Start-up cities
How lessons from the past might guide the future
Telosa render by BIG
Hi, it's Ben from the Tony Blair Institute. The idea of start-up cities are increasing in traction, while in a brilliant recent post on crypto cities, Vitalik Buterin laid out some radical thoughts on how technology can shape governance. As part of our ongoing work on the new geography of innovation, Lauren Packard in our San Francisco office looks at some of the ideas — and offers some thoughts on how they might succeed.
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As the havoc that Covid has wreaked on our supply chains and traditional networks of trade come to the fore, digital networks are continuing to flourish.
Throughout an extremely challenging pandemic, some have thrived by virtue of their position at the intersection of the technology and knowledge economies. In many respects, they were already predominately located on the web.
As a result, a sort of internet-era unionization has happened by accident. Having proven their ability to be productive outside of the office, many workers are now pushing for greater flexibility and creating a new dynamic in the longstanding tensions between labour and capital. Some companies—recognising the ability to compete for the world’s best talent by being unrestricted geographically—have bet on going “remote-first”.
Untethered to physical offices in pricy urban areas, some in the knowledge economy are moving to Austin and Miami, to the suburbs, and even to rural Italy, where a home can be had for as little as $1.
Some of these locations have made an attractive play to entice talent to relocate. But still all have one thing in common: pre-existing governments, with legacy processes, many of which were designed for the last century. As web3 and other trends push the idea of decentralization further, the question is: could we see new cities build on the foundation of technology today?
The startup city
Consider Próspera, a 58-acre city on a Honduran island run by Honduran Próspera, Inc.—an LLC incorporated in Delaware and backed by a San Francisco venture capital firm. It is the first of its kind in Honduras, after legislation was pass in 2013 to enable semi-privately governed cities to operate within the country.
Government services will be provided entirely by a contractor; all civil disputes will be resolved by private arbitration; the effective tax rate is under ten percent. Citizens and companies can opt-in to a wide variety of health, safety, and environment regulations or decline to follow any at all so long as they have liability insurance. In this default ‘regulatory yes’ approach, the burden is on private insurers – rather than the government – to assess whether an industry or activity is safe. Would-be Prósperans must obtain Honduran citizenship, pay a membership fee to Próspera, and sign an “agreement of coexistence.”
Another start-up city, Telosa, is the brainchild of tech entrepreneur Marc Lore. It promises an egalitarian and eco-friendly desert utopia but has yet to find a corporeal home. Culdesac, a car-free city in Arizona, is slated to open in 2022, while CityDAO just bought property in Wyoming, making it the first decentralised autonomous organisation (DAO) to own land.
Many of these startup cities bill themselves as focused experiments for new economic models and regulatory innovations which, when coupled with foreign direct investment, will create vast wealth for the nations within which they are located. They promise responsive, adaptive, and efficient governance to accommodate burgeoning populations of urbanites worldwide.
It’s an enticing prospect and while the concept may seem novel, it many ways it’s not: free market enclaves have existed for centuries. Some have created significant value that have had spillover effects for neighboring economies, while others have failed to live up to their promise.
A brief history of special economic zones
A special economic zone (SEZ) is a geographic area within a country’s national boundaries where different rules apply. In the nineteenth century, port cities such as Hong Kong, Gibraltar, and Singapore established free trade zones where customs were waived to increase exports and consequently trade, foreign investments, and jobs. In the mid-twentieth century, nations such as Bangladesh, Vietnam, Mauritius, and Honduras formalized free trade zones to increase manufacturing and export of goods such as electronics, cars, and garments.
Host nations incentivise foreign investment by waiving taxes (including sales, excise, and municipal taxes and taxes on profits, assets, and repatriation), streamlining customs and other regulations, and providing public infrastructure.
Today, there are over 5,400 SEZs in almost 150 countries. Over half are in China, followed by India, the United States, and the Philippines. These zones often serve as laboratories for nations to test out new free-market policies and foster specialized clusters of industry or drive innovation in areas such as science, tech, and biotech. Often, private companies or even foreign governments help administer them.
Hong Kong, Shenzen, and Singapore are touted as “miracles” that have spurred innovation and lifted millions out of poverty.
But not all SEZs have created lasting prosperity; many in India have largely failed to improve local economies. Some failed to attract foreign direct investment or remained un- or underdeveloped for decades. Even where zones have attracted investment and created jobs, they may not benefit the host nation’s economy if they fail to develop links to local businesses.
SEZs are often multi-use and engender new governance bodies and regulatory frameworks distinct from that of their host nation. Therefore, the SEZ framework lends itself to startup cities looking to create policy laboratories. Startup cities also seek to create new legal frameworks, judicial systems, and sovereign identity.
Many of them intend to leverage blockchain technology not only to mint cryptocurrencies such as city tokens and – as is the case in Vitalik Buterin’s through-provoking essay – to implement new and experimental forms of ownership and democratic governance.
Such ideas should be explored, but savvy host nations should also mine the long and rich history of SEZs for lessons learned. They must also think carefully about how policy innovations created for SEZs - designed for an economy predicated on the creation and transport of physical goods - apply to a digital economy, in which geography is largely irrelevant.
Some fundamental considerations are at the heart of this. Historically, economic benefits for SEZ host nations have fallen into two categories: first, direct benefits, namely export growth, jobs, and foreign exchange earnings, and second, indirect benefits including skills upgrading of the workforce, technology transfer, and linkages with domestic firms. These benefits justify foregone tax revenues and other incentives.
But if economic activity is primarily taking place in the cloud, how does the host nation benefit? What kind of jobs will be created? What kind of skills training will be offered? What kind of knowledge will the host nation acquire, and how? What kind of linkages (forward and back) will be created with national economy?
Further, startup cities often plan to use smart infrastructure, raising questions about privacy and long-term viability—what if the company that provides the technology goes under, or decides it no longer wants to support the services it installs?
None of these ae insurmountable, and agreements can be structured such to proactively address some of these concerns.
Three areas in particular need consideration.
Align incentives
While startup cities theoretically could be self-contained systems—especially if they leverage technological advances such as distributed solar and battery storage—they will almost inevitably require connection to host nation infrastructure such as the grid, airports, ports, roads, and water lines. The host nation and startup city should therefore structure the SEZ agreement such that tax revenue adequately provides for the creation and maintenance of critical infrastructure.
Land value and pricing are another incentive host nations must carefully deploy. By selling land to a startup city, nations cannot directly benefit from the land value appreciation. Leasing is one option, which may increase incentives to invest. For example, the Lekki Free Zone Development Company in Nigeria (a joint venture between a Chinese company and the Lagos State government) has a fifty year lease.
A start-up city authority
An independent authority should set a countrywide strategy including objectives, locations, and linkages to the local economy. The regulator should be shielded from political pressure and adequately funded to ensure effective implementation. It can be a specialised agency or a state-owned company.
The host nation and startup city must also create a coordination mechanism to supervise and monitor development and implementation, such as the joint China-Singapore governing body that governs Suzhou Industrial Park.
Socioeconomic objectives and performance requirements
The host nation can write or update laws to set out socioeconomic objectives. In South Africa, for example, the purpose of the Special Economic Zones Acts is to promote small, micro and medium enterprises and co-operatives, as well as skills and technology transfer. This can be particularly critical for around issues such as promoting skills transfer to local workers, creating forwards and backwards linkages with the domestic economy, and ensuring adequate data storage, security, and privacy. Similarly, laws can also include specific establishment and operational requirements
Perhaps akin to an agile method, startup cities should measure progress against these aims and agreement should be able to be restructured if they aren’t being met. The most successful SEZs have continuously adapted to evolving contexts and development objectives. Such flexibility will allow startup cities to leverage their utility as a policy laboratory for the tech revolution, which will require new and different institutional approaches.
There is increasing potential to create a more globally flexible labour market today, with nations competing for talent that is not necessarily within their borders. This presents exciting possibilities for countries and workers around the world.
Some of this builds on old ideals for free-market enclaves. But some of it is new because technology has opened up new geographical prospects for labour and new abilities to radically experiment in governance.
Start-up cities therefore offer exciting possibilities and nations looking to embrace the digital revolution should explore such ideas. They should just look to history as much as to the future.
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Enjoyed this post? See also our work on the New Geography of Innovation and our recent appearance on the Sand Hill Road podcast.