The Ultimate Startup: Creating a New Country

My good friend Auren Hoffman posited that existing nation states would benefit from a little bit of creative destruction and competition to maximize the welfare of their “customers“.

In light of the importance of governance on countries’ economic success I wholeheartedly agree. Bad governance has repeatedly destroyed countries or slowed their growth. We have had many dramatic examples from Mugabe’s destruction of Zimbabwe over the last 15 years to Argentina’s decline from one of the richest countries on a GDP per capita basis to a poor country over the course of the 20th century due to the populist policies of Peron and his successors. The extent to which bad policies and politicians can impact economic outcomes is disheartening and I hope that current American politicians ponder the lessons of history!

While we were brainstorming the idea, we came across an interesting article in the Atlantic by Paul Romer which suggested that poor countries should have foreign run “charter cities” within their borders:

While the specifics of his idea don’t feel right – I loved the example of Henry the Lion who created a merchant’s Mecca out of Lübeck and transformed it from a backwards city in a failed region with a “bad-governance equilibrium” into a resounding success through light taxation and regulation:

“Onerous taxes and trade restrictions were ruled out; merchants who settled in Lübeck would be exempt from duties and customs throughout Henry the Lion’s lands, which stretched south as far as Bavaria. The residents of Lübeck were promised fair treatment before the law and an independent mint that would shelter them from confiscatory inflation. With this bill of rights in place, Henry dispatched messengers to Russia, Denmark, Norway, and Sweden. Merchants who liked the sound of his charter were invited to migrate to Lübeck.

The plan worked. Immigrants soon began arriving in force, and Lübeck became the leading entrepôt for the budding Baltic Sea trade route, which eventually extended as far west as London and Bruges and as far east as Novgorod, in Russia. Hundreds of oaken cogs—ships powered by a single square sail—entered Lübeck’s harbor every year, their hulls bursting with Flemish cloth, Russian fur, and German salt. In less than a century, Lübeck went from a backwater to the most populous and prosperous town in northern Europe. “In medieval urban history there is hardly another example of a success so sudden and so brilliant,” writes the historian Philippe Dollinger.

Perhaps the only thing more remarkable than Lübeck’s wealth was the influence of its charter. As trade routes lengthened, new cities mushroomed all along the Baltic shore, and rather than develop a legal code from scratch, the next wave of city fathers copied Lübeck’s charter, importing its political and economic liberties. The early imitators included the nearby cities of Rostock and Danzig, but the charter was eventually adopted as far afield as Riga and Tallinn, the capitals of modern Latvia and Estonia. The medieval world had stumbled upon a formula for creating order out of chaos and prosperity amid backwardness. Lübeck ultimately became the seat of the Hanseatic League, an economic alliance of 200 cities that lasted nearly half a millennium.”

Paul Romer’s idea, while intriguing, does not feel right because in our nationalistic world sovereignty and land ownership are explosive issues. Creating cities with new foreign-run rules might solve the trust and credibility problem that many developing countries face as well as attract investments and jobs if people felt the charter would hold. However, it does not seem likely that countries would be willing to lease chunks of their land to foreign powers. The Madagascar example suggests it’s not likely to happen. Besides, Lübeck did not have foreign rule. There is no way Henry the Lion would have let a foreign ruler take charge.

I suspect that a large purchase of land from a poor country in an unpopulated area, most likely in Africa, might work if the new country’s sovereignty could be enforced.

I look forward to seeing some experimentation on the idea in the future!

Non sequitur: One of Paul Romer’s research papers in the early 90s was the inspiration for my junior paper at Princeton: Tariff Policy with Differentiated Products. Mathematically inclined readers wishing to assuage their curiosity can check it out 🙂

  • Interesting. I like the idea up until the ‘cities with foreign-run rules’. As you point out, most countries (especially poorly run ones) would balk at ceding sovereignty. However, Lubeck sounds more like a juiced-up free trade zone, kind of like Hong Kong, than a foreign run city. Lots of countries have free trade zones, and if China can have a pseudo-sovereign city within its borders, then I imagine other countries could too. The trick would be convincing/bribing poor, autocratic states to create ‘Hong Kongs’ within them. Maybe if we required it as a condition of US military aid?

    Once people see success so nearby, they might demand more of their leaders!

  • Mark: In a way it’s what happened in China. Deng Xiaoping experimented with lightly regulated free trade zones in Fujian and Guangdong (near Taiwan and Hong Kong) before expanding it to the rest of China after the model proved successful beyond his wildest dreams!

  • I think Hong Kong is a good example of a foreign ruled prosperity “zone”. In order to be successful the area needs to be in the cross roads of the trading routes. Syngapore, though not foreign governed, is a cool proxy. Dubai is trying to replicate the model with quite a few bumps along the way. African “zone” seems to a utopian concept, unless the Chinese decide to establish law & order in Sudan for the sake of natural resources. Enjoyed your Princeton paper (was surprised to see such eloquent formulas, realized that I am totally rusty in my econ math).

  • Fabrice: I’ve been a member of The Seasteading Institute – – for over a year for many of the reasons that you’ve brought up. It’s supported by Peter Thiel. This project is happening for real and we are all committed to seeing it through and being a part of it. [In the meantime, I’m resident in Andorra – the closest real-world comprise I could find 😉 ]

  • Hi Fabrice, I think Peter Thiel was exploring something similar a couple of years ago. (a new country in the middle of the ocean). I think the main ‘strategic’ problem with a project like this, is that if there is a trend, that should be in the direction of a brand new model, where the concept ‘country’or national state, is no longer the most efficient way to organize societies in the decades to come. National states didn’t exist before Westfalia, and we can not expect them to last for ever. In a World where private sector moves at the speed of light, vs public sector at horse power speed, and where markets are several times bigger than public finances, the real Revolution would be to replace the National States with something new, like a worldwide grid/network of societies, interacting and solving problems in a more cooperative and dynamic way. It is time to bring down barriers, not to create new ones. Best.

  • Krishneil: I fundamentally disagree. The tariff free zones in China ultimately led to the economic revolution that brought 400 million people out of poverty. The extention of the policies to the rest of China has revolutionized the country. Look what happened to Shanghai in a mere 20 years: