Free Cities: How countries worldwide are unleashing new economic prosperity

AN ASTONISHING 3.3bn people will move from the countryside to live in cities over the next forty years. How will we handle that influx? By installing better legal systems worldwide.

Legal institutions determine whether nations are rich or poor. Think of East and West Germany and North and South Korea, two controlled experiments in which culture was constant and the only difference was the legal rules within which economic activity took place.

Which legal institutions result in prosperity? The answer clearly includes property rights, the rule of law, and economic freedom. Investors won’t invest and entrepreneurs can’t create if ownership is uncertain or subject to confiscation, if judicial decisions are arbitrary or corrupt and if red tape prevents action. Poor nations are poor because they don’t provide the legal institutions required for entrepreneurial capitalism. As they improve their legal systems, as with China’s special economic zones and India’s legal reforms in the 1980s and 1990s, they become prosperous.

The challenge is how to get there. Political bickering and lobbying by special interests often prevent the legislative process from improving the system wholesale. What is to be done?

Bob Haywood, former director of the World Economic Processing Zones Association, suggests that free zones offer a unique path to reform. While elites often oppose reforms that threaten their cosy privileges directly, a subset may support a separate zone in which they can have more opportunity. Zones have stimulated economic development in Taiwan, South Korea, China, Mexico, Ireland and Mauritius. The management guru Peter Drucker described them as the only anti-poverty program that works; Jeffrey Sachs includes export processing zones as one of the few effective anti-poverty interventions.

Real estate developers often work simply to rezone land from residential to commercial – which can double or triple their investment. In the 1970s, free zone consultant Mark Frazier noted that successful free zones result in land value increasing by a factor of 50, 100 or more. Shenzhen land values have increased roughly 18,000 per cent in the past thirty years. From this perspective, most of the world is zoned for poverty when it could instead be zoned for prosperity.

Free zones typically provide tax and regulatory incentives to attract investment. But if the judicial system itself is among the obstacles to development, there are limits to the effectiveness of reduced taxes and regulations. What if it were possible to install a new legal and judicial system within a specified region? In 2003, Dubai pioneered this approach by designing the Dubai International Financial Centre (DIFC) as a 110-acre enclave of British common law, administered by a retired British commercial law judge. The DIFC has taken Dubai from a trivial player in international finance in 2003 to the sixteenth most important financial centre in the world today (as ranked by Xinhua-Dow Jones).

In 2011, Honduras became the first democratic nation to apply this strategy. Last July it passed legislation authorising the creation of Special Development Regions with autonomous legal systems as a strategy for attracting investment. Octavio Sanchez, chief of staff for President Lobo and the lead architect of the Honduran legislation, analysed the role of the judicial system in perpetuating poverty in 2008. He endorsed the idea of law as a “social technology” that should be more adaptive and efficient, and suggested hiring foreign judges to ensure credibility, much as was done by Dubai in the DIFC.

Dubai and Honduras are leading a global paradigm shift, treating law as a social technology that can improve people’s lives. Imagine if we still had to compute using IBM mainframes running COBOL, arguing over every proposed change in every line of code in an effort to update the system. That is, in essence, how we are trying to improve our legacy legal systems.

Now consider instead an innovative, consumer-driven, global industry in legal system creation, in which people have the opportunity to opt-in to new regions with better legal systems. Imagine a world in which much of the land that is now zoned for poverty in Africa, Asia, Latin America, and the Middle East becomes zoned for prosperity. Imagine private infrastructure developers partnering with private education, health care, and legal system developers to create new prosperity zones that democratise access to world-class education, health care, and law.

This is how we can handle 3.3bn people moving from rural to urban lives. Rezone millions of acres of currently unoccupied land from poverty to prosperity, and watch a new entrepreneurial industry step in. Obsolete systems will be upgraded to 21st-century legal technology.

The Free Cities movement is applying the genius of entrepreneurship to the most fundamental problem we face: building legal systems that give access to jobs, opportunity, and hope.

Michael Strong is a co-founder of the Free Cities Institute at Universidad Francisco Marroquin as well as a co-founder of Conscious Capitalism.

Shenzhen land values have increased roughly 18,000 per cent in thirty years.