Outsourcing Sovereignty

The New Cities Part II: An economist, an entrepreneur, and a small Latin American country all walk into a bar

This is part 2 of 5 in Urban Proxima’s series on the theory and practice of building new cities.

Part 1: That Time Google Tried to Build a Neighborhood

Part 2: Outsourcing Sovereignty

Part 3: Urbanism-as-a-Service

Part 4: Urban Larping

Bonus: Dreaming of Atlantis

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Cities are awesome, but every single one of them could be better in a thousand ways. Improving a city — in terms of its economy, infrastructure, or government — is always a challenge. Things are the way they are for a reason and the dead hand of the past lays heavily upon us all.

So maybe it’s too hard to reform a place like San Francisco (or build something too forward thinking in a place like Toronto). Perhaps too much infrastructure has been laid down or too many vested interests have a hand on the wheel of government to ever go in radically new directions.

Maybe, starting with a blank slate (and the benefit of hindsight) is the best way forward.

This isn’t a crazy thought, albeit different people take the idea in very different directions. Sometimes there’s a focus on problems like housing, transportation, or crime (all things we, as urbanists, think about everyday). Other times, though, the aims are deeper-reaching. Some folks want to rewrite the fundamental software of society, and cities are just hardware to run “new programs” on.

If that’s all a touch abstract, fear not. It’s exactly where our journey into building new cities starts today.

An economist with an idea

Once upon a time in 2009, the economist Paul Romer started pitching the idea of a charter city. He observed that the most effective way to increase the incomes of people in poor countries was to let them move to wealthy nations. From there he reasoned that there weren't poor people so much as poor places.

In Romer's view, the difference between a poor country and a rich one is all about institutions. Legal, political, and regulatory systems come together to enable or impede long-term planning. Long-term planning, in turn, enables capital accumulation and that's the secret that makes a place — and therefore the people in it — wealthy.

In more concrete terms, when people know that contracts will get enforced and the government won't randomly take away their stuff, it creates an environment in which people can do things that take years or decades to pay off. Building a factory or constructing an office building are complex tasks and only possible if people can plan far into the future.

Play that out over a couple hundred years and places with predictable rules outperform those with less stability. In practice, this ends up looking like British-style common law as seen in places like Canada, the U.S., the U.K., Hong Kong, and Singapore.

Hong Kong across time, credit: Alex Cowsky

Now, Romer wasn’t working in a theoretical vacuum. Economic historians Douglass North and Deirdre McCloskey developed a whole literature on institutions. More recently, Daron Acemoglu, Simon Johnson, and James Robinson have also received the Nobel for their work on institutions.¹

Where Romer deviated from other academics, though, is that he proposed a way to make these insights actionable.

The problem, as stated by Romer, is about connecting people with better institutions. But immigration will only ever help a limited number of people and if reforming an entire country's institutions were easy, there'd be nothing to talk about.

The solution? Section off a small part of a poor country and institute better rules there — this is the charter city idea.

Outsourcing governance

For Romer, the charter city model was an attempt to recreate the development path of places like Hong Kong on purpose.

Hong Kong, one of the wealthiest cities on Earth, saw most of its growth under British institutions.² But where Hong Kong’s development might be a happy byproduct of British rule, a charter city would be created on purpose.

In contrast to an unwanted colonial project, Romer envisioned a host nation inviting a “guarantor country” to administer a new city for the purposes of economic development. Say, Honduras inviting Canada to directly oversee a Toronto-sized chunk of land, administered under Canadian law.

If this sounds a little whacky, the idea is more common than you might think. Cordoning off a chunk of land and instituting (hopefully) better rules is the basic theory behind special economic zones (SEZ) all over the world. SEZ projects, though, usually entail specific rules to encourage particular industries. Charter cities were meant to grow into fully diversified urban economies.

A new kind of company town

Romer never really got to see his ideas tried out, but something kinda sorta close did get off the ground.

In 2013, the Honduran government created special areas called Zonas de empleo y desarrollo económico or ZEDEs. Within a ZEDE, the government contracts with a private company to build infrastructure and administer most public functions. Responsibilities like licensing, regulation, and taxation are all handled by the contracting company. In short, it allows the Honduran government to partially franchise out its sovereignty.

The difference between Romer's charter cities and the ZEDEs is this privatization angle. While Romer wanted rich nations to administer charter cities in poorer ones, the ZEDEs model gives responsibility to private operators. Suffice it to say, the idea was (and is) controversial within Honduras.³ In the intervening decade, though, stuff has been built.

Próspera, the most widely known ZEDE-enabled project, is located on the island of Roatán in Honduras. It collects its own taxes, issues its own business licenses, and even runs its own commercial court system.⁴

At 1.5 square miles, though, the jurisdiction is more neighborhood than city in terms of scale.⁵ And although it’s retained the services of Zaha-Hadid, the vibes remain decidedly beachfront resort.

Próspera

For now, the business model is to grow the economy by attracting startups, especially in software and bio-tech. Próspera's management believes that better institutions will create an international hub for startups and that founders will flock there to set up and scale. If that comes to pass, successful startups will have spillover effects that grow the local economy further.

If we remember where cities come from, we’ll recall that they all form around some anchor economic activity. So, is intentionally seeding the economic basis for a city with tech startups possible?

My best guess is…maybe?

Próspera’s operators don't seem to expect startups to come primarily from Honduras. That leaves them with the challenge of attracting companies and founders from abroad. In this, their competition includes places like Silicon Valley, Austin, New York, and Seattle. This, then, raises the question, how much of a distinct advantage does Próspera offer over cities in the U.S.?

Over the last quarter century, most startups have clustered in a handful of major hubs with deep labor markets. And on the legal front, new companies all incorporate in Delaware for the high quality courts. Given what already exists in the U.S., it’s not clear that Próspera is solving the good institutions problem 10x better than existing options.

Próspera does, however, have businesses like coffee shops, car rentals, and tattoo parlors. So, if the average Honduran is able to quickly and cheaply incorporate a business (without having to pay a bribe), that could be a game changer for many. It’s just not clear that these are the type of residents they’re focused on.

From practice to theory

As we go from charter cities to startup cities, there’s a subtle shift in theory. Charter cities were all about copying successful institutions into underdeveloped regions. Startup cities "yes, and" that with the extra element of creating multiple jurisdictions for people to choose between. That choice is supposed to enable trial and error–in other words, competitive governance.

In truth, this is just an extension of the laboratories of democracy idea popularized by U.S. Supreme Court Justice Louis Brandeis. The phrase refers to the way in which the U.S. federal system devolves significant power to individual states. To the extent there are objectively better solutions to certain problems, these ideas get tried, vetted, and adopted more widely by other states (in theory, anyway).

There’s some empirical substantiation for this idea as well.

First posited by the economist Charles Tiebout, Tiebout Sorting is the idea that when public goods are locally provided, residents can “vote with their feet”. This leads to an economically efficient provision of public goods as residents move between localities offering different baskets of services.

Tiebout’s thesis is controversial and probably only correct under specific conditions. Also, only an economist would think in these terms, so it’s - at best - one of those descriptive of what people do, not indicative of how people think kinda things.

That said, competitive governance enthusiasts aren’t making things up from whole cloth. They’re pursuing projects built on ideas that have existed in one form or another for a very long time.

Intermezzo

In my view, the it’s-all-about-the-institutions story is probably correct, but incomplete. Good institutions are absolutely necessary, but almost certainly not sufficient to bring about prosperity on their own. Declaring a hundred square miles of ocean a common-law jurisdiction won’t make Atlantis rise up from the depths, after all.

What’s needed instead is an appreciation of the problems people face in daily life. If the assignment is to build a better city, then the competitive governance mindset is like trying to create a better Uber app by rewriting iOS. It's not wrong so much as it's just operating on the wrong level of abstraction.

Next week, we'll look at projects that take a more “user centric” approach. These will include misunderstood examples like East Solano (formerly known as California Forever) and a lesser known project in Honduras called Ciudad Morazán (the ZEDE that urbanists should really be paying attention to). These examples are different from what we’ve discussed today and understanding how they’re so different is critical to appreciating why they’re so important. But more on that next time.

That’s it for this week. Feel free to lay in with questions, comments, and criticism down below. If you feel like buying me coffee or paying for my web hosting, tips are always appreciated, otherwise, I’ll look forward to seeing everyone back for part III.

1. Mandatory footnote acknowledging that the Nobel in Economics is not actually a Nobel, don’t come at me (at least for this).

2. To be clear, we do not, in fact, have to hand it to British Colonialism; pumping opium into the veins of an entire nation was bad. But, it can be simultaneously true that British Imperialism sucked and also that the institutions that Britain set up in Hong Kong helped make the city ridiculously rich.

3. That’s partly because of Honduras’ history with American companies overthrowing their governments (see: Cuyamel Fruit Company). It’s also because the two presidential administrations it took to pass the enabling legislation were famously corrupt and a fair amount of court packing was done to prevent the Honduran judicial system from declaring the whole thing unconstitutional.

4. Criminal complaints would still be handled through the Honduran legal system.

5. That’s about one and a half Bernal Heights (San Francisco), two Hell’s Kitchens (New York), or 60% of a Ballard (Seattle).