Free Cities: The Road to Growth

Introduction

Market competition is one of the most successful institutions ever developed by humankind. It is largely responsible for two of the greatest events in human history: The Industrial Revolution and the postwar reduction in international poverty. Poverty, once the natural condition of mankind, continues to exist solely because some states have not adopted market competition.

Unfortunately, there remain substantial barriers to the introduction of market competition in these states. In fact, competition in a certain crucial industry continues to be suppressed. If that industry is poorly run, a country remains impoverished. If improved, rapid economic growth quickly follows.

The industry is territorial governance. Political scientists and economists typically assume the state the be the sole provider. However, history shows a wide variety of types of territorial governance, from the corporate governance of the Dutch East India Company to Puritans, Quakers, and later Mormons establishing religious colonies. The current dominant model of statehood, while successful in some respects, has failed in others. Competition in territorial governance can remedy those failures.

I propose free cities as a mechanism for competition in territorial governance. A free city is an autonomous or semi-autonomous city. It can opt out of some or all of the legal and regulatory system of its host country. Recent examples include Hong Kong, Singapore, Shenzhen, and Dubai. I believe their success can be replicated throughout the world, accelerating economic growth and alleviating poverty.

Free cities matter for three reasons: territorial governance in the developing world, the rapid urbanization of the developing world, and technological innovation in the developed world.

Most developing countries are poorly governed. These countries lack rule of law, property rights, and state capacity, often leading to economic stagnation. Improving governance at the national level is typically difficult and slow. Free cities allow for rapid institutional improvements at the local level.

The developing world is also rapidly urbanizing. The UN estimates there will be an additional 2.5 billion urban residents by 2050. Accommodating these new residents requires not only building new infrastructure, but ensuring residents can trade, contract, and contribute to the global economy. Free cities make that possible.

Technological development drives economic growth in developed countries. However, overregulation has caused certain industries to stagnate. Alphabet, the parent company of Google, for example, is limiting its investment in health care in developed countries because of onerous regulations. Free cities in the developed world can opt out of harmful regulation, unleashing our best and brightest to address humanity’s most pressing problems.

The rest of this essay is split into four parts. First, I further develop the idea of free cities. Second, I offer suggestions on why and where we most need free cities, and how they will likely will work. Third, I review the evidence suggesting that free cities are viable. Lastly, I conclude.

Free Cities

Free cities is a catchall name for any city with substantial or complete autonomy. Free cities cover a range including Paul Romer’s charter cities, Shenzhen’s special economic zone, independent Singapore, and private, semi-autonomous cities. All allow the city to independently develop much of its legal and regulatory system.

To think about a free city, start by assuming it has complete sovereignty. Then consider what parts of the host country’s legal and regulatory system the free city would be likely to keep. Criminal law, for example, is probably at the top of the list. This differs from the typical thinking on special economic zones.[1] Most special economic zones begin by thinking about which laws and regulations to simplify or eliminate. Free cities, on the other hand, think about what laws or regulations to keep.

The primary advantage of free cities is their ability to rapidly adopt institutional improvements. Past free cities were typically built in sparsely populated areas, a trend that is likely to continue. By building in localities with few special interests, it is possible to institute more radical changes than would be accepted at the national level.

A secondary advantage of free cities is their ability to experiment with different types of governance. Innovations in governance tend to be slow. For example, most police departments in the United States are unable to receive or respond to texts. However, by introducing competition in territorial governance, we can more clearly observe which types of governance and policies create jobs and attract residents. This discovery process has spillover effects and thus benefits us all.

A tertiary advantage of free cities is their ability to improve governance of the host country. Competition works, even among states. Historically such competition has often been driven by war. However, free cities can drive competition through commerce. A successful free city spawns copycats, as well as calls for the host country to improve its governance. For example, China’s initial special economic zones and their later imitations were both largely influenced by Hong Kong.

Why, Where, and How

Different countries might allow the creation of free cities for different reasons: some to spur economic development, some to build needed infrastructure for urbanization, some to accelerate technological innovation, and others to create a sanctuary for refugees. In this section I detail some of the reasons to build free cities and the form those free cities might take.

In sub-Saharan Africa and Southern Asia, free cities can help with urbanization and improve governance. Both are among the least urbanized and worst governed. Free cities built in sub-Saharan Africa or Southern Asia in the near future could mirror the rise of Shenzhen, which grew from a fishing village of 30,000 people in 1980 to the greater metropolitan area having 16 million residents today, albeit likely on a smaller scale. Such cities would be built to accommodate a largely uneducated populace from rural areas. With low wages and economic freedom, these cities would likely become manufacturing hubs.

Developed countries have different needs. Europe and North America are both urbanized. There is no readily available population for a free city to draw from. Free cities could, however, offer centers for technological innovation. Marc Andreessen, a well-known Silicon Valley venture capitalist, argued in a Politico article, “Turn Detroit into Drone Valley,” that cities in the Rust Belt should opt out of onerous regulations and encourage technological experimentation. A free city could test driverless cars, drone delivery, and medical innovation.

Latin America is largely urbanized, but still suffers from poor governance. Free cities in Latin America might be closer to free suburbs. These free suburbs would be built close to existing cities and would be large enough to benefit from the rule of law and property rights. They would compete with the city, offering to reduce red tape for entrepreneurs and established companies.

Free cities could help alleviate the refugee crisis. One could be built on a Greek or Italian island. By creating a territory with laws and regulations conducive to economic growth, a free city could attract Syrian, Afghan, and Iraqi refugees. This is especially important as recent trends suggest Europe is unlikely to tolerate many more refugees.

While the particular reasons for building free cities might differ, they will likely adopt similar policies. Free cities should offer the rule of law, private property rights, and economic freedom. Starting a business should be cheap and easy. Enforcing contracts should be inexpensive and timely. And the government should be quick and responsive to people’s needs.

Delineating what these abstract notions mean in practice is tricky. However, generally free cities should import a legal system known to promote commerce—namely, common law. They should create their own system for registering businesses, perhaps copying Estonia. They should opt out of regulations regarding construction permits, labor, and environmental surveys. In place of such regulations, free cities should borrow financial regulation from Dubai, public services from Switzerland, and labor regulations from America.

Free cities can be self-supporting. They can finance themselves through a land-value tax. Land-value taxes, unlike other forms of taxation, do not increase deadweight loss. The supply of land cannot decrease, nor can it be hidden in offshore accounts. Further, as institutions are an important determinant of the value of land, improving institutions should allow the free city to quickly generate revenue to pay for initial investments in infrastructure. This ensures free cities can be self-sustaining, not dependent on subsidies.

Viability

Even if we acknowledge that free cities could improve territorial governance, a question remains. Are free cities viable? Where do the billions of dollars necessary to build a city come from, and would a country grant the type of autonomy necessary to jumpstart economic growth? How new cities are funded suggest financing free cities will not be a problem. Trends involving the creation of semi-autonomous zones suggest political norms on autonomy are changing.

The New Cities Foundation (2015, 7) writes, “If new cities of the past were spearheaded by the public sector, private stakeholders are the undisputed driving forces behind current projects.” Surveying current city projects, it becomes clear the New Cities Foundation is correct. Lavasa and King Abdullah Economic City both demonstrate that private capital is able and willing to fund the construction of new cities at the scale of tens of billions of dollars.

The spread of special economic zones suggests countries are becoming increasingly likely to grant autonomy. Over the last thirty years, the number of SEZs has exploded. Ireland founded the first one in 1959. For the next twenty years, growth in the number of SEZs was relatively slow. However, in the ’80s and ’90s, growth accelerated. Currently over 4,000 SEZs worldwide have been established.

Special economic zones are, however, not free cities. They typically lack both the autonomy and the scale to qualify.

We have seen, however, several encouraging signs. Honduras passed a law that allows for developers to create zonas de empleo y desarollo economico. These zones can opt out of Honduran regulatory law and import a legal system more conducive to development.

Meanwhile, Paul Romer engaged in in-depth talks with Madagascar to build a charter city. Unfortunately, after a coup, the project stalled.

More hopefully, King Abdullah Economic City is arguably a free city. The New York Times reported it was being built in part to allow Millennial Saudi women more freedom. The city’s website states it offer “privileged regulations” and that it is Saudi Arabia’s “most business friendly city.”

Given this evidence I not only believe that free cities are viable, I believe they are inevitable. Questions remain regarding their size and the scope of their autonomy. However, barring an unpredictable reversal in current trends, free cities are coming.

Conclusion

Poverty continues to exist, but largely because markets are closed. Unfortunately, increasing economic freedom at the national level is often difficult. Efforts frequently stall, and plans can take decades to implement even when successful. Free cities offer a shortcut to increasing economic freedom.

By using land inhabited by few special interests, free cities can rapidly improve institutions without the usual political battles. Additional competition in governance can not only improve the lives of the residents of the free city, but likely also the governance, and therefore the standard of living, of the entire host country.

Given the centrality of governance in economic development, it is especially important to focus on how to improve it. Free cities are among the better mechanisms. It is for this reason I believe Hayek’s lessons are best applied to free cities.

Bibliography

New Cities Foundation (2015). “New Cities and Concepts of Value: Planning, Building, and Responding to New Urban Realities – Reflection and Analysis of Themes Emerging from Cityquest – KAEC Forum 2015.”

[1] I consider Shenzhen to be a free city because the SEZ which led to its growth granted a wide degree of autonomy.

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