We are happy to welcome you to the Charter Cities Podcast, where we highlight the different facets of building a charter city. Through this platform, we hope that listeners will not only gain a deep understanding of charter cities from urban planning to politics and finance but also the necessary steps that it takes to build them. In this episode, we do things a bit differently, with Mark Lutter, founder of Charter Cities Institute, and host of the podcast getting put in the hot seat. His CCI colleague, Tamara Winter, interviews him on a range of topics, both directly and not so directly, related to charter cities.We learn more about the mission of CCI and why Mark believes that charter cities are a good model for economic development. Links mentioned in this episode can be found below the transcript.
Transcript (edited for readability):
Mark: Hello and welcome to the Charter Cities Podcast. I’m your host, Mark Lutter, the Founder and Executive Director of the Charter Cities Institute. On the Charter Cities Podcast, we illuminate the various aspects of building a charter city. From governance to urban planning, politics to finance, we hope listeners to the Charter Cities Podcast will come away with a deep understanding of charter cities, as well as the steps necessary to build them.
You can subscribe and learn more about charter cities at chartercitiesinstitute.org. Follow us on social media, @CCIdotCity on Twitter and Charter Cities Institute on Facebook. Thank you for listening.
For the first Charter Cities Podcast, we’re going to be doing something a little bit different. My colleague, Tamara Winter will be interviewing me.
Tamara: Welcome to the Show, Mark.
Mark: Thanks for having me.
Tamara: Paul Romer tried to do charter cities. He has a Nobel Prize in economics of course and he wasn’t really able to get traction for charter cities, so why will this attempt be different?
Mark: Paul Romer is obviously a genius. I think there’s a lot to learn from what he did, and we can take those lessons and be a little bit more successful. So, there are two key differences in our approach. First, Paul Romer was advocating using an external foreign country to act as the guarantor. For example, Canada would come in and administer a charter city in Haiti, or in Honduras. That has echoes of neocolonialism that makes it difficult to get political buy in.
Second, what we’re doing is working with people that are building new cities. Rather than taking this starting from scratch approach, we’re trying to go the path of least resistance to work with people who are already building new cities and then implement these reforms. It’s a little bit more of an incremental approach to build up momentum.
What we’re seeing is that our approach is already paying dividends. I think there’s a lot of credit to Paul and his coming up with this idea. I think that our strategy already has proof in that we have solid traction. I’m quite optimistic going forward.
Tamara: We have debates in the office pretty often about what kinds of industries charter cities should pursue. So, between manufacturing and services in particular, is there a reason to prefer one over the other?
Mark: It depends on what the goal of the charter city is and what the target resident population is. For example, one of the projects were working with in Zambia, Nkwashi, is developing a service sector. They are building a university and they are trying to target jobs that have relatively high human capital, primarily tech jobs, because the remote work market is exploding.
But I’m relatively skeptical of that model to scale. A service sector approach can work if you have a city with 100,000 people. It might work with several cities of 100,000 people. However, if you consider where most of the poverty alleviation has happened in the last 30, 40, 50 years, it’s occurred with industrialization. Starting with things textile manufacturing and going to bicycles and cars, etc, to move up the supply chain allows for massive employment. For example, San Francisco, it’s less than 10% of the population of San Francisco works in tech and that’s a tech city.
So, if you just think about the total employment that these high value add service sector jobs provide, they don’t provide this really wide scale of employment that makes it difficult to scale to have this really big impact if we’re talking about raising tens of millions of people out of poverty.
Tamara: Just a question about special economic zones. We’re often asked, how are charter cities different from special economic zones? Aside from of course the name, the literature on special economic zones is pretty mixed and there are lots of failed special economic zones of course. Why will charter cities be different?
Mark: Charter cities are a subset of special economic zones. Special economic zones say, “Okay, a country’s national business laws don’t apply – some percentage of them don’t apply in this area.” It might be taxes, it might be things like business registry, it might be imports or exports.
What we say is, “Okay, rather than doing this piecemeal approach, why not start from scratch and really blow everything up and build a new institutional infrastructure?” Create different labor, different taxes, different dispute resolution, devolving this power to the city level of authority.
Rather than saying, “Okay, this is what labor law is,” say, “Look, we can probably get labor law right. But this is a city, so there are going to be changes over time,” and you need to be able to respond quickly without going to permission from the national government, because the conditions on the ground are going to change very rapidly.
Third, charter cities are cities. They have residential, commercial, industrial, etc, the necessary elements for a city and sustained economic growth. While there are very successful industrial parks, they typically aren’t sufficient to spur sustained growth on their own, because there’s all of these backward linkages that might not be in the park, because you also need residential. Cities are the smallest political unit that can have sustained economic growth.
You also asked about the fact that many special economic zones have not been successful. We’re trying to learn from those successes and failures. Many special economic zones are politically motivated. Political decisions go into site selection and business selection.
For example, we visited a special economic zone in Zambia. The special economic zone had great roads, but few businesses were using it because the electricity wasn’t reliable.
We’re partnering with new city developments that are privately led, because we believe that the incentive mechanism, makes for better site selection, better target industries, and better identification of legal reforms necessary to foster economic development.
We can also consider Shenzhen, a special economic zone, as having important charter city characteristics. It started as 320 square kilometers. It did have a lot of power devolved to it. Learning from Shenzhen and other successes, we think we can really create a replicable model that can help jump-start growth and generate economic development.
Tamara: Dubai became successful in part because it capitalized on the mistakes of its neighbors. For example, when Persia began taxing merchants at their ports, Dubai responded quickly and established itself as a free port. This strategy seems somewhat risky. If charter cities all engage in regulatory arbitrage, won’t this just lead to a race to the bottom?
Mark: One, it depends on what margins the regulatory arbitrage is. If this regulatory arbitrage improves production, if it improves the productivity of people working there, then that’s probably good. If we think, “Okay, is a charter city in Nigeria and a charter city in Zambia both going to create better labor law, is that a race to the bottom, or is that attracting more investment and creating more jobs?”
There is an important point there in some regulatory arbitrage is a race to the bottom. One example is tax havens. There are some tax havens, a few more might be able to attract investment, create jobs, generate wealth, but that isn’t really necessarily positive sum for the world.
The Charter Cities Institute focuses on governance aspects that are positive for the whole world. What are the sustainable development practices that can lead to these general outcomes that aren’t taking a fixed pie, but really enlarging the pie for everybody?
Tamara: Yeah. At CCI, we often refer to Singapore, Hong Kong, Dubai and Shenzhen as proto charter cities. The quality of governance in each of these cities laid the foundation for tremendous economic growth. A simpler explanation might just be that they’re all entrepots. What do you think?
Mark: I think that’s an important point. There’s been a trend at least in part of the charter cities, competitive governance, space to think that governance is all that matters. You can go in the middle of the Pacific Ocean and you can build a successful little city. As long you have good rules, everything will work out.
That approach leaves out several important considerations. What we try to do is think about, “Okay, where are there population increases? Where is there urbanization happening? Where are these trade routes shifting to?” There’s a lot of trade, for example, like shifting around the Horn of Africa. There are several new ports being built on the horn of Africa.
Building into these larger geopolitical trends, I think is essential for charter cities, developers and entrepreneurs alike, to think about how these patterns are changing and to take advantage of them. Governance is important, but so is infrastructure, so is urban planning, so is a site selection. While governance is our specialty, we’re building out our capacity to really contribute to the conversation on site selection, on urban planning, on all of these other aspects that really make up the holistic approach of what it means to build a new city.
Tamara: Does that suggest then though that a successful charter city couldn’t be built, say in a landlocked area?
Mark: Oh, a charter city definitely could be built in a landlocked area. A successful charter city could not be built in for example, like Antarctica. In a landlocked area, sure. If we’re looking at for example, Rwanda, I’ve spoken with advisors to the government there who tell me, “Look, we don’t need a charter city. If there is a good reform, we’ll just pass it.” The population is under 10 million, so it can be thought of as a large city and they’re being very successful.
Ethiopia is also being very successful. They have quite successful industrial parks, which have charter city-esque elements. Switzerland is quite successful. Having access to trade routes is obviously important, but it is by no means necessary for economic development.
Tamara: You used to have a habit of reading a book before each trip to a new country, that was either about the country itself, or by a native author. Can you tell me what some of your favorites were?
Mark: One of my favorites is a Kazakh book called The Day Lasts More than a Hundred Years by, and I’m going to probably butcher the author’s name, Chinghiz Aitmatov. It’s fascinating, because it was written during Soviet times. Kazakhstan has this unique history. Kazakhs are steppe people, they’re nomadic. It’s a Muslim culture and they’re effectively conquered by the Soviet Union. It was actually one of the worst genocides in recent memory on par with Holodomor, in terms of the percentage with the Kazakh population that was killed.
The novel is quite interesting, because it juxtaposes modern Soviet power compared to old nomadic practices and the people who are torn between the two worlds with this really interesting sci-fi backdrop that never really fully made sense in the context of the story. Aliens were contacted. It really had this scene – here’s this far-off future that’s being forcefully imposed, combined with this longing for this old way of living that was slowly dying out. It was really moving.
Another book that I quite enjoyed, I think it’s The Dance of the Jakaranda, which is about Kenya. It’s about a British guy who basically, he’s one of the colonizers, eventually becoming governor. However, he comes to power in part by these just horrific acts of violence. He views himself as one of the architects of Kenya, while there’s these echoes of these atrocities that he’s committed that in the end come back to really haunt him.
Tamara: We’ll leave those in the show notes then, because people might be interested in reading those.
What would CCI do with say, a $100 million? For anyone who’s listening to this, you can in fact give us a $100 million.
Mark: With $100 million we would build a city. When we started, we wanted to make the charter cities movement sustainable. We had seen Paul Romer, as well as a number of charter cities companies in Honduras, fail to achieve progress. Not only that, there was little sustained momentum.
Our goal was to bring together people who were interested in charter cities and get a sustainable conversation going that could be much more broad-based on a single person, or a single country. In over the last few months, we’ve realized that this has been successful, so we’ve begun to think about what are the next steps? We see ourselves as really building out expertise necessary for charter cities. Currently, we’re focusing on governance. Later this year, we’d like to focus a little bit more about the urban planning and the infrastructure.
With the $100 million, we would ramp up our current activities, start meeting with presidents, start identifying site selection and really rolling up our sleeves and start hopefully moving dirt on some of these projects.
Tamara: That’s awesome. Okay, so you often joke that you are descended from a distinguished line of bureaucrats. What has having parents in the federal bureaucracy taught you about governance?
Mark: Hopefully they’re not listening to this, though I think they’ve heard me make this joke before. I grew up in Bethesda. At one point and maybe in middle school, I asked my parents if everybody becomes a lawyer when they grow up, all of my friend’s parents were lawyers, though mine weren’t.
I grew up in this idyllic era of the high in the 90s of the post-Cold War we could do anything, where there was this belief in this technocratic bureaucracy that would be able to make things better. The last few years, that narrative and belief has been shattered.
I get into discussions with my dad quite frequently; my mom sometimes, but my dad a bit more frequently. He still has this belief in technocratic solutions like, “No, you can’t do that. That’s not in the statute.” I’m just like, “Well ultimately, it’s about power and that power structure is fundamentally changing.” This idea that you’re going to follow a statute is embedded in all of these institutional norms that are being dissolved around us as we speak.
It’s that juxtaposition of to a certain extent, coming from this old world, with this old set of how things are done, but also seeing the rapid changes and I think understanding how to react and what might be next has given me a little bit of a unique vantage point in thinking about American governance and social organization and order more broadly.
Tamara: You’re not just descended from a long line of bureaucrats, but also a long line of particularly Dutch bureaucrats. We in the office talked a lot about the Dutch contribution to global economic history, but particularly the fine contours of Dutch economic history. How does being Dutch, if you heavily identify as such, influenced the way that you think about governance and the way that you think about building new cities?
Mark: Sure. I don’t identify strongly as Dutch. I’m Dutch to the same extent that most Americans have a grandfather or a grandparent from the country and then identify with that country, because sort of American history on some margins isn’t that strong. I’ve visited the Netherlands three times. It is the strongest non-American part of my culture that identify with, but I don’t speak a word of Dutch.
That being said, I do think that there are these cultural strains that do I think influence behavior. I sometimes joke that people, at least for myself, if you think about the Dutch, they have this very tolerant, very cosmopolitan perspective. A lot of my political beliefs are to a certain extent, these extended rationalizations of these beliefs that the Dutch people have built up over centuries.
Then just also, just a plug for why the Dutch are great and underappreciated, Tammy is rolling her eyes right now, but the Dutch created the modern world. They created the joint stock corporation. They pioneered modern international trade. They conquered the English, which led to the Glorious Revolution, which is typically identified as one of the turning points that created the net, sort of set the institutional stage for the Industrial Revolution.
The English don’t like to admit that they were invaded by the Dutch, because William of Orange was third in line for the throne. He took an army and landed on their shores and marched in and declared himself king. Yes, unfortunately, English like the Normans weren’t the last time you were beaten on your home soil, but we’ll still be friends, because now you I guess have subsequently had a slightly higher –
Tamara: I guess, we have to hope none of our British friends listen to this podcast.
Mark: Yes.
Tamara: Industrial policy is having a moment. Dani Rodrik is one among many who long argued that industrial policy is key to development. Should charter cities then pursue an industrial policy?
Mark: Yes. First, I think it’s useful to define industrial policy. We can think of industrial policy as a government taking specific actions to make it more attractive for certain businesses and certain types of industries to locate there.
If we consider a set of industries, some have positive spillover effects, and some have negative spillover effects. For example, resource extraction. Resource extraction is useful, it does produce value. However, there tend to be limited positive spillover effects. There’s a lot of resource extraction occurring in Africa, where, for example, a Canadian mining conglomerate comes in, sets up a mine, mines the resources, ships it to the US, to Canada to be processed and then used in our phones and in our laptops, making our lives better. The spillover effects with resource extraction, however, tend to be limited. There are more taxes and employment, but it is rarely transformative, having this broad-based social transformation that leads to economic development.
We can compare resource extraction to manufacturing, that tends to create knowledge and is able to scale in a way that resource extraction often is unable to scale.
If you’re thinking about a charter city, it’s important to think about what industries are possible in a given area? What is being produced? What processing might take place? What talent exists? You need to think about that. You also need to think about what are these positive spillovers? You don’t want to build a charter city and do textile manufacturing, then 30 years later, everybody is still working for very low wages in textile manufacturing.
Textile manufacturing is an important step on the ladder of development, but it is ultimately only one of the early rungs. Thinking about what industries to target, how to stage development, knowledge spillovers and linkages to the regional economy is crucial for generating transformative economic development.
Tamara: Your life’s mission is to see the creation of new well-governed cities that catalyze economic growth. That feels fair, right?
Mark: Yup.
Tamara: There is already a country that exists that it’s pretty good at building new high-state capacity cities and that’s China. If you’re interested in seeing new cities being built all over the world that are high-state capacity, that catalyze growth, why not just hope that China’s Belt and Road initiatives, which already has global partners all over the world is successful?
Mark: I think we should hope it’s successful. China is one of the greatest humanitarian miracles in the post-war era. They’ve lifted about 800 million people out of poverty in a strategy of special economic zones combined with urbanization, which is very analogous to how we think about charter cities.
That being said, while they’ve been quite successful on the economic development front, they’ve been a little bit less successful in the human rights front. It’s bad to throw millions of religious minorities into concentration camps. It’s bad to harvest the organs of religious minorities. Freedom of speech is good.
I think there’s one question of economic development and another question of values more broadly and how to think about humans flourishing.
On a slightly more particular level, while I do hope that the Belt and Road Initiative is successful, just in terms of bringing economic transformation to impoverished area, I’m perhaps a little bit skeptical. I’m not necessarily sure Belt and Road is financially sustainable. If you look at a slightly more detailed understanding of the structure of Belt and Road, it is not some top-down effort. China was doing a lot of these investments before Belt and Road was announced. Belt and Road is, to an extent, an ex-post-rationalization of an existing set of development strategies engaged by Chinese firms, both state-owned and private.
Second, China’s high savings rate has allowed them to undertake some of these massive infrastructure investments in China, betting that there would be the demand for them in several years. Most of the ghost cities are filled, because there was such rapid economic growth.
But in most of the areas that they’re investing in for Belt and Road, there is not the same degree of economic growth. The financial stability of many of these projects is probably not as high as would initially be believed. One way you would interpret it is they’re basically subsidizing infrastructure investments for Africa, for Asia, for parts of Latin America, which is probably net good, but not sustainable.
The third reason that I think charter cities are an important complement to this is to go back to the previous point of bringing American values, as well as the importance of governance. Most of the Belt and Road projects are infrastructure focused. Some of them are special economic zones. However, the broad-based reforms that can have explicit targets of integrating local populations of training people, of moving up the value chain is something that I haven’t seen in any particular Belt and Road project, and I think is really an important contribution to how we think about development.
Tamara: Honduras was supposed to be the test case for charter cities. It was the first and is still currently the only country with charter cities legislation on the books. You lived there for six months, to be closer to the action at the time. What do you think went wrong there?
Mark: A few things that happened. Just a quick recap, they invited Paul Romer in 2010 or 2011. He met with the president. They passed the legislation. Then they signed a memorandum of understanding with a private group. Paul Romer left, sending something for Tyler Cowen to post on Marginal Revolution about his reasons. Only a week or two after that, the Honduran Supreme Court ruled the law unconstitutional.
About a year later, or maybe nine months later, they passed similar legislation that was ruled constitutional by the Supreme Court. There’s been a handful of groups that have been down engaged in projects since. There are multiple reasons for the lack of success.
First, Honduras was coming out of a coup. There was a lot of political will for charter cities, but they didn’t set up the right institutional structures. One of the challenges with charter cities is that the countries which most need charter cities have institutional challenges, however, if they could have these institutional reforms, then they would already have implemented them.
There were governance challenges on the government side about setting up the Committee for the Adoption of Best Practices, the approval body, that was slowed down because of some internal conflicts and disagreements.
Then on the developer side, I think there were also challenges, because after Paul Romer left, there were a few groups that were interested, but just did not have the necessary experience in terms of building new cities, in terms of creating legal systems from scratch.
And so, while there was this level of excitement, there wasn’t this level of expertise and this knowledge about what it means to execute. With the government dysfunction, combined with the lack of capacity on the private side to execute, I think that really slowed it down. What we’re trying to do is really build some of that, at least private sector capacity to execute, so when these opportunities do arise, we can make sure that they’re taken advantage of.
Tamara: Yeah. Mark, you spend enough time in Africa now that you can answer this question with sincerity. Which African country has the best food? Of course, I am asking not as a Nigerian, although I remember I’m from Nigeria, so that’s a potential answer, but as an interested party. Again, I’m from Nigeria.
Mark: Zambian food. First, I’ll address the elephant in the room. Nigerian food is too hot. I don’t understand it. You take things, you cook them well and then you throw a lot of pepper on them until you can barely eat them.
Tamara: He’s referring to of course, the famous pepper soup. It’s literally pepper in soup.
Mark: Or pepper chicken. Half of your food is actually pepper.
Tamara: What I think is funny is that you often like to brag but you’re not like other people who grew up in Bethesda, Maryland. You guys can infer whatever you want from that. That you like spice. Then when you get spicy food, so I’m just confused. What is the truth?
Mark: Zambian food is great. We went to a local Zambian restaurant when we were there. Though our host really liked steak houses, but once we twisted his arm and we went to a local Zambian restaurant.
Tamara: What’s the flavor profile?
Mark: Very spicy. A little bit hot, but generally very flavorful.
Tamara: It’s interesting. They use a lot of things that we don’t really necessarily use in our cooking. For example, they use a lot of pumpkin all year round, as opposed to just saving that for a fall or something. I did like that.
Mark: It was good. Then I also tend to be a fan of Ethiopian food. It was quite interesting eating in Ethiopia after eating lots of Ethiopian food in the DC area –
Tamara: How’s it different?
Mark: The meat quality is lower in Ethiopia, but the flavors are bolder.
Tamara: Okay. I’ll remember that the next time I’m over there. Just back to charter cities, how exactly do you build a government from scratch? Who’s going to staff the administrative body, or bodies of a charter city? What are some semi-recent examples of new institutions being built from scratch?
Mark: This is something that we’ve been increasingly thinking about as some of our projects are getting traction and moving dirt. Assume a city with 1 million residents maybe 5% of the city is in the city government. That’s 5,000 people. Of that 5,000, maybe 10% of those are high-skilled, 500 people. You have people cleaning the streets, you don’t necessarily need a high level of education, but you do want a very talented, effective bureaucracy.
How do you identify, train, develop that bureaucracy that can effectively do that? If we look at recent examples of very successful development projects, places like Japan after World War II, places like Korea, one of the really striking stories is the effective bureaucracy that was developed. That was where all the smart kids go. They didn’t go into tech. They didn’t go into finance. They didn’t go into management consulting. They went into the Ministry of Industry or its equivalent.
One of the things we’re thinking about is, “Okay, how do we create this analogous thing?” How does this charter city attract the best and the brightest? All right, there’s probably a small number of expats who would be interested in senior administrative roles. Assume we’re thinking about a Nigerian charter city. Maybe some Nigerians who went to school in the US or Europe could be enticed back.
You can also recruit from universities. Unfortunately, Nigerian universities are generally not high-quality. More foreign students go to university in the Democratic Republic of Congo than they do in Nigeria. You can go to that talent pool, but that is probably not as deep as would be ideal. You can go to existing Nigerian governments, but they’ve already been inculcated in this bureaucracy that isn’t exactly as effective as it could be. There’s a risk of bringing this stagnant bureaucratic culture to what you really want to be this new dynamic city.
I think what’s going to end up happening is the establishment of training mechanisms for this generation of administrators to get them the skills that they need. The internal discussions in the office have largely been – this is a three, maybe four-year project is to actually create a university, a master’s program that’s just like a year and a half, online-only that can really start training this generation of administrators.
Training 500 people is not trivial, and that’s only one city. Multiply this by a number of cities and getting really this talent pool that just doesn’t exist in the world today, you need to start thinking about creating the pipelines that allow to do it, that allow you to be successful.
Tamara: Okay, I’m going to throw out a few names and you can tell me if they would have been good charter city founders. Napoleon.
Mark: Ooh, great at founding, bad at running. Napoleon is fascinating. I’m going to fanboy for a little bit here, because –
Tamara: Go for it.
Mark: He’s like a tech founder. He’s pretty socially awkward, but a genius and would just go and ask questions. When he arrived in Italy during his first tour as a general, he started by asking really stupid questions that betrayed a complete lack of understanding. The officer who was reporting to him was answering these questions and was like, “They sent me an idiot. He doesn’t know anything.” Then after five hours, the guy who was Napoleon was basically interviewing was just like, “Oh, wait, in five hours, Napoleon has now learned more about Italy than anybody else I’ve spoken to over the last year.” He was adept at quickly getting information.
Second, he’s a product of the Enlightenment. His primary support base was the petite bourgeoisie. He’s quite interested in new ideas in creating university centers of knowledge and breaking down these old hierarchical structures. For example, he conquers Malta and he stays in Malta for week. In that week, he destroys the feudal system, he sets up universities that still exists today. He creates a newspaper. He implements all of these great reforms. He’s quite good at this institution building stage.
Then if you look at later in his career, he doesn’t really understand economics. He’s relatively anti-free trade. He starts imposing price controls. A charitable interpretation is that it’s part of his political strategy and necessary to keep his political base happy. An uncharitable interpretation is that he doesn’t understand economics.
While Napoleon is very good at this institutional building phase, making sure you get the policies right is quite important. I’m not sure I would per se trust him to get the policies right.
Tamara: Booker T. Washington.
Mark: I think he would build a great charter city. If we look at what his life entailed that was charter city-esque on some margins. What he did was he realized he was living at turn-of-the-century US in the apartheid south where African Americans were routinely subject to brutal suppression and horrors. He said, “Okay. Well, how do we make lives better? Let’s just do it ourselves.”
He founded the Tuskegee Institute, which is still in operation today and really served as a fountain for African-American intellectualism in the first half of the 20th century. What happened was when he founded it, the first generation of students built the school themselves. They raised the buildings. After they did that, they went home to their communities and really took what they learned and what they brought to how to create these models for society, how to generate economic development that were successful in terms of really having these positive second-order effects. I see that as key. How do you get the initial economy started and Booker T. definitely showed how it would be possible.
Tamara: Catherine the Great.
Mark: Before talking about Catherine the Great, her predecessor, Peter the Great founded St. Petersburg, which, while not a charter city per se, did contain many similar elements.
Peter the Great realized, “Okay, Russia’s falling behind Europe. Let’s figure out how we can make Russia better, how we can make these things work.” He goes and spends several years shipbuilding in the Netherlands. It must have been quite a sight, because he was 6”6’, 6”7’, and so you’ve got a 6”6’, 6”7’ Russian guy in basically medieval Amsterdam, learning how to build ships, but it was a relatively cosmopolitan society at that time.
He goes, he takes those lessons and decides, “Okay, Russia needs to be more European-facing.” He says, “Okay, we’re going to build a new city here”, founding St. Petersburg. He moves the nobility there. Catherine the Great basically organizes what’s effectively a coup over her husband and takes power. One, this is impressive. This is an old society, there’s a lot of built-in sexism and she is able to concentrate and wield authority in a manner that allows her to be a very well-known, successful female ruler in that time.
Then, she continues Peter the Great’s policies of opening up to the west. She does found a number of towns and villages and really continues this broad urbanization, broad set of reforms that I think do translate well into thinking about charter cities and founding them.
Tamara: My personal favorite, Walt Disney. Answer carefully.
Mark: Bad.
Tamara: Well, it’s been great working with you and I hope you have a great day.
Mark: Let me explain. He tried to found a charter city and it was a bad city.
Tamara: I want to correct the historical record here. Walt died three months after unveiling the plans for Epcot. I think it’s premature to say, Walt would have been a bad charter city founder. Maybe I’m just saying that, because Disney World of course has the US’s ninth largest transit system by ridership, because it is truly the happiest place on earth, because the architecture is more inspiring than anything that was built in DC in the same time period. Again, this is your interview, so you tell us.
Mark: Disney World is fantastic, but Disney World is an amusement park. Disney World is in some ways, has a lot of similarities with charter cities. Disney created a bunch of shell companies to buy all the land, he got reforms passed at the Florida level, that basically created a single water district, a single environmental district. Some licensing and regulations are removed for Disney World, things like fire regulations. Surprisingly, they have not really had a lot of people die in a fire, because if they did, they would lose a lot of money.
Disney World does show this mechanism of evolving authority and market mechanisms being reasonably effective. He also created Celebration, Florida, which was supposed to be this community of the future. However, it effectively just turned into an above average suburb. Maybe it’s a nice place to live, but there weren’t really these deep governance reforms in the community.
It wasn’t the showcase of maybe he just got the timing wrong with the showcase of envisioning the future. It didn’t really pan out. Maybe it was the execution, because he wasn’t alive to really see it through. There was an example of him founding something that at least and maybe it’s just I’m picking a fight, because it’s fun, that didn’t become as successful as for example, St. Petersburg.
Tamara: Moving on, what are the current finding constraints for charter cities and how is this likely to change over the next decade?
Mark: There is several current constraints. I would say the number one current constraint is politics. It’s getting political buy-in to make these deep types of reforms that are necessary for charter cities. We’re currently working in conversations with a number of projects. That’s something that often comes up. Some of the more advanced projects, there’s other constraints. One of them is funding. These are new projects that don’t really fit in any typical basket.
We’ve started thinking about potentially doing early-stage funding for the master planning land acquisition, via Silicon Valley venture capital. The challenge is a lot of these projects are in Africa and they’re real estate related, so it doesn’t exactly fit the venture capital model. For longer term and larger investment, there are African development banks, they do more traditional infrastructure. These are a little bit more real estate, but also a little bit more city-like. Thinking about charter cities not just as these large real estate projects, but as cities that do continuously generate revenue. So, financing is another challenge.
A third challenge is talent. This are talent needs on both on the entrepreneurial level, of people who can build the cities themselves as well as the administrative side. Recently over the last six months, we’ve seen a decent increase in this talent, but it’s still lacking to some extent. Then also, just the talent for city administration. How do you hire the right people? How do you think about governance? How do you create labor law and administer it?
There aren’t really consultants who can do this. You can hire McKinsey, pay them a lot of money, but they don’t really know what they’re doing, and you have to – there’s a little bit of a principal agent problem in terms of giving really effective oversight. Those capacities need to be developed and they’re not really being developed right now. And so, we’re trying to tackle that talent margin on some level in terms of education and in terms of setting up some processes to identify people who might be effective administrators.
Tamara: The US is generally well-governed, but you’ve repeatedly noted that US institutions are in decline and this constrains innovation. Isn’t there a case to be made for charter cities in the US?
Mark: No. We should do charter cities in Canada instead.
Tamara: Okay. Explain that one. I will only note here that Google did of course, I guess Alphabet tried to do this with Sidewalk Labs and we know how that story went. Why Canada?
Mark: I’m only half joking. One, if you look at US just population trends, building charter cities are very capital intensive. US population is growing relatively slowly. There are a few areas where there are sufficient regulatory constraints that might make sense. For example, Y Combinator looked at doing a city outside of San Francisco. Scott Alexander has also blogged about this, where just because the housing constraints are so high, it might make sense to do something new.
There are several new city projects that are scouting rural areas. I’m generally a little bit skeptical of the demographics. You could create a community for 50,000, a 100,000 people. Ultimately, you’re not really going to build a new city from scratch. Even a 100,000-person new community are pushing it.
Second, while institutions are in decline, but it’s quite difficult I think to get the level of political buy-in to devolve authority. That might change over the next 10 years if there are some real big shocks. Right now, going to ask Trump, or whoever the Democratic nominee and maybe president is and say, “Hey, devolve labor law and tax administration to a city level for this new system” isn’t going to work.
I say Canada, because I think one of the things to think about in city construction is how are trade routes going to change? If we think about global warming, what’s going to happen is Siberia and the Canadian tundra are going to open up and this is going to mean two things; one, more resource extraction. There’s a lot of minerals which will have the price point for extraction that will become feasible once the temperature is a little bit less. Second is agriculture. There’s a lot of fields that could become productive in terms of grain, in terms of other types of agriculture. These changing trade routes will encourage investment.
The second reason to prefer Canada is that Canada does have healthier demographics than the US. Their immigration is better. Their birth rate I think is a little bit better. They’re actually adding population to the extent when it could fill up a medium-sized city.
Third, Canada does have I think a version with America like federalism and some margins is a little bit stronger than federalism. This federalism allows for more political openness to political decentralization.
Tamara: Explain your decision to found the Charter Cities Institute, then Center for Innovative Governance Research, as opposed to just joining an institute that was working on similar issues.
Mark: There weren’t really any institutes working on similar issues and nobody would hire me.
Tamara: With the non-pithy answer.
Mark: There was a tweet going around and I forget who, but five or six months ago, that was some founders found a company because they have a great idea. Other people found a company, because they need to prove to themselves that they can actually do it. I fall in the latter category to a certain extent. There were some discussions happening around charter cities, but I felt them lacking a bit. I would go to conferences and the same five people would be talking about the same two projects over five years.
I realized the conversation could be broadened. First I wrote a handful the papers trying to address this saying like. Then I realized that the papers just aren’t enough. If you really want to change something, you have to do it yourself. It was that, combined with just realizing that this is a very interesting space that none of the jobs that were presenting themselves to me would have made me happy.
The fact that most existing institutions just don’t – still don’t get what charter cities are. While the conversation has progressed, most mainstream think tanks and organizations still aren’t interested in charter cities. Having an independent institute has allowed us to change the conversation in much more forceful manner, than me being at some random think-tank.
Tamara: Which of CCI’s accomplishments are you the most proud of?
Mark: I think what we’ve effectively done is change the conversation in the competitive governance space. Our focus on emerging markets and a more incremental approach to change have been followed. Another thing I’m proud of is expanding the conversation around charter cities.
In Zambia, with Mwiya Musokotwane who’s building Nkwashi, we’re working with them to help understand what governance reforms might be valuable for Nkwashi and helping to implement them. Or the winner of the Charter Cities Business Plan Contest, Enyimba Economic City, they were interested in governance reforms and now we’ve been working relatively closely with figuring out how to implement the reforms.
I still think we’re in the early days. I’m proud of how we’ve changed the conversation and planted some of these seeds and have these ongoing conversations. I think the really big winds are going to come over the next year, or the next two, or three years once we start seeing some of the projects that we’re working with begin to bear fruit, begin to actually create these new administrative structures, start really moving dirt and attracting investment and that’s what I’m most looking forward to.
Tamara: So of course, you and I go back a little farther than me coming to work at the institute. When we first ran into each other at that Students for Liberty conference a year and a half ago, again after some years of not seeing each other, I remember you telling me about this institute that you were planning on building. It was going to be charter cities, but also pushing the technological frontier in the US. Then some months later, you all of a sudden had a partner charter city and the money to hire me. That really largely became possible, because of two key relationships; one with Mwiya Musokotwane, who of course is the CEO of Thebe Investment Management, which is building Nkwashi, and also, Tyler Cowen who that first EV grant. Can you tell me a little bit about those key relationships and how those decisions came into fruition?
Mark: A note of clarification, I in fact did not have enough money to hire you. That was lucky to come in soon. I think it was your third week on the job when we went to Zambia and I remember not having enough money in the bank to make payroll on the way back and hoping that the cheques were in the mail.
Tamara: This is not funny, but it is incredible in hindsight. I mean, it’s a little funny.
Mark: It’s funny. Tyler, he was on my dissertation committee. I actually never I took a class with him, which is one of my regrets in graduate school. When I started e-mailing him asking for advice and he was like, “Yeah, this probably isn’t going to work.” I was like, “Okay. Yes. Sure. Whatever. Everybody tells me that. I’m going to do it anyway.”
Then a year later, I mean, he helps get me a few introductions in Silicon Valley, which get me a few donations. I’m like, “Okay.” He’s skeptical, but willing to step out. He then tells me about what becomes Emergent Ventures, and he tells me like, “Just write me the proposal and sent directly to me. Don’t do the application process.” I sent it to him, and he gives me a grant as one of the first winners.
I think, he still told me like, “This is probably not going to work.” Two months ago or so, I had a dinner with him and Mwiya Musokotwane as well, and was chatting with Tyler and he was like, “Okay. Yeah, I think this is very interesting. But Mark, not all of your projects are going to work.” I was like, “Hey, this is an improvement. It went from this is probably not going to work to not all of your projects are going to work.” It was quite satisfying to see that.
I think his approach of a little bit more like, I don’t know what to call it, venture style philanthropy to bet on the high-impact, but early stage, high-risk projects, as well as the degree of mentorship has been quite supportive.
Mwiya Musokotwane who’s building in Nkwashi, he reached out to me almost three years ago now. He sent me a message on Facebook and he was like, “Hey, I am a Zambian Prince and I’m building a city in Zambia.” I was like, “Huh. What is this?” He didn’t actually say he was Zambian Prince. I’m joking.
Tamara: Thank you for explaining the joke.
Mark: You’re welcome. I had been reached out to by several new city projects at that point. It wasn’t a complete surprise, but a lot of them were basically not real. People had these crazy ideas, but his seemed quite real. At the time, I was working for a different firm, we set up a call with them, tried to set up a consulting relationship, but it didn’t really pan out. I was like, “Oh, this is super cool. This guy is building a new city.”
When I started the institute, I got back in touch with him. I asked him to be on the board of advisors, started talking about charter cities. He’s come to speak at a number of our events. He came to our first event in San Francisco a year ago, October. He’s flying from Zambia and we didn’t even offer to comp his ticket and I was like, “Okay, do you want to improve governance?” He was like, “Yeah, but I don’t really know how.” I was like, “Okay, we can help.”
Since then, it’s become great because I think we see eye to eye in a lot of issues and he does have this really big expansive vision and is executing very competently. His presence has also helped folks see that we’re doing more than just talking, but working with folks who are moving dirt.
Tamara: Yeah. It’s incredible to see Nkwashi’s progress just from when we first saw it in December of 2018 to now and it’s incredible that people are moving in there. Mwiya, if you’re listening to this, we can’t wait to see how it keeps growing.
Okay, so I’ve asked you a lot of questions about charter cities, but I want to just pivot as they say and just ask you a couple of random questions. We’ll come back to charter cities just at the very end. I’m looking at – we just talked about industrial policy and I’m looking at the US. I think, “Okay, we have huge farm subsidies, we can’t get rid of the Jones Act, we subsidize people living in floodplains. If we can’t solve such obvious infrastructure challenges, why should we trust the state with industrial policy?”
Mark: We shouldn’t. I think industrial policy can be good, but you need to think about this with public choice concerns, such as special interest groups tend to have heavy influence on decision-making and integrate with this later stage economy like the US. I think Mancur Olson’s Rise and Decline of Nations, where everything gets jammed up because all the rents are being eaten up is a good conceptual framework.
If you look at the very successful instances of industrial policy, largely in East Asia, what happened was extremely rapid growth with extremely close collaboration between government and industries with government effectively having the upper hand and being able to force fire executives, force industries to change if they so desired.
Right now, the political institutions in the US do not allow this. For me, while I think industrial policy is still potentially good for the US, I would frame it more in terms of state capacity. Before embarking on “Okay, these are the specific actions that the government should take,” I would think about, “Okay, what institutional capacity do we need to be able to undertake these actions?”
For a more specific analogy, we can think about okay, let’s land a man on the moon in five years. Is NASA today capable of doing that? Before thinking about the goal, I would think about the institutional capacity and see what has gone wrong with why NASA is unable to accomplish some of these things. I think that framing is useful for the broader political discussion generally.
Tamara: What does Silicon Valley not understand?
Mark: Politics.
Tamara: Fair enough.
Mark: I think this is useful to discuss a little bit more. One of my friends has this saying, where Silicon Valley likes to think they’re above politics, but in fact, they’re below it. I think over the last few years, we’ve seen a very rapid learning curve, where they have realized that while they might not be interested in politics, politics is sure interested in them. They see Zuckerberg go present to congress and they get a little bit worried that congressmen are asking like, “Can you please fix my iPhone?”
I’m hoping that this knowledge continues to coalesce, because what we’re seeing is the existing elites, I think are largely out of touch and don’t have feedback loops. After the Iraq war, all the major supporters got promotions. I think Silicon Valley is good at building and that can on some margins be translated to institution building. I hope that they can think about and become more serious about that while realizing that political problems are not engineering problems and need a different approach and a different way of thinking about it.
Tamara: What’s the best book you’ve ever read that’s not related to charter cities?
Mark: Recently, one of the very good books I read was the Napoleon biography, which was fantastic. I think that’s probably the best biography I’ve read. Also looking at the bookshelf, The Three-Body Problem, which is fantastic. Then maybe an underrated book that not many people have heard of is The Art of Community, which is by Spencer MacCallum.
Tamara: I want to go back to The Three-Body Problem. How does Chinese art and literature reflect their conception of the world and not just art and literature, but really art literature movies, Chinese culture broadly?
Mark: Art is reflective of the people who are creating it. Oftentimes, China has seen tremendous material progress over the last 40 years. For example, one of my buddies from a summer camp growing up, he married a woman from rural China. It was really fascinating, because we were back at this beach and going sailing on a pretty windy day and she’s like, “Oh, I want to go sailing.” “Can you swim?” “No, but I want to go sailing.”
There’s this just basic optimism, where I think most Americans are like, “Okay, you’re 20-something, you don’t know how to swim, you want to go out on a pretty rough day, you just believe that’s possible.” This optimism has influenced Chinese art broadly. If we think about The Three-Body Problem, these are these big civilizational questions. Another book by the same author, I think it’s called Starship Earth, turns the earth into a spaceship by building a bunch of giant engines on it, because the sun is blowing up and they need to escape to another solar system.
Their literature thinks in mechanistic terms, tackling these huge challenges. The US for example, has not seen that type of material progress. Most of our science fiction is, “What if computers got much more computery?” Just getting really in this techno-dystopian thing, where there isn’t really material progress, there’s just the expansion of electronics into every sphere of our life, which feeds into a little bit of this cultural complacency and unwillingness to push frontiers.
Tamara: Which historical era is most analogous to this one?
Mark: I think there’s a lot to learn from different eras of history. One of my favorite podcasts is Revolutions with Mike Duncan. It’s quite interesting, because he goes through all these revolutions. For example, the French Revolution, the Haitian Revolution, the American Revolution, the revolutions of 1848. Within all of these different revolutions, you really see this era of social change, where basically what you have is the emergence of the petite bourgeoisie, which because they’re becoming more productive, because they’re gaining wealth, you see all of these old social institutions break down on different margins, sometimes quietly and sometimes very violently. I think what we’re seeing now is this change in the factors of production that is leading to this change in social organization.
Another era that I think is somewhat maybe overplayed, but I still think is quite important is looking at Rome, particularly as it transitioned from the Roman Republic to the Roman Empire. The US is in a similar transition. If we think moving forward a hundred years, what is the relationship between congress and the presidential branch? Congress is likely to become a vestigial organ, with power is increasingly concentrated in the presidency. I do think there are some important parallels that can be drawn from Rome.
Tamara: You often think about the history of city-states and specifically the Hanseatic League, probably the greatest network of city-states that ever existed. If we look at what happened with the Hanseatic League, the Hanseatic League lost out to nation-states. Why should it be a model for governance today?
Mark: First, I guess a little bit more explanation on what the Hanseatic League is, it was founded in the 12th century in the Baltic region by a bunch of German traders. One of the first towns was called Lubeck. They developed this body of law called Lubeck Law. Then people related to those traders who went and founded a number of other cities that were often used a similar legal system. On some margins, it is a model for how the creation of a legal system with this urbanization process can lead to successful commerce and trade.
The Hanseatic League is quite interesting, because it’s an example of a non-contiguous, political unit. Though the political unit was never formalized, they did fight wars. They fought two wars with the Danish government force the Danes to open markets to trading and goods. They were able to raise armies. They were able to fight. They were able to coordinate somewhat effectively.
The Hanseatic League is a useful model in an era of rapid urbanization to think about how to create these new political units that allow for more commerce and trade. Over the long-term, I think there are obviously are some challenges. Charter cities are valuable, not as a political unit, but as a means to achieve economic outcomes.
They are not good because the city-state is the optimal social unit. If they are able to achieve those values in terms of advancing economic development and then they transition into different forms of governance, I don’t see that as necessarily a bad outcome.
Tamara: What does Harry and Megan leaving the monarchy have to do with state capacity? I’m dying to know.
Mark: This question might be dated by the time we – (how right my prediction was…)
Tamara: But I still want to know the answer.
Mark: I think it’s indicative of broad declines in state capacity that are happening. Because what they’re going for is the benefits of nobility as a lifestyle brand, getting invited to all the fun parties with none of the associated responsibilities. Instead of actually keeping up these old institutions, these old traditions, they just want to not have to fulfill this set of obligations, and this is part of the challenge.
We can consider citizenship as it emerged, which can be a broader analogy for institutions and institutional development. During the feudal era there wasn’t citizenship. Lords fought battles, but the people didn’t really care. Then the modern merchant class started gaining political power. With that power, they developed these new ideas of citizenship which really came to the first modern incarnation in the Netherlands, where being a citizen meant you had certain rights, but also certain responsibilities. It was generally universal.
Thinking about as this has developed, we still expect the benefits from the citizenship, but have lost a sense of these obligations, which have started to strain at some of the social structures. Harry and Megan leaving the monarchy is on some margin, an indication of this set of responsibility to these institutions that I think are crucial to maintaining the social order. These decisions very critically as we transition into a new era and decaying institutions and need to be rebuilt, or reconstructed.
Tamara: I’ve just got two questions to wrap-up. First, how has your thinking about how to establish charter cities evolved since CCI started working on the ground?
Mark: Yeah. I think it’s evolved a lot. Initially, I thought it would be easier to start conversations as a non-profit. That was wrong. It’s not easier, it’s harder. Talking with government officials, sometimes they’re a little bit suspicious. “You’re a non-profit. What do you want?”
Then also for example, I thought the international development community would be I thought once we were able to show them some progress and some – here, people are building new cities and there’s just been very little engagement. I’ve been a little bit frustrated with that.
I’ve been a little bit pleasantly surprised by the actual amount of engagement that we’ve gotten on the ground. I thought the first few years would be much more about building up expertise and knowledge, but in fact, it’s been much more heavily focused on traction than I expected, which is quite a good thing, but the general level of excitement that I expected to be able to generate in the national development community and the media more broadly has come much slower than I thought.
Tamara: Finally, how can listeners of this podcast get involved with charter cities?
Mark: One, you can subscribe to this podcast, the Charter Cities Podcast. You can follow us on Twitter @CCIdotCity. We’re on Facebook, Charter Cities Institute. Feel free to shoot me an e-mail. I’m generally willing to respond to questions.
Tamara: What’s your e-mail?
Mark: [email protected]. Being part of the conversation and figuring out exactly where your skill sets fit and what skill sets might be necessary to build to fit better. We’re really invested in building this community as a whole, and so we’d love to help you get more involved.
Tamara: Thank you so much for listening. You can also subscribe to our newsletter and that link is on our Twitter, so @CCIdotCity. We’re on Facebook at The Charter Cities Institute. We’re on LinkedIn as well. We are allegedly on Instagram.
Thanks so much for listening. Mark, thanks for being here.
Mark: Thank you for listening to the Charter Cities Podcast. For more information about this episode and our guest, to subscribe to the show, or to connect with the Charter Cities Institute, please visit chartercitiesinstitute.org. Follow us on social media @CCIdotCity on Twitter and Charter Cities Institute on Facebook. I’m your host, Mark Lutter and thank you for listening to the Charter Cities Podcast.
[END]
Links Mentioned in Today’s Episode:
City of Gold: Dubai and the Dream of Capitalism
The Day Lasts More than a Hundred Years
Catherine the Great: Portrait of a Woman
Walt Disney: The Triumph of the American Imagination
The Rise and Decline of Nations
