Creating the Charter Cities Ecosystem

This is a talk I gave at the Center for Innovative Governance Research’s SF event. During the event, I frequently went off script, but I thought it worthwhile to share my written remarks as well.

Introduction
Thank you all for coming today. My name is Mark Lutter, and I’m the founder and Executive Director of the Center for Innovative Governance Research. It means the world to me that you’re willing to take time out of your busy schedules to attend.

We are in the early stages of a global revolution in governance.

The post-war governing consensus is rapidly changing. America is pulling back from the world stage, and the European project is facing its strongest challenge — migration.

China is increasingly confident, projecting economic and military power abroad.

Africa has its first tigers emerging in Ethiopia and Rwanda.

And Russia continues to disrupt the status quo.

We are approaching a historical inflection point, the kind which only occurs every two or three generations. Inflection points are major transitions from one governance system to another. The set of institutions which ‘win’ will provide a basis for governing much of humanity for the next 50 years, or more.

I am here today to argue that semi-autonomous municipalities — charter cities — provide the governing institutions that can best help humanity reach her potential, giving men, women, and their families the greatest opportunity for fulfillment and prosperity.

If you are here, I assume you have sympathy or at least an interest in the idea of charter cities. In this talk I will lay out a strategic plan for the development of charter cities globally, specifically how to build charter cities ecosystem.

Inflection point
First: What’s an inflection point?

I’m going to start with a negative example: the 1992 American presidential election. It was not an inflection point.

What would the world look like today if George HW Bush had won instead of Bill Clinton? It would probably have looked pretty similar. China would still have risen. The US would still be relatively stagnant. Perhaps the Middle East would be more stable if George H.W. Bush’s less aggressive foreign policy remained credible.

Long story short: if this was Back to the Future, and HW Bush had got four more years, today, we wouldn’t notice a big difference.

Biff Tannen is already President, anyway.

I swear, that’s my only Trump joke for today.

We can also consider the Bolshevik revolution. What would have happened if the Germans had prevented Lenin from returning to Russia? Without the horrors of communism, maybe the fascists wouldn’t have been able to consolidate power. There undoubtedly would have been some political extremism, but perhaps the worst horrors of the 20th century could have been avoided.

Inflection points occur when the linear path of history breaks down, when there is a high degree of uncertainty about future, which allows for a much wider range of action. They occur when where there is a breakdown of the existing social order and the opportunity to create something new.

We have not hit a global inflection point, but we are approaching it. Economic, demographic, and migration trends are upending the post war consensus, creating the opportunity for something new.

The one thing we know, the global governance structure for the next 50 years is going to be substantially different than the current one.

The inflection point we’re approaching has three major causes.

First, the growth of China is challenging the existing power structure.

Second, the sclerotic governance, and the decline of state capacity in the West.

Third, demographic changes and migration trends.

These trends create uncertainty, but also opportunity.

We have the potential to shape the future. But exercising this potential requires effective coordination. We must begin planting the seeds, understanding the trends, and shaping the future to turn these changes into a benefit for millions of people.

Not by embracing fantasies, ideologies, or our own wishes — but by pragmatically looking at how the world works, and building a government that works with it.

That is why we’re here today.

Why Charter Cities
So why charter cities?

Steve Wozniak pitched HP five times with his original design for the Apple I Computer. HP wasn’t interested.

It was easier for him to go his own direction — as difficult and challenging as it was — than do surgery on an unwilling patient.

A charter city is a political tool to allow for greater innovation in governance.

Public choice problems often stymie the improvement of governance, leading to stagnation.

Charter cities, built on greenfield sites, sites with no population or existing industry, offer an end-run around typical public choice problems, as no interest groups are losing rents on the greenfield sites.

In fact, if properly engaged with a real estate developer, charter cities reverse the logic of collective action.

The real estate developer has an interest in increasing their land values, which occurs as a result of governance improvements. By becoming a sponge for a fraction of the increased wealth that a charter city generates, real estate developers can become a powerful interest group in favor of charter cities.

The value of charter cities is twofold.

First, to improve governance, so poorly governed countries have the ability to rapidly improve quality of life and public services.

Second, experimentation in governance, so well-governed countries can figure out on what methods on the margins can improve governance.

We have a reasonably good idea of what institutions lead to economic development.

These institutions are rule of law, property rights, and an open business environment.

What we don’t know is how to effectively convince poorly governed countries to adopt these institutions.

Enter, the charter city.

By creating charter cities in low and middle-income countries, it is possible to rapidly improve governance for their residents and businesses, as well as demonstrate the benefits of these improvements to the host country and surrounding region.

A similar approach, special economic zones combined with urbanization, created the greatest humanitarian miracle since World War II in China, lifting 800 million people out of poverty. Deng Xiaopeng, realizing that Mao’s rigid communism was leading to widespread immiseration, famously said, it doesn’t matter if a cat is black or white, so long as it catches mice.

He authorized the creation of four special economic zones in 1980. One was Shenzhen, which at the time was a fishing village of 30,000 people. Now it is the manufacturing capital of the world with 16 million residents.

The second rationale for charter cities is to improve governance on the frontier: Creating charter cities for permissionless innovation in medicine, cars, or manufacturing processes.

There is no clear model for what governance beyond the frontier looks like. We need to literally conduct the experiment ourselves to find out.

Take medical innovation for example. Unfortunately, Jim O’Neill, who should be in the audience wasn’t appointed FDA Commissioner.

It costs over $1 Billion to develop a new drug, and even people with life threatening conditions have trouble acquiring promising new treatments.

What does the optimal governance system for medical innovation look like? I don’t know. However, charter cities offer a mechanism to find out.

Charter cities are a platform where new governance arrangements can be tested at relatively low cost. If they’re successful, entire countries can adopt them.

Building charter cities
Silicon Valley has previously dipped her toes into city building.

What arguably began with the Seasteading Institute has since spread to Google with Sidewalk Labs, and Y Combinator.

I have had multiple unicorn founders tell me, ‘I am building a war chest, so when I exit, I can build a city’.

Those are high flying dreams. But a lot of people are having them — and more are going to become a reality far faster than you might think.

But a charter city is not a typical startup where you can lock three engineers in a room for six months until they emerge with a minimum viable product.

A charter city is more analogous to a startup which focuses on atoms, Boom, Tesla, WeWork, or SpaceX.

Even those examples don’t fully capture the complexity, however. Building a charter city is a massive engineering project, a massive political project, and a massive social project — combined These dimensions can be summarized as politics, governance, and real estate.

Building a new city, without any legal autonomy, is in its own right a tremendous undertaking.

You’ll heard Mwiya speak on some of the challenges and opportunities later. Required investments are in the hundreds of millions, if not billions of dollars, and that is for a satellite city.

In low income countries, building a satellite city also requires building out much of the infrastructure we take for granted in the United States.

You have to generate and supply reliable electricity. You need to build water, sewage, and roads.

But building the physical infrastructure of a charter city is arguably the easy part. There are companies that do this all the time for states and localities, with such experience, so at least there’s a roadmap for how to proceed.

The second part is governance. Ideally the host country will pass a law which will grant complete legal autonomy to the charter city.

The charter city then has a blank slate with which to create, or more likely import, a new legal system.

There is limited precedent for this. Dubai, for example, realized that Islamic law wasn’t exactly conducive to modern finance, so it created the Dubai International Financial Centre.

To attract finance, they imported common law, and hired a British judge as the chief judicial officer.

The DIFC serves as a partial template. It shows that law can be successfully imported, but it applies only to financial law.

A charter city would also need labor law, environmental law, building codes, real estate law, and more.

Its legal system needs to be trustworthy, both from the perspective of potential residents and potential businesses. Creating a complete new legal system from scratch has not, to my knowledge, been done in recent past.

The third part is politics. The host country must pass legislation to grant the charter city the legal autonomy necessary to improve governance.

The host country must also credibly commit to being bound by the legislation for at least the near future to ensure the charter city can attract investment.

Passing such legislation requires a concerted political effort. Allies must be found in various ministries, high level official must be convinced the project advances their interests, and more.

This has been done in varying degrees in different countries, like the DIFC. China, with One Belt One Road, has had success achieving legal autonomy in low income countries, as has the United Arab Emirates via Dubai Ports World.

World Today
As I said before, we are at an inflection point in world history.

Changes in global governance combined with rapid urbanization make it the perfect time to build a charter city.

Countries have become more willing to embrace the legal action necessary for a charter city. 
The Seasteading Institute, for example, changed their strategy to pursue a partnership with a host country instead of building on the open ocean.

Real estate and governance are two of the biggest markets in the world. The land value of Chicago increased 30,000-fold in its first hundred years of existence. State expenditures, a proxy for governance, accounts for 30% of total global GDP.

This is a phrase you’re not going to hear in many places, but Silicon Valley risks being left behind. Cities and special economic zones are being built all over the world.

The pace at which China urbanized over the last 30 years has hit the rest of Asia, and Africa as well.

The UN estimates there will be an additional 2.5 billion urban residents by 2050.

That’s 70 million new urban residents annually.

Wade Shepard, a journalist who frequently reports on new city projects, estimates that over 200 master planned new cities are being built across the world.

This number doesn’t even include organic city growth.

Saudi Arabia is building Neom, a $500 billion new city project, projected to have a degree of legal autonomy.

Kazakhstan is exploring a new, legally autonomous city north of Almaty. It has yet to be publicly announced.

Rendeavour, the largest urban property developer in Africa, is building 7 new city or special economic zone projects in 5 countries.

Egypt is moving its capital from Cairo to a yet unnamed planned megacity. This is as big a change as the capitol of Japan becoming Edo — Tokyo. But in our lifetime.

And the Chinese have their One Belt One Road project. They’re exporting the ingredients of their success: special economic zones combined with urbanization. It’s the Chinese version of the Marshall plan, but on steroids. President Xi claims that China will invest $4 Trillion, with a T, in One Belt One Road projects around the globe.

Chinese new cities and special economic zones are being built in places such as Malaysia, with a $100 billion project called Forest City, to Oman, a $10 billion special economic zone and industrial city called Duqm, to Kenya, where Chinese investors are creating a $2 billion special economic zone in the city of Eldoret.

And, as in my experience showing is better than telling, this afternoon Mwiya and Hunter will talk about how city building and special economic zones are being approached around the globe.

It’s time for Silicon Valley to dive into the city building game.

Ecosystem
The binding constraint on building charter cities is the lack of an ecosystem. As I’ve said earlier, the traditional startup model isn’t sufficient to create a charter city.

The new model, coordinating between host country, land owners, developers, financiers, and governance, to get a charter city off the ground has yet to be cracked. Perhaps it will take a heroic entrepreneur to crack it.

But I want to suggest something else, to instead create the ecosystem which can nurture the development of charter cities. Building the ecosystem combines a vision of social change with a VC style approach, ensuring all the charter city eggs aren’t in one basket.

And that, we CAN learn from our surroundings in Silicon Valley.

Silicon Valley shows the importance of an ecosystem. Its culture; the norms, practices, belief set, create a successful machine designed to birth unicorns.

This ecosystem was not born: it evolved over time.

But if it had existed in 1970, perhaps there would be a few more Apples today.

Well, for charter city building, we’re in Silicon Valley in 1970, internet in 1990, crypto in 2008. Luckily, we have one advantage.

The fact that you’re all here demonstrates the power of these ideas. We already have the beginning of a community which can make charter cities a reality. All we need is a strategic approach.

Previous attempts at creating charter cities have placed all their efforts on a single person, like Paul Romer, or a single country, like Honduras.

Romer almost passed legislation in Madagascar, and successfully helped pass legislation in Honduras, but once he stopped speaking publicly on charter cities, most of the discussion died.

Techno-libertarians went to Honduras when the legislation passed, but it wasn’t ready for prime time, and the momentum died.

To have a sustainable movement, the Center for Innovative Governance Research is creating an ecosystem for charter cities, modeled on the Silicon Valley ecosystem which has proven so successful.

The first step in creating an ecosystem is to identify the stakeholders.

I have identified eight groups with an interest in charter cities. They are: Silicon Valley, technocrats, development banks, the humanitarian community, the financiers, real estate companies, special economic zone operators, and politicians.

Given where we are, I don’t need to explain the importance of Silicon Valley. You can provide the entrepreneurs, early stage funding, and big ideas for charter cities.

The second group is where Paul Romer hails from, the technocrats; economists, lawyers, and urban planners. Romer showed the importance of framing and credibility, whether institutional or personal. Further, the technocrats are necessary for the details of policy implementation.

Development banks have some overlap with economists. They bring credibility to charter cities. If relationships are pursued in the right manner, they can also bring infrastructure loans, and political pressure on the host country.

The humanitarian community in Europe has been exploring the idea of refugee cities to help solve their refugee crisis.

Most refugees don’t have work rights in refugee camps, but turning refugee camps into charter cities could provide a long term, politically sensitive solution to displaced peoples who aren’t able to return home in the near future.

Charter cities are multi-billion-dollar projects and require institutions able to fund at that level.

As such, investment banks and sovereign wealth funds are an important part of the equation. They must be engaged early, to ensure they have an accurate mental model of charter cities.

Mega real estate companies have the knowledge and experience in building communities for hundreds of thousands of residents. Charter cities live and die by real estate. As such, it’s essential to coordinate with the people and institutions with such expertise.

Special economic zone operators understand how to operate in a different legal environments and attract companies. Several of the Dubai special economic zones, for example, are beginning to think about how to export their model.

Lastly, charter cities are political projects, as well as business projects. Political leaders need to be part of the conversation to ensure that charter cities are conceived, communicated, and executed in a manner which they understand, and benefits them — and most importantly, benefits the people they serve.

Creating the community is vital. It is unlikely that a single part of the community will be able to successfully build a charter city on its own.

In fact, there are still competing ideas for what will make the ideal city.

Each piece of the community is approaching the idea from a different angle, seeing part of the total.

After identifying the community, the second step is creating a shared mental model of a charter city.

I define a charter city as a city with substantial, if not complete, legal autonomy.

Paul Romer, the originator of the term, included in his TED talk the requirement of a guarantor country, likely a high-income country which could ‘import’ their institutions to the charter city.

In later interviews and articles, Romer seemingly walked away from the requirement of a guarantor country.

Nevertheless, the perception that a charter city requires a guarantor remains. Another relevant question is what it means in practice to create a new legal system. There are a huge number of unknowns which require further elaboration. Further, the legal system needs to be designed with the culture and norms of potential residents in mind. Forcing an alien legal system on a people is a sure way to cause challenges.

Other relevant questions include the governance structure. How will infrastructure and governance be related. Will a single entity control both? How will financiers reap returns?

When entrepreneurs approach financiers, there shouldn’t need to be a 30-minute explanation of a charter city before detailing the specifics of the project itself.

When economists approach politicians, the politician should understand the essence of a charter city.

The lack of shared mental models has up until now stymied the development of charter cities by raising transaction costs among the relevant groups.

Lowering these transaction costs is a challenge, but will lead to far greater benefits down the line. The event is the first step. Its purpose is to create the foundation for the community which will be necessary for the long-term success of charter cities.

Today, I invited a wide range of speakers to illustrate the wide interest in charter cities and make it common knowledge.

Conclusion
This is just the beginning. We are in the early stages of a major change in governance around the globe. Creating the ecosystem for charter cities, and charter cities themselves, are decades long projects. This is not an easy task, but it is a necessary one.

We must continue with events like this one and scale. While there are representatives from most of the relevant groups of the community attending today, we are only representatives.

To fully engage the men and women who will benefit and thrive from this new future, we need events closer to their turf: in Dubai, in Africa, in Latin America. This allows us to first fully map the relevant groups, understand who the important organizations and individuals are, and facilitate their relationships.

In addition to events, we must also increase our research. There are two types of research, foundational and practical. The foundational research should make the base case for charter cities, creating a coherent narrative that can effectively spread. What is the basic economic case for charter cities, the basic legal case, the basic moral case.

The practical research should impact real world decision making with regards to charter cities. Lant Pritchett tells a story where the governor of a Pakistani state asked him how he should allocate his budget to maximize growth potential. Lant realized that the current state of economic research had relatively little to say on this topic. That should not be the case for charter cities.

What is the impact of improvements in the Doing Business Index on urban land values? What are the advantages and disadvantages of the legal systems in the Dubai International Financial Center, the Abu Dhabi Global Market, and the Qatar Financial Authority and how can those lessons be applied to charter cities? In a former colony of France is it better to use Common Law given its international reputation, or civil law given trading ties to France?

By creating the ecosystem for charter cities, the Center for Innovative Governance Research becomes the Schelling point for charter cities. We want our experts to testify when governments are considering charter city legislation. We want entrepreneurs to call use for strategic advice when building charter cities. We want our experts to have key roles in the process of creating new governance systems.

However, we can’t do it alone. We need to build the community that can improve the world via charter cities. I look forward to creating the future with you.