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Charter Cities

6 min read

Part of Federalism and exit.

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Every episode (4)

Who argued it

Mark Lutter ×2 · Patri Friedman · Joe Quirk · Tom W. Bell

Special Economic Zones · Seasteading · Foot Voting · Competitive Governance · Public Choice Theory

Background

Definition and origins

Charter cities are developments that are different jurisdictions from the surrounding country: they have their own laws, their own courts, and their own police. Patri Friedman, whose firm Pronomos Capital invests in them, describes them as sovereign communities whose residents want to write their regulations locally. The business model for a land community generally involves holding a share of the land, with revenue from rent and taxes; if the economy grows, the developer captures a slice of newly created GDP Patri Friedman’s Plan to Accelerate the Free Cities of the Future (2022).

Mark Lutter traces the modern concept to Paul Romer, whom he calls a world-famous economist probably on the short list for a Nobel Prize. About nine years before the 2018 broadcast, Romer gave a TED talk on charter cities, a concept Lutter calls very similar to free cities. Romer had one opportunity in Madagascar and another in Honduras, but political challenges in both countries led him to pull out and the projects were not successful; Romer more or less walked away from the concept publicly, and much of the energy around it died with him The End of Nation-States? (2018).

The ZEDE program

Honduras is the one program Friedman describes as fully operating, though he notes the country changed its mind and shut the program down. In 2010, 2011, and 2012, Honduras changed its constitution to create a program called the RED or ZEDE program—zones of economic development. Friedman calls this the first modern version of a special economic zone, contrasting it with traditional zones that offer only shallow tax, tariff, or foreign-worker breaks Patri Friedman’s Plan to Accelerate the Free Cities of the Future (2022).

The ZEDE design drew on the Dubai International Financial Centre, where Dubai treated its laws and institutions like a startup treats its tech stack, copying British financial regulations in English and applying them to the zone. Under the Honduran program, a private developer applies to a regulator with the investment behind it, the industry it will bring, and the jobs it will create; regulation requires that jobs be at least 90% for Hondurans. The zones follow Honduran criminal law but can create their own commercial law with the regulator’s approval, all under Honduran sovereignty, its constitution, and its international treaties. Friedman says some projects his firm works with are considering similar autonomy, and others would let the zone write criminal as well as commercial law. The pitch is that companies uncomfortable with the Honduran regulatory system are comfortable with Delaware corporate law or similar rules, bringing in foreign investment, hospitals, factories, and schools Patri Friedman’s Plan to Accelerate the Free Cities of the Future (2022).

The case for competitive governance

Lutter’s argument rests on a distinction Bob Zadek draws in introducing him: libertarians need strong government in certain respects, because without a strong government that enforces a rule of law, enforces contract obligations, and creates a way to peaceably resolve disputes, the free market cannot function. Zadek frames the free city as federalism at the city level—try an idea, see if it works, and let it spread if it does The End of Nation-States? (2018).

Lutter agrees that some policies belong at the national level, such as national defense, while others are better done locally because they may be more responsive to citizens’ needs. He calls Africa and parts of Asia the most exciting area for charter cities because they are urbanizing extremely rapidly. In sub-Saharan Africa, the country ranking highest on the World Bank Doing Business Index ranks about 50; a charter city that ranked 40 would, in his telling, become a magnet for every entrepreneurial person on the continent and change the dialogue toward economic liberalization The End of Nation-States? (2018).

Lutter identifies the primary constraint as political, not mean-spiritedness, citing special interest groups that might oppose projects and the newness of the idea: Singapore and Hong Kong are seen as anomalies, and people in Africa do not necessarily see them as a model that can be replicated there. He recounts a friend at the World Bank describing a conversation about an African country that proposed creating a charter city, where the question was whether the country knew what a charter city was or was just using the right buzzwords. His organization’s answer is to build an ecosystem so the idea does not depend on a single person or country, bringing together Silicon Valley entrepreneurs—he estimates 10 to 20 percent of unicorn founders are interested in building a free city—economists, the humanitarian community, new city developers, financiers, and politicians The End of Nation-States? (2018).

Across episodes: Lutter and Friedman

The topic appears in three episodes. Mark Lutter, then a PhD candidate at George Mason University, discusses the Free City Movement and proprietary cities in 2016 Mark Lutter on Proprietary Cities (2016). In 2018, now founder and executive director of the Center for Innovative Governance Research, he discusses historical successes like Singapore and Shenzhen, the political challenges in Honduras, and urbanization in sub-Saharan Africa The End of Nation-States? (2018). In 2022, Patri Friedman describes the transition from seasteading to land-based charter cities and Pronomos Capital’s investment model Patri Friedman’s Plan to Accelerate the Free Cities of the Future (2022). The episodes show a shift in emphasis: Lutter speaks of building an ecosystem of interest groups so the idea survives its champions, while Friedman speaks as an investor in operating jurisdictions and reports that Honduras shut its program down.

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