Local Governments Are Changing the World

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

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

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

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

The Innovative Governance Movement

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

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

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

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

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

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

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

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

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

Landscape

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

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

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

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

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

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

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

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

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

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

The Future of Innovative Governance

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

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

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

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

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

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

Conclusion

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

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

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