Charter Cities Podcast Episode 13: A Look Behind the Charter Cities Movement with Mark Lutter and Kurtis Lockhart
Transcript (edited for clarity):
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, @cci.city on Twitter and Charter Cities Institute on Facebook. Thank you for listening.
Kurtis: Hello. This is Kurtis Lockhart, Head of Research at The Charter Cities Institute. Today on the podcast, we're going to do something a little different. CCI has grown pretty rapidly recently from three of us in February to 10 of us as of this week. On top of the growth in the number of staff, our projects have also grown and matured, and this growth combines with a broader surge in interest in the charter city space more generally since the start of this year.
We thought we would pause to survey the space, as well as provide a high-level overview of charter cities as a concept and why we think charter cities is an idea, whose time has come. To help guide us through this discussion, we have CCI's Founder and Executive Director, Mark Lutter. Hi, Mark.
Mark: Hi, Kurtis.
Kurtis: Mark, before we dive into things, charter cities, why don't we just give a high-level definition of what charter cities means.
Mark: Sure. A charter city is a new city development that has a special jurisdiction that allows it to adopt a more competitive business environment. Charter cities are important, because over the long-term, governance, institutions determine economic outcomes. A lot of places that are urbanizing very rapidly, primarily in the global south and Africa and Asia do not have very good institutions, do not have very good governance. Charter cities are a mechanism that allows to improve governance for these new urban residents and allow for much more substantial economic growth and poverty alleviation over the next 30, 50, 100 years.
Kurtis: Can you delineate how charter cities are different than existing cities, or any local devolved power to current cities?
Mark: Sure. It depends on the country, but most countries have a national government, which typically has a set of laws and regulations which they control. The national government will do things like labor law, will have environmental regulations, will have banking law, will have the national government determine business registries as well. Then the city government, again this depends on the country, depends on the jurisdiction, but then there are some things that would be specifically reserved for the city government.
Might be things like policing, it might be things like education. Typically, the national government sets the laws and regulations which have the most impact on long-term economic development. How a charter city would be different is we can imagine a country where typically, the city would have, let's say, control over policing, as well as education. The typical things like traffic control, garbage collection, etc. That is one city in this country. That is the normal city.
Then the charter city would say, okay, now we will also have some authority that is typically reserved for the federal government. In addition to policing, education, garbage collection, etc., it also might have things like business registration. It might have things like labor law, might have environmental law, this broader cohort of governance powers that are devolved to the charter city that allow the charter city to create a more competitive business environment to attract investment, to create jobs, to spur entrepreneurship that can really set it on this long-term growth trajectory.
Kurtis: On this line, charter cities as an idea, it seems quite similar to special economic zones, which have been tested in other countries, most notably in China and elsewhere. How does charter cities, as an idea, differ from these special economic zones?
Mark: Most special economic zones tend to be relatively small. Their set of reforms are limited. They don't actually have any delineated governance authority. They just have a specific set of reforms that are passed by the federal level and they tend to be focused on a single industry. This means, while special economic zones can be effective for attracting investment, they're not sufficient for basically, this transformational process that will lead to long-run economic growth.
Basically, the city is the smallest unit that can really have sustained economic growth. A special economic zone, if we imagine there's 50 acres, they build an industrial park, they improve production, they create some good jobs, that's not going to really be transformative. The question is what happens in 10 years? What happens in 20 years? If you build a special economic zone that's an industrial park and 10 years it's the same special economic zone and the same industrial park, you're not really growing.
A city, a charter city, it has these four characteristics; one, it's city scale. It has addition to the industrial aspect, it has residential, it has commercial, it has services it has this broad economic base that is sufficient to spur long-term economic development. In addition to the size. Then second to the size, there is also the set of authority that it has. Most special economic zones, they take the country's laws as a given and then cut around the edges.
It might be slightly less taxes. It might be a one-stop shop. It might be no export, or no import duties. A charter city has a different framing. It says, okay, instead of taking the existing laws as a given, let's just start from scratch. Now of course in practice, you're never really going to start from scratch. You want to leave the constitution the same. You want to leave criminal law the same. You want to leave international treaties the same. Then depending on the strength of the different political factions, if there are very strong labor unions, you might not be able to change labor law very much for a charter city.
I think that framing is important, this idea of starting a new legal system from scratch. Instead of like most special economic zones, which is figuring out what reforms of the legal system can take place. Then the third part again is what authority, not what reforms exist, but what authority does the charter city have to make these reforms. In a special economic zone, what will happen is the government will often pass a law and then they will say, “All right, labor law is X in the country. It is Y in the special economic zone.” Then there's an administrative apparatus set up to enforce Y in the special economic zone.
The challenge is what if Y is wrong? What if the real labor law that should have been implemented was Z? Then, if the special economic zone is set up and they realize, “Okay, Y is wrong. We want to implement Z,” they need to go back to the central government. Maybe go back to the legislative process and say, “Hey, we want Z.” This is very costly. This is very time-consuming.
Really, what you want is the city government to have the authority to say, “Okay, we tried Y. It's not working. Z is actually the better one.” They can just do Z without getting any additional buy-in from the federal government. It'll be much more responsive to changes and to needs on the ground.
The fourth important aspect of a charter city differentiating it from a special economic zone is that the charter city has a much more varied industry base. Instead of focusing on textile manufacturing, or on electronics processing, or on any of these single industries is really this broad base of activity, where it might start with, I don't know, palm oil processing, then it builds out supply chain linkages which are all in the city itself, instead of external to the city. Then as the capacity builds up there, works its way up the supply chain, slowly growing, industrializing, creating more productivity.
I think, maybe the primary distinction is that many, not all, but many special economic zones are primarily – they attract foreign direct investment. That is their goal. Their goal is also to create jobs, but their goal is not to spur long-term economic development. The goal of a charter city is to spur long-term economic development and those four reasons I mentioned are key to how a charter city does it and how those differences allow it to be much more successful than many special economic zones have been.
Kurtis: Just to summarize. One of the things that is a key differentiation between the two is just scale. Charter cities are a city. Special economic zones seem like a smaller jurisdiction. The second is, I guess, uses within that zone. So, you're saying charter cities, like most cities have multiple uses, mixed use, industrial, residential, etc. Whereas, zones and industrial parks tend to be focused on one particular industry.
Then the third one, which I think you can agree or disagree, but this is probably the most important one is devolved authority, so that the local governing entity can be responsive to changes on the ground as circumstances alter.
Mark: Yeah. I guess, I would clarify, I’ve been using this as two separate things. One is what is the difference in laws. Then two, what is the process for changing the laws in the city, or zone? One, what is okay, it can have different labor law, but then I’m differentiating the different labor law from then the zone having the authority to change labor law in the future within a relatively wide degree of freedom, versus it could have different labor law from the rest of the country, but it might not have that freedom to then make future changes. I’ve differentiated those into two separate things. You don't really have to. It could just be one, but that's how – that is a very important component.
Kurtis: Yeah. You could see one is policies. What is the law in a static period in time? The other is governance. How do you change the laws over time? I guess on the topic of governance, how would charter cities be governed? How would their governance be different from the rest of the country?
Mark: Sure. This will come down to every individual charter city. What we see is the goal to get basically these policy outcomes. You need to align the incentives. You need to ensure that the group and the individuals making the policy decisions are rewarded for making good decisions and are punished for making bad decisions. Typically, the argument in democracy is that if you will vote in people who make good decisions and vote out people who make bad decisions, and that will lead to these good outcomes.
While that has generally been true in a lot of circumstances, in some circumstances it has not really led to sustained economic development. It has not led to the proper decision-making process. I think the other important aspect to consider is with Paul Romer, what he was proposing was a high-income country would go into a low-income country and act as a guarantor.
Paul Romer came up with the idea of charter cities in 2009. He won the Nobel Prize in economics. He proposed a high-income country going to [a] low-income country, act as the guarantor. Canada would go into Honduras and basically administer the city. What we are proposing is a public-private partnership. This is a mechanism by which a private city developer would go, would acquire the land, would work with the government to create this governance framework.
The private city developer would have an influence on the laws of the city, because they would need to ensure that their investment was well spent, that they would be able to recoup. In the US, for example, this is a typical process if a homeowner's association is being developed, a developer has three votes for every unsold property, which basically gives the developer control of the homeowners’ association, until 75% of the properties are sold.
Because the city is a little bit different, a city doesn't really have a set amount of units to sell, so you can't say until 75% of the units are sold, because you're not going to know how many units you're going to build over a third of your time horizon. You can get general estimates, but you're not going to be able to get a real strong point prediction, but you can still use that general framework of okay, the developer basically builds. They have control of the governance process, until they are able to ensure the long-term profitability of it. After that, it transitions to whatever the typical governance structure is in that host country. Probably, I mean, a democratic structure. Typically, what we've found from our research looking at in the US is the best way to set it up is a city council with a city manager who is elected by the city council.
Kurtis: I guess, bringing in the distinction between CCI's model with a public-private partnership, versus the Paul Romer model that you went over, which is guarantor country coming in, on the PPP side of things, why would a government invite a company in in the first place to come and build and govern this city?
Mark: Sure. I mean one, PPP models are pretty standard. There's also the build, operate, transfer model, which is used for infrastructure building in both low-income and high-income countries. There's been a widespread recognition that oftentimes, it's good to get private sector expertise, to get private sector interest for these mega infrastructure projects. Then two, I think a lot of governments, particularly in emerging markets in the global south, realize the challenges that they are facing. They realize that they are urbanizing very rapidly. They realize that their existing infrastructure cannot handle the urbanization and they are looking for and open to solutions.
This is basically coming and saying, “Hey, here's a solution. This can address some of your immediate needs, as well as long-term needs in terms of right infrastructure provision, in terms of governance, in terms of creating housing, creating jobs.” So far, based on our discussions with governments, there has been an interest in this. I think the key thing to stress is that while previous discussions about charter city sometimes focused on autonomy, or on independence, or to some people even focused on the sovereignty of the city, we are not focusing [on] that. We are making very clear that the city is not sovereign, that is within the – that is still under the national jurisdiction that it is integrated with all of the regional plans for development that it really is in accordance with the national goals.
We believe that this is a valuable proposition for governments to come and say, “Hey, look. You have these challenges. We know you have these challenges. Here, we can come and set up this structure that allows you to effectively meet and address some of these challenges in a better way than you would do without this proposal.”
Kurtis: I guess, the concept arises, this idea if these cities, these new city projects we're already seeing some being built in the global south, what enables these new cities to be more attractive than cities that already exist in these jurisdictions?
Mark: Sure. Well, I guess one, just to clarify, there are Journalist Wade Shepard’s estimate, Journalist Wade Shepard estimates that there are about 200 new masterplan cities being built around the world right now. Some of these are being built by governments, some of these are being built by private developers, some of them are being built by public-private partnerships. The value proposition is different in every region and in every city. There isn't really a universal standardized model. Some, for example, Eko Atlantic in Lagos, Nigeria is really being built for a high-income segment. They're billing themselves as the Dubai of West Africa, really tall, really fancy buildings. Average price point is relatively high.
Other projects, for example, Nkawashi in Zambia which we are working with is going for a middle-class appeal with lawyers, with doctors, with teachers, folks like that and they are focusing on creating a technology sector. You have Forest City in Malaysia, which is being built, targeting basically, high-net-worth individuals in China to come open a second home. There's probably some implicit thing of park your money outside of China in case something happens, because you see a lot of capital flight from China, where particularly the high-net-worth individuals want to buy property as a hedge in overseas markets.
These masterplan cities have a variety of different value propositions, depending on the nature of the local market, there is relatively little coordination, communication between these. Sometimes there is regionally. For example, Africa projects talk to each other. We haven't been that in depth in Asia, but I assume the Asian projects at least talk to each other a little bit, but the information sharing is still pretty limited at this stage and I completely forgot what question you asked. Remind me.
Kurtis: What enables a charter city to be more attractive than these pre-existing cities?
Mark: Okay. One, there are the master plan cities. The reason that master fan cities are more attractive than pre-existing cities is because the master – Kurtis is grinning at me now, because I’m still not answering your question. I’m getting there. Masterplan cities tend to be a little bit more attractive than the pre-existing cities, because they have better infrastructure planning. They might have more reliable electricity. They have better public services and that is why you might want to live in a masterplan city.
The reason you would want to live in a charter city as opposed to just a masterplan city is one, you would still want to live in the charter city above a regular city for all the previous reasons of a masterplan city, than the additional advantages that a charter city would have over a masterplan city is that it would allow for easier registration of businesses, it would allow for perhaps, lower taxes, it would allow for a better environmental law, it would allow for this kind, a better education law, this whole host of factors that you don't really think about that often, until you interact with the government and US, we think about this like, “Oh, going to the DMV.” Imagine if that going to the DMV is a major part of your life, that would be terrible.
A charter city can basically remove that massive, I don't know, burden. If we think in sub-Saharan Africa, for example, it takes on average 36% of per capita income just to legally register a business. You could create a charter city where it's much cheaper to legally register a business. In some of these places, it's very difficult to pay taxes. A lot of the sector is informal. If you figure out how to recognize some of the informal sectors, make it formal and then what if you're able to collect tax revenue from a much broader base? Here are these, I don't know, key governance issues that a charter city can help address that simply cannot be done without creating this new institutional environment.
Kurtis: I guess, the broad question is what conditions in a country, in a host country, I guess, would you say are most important in terms of where these new cities, or charter cities are being located?
Mark: Sure. I mean, there's a few key points. One, is the government has to want you there, because otherwise, you're not going to get the decentralization of authority that will make a charter city be successful. Two is you probably want to have a rapidly urbanizing population. A lot of folks talk about doing charter cities in the U.S. or in Europe. I’m generally skeptical of most of those plans. The population just isn't there. U.S., the most high-income countries, the demographics, the birth rates are below replacement. The U.S. only has positive population growth, because of immigration.
The most recent city built in the US, I think it's called Celebration. Is just a retirement community in Florida. It's got 250,000 people, but it's – I mean, it's a masterplan community. It's interesting, but it's literally a retirement community. There isn't the demographics to actually build new cities in most high-income countries. Then in addition to the openness of government, as well as the demographics, you want to be on emerging trade routes. Figure out, here is a port that will be a much bigger port in 20 and 30 years. Here is a region that is growing rapidly. Bet on these overarching trends.
Then, I think the last thing is that you need to balance the government in terms of their stability. If a government is very stable and effective, it's probably not going to need a charter city. It's probably going to be a high-income country. For example, it might not even be a high-income country, but I’ve spoken with an advisor to Rwanda. I was like, “Hey, would you guys be interested in charter cities?” He was like, “Well, no. Kagami. If there's a good idea, Kagami will just implement it.” They have a pretty effective government, even though it's a low-income country and then the value add of a charter city is relatively low.
Then some countries, for example, like Somalia probably would not – a charter city would be a relatively difficult value proposition there, because it's so unstable. You need a degree of stability to attract the capital necessary to build a charter city. If the government is super effective and super functioning, then the value proposition of a charter city is relatively weak, because the governance is already pretty good in that country.
Kurtis: Great. I guess, turning to why charter cities are an idea worth paying attention to, why they're important, I guess, the question becomes why is now the right time for charter cities as an idea?
Mark: Sure. I mean, if you look at the history of the charter city space, Paul Romer came up with the modern iteration of the idea in 2009. You had Patri Friedman, who launched the Seasteading Institute in 2008. Both of those, proposals generated a lot of interest, a lot of excitement over the first few years and then lost a little bit of traction, in part because it turns out that it's very expensive to build floating land mass, and so the value proposition for Seasteading became a little bit less apparent after the first two, three years.
Then with charter cities, Romer got interest in Madagascar, got interest in Honduras. Neither of those worked out. Then he walked away. A lot of the interest died off. What I think happened now is several things; one, the trend of masterplan cities being built around the world is much more apparent. The value proposition of charter cities is a little bit easier when you can just focus on the governance and say, “Hey, look. People are building these cities. It's okay. It's a thing.” Two, I think there is more general interest.
Kurtis: Like it's happening already. It will help these existing projects.
Mark: Yeah. That's a better value proposition. Then two, there's a little bit more general interest. With Romer and Seasteading when they launched, there were – you had strong visionary leaders, but there wasn't this broad infrastructure, which is one of the things that charter cities is trying to build, to try to activate this broader interest in charter cities. A third reason is I think to a certain extent, the withdrawal of the American defense umbrella, which has opened the door for a much wider range of institutional possibilities than people accepted 10, 15 years ago.
You're seeing this with Belt and Road. Belt and Road is implementing some – what might be described as charter city projects, where Chinese money is basically dumping in to build new city developments and emerging markets that have different governance from the host country. You are seeing this, I don't know, change in norms, is changing acceptance that is making charter cities more of a possibility than they were 10, 15 years ago.
Kurtis: You went over Romer’s idea of Seasteading change in the US foreign policy and geopolitical stuff with Belt and Road. In terms of significance and importance of the idea, how is it important for mooring, I guess, the development side of things?
Mark: Sure. I think the international development community cares about alleviating global poverty, as well as the specific instantiations. It challenges that global poverty causes. I think, urbanization, migration. I really think charter cities touch on a lot of these factors. Charter cities can help alleviate global poverty. There's almost 80 million new urban residents annually. Most of these people are going to live in low-income countries. They're going to be impoverished. They have few life opportunities.
Charter cities can help make a substantial dent in those numbers by creating opportunities for these new urban residents by allowing them to engage the global economy, by allowing them to flourish. That tackles, I think two of the primary values of the international development community in both the challenge of accommodating this rapid urbanization, as well as liberal poverty.
Kurtis: Then I guess, more broadly and then back to the, I guess, geopolitical stuff, so Francis had this book come out at the end of history. There was this time in the 90s, where liberalism was ascendant, democratic capitalism was ascendant. Now fast forward to today, there are literal courses being taught in political science called democratic erosion. It seems like times have changed. How can I guess, charter cities help spread liberalism around the world?
Mark: Sure. I think, liberalism is definitely in decline. I see, if you look at the history of cities, particularly trade-oriented cities, which are often on the coast, they have always been more cosmopolitan. They've always been more liberal than the hinterland of the regions in which they were based. If we think [of] the first proto-modern government, it was in the late middle ages. It was the Italian city-states. You saw this spread throughout where basically, merchant-led cities throughout Europe, you had the Hanseatic League in the north, in the Baltic region. They tended to be much more, I don't know, cosmopolitan, just by the nature of being a trading entity, you need to be able to interact with a variety of people from a variety of different backgrounds and you need to be tolerant of them and this spread.
The Netherlands became an entrepot country, focused on trade, very cosmopolitan. You had for example, the pilgrims who founded Plymouth Rock, went to the Netherlands first, because the Netherlands had religious freedom. You had philosophers like Spinoza go to the Netherlands again, because the Netherlands had religious freedom, the time when it was very rare. Then that, I don’t know, form of government went to England when William of Orange conquered England in the glorious revolution.
You see how, I don't know, cities, how particularly trade and merchant dominate cities have been these places of cosmopolitanism, of places of liberalism. We believe by helping to seed a new generation of merchant-led cities, of trade-oriented cities in the global south can renew this idea of cosmopolitanism, of liberalism, of the value, of things like private property, of respecting other people, even if they might have different backgrounds from you and really allowing this demonstration of the fact that hey, you don't need an authoritarian government to develop. You don't need this intrusive state. You can just have an effective government that allows you to do your thing and everybody can prosper with that. That is something that I think we're seeing increasingly, I don't know, maybe rare, particularly with the rise of China, where a lot of governments are saying, “All right. Well, the U.S. hasn't really helped us. They might have given us some foreign aid, but it hasn't led to economic development, while China is promising an alternative model for economic development.”
Charter cities can be this value proposition where it's okay, look, there is a model for economic development that is liberal, that is tolerant, that is cosmopolitan, that does allow you to see a strong economic growth and poverty alleviation that can hopefully make the world a better place.
Kurtis: I think I agree. Folks, you mentioned some of them, but also, I remember Montesquieu talks about how commerce can, I guess, make for more moderation and mores and such like that, so I think this definitely aligns. One other thing I would ask and I do see a bit of a conflict though is you're asking these private new city developers to come in, which isn't necessarily the most democratic, which I guess, most would align democracy with liberalism. How do you square that circle?
Mark: Sure. I think that one, democratic countries often come up with ways to tie their hands, because this is the central challenge of government is how do you get government to commit over the long-term to ensure that they won't renege on their promises. This is what independent courts are. Independent courts are saying, “Look, the government will tie their hands by having the set of independent judges that will rule against the government sometimes, that will ensure the respect of property rights.”
We've also seen this with central banks, where independents of almost all high-income countries have independent central banks where they say, “Okay. Look, we have decided that the government should control monetary policy, but we realize that putting monetary policy in the hands of popularly elected officials will probably lead to some very bad long-term consequences, because before every election, the elected officials will just want to well, pump a bunch of money in the system.”
Kurtis: Money printers go bur.
Mark: Yeah. I think it is possible for democratic countries to realize, it can be challenging, because of some public choice reasons, because there are these special interests that might oppose broad reforms, so we do it in a concentrated area. As well as we want to figure out a way to both tie our hands and ensure that this new independent governing agency aligns with our long-term values. Charter cities, I think, are a way that can do that.
I mean, currently, just because of the history, because of norms, I think they are seen as somewhat different from central banks, they're seen as somewhat different from independent judges. To me, that is mostly just a, I don't know, historical quirk in that charter cities aren't very common, so there's a natural bias against new ideas. But figuring out how governments can tie their hands to align their long-term incentives has always been the central challenge and charter cities are a way that can do that that we think can lead to substantial gains in terms of economic growth and economic development.
Kurtis: Great. Moving on. Effective altruism is this big movement. It's become increasingly large over the last decade. They use this framework, three-pronged framework around tractability, neglectedness and scalability. How would you say this idea that charter cities fits into the framework?
Mark: Sure. I’ve always, I don't know, been, effective altruism adjacent and quite sympathetic to their ideas, and I think developed, I don't know, this model, or strategy for the charter cities framework, I think broadly within that, the effective altruism model. As for three things in terms of scalability, there are 80 million new urban residents annually. There's going to be over 2 billion new urban residents over the next 30 years. This is probably the final wave of urbanization in human history. There's a chance to make a massive impact with the Charter Cities Institute. We are trying to lift tens of millions of people out of poverty.
That has a tremendous scale in terms of neglected-ness. Charter cities, I think, are still quite neglected. If you look at for example, the EA Movement, talks a lot about existential risk, particularly the AI risk. Organizations like Miri and especially open AI are extremely well-funded. Their binding constraint is probably not funding. If we think about effective altruism within the international development space, there are places like GiveWell. GiveWell funds for example, antimalarial pills, mosquito nets, deworming, cash transfers, things like that.
I believe GiveWell gives upwards of a 100 million dollars a year to these various charities. Again, right those are good things. They should probably get more money, but there's already substantial amount of interest and effort going there. You also see a lot of the RCTS are probably the hottest thing in international development now. The effect of altruism pays a lot of attention to RCTS. J-PAL is the MIT-affiliated research lab that focuses on RCTS. The last Nobel prize in economics was won by the practitioners of RCTS. There's a lot of interest. There's a lot of focus around that.
If we look at charter cities in terms of the charter city space, the total funding for non-profits in the charter city space is currently probably under 1 million dollars a year. It's definitely under 2 million a year. I mean, I don't know the budgets of other organizations, but the total amount of funding is very small. I think there's definitely a case that charter cities are quite neglected, compared to other effective altruist-related cause areas.
Then the third, so I did scale and I had neglected-ness tractability. Tractability, I think, hopefully you get that from this conversation, as well as some of the other output we're putting out. Charter cities are being built. New city developments are being built. There are real, concrete steps that can be taken. We're working with projects in Nigeria, in Central America, in Zambia. We have a handful of projects that we're having conversations with in the pipeline- that we haven't formalized the arrangement from Sierra Leone, to Kenya, to South Africa. We are hoping to expand to India and to Asia in the future, but there is a lot of interest in this idea. There are meaningful concrete steps that can be taken that will have a big impact. I think that charter cities are very tractable.
Kurtis: I guess, just pushing back a bit on some of those things. CCI, it's a non-profit and I think, pretty famously non-profits aren't seen as these things that scale all that well, at least when you compare them to the tech sector. How does an organization like CCI actually scale an idea like this?
Mark: Sure. What I think of a startup, typically startups are thought of as technology companies, where the defining feature is basically, you have a zero marginal cost product, where you develop a product, you get product market fit. Then once you have that, you just go to the moon. The famous example is Mark Zuckerberg with Facebook. Once you have Facebook, the cost of adding [an] additional user is, I don't know, 5 cents in server space. It's practically zero. Once you have the Facebook platform, you can scale up super rapidly.
I don't think that's really, the only way to understand startups. Startups are anything that scales quickly. If you look at for example, the entertainment industry with movies, what is a movie production? Somebody has an idea. They write a script, or they bring some people together and then that script gets taken up by a producer and then they hire actors and then they get a director and then they put together the whole team, the editors, the video shooters. I mean, I have no idea how you make a movie, but there's – you see the credits at the end and there's a lot of people on the credits.
All those people are basically on contract work for this individual movie. It basically goes from ideation, here's the idea to we shoot a movie, to premiering and, I don't know, a two to three-year period. I mean, sometimes the scripts float around a little bit longer. From actual, “All right, let's push this forward,” to its premiere, that is a relatively short time horizon. You can see movies, they gross hundreds of millions of dollars.
If you think about for example, elections. Elections are also startups. During a presidential election, each party might raise a total of one billion dollars in terms of direct spending, in terms of affiliated spending, etc. Within a 18-month period from the announcement of candidacy, to the election itself, they raise up billion dollars and then they spend all that money to coordinate this vast number of people, campaigns at their peak, probably employ thousands of people around the country. It is this massive coordination of scaling up and there are all of these people and individuals who are specialized in various areas that you can tap to make sure you run an effective campaign.
Okay, how does CCI scale? This is a conversation I’ve been having with with folks in Silicon Valley. A lot of think tanks in D.C. do not scale. If you're working on, I don't know, social security reform, it's basically trench warfare, or healthcare reform, where you write a bunch of policy papers, they write a bunch of policy papers, you move the margin a little bit. I go to the next trench and then you lose the next election cycle, your people lose the next election cycle and you push back two trenches. Over the long-term, there's very little progress. Even with Obamacare, the US healthcare system is still basically broken.
What makes, I think, charter cities different is that it is pretty possible. It is pretty easy to envision a future in five years, in 10 years, where there are charter cities being built. I mean, our charter city is being built now, but there are hundreds of thousands, millions of people living in charter cities, where there is the legal infrastructure, there are these administrative structures that have been created to govern charter cities, where there is widespread acceptance, where there is widespread interest in charter cities.
I mean, I don't know, Genghis Khan maybe isn't the best example. If you look at Genghis Khan, what he did before he went out to basically conquer the largest landmass empire ever is he basically spent, depending on how you want to count, 10 plus years rounding up all the tribes in Mongolia and basically, uniting them under his banner.
This is somewhat, I don't know, semi-analogous in the sense that you need to put all the pieces in place. You need to get all the stakeholders together. You need to get this general belief. Once all of this is in place, then it's possible to really scale up very rapidly in terms of implementing charter cities. In practice, what that means is over the last – I started the Charter Cities Institute almost three years ago. Every year, we get more charter city developments approaching us.
The first year, we got some, I don't know, most of the developments were half crazy. Whereas like, “Yeah, in this, I don't know, geographically contested region, where this tribe is semi-seceded from the central government, we want to build [a] charter city.” It’s like, okay, that is not realistic. How do you build a city when the central government won't let you import a water filter for your water treatment plant?
Now the projects we're getting are much more serious. It's like, we have 10,000 hectares. We have acquired land. We have government buy-in. The governor of the state is going and pitching us our project, investment promotion conferences. We have a very clear masterplan. We have X. We have Y. Some of the projects are earlier stage, where it's like, we have 10,000 hectares and we've been thinking about what it means to build a city, they don't really know what to do. We've seen that, I guess, the level of interest, the level of seriousness of the projects that we are engaging with has increased substantially. We believe that especially as we see some wins start to rack up, I mean, arguably the world's first charter city was announced Prospera three, four months ago in Honduras, where okay, they have created, all right, a legal system from scratch. It's not really fully developed. It's still relatively early, but that's a very substantial step forward compared to what we've seen the previous 10 years.
As we see projects do successful fundraisers, as we've seen projects start to get residents, as we see projects create business registries, create labor law and start enforcing them as we see this, the court cases pile up to set a degree of precedent that, these laws are stable, they're not going to be changed at a whim, etc. As we get buy in from politicians, from international development community, this allows everything to scale very rapidly. This is what the Charter Cities Institute is doing is developing a strategy that allows for this very rapid scaling of charter cities.
As I previously mentioned, historically, charter cities were often single projects. Whereas as like, “I’m going to go to Madagascar to start a charter city.” What we are trying to do is create this network, is create this knowledge, is create this set of best practices, where once the information is out in the ether, where once there are firms who you know you can easily tap into for masterplan, or who you can easily tap into for construction, who you can easily tap into for financing. It's possible not just to get one or two projects started. It's possible to get a dozen projects started, because all of the expertise are in place. All you really need at that point is the local knowledge of the local system. What is necessary? What industry should you target? How do you talk to government?
All those things are extremely difficult on their own. I don't want to trivialize that. Then once you add in funding, once you add in master-planning, once you add in governance structure, then it becomes a really herculean task. If we can simplify that and just focus it on the particulars for local countries, then it's possible to get five, six really serious charter cities projects started every year. That's when you're taking, you can target – we want 3%. We want 5% of new urban residents annually. Mind you, 5% of annual new urban residents, that's four million people. That's a lot of people who might be moving into areas where it just gives them a much better opportunity at a better life.
Kurtis: What I’m getting is in essence, the plan to scale drives a lot from solving a very monumental coordination challenge.
Mark: Yeah. Yeah. It is, how do you get all of the pieces in place? How do you sequence the conversations? How do you sequence level of interest? How do you sequence the resource is necessary? How do you get this broad buy-in to make all these changes? It is this monumental coordination challenge. I think we've made very solid progress, I mean, just thinking about it internally, the conversations we were having two years ago, a year and a half ago. If you listened to the 80,000 hours podcast with Rob Wiblin, it was still – then it was like, here is this a fairly high-level thing. The strategy was generally etched out.
Now if you look at what we're doing, it's much more particular in terms of the problems we're solving. There has been a huge amount of progress that has been made. There's a bunch of work that needs to be done, but it's I don't know, it's very clear to me that we're moving strongly in the right direction and it's just a question of how can we move even faster.
Kurtis: Re-listening to that podcast, I think you – if I’m quoting right, said something along the lines of, “I don't know what I’m doing.” I think that is broadly changing towards the course of the past year and a half. I guess, one more thing along the effective altruism movement. Around the neglected this thing, a former – well, a Nobel Laureate has worked on this problem. A big-time investor, one of the most famous investors on the planet, Peter Thiel has worked on this problem adjacently. Does that push against the argument of neglected-ness there?
Mark: Well, neither of them are really working on it now, so no. They both did not succeed. No.
Kurtis: Fair enough. I guess, so on that, that is a good segue into the history of this space. Do you want to go over that a bit? I know, people tend to think it all starts with Romer and his TED Talk in 2009. Do you agree with that? Does it start before that? Give us a little overview.
Mark: Sure. Well, no. Not really. I mean, it starts with human history. Cities have been a constant in human history and cities, the initial understanding of a city was that it would have different governance from the interland, that the rules in the city would be different. You would have specialized structures. You would have recognizable open spaces, public gathering, markets, temples, administrative buildings. You would not see these in urban areas in the pre-modern area. That initial difference in governing structure really defined almost what a city was as they first emerged.
Then as you got states, as you got empires, then sometimes the cities were subsumed by the states, or empires, or sometimes they became the central nucleus, which then created the state, or the empire. You would always have had throughout human history, these autonomous, or semi-autonomous cities that had differing degrees of self-governance that were focused on trade, that were focused on industry. The idea of free cities, of charter cities has really been, I don't know, with us throughout human history. It's a very old form of social organization.
That being said, the modern idea of charter city is to me, I see it coming from these two separate strands; one is Paul Romer, who did I would say, semi-independently. Independently develop the idea of charter cities with the TED Talk in 2009. That really gave it the modern focus of what it is and obviously, he was different from us in that he argued for a high-income country to act as the guarantor in a low-income country. We are advocating for a public-private partnership, but the fundamentals were relatively similar of how do you create good rules in places that don't have good rules to spur economic growth.
The other intellectual tradition comes from what might be described as the techno libertarians. This goes back a little bit further. You have in the 70s, even late 60s, I believe, groups like Operation Atlantis, the Republic of Minerva. They were both sponsored by Werner Stiefel, who was a Jew who escaped the Nazis and created a successful cosmetics business. Then he believed that the US was going down the same path as Nazi Germany, so wanted to create a society where it would not go down that path.
They focused on in Operation Atlantis. They put a bunch of sand on a reef in the Caribbean and then got chased off by a gun boat from the dictator of Haiti and that failed. Republic of Minerva was somewhat similar. In the Pacific they found a reef. They put some sand on it and they were chased off by a gun boat from the governor, the president of Tonga. Both of those were much more extreme ideas. It was this build, a new society, that kernel that had some analogies to the charter city space.
That went down, ended up with a Seasteading. Patri Friedman, if you listen to the podcast with Patri Friedman, the charter cities podcast episode. It's interesting, because he was inspired by those initial attempts. He was also reacting against them to develop a more sane and a more practical proposal, which was Seasteading. That was focused more on how do you push the frontier? How do you create these high-income – how do you really track the high human capital, the high labor intensive, or high human capital, high-productivity folks?
One of the sayings in the Seasteading Institute was the US runs on code that is 240-years-old. How do you push that frontier? There was still that similarity in that it was how do you build this new governed, independently, semi-independently governed city even if it was focused on the waters and focused on a different demographic than Paul Romer's version of charter cities are?
Over the last 10 years or so, those visions have somewhat merged where Patri Friedman's fund, for example, is focusing on charter cities, it's focusing on emerging markets. Charter cities are seen as, look, even if Seasteading is your ultimate goal, even if it is the high-income folks, pushing the frontier, that's just not practical at this time. Let's focus on where it is practical. There has been this merging of visions, building of a small community that draws from these intellectual roots that is now pushing the idea of charter cities generally.
The way, I think the unique value add for CCI, for the Charter Cities Institute is that we do have this very, what might be called big tent approach, where our hypothesis is charter cities are an idea whose time has come. All right, look, we can talk to the people who already believe in this idea, but that's boring. Let's explicitly go out. Let's explicitly try to build a coalition. Let's explicitly try to activate this much wider pool of resources that is out there that cares about governance, that cares about poverty, that cares about urbanization, that cares about global warming, that cares about these things and let's figure out how charter cities can interact with their existing goals to have this very broad impact on the world.
Kurtis: I guess, just on the Seasteading, I guess, movement and Romer’s version of the charter cities concept, you went over them broadly, but what have we learned? One was in Seasteading started in 2008. Romer’s TED Talk was in 2009. It's been over a decade. What have we learned since?
Mark: I think with Romer’s TED Talk, what we learned was several things. One is Romer’s vision where you have a high-income country act as a guarantor is very difficult to get political buy-in. That's part of the reason why we've pursued the PPP model. The other reason is just that high-income countries aren't as well-governed as we thought. Like the US, we currently can't travel to Europe without quarantining ourselves, because we are unable to handle COVID.
Building new institutions, rather than trying to translate institutions, I think is the right move for a number of reasons. The other important thing that I think is sometimes lost is that Romer was tremendously successful, at least, in generating ideas and in generating some movement. He went to Madagascar. He's meeting with the president. He went to Honduras. He helped change the law in Honduras. He helped change the constitution in Honduras before things fell apart.
I think Romer is sometimes unfairly denigrated, because people don't realize what a monumental accomplishment that was. Nobody else, nobody in the movement since has given a TED Talk, for example. He was able to really start the conversation, even though it wasn't sustained, that was still something that to a certain extent, we haven't yet reached those peaks. I think the foundation is much stronger now than it was then, but the peaks there were still higher than today.
The other part is he goes to Madagascar, goes to Honduras, neither of those work out and then everything falls. What CCI is focused on is building this broader ecosystem, is making sure the space, the movement is not dependent on a single person, or a single country. If I get hit by a bus, CCI will still go on. Hopefully, I don't know if it's as successful as before, hopefully not as successfully as before. I don't know which is, I don't know, more gratifying to my ego. It will continue to exist.
There are a set of people who care passionately about this idea. There are a set of networks. There are a set of relationships. The idea will continue second, is this idea of building out this broader network of having this big tent of trying to activate this broader set of resources, where Romer was really trying to focus on just do one and figure it out. In a certain sense, a much more entrepreneurial approach, but also a much higher risk approach, where when they weren't successful, there was no further leverage to activate.
Then as for what we've learned from I think, Seasteading is several things. One, building floating platforms is really expensive and not practical with current levels of technology. Two, is if you look at Seasteading’s branding, it's also, I think, substantially improved over the last 10 years. First, it was let's build floating cities, mostly targeting high-income, high-productivity people. Now they're focusing on pacific islands. They're focusing on how to fight global warming, how to help pacific islands that otherwise might see challenges with higher sea levels to provide solutions to them.
I think a third is just in terms of focusing on, I don't know, maybe the practicality of it. I think that might be another major contribution of CCI, or maybe major contribution is the wrong word. Just major emphasis of CCI is to focus on what are practical intermediate steps? It's very easy to step back and say, “Hey, let's do a city.” A lot of people are saying, building a city would be cool, but it's a different thing to actually work backwards from that and what are the intermediate steps you can take on a day-by-day, week-by-week, month-by-month basis to actually make this a reality.
I think, what hopefully CCI has contributed to is actually really breaking that down on a granular level to have all of these intermediate steps to build up momentum, to build up a network that makes this broader ambition possible.
Kurtis: I guess, most cities in history, they're the product of emergent individual choices. They're the result of human action, but not human design. Having said that though, there have been cities in history that have been planned in some way or another. They have been designed. Do you want to go over that history and what do they have to say about charter cities today?
Mark: Sure. Right. I mean, we can think of if we're going to reach far back to Alexandria, it was founded by Alexander the Great. I mean, he founded a bunch of cities called Alexandria, but the one we remember today is in Egypt. That was a very important city in the Mediterranean for centuries. I had the Library of Alexander, which is one of the, I don't know if it was actually one of the seven wonders of the ancient world. Metaphorically, at least it was in terms of a repository of knowledge. If you read history of the Roman Empire, Alexandria and Egypt more broadly was the crown jewel after Rome and maybe Constantinople, but it was really up there. When Augustus got in a fight with, what's the guy's name? Cleopatra. He married Cleopatra and he was Caesar’s right-hand man.
Mark: No. Brutus killed Caesar.
Mark: Mark Anthony. Yeah, there we go. Mark Anthony. He went to Alexandria. That's where he built his power base, while Augustus built his power base in Rome. That was a fairly successful city. Then we also have St. Petersburg, which in some ways was quite successful right. It was founded by Peter the Great. He was like, “All right. I want to modernize Russia. I want to focus on Europe.” He went to Amsterdam to learn how to build ships and St. Petersburg was to a certain extent, model in Amsterdam with a lot of canals. It was a new port that would be frozen a lot less of the year than their previous port.
It was the capital of Russia for a long period. It also, I mean, did help because it did allow for more penetration of European ideas into Russia, which ended up causing several revolutions in Russia, or at least almost revolutions. It did lead to this broader instability, but that was what Peter wanted when he started. He wanted this broader exposure to Europe. This broader exposure to these ideas, because that's how he thought Russia would modernize. Right now, St. Petersburg, I believe it's one of the fourth, maybe fifth biggest cities in Europe. Just in terms of population, it's actually quite impressive. I think those are at least, if we're thinking historically, some of the really successful projects that have – we still remember today that have made an imprint on human consciousness.
Kurtis: Then in terms of masterplan cities today, you cited Wade Shepard’s work around 200 masterplan cities today. I think you mentioned Forest City in Malaysia. Do we, or I should say, the charter city space have some lessons to learn from these projects?
Mark: Sure. Most of the master-planned cities today are not very good. This is one of the main challenges of building a city is that you need to balance order and evolutionary growth. Oftentimes, particularly in emerging markets, they fall way – they underemphasize order. You basically have slums that have very little – the roads are unclear, the public spaces are unclear, public goods are unclear, services are almost non-existent. They fall way too far on the disorder side.
On the other hand, the master plan cities tend to fall way too much on the order side. I was in a meeting, for example on a planning project in Kazakhstan, a new city development being based around [an] airport. There was a discussion like, okay, we can build a financial center here, or we can build it here. We can have tall buildings. We can have medium-sized buildings. To me, I was just like, this discussion is insane.
Yesterday, we were moving the city 20 miles to the east. Now we're talking about how tall the billings are going to be in the financial district. Who even wants to go move to Kazakhstan to start a financial center? Why would you go to Dubai? Why would you go to London? There was this, I think degree of, I don't know, lack of realism among the planners. I think this is a pretty constant theme. If you look at where a lot of the master-planned cities are being built, some of them are government projects and governments are able to build new cities, because they don't have the same budget constraints as private companies and because they can just force all of the bureaucrats to go live in the new capital city.
The challenge is that you end up with cities that sometimes look like Brasilia, where if you, I believe his name is Oscar Niemeyer, he is the architect of Brasilia and you can actually read some quotes. He's like, “Do not tell me it is a successful or failed city now. We will know if it's successful or failed in 1,000 years,” because he basically wants a historian to go back and look at archaeologists go back and look at the ancient ruins and be like, these are some awesome buildings.
Kurtis: He likes it to look like a bird from above.
Mark: Yeah. What? No. Okay, you're going to ignore the people who are actually living in the city now, because you want some archaeologists to go and say these are awesome buildings. That is literally his attitude. It's, I don't know, horrifying. Brasilia just from a simple metric, the commuting times of the lower income people are much higher than any other city in Brazil, just because it was poorly planned and designed, that there is very poor public transportation, there's very poor walkability. It's designed around cars. The other, I think, challenge is one, the feedback loop on cities is just so long.
Look, you hire an architect. What do you do if you're building a new city and you have way too much money? You're in the Middle East. You have way too much money. You're building a city, okay, so what do you do? You hire an architect. Where do you go? You go to MIT. You go to Harvard. You go to the fanciest people. These architects and these urban planners, they're very good at doing single-city blocks. They're like, “Okay. I can do a single-city block and I’ve read Jane Jacobs. I can make it walkable. I can make the interactions and blah, blah, blah.” Now you want me to build a city. Okay, this is awesome.
What is a city? A city is just a thousand city blocks. I’m just going to do one city block and then do it a thousand times. They don't realize that that's not really how a city works. They keep getting called, because the feedback loop is so long. You plan a city and then it's not start to be built. They don't actually break ground for two years. They don't actually see the results for eight years, for 10 years. By the time people are actually looking at the results of what is happening in the city, you've already planned another two or three projects.
Because it's so prestige-based and the feedback loop is so broken, you get this community that advises these new city developments that just have very little connection with what it actually means to do a new city. If you talk to the folks who are doing new cities in emerging markets, where they don't have infinitely deep pockets and where their approach is much more organic, where it is this balancing of okay, we need the public spaces, we need the roads, we need the parks, but we don't really know what it's going to look like in 15 years. We have to leave it semi-open, but defining exactly what's open, what's known, what's not known, how it will evolve? That's a really tricky balance to get right.
Particularly with consultants who don't have a long-term vested interest in the project and rarely get it right, I think most new cities are falling way too – masterplan cities are falling way too heavily on the over-planning.
Kurtis: The order side aspect.
Mark: The order side. Yeah. Are just not really pleasant places to live.
Kurtis: Will Mark had a good podcast and discussion about this whole order, disorder, over-planning versus under-planning with Lamberto of the Marin Institute in NYU. We'll stick up a link to that. I guess you went over some of the drawbacks, or challenges that masterplan cities like Brasilia have encountered. There's obviously, also a handful of very successful semi-autonomous cities in the post-war era. What lessons can we learn from places like this, like Hong Kong, Dubai, Shenzhen, Singapore?
Mark: Sure. One of the lessons is that it's really hard. You need a lot of luck and you need a good location. All right, there are some similarities, but there are probably more differences than similarities. The similarities are mostly that they had varying degrees of decision-making rights over their governance structures.
Singapore is a country. Dubai is part of the UAE, but it is very much self-governed. Hong Kong was a British colony and had a pretty strong degree of self-governance. Then Shenzhen was a special economic zone that had a very strong degree of self-governance. Beyond that, there are a lot of differences. If we look at Hong Kong, they had the advantage of, look, the British are relatively were liberal in the classical sense. They had a hands-off approach. They allowed for general trade. They were relatively broke until the 60s, so they weren't even investing a lot in infrastructure, the Hong Kong government.
They tried very hard to be a net taxpayer to the UK, instead of a net tax-taker. They would have more decision rights over the local governance. They also had the benefit of the Chinese civil war occurring at the same time. You basically had this mass migration of particularly entrepreneurs from Shanghai, which was the commercial capital of China. Mostly textile manufacturers who came and really started the textile manufacturing industry in Hong Kong.
Then that textile manufacturing slowly turned into electronics. I remember when I was a kid, most of my toys at Christmas would say ‘Made in Hong Kong’, how they also say ‘Made in China’. That transformed, created a lot of wealth, a lot of economic growth. Then it transformed itself into a financial capital when Shenzhen opened up and there were much lower wages in Shenzhen and in Guangdong province. They outsourced a lot of the – they outsourced a lot of the manufacturing there, but became a financial center based on the British common law tradition.
I think what is unique is that they did have a very laissez faire policy, where there was not any state-led industrialization. If we look at Singapore, if we look at Korea, if we look at Japan, all of those had pretty heavy state involvement in industrialization. Hong Kong did not. It is really a libertarian success story, if you will.
I think the other thing about Hong Kong is it does show the risk of what might be described as future expropriation, where now as we're seeing, the Chinese government is cracking down on Hong Kong, is limiting their freedoms. It's trying to keep the economic freedoms, but it's really severely limiting the political freedoms and that's because Beijing perceives a politically independent Hong Kong as a threat.
It does require us to keep in the back of our heads, okay, how can we minimize the probability of this future state appropriation that would reverse the gains? At the same time, if we can help create a city of seven million people that inspires a region of broader reforms and helps a lot of poverty alleviation, even if it does get crushed in 70 years, I’d still think, I don’t know, I’d still be proud of that.
Okay, Singapore. Singapore is the only country in the world that didn't want to be a country. It was kicked out of Malaysia in 1965 after a failed merger. It had the benefit of being governed by Lee Kuan Yew, who was probably one of if not the top statesmen in the post-war era, who after effectively consolidating authority in the people's action party, governed it and they faced some immediate challenges, for example, the British military in I believe, ’69. Pulled out their base, which employed 10% to 20% of all the Singaporeans.
Singapore is a multi-ethnic society. I think it's the majority, I think Chinese, like 80, but then they've got Malays, they've got Indians, they've got some of the British holdovers. They faced some race riots at a time. There's this interesting story, when they were worried about the Malaysians, so they called up the guard. Then at one point, one of the lieutenants dismissed all the guardsmen of Malaysian heritage and then they went out and rioted. Lee Kuan Yew went back and said, “No, no. It's okay. You're welcome. Even though you were riding yesterday. Get back in your guard’s uniform. It's cool.”
You read that story in his biography and it's like, you're not sure whether he's telling the truth that it was a mistake that they fired all of them and then they tried to cover it up, or it was a mistake. It shows the chaos of this early state formation and all of these really, seemingly intractable challenges that you face and how you overcome them. Then what do they do? They basically did several things. One, they had a very efficient effective government. They really recruited the best, the top people in the government. They would recruit Singaporeans who went to school in the US and the UK. They paid them very well. They focused on industrialization. He saw his job as all right, they looked at Israel. How can Israel attract all this multinational talent?
He saw his job as a CEO. He went and spent some years in the US. Was constantly pitching like hey, come locate your company in Singapore. Come build a factory in Singapore. Come do this. The state was pretty heavily involved in that industrialization process, building an industrial park. Singapore consistently ranks in the top one or two of the economic freedom of the world index. That's only by economic freedom standards. If you actually look at government involvement in the economy, it's pretty substantive.
Then you have Shenzhen. Shenzhen was to a certain extent, the most chaotic of them all. Hong Kong was a British colony, so they had that historical legacy. Singapore had Lee Kuan Yew and Shenzhen was okay, Mao was dead, Deng Xiaoping takes over and he's like, “Okay, we need to actually build an economy and modernize. How do we do this?” Well, we can't do this in Beijing, because that's going to annoy too many people. We can't do this in Shanghai. That's the traditional commercial capital and that is a power center of the anti-communist party. We just chased all of our merchants out of Shanghai.
Shenzhen is a backwater. He declared a special economic zone in 1980. One, it's much more like a charter city than a special economic zone. It is 320 square kilometers, massive. There were a handful of fishing villages with a total population of about 100,000 people. They basically decentralized a substantial amount of authority. Unlike most special economic zones, where it's like, you have lower taxes, it was like, no, with the exception of, I believe, it's postal service and defense and maybe rail service. They're like, the local government can basically do whatever they want. They had no plan. There was no visionary leader. It was just the local leaders stumbling and trying to figure it out.
Kurtis: A pretty substantial arbitrage opportunity with the rest of China.
Mark: Yeah. It had this very strong, I don't know, base to come from in the sense that China has a long history of statehood, so people knew how to interact with government. You had this, now had intentionally prevented urbanization from happening, because he was afraid of getting invaded by the soviets, and so he didn't want the soviets to be able to take over cities. There's this pent-up demand for urbanization. You had across the border, was Hong Kong, so you did have this administrative talent and this capital that could be instantly put to use.
In five years, Shenzhen had the highest building in all of China. Now visits in ’84. I believe it was in ’84. There's a very good book called The Shenzhen Experiment, where he goes and he's talking to some villagers and he's like, “Wait, these villagers are making more than my whole family.” What's going on here? These are peasants. There's also this interesting story where Deng Xiaoping goes to Singapore, he meets Lee Kuan Yew. He's like, “Oh, man. How did you get all of these really smart Chinese who are really productive?” He's like, “No. Their grandparents were peasants. It’s just like, they came here and we gave them better laws and now they are richer, because they have better laws. It's not the people, it's the rules.
The motto is it doesn't matter if it's a black or white cat, so long as it catches the mouse, or feeling the stones in the river with your feet to give the sense of it's really this trial and error experimentation. They pioneered reforms to labor law. They pioneered reforms to land. They pioneered reforms of state of enterprises, to banking law, to everything that laborers spread throughout foreign direct investment, that later spread throughout the rest of China and really catalyzed this huge economic growth, which has lifted about 850 million people out of poverty.
One of the interesting things is that you did see this constant tension, the communist hardliners, all wanted to shut it down. They're like, “No. This is too capitalist. This is bad.” After Deng Xiaoping left power, he does a China tour, or a southern tour in 1992 when he is – he's late 80s. He's pretty old. He has no formal authority anymore, but his successor is like, “Hey, maybe I should – I don't know. Shenzhen, maybe it should be a thing.” Deng Xiaoping just goes and he goes and he visits and he talks to them and it's reported and that's enough to really build the political support. No, this is working. You need to double down on this.
Deng Xiaoping's biographer actually says that Deng attributed this – no, it was Deng Xiaoping’s biographer who attributed the southern tour to the preservation of the Shenzhen in 1992, which really shows how, I don't know, these sometimes decisions have these really long-term consequences. These decisions matter.
Then Dubai, the last example it had again, the advantage of a visionary leader. It had a good geography. It's basically a desert and there's nothing in the desert. Their advantage was that Iran is very bad at ruling themselves. In the late 1890s, some Iranian port cities raised tariffs and Dubai was like, “Hey, guys. Come and hang out in Dubai and we won't charge you tariffs.” They did. This is in The City of Gold, which is a very good book about Dubai. The first time they did this in 1890 or so. It was like, yeah.
Then a dozen or two dozen traders came. It's like, okay, so this is 1890. It's not that long ago and it's enough to mention a dozen or two dozen traders. This is a very small number of people. That basically, is the seed of this, I don't know, regional arbitrage, where they realized, every time Iran does something stupid, every time one of our neighbors does something stupid, we can just invite those people who have had negative consequences because of that bad policy to work here.
This, Sheikh Rashid who took power in I believe, ’55, was the visionary responsible for creating modern Dubai. The model is massive infrastructure investment, combined with taking advantage of regional mishaps. All right, building power, so you have electricity. Building a massive port that's way bigger than all the analysts suggest and then suddenly, it's at capacity much sooner than expected. Iran has the Iranian revolution. It turns out that previously, planes would stop in Tehran going west, east or east-west. Then Dubai is like, “Hey, let's build a really big airport and have them stop here instead.” When they built their airport, they had more parking spaces than there were cars in all of Dubai, because it was like, “All right. No, we're going to be this thing. We're going to bet on this future.”
Okay, Lebanon which Beirut used to be the financial center of the Middle East. Okay, Lebanon is in a civil war, maybe we should start attracting finance, maybe we should start tracking investment. Basically, played on this massive infrastructure projects. Plus being a stable and cosmopolitan region in the Middle East when most of the rest of the middle east was either not stable, or not cosmopolitan. If you visit Dubai, the people there are very proud. They're like, “No, look. You can be a Jew and we don't really care. You can't really be Israeli, but you can be a Jew and we don't really care. You can be a Christian. You can do these things.” When, if, you go to Saudi Arabia, for example, Saudi Arabia, every woman is legally required to wear a niqab. There is this, I don't know, broader acceptance. It's just like, look, do commerce, do business here and we'll keep our hands out of it, but here is a framework.
Kurtis: The whole spreading liberalism thing that you talked about earlier. That's great. I mean, that's provided high-level demonstrations of how this idea could work in practice and some successes with the four you just went over, as well as some not so great successes in Brasilia. I guess, that is a good transition into common criticisms, or drawbacks of the idea. I’ll just ask generally first. What would you say are the biggest weaknesses of the idea of charter cities?
Mark: I can give you the common criticisms. I don't think there are actually weaknesses. I think, one of the ways that gives me confidence that I think we are correct is that the vast majority of criticisms we get, I think are actually based on misunderstandings. There was an article published in the American Conservative about how charter cities are high modernism. It's like, no, we don't actually believe that. We can talk with you and I think that you will be convinced already. Or charter cities will only target the rich. It's like, no. We are specifically figuring out how to develop a model that targets low-income folks.
I think the probably most common criticisms that we get are, isn't this neo-colonialism? Then two, aren't these just for the rich? The answer is no. We're working with partners in the host countries. We need a partner on the ground. We need the government to say yes and people need to move there. Colonialism was bad, because it had guns. Like it said, “You do this, or we are going to shoot you.” We are coming in upon invitation and we have – there's these three layers of, I don't know, voluntariness. Both the company has to invite us, the host country has to invite us and then the people have to choose to move there.
I think it's I don't know, conflating that with showing up with a bunch of guns and shooting people if they don't do what you want. I think those are two substantial – there's a pretty substantial difference. Then with regards to aren't these just enclaves for the rich? Some cities are going to be. Some charter cities, we are seeing some projects that are focusing primarily on upper income residents. If you just think about it, Toyota for example, sells more cars than Mercedes. It has a higher market cap than Mercedes. Why? Because selling cars to the vast majority of people tends to be relatively profitable. The most popular car in the world is the Corolla. We believe that one, there is a market demand for cities that – charter cities that cater to lower income elements.
Then two, just as an organization, we are explicitly doing this, where we're developing urban planning guidelines that are very explicitly targeting an income segment that is much lower than most of the cities that are being built around the world today.
Kurtis: I guess, another thing that if you think about yourself choosing whether to move you and your family to this new place, I would imagine at the beginning when there's very few people, I don't have much incentive to move myself and my family. How do you think about, is there a criticism there that you commonly get? How do you get those first movers in the first place? Why do I want to move there in the first place?
Mark: Yeah. I do think that's definitely common, I don't know. I’m sure even it's a criticism, because most of the critics don't think that far ahead. That is, I think, one of the major challenges of charter cities is how do you overcome this coordination problem? How do you actually get that critical mass of people to move to an area that can jumpstart economic activity? If you think about cities, there tends to be three ways to build one. One, you can be government in which case, you can force your bureaucrats to move there. That's Brasilia, that's Abuja, that's Asana.
Two, there can be an economic reason. Maybe if you think about Chicago, it has this advantage that you can get from Chicago to the Atlantic, or you can go all the way down the Mississippi. You basically have access to America’s hinterland and then you have access to both the Gulf of Mexico, as well as Europe via the Atlantic. It really is at the center of this broad trade network. New York is on the Hudson. San Francisco is on the San Francisco Bay. Building within these natural trading networks tends to be a central feature of human settlement, as well as the other big one tends to be mining towns where somebody might find gold, or find copper, or something and enough people move there that even when the gold or copper runs out, there still is enough economic activity to continue to sustain itself over time.
Then the third and final reason is you can start a religion. This is Salt Lake City and Utah. This is Israel, where how do you coordinate? You have people with a strong identity. It doesn't have to be a religion per se, but it has to be a strong cultural identity, which says, “All right, we will move to X and coordinate and all move there to ensure that something happens.”
It's almost always in those cases. It's because of some degree of persecution, where this identity is unique enough that they feel persecuted by their – most the time, they are being persecuted, not just a feeling by their surrounding region. They say, okay, let us set up a society. Let us set up somewhere to live, where we have this identity and we can govern ourselves and not be persecuted.
Yeah, this is definitely very tricky. The way we think about this with charter cities is okay, if you –instead of building in the middle of nowhere, build two hours outside of an existing city, outside of an existing population center. This has two advantages. One, you can piggyback off their infrastructure, so you don't need to spend hundreds of millions, if not billions of dollars on an airport, on a port, because you have access to that existing infrastructure.
Two is that you can piggyback off their labor market. Two hours is enough to get cheap land to really get enough land to build a city, but it's close enough that you can – people from the city can go there work for a day. It's not really in commuting distance, but it's close enough that it's almost doable at least in the initial phases, until you get a sufficient population mass to really develop.
Kurtis: I mean, you talked about the persecution, starting a charter city as a result of a religion, or an identity group being persecuted from the host country and then you alluded to this similar thing happening in Hong Kong today with the CCP coming in and trying to enforce this this national security law on Hong Kong. On that broader topic, how do you prevent that? How do you prevent the host country in this case in China from expropriating a jurisdiction that previously had autonomy?
Mark: Sure. There's no silver bullet for this, but there are a few ways that you can minimize the risk. Paul Romer was, if you have a guarantor country, then it's basically bound international law. Honduras is not going to want to invade Canada, which it would be illegally doing if there was a city that Canada was administering in Honduras. Our approach is a little bit different. Our idea is you want to align all of the incentives. This might mean the city gives an equity stake to the state government, an equity stake to the national government, to you get business leaders and other leaders in the community to invest in the early stages, either directly in the city development company, or to build factories in the city itself.
You might want to list the city on a local stock market. Why? Because then, people might buy the stock, pension funds would buy the stock and pension funds tend to be politically powerful. You want a lot. There's this, I don't know, perception in some circles that charter cities are about exit, but they're really not about exit, just picking up and leaving. They need to be embedded in the local and in the regional community, because otherwise, they will not be sustainable over a long time horizon.
Exit is only really possible if you have an overwhelming technological superiority, or superiority of force that you can choose to ignore the interests of the broader region and charter cities don't and doesn't want to have that. You do really need to be embedded within the broader region. Then if the broader region is benefiting from charter cities, then we think that that is probably a good thing. The real challenge is not economically, but politically. If the charter city is seen as a threat to it politically.
In China, what's happening is the Chinese narrative, Beijing’s narrative is that because of China's unique history, China needs authoritarianism and democracy is a western idea. It's not a universal idea. Hong Kong to a certain extent, proves that wrong, because Hong Kong is democratic and Hong Kong has free speech and shows that no, these aren't western ideas. These are universal ideas.
You can imagine this in emerging markets. For example, if you have a charter city that is in one, like a lot of emerging markets, they have different ethnic groups. If the charter city is in the region of one ethnic group and not the others, then this might disrupt the equilibrium, the political equilibrium and lead to retaliation against the city in the future. If you're developing a charter city in a country that has three dominant ethnic groups, you might want to ensure that either all three of those ethnic groups have equal access to a charter city, or that you develop three charter cities in their respective regions. Make sure that it doesn't upset the long-term political equilibrium to minimize the risk that the government decides to act against it at a future time.
Kurtis: I guess, semi-relatedly to this, because you're talking about a government coming and expropriating, or general, political instability. I would imagine that middle or higher income countries have a little more political stability. Why not focus on starting charter cities in these places?
Mark: Open to it. Again, high-income countries don't really have the demographics. Middle income countries, yeah, open to it depending what the demographics are. I mean, it's much more easy to attract people when there are urban populations growing, than to attract people to move from existing urban populations. Even if you look at SF, which is seeing the biggest exodus of any city in the US in the last, I don't know, a few decades, what are the absolute numbers of people moving away from SF over the next two, three, four, let's say five years? Or the population of the Bay Area, the greater Bay Area is probably three, four million people. The tech workers there are probably optimistically make up 10%, so let's say 400,000 people. How many of the tech workers are removed? Let's say, 20% of the tech workers.
That is basically 80,000 people. Now, how many of them can you actually capture? If you're capturing 10% of them, of the tech workers who are moving, which I think is probably again, somewhat optimistic. You're capturing 8,000 people. Those numbers are just way too small to actually build a city around. If you're talking about middle-income countries, some middle-income countries might have the demographics. I looked at Ecuador briefly. I think they will initially have five or six million urban residents over the next 30 years. You could do a city with a half million people there if you're capturing 20% of the new urban residents.
Some middle-income countries do have that right mix. We would be interested in looking at them. For the listeners, our model is if you are a new city developer and you are interested in the charter city model, or if you are a very large landowner and you are interested in the charter city model, we're happy to – or if you're a government, you're interested in the charter city model, we're happy to have a conversation and see where that goes and how it could be of assistance.
Kurtis: Then I guess, maybe just continuing on the criticism, or weaknesses point, so there may be someone that says, if you're drawing a lot of the population from the host country at large, aren't you going to encounter similar problems that the host country at large faces, because you're getting the same folks, you're getting the same culture, you're getting the same background, education levels as the host country? Why would things necessarily change if that's the case?
Mark: I would break this down into two aspects. One is the governing the city government body itself, the city government. Then two, are the people. One, if you look at people, they tend to respond to incentives. Culture is important. Culture does matter. We should be realistic about expectations. Shenzhen going from a fishing village, a series of fishing villages with 100,000 residents to being a world-class city in 40 years will probably never be repeated.
That being said, you could go from nothing to in 40 years, to a middle-income city of 2 million people, or 3 million people. That is very achievable, depending on the country, depending on the context. Second, if you listen to the podcast we did – I did with Gyude Moore, he talks about this cultural change in Liberia, where they basically managed to get people to start obeying parking laws. How do they do it? If you parked illegally, you got jack-booted. They also jack-booted the ministers who parked illegally. There was a study that looked at illegal parking, again in New York for diplomats before and after. Before, they had a diplomatic immunity. Afterwards, New York City revoked it.
Before they had diplomatic immunity, Sweden never parked illegally. When they did, they would always pay the fines, even though they were not legally obligated to pay the fines. Nigeria parked illegally very frequently. Nigerian diplomats - When they were ticketed, they very rarely paid the fines, if ever. New York City changed that, and so started requiring the payment of fines. What happened was the Swede’s behavior did not change very much. The Nigerian behavior changed substantially. They stopped parking illegally. When they did park illegally, they paid the fines, because there were serious consequences to not paying the fines.
It is definitely challenging to have these cultural changes, but it is possible. If you think about two of them for example, Walmart in the U.S. versus in let's say, Mexico. Mexico probably has slightly higher corruption rates than the U.S. Walmart in Mexico probably is what we might describe as slightly more corrupt. There's slightly more employee theft. There's slightly more things like that than in American Walmarts.
That increased rate of corruption in Walmart is probably much lower than the increased rate of corruption in the Mexican government, versus the U.S. government. Why is that? It's because private companies have different incentive structures than public companies. With the new city developer, they would have a different incentive structure. Because of that, I think we can expect them to have a strong incentive to root out corruption in the city government, where it happens and to minimize the cost of that.
Two, corruption, I don't know, it's not as bad as most people think. Most people think like, “Oh, corruption is the reason that most countries don't develop,” but the US was corrupt as hell in the 19th century. Tammany Hall, everybody knows that. I mean, even if you look at the 1960s. I mean, LBJ stole the election. It's common knowledge and things were very corrupt. Even now, some cities, Chicago every third mayor, every second mayor ends up in prison, because of a corruption probe. We look at China, China was very corrupt and it's still pretty corrupt and has managed to develop.
Then the second part is how do you create the culture in the people in the city? This is, I think, somewhat more difficult. If we look at companies, a lot of companies have a very strong focus on creating a company culture. Why? Because, how do you enforce certain behaviors when there is no monitoring mechanism? You get this identity, this belief and this is the right way to act. In a company, you can fire people who don't abide by those cultural norms. In a city, you can't really ask those people to leave.
You can see a culture in a number of ways, in terms of who the first residents are, who you target to move there, how you reward certain behaviors, how you punish other behaviors, how you create these common rituals and these common practices. You can encourage this broader focus on long-termism, focus on hard work, focus on these bourgeoisie cultures that do lead to higher rates of savings, that lead to more investment, that lead to more economic growth and better outcomes over a longer time horizon.
Kurtis: Great. I guess, moving on to focus on the actual building and implementation aspect of charter cities and what it means to build a city in practice. Reading through CCI's materials, especially the website, there's a recent broad introduction to charter cities written by our colleague, Jeff Mason and yourself. It broke down the process into six main things. One being governance. Second, policies, then urban planning site selection, selecting an anchor tenant and then minimizing the risk of expropriation. Let's dive into some of these aspects.
First, the governance piece. One of the things that was focused on was really getting as much devolved and decentralized political authority as possible. How do you go about that, given you typically host countries and central governments don't like devolving power.
Mark: I mean, this is part of the broad social change that the Charter Cities Institute is trying to accomplish. How do you convince these countries? Sometimes, it's by going and pitching them. We are working with some projects that are talking directly to the host country to try to get a set of concessions and basically saying, look, if you give us these concessions, we will bring over X amount of money and invest it. Other countries, Honduras for example, implemented these reforms in the immediate Zelaya post “coup era.” There was desperation and that the country was not doing very well and wanted to try big, bold ideas to get it back on the right track.
In Nigeria, we are working within the existing special economic zone framework and seeing how far we can adjust that framework to apply more to a city, because it was designed for industrial parks, not for cities. What we're trying to do is change the general conversation where if a minister says, or a president says, “Oh, our neighbor did it. Our neighbor did this. We're better than our neighbor, so we can do this too.” Or an entrepreneur, or city developer goes to talk to that minister, or that president and says, “Hey, I want to build a charter city.” Then the president says, “Oh, I read about that last week in The Economist. Or I read about that last week in The Financial Times.” It just makes that entire set of conversations much easier, where then if you've got the administrators, the bureaucrats in the special economic zone program who say, “Yeah, I went to the Special Economic Zone Conference two months ago and they mentioned charter cities. That's a cool idea. I want to figure out how we can make our special economic zones more like charter cities.”
It’s a part of this, getting the idea in all these different places, making it part of the conversation, making it a little bit more accessible, a little bit more understandable to the key decision makers to help them be interested and move that way.
Kurtis: We made this distinction over governance is how you change the rules over time. Then policies are one step down from that, what are the rules at a given period of time? Having said that, what policies is CCI putting forth for charter cities to enact?
Mark: I don't know. You're writing the governance handbook. Tell me what's going on. What policies are we telling people to adopt?
Kurtis: I feel like, we're focusing on you, Mark. You got to finish it out.
Mark: I mean, we're basically trying to aggregate best practices. The governance handbook will probably be out this winter.
Kurtis: He's looking at me.
Mark: You heard it here first, folks. Winter of 2021. Looking at for example, The World Bank as they're doing business index. Looking at what it means to create a business registry, what does good labor law mean, what does good environmental law mean? There are right recommendations for all of these policies, it's just that these recommendations tend to be somewhat scattered and somewhat difficult to coalesce, because nobody's really tried to create a legal system from scratch in the recent past.
The closest example was probably the Dubai International Financial Center, where they focused on a financial legal system and not a broad-based legal system, which is what we're trying to do. Our process is several fold; that's one, reading the sources, it's two, looking at success cases in different countries. Three, it's talking to various experts and using our common sense and what we see as our lodestar in terms of developing the governance framework is making it – We focus on basically, market. The market and state capacity.
It needs to be a market. It needs to be easy to start a business. It needs to be easy to trade. It needs to be easy to invest. It needs to be easy to hire people. It needs to be easy to fire people. It needs to be easy to do all these things, to ensure a very flexible labor market, to ensure attracting foreign investment to create jobs, to sustain entrepreneurship, etc.
Then in addition to that, we need state capacity. What the state capacity means is basically, having a government that's efficient, that can say, “I want to do X task and I can do X task in a reasonable amount of time at a relatively low cost and figure it out.” If you look in the U.S. for example, in the middle of The Great Depression, it took three years to build The Golden Gate Bridge, and then to build the on-ramp to The Golden Gate Bridge, which is a 1.5 mile tunnel, it took seven years and actually cost more adjusted for inflation than The Golden Gate Bridge did.
It's like, all right, the U.S. is much less good at doing things. We still can't put a man back on the moon. We did that 50 years ago. What is going on? Emerging markets have this problem, but to a much greater extent. How do we design the government to not just have an open market, but also have an effective government that is able to provide these public goods, that is able to provide the supporting infrastructure for the market and for market participants?
Kurtis: I guess, rules and policies get you a certain amount of the way there, but I would imagine a big piece of it is also recruiting good people and getting a quality staff in place. How are you guys thinking about that?
Mark: Sure. I mean, this is definitely one –
Kurtis: I say, you guys. How are we thinking about that? You guys.
Mark: Our goal is to make sure that there is really top-quality staff administering these charter cities. This can be done in a few ways. One, you can target expats. If there are Nigerians who are working in the U.S., who went to school in the U.S., you might be able to get some of them to move back to Nigeria to say, “Hey, do you want to help build a city? Do you want to help build your country? This is a cool legacy project.”
That's probably only going to be enough to fill a handful of positions, not the majority of it. You probably don't want to hire from the Nigerian government, because the Nigerian government is not effective, and so you don't want to bring in those ineffective norms to the new system. You can hire a handful of people from that, but you don't really want that to be the majority staffing source. What we are basically looking at is creating pipelines to train this new generation of administrators. More specifically, what we are doing is looking to partner with universities. We've had discussions with Universidad Francisco Marroquin in Guatemala. We've had discussions with the African School of Economics to figure out how we can do certificate courses? How can we partner with the charter city developers? How can we have these conversations? Then, how can we design full courses? How can we design master's programs, etc., to teach the skills that are necessary to actually administer a charter city?
We believe, by helping to develop those pipelines, we can ensure that our administrative system for the charter cities is really effective, is really responsive and able to ensure that the cities have the best provision of public goods that is reasonably possible.
Kurtis: Great. I guess, just going down the list, next is urban planning. How does CCI think about the urban plan for a charter city?
Mark: Sure. I’ve discussed this a little bit previously with our planning guidelines that we are developing. We have on staff, Heba Elhenafi. She's an Egyptian urban planner. She is great. We're beginning to think about what it means to balance the needs of urban spaces, of the need for order, versus the need for this organic evolutionary growth? We're trying to focus on minimizing cars, because most of our residents won't be able to afford cars, and also, cars are bad.
We are trying to think about what the infrastructure costs. How do we balance those infrastructure costs? We're coming up with a financial model that hopefully, we’ll make public sometime this fall to show like, “Hey, charter cities can be a productive, a viable product, a profitable investment.” We're developing this. How do we actually think about the physical infrastructure build out of cities? How do we design public spaces? How do we make sure that workplaces work and residential and educational places are accessible to the broader population?
Kurtis: You talked about before the spectrum of disorder, slums and chaos, chaotic slums over time on one side and order on the other being like overly-planned cities like Brasilia. How are you thinking about that in regards to this urban planning?
Mark: That's the key of urban planning to figure out how to strike the right balance between order and disorder. We're breaking it up into phases, where phase one is basically going to be an industrial park. That's probably going to be very ordered, because it needs to be very clear. This is the power of reliability. This is the water reliability. These are the roads. This is the access to the transportation network. Then after that with phase two and phase three, they're much more organic where we will have, all right, here the roads. If we think about the commission of 1811, which defined what the public spaces and private spaces were in New York, they realized that Manhattan is growing and it's growing chaotically, so let's just build a grid and that grid still defines New York today.
We are thinking about how can we create this framework, how can we create these guidelines that can be applicable to a wide range of cities that can really allow for this growth, allow for this organic chaos of a city, but still within enough bounds that it can attract investment, that it can ensure that the proper guidelines, outlines are set down for the city to be successful for a long time in the future?
Kurtis: Cool. I guess, another – the fourth really important thing that the way we break down and think about actually building and implementing charter cities in practice, comes down to site selection. You emphasized location before, so how do you select a site, what are the key factors that you think and CCI thinks are most important?
Mark: Sure. The key factors again are government. We need a government that's amenable to the legal reforms to develop a charter city. Availability of land. In some emerging markets, the land is not titled and might have some degree of customary ownership. Then it can be very difficult and very costly to develop the land, or acquire the land. It might be with certainty, that you actually are the sole owner. You want to probably be within. We're currently thinking about doing it within two hours of an existing population center, to allow for access to that population center for some of the first residents, as well as to allow for access to that.
Kurtis: The piggybacking.
Mark: Yeah, piggybacking off of their infrastructure network, so you don't have to build your own airport, you don’t have to build your own port, so you have advantages. You want to build within a booming trade network, so where you think that trade is going to grow substantially over the coming years. You want to build within a country that is a rapidly urbanizing population, so that you can easily fill the new city. I think those are the key elements in thinking about site selection.
Kurtis: From selecting a site to selecting your first tenants, the biggest selection problem being selecting that first big anchor tenant. How do you think about that? I guess this falls into the realm of broader industrial policy.
Mark: Sure. The anchor tenant is the first mover who hopefully creates the first 5,000 jobs and can get that critical mass started, because you have 5,000 people who live there that makes it worthwhile to build a small restaurant, to build a grocery store, to build these basic amenities, to allow for the broader economic activity to take place.
What we think about is making sure this anchor tenant is in-line with the broader region. Typically, this is going to mean an industrial anchor tenant. Why? Because industrialization has so far been really the only way that countries have created a lot of jobs and created sustained economic development. You have a handful of counter examples, but those are basically only oil-rich countries and not all countries are blessed with large amounts of oil with small populations. How do you create this broad set of jobs?
The way we like to think about it is a lot of countries, particularly in emerging markets are export-oriented with a natural resource. Maybe it's copper. Maybe it's gold. Maybe it's oil. Maybe it's palm oil, etc. Maybe you start by creating a processing center for that resource. Instead of shipping that resource to South Africa, Portugal or China to get processed, you just ship it to the charter city. That creates a lot of jobs. It creates some supply chain linkages, so then you have the people who make the tools for the machines. Within that network, you have some of the financiers for the small and medium-sized enterprises within that network and then you can start moving up the value chain.
If you look at how east Asia industrialized, all of it was basically through this. They started with very low-value add manufacturing. Oftentimes, it was textile manufacturing and then moved up the value chain to electronics, to automobiles, etc., until they became high-income countries. We're imagining somewhat similarly. How do you identify that key industry that is not there, or is there but not sufficient quantities, that really links to the rest of the region. It also has these positive spillovers. An industry that leads to additional industries, additional investment, additional growth and not an industry that just stands alone and doesn't do that.
That being said, there is I think, the possibility for industries that are focused on information technology. Some countries because of unstable currencies, the developer might not want to create a lot of regional linkages and might instead, want to create linkages with overseas economies to ensure that their funding streams are denominated in currencies that are more stable than the currencies of the host country.
We expect to see a variety of these models take place. Our general bet is just to really scale to tens of millions of people. I think, the only industries that can really do that, that can accommodate that amount of job creation are the industrial industries, or –
Kurtis: Manufacturing. The last one is the risk of expropriation, but you covered that with your talk about Hong Kong and what the CCP is currently doing. I’ll ask you, because you did bring this up around financing and making it economically viable. How do you raise funding to build a charter city? We have several projects on the ground right now, how are we going about talking about financing these cities?
Mark: The projects right now, the new city development, it's not really an industry. Everybody's figuring it out by themselves, so there's a variety of models. Some projects have land and then do pre-sales on lots and use that funding, those funding streams to build out infrastructure. Other projects are raising early money from venture capital to close the deal to do the master planning. At which point, you can go to more traditional banks. Other countries, other projects are at the point where they're raising from these DFCs, development finance, or DFIs development finance institutions, like African Export-import Bank, African Development Bank.
Some projects, the entrepreneur, the developer has income streams from other businesses and is reinvesting the profits from those income streams into the city development. The way we're basically anticipating that this space emerges is initial funding, let's say up to 5 or 10 million dollars will be financed primarily through a venture capital model. Most of it won't be venture capital. Most of it will probably be high-net-worth individuals, because most venture capital firms are too afraid of charter cities at this point with the exception of Pronomos by Patri Friedman. That is somewhat higher risk money, where that money can be used to get the deal in place. To do –
Kurtis: Like the initial team on the ground, because there's a lot of grunt work that you got to do before that is actually moved.
Mark: Yeah. Get the land. Get the government buy-in. Get some of the master planning done, etc. Do all of that stuff. That is somewhat high-risk and charter cities have a multi-billion dollar potential. That fits the kind of all right, if you invest in a bunch of projects, you only need a handful to succeed to really pay back the fund.
The second challenge is going to be after you do that, then once everything is in place, it's more of a traditional real estate project. A very, very massive real estate project, but more traditional real estate. That money might come from the DFI’s, from the IFC, from African Development Bank, etc., these larger players. Right now, my understanding is the DFI’s mostly focus on single projects, so a bridge, or a power plant and they don't really focus on a comprehensive investment, and so that is a conversation that hopefully can change over these coming years, but that is, I think, where we see most of the financing structure happen.
The way to think about it is okay, you have the master planning, you get all that done. You need a lot of initial capital, probably at least a few hundred million dollars and then hopefully, over five to 10 years, you're able to break even. Then you have small profits. Then after you're 15 to 20, then it's basically printing money.
Kurtis: On a very practical, granular level, because I know one of our interns, Jidy, is working on this right now with you. How do you actually build the financial model for a charter city? What is going in for that?
Mark: Jidy is actually doing a very good job. What we have done is basically, one, reach out to people who are involved in real estate, who are involved in construction, copy those models. What way we're thinking about it is the early stage, because we really want to target lower-income residents, so some of the roads won't be paved. How do we cut these infrastructure costs? Not all the houses will have indoor plumbing.
Then the idea is over time as these neighborhoods become more wealthy, then you can put in all of these things that are more associated with high-income neighborhoods, high-income regions. We're really focused on making them accessible to low-income residents. Then it's, I don't know, it's just what are the costs and then what are the revenue streams? The cost at how much does it cost to build a power plant, to build a water filtration plant, to build roads, to build water pipes, to string electricity, power lines? You basically get per unit cost for all of that and that's your costing basis. Then your profit basis, you just make a series of assumptions. All right, are we going to sell land? Are we going to lease land? What is the cost that we're going to sell a land at? What is the cost we're going to lease land at and how does that change over time? How many people are going to move to the city?
Kurtis: I guess, that's another way where you can incentivize the first movers is by giving them a little discount at the beginning, right?
Mark: You give them lower costs. You could even cut, set aside –
Kurtis: Cater tenants as well.
Mark: - 10% of the equity of a project and just give that to the first 10,000 residents or something. There's a number of ways you can really incentivize the first movers to move to the city and not only move to and live there, but proselytize it across their friends, across their social networks, etc., to really encourage this rapid move-in. Because you really need to build up a lot of momentum at the beginning to ensure that you, I think, are successful in starting it and then getting that growth.
Kurtis: We're going to transition a little bit to talk about the Charter Cities Institute, CCI as an organization. Give us a little context and the history of the organization, as well as look into some of the things we think about moving into the future. First, let's start with – tell us a little bit of how you founded this organization, Mark.
Mark: Sure. I finished grad school about four years ago. Then the first year, I was working for an asset management firm that was doing early stage investments in charter cities. What I realized was that there was this opportunity, the space for this broader charter cities conversation to take place. The asset management firm was struggling a little bit to find projects to invest in. It was very clear from some of our discussions with potential partners, that there was still this lack of understanding of what charter cities were. Combine that with the history of the charter city space has to a certain extent, been somewhat I guess, inward-looking.
The belief in starting CCI was that this is a powerful idea. There's a lot of people whose values that this idea of charter cities would advance. There's a lot of groups that care about things like urbanization, migration, global poverty, governance. These organizations, individuals, can be enlisted to help work towards charter cities if there can – a framework can be developed that helps engage these different stakeholders.
The idea of the Charter Cities Institute was to create this framework to engage all these stakeholders who are interested in these challenges and work with them to figure out how their resources could be deployed to charter cities. I think, the second insight was that there was a lot of effort and attention that was being focused on individual places and/or individual people. For example, Paul Romer, he works in Madagascar and then in Honduras and nothing happens. He leaves and a huge amount of momentum dies.
Then there was a handful of projects that went to work in Honduras. Until very recently, none of those projects had success, or really couldn't make it to a public milestone. I had this fear that if there was too much focus on these projects that might not be successful, or if there are too much focus on single people, that could really damage the momentum of the charter city space.
With this belief that there is this larger group of stakeholders to engage. Then two, by starting conversations with new city developments and other similar projects in other countries, it will be possible to build up momentum, it will be possible to create a network that could really accelerate the development of charter cities, generally.
Kurtis: I guess, going a step before that, why were you attracted to this idea of charter cities in the first place? I believe this starts with Somalis in some way or another? Why don't you tell that story?
Mark: Sure. When I was in graduate school - or not graduate school. This was just after I finished undergrad. I went to a conference. One of the speakers mentioned in passing, a guy named Michael van Notten, who tried to start a freeport in Somali land.
Kurtis: As you do.
Mark: Yeah. I was 21 and I was like, “Oh, my God. This is an amazing idea. Let me figure out what's going on here.” I basically started down the rabbit hole. I looked up his book. It's called The Law of the Somalis. It's a very good book. Unfortunately, Michael van Notten had since passed away. Editor to the book, a guy named Spencer McCollum was still alive. He was in Mexico. I e-mailed him and he's like, “Hey, do you want to come visit me in Mexico?” I’m thinking, old man on the Internet invited me to Mexico. “That sounds great. Sure. Why not?” This was at the height of the drug war. I fly down to El Paso, Texas. Go across the border of Juarez, get on a bus and go to Casas Grandes and him and his wife are waiting to pick me up.
Kurtis: You're coming off as totally sane right now. That is the goal.
Mark: I spent a month with Spencer in Mexico, chatting about ideas, things like that. I keep having this idea in the back of my head. I started graduate school about a year later at George Mason, doing my Ph.D. in economics. There's a small community of folks interested in charter cities and competitive governance and Seasteading. I started to have conversations with this group of folks. I attend a conference in Roatan. Then I started doing my dissertation, my Ph.D. on charter cities.
This was about four years. No, this was about six years ago. I go down to Honduras for about six months to be closer to the action. Unfortunately, nothing's really happening at that point. I come back to the U.S. and finished my dissertation. What really attracted me to the idea was that here is this thing that seemed to have world-changing potential, these new cities that have a degree of legal autonomy to allow them to have much better laws and regulations. It had pretty clear massive potential and nobody was really talking about it, or focusing on it. It always struck me as interesting. Here's this world-changing idea and nobody seems to care. I couldn't quite figure it out.
The more I thought about and the more I focused on it, the more I convinced myself that there was this opportunity here. There was this perspective that I had that at first, I thought, “Oh, everybody else agrees with this perspective.
Then for example, I went to a conference in London that was basically a planning session for a city in Kazakhstan. I remember, actually worried, I got this invitation. I was like, “Oh, what am I going to say?” I have nothing unique to offer. All I’m going to say is just the standard stuff, “Hey, markets work. Why don't you set up a governance system that is reasonably effective to ensure that you can attract business and create jobs, etc.?”
I didn't think this was a very unique perspective, so I was just thinking like, “Hey, this is a cool opportunity, but I’m worried that I will have a value add.” I get there and lack of a better way to put it, I realized that nobody else believes this. I was the only economist they had invited. There was a bunch of urban planners and architects. There's one conversation where it's like, we can put the financial district here, we can put it here. They're pointing at a map. We can have tall buildings. We can have medium-sized buildings. I point out what I thought was obvious, which is it doesn't matter how tall the buildings are or where they're put. If you don't have a legal system that is trustworthy, you're not going to get any financial institutions to relocate their businesses there.
This concept was just so foreign to them that I wasn't making any traction. I was too junior that nobody would really listen to me. I did a little bit more consulting work with them. I had a trip to Kazakhstan, but it never really fully panned out.
Kurtis: This is NeWay?
Mark: No, this is not NeWay. This is prior to NeWay. This is right when I was finishing graduate school. They actually promised me a job. They looked me in my eye, shook my hand and were like, “Are you willing to move to Kazakhstan?” I was like, “I live in Honduras. I don't care.” Then they did not actually make that offer.
That basically made me realize that there are these people, it took the idea from this ideation phase to this practical, on-the-ground phase. It's not just people talking about this big idea. It is also people who are able to move dirt, able to build these relationships with government, able to make it a reality. The other thing this taught me was okay, moving from ideation to practice phase and two, the experts in the room lacked expertise, let's say.
Kurtis: The experts in the room were not experts.
Mark: Yeah. I mean, they parade as experts, but the challenge is new city developments have very long-time horizons. Because of that, it's difficult to identify that okay, here are the people who've done it before, because it takes 10 to 20 years for the people who have “done it before” to see good results. What that means is that instead of going to the people who have “done it before,” the new city developers just go to the prestigious institutions.
For example with us, it was a distinguished professor at MIT in Kazakhstan, the professors at Harvard, whatever. These people might be very good at designing city blocks and their assumption is a city is just a thousand city blocks, so we can control C and control V and just replicate everything, without realizing the dynamics are non-linear and totally not the same. You have to think about a city in a functionally different way than a single city block. It just made me realized, I had gone into these meetings fearing, “Hey, my ideas aren't that unique. My ideas are not that original. Everybody else knows this common sense stuff to walking out,” basically being like, okay, here is a massive opportunity. People are building new cities and the people they are talking to have no meaningful expertise to actually help them.
What I can do is try to work with some of these new city developers to influence them to point in the direction that can really help economic growth, that can really help create these new institutions. I’m not a distinguished professor at MIT, so it's not just like they're going to call me up. After that, that was basically summer four years ago. I was finishing grad school. Went to Kazakhstan. That job didn't work out. I started with NeWAY Capital, the asset management firm. That was first, they were looking at early stage investments in charter cities, but there weren't really very many charter cities to invest and they were having a challenge with deal flow.
They've since pivoted to launch Prospera in Honduras. Arguably, the first successful charter city. They need to go all-in on a project. What I wanted to do, I was a little bit nervous about Honduras, because there had been a lot of projects that had put a lot of effort in there and not much had happened. I wanted to create an institution that could hopefully diversify the charter city space a little bit and that could also have this expansionary viewpoint, trying to work with new city developers, trying to work with the international development community, trying to work with all these different stakeholders that had previously not really been engaged.
The charter cities community had been somewhat insular, where if people wanted to join, great. We welcome you in. But there was no explicit outreach attempt to other individuals and organizations. I thought that there was a large value add that could be had there. That was the idea in starting the Charter Cities Institute.
Kurtis: The Charter Cities Institute was founded under another name, (which we shall not repeat here) in around Halloween 2017, so about three years ago now, almost exactly. It's been three years. What did young Mark Lutter get wrong?
Mark: Lots. I mean, a few things. When I started, I thought it would take three to four months to pay myself. It did not. It took me a year. Raising money is very difficult. Some of the stakeholder groups that I thought would be quicker to engage have been quite slow to engage. In general, I think our publicity, our level of attention that people are focusing on us is much lower than I initially anticipated. To be honest, a continual source of frustration where Paul Romer comes out with the idea, he gets a TED Talk, he gets articles in the Atlantic. Obviously, he's a Nobel laureate caliber economist and since then he has won the Nobel Prize.
Then two, his idea was much more original. Our idea is basically derivative of his. It's understandable that he gets more attention. You also have organizations like the Seasteading Institute have gotten huge amounts of publicity, partly because of their relationship with Peter Thiel, also partially because it is a very powerful idea. My operating assumption when starting is okay, look, our idea is a little bit derivative, but we have a new approach, a new take. We're pursuing this public-private partnership model.
We are actually pointing out that there are a lot of these new city developments on the ground that are happening. I wouldn't have expected, or quite like Paul Romer levels of attention. I would have thought that we would have a lot more engagement. We have partners that are moving dirt. We have partners that are building universities. We have partners that are creating new legal systems from scratch. I think it's quite exciting. Even though the traction has been much higher than Romer got and we haven't reached close to that level of attention and interest.
Given that a primary part of our strategy has been this, being the central point, charter cities stakeholders can engage with, the lack of having a large megaphone has been, I think, quite challenging, in that it's affected our ability to get the message out, to engage these various stakeholders. That has been maybe one of the large things that I have been wrong about, other things that I’m not sure I was wrong per se about, but in terms of having been learning experience is just one, learning how to manage people. I was not very good two years ago. I think I've gotten a little bit better, though Kurtis might edit something in this track to tell you otherwise. Hiring people, building an organization, developing a level of professionalism that I might not have previously had. I think Kurtis might sneak up again regarding that comment as well.
Kurtis: No, man. You go. You're good.
Mark: Those, I don't think are unique to me per se. It's just the standard organization building that an entrepreneur goes through. It wasn't wrong. I think I had this maybe intellectual idea of the challenges, but there's a very different understanding of having an intellectual idea of these challenges, versus the visceral experience of actually moving through it.
Kurtis: I mean, I asked you what you got wrong. I should probably out of respect and fairness, ask you what you got right.
Mark: Well, here's actually another thing I got wrong. This is the thing that makes me look a little bit good at least. The other thing I got, I expected it to take much longer to get projects on the ground. I thought that the first few years would be largely an intellectual exercise. While there has been a great deal of intellectual exercise, we have some partner organizations on the ground, the charter city space is exploding much more quickly than I thought it would. That has been a very pleasant surprise.
I think, broadly to answer the question of what was right, I think the framework was generally right. The strategy is working. We have not had to pivot. We have had to adjust our focus. We have had to target things, but the general idea that going to the roof of a building and having a bullhorn and yelling about charter cities and having people come to you to talk about it has proven correct. Our, I think, the best partners have been folks who have reached out to us. From donors, to individuals, to new city developments, we get a credible new city development that reaches out to us about once every month.
It's just really exciting to see that we have, I think to a certain extent, become this hub for charter cities based on this fraught strategy. Then two, we are beginning to see our research impact on the ground decisions. For example, we are developing a charter cities handbook. This charter cities handbook, we have shared some of the preliminary drafts with an organization, a new city developer that we sometimes work with and they have found those drafts quite helpful.
We have had discussions about our charter cities model legislation and our model charter. They align very closely with the thoughts of one of our other partners. We have seen our ideas and research begin to shape the agenda of new city developers on the ground. I suspect, Kurtis can probably tell you this. When I started telling him about this is what the charter city's handbook is going to be, he might have been a little bit skeptical about the value and our ability to pull it off.
Kurtis: Skeptical is I think an apt word in this context.
Mark: Maybe even a kind word. To continue that, I think there's still definitely a lot of work to go, where we have gotten the city developer level. We've only just begun to penetrate it and we need to penetrate it much further in order to have the impact. Then the second thing where we have been a little bit slower than I would have hoped in terms of our engagement is with the international development community, with organizations like The World Bank, the U.N., etc., where we have begun to see some initial shoots of engagement, but really, I think success requires a lot more engagement in terms of co-authoring papers, in terms of hoping to influence their annual reports, their documents to really put charter cities on the agenda, just because that can unlock a huge amount of resources, both in terms of technical talent, as well as in terms of financing, that can help really accelerate the development.
Kurtis: Just agenda setting.
Mark: Agenda setting that can really help accelerate the development of charter cities.
Kurtis: We chatted a bit about CCI's history, how you founded it, how you got interested in the charter cities idea in the first place. What would you say is the biggest binding constraint for the Charter Cities Institute as an organization?
Mark: I think, one is immediately, it's probably just funding. Well, we have I think, a very strong team and we are making headway, obviously, if we had more funding and more people, we could make more headway. Another major binding constraint is obviously COVID. Even if we had more funding now, a lot of the activities that we would want to do in terms of events, in terms of partnership building are just much, much easier to do in person. COVID has proven to slow our progress somewhat substantially.
Then in addition, in thinking about long-term plans, there's a lot of research we can undertake, there's a lot of events we can hold, there's a lot of influence that we can peddle in terms of helping to set the agenda, in terms of bringing stakeholders together. Being able to execute on those margins would be very good and very productive. I think in addition to that, regarding CCI, there's the other question of what is the binding constraint on the charter city space, generally.
I think there are two answers to this question. One is that the basic answer is politics. Charter cities need political buy-in from key stakeholders. You need to have a government that passes legislation, or reinterprets existing legislation to allow for the degree of autonomy to make a charter city successful. That is a large constraint. At the same time, I see the constraints as being nested. While politics is an important constraint, another constraint is capacity. Do you have a team that is able to execute?
For example, in Honduras, the charter cities legislation has been on the books for about seven years. It's only been in the last few months that a charter city has actually been approved. That was I believe, part of it was politics. The approval process was not structured particularly well. Then part of it was also capacity. You needed somebody who was a bulldog to really force things through to get all the stakeholders at the table, to prove that it was possible and similarly, looking at some of these other new city developments.
I think one of the questions is all right, who can actually push this through? Who can help create it? Who can build something from nothing? Part of this is just like the entrepreneur. You need the entrepreneur to push things forward. Part of it is this general capacity, where there needs to be this support structure for the entrepreneur. If you think about Silicon Valley, Silicon Valley is designed to produce technology startups. There's an entire supporting infrastructure, there are venture capitalists to fund early stages, from late stage, there's angel investors, there's mentorship, there's blogs talking about what product market fit is, how do you know when you're successful? How do you know when you should raise money? How do you know how to hire people? How do you know how to hire executives? How do you know how to hire people who are outside your specific skill set?
There's this entire set of discussions and ideas, where if you're plugged in, it becomes much easier to build and scale a company. We aren't anywhere close to there at charter cities, where there's a few entrepreneurs who are really trying to push things forward and there are some discussions going – These discussions are much better than they were several years ago, but it's still quite nascent. All right, if you're trying to hire an executive, who do you hire? There's no talent pool available. You have to hire from somebody outside the charter city space.
Kurtis: Although, your CEO tweet did do pretty well, didn't it?
Mark: Lots of people were interested in it, but most of them were not from the charter city space. There is this level of interest, but it hasn't been systematized. It hasn't been made legible. It hasn't really created the – with that, there's the general capacity. I think a key part of that is also funding. Patri Friedman has Pronomos Capital. They're doing early stage investments, but it's only a 10 million dollar fund. It can write small initial checks. Even if you want to raise several million dollars, do the initial master planning, which if you're engaging in a city side project, you need a few million dollars, if not more. Patri isn't able to fill those rounds himself.
He can participate, but you need to get additional investors. Then added on to that challenge let's assume you get that master plan successfully, where do you go from there? It's hard to know exactly where you go from there. At this stage, most of the DFI’s, the development finance institutions are still relatively conservative. They don't know what charter cities are. They are unlikely to fully engage. Some of them have mandates that need to be project specific, so they will build a bridge, or they will build a power point, or they will build a road. A charter city, it has all of these elements. There needs to be some change in mandate, or at least change in understanding with these DFI’s and with these other large players, to really start engaging with the charter city space.
Kurtis: You mentioned a few times in the last answer about strategy. I know we've spoken a few times in this conversation about the Charter Cities Institute building the ecosystem for charter cities. Why focus on the ecosystem? Why is that part of our mission statement?
Mark: Yeah. I think, there's several ways to break this down. First, I think one of the challenges in the charter city space over the last 10 years has been perhaps a lack of strategic vision. The ideas are there, but the execution sometimes can be quite good. There have been talented people who have participated, but they haven't in my opinion, mapped the idea maze properly, where in the idea maze, you don't know exactly what's going to happen in your startup, or in your enterprise, but you have a decision tree where you know about the impacts that different external shocks will have on your decision-making and you've already mapped it out to a certain extent.
You understand what happened historically. With that, you're able to form a clear, coherent strategy that is able to scale to have a large impact. I think, a lot of the attempts have not had that broad focus, which has led to a lot of effort that I mean, sometimes even the best-laid plans go awry, but there hasn't been as much learning within the space as I think, otherwise possible. I think CCI can hopefully add to this by creating this set of knowledge, creating a set of practices that can inform entrepreneurs around the world. I think the key thing to understand as to why to focus on ecosystem creation instead of a single project is several fold; one, just risk diversification. If you're focusing on a single-project, that single project has a high probability of failure.
When we're thinking about a charter city space, I think it's important to generate momentum and build up momentum. Having a network allows for the building of momentum and the sharing of information much better than a single project. Two is, by its nature, charter cities require a huge amount of local on the ground context. In Silicon Valley for example, you can start a startup and you don't need somebody on the ground in Nigeria in the first six months, unless you're starting a startup in Nigeria. With a charter city, if you're building a charter city in Nigeria, you do need somebody on the ground in Nigeria. Not only that, you need to have deep personal knowledge of Nigeria. Who are the key stakeholders to talk to? What government agencies will be sympathetic? What government agencies won't be sympathetic?
This is tremendously challenging for if you are an entrepreneur, you can't just parachute in one of these countries. You need this network. You need this knowledge. You need this understanding. Even if I did want to start a charter city from scratch three years ago, it's unclear what meaningful progress I could have made, just given the fact of a limited network and given the fact that if you go to an emerging country, an emerging market you're often charged with the American price, because they just see you as a bag full of money that can be taken advantage of.
I think, a third important aspect of charter cities in building the ecosystem, is that you need to really accelerate the development of charter cities. One charter city just isn't enough. All right, there is now a charter city, or at least a proto charter city, whatever you want to call it, Prospera has a lot of charter city elements in Honduras. What replication are we going to see elsewhere? Is Guatemala going to pass a law? Is El Salvador going to pass a law to allow for charter cities? They have launched Prospera and I believe their plan is in the first five or 10 years to get 500 million dollars of investment.
Maybe in five or 10 years, when there is this large investment, assuming that they are successful, then these nearby countries adopt charter cities legislation. That's five or 10 years in the future. That's a really long time. That's only in Central America. That's not South America. That's not Africa. That's not Asia.
Because charter cities by their very nature, have these long-time horizons, and additionally, because the problems that they are aiming to solve, namely this very rapid urbanization has a limited time horizon. People move to cities. Once they're in cities, there's no moving them out of cities. Changing those embedded structures, both institutional, as well as physical infrastructure, once people live in cities is monumentally more difficult than changing it prior to their moving to cities. There is this I think, moral urgency of acting very quickly in the charter city space, combined with this very long feedback loop by the nature of new city developments, having this long feedback loop.
A non-profit, namely the Charter Cities Institute, by building an ecosystem, we can short circuit this feedback loop, where now that we have a global network, it's much easier to share lessons from Prospera to Africa. It's much easier to share lessons from some of the projects we're working within Africa to Latin America, to Asia, etc. By building out this network, we can short-circuit this feedback loop and help create this set of best practices, this set of knowledge, this set of understanding that can greatly accelerate the development of charter cities in a way that single projects, I think are unlikely to do.
This isn't to say that we don't – single projects are obviously crucial to the charter city success. We need more of them. Most of them currently just don't have the scale to have all right, the massive, I don't know, to call it educational impact, or cultural impact. Even if they do, having that cultural impact necessitates people who can help spread it. Some of the projects we are working with, for example in Nigeria, in Zambia are interested in having us as a partner, in part because we can help broadcast their message. We can help put them in front of people they might otherwise not talk to. We can help put them in front of media sources that might not otherwise be interested.
You do need to build this message spreading network too to ensure that these lessons are learnt and can be broadly applied. I think there's a very large value add in that, even if that value can be somewhat difficult to capture.
Kurtis: Great. You talked a bit about what you've gotten right since you founded the institute three years ago, what you got not so right. Let's talk about how you've built CCI as an institution. How's it going over the last, what was year one like, what was year two, year three and what do you expect for the future?
Mark: Sure. Year one was – I’m embarrassed to look back on it. Our website was mediocre. We had a silly name. I traveled a lot. Most of that travel might not have been very productive, where I was trying to sell the idea. It was doing a multiple of things. It was one, trying to get funding, so I could pay myself and hopefully hire and pay other people. It was two, trying to build the network, trying to plant the seeds. Thinking back on it, there's a handful of people who I think I met in that first year of traveling, who have since proven to be quite valuable and helpful. Most of them probably weren't.
It was really trying to sell this big idea and begin to start nailing down the specifics. Then the second year, I made my first hire. I mean, it was still – we nailed down the specifics a little bit more. We held some events. We started to really build the network. We started to write a little bit more. We've drastically improved our website and we started to make, I think what we were doing a little bit more concrete.
Over the last year or so, we have grown, I think technically actually, from two people to nine, maybe three people to nine. I don't know if Jeff was technically onboard a year ago. Really built out our research capacity, so we could deliver. I met a lot of people and it's like, “Oh, let's do this partnership. Cool, yes.” But all right, it's just me. I don't have time to do a lot of research. I’m trying to do a lot of other things. There's this, I think saying in Silicon Valley, where a startup is first doing everything poorly. Then adding some people and doing everything mediocrely –
Kurtis: I think the fancy term is minimum viable product.
Mark: Yeah. Then adding more people and doing everything better and then adding a lot of people and doing everything very well. Over the last year, what we've seen is we've added people and we're doing things I think much better. At the same time, I think there's a lot of improvement. It's just natural. I think this is one of the challenges in that in hiring, we're trying to add people from who have international development experience, as well as people who have this entrepreneurial ability. Unfortunately, the overlap is not as much as I would like sometimes. Kurtis is shaking his head, because –
Kurtis: We're trying to make friends, man.
Mark: I’m phrasing that diplomatically. There is this, I think to a certain extent, sometimes just expert bias, where once you go very deep on a subject, this happened to me in grad school, where it's like I haven't read the five books on that subject, so I’m not an expert. I actually remember at one point, somebody asked me, “Mark, what do you know about Somalia?” I was like, “Oh, I’ve only read five books on the subject. I’m not really an expert.” He was like, “Well, five books seems like a lot.” That's just how, I think, a lot of academics think.
There has been this knowledge that we want to pull from the international development community, but we also want to ensure that it is paired with this okay, I don't know that. It doesn't mean I say, all right, this is somebody else's responsibility, but this just means I need to put on my thinking cap and go talk to people.
Really balancing that get-done attitude, that figure-it-out attitude with this domain-specific knowledge has been quite important in building out our team, in building out our success. A lot of previous charter cities and related organizations have focused on hiring people who are in the space. As I mentioned, our expansionary attitude is not just focused to who we're forming partnerships with, but also who we hire.
A lot of the people we hire don't know really what charter cities are when they come in. They might have read a little bit, or heard a podcast, but it is much more of a – we have an onboarding plan, much more of a way to get people in-line with the ideas, with our general belief being charter cities are awesome. Once people learn what they are, they will believe that they're awesome too and that's much easier to overcome than this domain specific knowledge that in terms of whether it's communications, or fundraising, or governance that people spend years studying and getting quite good at.
We tend to focus on emphasizing the latter for hires, rather than the former, to ensure that we have a team that can execute very effectively. Now we're nine people. We're still quite small. I think we're much better able to execute and deliver on projects than we were a year ago, but at the same time, obviously if we have a team of 20 people, 40 people, we'll be able to undertake a much larger number of projects than currently.
My general belief is charter cities are drastically underfunded. I mean, there could be a budget of 10 million dollars plus, 50 million dollars and the marginal impact of a dollar, it does not decrease very quickly at this point. I mean, obviously, if things like, that's the marginal impact of a dollar is almost constant throughout. It's not constant for charter cities, but the decrease is pretty slow. There's just a huge amount of work that can be done, given that we're trying to build cities. There's lots of capital necessary.
Kurtis: On the topic of hiring. You talked a bit about how you evaluate candidates. You want someone who's scrappy and entrepreneurial. You talked a bit about the background and skill set you're looking for in international development people. What else are you looking for in terms of background and skill set?
Mark: Yeah. I think there needs to be a scrappy entrepreneurialness. Ideally, the candidate should be on Twitter way too much, just so if we can make jokes in the office.
Kurtis: I can attest to being left out. Yes.
Mark: I think that experience with international development, with governance, or with urban planning, with cities, just some familiarity with the space. The idea that there's this core set of charter cities ideas and understanding. This core set shares a lot of values with a lot of mainstream ideas in terms of development, this focus on governance, this focus on poverty alleviation, the focus on economic growth. We have a particular instantiation of these ideas and values, plus a strategic plan to execute.
If you are adjacent, whether it's cities, whether it's Silicon Valley, whether it's governance, whether it is urban planning, there is this belief that okay, you have your expertise, let's bring you onboard, let's inculcate you into one, like what charter cities are, this charter cities understanding and belief. Then two, what CCI culture is, this entrepreneurialness, this intellectual curiosity, this willingness to tackle new challenges by its nature. I think this job requires you to do things that you haven't done before. We need a team that is willing to roll up their sleeves and figure it out.
Additionally, how I think about the CCI culture is that we are building the culture not just for CCI, but also for the charter cities space generally. What this means is that there is this – I think this was a Paul Graham tweet, where somebody tweeted like, “It's scary building a company and watching the entire company adopt your own habits, whether they're good or bad.” Paul Graham's response was, “Sometimes you even see this happen in entire industries,” which to be honest, is terrifying because I have a lot of habits that I’m not particularly proud of.
What I try to emphasize in our office is that we need to hold ourselves to a very high standard, both internally as a culture, because to build an organization, it's important to have a good office culture, so people are able to make decisions independently, while still being in-line with the broader goals of the organization. Then additionally, because for a lot of charter city developments, we are one of the primary touch points, if not the only touch point. Therefore, our culture and our values will be interpreted as representing the entire charter cities community. Ensuring that we don't just have values to improve our productivity as an organization, we also want values to improve the charter city space generally.
I think the values are similar. Things like intellectual curiosity, willingness to take risks, a big vision, a spirit of generosity, things like that. I truly believe that in 30, 40 years, people are going to look back at some of these decisions that we're making in the first few years. They're going to look at the arguments we had, the successes, the failures, etc. They will inform how people think about the space, about these cities, where tens of millions of people might live and where people are going to make decisions based on what they take from the lessons of our work. To me, that's I think tremendously important and gives us a huge amount of responsibility to act as I think, careful stewards for what we're doing.
Kurtis: What positions is CCI looking to fill over the coming years? If folks do hear this and they want to get involved, what skills should they be building out?
Mark: Sure. Well, I think there are two questions. One is CCI and then two is charter cities generally. With CCI, I think what we are going to do is our primary focus is research. We are going to continue to focus on research. We have a emphasis on ideally, we want to hire researchers from the markets we are working in, whether it's Latin America, whether it's Africa, whether it's Asia. There is some domain-specific knowledge that is very valuable for people who live and experience those conditions, that it's just very difficult to get if you are not in that situation.
Specifically, what these research positions might look like is things like urban planning, urban governance, I don't know, banking law and regulation. Kurtis is having fun with that right now. What other research positions are we thinking about? We will need legal help. I think in addition to that, what we are looking, we will need to build our communications department, so to help ensure that we message effectively across a wide audience. I think we have a very strong internal writing culture. We value being able to communicate effectively in writing quite highly and ensuring that we can continue to fill positions with people who are effective writers.
In addition, we have a development department, so people who are able to help fundraise, people are able to unlock new sources of revenue, whether it is right now for example, most of our donations are from high-net-worth individuals. It would be great to start getting money from foundations, or to diversify our revenue streams a little bit, so people are good grant writers. Partnerships, we will need to form a lot of partnerships with different organizations. We will need to host events. Obviously, as we continue to grow, we will need to ensure our operations stays smooth and we can provide good compensation packages to attract the best quality candidates.
That is what I think we are thinking about with CCI as an organization. There's the broader charter city space, which has a lot more roles to fill. I think this is going to be things, like one, is just all right, on the general side is urban planning, is financing, whether it's early stage financing, which is a little bit more venture capital style, or whether it's late stage financing, which is more real estate style; engineers, project managers.
I mean, some of the challenges are land acquisition. If you happen to be a very large landowner in an emerging market, give us a call. We have some ideas. Landowners. If you're a politician in an emerging market and you're interested in charter cities, or if you're a public intellectual, an advisor, you're interested in charter cities. I see charter cities as something that really affects almost everyone and everything. If you have this level of interest, whatever your skill set, if you're working in emerging markets, this probably has some relation to something that you do and we're happy to really have a conversation about that.
I think, more specifically if you want to be in the charter cities space per se, what is really helpful at this stage in the charter city space, not CCI, but is just young entrepreneurial people with a high degree of aptitude and high degree of I guess, what might be described as not really autonomy, but people with a lot of drive who can just figure problems out, this classic entrepreneurial spirit.
Some of our partners, I suspect, would be quite interested and they have expressed interest in hiring people like this that you can just throw out problems and they figure it out. I think that there is right now over the next two years, I think that will be the primary characteristic of folks getting involved in the charter city space, is just this very high ability, very able to throw at a wide degree of problems and figure it out type person. It's still very early. Over the next two years, three years, things will start to formalize, get structure. Then there will be more of a need for much more specific positions. For now, it's more of the generalist, I think, in this space that that is probably the primary value.
Kurtis: In terms of, apart from you growing up here, why start CCI in Washington D.C.? Influence. I mean, if you want to do tech, you go to Silicon Valley. If you want to act, you go to LA. If you want to do finance, you go to New York. If you want to pedal influence, you go to Washington D.C. and Potomac.
Mark: Yeah. I think for example, one of the challenges the Seasteading Institute faced was they adopted this Silicon Valley attitude, where it's like, “Screw you. We can do it better,” which if you're working with governments, if you're doing a startup, you don't need to ask Google, or IBM, “Hey, is my startup okay?” If you want to build a new governing system, you do need to ask governments, “Hey, is this okay? Can we work together?” That requires an attitude and approach that is not adversarial, that is not confrontational.
To do that, it's quite important to be in Washington D.C. That's where all of these conversations happen. The World Bank has a headquarters in D.C. Center for Global Development is in D.C., all the think tanks are in DC, the talent pool is in DC for a lot of these things. Being in D.C. and able to have these conversations and able to influence some of these larger organizations to help them begin to focus on charter cities, I believe is crucial for the long-term success.
Kurtis: I should have probably asked this earlier, but can you explain in concrete terms what CCI does.
Mark: Our primary function is really as a think tank/advocacy organization. We do a variety of things around this. One, we put out white papers. We do research. Our research tends to take several different dimensions. We put out what we are just calling reference guides. Our hope is that these reference guides will be used by new city developers to influence their decisions on the ground. These reference guides are things like a model charter, model legislation, a governance handbook, urban planning guidelines, that can really develop a common model for what a charter city is that it will then be adjusted on a case-by-case basis.
In addition, we have a research paper series, where we try to think – we work with typically outside academics, and so we've done one on radical exchange. We have done one that we're publishing soon on local city management. We're interested in publishing this wide variety of papers, potentially doing one gender in cities, one on environmentalism in cities, one urban planning in cities. Just trying to distill information from these specific areas, but distill it how it applies to charter cities.
Then, we also have things that are a little bit more public-facing, a little bit more accessible, we have a blog, we are on social media, we have a podcast, we have a YouTube channel. The YouTube channel is still nerdy, but we're slowly trying to turn our nerdiness down to make it more acceptable, or more digestible to a broader audience. We did host events and we will begin to host events again once COVID is over.
We believe that stakeholder engagement is very important and can happen much more naturally in-person environments than in non-person environments, then online. We have a partnership, so we like to work with other organizations. We figure out, can we co-author a paper? Can we do a joint event? Can we work together on this common or shared purpose? Then lastly, we work with new city developments on the ground.
There are a lot of new city developers on the ground and we're working with several; one in Zambia, two in Nigeria, one in Latin America. The two help them overcome their challenges, whether it's working with government, whether it is drafting regulations, legislation, whether it's figuring out how to create an administrative structure from scratch. We try to be relatively flexible in terms of what the individual needs of the partner are, and as long as they share the common vision and we can work out an agreement, then we figure out how we can help.
Kurtis: Just to summing that up in digestible terms, so technical assistance, partnering with new city developers on the ground, partnerships with we want to obviously get into the international development community, so folks like the U.N., World Bank, DFC and others research. That's my jam, where we write research papers and our reference guides. Then more media and events type stuff. On top of that, how does CCI measure its impact?
Mark: This is a tricky question. I, actually over the last few days, looked through a bunch of think tanks and how they measured their impact. All the measurements are not very good. Where it's like, we produced this many papers. It's like, okay, that's an output, not an outcome. That's an output. The question is if you're a think tank, did you influence this law? Okay, maybe this law would have been much worse without you, or maybe you helped introduce this new law, or maybe you changed the national conversation, so they're now focusing on X, instead of Y.
The counterfactual is very difficult, because with a company the counter – the question is are you making money? What is cash flow in versus cash flow out? There are ways to measure that. With non-profits, it is quite tricky. Up until now, we've been small enough that to be honest, we can do it a little bit by gut feel. We know what would have happened without us. Obviously, this requires a degree of trust from people who are listening, but we can point and say, “Hey, this company would not have existed without us,” which has happened on two occasions at least.
We can point and say, “Hey, this thing drastically changed their mission statement to make it much more in-line with our language than it was before,” which is also something that has happened. We can say that this funding opportunity to one of our partners would not have happened if it wasn't for an introduction that either we facilitated, or where they met at our event. The charter city space is still small enough that it is relatively possible to develop individual causal links for almost everything that has happened.
Broadly, the question how do we measure our influence or how do we measure success, it is basically by influence. It is if we're looking five years in the future, it is the World Bank, it is the U.N., it is the World Economic Forum, all of these having charter cities at the top of their agenda and all of them directing substantial resources in both manpower and technical assistance and energy, as well as financial resources to charter cities.
What this means is that while they are directing resources, this means that more charter cities are being built than what otherwise have been built. The charter seas that are being built are being built on a faster scale that are making decisions better, because we have helped to create this framework in place and this network in place, such that there can be a greater overall impact. If we're thinking 10, 20 years in the future, the counterfactual is there are millions of people who have better lives, because they're living in charter cities than if we had not existed.
The ultimate goal is to lift tens of millions of people out of poverty with charter cities, but obviously, establishing this causal link is a little bit tricky. What we are doing now that we've really created and solidified our leadership team is coming up with really specific metrics for every department, so we can start measuring our success in terms of how are we influencing the conversation. What is happening which otherwise would not have happened? Because I really want to ensure a lot of non-profit organizations tend just to become clubs, where the donor is hanging out with their friends and the staff just likes talking about ideas, which is fine. It's a club. But have to a certain extent, given up on achieving change.
We are very much outcome-oriented. We are very much focused on achieving change. As such, it's really crucial to ensure that we are focused on that. I’m not even sure. Metrics, I think are important. I mean, ultimately CCI probably taps out at 50, or a 100 people. We're never really going to get above Dunbar’s number. I think the measurement challenges are a little bit less than if you're in a 10,000-person organization. Nevertheless, they still exist and figuring out how to quantify them a little bit better to ensure that we are having the impact that we are dedicating our resources to where we want to go is key.
Kurtis: Great. Now to the future of charter cities as an idea. What charter city developments are you most excited about and what do you think the charter city space will look like in five years, 10 years down the road?
Mark: Sure. Some of the projects I’m most excited about, our partner organizations. In Zambia, Nkwashi, they started moving dirt on their university. That's very exciting. I’m on the board of the university.
Kurtis: Mark is a part owner of a university. That is terrifying.
Mark: Well, CCI is. That's my favorite party trick. Co-founder of a Zambian university. In addition, in Nigeria, working with two projects; Talent City and Enyimba Economic City. Talent City is led by Iyinoluwa Aboyeji, who is a Nigerian entrepreneur. They're focusing on technology and on the technology sector. Getting that will draw a lot of attention. Technology tends to be relatively sexy.
Enyimba Economic City is a new city development. It's being built on 95 square kilometers for 1.5 million residents. The scale of it is just completely massive. We are working with them to apply Nigerian special economic zone law, but adopting a little bit, because it's city scale instead of an industrial park, and seeing what we can implement there. There is this interesting regulatory aspect, as well as the scale, just being tremendous. Then in Latin America, we're working with a project that has a very high degree of legal autonomy. Figuring out what does it actually mean to create a legal and regulatory system from scratch. This project is also targeting lower income residents, which is quite interesting, because that price point, a lot of these new city developments haven't figured out how to hit a lower price point to be accessible to the widest range of people.
Other projects that we aren't directly working with, but are still engaged with, Prospera is obviously exciting. This is the first, or at least, arguably the first charter city development in the world, in Roatan, Honduras. One of the projects that I’m working on in my personal capacity is Victoria Harbour Group to build a new city for Hong Kong residents. That is a tremendously exciting project. Then we have a pipeline, a handful more projects that we've had early discussions with that are also quite interesting that might not be ready to go public at this stage, but we believe can have a meaningful impact down the line.
Kurtis: Great. Just looking at the elevator pitch for the Charter Cities Institute, what would it be?
Mark: Charter cities, new cities with better laws, have the potential to lift tens of millions of people out of poverty by improving governance in emerging markets and combining that with new city development. Come and join us as we change the world for the better.
Kurtis: Mark, tell us what the Charter Cities Institute looks like in five years or 10 years.
Mark: Thank you for asking, Kurtis. Our goal is to be a global, well-known organization. We want to be setting the agenda. We want to be in all of the discussions, similarly to how environmentalism within about a 10-year period went from this idea that people had in the back of their minds, to the launching of the organizations like the EPA, to the passage of NEPA, to being a front and center consideration for policy-making across the United States, where there were new government organizations that were dedicated to it, or obviously a lot of private organizations. Then it was just a primary concern and consideration for almost any project.
Similarly, given the scope of charter cities and their potential to relate to almost all areas that are of concern in emerging markets, we are hoping that Charter Cities Institute can drive that conversation and can help spawn the creation of this larger supporting environment. In practice, what would that look like? That would mean organizations like the U.N. and World Bank put charter cities in their agenda. There are charter cities panels at their major conferences. There are charter city speakers at those events. Organizations like the World Economic Forum, for example, might create a working group on charter cities. Countries start adopting charter cities legislation.
CCI speakers, or CCI staff are invited to speak at national congresses, or legislatures about the impact of charter cities. CCI experts are helping to draft charter cities legislation, or helping to draft city charters, are helping to really set up these governance frameworks, that there are these major funds, the DFIs, as well as sovereign wealth funds, whether it's IFC, begin to explicitly consider charter cities as a area to invest in.
You have a series of charter cities conferences. Of course, Charter Cities Institute will be organizing them, but other organizations will throw related conferences, or invite relevant speakers to give the charter city's perspective, that everybody in the international development community will have an opinion on charter cities. They don't all have to be positive, but it needs to be so thick that you can't really escape it.
Obviously, part of this means that hopefully, it will become much easier for charter city developers where there is an active talent pool for example, senior – the vice president of sales. If you need somebody to sell your lots, there is a talent pool that exists who has done that with charter cities before. There are organizations that can help get the first 10,000 residents to the charter city, via social network and promotion. There are funds that are dedicated to early stage charter city investing. Hopefully, Patri Friedman can scale up, but then maybe one or two others, such that there is a wider pool of available funding and interest.
There is a strong network particularly with a heavy focus on people in emerging markets, of folks interested in charter cities, whether it's founding them, whether it's working for them, whether it's talking about them, that there is this level of interest. Then obviously, most importantly, if we're thinking in five years, I think having maybe 10, 20 charter cities that are being developed with a total population of 10 million people. Obviously, there won't be 10 million people living in them now, but with a projected population of 10 million. If we assume 20 charter cities total with the population of 10 million, or projected population, that means average population in a charter city is about a half million, which is ambitious in five years, but I think probably feasible if we execute extremely effectively, and really have the groundwork be laid for this hopefully, massive explosion in human flourishing and human well-being and human creativity that can help lift a lot of lives out of poverty.
Kurtis: Okay. To end, why don't you tell folks who are interested in listening where they can go to learn a little more?
Mark: You can check us out @cci.city on Twitter. I am M-A-R-K-L-U-T-T-E-R on Twitter. Mark Lutter. We are also on Facebook. We are on Instagram. I think we're going to revive our Instagram soon, so you can follow us and get the new updates. We are on LinkedIn. We have a newsletter. We have a blog. Come check us out and be part of –
Kurtis: We have a website.
Mark: We have a website. Chartercitiesinstitute.org.
Kurtis: Great. With that, thanks so much and that's it.
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, @cci.city on Twitter and Charter Cities Institute on Facebook. I’m your host, Mark Lutter and thank you for listening to The Charter Cities Podcast.