An Open Letter to the Leaders of Developing Nations

By Titus Gebel

Dear Leader,

I can only assume that you want the best for your people. Perhaps you have been looking for a way to pull your country out of poverty. But you know you will be met with resistance. And at some level you know that to fundamentally change the nation’s trajectory, you would have to completely change the laws, regulations and supplicants that make up the structure of your society. I understand that’s nigh impossible.

With this open letter, I offer a modest proposal. And yet variations on this proposal have worked all over the world, cutting the Gordian Knot between revolutionary overhaul and the malaise of inaction.

The world has learned a lot after 80 years of foreign aid. It took us that long to ask the right questions. For example, we don’t need to ask why poor countries are poor; but rather why are rich countries rich? When we look at the most successful places around the world, we can learn a lot.

Consider Hong Kong, Dubai, Switzerland, Mauritius, and Estonia. Among them, millions have risen out of penury–some in only the last 30 years. Each comes from different circumstances, with different cultures; and yet they share some common aspects:

  1. Sound property rights
  2. Rule of law and independent dispute resolution
  3. Stable financial system and sound money
  4. Open to domestic and international markets
  5. Non-burdensome tax and regulatory regimes

The above is not exhaustive, but it’s a good start. It’s certainly what foreign direct investors are looking for. When we begin to think about how to implement these common aspects, matters become more complicated. But they needn’t be.

I humbly suggest an experiment: the next evolution of a special economic zone (SEZ). You certainly have heard about SEZs before, but I don’t just mean any SEZ. I’m referring to a Prosperity Zone which goes clearly beyond the traditional SEZ.

I am not only an advocate of special jurisdictions, but I lead an organization that will help bring these into existence. (And yes, negotiations with interested governments have already begun.)

Imagine a small carve-out of territory in your home country, preferably near a body of water. A company offers residents and entrepreneurs the basic services of a state, such as the protection of life, liberty and property, within that defined territory. They pay an expenditure-based amount for those services. The rules are simple. And as long as they don’t break those simple rules and respect the rights of their fellow residents, they can do as they wish.

Their rights and obligations are laid down in a contract with the “government service provider”, a private company. Conflicts about the contract go to independent arbitration. Thus, they are a contracting party on an equal footing with the provider and have a secured legal position, as opposed to being subject to the ever-changing whims of politics.

Only if they like the offer will they become residents. It’s a real social contract.

The operating company has an agreement with the host nation, about the long-term use of the territory, which covers the specific political and legal requirements, as well as the protection of human rights of the residents.

So why are Prosperity Zones better than the standard model? Allow me to offer six reasons this form is likely to be superior to traditional governance models:

  1. Experimentation. We have a good idea about what makes for a prosperous society. Nobel laureate in economics Douglass North said, “The organizations that come into existence will reflect the opportunities provided by the institutional matrix. That is, if the institutional framework rewards piracy then piratical organizations will come into existence; and if the institutional framework rewards productive activities then organizations – firms – will come into existence to engage in productive activities.“ But there is not just one institutional matrix. We can run an experiment using best practices.
  2. Certainty. The city operator cannot change the contract unilaterally. Clear, stable and understandable rules of the game, as terms of an actual contract, reduce what economist Robert Higgs refers to as “regime uncertainty.” Such clarity and stability makes it more likely that investors and residents will send capital into support budding enterprises. Certainly it means businesses can trust the governing organization is there to do a specific job–namely what it was contracted to do.
  3. Recourse. Government justifies its authority, and very often its caprice, though appeals to an abstract “social contract.” New regimes, claiming mandates for change, can make life tough for ordinary people and businesses. Citizens have little recourse when police or authorities abuse their power. And they have little recourse but to pray for change; some will hold elections, but these offer no real accountability. In a Prosperity Zone, the contract is real, and the provider can be brought to court on an equal footing.
  4. Scale. What is the optimum size of a jurisdiction? How many people should be governed within its borders? Answers to these questions are debatable, but when we consider that some of the most stable and prosperous societies on earth are reasonably small — e.g. Switzerland, Hong Kong, Liechtenstein, Singapore, Dubai, and Luxembourg — there is a strong anecdotal case for bottom-up, location-specific governance.
  5. Competition. The difference between a collection of small jurisdictions and one massive monolithic jurisdiction is that, in the former, you get pluralism, experimentation and competition. In short, if you don’t like Singapore, you can vote with your boat and move to Hong Kong. Likewise, if a Prosperity Zone fails to offer its citizens security and opportunity, people will just leave. To keep people and capital from leaving this small jurisdiction, things have to be better than the alternatives.
  6. Skin in the Game. This model has significant advantages over conventional social systems, because of their incentive structure. The incentives for the operator of a Prosperity Zone are fundamentally different from those of today’s states. First, the operator has a direct economic interest in the success of the community. Second, like any contract provider, he can be held liable for errors. He cannot conceal his responsibility or pass it on to third parties. He bears his own personal risk. Third, he cannot force customers to accept his product, but must attract sovereign citizens through the attractiveness of his product.

Remember also that apart from the above benefits, you can charge hosting fees or ask the provider to share profits with the host nation. In this way, everyone’s incentives are aligned: The wider nation benefits from revenues of this new economic engine, not to mention from the jobs and innovations likely to arise there.

Indeed, the only political hurdle to overcome is ensuring the establishment of a special jurisdiction in this small territorial carve-out, say 100 square miles. Once that happens, the rest is up to the government services provider. And the only way that firm can profit is by creating a Prosperity Zone that benefits everyone.

Titus Gebel