration at the local level built support for new ways of thinking and doing business.

The greatest humanitarian miracle in the postwar era is China. The World Bank estimates that economic growth in China has lifted approximately 800 million people out of poverty since 1980. Chinese growth was largely driven through strategic economic reforms implemented through special economic zones. Economic reforms were impossible at a national level; however, by testing them in relative backwaters, the demonstrated success led to replication throughout the country.

Shenzhen, which was a fishing village of 30,000 residents in 1980, epitomizes the success of Chinese special economic zones. In 1981, the first year of the city’s special status, it attracted over 50% of all foreign direct investment in China, which at the time had a population of 993 million. Now, the greater metropolitan area of Shenzhen has a population of 23 million. In 2016, Wired Magazine dubbed it the “Silicon Valley of Hardware.”

The initial success of Shenzhen led to China replicating their special economic zone strategy of reforms. Within four years, the success of the SEZs became clear. China opened its economy, identifying 14 coastal cities to extend similar SEZ policies to. The following year, such policies were applied to cities in the Pearl River Delta, the Yangtze River Delta, and the Min Delta. Even after the Tiananmen crackdown in 1989, SEZ policies continued to advance, with Shanghai gaining the Pudong New District in 1990. In 1992, all capitals of provinces and autonomous regions in the interior gained special status. By this time, special economic zones were no longer as special, as their policies had spread throughout China.

Despite China’s success, no other country, with the exception of Dubai (ok, it’s not really a country), has generated sustained economic growth through SEZs. India, for example, passed SEZ legislation in 2005. In theory the legislation was modeled on China’s. In practice, though, it was piecemeal, and didn’t lead to substantive changes.

The Innovative Governance Movement

The particular reasons why China’s special economic zone success was never replicated elsewhere is beyond the scope of this essay. However, the last ten years has seen a surge of interest in innovative governance. The innovative governance movement has combined an academic as well as popular interest in Shenzhen and China’s special economic zones, relating their success to what might be broadly termed charter cities, semi-autonomous, or fully autonomous cities.

The innovative governance movement is interested in improving governance via the creation of new jurisdictions with significant degrees of autonomy. These new jurisdictions could import successful institutions to create the conditions for catch up growth. Or the new jurisdictions could experiment with new forms of governance, to push the frontier. The overarching thesis of innovative governance is that the existing equilibrium of political units is overly resistant to change, and small, new jurisdictions, particularly on greenfield sites, are an effective mechanism to institutional improvements.

The modern innovative governance movement was launched ten years ago when Patri Friedman and Wayne Gramlich created the Seasteading Institute. Critical of the lack of success of traditional libertarian attempts at social change, the Seasteading Institute argued that new societies, “seasteads,” could be created in international waters. Seasteads would provide a blank slate for institutional innovation and experimentation. Successful models of governance could attract new residents, while unsuccessful ones would fail. This iterative, evolutionary process of governance improvements could help push the frontier of the optimal type of government.

In 2009, one year later, Paul Romer gave his famous TED talk on charter cities. Unlike the Seasteading Institute, which focused on pushing the institutional frontier, Romer focused on improving institutions in low- and middle-income countries. He argued that a high-income country, Canada for example, could act as a guarantor for a new city in a low-income country, Haiti for example, effectively importing Canadian institutions to Haiti. Later Romer seemingly expanded the definition of charter cities to not require a guarantor country.

Related nonprofits proliferated in the following years. The Charter Cities Institute, later rebranded as the Startup Cities Institute, launched out of Universidad Francisco Marroquin, only to fold several years later. Enterprise Cities, run by trade lawyer Shanker Singham, was based in Babson College. Refugee Cities was launched to apply these ideas to the refugee crisis.

More interesting than the discussion has been the projects. Romer took the lead, meeting with the President of Madagascar in December 2008. However, while Romer was making progress with the president, political unrest grew because of a planned 99-year lease of a Connecticut-sized tract of land to Daewoo, a South Korean corporation. The political unrest turned to protests, which turned to riots. Guards opened fire on marchers outside of the Presidential Palace, killing 28 people, soon after which the president resigned.

The next potential project was in Honduras. Inspired by Romer, in 2011 Honduras passed the RED legislation, which allowed the creation of charter cities. In September 2012, Romer publicly unaffiliated himself with Honduras. The Transparency Commission, which he had been promised a role in, was never legally created, and a Honduran agency signed a memorandum of understanding with a private company interested in creating a charter city. In October 2012, the Honduran Supreme Court ruled against the RED legislation.

Charter city hopes for Honduras, however, refused to die. In 2013, Honduras passed the ZEDE legislation, aimed at creating a framework within which charter cities could be created, as well as pass constitutional muster. The ZEDE legislation did pass constitutional muster, though the justices who had voted against the RED legislation had been removed from the Supreme Court. Since then, no projects in Honduras have been approved, at least publicly. However, there remains continued interest in Honduras (see here, here, and here) as the law, as it is written, creates tremendous potential opportunity.

The last relevant project is Blue Frontiers, a for-profit spinoff of the Seasteading Institute. In 2017 the Seasteading Institute signed a memorandum of understanding with French Polynesia to create floating islands in protected waters. In return for the investment, the government of French Polynesia would create a seazone, a special economic zone on the water, such that the seastead could compete via regulatory arbitrage.

Landscape

Historically, the innovative governance movement has been heavily influenced, and arguably led, by techno-libertarians, with Romer being the obvious exception. This is beginning to change. However, while the techno-libertarian attitude was arguably important for the vision, it hampered the development of more practical capacities necessary for the creation of charter cities.

Silicon Valley is a world of amateurs. To launch a startup, just lock three talented programmers in a basement for six months and they’ll emerge with a minimum viable product. Facebook’s old motto, “Move fast and break things” is reflective of Silicon Valley culture broadly. Such an approach is not practical for charter cities.

First, charter cities are both political and business projects. They are political projects in the sense that they require legislative approval from a host country to create legal autonomy, as well as continued tacit approval of such autonomy. They are business projects as they need hundreds of millions, if not billions, of dollars of investment to be economically viable. Politicians are generally reluctant to break things or empower others to do so. Similarly, required centi-million dollar plus investments for minimum viable products requires a degree of expertise.

Luckily, things are changing, making charter cities more viable than they were ten years ago. A handful of influential groups are beginning to think about charter cities. That said, they’re coming at it from different angles, and few have the full vision. However, with proper coordination, it’s possible to rapidly, within 2 to 3 years, create the environment within which several charter city projects can be launched. Let’s consider some of the perspectives at hand.

Economists: Most development economists are sympathetic to charter cities. While some are strongly critical, there is nevertheless a general sense that charter cities are an idea worth trying. The downside is that economists don’t get career points for discussing charter cities. For example, Romer, who is frequently listed as a contender for the Nobel Prize, gave a TED talk on charter cities rather than publishing an academic article.

Silicon Valley: Silicon Valley is interested in cities. YCombinator made a big splash about building a city, though it was later toned down to research. Seasteading is big enough to be made fun of on HBO’s Silicon Valley. Multiple unicorn founders have told me they are building up a war chest such that they can build a city when they exit.

Humanitarians: While the refugee crisis has dropped out of the news recently, there remains interest in improving refugee camps via special economic zones and creating charter cities as a mechanism for economic development to lower the demand for emigration. The Jordan Compact gives aid and favorable grants to Jordan in exchange for work rights for refugees and increasing refugee participation in special economic zones. Kilian Kleinschmidt, who formerly ran the Za’atari refugee camp in Jordan and is on the Board of Advisers of my nonprofit, the Center for Innovative Governance Research, argues for special development zones for migrants. And of course, there is the aforementioned nonprofit Refugee Cities. Michael Castle-Miller is developing the legal and institutional frameworks for these charter cities via his teams at Politas Consulting.

New-city projects: There are dozens of new city projects around the world. These new city projects are real estate plays, building satellite cities of 50,000 or more residents. Investments in these new cities is rarely under $1 billion. Nkwashi, a new city project in Zambia, is one of my favorite examples. Mwiya Musokotwane, the CEO, is on the Board of Advisers for the Center for Innovative Governance Research.

Some of the new city projects are beginning to think about governance, which is a natural path as their revenues are based on land values.

A final interesting development, which is hard to place or categorize, is that Anders Fogh Rasmussen, the former Prime Minister of Denmark and former Secretary General of NATO, also has an interest in charter cities and special economic zones. He recently launched a new foundation, the Alliance of Democracies Foundation. One of the key initiatives of the Foundation is Expeditionary Economics, which is focusing, as previously mentioned, on charter cities and special economic zones.

The Future of Innovative Governance

Innovative governance is happening; governments are increasingly willing to grant autonomy for economic growth. Combine that with the profits that result from building cities; land values in Chicago, for example, increased over 30,000-fold the first hundred years of its existence, and the potential of innovative governance becomes clear. Innovative governance projects can be split into three categories, government-led, real estate led, and entrepreneurial.

Government-led projects are the most developed. By definition, they are able to overcome the political barriers. The Dubai International Financial Center, for example, is an excellent case study in how to import common law. Dubai realized that Islamic law is not particularly conducive to the modern banking system, so they hired a British judge to oversee the importation of common law. Abu Dhabi recently followed suit with the Abu Dhabi Global Market.

Neom is arguably the most interesting innovative governance project. It is a Saudi led project, on Saudi, Jordanian, and Egyptian land, with a projected price tag of $500 billion. Promotional materials suggest substantial, if not complete, autonomy in commercial law. The other potential government-led project on the horizon is a refugee city, likely in the Middle East or North Africa. It has attracted the interest of people as diverse as Gordon Brown, who called for economic zones for refugees, to George Soros, who also called for economic zones for refugees.

The Jordan Compact is perhaps the closest thing to the internationally led vision. It brings together grants, low interest loans, and tariff breaks for giving refugees work permits and integrating them into under-capacity special economic zones. Unfortunately, the early signs suggest it isn’t living up to its potential. There has been limited discussion of a grander vision of a charter city. For example Pascal-Emmanuel Gobry has called for Europe to build and protect a ‘Hong Kong’ in Syria.

New-city projects, as mentioned above, are likely to prompt some thinking about improving governance. They’ll tend to be risk averse, however, as they view governance as a non-vital bonus to their real estate project. However, as many of these projects are sufficiently large, many of the developers have good relationships with government officials who could help create a special economic zone for the new city.

The third type of project is entrepreneurial. Blue Frontiers falls into this category, and there are a handful of others which are not yet public. Entrepreneurial projects tend to have the biggest dreams and governance innovations, but the also have greater risks of failure.

Conclusion

As charter cities and other innovative governance projects become increasingly viable, it becomes important for interested groups to coordinate with one another. Conversations for too long have remained siloed. Lessons learned by one group aren’t effectively transmitted to other groups, limiting the impact of the ideas.

Additional research is necessary. While there has been promising interest in recent years, given the role charter cities and innovative governance projects are going to play in the twenty-first century, the current state of knowledge remains inadequate. Foundational questions — such as the economic, legal, and moral case for charter cities and innovative governance — need strengthening. Similarly, practical questions, such as the impact of improvements in the World Bank’s Doing Business Index on urban land values, and the best practices in creating a legal system from scratch, can help guide charter cities and other innovative governance projects.

It is important to continue to develop the ecosystem for innovative governance. As China demonstrated, hundreds of millions of people can be lifted out of poverty through a strategy of zone-based economic reforms. There is an opportunity to replicate that strategy. It should be taken full advantage of.

Coming Up

Essay by Lant Pritchett. Conversation through the end of the month.

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