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Why I’m Bullish on Charter Cities

Politicians ask why people are poor. Economists ask why people are rich. Rich is a more interesting question than poor, because poor is the default, which makes poverty over-determined: a theory of poverty is interesting in the same way that the theory of gravity is interesting, but I’m less focused on being Isaac Newton than being the Wright Brothers.

There are a few ways countries have gotten rich, but they’re not all reliable.

One solid option is to have lots of valuable natural resources. Qatar, for example, has the third largest natural gas reserves in the world, and a GDP per capita of $63,500. On the other hand, Venezuela has the world’s largest oil reserves, and they’re starving.

Another option is for the state to take whatever means it can to tamp down consumption in favor of savings, and hope to turn those savings into wealth-producing assets. This was more or less the blueprint of 19th century Prussia (where the social contract was more or less that cartels could engage in price-fixing as long as they kept boosting production and thus employment) and postwar Japan and Korea, as well as China — all countries where the banking system, to one degree or another, was a system that transferred wealth from savings to manufacturers in order to build an industrial base.

That’s a challenging option; it tends to require an active, efficient, government whose legitimacy is unquestioned.

There’s another option, though: Singapore, Hong Kong, and Dubai got rich with relatively hands-off government and few natural resources. Is that the trick? A fishing village plus a single copy of Free to Choose, and bam! You’re one of the richest places on earth?

Not quite: those places all benefited from a) natural harbors, and b) reliable institutions. While the government didn’t force people to invest, it did enforce contracts and maintain order. Harbors are a rare and valuable resource, but they’re not strictly necessary: Switzerland has done fine without them, and before Germany was a unified entity, the free imperial cities were generally landlocked and generally prosperous.

Good institutions are not strictly necessary for economic prosperity — the edge case there is any country with natural resources and a military loyal to the regime — but they’re generally a good start. And unlike natural resource wealth, wealth from accumulated human capital doesn’t suffer from the problem that when you’ve extracted it, it’s gone. Which is why prudent countries with abundant natural resources deliberately try to diversify their economy away from resource extraction. There’s a reason Norway, the country with the fifth-highest oil production per capita in the world, doesn’t typically get described as a "petro-state."

Where Do These Institutions Come From?

Hemingway once said that he went bankrupt in two ways: "Gradually, then suddenly." So it is with institutions. The free cities of Germany developed their institutions over a period of centuries, and constantly tweaked the rules. In places like Singapore and Shenzhen, there was a shorter process, led by a political break: they had to immediately design a set of rules that were effective and enforceable, which tends to favor a short list.

While a decisive political break is, historically, a catalyst for developing the legal groundwork for effective governance, it’s not the only option.

Enter the charter city.

Charter cities, as advocated by economist Paul Romer and many others, are cities that operate within a country but have their own code of laws. Generally it’s a streamlined legal code designed to make it easy to enforce contracts, hire and fire workers, and start companies. Charter cities are a clever way to slice the Gordian Knot of politics: rather than incrementally reform every part of a country’s legal code, you test out a new legal code in a small area. If it fails, that’s unfortunate, but if it succeeds, you can copy it elsewhere.

Charter cities go with developing countries like peanut butter and chocolate. They tend to attract the kinds of people who would otherwise emigrate entirely, and they give outside an investors a good reason to give the country a second look. There’s risk, both internally and externally, but the poorer the country the lower the opportunity cost and the higher the potential rewards.

There have been similar projects for decades. I still look back fondly on a Seasteading meetup I went to a decade ago, where attendees discussed the finer points of medical tourism, legalized gambling, and floating anarcho-communist and anarcho-capitalist utopias. Seasteads turn out to be hard, although if you want to invest in a seastead that takes advantage of lax gambling regulations, minimal labor laws, light-touch environmental rules, and effectively zero tax rates, note that there are several large publicly-traded cruise line operators.

There are three traps people fall into when they start alternative governance projects:

  • Technical risk: This has been a persistent problem for Seasteads. As it turns out, there’s a good reason people generally live on land and use the ocean for travel, not residence. It’s hard to supply a ship with food and fuel unless you go to port, and once you’re a regular at a port you tend to fall under the jurisdiction of whatever country controls it.
  • Ideology: Most of the people involved in alternative governance tend to be pretty libertarian; in that Seasteading meetup, the statists were the ones who thought Ron Paul would make a good President, the moderates thought there shouldn’t be a President at all, and the extremists thought government as a whole was a bad idea. That may be true, but as a general principle any country without a government can field a smaller army than any country with a government. Tonga, a country of 100,000 people with a GDP of half a billion dollars, is not exactly a military superpower. However, they were able to easily conquer the microstate of Minerva in 1972. Minerva also faced technical risk; it sank.
  • Pure profit-seeking: Ironically, not a huge problem for alt governance yet — unless you consider crypto-currencies an expression of the desire for escape from excessive regulations, in which case the most pressing problem in the entire space is that it’s full of sharp operators with zero scruples.

Charter cities solve each of these problems. There’s minimal technical risk in building a new city on land, compared to building them in the middle of the ocean or on the blockchain. It’s not trivial; as it turns out, building roads, power lines, plumbing, etc. is an expensive task. But at least it’s a problem you know you can solve.

Ideologues don’t do well with charter city plans, because they scare off the governments they need approval from. Working with politicians involves compromises, often a lot of them, so it’s anathema to anyone with strict principles. On the other hand, this means that all of the purest libertarian states are so pure they don’t actually exist. Everywhere else has traffic cops; they may be non-union traffic cops paid partially with stock options, but they are still traffic cops.

Pure profit-seeking, on the other hand, flounders in the face of charter cities, simply because there are easier and safer ways to make a buck. If you really want to get rich, there are plenty of ways to do it in places where you can drink the water.

Charter cities effectively force founders to be pragmatists with an ideological bent, and that’s a great thing to be. Lee Kuan Yew may have founded and led one of the most capitalist places on earth, but he started his political career in a socialist party. He just made a series of prudent choices after that.

This post is one of my occasional posts that’s both noodling about an idea and talking up an investment; I’m very happy to say that I’ve actually put some money where my mouth is and invested in an early round for Bluebook Cities, a new charter city operator that will bring Shenzhen-as-a-Service to countries around the world. It’s early, and it’s exciting. I can’t wait to see where this goes.

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