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The Landscape of Innovative Governance

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Six years ago, interest in unconventional ways of improving governance peaked. Periodicals like The Atlantic and The Economist were publishing feature-length stories about charter cities. Honduras had passed legislation allowing the creation of special development regions, which allowed for the importation or creation of new frameworks for commercial law. Two companies, MGK and Future Cities Development, were operating in Honduras, vying to buy land to create the autonomous special-development regions authorized by Honduran statute. The Free Cities Institute had recently been established at Universidad Francisco Marroquín.

Where are we today? Paul Romer invented the idea of the charter city – a legally autonomous zone in a developing country that imports successful models of governance – and popularized it with an influential 2009 Ted Talk. In January 2018, he resigned as Chief Economist of the World Bank without having publicly commented on his brainchild during his tenure. The Honduran statute was declared unconstitutional. In 2013 a similar statute was passed, which, while still on the books, has not led to any successful projects. The Free Cities Institute rebranded itself as the Startup Cities Institute before closing its doors.

This is not to suggest no progress has been made. The Seasteading Institute, for example, signed a Memorandum of Understanding with the Government of French Polynesia. Three books, Seasteading by Joe Quirk and Patri Friedman, Your Next Government? by Tom Bell and The Political Economy of Special Economic Zones by Lotta Moberg were recently published. The Startup Societies Foundation has, by and large, filled the void left by the Free Cities Institute, by trying to popularize the idea of creating new jurisdictions and hosting conferences. Neom, a half-trillion-dollar, 10,000-square-mile autonomous city is being built in Saudi Arabia, and sharing sovereignty with Egypt and Jordan, was announced.

Wait, what? People in the innovative governance space have long been thinking about creating city states, experimenting with and improving models for territorial governance. The result is not just a lack of progress in the past six years, but backsliding. Then, Saudi Arabia announces Neom, which will have “its own tax and labor laws and an autonomous judicial system,” and not only is nobody in the space positioned to influence Neom, most people are only vaguely aware of it.

The contention of this essay and of the think tank I have just launched, the Center for Innovative Governance Research, is that the innovative governance movement is correct on the basics but has been pursuing an ineffective strategy. The innovative governance movement did predict the coming political decentralization of which we are still in the early stages. Unfortunately, the strategy being pursued by them currently has left them marginalized, largely relegated to the sidelines and isolated from the best opportunities for innovative governance.

For example, I recently spoke with a World Bank economist who is well-known for his research on special economic zones. During our conversation, I learned he was also sympathetic to charter cities, but, was entirely unfamiliar with seasteading. Note that the in 2017 seasteading was featured prominently in both the The New York Times (twice) and The Wall Street Journal. The most natural of allies was unaware of a well-known example of innovative governance coming from the “movement.”

Innovative governance constitutes institutional change, requiring the support of at least part of the ruling elite. From a global perspective, the ruling elite are World Bank and McKinsey types who determine the Overton window. To create innovative governance, it is therefore necessary to frame the arguments in a manner that appeals to the sensibilities of the neoliberal ruling class. They’re often at the levers of power: just look at how Crown Prince Mohammed bin Salman of Saudi Arabia relied on global management consultancy firm McKinsey & Company to retool his nation’s entire oil industry.

The Seasteading Institute gives us a clearer illustration of power of “cosmopolitan” messaging. The organization able to sign a memorandum of understanding with the government of French Polynesia last year, in part, due to their successful rebrand away from ‘floating islands for libertarian billionaires to avoid taxes’ to ‘eco-friendly technology to help alleviate negative effects of global warming in island nations.’ By corollary, it’s difficult to imagine projects like Liberland or Roger Ver’s Free Society gaining much traction. The tone and attitude of such projects, a metaphorical middle finger to existing institutions, is unlikely to play well with the countries who need to recognize the legitimacy of such a project.

Implicit in the argument – that selling innovative governance is a matter of tone rather than a matter of its merit – is the belief that there is a great deal of untapped elite interest in the idea that can be activated with the right strategy. Successfully tapping this interest can lead to a rapid shift in elite opinion and accelerate the creation of semi-autonomous cities.

There are three groups interested in innovative governance: the heterodox, the mainstream, and the pragmatic. The heterodox group is dominated by libertarians and techno-futurists and is what, up till now, I have been referring to as the innovative governance movement. The mainstream group works within established institutions, and is dominated by economists and lawyers. The pragmatic group is simply individuals and organizations which realize that political decentralization of any form would benefit their goals.

The Heterodox

The heterodox current is the most self-aware and active of the innovative governance movement.

It is dominated by libertarians and techno-futurists, many with connections to Silicon Valley. They have the best-defined narrative, and this has translated into some limited real-world success.

Those in the heterodox camp tend to be entrepreneurial and uncredentialed. Their entrepreneurial spirit leads them to launch a number of innovative governance projects, but their lack of credentials often limits the potential success of these projects and prevents engagement in the public sphere.

Members of this current are the most radical, both in their rejection of existing governance models and their willingness to embrace unproven alternatives. Their focus is on experimenting with and creating new, improved institutions, rather than imported best practices to developing countries. Their attitude is ‘we can do it better.’ Over time, the radicality of certain members of the heterodox group has waned, leading to the embrace of more down-to-earth visions.

The heterodox group has a longer history than the “mainstreams” or the “pragmatics.” It originates with Spencer Heath, a dissident Georgist. Heath’s 1957 book, Citadel, Market, and Altar, argued for proprietary communities, where a single, profit seeking landowner, would govern communities. His grandson, Spencer MacCallum, carried on this strain of thought with his 1970 book, The Art of Community.

The 60’s and 70’s saw members of the heterodox approach attempt to create new countries. Werner Stiefel, a successful soap manufacturer who had escaped the Nazis, launched Operation Atlantis in 1968. Believing America was on the same path as Germany in the 30’s, he sought to create a new country in international waters founded on libertarian principles. In 1972 The Republic of Minerva sought to create a micro-nation, also founded on libertarian principles, on the Minerva reefs by reclaiming land. Neither project succeeded.

Operation Atlantis and The Republic of Minerva exemplify the attitude and approach of the heterodox group. In the post-war era, classical liberalism was being displaced by libertarianism with its emphasis on Rothbardian property rights and the illegitimacy of the state. In addition, books like “The Road to Serfdom” were warning of the risk of social democracies becoming totalitarian governments.

The next few decades were relatively quiet on the heterodox front. The next major event was the founding of the Seasteading Institute in 2008 by Patri Friedman and Wayne Gramlich. The Seasteading Institute was premised on the insight that innovative governance attempts should focus on the ocean as no country would grant the level of autonomy necessary to have meaningful innovation in governance.

The Seasteading Institute was very effective at garnering publicity. Unfortunately, it was often the wrong kind of publicity, with headlines characterizing its endeavors as libertarian billionaires trying to avoid taxes by building private islands. However, the Seasteading Institute did manage to create a broader discussion about innovative governance, shifting the tone of the heterodox approach away from strict libertarianism, toward a Silicon Valley-inspired techno-futurism.

The next five years became very busy for the heterodox group, particularly in Central America. In 2012 Honduras passed legislation, called RED for the Spanish acronym, which created a process to create a charter city, attracting the interest of several entrepreneurs and a great deal of press coverage. Honduras is interesting because it involves both the heterodox and the mainstream groups. Depending on who is telling the story, Romer either inspired the original RED legislation or was brought in as a political move to increase support for the pre-planned RED legislation. Subsequent clashes between Romer, Honduran officials, and heterodox companies have created bad blood which still lingers today.

Two companies launched out of the heterodox group to take advantage of the RED legislation: MKG, led by Michael Strong, and Future Cities Development, led by Patri Friedman. On September 3rd 2012, the President of the Honduran Congress, Juan Orlando Hernandez, signed a letter of intent with MKG.

It was this letter that led Romer to abandon his efforts in Honduras, which I’ll discuss in the next section. On October 18th, the Honduran Supreme Court ruled that the RED legislation was unconstitutional, leading Future Cities Development to disband.

Once the Honduran Supreme Court ruled against the RED legislation, the excitement wore off.  Honduras nevertheless remained interested in innovative governance. In 2013, the Honduran legislature passed legislation authorizing the creation of Zones of Employment and Economic Development (ZEDE). The ZEDE legislation also created a Committee for the Adoption of Best Practices which would approve proposed ZEDE projects. While there was a brief flurry of media interest, to this date no projects have been publicly approved.   

In 2013, Balaji Srinivasan, a partner at Andreessen Horowitz, gave a talk entitled Silicon Valley’s Ultimate Exit. He argued that the United States is outdated, and exit, the creation of new political units, is necessary to escape our current trajectory. His talk and subsequent thought represent the vanguard of the techno-futurist idea of new jurisdictions and changing governance.

One of the more interesting developments has been the companies which have launched to supply innovative governance. Titus Gebel, a German entrepreneur founded Free Private Cities, a corporation dedicated to building and managing an autonomous city. After The Seasteading Institute signed a memorandum of understanding with the government of French Polynesia, Blue Frontiers, a for profit corporation, was launched to continue negotiations to create a seazone and build the first seastead.

The Mainstream

The mainstream current is composed of economists, policy wonks, and humanitarians. They are typically credentialed having post-graduate degrees and working in international organizations, think tanks, or universities. Their approach tends to be technocratic and is focused on rapidly improving institutions such as rule of law in the developing world.

The mainstream approach works within existing systems. The idea is that the developed world works reasonably well, and that success should be transported to the developing world. They view innovative governance as a mechanism to expand currently successful institutions.

The best representative of the mainstream group is Paul Romer, a Professor of Economics at the Stern School of Business at New York University and former Chief Economist of the World Bank. His most important academic contribution is endogenous growth theory, which shows how the development of new ideas can improve per capita income growth. Two of his papers on the topic “Endogenous technological change” and “Increasing returns and long-run growth” have each been cited over 24,000 times.

Romer’s 2009 TED talk triggered mainstream interest in innovative governance. The economist defined charter cities as having three necessary characteristics: a charter, which defines the rules of the city; a greenfield site, meaning an empty location for the city to ensure that nobody lived there before; and a partnership between nations, which determines which country’s governance structure will be imported.

Romer had two high profile attempts to create a charter city. The first was in Madagascar, which because of political challenges was willing to embrace out-of-the-box thinking. They were ready to sign a lease for a Connecticut sized piece of agricultural land with Daewoo, a South Korean corporation, and were considering having Mauritius administer an export processing zone.

In December 2008, Romer successfully pitched a new charter city to Marc Ravalomanana, the President of Madagascar. Ravalomanana even suggested creating two charter cities. Unfortunately, the proposal was short lived. In Madagascar political opposition was building against the lease to Daewoo. In January 2009, tensions exploded, leading to mass protests, including violence. In February 2009, guards opened fire on protesters outside the presidential palace, killing 28 of them. Ravalomanana was soon forced to resign before the end of his term.

Soon after the fiasco in Madagascar, Honduras provided another opportunity for Romer to create a charter city. In 2009 Honduras, one of the most violent countries in the world, underwent a constitutional crisis. The post-crisis administration was considering radical reforms, some similar to charter cities. In December 2010 a group of advisers to the new president arranged to meet Romer in Miami.

Romer’s presentation in Miami went well and he was invited to Honduras in January. Later in January the Honduran Congress passed a constitutional amendment to allow the creation of special development zones (REDs being the Spanish acronym). The REDs differed in an important aspect to the charter cities idea Romer proposed in his TED talk. Instead of a developed country serving as a guarantor nation, there would be a transparency commission appointed by the government which would then appoint a Honduran governor to each RED.

Romer’s involvement in Honduras ended abruptly in 2012. He sent a “personal statement to the news media” to Tyler Cowen, who then published it on his blog. Romer stated that the Honduran President had signed a decree naming him and four other individuals to the transparency commission, but that the decree was never published in the Gazette, therefore never becoming law. The trigger for Romer’s departure was the government signing a public-private partnership with a private company and the details subsequently being leaked to the media.

Romer has rarely mentioned charter cities in the public sphere since Honduras. He has, however, inspired several followers to propose ideas similar to charter cities. Three followers stand out, Shanker Singham, Michael Castle Miller, and Kilian Kleinschmidt.

Shanker Singham is a leading international trade lawyer, authoring one of the comprehensive textbooks on competition and international trade. In 2014, he was Managing Director of the Competitiveness and Enterprise Development Project at Babson Global, where he developed his idea of enterprise cities, a less radical version of charter cities. In an enterprise city, the national government would negotiate with the developer to create an independent governing body. The independent governing body would create a legal framework within the city which would encourage investment, competition, and economic development.

In 2015 The Economist reported that Singham was in early stage discussions with Dominican Republic, Colombia, Morocco, Bosnia, India and Oman. Those discussions do not appear to have yielded fruit, as Singham is no longer at Babsom Global, instead leading the Legatum Institute’s work on the Economics of Prosperity and is Chairman of its Special Trade Commission.

Michael Castle Miller is a lawyer specializing in special economic zones. He launched a non-profit, Refugee Cities in 2016. Refugee Cities combines the logic of special economic zones and charter cities, applying them to refugee camps. Most countries do not give work permits to refugees. By creating a legal framework for refugees to work, and companies to invest, Refugee Cities can turn refugee camps from despondent, dependent communities into beacons of hope.

Kilian Kleinschmidt currently runs a consulting firm, the Innovation and Planning Agency. In 2013, he was in charge of Zaatari Refugee Camp in Jordan, the world’s second-largest refugee camp. While manager for Zaatari, Kleinschmidt realized that the challenges he faced in creating an urban environment for a displaced population were comparable to the challenges occurring throughout Africa and Asia due to urbanization. Taking lessons from Zaatari, Kleinschmidt is advocating special development zones as an integrated solution containing a new governance model as a way to accommodate economic migrants moving to cities.

The mainstream approach has arguably achieved greater success than the heterodox approach, with the Jordan Compact being the prime example. Spurred by the refugee crisis, the international community pledged $2 billion to Jordan in grants and preferential interest loans, as well as low tariffs, if refugees in Jordan would be given work permits to labor in Jordan’s special economic zones, many of which are operating below capacity.

The Jordan Compact hasn’t reached its lofty goals. The special economic zones were located too far from the refugees and there was a skills mismatch between the refugees and the needs of the special economic zones. However, it does prove that the mainstream approach, including the international community, isn’t always as slow and bureaucratic as commonly believed.

The Pragmatic

The pragmatic group consists of a number of different individuals and projects which have more or less independently created innovative governance projects. It is made up political entrepreneurs as well as business entrepreneurs. The unifying feature of the pragmatic group is that they have used innovative governance as a tool to advance their immediate objectives.

The best modern example of the practical approach is Shenzhen. Post-Mao China was desperately poor, still under the shadow of the Cultural Revolution. In 1980 China created four special economic zones, including one in Shenzhen. The special economic zones were located far away from the politics in Beijing. The special economic zones were created, not as part of some master plan, but because politicians and businessmen saw an opportunity for economic reforms without challenging the national political system.

The result was the greatest humanitarian miracle in the post-war era. China grew at 10 percent annually for 30 years, lifting 800 million people out of poverty. This success was largely due to special economic zones as a strategy for opening up the country. The special economic zones served as a model for strategic liberalization of economic policies. Unfortunately, much of the world failed to emulate the lessons from China’s success.

Another good example of the practical approach is Dubai, particularly the Dubai International Financial Centre (DIFC). In 2002, Dubai decided to create a financial center. They realized that Islamic law isn’t exactly conducive to finance, and after finding that the top four financial centers, New York, London, Hong Kong, and Singapore used common law, they decided to import common law for the DIFC. They hired a British judge, Sir Anthony Evans, be Chief Justice, becoming the top rated financial center in the Middle East.

A more recent example is the previously mentioned Neom, an announced new city project in Saudi Arabia. Neom will “operate independently from the “existing governmental framework” with its own tax and labor laws and an autonomous judicial system.” Taking the lessons of independent governance from the DIFC and multiplying it, Neom is arguably the most similar to Romer’s charter cities.

With the exception of Neom, however, the trend amongst the pragmatic group has been away from political entrepreneurs and towards regular entrepreneurs. There are dozens of new city projects around the world. They are typically led by real estate companies seeking a profit. While most of these projects are focused on the physical infrastructure, a few are beginning to explore how innovative governance could improve outcomes.

The pragmatic group arguably has the most potential. Coming at innovative governance from a non-ideological perspective, they are typically better funded and more practical than both the heterodox group or the mainstream group. A disadvantage is that they are often more risk averse, limiting the potential success of a particular project.

Terminology

The lack of a cohesive narrative shows up in the diverse terminology used to refer to similar ideas. The lack of an agreed upon terminology hinders communication between groups, limiting potential mutually beneficial exchange. For example, just in this essay I have reviewed groups which have used the terms, charter city, enterprise city, free city, and startup city, and those are just the terms which include city.

Charter city is likely the best-known term due to Romer’s TED talk. It is the term I favor when referring to new, autonomous cities. One challenge is that it remains associated with colonialism, as Romer argued that charter cities needed a guarantor country during his TED talk, though he later seemed to have welcomed alternative governance models.

Free cities is another well known term, which has a long history. Independent city states, like Venice and Genoa, as well as semi-independent cities, such as Lubeck, were all referred to as free cities. Enterprise city, though catchy, never caught on. It was promoted by Shanker Singham, but since he has abandoned his efforts, I haven’t heard the term mentioned.

Startup cities has caught on, in part because startups are cool. However, it doesn’t quite work because it isn’t immediately obvious whether or not the city has any legal autonomy. Not to mention that new city projects, while taking some lessons from startup culture, have a very different set of constraints than most startups.

While cities are an important aspect of this conversation, they are not the only aspect. The Dubai International Financial Center, for example, is a very successful zone that is not an entire city. Similarly, most projects along these lines in developed countries will not be cities, for the simple reason that the developed world is already highly urbanized. For example, Marc Andreessen’s essay, Turn Detroit into Drone Valley, offers a roadmap for the type of zone based reforms which could be implemented in high-income countries.

Lessons Learned

In thinking about the innovative governance landscape, there are a number of important lessons. First, don’t put all your eggs in one basket. Second, work within existing institutions, not against them. Third, create a single narrative. Fourth, develop a technical understanding of innovative governance.

Much of the reason for 2012 being the peak of innovative governance is due to too few points of failure, Romer and Honduras. Once Romer stepped away from charter cities, the press and media did as well. When the RED legislation was declared unconstitutional, investors were scared off of Honduras.

Because of his academic credentials and his TED talk, Paul Romer was able to market himself as the charter cities guru. He was in demand to testify before legislatures and to create the legislative framework for charter cities. Unfortunately, he never created the institutional infrastructure to implement the idea, which effectively meant substantial challenges for the idea once he stepped away.

Honduras passed the most advanced innovative governance legislation, attracting a great deal of attention. At least two companies interested in innovative governance launched to take advantage of the legislation. However, much momentum was lost when the Supreme Court ruled the legislation unconstitutional.

The lesson is that long run success requires a diversity of approaches. A solid intellectual and organizational base can ensure the opportunities are taken advantage of once they arise. Further, embracing marginal changes, in addition to the radical ones, makes it possible to continually make progress.

The second lesson is to work within existing institutions. The Seasteading Institute received bad press early on as it was perceived as advocating an escape for the super-rich from existing institutions. The criticism was to an extent accurate, as the Seasteading Institute positioned itself as a mechanism to escape from politics.

Similarly, part of the reason for the limited success of the heterodox group is their positioning. Innovative governance requires the cooperation of a host country, or in the case of seasteading the international community. Innovative governance is a political argument, and needs to be understood as such.

A corollary to this point is the importance of credentialism. While the Silicon Valley startup mentality has been successful in the world of bytes, and aspects of it have successfully transitioned to the world of atoms, it has yet to see success in politics. Successfully engaging political institutions generally means meeting them on their terms, including their respect for credentials.

The third lesson is to create a single narrative. The heterodox group is the only group I’ve mentioned which has successfully been able to create an ongoing conversation, an important precursor to innovative governance. This success is in part due to the libertarian heritage of the heterodox group. Libertarians have experience creating successful counter-narratives to the dominant paradigm.

There is a great deal of untapped interest in innovative governance, however. In private conversations, primarily with people in the mainstream group, I have found high levels of residual interest in charter cities. In fact, several high profile people have advocated for similar ideas to help alleviate the refugee crisis, including George Soros and Gordon Brown.

This suggests there is an opportunity for thought leadership. Unifying the narrative can bring these disparate groups together, opening new possibilities. Of course, doing so requires reframing the discussion in language all the groups understand and respect.

One example of this is the cultural aspect of the heterodox group. Innovative governance has become cool, and there exist a set of people who appear to advocate for it as an aesthetic choice. However, the money and influence necessary for innovative governance to succeed will not be advanced by aesthetic choices. The innovative governance movement must develop our technical abilities.  

To this extent it is possible to learn from DC think tanks. They develop a wide range of policy expertise. When politicians who support their policies are elected, they are able to offer those politicians a menu of policy choices to implement. The innovative governance movement should follow their example.

Governance is changing, in terms of what is practical and what is acceptable. However, ensuring those changes are positive requires hard work and effective coordination. The Center for Innovative Governance Research hopes to provide some of that coordination, as well as research into the specifics of all forms of innovative governance zones.

Eden Hardcastle is an economist living in Washinton, DC. He has consulted and advised a half dozen new jurisdiction projects and his work has been translated into three languages.