Unfamiliar Rules and the Lost Elons
Driving through rural Nigeria, we stop in traffic and a teenager walks up to the shotgun window of our van. He’s selling water. We buy two bottles. Like 100mm other Nigerians, he lives on less than $2/day.
As strange as it may sound, unfamiliar rules have neutered his potential.
Here’s how this works: Growing businesses are hesitant to invest in countries with rules — the laws, regulations, and court procedures that coordinate the execution of society’s transactions [1] — that they don’t understand. As a consequence, they demand a higher rate of return for their investment. The other side of the coin is a higher cost of capital for businesses in these countries. Because financing is harder, they can’t hire as many new employees. So, because of unfamiliar rules, would-be employees end up selling water on the street instead of learning professional skills.
Unfamiliar rules squander an enormous amount of potential. Africa gave us one Elon; how many have we lost to poverty?
On a recent flight in Africa, I met Obed. Obed is a young engineer building cheaper mass transit for his home country. Within a few minutes of chatting, he told me that he wants to become Africa’s next Elon Musk. He’s raising money for a new venture, but his country’s rules have slowed him down. Rules haven’t just weakened capital markets — governments have explicitly outlawed some early-stage capital. Obed is prohibited from accepting <$200k investments from foreign investors due to his country’s minimum foreign investment laws.
Rules are freely replicable, and familiarity is a feature, so why don’t governments stay up-to-date with best practices? Unfortunately, it’s hard to reform government institutions because officials have no financial incentive to take risks on new practices. Further, special interests earn rents on the status quo, so they protect it fiercely.
If fixing existing systems is too hard, perhaps we can make familiar rules accessible by opening borders to countries that already have them. 750 million people want to emigrate, and the US is their top choice. This is unsurprising: some US interns make $15/hour, a >60x pay increase for 50% of the Nigerian population. But mass migration is politically infeasible.
To give the lost Elons access to rules that will help them catalyze their potentials, we need to build new cities with new institutions that offer familiar rules — in their backyards.
We can draw inspiration from Dubai’s free zones. Built in 2002, the Dubai International Financial Centre (DIFC) has special laws, an international commercial court, and independent regulatory agencies. While the rest of Dubai uses statutory and Sharia law, the DIFC imported common law. These rules are familiar to international investors. Within four years of launching, the DIFC registered over 750 companies and attracted $18B in incremental infrastructure investment. Frontier markets need their own DIFCs.
Nobel laureate Paul Romer agrees. He proposed charter cities — new cities with special rules operated by foreign governments — to much fanfare in 2009. A Romerian charter city might entail Canada building and operating a city in Honduras, within which Canada’s rules would apply. Canadian rules, which investors trust, attract capital to fuel growing businesses, fund infrastructure projects, and build schools to develop talent for the growing labor market. Since 2009, the notion of the charter city has broadened. Now, ‘charter city’ simply means a new city with special rules (no need for a foreign government to get involved). As of 2020, we have no charter cities. This is about to change.
Brexit inverted the inertia of law; we now see specialist commercial courts (the kind charter cities need) launching in Singapore, Qatar, Germany, the Netherlands, Belgium, and France. Simultaneously, the population explosion in Africa is forcing governments to think creatively about how they’ll attract the foreign investment needed to support this growth.
To help these governments, Bluebook Cities is building something we like to call Dubai-as-a-Service: new cities that make it safe and easy to do business in frontier markets.
By bringing familiar laws to places like Nigeria, we can unlock new markets for growing businesses, and in doing so, deliver foreign investment to stressed governments.
And if we’re lucky, we’ll also unlock a first job — or better yet, seed funding — for Africa’s next Elon Musk.
Dryden W. T. Brown
Co-Founder & CEO, Bluebook Cities
If you want to learn more, email me: dryden[at]trybluebook.com.
[1] lawOS: Regulations as society’s operating system
[2] New Specialist Commercial Courts — Changing Dispute Resolution post Brexit?
