Transcript

Robert Wiblin: Hi listeners, this is the 80,000 Hours Podcast, where each week we have an unusually in-depth conversation about one of the world’s most pressing problems and how you can use your career to solve it. I’m Rob Wiblin, Director of Research at 80,000 Hours.

Today we’re talking to two people who want to get tens of millions of people out of poverty by starting unusually ambitious special economic zones, which they call charter cities.

Just before that, a few people this week have asked me how much editing we do on the show.

As we’ve started doing more expansive interviews, Keiran has been doing progressively more editing to avoid repetition or lines of questioning that don’t go anywhere, which I think has gone well.

We also let guests take time to think about their answer before they start talking, and we obviously cut out those silences. So if you were worried that we seem preternaturally quick on our feet, be assured that we have to stop and think from time-to-time as well – that just doesn’t make it in the final cut.

Finally, so guests can speak freely without any anxiety, we let them cut out anything that they regret saying – either because it’s sensitive or not the best presentation of what they actually believe.

Second, I did a hour-long interview on a show called The Good Life with Andrew Leigh. We decided not to put it out on this feed, because we spent more time discussing my life and general advice on how to succeed, than how to do good in your career specifically.

But we’ll stick up a link to that episode in the show notes so that you can listen if you like. There’s new things in there even for regular listeners to this show, and I’ve mostly heard good feedback so far.

Alright, with that out of the way, here’s Dr Mark Lutter, joined later in the episode by his new colleague Tamara Winter.

Robert Wiblin: Today, I’m speaking with Dr. Mark Lutter. Mark is the founder and executive director of the Center for Innovative Governance Research, a new nonprofit which is trying to foster the creation of charter cities. He has a PhD in Accounting from George Mason University, where he wrote his thesis about charter cities. Prior to launching the Center for Innovative Governance Research, Mark worked at an asset management firm, which coincidentally also made early-stage investments in charter cities. Thanks for coming on the podcast, Mark.

Mark Lutter: Thanks for having me.

What are charter cities?

Robert Wiblin: I hope to talk about how to found new, innovative nonprofits like you’re doing. Also, whether charter cities actually a good idea. First, for those who don’t know, what are charter cities?

Mark Lutter: Charter cities are new cities with new jurisdictions. Over the long run, the best way to improve welfare, the determinant of economic outcomes is governance. Many countries have poor governance, and charter cities are basically a mechanism by which you can do very radical, very substantive improvements in governance, in these countries, by focusing on a geographic area. Particularly one that does not have anybody living there, where there are no special interests. You can get much deeper reforms, then otherwise possible. People move to that area. You get a city. The people get more wealthy there. Hopefully, then you show the rest of the country as well as the surrounding region, “Hey, these reforms work. These are good policies. They can be adopted, and lead to good outcomes more generally.”

Robert Wiblin: How would governance of these new cities be different from everywhere else?

Mark Lutter: There are a lot of different governance indicators. One of those common ones is the World Bank Doing Business Index. If you look, for example, at Sub Saharan Africa, it takes on average 46% of per capita income just to legally register a business. The governance in a charter city would be different by making it much cheaper and easier to legally register a business, as well as to hire people, as well as to build new buildings, et cetera, et cetera. It would create an environment that fosters investment, that fosters job creation, that fosters trade, that lead to these good outcomes.

Robert Wiblin: Would these new charter cities be governed by other countries or by other businesses, or just have a different legal arrangement with the same government as the country that they’re in, or any of the above?

Mark Lutter: Broadly speaking, any of the above by the wide definition, which is a new city with a new jurisdiction that has a different set of business law, commercial law, then the rest of the country. Paul Romer, when he originally proposed this idea, did propose that a guarantor country, a high-income country, would administer the charter city in a low-income country. What we do at the Center for Innovative Governance Research is focused not on that, because we don’t think that’s politically feasible, but focus on creating new jurisdictions that are governed in a way that the host country is comfortable with. This might be a new legal entity like nonprofit created. It could have the board of directors be represented from the UN, the World Bank, et cetera. It might work closely with the developer that is building up the infrastructure of the new city. But this is something that is very much going to emerge from the discussion with the host country as well as our partners on the ground.

Robert Wiblin: Why do you think charter city’s a really important idea?

Mark Lutter: Yeah. If we look back at the last, the greatest humanitarian miracle in the post-war era has been China, which lifted about 800 million people out of poverty. What they did was urbanization combined with special economic zones. Starting with Hong Kong and Taiwan, they basically looked and said, “Wait, Hong Kong’s rich. Taiwan is rich. They’re Chinese, we’re Chinese. Why are they doing well and we’re starving?” In 1980, they created four special economic zones. One was in Shenzhen. That was the biggest, the first year of its existence. A special economic zone in Shenzhen attracted over half of all foreign direct investment in all of China. This is a 30000-person fishing village attracting more foreign direct investment than a country with 700 million people.

Mark Lutter: That basically spread. These areas were successful. In 1984, they created some more. 1988, they created some more, until they basically spread throughout the entire country. Now, depending on what statistics you look, some 90% of China is a special economic zone. This strategy of governance reforms, combined with locating them in areas that don’t have a lot of political involvement, so you can get deeper reforms to test and basically to demonstrate their success is a proven, effective mechanism for such reforms that can then lead to changing the long term growth rate. Why is it an important problem? You still have billions of people living in poverty. To get them out of poverty and to change the growth rate, governance reforms is probably the single best way to do that. Charter cities are probably the best way to change the governance system in most of these countries.

The best way to shift governance

Robert Wiblin: Why is charter city’s the best way to shift governance? I guess most people trying to improve government in the developing world or indeed anywhere. I’m not trying to do it by founding the new cities.

Mark Lutter: Basically, it can be very difficult to change governance on a national level. What’s known to economists, as the logic of collective action, which is basically that there can be small groups of people that benefit from bad laws. Even if the net impact of those laws is negative, because the group that benefits from them is small, they will be able to keep the law enforced. A common example from the US is sugar tariffs. The US has cane sugar price’s about twice as high as the rest of the world, because we have high tariffs, because there’s a group of farmers in Florida that harvest cane sugar. Even though the net benefit from to the American consumer of these tariffs is negative, because every person loses $5 to $10 a year, based on these tariffs, but the farmers each gain a million dollars let’s say. Because of that, they’re able to coordinate much more effectively and keep a tariff in place.

Mark Lutter: Similarly, if you look at a lot of low-income countries, you have similar problems of political economy where, even though everybody agrees, it would be better to make it easier to start a business, to legally register a business. Then the existing businesses basically think, “Oh, well, this is more competition. Competition hurts my profit margins and so let’s prevent this.” You look at, for example, Egypt. During the Arab Spring, everybody was very excited. The outcome, it actually turns out that the military is in charge and controls everything in the entire economy. That’s not going to be the same in all countries. It shows that a lot of these governance reforms end up affecting the bottom line of some powerful interest group.

Mark Lutter: One of the questions is, how do you implement good governance reforms is put them in a place that is not politically important. That will not impact the bottom line of these powerful interest groups. Then you’re able to use that as a test ground to demonstrate the success of those reforms. Improving the lives of the people who move there, as well as improving the lives of, hopefully, the rest of the country because they get spillover effects as well as a demonstration of those good policies.

What was different about the policies in China’s special economic zone?

Robert Wiblin: What was different about the policies in China’s special economic zone that really made them take off? Could it just be that China was poised to take off anyway?

Mark Lutter: China certainly had a lot of factors. For example, there was a very rapidly urbanizing population. There was a large labor force. They have a long history of statehood. They basically understood what a state is and how it acts, which tends to be an indicator of development potential. They had state capacity. The state was actually able to do and accomplish things. I don’t want to downplay those margins. Those were certainly important, but at the same time, China’s had all of these qualities throughout history. It did take off. When it took off, in part, because of the specific governance reforms. Just looking at, to a certain extent, the randomized control trial of Shenzhen versus not Shenzhen. Shenzhen had those governance reforms. They were able to develop very rapidly in large part due to those reforms.

Mark Lutter: 1979, they did not get any foreign direct investment. When they made it legal to get for an investment, they got a lot. If you see over time, basically, it was a constant back and forth between the city of Shenzhen. A lot of the reforms were initiated by the city. It wasn’t Beijing coming and saying, “Do this.” It was the locals as well as Hong Kong businessmen basically looking to offshore, labor-intensive manufacturing to Shenzhen and working together to propose these reforms. Over time, they also implemented labor reforms. They implemented land reforms. The first stock exchange in China was in Shenzhen. Over the last 40 years, it has been one of the most innovative places in terms of governance by adopting these generally market-oriented reforms earlier than the rest of China.

Mark Lutter: As a result, gaining some of the growth. Of course, it also had a lot of advantages. It is close to Hong Kong. There’s natural business ties there. It’s in a delta that allows for easy exporting. But without those aspects, even if they kept the same institutional state, it would not have become what it is today.

Scale, neglectedness, tractability

Robert Wiblin: I’ve got a lot of follow-up questions and certain question marks about this idea to come later. First, let’s just survey the case in favor working on this problem. As you probably know, we use this framework of scale and neglected-ness, and tractability to try to assess the cost effectiveness of working on a particular problem. Would you walk us through the scale and neglected-ness, and tractability to this problem? Perhaps, how that inform your decision to work on it?

Mark Lutter: Sure. In terms of scale, our goal at the center is to raise tens of millions of people out of poverty, which I think is realistic, given the impact of you have 70 million people moving to cities annually. Even if we’re able to just capture a small percentage of them in charter cities, if the charter cities are successful, then we are having immense impact on global poverty. In terms of neglected-ness, I think it’s extremely neglected. There has been a small community that has been interested in charter cities and related ideas for 10 years. There are a handful of other semi-related organizations. I mean, total funding for all organizations in this space, nonprofits, is probably under a million dollars annually.

Mark Lutter: Total funding for the for-profit companies is probably under $10 million annually. I think it within the effective altruists’ framework, if we just take open philanthropy, which has, I believe their endowment is 11 million. Spending 5% a year. They’re spending basically 500 million annually. Given that amount, the amount of resources that are going to charter cities is quite small.

Mark Lutter: In terms of tractability, we have incubated two projects. We expect to basically be at like four, five, six projects by the end of the year. Next year, we expect to be up to 10 projects. What we mean by incubating? The role we play is 30000 for air support. We want to put groups on the ground that are capable of executing. We give high-level strategic advice and introductions. Effectively, we would be able to step back and they would still be able to move forward. That’s the metric we use. I mean, right now, we have two groups on the ground that both have a … I mean, if you’re pessimistic, non trivial. If you’re optimistic, 60 to 70% chance of actually building a charter city. I think the tractability is very high.

Mark Lutter: I think briefly to, I guess, cost effectiveness point, in addition, two aspects. One, charter cities have a profit mechanism. If you build a charter city, the land will increase substantially in value that will be able to pay for all the infrastructure that creates this beneficial cycle. Once you get one charter city development, the developer might want to build more. Other people will see that successful and want to build them. You basically have this built in profit mechanism. The actual charity cost is really just getting the cycle started. Then the profit motive kicks in. Because of that, the cost effectiveness, I think, is quite high.

Mark Lutter: The additional aspect that I think is important compared to a lot of traditional, especially in the economic development space, that effective altruists focus on, is level first growth. For example, if you eliminate malaria in the world, that will have a substantial impact on people’s well being. But there isn’t that much evidence that will have a growth effect. If you’re talking about taking people from $1000 per capita to $10000, we need to do is raise the growth rate by one to 3% per year, continuously over a 30, 40, 50-year period. There isn’t that much evidence that reducing disease burden does that. There is a lot of evidence that improving governance does that. In terms of having these very long-term effects, the best long term effect for raising people out of poverty is creating economic growth. Governance is the best tool to do that. I think charter cities are the best to improve governance.

Robert Wiblin: I’m not sure whether I would have recommended doing this, but have you tried to estimate the cost effectiveness of, say, a year of your time working on this problem in terms of how many people you get out of poverty per year? How that might compare to other things if it was recommended charities?

Mark Lutter: I have done very, very preliminary stuff. We have a master student, who is coming to work with us over the summer. His project is going to be to actually build out a case for charter cities within the effective altruists’ framework. The basic challenge is you have, GiveWell’s mechanisms of improving what is the cost effectiveness of these different charities. But then translating that to economic growth requires a number of assumptions. It’s basically just assuming my assumptions are correct and haven’t actually like drawn out the assumptions anyway. My feeling is that we are comparable with some of the most cost-effective charities. Just in terms, my estimate is we can basically incubate a charter city for a half million dollars. Given that, if you assume that, what a charter city does is basically raises per capita income of, let’s say, 100000 people by one to 2% over a 30-year period. I think that is the extremely effective way to alleviate poverty.

What does CIGR do?

Robert Wiblin: Seeding a charter city for half a million dollars, it sounds ambitious. What does CIGR actually do that could cost a charter city half a million dollars?

Mark Lutter: The tagline for the center is building the ecosystem for charter cities. What we see is that there are a number of groups that are interested in charter cities approaching these ideas from different angles. To a certain extent, it’s an idea whose time has come. These stakeholders include Silicon Valley. I’ve spoken to multiple unicorn founders, who tell me when I exit, I’m building up a warchest so that when I exit, I can build a city. You have policy experts particularly development economists, where you have a large fraction of them are interested in charter cities from Paul Romer’s work, but don’t get career points for talking about them, because there’s no data set. So you can’t actually publish. You have humanitarians, particularly in Europe, who are trying to think about different ways to approach the refugee crisis.

Mark Lutter: Because you see refugee camps that last for two, three generations, they need to how do you actually create something that’s sustainable, such that these camps are just not dependent on indefinitely. You have new city projects, mostly in the Global South, in Africa and Asia. You have dozens of new cities that are being dealt. Specifically, we have three programs. One is content. We have a podcast. We have a blog. We put out research. Then, two, we do events. With the events, what we do is basically try to bring these stakeholders together such that they can start talking. They can build shared mental models of charter cities and potentially collaborate in the future.

Mark Lutter: The third thing we do is collaboration, where we work with projects on the ground to actually basically understand what charter city is and get to work. The project that was currently most developed that we’re working on is in Zambia. We’re working with the company that’s building it. It’s called Thebe Investment Management. The city itself is called Nkwashi, N-K-W-A-S-H-I. They are building outside of Lusaka, which is the capital of Zambia, a new city for 100000 residents. It will also include a university and industrial park, a business district. They are interested in becoming a charter city. One, to increase economic activity. Then, two, to act to a certain extent as a buffer against copper price fluctuations, because the Zambian economy is very dependent on copper prices.

Mark Lutter: Nkwashi wants to have an economy that is greater than simply a function of copper prices. How we’re working with them? I’ve known the CEO for about two years. He messaged me on Facebook. He expressed interest in becoming a charter city. We’re working with them and Zambian government to basically figure out what a charter city actually is. That’s relatively low-resource cost. Because while we are the NGO that’s presenting directly to the Zambian government, a lot of the heavy lifting, they’re telling us who to talk to. I’m not gonna figure out Zambian politics. That’s really complicated, but they understand it.

Mark Lutter: Our costs are effectively, one, identifying the group. Two, making sure we have a shared goal. Then, three, traveling to the respective country every few months to work with them and the government to actually pass this. What we’re trying to do is basically come up with a scalable model that we can help to incubate dozens of charter cities, with the idea that even though all of the conversations in Zambia have been going extremely well, at the same time, politics in the US is unpredictable. Politics in Zambia is unpredictable. That’s hard to know if there’s a change in political winds, or something happens that is just out of our control. That makes it less likely. What we want to do is make sure one, there are a lot of projects that are going on all over the world. Then, two, also make the idea of charter cities more salient, such that it makes all these projects, all those conversations easier because no longer is it, “Oh, this is crazy idea.” But it’s, “Oh, these other guys are doing it,” and making it such that it’s becomes much more within the realm of political possibility, rather than something that only countries in bad situations try.

Why go with the term ‘charter cities’?

Robert Wiblin: Why go with the term charter cities? Do you think that’s very associate now in people’s minds with an economist, programmers’ idea of one country voluntarily giving up sovereignty over some unoccupied piece of land to another country’s legal system? Which was a provocative and interesting idea, but also quite controversial. Whereas, it sounds like you’re talking about mostly about seeding, special economic zones, which I think probably it’d be easier to get more people on board with that.

Mark Lutter: There’s several substantive differences between charter cities and special economic zones. First, as a point of, I think, history, Paul Romer in his initial TED Talk, he suggested that high-income countries would act as a guarantor, which effectively minister the city. Later, he appeared to go against that. For example, when he was in Honduras, the initial legislation. It was not clear that it required a guarantor country. In subsequent talks, he appeared to move away from that. It was never 100%. Two, what we think of charter city is as the next generation of special economic zones. Most special economic zones, they focus on a single industry. Maybe it’s textile manufacturing, right? Maybe it’s call centers.

Robert Wiblin: Electronics and so on, yeah.

Mark Lutter: In addition, the framing of special economic zones is countries have bodies of law. They cut around the edges and think, “Okay, on what margins can we improve this to make it a better place to do business?” Charter city things are if we’re building a commercial ecosystem from scratch, how can we make this the best place to do business? I think the framing is quite important in that you’re not focusing on a single industry. You’re adopting this broad framework that is for a city that can allow the emergence of multiple industries. That includes residential. Two, you’re not cutting on the edges. You’re really rethinking the institutional structure, the governance structure to get long-term growth rates. The way we think of this is, how can we create the seeds for basically 50-year success? The question isn’t in year three, are there five companies that are there? The question is, in year 50, is this a thriving city? I think because of that, what we’re trying to do is really create this broad framework that once setup, does not need continuous involvement, continuous action to lead to these long-term good outcomes.

Comparisons to seasteading and other new city projects

Robert Wiblin: How do these charter cities compare to other attempts to do that in a bit of governance? I’ve heard we were talking about seasteading or I guess private cities, proprietary cities I heard mentioned of. I guess just attempts to have separate these efforts on the part of cities or like devolved powers down to the city level, rather than the national level.

Mark Lutter: Seasteading is the idea of building new cities, floating cities on the ocean that have new legal institutions. It was founded in 2008 by Patri Friedman and Wayne Gramlich. A lot of their initial funding came from Peter Thiel. There’s an excellent book. I believe it’s called Seasteading by Joe Quirk and Patri Friedman. Seasteading has been one of the most, I think, influential ideas in Silicon Valley regarding the space of new cities. Private cities are, I think, just as they sound you have a private developer that basically builds the city. Examples, Jamshedpur in India is a private city built by Jamsetji, Tata Group, initially around a steel foundry. Then since evolving into a greater city. You don’t have very many private cities, historically. Most new city projects historically have been government-founded.

Mark Lutter: Brasilia, for example. More recently a lot of new city projects are private or public-private partnerships. There still are a few states that are building new cities themselves. More often, they either work with companies. Then also just because of the very rapid urbanization that’s occurring in Africa and Asia, you have some real estate developers that see this as an opportunity to basically build satellite cities that house 100000 plus residents.

Mark Lutter: I know the seasteading folks. I like them a lot. A lot of their work has, to a certain extent, help frame my own thoughts and our own strategy. I think one of the distinctions is, it’s much easier to build on land than on water.

Mark Lutter: Seasteading was originally founded in 2008. At that time, I think that the common assumption, which at the time was correct, was that no country would really grant the new jurisdiction enough.

Robert Wiblin: Autonomy.

Mark Lutter: to really adopt some of these good reforms. It was heavily focused on sovereignty, which I don’t think is particularly important for long-term economic outcomes. What you need is commercial law, not criminal law, not international treaties. Then, two, this in indicative of the Silicon Valley mindset, within which seasteading evolved, is I think they took a relatively, I guess, aggressive posture. I don’t think it’s actually necessarily correct within governance. Governance is actually really hard. I think it’s important to work with existing institutions. When you build a new tech company, it’s possible to say that because you’re working within this institutional environment that allows for those projects to exist.

Mark Lutter: You don’t need to ask permission from HP to start Apple. If you are trying to create a charter city, a special economic zone on steroids, if you’re trying to improve governance, then I mean, you do need to play nice. You can’t be taking potshots at everybody and telling them how they’re old and obsolete. You’re gonna do it much better than them. Governance is really hard. If it was easy, the world would be a lot richer. I think it’s important to have a degree of humility as to some of the challenges. Then, two, just these are potential future colleagues. These are not competitors that you’re working with these governments. I think understanding that framing is important. The other one you mentioned was private cities.

Mark Lutter: Private cities specifically don’t have any degree of new jurisdiction. There are a number of private cities, but it’s just a large real estate project, which I think is interesting. Maybe they have some local governance screen, a specific HOA for that. I think there’s a lot of interesting things there. Those aren’t things that tend to lead to changes in long-term economic outcomes. That’s what we’re interested in.

Robert Wiblin: The seasteading thing was very provocative, interesting idea. That was a bit out there, always seemed a bit wild. I guess it hasn’t really happened, at least not yet. With private cities, I think isn’t the idea this as I’ve heard it, that you’d have a private company that owns the city and builds up all the infrastructure like the electrical network, the plumbing, all that kind of thing, and the roads. I think part of the idea was that they would continue to own most of it and only rented out so that they would continue to have huge equity or investment stake. The fact that this city runs well because they want it to go really well so that people wanna live there.

Mark Lutter: I’m quite sympathetic to that model. I mean it’s somewhat similar to a shopping mall. That a shopping mall provides all sorts of public goods, open spaces, security, lighting, trash collection, et cetera. Why? Because they want to increase the value of their storefront. Private cities, in a certain extent, are a extension of Georgism where basically, the income of the private city is rents. It’s approximately a land value tax. They’re incentivized to provide all these public goods. This is somewhat similar to our model. It’s just that we increase the idea of public goods to also include governance. Because no matter how good city administration is, if you’re in a country that requires 50% of per capita income to legally registered business. Then that’s not great.

How interested should people who aren’t primarily focused on poverty be in this idea?

Robert Wiblin: How much is this a method for experimenting with better governance and improving how humans know how to govern themselves, in general, versus an effort primarily to bring countries that are struggling up to the frontier of how good governance is? I guess I’m wondering, should people who aren’t primarily focused on development and reducing poverty? How interested should they be in this idea?

Mark Lutter: I think charter cities are a quite good way for experiments. Also, just in terms of total impact. We’ve decided to focus primarily on international development to start. Just because when you have a rapidly-urbanizing population, there’s a lot of people moving to new cities. New cities are being built. Versus, if you look at the frontier countries, they are already relatively urbanized. Attracting a population is is tricky. We are interested in pushing the frontiers. For example, I’m working with Glen Weyl. I think you actually had him on recently. The nonprofit that he founded, as a result of the book Radical Exchange. One of the ideas that was most exciting to me in his book is the Harberger tax which, to me, private property is a very foundational notion of Western civilization.

Mark Lutter: This is the most substantive challenge to that notion that I’ve rarely ever seen. For our listeners who don’t know, a Harberger tax is basically a tax on private property. Where what you do is you’re taxed at the … you self-appraise the value of the property. Let’s say you own commercial real estate. You report the value of that commercial real estate at, let’s say, a million dollars. You are then taxed at that million dollar rate, which incentivizes you to lower the value of the appraised real estate. On the other hand, anybody can buy the real estate at that self-appraised value, which incentivizes you to push it higher.

Mark Lutter: The value behind the Harberger tax is it basically, substantially lower transaction costs in society, because usually price formation takes a long time to discover. There’s a lot of negotiation involved. This effectively sets up a mechanism within which all prices for whatever set of goods the Harberger tax applies to is known. It’s possible to implement this in various phases in the US, for example. You could imagine Harberger tax for this spectrum or Harberger tax for natural resources like oil. It’s hard to really imagine it rolling out beyond that. At least, in the short term, Harberger taxes for commercial property, or Harberger taxes for residential property.

Mark Lutter: I think charter cities offer an opportunity within which it’s possible to test some of these ideas that would restructure society. That would basically push the frontier of governance. I’m quite interested in seeing how this happened. I see those as more second and third generation charter cities with the assumption that the net rate. If you’re spending a few hundred million, a few billion dollars, building out infrastructure, you want to reduce risk at every level. Introducing new forms of social organization, when you’re not exactly sure how they work, isn’t the best thing to do when you do that. Once you figure out all the other elements, and once you have that institutional credibility, then let’s figure out run some experiments with this and see if it works and then implement it more widely. But until you get ready the basics down or you don’t want the first charter city to be a giant failure, because then, it substantially lowers the momentum. Once you have the momentum, then you can have the few figures.

Robert Wiblin: A perfect concept. Early on, the first charter cities you want to be more what we’ve already seen before with special economic zones. You can be confident that work out to some extent. Or, you’ll be able to convince people to get them off the ground. Then having done that, having brought up the idea, then you can potentially start charter cities where the key idea is to experiment with a new form of governance. A new voting or a new economic policy that people haven’t tried elsewhere. If it doesn’t work out, then well, at least then you haven’t started a new city, but you haven’t destroyed something that already existed. Allows more flexibility.

Where does the idea fit on the political spectrum?

Robert Wiblin: Where does this idea of fit into the political spectrum? Are there groups that are particularly enthusiastic about it and groups at all? Or is it just like everyone might be interested in it?

Mark Lutter: I think it transcends traditional political divisions. For example, if you look at the right, which wants to restrict immigration, there’s obviously these massive benefits, particularly to the immigrants, of more open borders. A lot of people on the right understand that there are these benefits, but are worried about maybe long-term institutional stability or impacts on wages on the lower-income spectrum. Charter cities, for them, basically provide a way for them to be like, “Oh, here’s a positive growth program for people in low-income countries.” At the same time, for four people on the left, there has historically been this natural, I guess, more universalism. This natural interest in global poverty. I think charter cities, for them, offer a reasonably cost-effective mechanism that should be, in my opinion, at least part of a basket of approaches to help to lower global poverty.

Robert Wiblin: My impression is that it seems like this more interest in this idea coming from economists. I guess libertarians as well seem to be particularly keen on it. I guess I’m not sure why that is. Is there didn’t get any ideological reason why people on the left haven’t shown as much interest? Or, is that just it happened to begin in a more libertarian social saying and it hasn’t quite spread yet?

Mark Lutter: I think with libertarians, just sociologically, there’s this extreme libertarian notion where if we create the right constitution, then everything good happens. One, I think that’s an accurate assessment. For example, if you look at the … I like the US Constitution, but if you compare the US to any other country that was colonized by Anglos, the outcomes are relatively similar. US, on average, has more free speech. We also have stronger gun right protections. Standard of living is generally comparable to the US and Canada. Canada does not have the same constitutional history. There is this belief that this rationally-derived set of laws can create a perfect society. Combined with amongst at least a subpopulation of libertarians, the belief in the illegitimacy of the current US government and a willingness to embrace relatively extreme alternative forms. Once you get closer to the center, you, one, lose the belief that the US government is illegitimate.

Mark Lutter: And then two, also lose the, we can create the right society belief. And I think those combined to, if you look for example, there’s the Republic of Minerva and Operation Atlantis. Operation Atlantis, the funder, a Jew who escaped the Holocaust, he made a bunch of money and he saw similar trends happening in the US, and wanted to create a new society where that would basically be safe from these trends, and funded an attempt to do this in the Caribbean, but was unsuccessful.

Mark Lutter: There was another attempt called the Republic of Minerva, that was basically putting a bunch of sand on a reef to make it a new island, and then claim it as a country. That got run off by a gun-boat from the Republic of Tonga. And this intellectual history has sort of filtered down in libertarian circles, that have been very interested in create new countries. I’m very self-consciously trying to move away from that aspect. I don’t think you need a new country and I don’t think we could rationally derive the rules of a just society from thinking about it.

Mark Lutter: I think they’re very much empirical notions that arise through repeated interaction, and we can adopt existing best practices in countries. But I do think on the far left, you actually do see a somewhat analogous trend. It might not be charter cities, but the far left does have these sort of utopian visions of creating new societies, which you see most common in like communes and things like that. It’s just that I think the far left puts perhaps less thought into, right, scaling and into how that would interact with the global economy. And because of that, and also because of my own history in libertarianism, I’m more familiar with the sort of libertarian aspects of that history, and how that translates to actually implementing charter cities on the ground.

Robert Wiblin: I guess I’m not super familiar with hard left politics, but when I was thinking about it, I couldn’t see any reason why you couldn’t create a charter city that was based on a more leftist view of things. Because you gave examples of rent-seeking and economic groups, and how we could have a more free market like way of making places richer, but you could also think the problem is governments don’t provide enough services or they don’t provide services in the right way, so we’re going to make a new city with amazing public schools and universal health care and all these other ideas, and we’re going to show how great that works in this new place.

Mark Lutter: So yeah and to clarify, I think markets generally work and sometimes they don’t. And governments should act when markets fail. I think government is actually very important for long-term economic outcomes. One of the reasons that China has been successful is because, right, their government has the capacity. And this is a growing strand of literature in economics, basically, is the government able to provide public goods. And so interesting example, I took a bus several years ago from Honduras to El Salvador, and the bus would only leave at six am. Why? Because it needed to cross the border, basically, go through this part of Honduras during the daytime, because if it went through at night, there were literal highway bandits.

Mark Lutter: And so you want a state that is able to make sure there’s no highway bandits, so you can go along streets at night. And that’s a very important thing for the state to do. And if you look at a lot of low-income countries, the state is unable to provide basic public goods. So one way to think about charter cities is, to a certain extent, is you’re outsourcing state capacity. You’re finding an actor that has the government structure, that has the incentives set such that it can provide a lot of these public goods.

Mark Lutter: Another interesting example is Liberia during the Ebola crisis. There was a Firestone plantation, rubber, that had about 10 thousand people. And they were effectively able to have nobody die, they had a few cases of Ebola but nobody died, because, right, these people had no training. It was just like, “All right. We Googled, what are best practices? If we think somebody is sick, we quarantine them until they’re okay.” And they were able to do that, and right, it’s not technologically complicated, it’s just organizationally complicated.

Mark Lutter: And if you have something that’s effective, a state that’s effective, that can provide these public goods, that’s very important. And so it’s very important that the charter city is able to provide these public goods as well as having, I think, a market that allows for this economic activity. At the same time, I might be wrong, right? And so after the legislation that we proposed as a blank state and commercial law, which would allow people to adopt the very different set of policies where you could see, not just great distributive policies but also a set of government ownership.

Mark Lutter: And I mean, Singapore for example, the government, I believe it’s the sovereign wealth fund, has substantial ownership stakes in a lot of companies based in Singapore. So that is a model that can work in at least some specific contexts. It might work in others. And while I have my own set of policies that I think will be most successful, and those are the ones that I generally recommend charter city projects adopt, I could be wrong. And if other people want to try different sets of policies, right, that’s the test. Can you set these sets of policies such that people want to live there, such that it raises income of people who do live there. And I think this offers a mechanism to do that and figure out what makes the most sense on the ground.

Robert Wiblin: Yes, you mentioned this kind of scaling mechanism where I guess some organization or possible the government buys up all of this land, when there’s very little there. And the hope is that by running it well and getting a lot of people to come in there and having a kind of economies of agglomeration, as you govern the city well and it grows, the value of the land will become much higher, and then you’ll be able to sell off the land progressively to fund the growth of public services, and plumbing and everything else that you need to make the city function. Are there historical examples of that working as like a primary funding mechanism?

Mark Lutter: Not that I’m aware of. I mean, you have some examples that are semi-Georgist. So for example, in Hong Kong and in Singapore, the government does provide a lot of the housing in Singapore, I believe it’s like 80%. Similarly, in Dubai, all the land is basically owned by the royal family. And so you do have this acting to a certain extent as a funding mechanism. I think that will be major funding mechanism. I’m not sure it will be the only funding mechanism. You could also implement various taxes in terms of income tax, in terms of sales tax, and I think the set of best practices for taxation is going to depend relatively heavily on the charter city. But just imagine if you bought land in Shenzhen four years ago; you would be retired and very, very wealthy. In Chicago, the first hundred years of its existence, inland values increased about 30 000 fold. Not like percent, fold. So that’s like bitcoin over returns, granted over much longer time rise but still extremely substantive returns.

History of the idea

Robert Wiblin: Yeah. Do you want to fill in anymore of the history of this idea? So I guess Paul Romer, he’s a famous Nobel prize winning economist, gave this TED talk back in 2009, and it got a lot of press attention. It was controversial … The main criticism I recall hearing is that people thought that it sounded kinda neocolonial, this was the term. That is was like, oh you got this like country like India that can’t govern itself very well so it should like give over this land to the British or America or something to run it, and I think this smacked people. They just didn’t like the sense of it. I guess I’m not quite sure whether that criticism entirely makes sense in as much as it’s like voluntary to do it and it’s like all their choice to move there. But I agree that there’s something that’s a bit disturbing about it. [inaudible 00:39:49] your just running away from that side of things completely. It’s like there’s no change in sovereignty here. It’s a reboot of this idea.

Mark Lutter: Yeah. So just briefly on the neocolonialism. This was actually recently brought up by Gunter Nook who’s the German special Envoy to Africa, and he called it voluntary colonialism in an article for the BBC. And I think he has something similar to Paul Romer’s conception where you would have the city be administered by [inaudible 00:40:14] I imagine he’s thinking probably Germany. I mean just on a practical level I actually don’t think that would be effective. I don’t think many high-income countries have the administrative capacity to effectively [inaudible 00:40:25], or even just if you imagine the decision making structure to hire a construction firm build a new city, the US for example, we could build the Golden Gate Bridge in about three years, and then the [inaudible 00:40:37] the Golden Gate Bridge that took 10 years.

Mark Lutter: And so the say capacity of high income countries has dropped substantially over the last 30 to 40 years. And then two, we would run into all these political problems. And so we have quite a strong preference of working with local entrepreneurs who understand the governments, because if you’re undertaking projects with 50 year time horizon politics is very important, and having somebody who is seen as advancing the interests of the country, who is seen as part of it, who has his own interest there, his own family there I think aligns the political incentives much better and is able to neuter a lot of the criticisms of neocolonialism.

Mark Lutter: With regards to the history of the idea, so basically Paul Romer 2009 gives the TED talk. He has an opportunity to start a charter city in Madagascar. There’s a very good Atlantic article on this, I believe it’s called The Politically Incorrect Guide To Solving Poverty, let’s stick up a link to that. And that is unsuccessful. There’s a coup. The coup was probably due to the fact that Madagascar gave a large amount of land to Dae woo which is a south Korean corporation, and there was a feeling of ‘don’t give land to foreign corporations.’ And so the president lost power and that didn’t work. Paul Romer then went to Honduras. The legislation was passed there. There were at least two groups that I know of; Future Cities Inc. which was Patri Friedman, and MGK which was Michael Strong. MGK signed a Memorandum of Understanding with the government of Honduras. Paul Romer got angry that two sides of the story are, actually I don’t wanna get nasty.

Robert Wiblin: Yeah. There’s no need for that. But there was kind of a falling out or something between the bunch of different groups there.

Mark Lutter: Yeah. And then the Honduran Supreme Court ruled that unconstitutional. Subsequently a similar law was passed and the Honduran Supreme Court ruled it constitutional. The results were changed in the Supreme Court where all the judges who ruled against the first one got fired.

Robert Wiblin: Coincidence.

Mark Lutter: Yeah. This was actually probably a coincidence because similar to the US there’s a left right split. And the Honduranian media generally reports that the firing was due to a police corruption case. And I lived in Honduras for six months, and I actually don’t think there was enough political capital to fire people over the charter cities. It was a relatively niche opinion/interest, and the Honduran legislation is still on the books. And there are recently rumors that think projects are finally moving forward. There have been rumors before.

Mark Lutter: These rumors seem a lot more real. We recently released a white paper on Honduran charter cities, framing it within the migration context. Like the US has spent about 2.1 billion dollars for the last three years trying to develop central America, and you can build the first phase of a charter city for a hundred or two hundred million. And try and just sort of lay that out like, ‘Hey guys, it’s not that complicated. You got to do it.’ Those are the two main ones basically after Paul Romer had the falling out in Honduran. He stopped publicly speaking on it. And-

Robert Wiblin: He went onto the World bank for a while, and he’s back in research.

Mark Lutter: Yeah. What happened was he left in 2011 I believe it was, and then was at NYU funding the Marron Institute. Started focusing on Urban issues more probably. He would mention charter cities occasionally in interviews. Then went to the world bank as chief economist, then left the world bank. And won the Nobel Prize and now he’s, I don’t know, doing whatever Nobel Prize winners do.

Robert Wiblin: Yeah. It’s been a busy decade for him. But he’s moved on to new pastures.

Mark Lutter: Yeah.

Robert Wiblin: In these countries that have serious governance issues as Honduras has a massive crime and corruption problems, I know less about Madagascar, why would these governments … They’re trying to like exploit potentially there population to extract resources, or the government is not following there interest all that well. Why would they then hand over a particular amount of land like giving up their ability to kind of extract money and power from them?

Mark Lutter: So I would not think about Governments do act in this, so in the sense of it all governments are made up of different agents that have different motivations or different interests. Again, I’m less familiar with this specific history of Madagascar. My understanding high-level is basically Paul Rover gives his TED talk, he’s famous and the president likes him and invites him. Honduras is a little bit different. Honduras had just gone through a constitutional crisis in 2009 I believe, where the previous president who was a leftist and allied a little bit with Chavez. You can call it a coup, you can call it not a coup. He wanted to run for a second term which is against the constitution and created all these political struggles, so he was removed from power.

Mark Lutter: At the time, the murder rate in Honduras was number one in the world. It’s still quite high, but it’s dropped substantially since then. So you basically have this political crisis combined with this violence crisis. And then the last aspect was basically you had the right leadership in place at the right time. If you talk to Hondurans they had ideas similar to this prior to Paul Romer. And Paul Romer was brought in partially to basically help push an idea they already had through. And what we’re trying to do is to eliminate some of that randomness to one, frame these ideas in manner that’s much more palatable so you don’t have these sort of arbitrary circumstances leading to charter cities where severe political crisis or TED talk make it such that this is a-

Robert Wiblin: More systematic considered decision or something.

Mark Lutter: Yeah. Broad solution that applies to a wide variety of countries. Any country that’s dealing with rapid organization, it’s dealing with [inaudible 00:46:51] intermitting the sets of reforms they like, that this is a potential solution for them.

Selecting the right places

Robert Wiblin: So it seems like this kind of improvement in governance would be more valuable, kind of the more dysfunctional the country is. But on the other hand of course a country that’s really unconditional is not gonna potentially be able to manage the transition or won’t be interested in doing it. What kind of process are you going about selecting places or like countries should take in discerning whether to pursue this, and to whether be among the pioneers?

Mark Lutter: The ideal country I think is about 1000 to 5000 per capita GDP. If it’s under 1000 it’s probably going to be a little bit too dysfunctional to be able to adopt. So well governed countries do not need charter cities because they’re already … there’s still some beneficial aspects that charter cities would provide, but they’re not as important. In poorly governed countries, it’s more urgent but then the fact that they’re figuring out how to walk this tight rope. How do you get a country that’s not very well governed to adopt this pocket of good governance. And that’s really the tightrope to walk that were doing a reasonable good job of walking and figuring out.

Mark Lutter: And as to more specifically what are the important qualifications to consider when thinking about charter cities, what countries. You need a minimum level of commitment ability. So for example, the democratic republic of Congo where the government effectively only controls the capital, Kinshasa, that is not a good candidate. If you have a country that’s relatively functioning, that’s on a growth path, for example South Korea, which is already a high income country there’s probably not a lot of need for a charter city. Middle income countries that have hit the middle income trap like Mexico there’s potential benefit though it’s not as strong as a benefit would be in Honduras which is still … I think actually technically might be a middle income country but their per capita GP is like four times lower than Mexico. And similarly there are other projects.

Mark Lutter: We’re relatively optimistic about where we look. So the model have adopted is basically looking for strong partners on the ground. So in Zambia it’s a new city development. We are in early conversations with the largest urban developer in Africa, and they’ve expressed interest in turning some of there projects into a charter city. And so hopefully they decide to start taking meaningful steps at some point this year. And then we’re putting out a white paper looking at Venezuela. With the assumption being that okay, assuming this transfer of power does go through, they’re basically looking at what is a wholesale development plan like rejuvenation plan for Venezuela, and they’d be willing to adopt ideas that otherwise they might not be willing to adopt. And if you can get charter cities to be part of the conversation there’s about 3 000 000 Venezuelan refugees and most of them are gonna move back to their previous residences and some of them will not. So that offers the opportunity there.

Mark Lutter: We have interests in specific profile of a country but more definitive criteria is who is on the ground and what can they do.

Robert Wiblin: Yeah. I’m surprised you bring up Venezuela ’cause guess I was thinking, given experience in these other countries, you might, one; go to a country where there’s kind of a by part as a consensus or by part as an interest in issuing this. If Maduro gets removed and then someone else comes in he might be interested in this. That’s like a very fragile situation where easily the worst could happen and you’d get kicked out.

Mark Lutter: I actually don’t think that Venezuela is that fragile. I mean now it obviously is, but my guess is if they form a new government then I think there will be a reasonably rapid shift where within two years that government, so long as it can provide some semblance of stability and economic growth. Venezuela is pretty close to the bottom. So no more [inaudible 00:50:36][inaudible 00:50:38]. Just like money that depreciates 50% per year rather than like 500000%. And my guess is that if you’re able to deliver that over a year, two years, you’ll basically have a new political consensus.

Mark Lutter: So I think that is at an inflection point where you could see that shift very substantially in terms of the outcomes. It’s still obviously risky, like Maduro might stay in power in which case our efforts are not going to go anywhere; or two, there could be this like transition and then de-transition. But we want by parts and consensus in all the places that we undertake this, but sometimes that’s not going to be feasible for one reason or another. And we see it as worthwhile basically planting the seed and trying to get it started.

Robert Wiblin: Are there any other countries kind of on the list that are poor enough so this is really useful, but like stable enough that it can actually function I guess, like Ethiopia jumps to mind, possibly Bangladesh, yeah?

Mark Lutter: Bangladesh. I’d like to start conversations in Bangladesh. I think that they have a very good special economics zone regime. I’m less familiar with a lot of the specific politics. Right now we’re in Africa, Latin America. We’d like to expand to Asia. Ethiopia would be I think quite interesting like all their political moves over the last year have been very positive in terms of moving to a [inaudible 00:51:56]democracy. Peace with Eritrea. They have an effective special economics zone program that might be expanded. I’d be interested to start conversations on charter cities there. Rwanda’s another interesting example. They actually probably don’t need them because the words of one of the advisers to the government, ‘If we hear there’s a good policy, we’ll just pass it.’ Like we don’t need a charter city [crosstalk 00:52:14] try that out.

Mark Lutter: I think Kenya’s is another good example of a potential place for a charter city. I mean basically what you want … I think a lot of sub-Saharan Africa would be good. Latin America is actually more urbanized than Europe in point of, no is that urbanization statistics or self-reported and also self-defined, so not a one to one comparison but it’s still metric. So it’s a little bit trickier in Latin America than in Africa. Africa is urbanizing very rapidly. Most of the governance is quite poor and so you have this very young population, and if you can unleash them I mean one, you’d not just the obvious humanitarian benefit of make life better for them; and then two, the sort of global benefit of you have a bunch of young, smart people that can now contribute to the global economy. That’s the big one. And yeah, we were interested in getting into Asia, but haven’t taken any concrete steps there at this point.

Common criticisms and biggest weaknesses

Robert Wiblin: What do you think are the biggest weaknesses of this idea. What worries you the most?

Mark Lutter: Before what worries me the most, the most common criticism is just the ability to create one. In addition there is the commitment ability of the host country. If you get a successful charter city then won’t the host country just come and take it? There’s the long-term criticism if charter cities move in towards government as a service model, and if you look at the countries that will fully embrace it like Dubai poor people are not treated very well.

Mark Lutter: So with the political feasibility question, I think it’s generally overstated. Ten years ago it probably would have been accurate. The countries have become much more willing to accept these special economics [inaudible 00:53:51] charter cities than they would have been ten years ago based on my conversations with governments and the number of people that have reached out to us who are engaged in similar projects. It just seems very clear that charter cities are a very real political possibility. Another question is basically if you have a successful charter city why won’t the government just come and confiscate it? Which is a possibility, there’s several ways to mitigate against that risk. One is, in terms of basically signing treaties such that if the country reneges on the law then you can confiscate overseas assets.

Mark Lutter: This is typically used in cases with natural resources. Most countries in the world are signatories to the New York Convention of 1958. And what this means is that if a country basically confiscates your assets as a company and you win in court, you can confiscate their overseas assets to sell to recoup the costs. And so if you build a oil refinery and the country comes and takes it, if you win the lawsuit then you can go and take their ships overseas or whatever to pay yourself back. This is has been used successfully several times, so if you create a charter city in the correct manner then this would be an asset. But you could be re compensated if it’s confiscated, if it’s expropriated, so that allows for protection against this expropriation.

Mark Lutter: Three just, the new city projects are being built. There’s lot of these large real estate projects, these mega infrastructure projects that are being built. So there are entrepreneurs who think that this is right while the concern is not sufficient of a concern to justify not building a new city. And then three, you want to align interest of the host country with the interest of the charter city. So you want to create a lot of jobs, you want to educate people, you want to have this positive spillover effect such that the people of the host country and their leaders see this as something to be proud of, not something to limit or restrict.

Mark Lutter: And then the third aspect. This is me, the one I’m most worried about. So Dubai for example, you can’t beg, so if you start begging they’ll just put you on a plane and ship you home. And there isn’t much of a … There’s a welfare stay for the Emiratees, but if you’re not Emiratee welfare state is we’re going to send you home and you’re on your own. This works if you have a handful of charter cities but if you have a lot of them then there is probably a portion of the population, however you want to define it, that either for genetic or very deep seated cultural reasons is just not productive. And I think the right thing to do is to create a system such they can still live decent lives, but once you start removing this whole idea of citizenship and of nationality of this sort of collective body that has certain benefits but also these renounceable obligations. And you move towards this very explicit governance as a service model

Robert Wiblin: And you provide for redistribution, I guess.

Mark Lutter: Basically.

Robert Wiblin: ‘Cause people would just leave I guess if they get kicked out.

Mark Lutter: Yeah. And so you have this relatively small percentage of the population that just might see a substantial drop in their standard of living, because they’re relatively unproductive.

Robert Wiblin: So you’ve got some special economic zone. The sovereignty is still the original country, but it’s a company, I guess, that owns it and is developing it and gradually selling off bits of it and taking tax revenue potentially, or I guess taking rents and so on?

Mark Lutter: There’s going to be different structures of governance. So it will be the way that we’re proposing it which I think is going to be the dominant model, is it’s still under the sovereignty of the host country, the constitution international treaty’s criminal law. And it will have this special administrative jurisdiction that will basically have power for our commercial law. This special administrative jurisdiction we’re proposing be an independent body, and think of this like a new government commission. We’re proposing that this basically fire walled from the rest of the government to try get away from the legacy problems as much as possible to be able to implement these best practices reforms.

Mark Lutter: We’re also proposing that this administrative body work closely with the developer, and usually it’s going to be one with the idea being that if the developer is building all of it then they’re incentivized to provide these public goods when if you have a number of different developers then the collective action problem becomes more and more difficult. And so this administrative body will work closely with this developer to basically figure out what is the proper set of public goods. We also generally encourage the developer to keep their long-term interest in the plans by leasing rather than outright selling it because you want them to be there in 20 years. Like in the first 20 years it’s more residential and then in 20 years if you want to instead of having like single family homes you want to start building apartments, or whatever that is.

Mark Lutter: So basically trying to keep the governance structure in tact to continue to align the interests of the residence and businesses and potential residences and potential businesses with the interests of the governing body. In practice, I think we’re going to see a reasonably wide variety of these government structures and how they work. Some people think that there is some [inaudible 00:58:52] republic. There is this ideal form of governance. And well once we get that, everything will be okay. I think that’s the wrong way to think about it. The government of France in 1938, the optimal government of France in 1938, is very different from the optimal government of France today. In 1938 there’s this existential threat on the border in to … But today they don’t have that existential threat. There’s a whole different host of problems. And so similarly optimal government set I think is very dependent on conditions and on context, and depending on the conditions and context I suspect that in different scenarios we’re gonna see different government institutions emerge. What we see as key is basically aligning the interests of the governing body, with interests of like residents and potential residents and businesses and potential businesses. And if you get that incentive feedback group right, then almost everything else is downstream from that.

Robert Wiblin: There’s not like special [inaudible 00:59:43]. It’s like different policies the countries have tried. I guess handing it over to a private entity to that extent I guess one thing that plays into people like concerns about business power, and handing over anything to like a profit motivated organization I think tends to freak people out. Then there’s also just, it’s a huge admission of failure I guess by the government to be like, ‘We are so incompetent that like the only way we can get this to work is to basically hand over a significant amount like most of the control over the city.’ Are those the kinds of reasons that you think that this hasn’t happened already. It’s an idea that’s been around but hasn’t happened very much?

Mark Lutter: I’d like to push back a little bit. One, different from the developer and the governance body. Those will be two different institutions. And what we propose working closely with. It’s probably not going to be legal control. I don’t think legal control of the private entity having … like for profit entity having legal control over governance is something that will fly. I’d like to see it tested out a few times. I think it might work, but I’m somewhat conservative in this matter, like don’t test new government systems. You wanna test them, but don’t make very strong claims about the functioning government systems before you see them tested. And then two, I think it might lead into certain fears, but if you look at places that have to a certain extent somewhat analogous government structures like Disney World. Disney World works reasonably well.

Robert Wiblin: People don’t really live in Disney World though.

Mark Lutter: No. But there still a lot of problems that could potentially arise. Just in terms of Disney World has a degree of … It’s a special jurisdiction to a certain extent from the state of Florida. And so they have different building codes and all these things, and generally I think Disney World is probably much safer than the rest of Florida. Because if Disney screws up then they lose a boat load of money. So I think having that incentive structure should probably have hopefully similar outcomes. You do want to basically have some form of oversight to make sure that there aren’t abuses. I think for the first generation of residents A pretty strong form of oversight is just like whether they want to move there or not. After then you have a second generation of residents where they’re more captive and you probably want to transition to slightly different structures once it’s stable and reached equilibrium. And what that looks like I don’t know exactly. I think that’s again going to be country dependent and context dependent.

Robert Wiblin: I guess it’s the concern that we’ll have that I suppose to begin with when you’re building it, that you have to make it very appealing. Like how do you proposition to get anyone to move there in the first place. But then I guess once you’ve got [inaudible 01:02:05] effects, once people have like made investments and living in that location then the organization that owns it or runs it has a lot of micro power potential, a lot of discretion before people might leave. And so they could potentially exploit the next generation. People would think that you would gradually have to move away from having a CEO and having more like an elected government in order to like prevent that kind of exploitation.

Mark Lutter: Yeah. I’m quite open to that. I think realistically most of these projects are going to have basically a transition period where say like in 50 or 100 years or whatever it is we’re going to transition to this form of government. I think initially if you’re trying to attract billions of dollars of investment then you can’t have 10 residents have decision making rights just by voting on how that money is spent. But after it’s basically reached peak and we’ve reached equilibrium you probably want to transition to a more traditional form of government. And previously you asked basically is this admission of failure by the host countries. I wouldn’t say it’s that. Countries tend to have the policies the institutions they have because of very particular legacies.

Mark Lutter: They still work on legacies. And these legacies often involve to a certain extent horrific crime, colonialism, slaughter of indigenous populations, and then just bad luck and bad circumstances. And so I think there is a general awareness of the need to improve and charter cities are an avenue that allows for this improvement. Like you’re not going to get charter cities that legislation passed if it’s not already a policy set that the political leaders of that country want to see implemented. And so I wouldn’t see it as an admission of failure. I see it as a opportunity within which they are able to implement sets of reforms that they hopefully already wanted to implement that otherwise might not have the particular package just might not have been presented in the right manner or available to them.

Why isn’t this already common?

Robert Wiblin: So why don’t places do this already more often?

Mark Lutter: I think the big change is just over the last 10 years there’s been a substantial change in the countries willingness to embrace new ideas like this. And so historically you’ve seen sort of a change in special economic zones. Like first it was basically export processing where they just focus on exports. Then you see them get larger and a bit more manufacturing intense. And then two, the other aspect is … So one thing is, in Africa for example, a lot of African countries did not have a strong middle class until recently. And so nobody’s figured out how to basically build, mass produce commercial housing for low income people in low income countries. Typically that’s slums and nobody’s figured out how to commercialize that. So basically to undertake this type of profitable large scale real estate building that is a essential component of charter cities you need a middle class in that country to purchase that real estate because nobody has the business model to do it for low-income.

Mark Lutter: And if you’re just doing it for a lead then it’s not particularly helpful because they already have a good rule set, because it’s not based on the country, it’s based on their personal relationships. And so we’re generally just to back up, I like to think of charter cities as having three essential components. Politics, governance then new city. So where politics is a country needs to pass legislation and continue to enforce legislation that allows for this different rule set in the charter city. Two is governance. You have this blank slate for rules that you need to create functioning rules that works and is successful over long term. Both of them are very hard to do. And third is real estate.

Mark Lutter: You actually have to build a new city, and that is also quite hard to do. And so this combination of these three things … you’ve seen different groups sort of like pawing at different aspects of the idea but nobodies really fully put it together. And I think that’s largely just because ideas change over time. And I’m not sure exactly why countries have gotten more amenable to these types of deep reforms but they have and that opens opportunity as well as these new city projects that are beginning to think about governance. To really put them all together.

Robert Wiblin: It seems like in order to get a sufficiently greenfield site that doesn’t have existing residence who are gonna tell you to go jump off a pier, you have to kind of go somewhere quiet, remote, potentially where people haven’t settled there for a reason, and there’s gonna be a terribly appealing place to live. And ’cause there’s such like strong feedback loops causing people to continue hate where other people are already living, might it be quite hard to get a new place off the ground like that?

Mark Lutter: So what we’re seeing is, these aren’t really new cities. These are more satellite cities. So, when you have cities that are growing at like 4, 5% per year, the land that was previously uneconomical suddenly becomes economical. The project working within Zambia was originally a farm. The government built a new road that cut the travel time from 2 hours to 30 minutes and now, okay a farm is no longer the highest value assets so how can we change this.

Mark Lutter: And so when you have cities that have basically very rapid growth plans, you can buy real estate that’s sufficiently far out to get a large enough amount and then piggy-back off of the existing infrastructure and you can’t do it if you have a population of like 10,000. That’s probably too small to get most of the benefits from improved governance. But a population of 100,000, you can capture a lot of them.

Mark Lutter: At some point in the second generation or third generation of charter cities, I do expect to see the true greenfield cities where you actually building in a new site that has no existing infrastructure. And you see this a little bit, for example, a lot with Neom, which is the new Saudi city that they’re building for $500 Billion. Like the certain amount of money.

Mark Lutter: But most of these projects tend to be state back because they don’t seem to face the same financial constraints as do private projects. At some point, once the skillset is built out, that you have a track record of “We built the city for 100,000 people and it’s very successful. Now were gonna raise a few, like tens of billions of dollars to build a new airport and with a new port and all of that stuff. I think you probably see that happen over the coming years. But you basically need to build out the track record first.

Robert Wiblin: So you’re saying that initially you think about the kind of … just on the outskirts of existing cities?

Mark Lutter: Yeah, satellite cities. One of the key aspects of the charter cities legislation that we’re proposing is a house for incorporation of new land into a charter city without further legislative action. So, if you have a charter city that is successful and nearby land owners are like, “Oh, hey. Do that.” They can join. If there is a population on that land, then you wanna set within that population probably a super majority. Like 60%. Because then you like strong institutional change. You want super majorities such that then successful charter cities will be able to naturally grow without getting the legislation involved. As long as you have all of the parties agreeing to that growth.

Robert Wiblin: You’re starting one of these places in a county that has a big problem with crime or corruption or something like that. Most of the people moving there presumably are gonna be from this host country. Why wouldn’t it just kind of inherit some of the cultural problems to what’s holding back the country as a whole? Is it really gonna be possible to shift the culture all that much?

Mark Lutter: It depends on who the target audience is and how you do that. So, for example if you travel to Dubai, I mean Dubai, percentage of Emiratis who live in Dubai is I think like 7% of Dubai-ians, Dubaians or Emiratis. But there still is a very unique Dubai culture that is largely inherited from the Emiratis. From their decisions. So, I think people actually underestimate the impact of founders on culture. It’s not gonna be as strong as a company where the founders get to choose who their employees are.

Mark Lutter: But different cities are going to have different strengths and attract different types of people. And I think that does have a reasonably strong effect on culture. Two, if you look at for certain aspects, for corruption for example, when corrupt politicians go to New York to the UN, they start paying parking tickets. Why? Because it’s actually like an economic study on this, before they were not like UN diplomats were not legally required to pay parking tickets, the Swedes would always pay. The Nigerians would very infrequently pay. And then they basically changed the law and started enforcing it to everybody, and suddenly the Nigerians start paying and stop parking.

Mark Lutter: And so, even if there are these cultural problems that persist, if you have the governance structure with the right incentives then, even if they would like to be corrupt, if you make corruption costly, then they will stop being corrupt. And you are going to have as set of challenges, of example, the special economic zones in Egypt have found it difficult to be profitable because women are basically have to go home at certain times of the day. It’s a Muslim population, and so there are these relatively strong cultural constraints that they’re not going to get around. And these are going to be inevitable in certain charter cities. Getting around strong cultural constraints to work, to interaction, to whatever.

Mark Lutter: And … hope is one that the formal institutions are going to be sufficient to even informal institutions like the culture is not conducive to economic development. The formal institutions can still lead to improvement. And then two, hopefully this change in culture over time. And so, I mean to be clear, in some places in Zambia, it’s not, for example, realistic to have a Dubai in 30 years. But Zambia might be able to have a Johannesburg in 30 years. And so trying to focus on what are the realistic objectives for these countries. This isn’t pie in the sky, this isn’t like let’s turn Kenya into Denmark, this is a like lets turn Kenya into South Africa.

Robert Wiblin: [inaudible 01:11:21] at Kenya?

Mark Lutter: Yeah, right? Like let’s figure out what is the right goal within the right time horizon that is reasonably achievable. And it’s like trying to figure out what can lead to that. charter cities aren’t going to be perfect. But the question is, are charter cities going to improve things? Are the better than the alternative? And I think the answer is, in a vast majority of cases, yes.

Robert Wiblin: So, are they gonna have immigration restrictions? So you can choose the people who you wanna come. Like people who are more educated or more productive.

Mark Lutter: I would not support a charter city that had that. I think you want the charter city to have open immigration for the host county. I mean, I’m not sure I necessarily oppose it too. But I very strongly counsel against doing that. Maybe in my reason for getting interested in charter cities is largely had to do with global poverty at aviation, and if you’re restricting the people who are the neediest and you’re not ready to help them with global poverty and aviation, even if you’re, maybe you’re helping on some margins, but it’s not the most important margins.

Robert Wiblin: Will the city potentially pay money back to the host country as a way of keeping it on board?

Mark Lutter: Yeah, [crosstalk 01:12:17] certainly. Yeah.

Robert Wiblin: So it kind of have to be pay [inaudible 01:12:20] back to the [crosstalk 01:12:21]

Mark Lutter: Yeah. I suspect what nay charter city basically what you’ll do is you’ll set a law that will basically, an agreement that says this is the amount we pay every year, this is how it increases. We have this natural increase rate. It would basically say “We’ll pay like 20% of the taxes that we’re getting to the host country and we’re going to start at the current level and we’re also going to have this minimum balance current level plus like 5% per year. So you have this minimum bound and then it’s most likely go much higher. But you’re going to have some revenue sharing agreement with the host country. That’s certain.

Robert Wiblin: On the tractability, it seems like you’ve a lot of things that have to come together all at once. You got to have a host country that’s willing to do this. Then you gotta like go to business and get funding to potentially build up all of this infrastructure. And then just like building infrastructure in these countries is really hard, or building infrastructure anywhere is super hard. So it’s like it’s kind of …

Mark Lutter: That’s why we let other people do it for us.

What are the odds of charter cities starting soon?

Robert Wiblin: So what do you think of the odds of this actually that a lot of these things start in the next 5, 10, or 15 years? What would you bet on it?

Mark Lutter: Next five years, like 90%.

Robert Wiblin: 90%? Wow, okay. Why so confident?

Mark Lutter: So it depends on what you mean as start. What I would define as start is basically have a country has approved a new legal administration for a defined geographic area. The new legal system that, say, actually has a judge who decides at least one court case. Plus you basically have like dirt moving which I think is a reasonable definition for a start. And basically what we have is … so regarding the building out of the physical infrastructure, there are a number of projects that are building new cities, right? There are a few dozen new city projects around the world and we want to partner with them to basically help them and the host countries to create government structure that will lead to the adherence [inaudible 01:14:07] of increasing rent values. So we say here is a government structure that increases your land values. And then we work with the host country as like, “All right. This is basically how you do it.”

Mark Lutter: And why am I so confident? It’s because we’re working with one in Zambia that is already moving dirt. We’re working with the government, and the government is so far been excited. We have a team on the ground that is working to create charter city in The Honduras. Honduras already has a legislation. And so we’re working with a guy who has experience doing supply chain manufacturing, so basically building industrial parks. And that’s gonna be the first phase.

Robert Wiblin: Was that ’cause I guess some of the work had already been done in these cases? [crosstalk 01:14:49]

Robert Wiblin: Yeah. In Zambia, is that primarily your work?

Mark Lutter: … in Zambia … no. There’s a guy building a new city and we’re just jumping along for the ride (laughs). That’s our motto. We’re basically providing, like I said on my podcast, I would like to improve governance. But I don’t have a capacity. I was like let me introduce you to somebody who can actually run through legislation. So we’re basically providing like 30,000 for air support. And this is our model. Find the projects that are on the ground that are interested in these things and accelerate them.

Robert Wiblin: So, you’re looking for cases where people are already trying to start cities and build them, and then you’re coming along and saying, “Why don’t you also try this?” Like legal innovation as well where you have kind of a new government that …

Mark Lutter: Yeah, it could be that like this … right? All right, why don’t you try this legal innovation that leads to a new government structure. It could be a think tank that is already pushing special economics and reform. And we were like, “Why don’t you think about this so you can pass the legislation,” it could be Honduras where they already have the legislation. So, it’s then trying to think of what does this actually look like when we put out a state-like phased project and how can we make that successful, and so far, one of the things that we hoped to announce soon, funding dependent, is charter cities business band contest where a hundred K first prize, 50k second prize where the goal will basically be to identify teams on the ground that have the capacity to build charter cities. We want to get one, two, three projects, and we can say, “All right here, go talk to the investors.”

Mark Lutter: This is how you do the different stages, right? Get a memorandum of understanding from the government, and then go raise, I don’t know, a few hundred thousand dollars and then build out the full feasibility study and then go raise like $30 million whatever it is. But that planning processes, it’s not the same everywhere but it’s similar enough and I’ve seen it enough that I can go through the phases and we can put them in contact with a different groups at the different stages that allows them to basically build out. And even if you assume any one of these projects has a 10% chance, which I think is a extremely, extremely pessimistic assumption, just based on their rate of projects that we’re seeing, we’re still probably at 90% chance of seeing a charter city within five years.

Robert Wiblin: Earlier, you mentioned this kind of difference in level versus growth effects. I guess you’re saying it’s one thing to get a one off boost of 10% to people’s income, but it’s another thing to increase the growth rate from one to 2% each year. In the long term, the latter is much better, potentially. And it sounded like you were saying that you think that governance affects the growth rate, whereas other things like improving health maybe on the [inaudible 01:17:14] level. But I guess it seems like people who are healthier could also potentially work harder, improve their productivity more quickly. The clustering is the evidence that it’s governance specifically that really matters to the long term trajectory rather than, you know, like a wider bundle of things that that people could affect by other means.

Mark Lutter: So far as I know, I don’t know any economist who make serious strong arguments that, things like disease burden have these long term effects. I mean, you can extrapolate like Jeff [Sachs 01:17:40] does to a certain extent, but you can’t do RCTs with this. So, the level is automatically going to be weaker than what is the impact of a malarial meds on malaria. And then you can get quality-

Robert Wiblin: Short term effects.

Mark Lutter: … yeah, get qualities out of that. But this is noncontroversial wisdom in amongst these developing economies. That governance matters for a long term growth. There is an argument to be made that any disease burden like great Ken, but it’s a few degrees removed, and I don’t see that argument being made nearly as frequently. I mean for a specific evidence, there isn’t that much per se. But if you look at just the history, like US had malaria, but the US, think most people would agree that US got rid of malaria because we were basically getting rich and had the capacity to do. So, not because of, not like we got rid of malaria and then we got rich. And I think you see this around the world with basically disease burdens and how they’re reduced. It’s largely a consequence of development than a costs.

Robert Wiblin: So, one reason that people might offer for doing is that they think, “Well, we’re going to do this innovative work where we come up with charter cities and we create one or two or three, that demonstrate to the world how great they are. And then other places we’ll copy. And so we’ve got this large leverage by kind of doing research or innovation that will spread elsewhere. I wonder, how big an effect might that be given that we already have kind of lots of special economic zones around the world that have demonstrated this is a way to make a place richer. We also of private cities and we have corporations that own large amounts of land and then internalize all the effects of that.

Would a lot of people copy a successful charter city?

Robert Wiblin: And I guess we also have new innovative legal infrastructures, even charter cities on a small scale in the US where people try to improve how things are governed. Do you think that if you managed to get a few of these off the ground, a lot of people would copy or, is it just the case that there’s actually barriers to implementing this and this is going to get, [inaudible 01:19:23] to get them up?

Mark Lutter: No, I think that there will be a pretty strong cascading effect where I think a lot of it depends on how you frame them. For example, like Singapore, Shenzhen, Hong Kong, Dubai, are all semi-charter cities, but they all have these relatively unique historical contexts that make it, I think, difficult for other countries to really see what happened. So I mean, for example, I mean Shenzhen had this cascading effect within China in 2005. India passed special economic zone legislation that was supposedly modeled on the Chinese, but it sort of missed all of these things. The geographic area wasn’t big enough, there wasn’t enough improvement in business quality, locations were bad, et cetera, et cetera. And so now their internal narrative is we tried this and it didn’t work. So [inaudible 01:20:07] without, when the right lesson is, we did not try this correctly. And so if we try this correctly, it might work.

Mark Lutter: You see the Dubai international financial center has spawned like the Qatar Financial Authority and the Abu Dhabi global market, which all have adopted common law. So, you see these regional cascading effects with charter city-esque developments. So, I think the key … and this is also context dependent and something that we’re trying to help. The key is one, have an awareness of charter cities, right? Like this is what a charter city is, these are the key defining features such that when one has created, it’s not just a, this is a charter city-esque whatever, but like, no, this is a charter city and this is how you do it. Right? Basically create a replicable model. You’re always going to have regional effects. Like if you have a charter city in Honduras, you’re most likely … follow ups are going to be in El Salvador, in Nicaragua, and Guatemala.

Mark Lutter: And if you got one in Africa, it’s not like Bangladesh is going to go look at African and be like, “Oh man, they’re doing it. So we’ll try it here.” It’s a little bit too socially distant but you’ll see that in Africa. And one of the things that we’re trying to do, for example, we have a conference in Johannesburg on October 2nd and 3rd is trying to create this network, create this common knowledge of charter cities to get the media paying attention to understand charter cities such that when we begin to see successes, there is a common knowledge of charter cities and that is able to be spread via existing networks to allow for basically the cascading effect to take place a little bit more easily than it would happen without that network.

Why is Mark the right person to do this?

Robert Wiblin: What makes you the right person to be doing this? You might think that if you wanna get charter cities up in Honduras or Zambia you need a Zambian or someone from Honduras to be pushing it. Is someone from America … ’cause you don’t want to start one in America, so …

Mark Lutter: We’re working with a Zambian and a Honduran because we think that they’re the right people to do it.

Robert Wiblin: Yeah, but why are you the right person to be leading this coordination effort across countries?

Mark Lutter: I don’t think anybody else sees it. So, basically, there’s a number of different stakeholders, and my advantage is that I can speak multiple languages. I can speak Silicon Valley, I can speak economist. I can’t really speak real estate developer, but I’m kind of conversational, and …

Robert Wiblin: Are you from DC originally?

Mark Lutter: Yeah.

Robert Wiblin: Okay. So your parents were in the government, in bureaucracy?

Mark Lutter: I come from a distinguished line of bureaucrats and I think because of that, for example, if you look at the sort of libertarian history, much of their challenge has been the inability to effectively communicate with government because their approach was a little bit too antagonistic.

Mark Lutter: If you look at the Paul [Romer 01:22:36] attempts, I don’t think they were able to effectively communicate with the business community. If you build a new city, you need people who can build new cities and who can raise the money to build new cities, and you need to be able to interact with them. If you are a new city then you need to be able to speak policy to them and explain to them what is the importance of governance and why does this benefit you. And so, what I saw was a number of different conversations that were siloed, that were unaware. I was speaking to one of the leading special economic zone economists and I mentioned seasteading and he had no idea what that was. And I tried to alert people to this. I would tell people in person. I read a few articles and at first I thought, “Okay, well once I tell people, then they’ll get it,” (laughs) and then the problem would be solved.

Mark Lutter: And that did not happen. And the result was I was like, okay, well I’ll just show people. And so I started this organization to bring those groups together, to have them talk to each other instead of just writing articles about it. To actually do it. So far I think our traction has been quite good. Just from a purely organizational perspective, we don’t have a very big reputation yet. There’s a chance within the next year or two. There basically is some large established organization that is able to write the UCs, some [inaudible 01:23:51] Brookings. And besides were gonna create a charter cities, whatever. And the they have all the resources, they have all the connections. There’s the risk to the center that they could suck all the air out of the room.

Mark Lutter: I actually don’t even think that’s that big of a risk because I don’t think they would be able to do it. Because they would have a very specific perspective on how to do that, but they wouldn’t see the other stakeholders. For example, if you don’t see the new city developers, then what is an academic, who’s currently works at Brookings gonna build a new city? (laughs) And so it does have all of these different stakeholders who had all of these different conversations. And because of my experience at George Mason, I speak economist, I have that perspective, but it’s also a weird school because I like part of the reason I went to burning man a bunch, I was in sort of like silicon valley crowds. I had some of those contacts. And so it’s like semi-outsider semi-insider perspective that was able to allow me to, I think understand this, this unique point that nobody else has figured out until now and use that as leverage to build our organization.

Robert Wiblin: Who you think are your best and most kind of provocative critics? The person here like, “Well, I don’t agree with them, but I’m learning by talking to this person.

Mark Lutter: Sarah [Moser 01:26:25]. She’s a professor of, I believe, geography at McGilll, and she comes at this from, she writes a lot on new cities, not necessarily charter cities. We had a Cato unbound exchange and her worry is basically frequently that these are going to be enclaves for the wealthy. Which part of me that’s sort of like libertarian-ish part, I tend to view inequality as much less of a problem than most people from a left perspective.

Robert Wiblin: I guess it’s true that if it just became an enclave for the rich, you wouldn’t feel like you’d super succeeded.

Mark Lutter: Yeah, that’s definitely true. I do believe that is a legitimate criticism. A lot of the new city projects that are currently being built are targeting middle and upper income people, and high income.

Robert Wiblin: And they just kind of like segregate themselves often like … [inaudible 01:27:05]

Mark Lutter: Yeah. And I’m not against this per se, it’s just that those aren’t interesting to me. I don’t … You can build gated community, good for you, I think you should be able to do that-

Robert Wiblin: But that’s not ending poverty.

Mark Lutter: But yeah, it doesn’t have an impact and I don’t really care.

Robert Wiblin: So, what would determine whether these things do become just places that the wealthy moved to versus places that everyone can move to? It does seem like that there could be, if you’re the corporation that starting this area, then there could be pretty strong incentive to just bring in the most educated people to make it as rich as possible as quickly as possible.

Mark Lutter: I don’t think so I think the strongest incentive is actually to bring in the low income people.

Robert Wiblin: Why is that?

Mark Lutter: Toyota sells more cars than Mercedes does. Toyota make some money then Mercedes does. Why? ‘Cause Toyota hits a larger market segment. The largest addressable market is, it’s probably not lowest income, but it’s low income. If you at Kenya migrate, how many charter cities can you build for high income Kenyans? One maybe, for middle income Kenyan’s, like two, three maybe, for low income Kenyan’s, I don’t know, five, ten?

Robert Wiblin: If you want to increase the land value up, then you just want everyone to be able to move there. Get as many people interested in moving to the city as possible. So, why limit it? I guess like an open borders policy probably maximizes the land value or at least it arguably could.

Mark Lutter: Yeah. This goes to the discussion we were having previously, right? You can think of charter cities as what I call a Shenzhen clone or a Dubai clone where Shenzhen is you’re targeting low income people. It’s, this is sort of the global poverty and those are usually going to be highly labor intensive, low human capital, versus Dubai where you target high human capital. And the number of Dubai clones you can build is limited. There aren’t that many opportunities to build that. Right? I can maybe do one in North Africa and one in Central America and one in South America. But there’s so many more opportunities to basically target low human capital people too to build that out. And that’s just, that’s much more exciting to me and much more interesting.

Tamara’s story

Robert Wiblin: So, this next section on what con