Make Governments Compete—for Us

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.

Also from this issue

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.

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.

  • 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.

  • Lant Pritchett doubts that charter cities can do much to help the developing world. If a developing state already has good institutions, the model is useless; if it has bad institutions, then it will plunder or otherwise undermine the experiment. Total factor productivity has been a difficult problem for economists, and much about it remains mysterious. But China appears to be the only place in the last forty years where special economic zones have worked, and this suggests that they are not as promising as their proponents think.