Why The Caribbean Needs Charter Cities
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Also available on Apple Podcasts.
Let's unravel the complexities of Charter Cities with Mark Lutter, a pioneer who is shaping urban landscapes as the CEO of Braavos Cities, and founder and chairman of the Charter Cities Institute. Is it possible to revolutionize economic growth through innovative governance? This episode, Rasheed and Mark unravel the intricacies and debates surrounding Charter Cities, offering a compelling conversation that challenges conventional wisdom around city planning and economic growth.
[00:58] Why Charter Citites Remain Relevant
[03:05] Is Urbanization Mesaurable?
[04:42] Objections to Charter Citites
[07:47] Improvement of Institutional Frameworks
[12:12] The Role of Culture for a New City
[14:57] A Need for a Renaissance City or Suburbia
[17:20] Mental Modeling the Need for Charter Cities
[20:00] Charter Cities Institute’s Vision
[22:21] Dubai’s Place in Being a Progress City
[24:51] Honduras’ Success as a Host Country
[30:17] The Upcoming Project in the Caribbean
Contact Info: Mark Lutter
X (Twitter): @MarkLutter
Email us at firstname.lastname@example.org
[00:04] Rasheed Griffith: Hi everyone! Welcome back to Caribbean Progress. A podcast of the Caribbean Progress Studies Institute. Today I will be discussing Charter Cities with Mark Lutter. One of my favourite topics. Mark, is the CEO of Braavos Cities, a charter city development company, and also, the founder and chairman of the Charter Cities Institute. We had a very wide ranging conversation, from the axiomatic institutional paradigms required for a successful city, all the way to the policy benefits of developing a brand new charter city in the Caribbean. So, I hope you enjoy, this very wide conversation with Mark.
[00:54] Rasheed Griffith: Thank you so much, Mark, for coming on the show today.
[00:56] Mark Lutter: Thanks for having me.
[00:58] Rasheed Griffith: So, charter cities in general have a very mixed appreciation. There's some people who love them, maybe too much. There's some people who hate them, obviously a bit too much, and it's very difficult to have a conversation nuanced down the middle.
[01:11] And I wanna start off with just having a pitch on why it is still in 2023, even a very good idea to be talking about charter cities, given that there's not been that much successful examples of recent with them.
[01:25] Mark Lutter: The basic short pitch is that governance matters for economic growth. Well governed countries tend to be relatively prosperous, poorly governed countries tend to be relatively poor. At the same time, it is often very difficult to implement reforms at a national level. There are interest groups that might benefit from the status quo and want to block reforms, even if the reforms are net positive. Certain interest groups might lose out and seek to block those reforms.
[01:49] Therefore, charter cities can serve to a certain extent as what might be described as an institutional hack. A way to rapidly improve institutions in a designated zone, a designated area, that can lead to sustained economic growth for that zone, for that area. And hopefully demonstrate to the country how these reforms can work and be expanded to the entire country or to other zones over time.
[02:11] And that's kind of the short version. Then add that to the fact that humanity is currently undergoing kind of our last urbanization. The US hit 50% urbanization, I believe at around 1920. China hit 50% urbanization. I don't actually know, probably sometime in the 90’s. The world hit 50% urbanization like seven, eight years ago.
[02:31] So this, wave of urbanization is our last chance to get it right, and if we get it wrong, the consequences will live with us for generations. And what does wrong mean in this context? Wrong means bad urban plans, physical layouts. It means bad governance structures. And if we implement these things poorly, then it becomes much more difficult to change down the line.
[02:52] If we implement this urbanization wave well, then that can lead to hopefully sustained economic growth to better outcomes, better standard of living for a lot of people that are currently in that kind of final wave of urbanization.
[03:05] Rasheed Griffith: What is the measurement of urbanization being used in this context?
[03:10] Mark Lutter: It's actually self-reported and self-defined. The UN for example, will take it from a lot of different countries, but countries will tend to self-report and self-define urbanization. So it could be something like living in a town of 50,000 people. Then how do you have define a town? It could be municipal boundaries.
[03:28] It could be the population density where you need at least 10 people per kilometer for it to count as a town. And you can't just have people like spread out with a very big boundary count as a town. So, it's a little bit inconsistent to that extent. However, you can basically look at satellite data, which can map urbanization flows, and the satellite data is broadly consistent with the data.
[03:49] With the kind of self-reported data. So even though there are some inconsistencies there, there's what might be described as a general understanding of what urbanization means. Lots of people living in a specific area, while there's disagreement on how exactly to measure that, different measurements come up with a proximal the same answer that urbanization is happening.
[04:08] More people are living in densely agglomerated areas than before. And at some point the US is about 80% urbanized. At some point that trend stops and levels out at which point you have the kind of proportion of people living in cities and in rural areas that ends up being somewhat consistent over time.
[04:24] Rasheed Griffith: Yeah because, growing up in the Caribbean, every time someone asks me, oh, what's the capital of your country, I mean it is a capital by name and category. But it's not what you would think of, when you think of a capital city, per se. Thats why the urbanization always means, as you said, very different things to different people for sure.
[04:42] I'm curious though, why is it that you think, with your version of this, that there is so much objection to the idea of Charter City beyond just the basic one of oh, some kind of sovereign threat to some particular body of politics?
[04:58] Mark Lutter: Before going into that, the point of urbanization is important. People often point to Renaissance Florence, which was very successful in terms of its impact on humanity, but had like 50,000 people living there. And now you have suburbs in the US that have much more than 50,000 people that aren't contributing anything close to as meaningful in terms of art, culture, et cetera.
[05:18] I would categorize this as agglomeration. Agglomeration matters. Urbanization is overlapping with agglomeration. But these are two different concepts and depending on the nature of the economic system, the nature of governance, the type of people, the culture, their interactions with the outside world, that changes what agglomeration looks like and what kind of urbanization looks like in a lot of these contexts.
[05:41] So to step back. As you mentioned, the standard argent against Charter Cities is a, threat to sovereignty and some proponents of charter cities are advocating for things that are reasonably considered threats to sovereignty in terms of giving up jurisdiction to a foreign entity.
[05:53] At the Charter Cities Institute, we advocated public-private partnership, so more what might be described as a special economic zone 2.0. Other critiques are basically: one, is just the execution risk is very high. So even if you're sympathetic to the idea of charter cities, you might say, look, you have all of these different stakeholders that you have to manage.
[06:12] You have to manage government, you have to manage capital, you have to manage residents. And setting these all up in a manner that you can, actually execute on them effectively is close to impossible, or at least difficult enough that it outways the potential benefit of charter cities. I've heard that from people at the World Bank, for example. Where I think at least at a lot of these large bureaucratic institutions, people are more inclined to think of why things will fail rather than like how to make them work.
[06:35] Another argent against charter cities is, most of the good areas for new cities have been taken. So people are relatively efficient and have already moved to the good natural ports, to the fertile lands, and so building a new city is, finding that location. Is just very difficult that you can get enough economic justification for the large, upfront capital investment.
[06:55] Then three, your critique might just be that, any charter city is going to be subject on some margin to the host country. And so you have this, chicken and egg problem, where well-governed host countries don't really need charter cities.
[07:10] People sometimes talk about the US. Like let's build Hong Kong in the US. It's like the US has Hong Kong. It's called New York, it's called Miami, it's called Chicago. All of these cities have Hong Kong's population of 7 million. New York is like 20, Chicago's 10, 11, Miami's probably only like three or four, but these cities are also substantially richer than Hong Kong.
[07:27] Hong Kong's per capita income is I think, about 35,000. US per capita income is closer to 60. So it doesn't make sense in the US to try to create these new cities. One, because we're already highly urbanized. Two, because we're already relatively well governed. And so you have to operate in places that have substantial benefits from governance improvements.
[07:47] However, the challenge in these places is that, because you're still subject to the sovereignty on some margin of a host country, if that host country changes their mind, then they might say, okay, look, you guys are doing well, but we want a greater percentage of tax revenue. Or, we think that you're kind of threatening our national goals, which is how China treated Hong Kong over the last few years when they passed the national security law.
[08:08] So you have this, what might be described as expropriation risk or sovereign risk, even if it doesn't end up being actual expropriation of the asset, it could be equivalent of a regulatory taking that then makes the charter city much less competitive than before. And charter cities only really make sense in areas that have this need for improved governance. But at the same time, there's always that risk that the government changes their mind and then cracks down amids any future potential growth.
[08:33] Rasheed Griffith: But then what is the solution to that particular problem?
[08:37] Mark Lutter: So there's no silver bullet. I think one is many people think of charter cities as a form of exit. Society is wrong in some way. That's me and my friends and our broader range of associates get together, go somewhere and build a new and better society. And I don't think that's the right way to think about charter cities. There isn't really [inaudible] anywhere in the world.
[08:57] So no matter where you go, there's gonna be some people with some population living there that you need to interact with and engage with. If you look at what's arguably the most successful, new society over the last, hundred years, arguably Israel. And what did Israel take to actually build a new society?
[09:12] They needed a religion that had thousands of years of history. They were facing literal genocide in Eastern Europe. They had the backing of the world's greatest superpower at the time, the United Kingdom. They were going into a relatively uncoordinated and fractured society initially and kind of under the Ottoman Empire before it collapsed and then under British control.
[09:31] And even then, it was extremely difficult. And there are very high tensions that remain to this day between them and the local Arab population. So I don't think charter cities are about exit. Really they're about creating better institutional frameworks. And why does this protect against the risk of expropriation?
[09:46] Because if you structure the charter city right, what does it mean? It means, one, you're creating a lot of jobs and most governments get reelected based on jobs or even if they are a non-Democratic government, there is still some form of legitimacy that's based on delivering some form of outcome to people. So create a lot of jobs.
[10:02] Two is, you want to figure out how to ally yourselves with powerful business interest in the country. Maybe this means the business interest having a direct share in the city development company, where they get revenue based on increased price value of land.
[10:15] Maybe it means just getting these powerful business interests to kind of build factories or build restaurants or shops or whatever their kind of vertical is in the city so that their revenues are linked to that. It means creating, a tax sharing system so that the increase revenue generated from the country is from the city is shared broadly throughout the country. That's called the internal politics there.
[10:34] And the external politics there that you can do to minimize this. You can think large capital intensive projects do exist in lower income countries. They typically take the form of, natural resource exploitation, so there might be kind of copper, oil, and companies will invest billions of dollars over very long time horizons.
[10:52] Which means that there is a legal framework to at least protect some set of asset classes. And we can take learnings from that specific set and kind of apply them to new city developments or new urban developments.
[11:04] What does that look like? It means one: get capital from, a development bank. So if you're in Africa, you go to the Africa Development Bank, and you probably don't want them to get their capital first because like many development banks, they're a little bit slow. They're a little bit bureaucratic. But after you have a deal structure, get them to invest some amount and they might have like five projects in the country and so therefore, they invest some in yours, but they've also got these other deals in the country that are ongoing and the government doesn't want to mess with your deal because then it threatens those other deals that are ongoing.
[11:35] Two is, you can go to a Middle Eastern country and go to the Sovereign Wealth Fund and say, Hey, Mr. Sovereign Wealth Fund, do you want to invest a hundred million dollars, five hundred million dollars, over x time period. However, to protect this investment, we suggest doing a bilateral treaty with the host country that basically says, Hey, let's make sure that this legal system is in place for at least 20, 30, 40, 50 years, whatever it is, to realize the return on that initial investment.
[12:00] So, there are a variety of ways to protect against the risk of expropriation. None of them are bulletproof, but I think on some margin, make it feasible for these projects under the right set of conditions to to be possible.
[12:12] Rasheed Griffith: There is another institution that, as part of the idea of better institutions, that isn't often brought up when this discussion happens, but that's the idea of culture. Where culture binds, and culture is kind of the bedrock of which a lot of things are being thought of and designed and innovated and so on.
[12:28] If you have a, let’s say a blank canvas, do you think there's actually a problem when it comes to the kind of the contextual innovation, the binding of people in one place to actually produce these, good outcomes you think come from agglomeration?
[12:40] Mark Lutter: So I think culture is very important. The way I think about cities broadly is, where does the population of the city come from? And you have to basically tap into a global migration trend, of which there are two that are currently, I believe, sufficient enough to justify a city scale development.
[12:54] The first global migration trend is, in the global south, a rural to urban, as well as kind of an expansionary urban population. Where Africa, for example, will have about a billion new urban residents over the next 30 years. That's a large amount of people. The second urbanization trend, and this isn't really an urbanization trend, this is a migration trend, is global south to global north.
[13:13] Lots of people want to move to the US, to Europe, for better job opportunities. Mostly for better job opportunities, sometimes for other reasons. And so there is a extremely large demand there, both among low and high skilled migrants. And so when thinking about culture, I think first you need to think about, who is the target pool that you are looking to attract?
[13:32] If you're looking to attract global south to global north, that's a very different cultural pool, than if you're looking to do a new city somewhere in East Africa, that might be more focused on early stage manufacturing. That being said, I do believe there is, let's call it progress cities.
[13:48] There's a handful of times and places in human history there's been a disproportionate amount of progress. A lot of these occurred, when a people that was previously, oppressed on some margin becomes less oppressed. Not necessarily not oppressed, but less oppressed. They all move to a place or to a set of places close by, and then there's a cultural flourishing because of that.
[14:09] If you look at Eastern Europe with Vienna, it was the, the Jewish population that went from being very oppressed to much less oppressed. All go to Vienna. Lots of cultural exchange innovation. You can look at the Harlem Renaissance in the 1920s in New York. Kind of former sharecroppers great migration. Much of it goes to New York. They were still oppressed in New York, but a lot less oppressed than in, what was effectively apartheid south a kind of cultural flourishing there.
[14:31] And so if you think that by creating a city that is a little bit more welcoming and a little bit more productive than a lot of the regions that people are moving from, I think it is possible to see a cultural flourishing there. Provided you kind of imbue it with some of the right characteristics, get some of the right kind of community setting early on. That can lead to kind of a flourishing of some of these new ideas that otherwise might not take place because of the lack of networks and relationships that is really key to their development.
[14:57] Rasheed Griffith: I do wonder, is it implicit or is it actually an explicit focus of, let's say people who really are discussing or championing charter cities, are trying to create cities that are like a Renaissance Vienna, and not necessarily like a urban California. It's very pleasant. A good environment to grow his kids and have all the education and so on.
[15:21] Not that much innovation really comes from that part of California, at least up until very, very, very recently or somewhere like Calgary, Canada. Very pleasant, normal places and not these really high intensity innovation centers. Is that actually implicit or is that explicit aim to have that other side of the conversation more dominant?
[15:39] Mark Lutter: It depends on, I think, who you talk to. So let's call it Silicon Valley wing of the Charter Cities movement has been much more interested in a renaissance city. And sometimes they call it that explicitly, sometimes they don't. But if you look at the history, for example, of Patrie Friedman who started The Seasteading Institute.
[15:55] That was very explicitly attempt to push the frontier. The analogy they frequently use is America runs on 200, back then it was 230 year old code. Now it's 240, almost 250 year old code. The Constitution being that code. How do we update it? How do we modernize it? And so that was very explicitly focused on attracting kind of people on the cutting edge, there's a focus on regulatory arbitrage.
[16:16] Things like that. You have Praxis, which is, I don't think they use the Renaissance language, but there's a feeling of, all right, something wrong in society. We need to do it better. And they're appealing to this right wing, like Peter Thiel esque aesthetic.
[16:30] There's definitely. Some of that, that is sometimes more explicit, sometimes less explicit. The Charter Cities Institute takes what might be described as a bit more of a pragmatic slash economist approach and say: One, where is this going to happen? This is going to happen where there is rapid urbanization occurring.
[16:47] Two, what are those populations that are experiencing rapid urbanization? It’s mainly in kind of sub-Saharan Africa and parts of Asia. Three, to make this work, first let's focus on getting the economics to work before focusing on these kind of broader cultural, issues and concerns.
[17:04] I think it would be great if some of these cities do lead to this cultural flourishing, and that's something that I've been thinking about more recently. However, on some margin if you don't have the core economics and construct then everything else is a little bit irrelevant, and we focus on trying to get that core construct to work a little bit more effectively first.
[17:20] Rasheed Griffith: I'm wondering if you’ve given any explicit thought to your own mental model when you're thinking about these charter cities and just general urbanization topics. Like how do you think you've come to have a particular worldview about this particular, very important policy agenda that could actually have this transformitive effect on many places in a very short period of time.
[17:44] Mark Lutter: I do try to create accurate mental models and consistently update them. I'm not sure I'm always accurate, but I try to be at least self-aware on that front. And I don't know if this directly answers your question, but the way my intellectual path was, after my undergrad, I finished it, I went to a lecture and during the lecture somebody mentioned a Dutch lawyer named Michael Van Naughton, who tried to build a Freeport in Somaliland. And I thought this is a great idea. Went down the rabbit hole.
[18:08] Fun fact, Dubai Port's World built a $400 million free port in Somaliland called, DPW Berbera. That actually had more of validity that might be suspected on the initial assption. But to me, what I saw, especially when I was in graduate school, is governance matters. Governance is very difficult to change at the national level.
[18:25] What are some like neglected areas that are high leverage points that can lead to more change? And the answer to me was cities, especially in areas of very rapid urbanization. As I've built my career, I think that's also been influenced by one, reading a lot of books about cities, reading a lot of books about history, reading a lot of books about economics.
[18:44] Getting a better understanding of how this worked in practice. Where there is, what might be called, a naive libertarian idea about cities. Where it's just like, look, Hong Kong works. Singapore works. They both rank very highly on economic freedom, therefore get economic freedom and you can have your own Hong Kong and Singapore.
[18:59] And it's like, no, there were very specific underlying conditions that allowed them to occur. Hong Kong had a very large influx of the Chinese entrepreneurial class after the Communist takeover from Shanghai that kind of created the a lot of the initial economic impetus and spark. And Singapore, like Lee Kuan Yew is arguably the greatest leader of the 21st century.
[19:20] However, Singapore is one of the most trafficked straits in the world. It is 70% ethnic Chinese. Which tend to correlate pretty highly with good economic outcomes. Malaysia, which Singapore briefly had a union with, has a per capita income of almost $20,000 dollars. So Singapore, without Lee Kuan Yew, would probably be doing okay.
[19:39] Would it be Singapore? No. Would it be kind of extremely poor? Also no. Really, understanding the underlying conditions that lead to economic success, takes a good general framework, and then a good kind of particular understanding of the levers that you can pull. And that might be influenced in a particular context.
[20:00] Rasheed Griffith: What are some of the real life examples, if there are any really good ones, real life examples of cities that you would use, to try to explain what you are trying to build also?
[20:13] Mark Lutter: Yeah, I think for the Charter Cities Institute, the best example is probably Shenzhen. This is not to say that we want to achieve the same success as Shenzhen. I think that was a success that's probably unique in han history. Now forcibly prevented urbanization because he was worried that that would concentrate both economic activity in people and make it more susceptible to a Soviet nuclear attack and invasion. So there was a very strong built up demand for urbanization in China.
[20:38] Shenzhen was extremely close to Hong Kong, which allowed rapid capital and knowledge transfer because they speak the same language, had the same history. Oftentimes were literal relatives. Mao’s ways of economics or governance was arguably the most oppressive from a governance system in human history. From an economic perspective, per capita income was around $200 a year. So the starting base was extremely low.
[21:00] The Chinese had a very long history of statehood. They had relatively high degrees of state capacity, at least in certain areas. They had the nuclear bomb in 1967. So even though it was an extremely repressive economic system, there were still high capacity. Where once they reorganized the economics, the governance, there was the possibility for extremely high takeoff.
[21:18] So that's why it's different and very hard to replicate. Why did I pick it as an example, is because it started from a very low base. They focused initially on basically low scaled high labor requirement manufacturing. So then they worked their way up from that base, got into higher chains of manufacturing, to eventually become the city that it is today.
[21:38] And if we're looking at Africa, where my nonprofit works, the Charter Cities Institute that, alot of the base that we're starting from is relatively low. It's higher than kind of China in 1980 where many African countries have incomes of a thousand, two thousand per capita.
[22:52] This is actually one of the challenges. That much of Africa is not competitive in manufacturing because wages are too high. Which makes it difficult for them to start growing up the economic ladder. However, it's similar in that we think labor intensive manufacturing, that tends to be relatively export led and export oriented, is oftentimes the best starting path for economic development where a charter city can follow that path. Start with labor intensive textile manufacturing, slowly work its way up the value chain over time, make everybody a bit richer and become successful.
[22:21] Rasheed Griffith: Where does Dubai fit into this framework?
[22:24] Mark Lutter: Yeah, so Dubai is, to a certain extent, it's just a classic entrepôt. It's a city, that sits in the middle of a region that experienced a massive resource boom. And the region was relatively oppressive by most Western standards. Saudi Arabia, for example, until several years ago, women were unable to drive.
[22:42] You have to wear a niqab everywhere. So the value proposition of Dubai was several fold. If you look at the pretty early history of Dubai, like early 20th, late 19th century, they would basically get Iranian traders who are often of Arab descent. And whenever Iran would raise tariffs, they would say, hey look, we've got a free port. Come over here and trade.
[23:00] And the first few times it happens, it's like literally a dozen people. numbers are absolutely tiny. I think today Iranians make up about a third of the Dubai population. So over time that kind of worked. When the British stopped protecting them, they offered to basically pay the British.
[23:15] They were like, if you stop protecting us, we will probably get conquered by Saudi Arabia or somebody else. We will pay you to stay. The British were like, thanks. No, thanks. We're done with colonialism. Goodbye. Most of the indicators of Dubai at that time were extremely poor in terms of life expectancy, in terms of literacy rates.
[23:31] But basically what Dubai had was like Singapore. In a very strategic location. Singapore, the region was experiencing not a resource boom, but just a massive economic boom. Dubai was in an area experiencing a massive resource boom. They had enough oil to do some large infrastructure investment, but not so much oil that they became lazy and complacent.
[23:49] So they recycled their oil revenue to large infrastructure investment and basically said, hey look, we're going to be the Cosmopolitan center of the Middle East. Took advantage of regional missteps. The Iranian Revolution. Hey guys, land your planes in Dubai. Lebanese civil War. Hey, maybe you should come park your money in Dubai, not Lebanon, right?
[24:07] With a relatively clever economic zone strategy that said, Sharia law doesn't allow for interest. So maybe we adopt common law to create a financial center because that's what all the global financial centers use. Short version, reach and experiencing massive resource boom.
Cosmopolitan, entrepôt strategic moves, taking advantage of regional missteps, and becoming successful because of that.
[24:51] Rasheed Griffith: So I'm from the Caribbean. I've, by the time I heard about the whole formalized concept of charter cities, I always say this is a perfect location to have these being designed and built and managed and try to expand.
[25:04] Now there is one already, at least one, in the Caribbean on Roatan called Próspera, which you know of. And I'm curious, what's your thoughts on that endeavor? Personally, I thought it was going to be just a uphill battle because of Honduras. We know how Honduras is as a governance jurisdiction, legal jurisdiction and so on. But I'm curious what your thoughts on Próspera is, given it is actually a fully fledged legally valid charter city in almost every definition.
[25:33] Mark Lutter: Yeah. I think they have what on some margin is the most important part. which is they have a jurisdiction. Lots of people talk about this for a long time, and getting a jurisdiction is extremely hard, and they have that. The basic challenge, as you mentioned, is relations with the host country.
[21:49] And so Honduras, the initial Charter Cities legislation was passed in the wake of a constitutional crisis. The president tried to run for a second term that was unconstitutional. Everybody was like, no, you can't do that. He was like, I'm gonna do it anyway. Congress turned against him. Supreme Court turned against him eventually military puts him on a plane, ships him to Costa Rica.
[26:07] Was that a coup? Maybe. I don't know. I don't think it's worthwhile playing semantics. Military putting president on plane to other country, bad. President trying to run for an unconstitutional second term, also bad. The point is there was a constitutional crisis in the aftermath.
[26:22] The opposition party took power, passed this legislation. However, it wasn't really the opposition party that passed it. It was like five people, in the opposition party that really wanted it done. So there wasn't a broad consensus for it. There was a small minority consensus for it. Fast forward about a decade later, the opposition party takes power.
[26:40] This is now the party that does not like the legislation. In the 10 years, there were some projects that got off the ground, but not in terms of substantial employment or wealth generation. They were still relatively early. So now, the left wing party takes power. And in Latin America, for example, like they have left and right wing parties except, well in the US historically it's been center left and center right.
[27:03] In Latin America, the left wing parties tend to be very, very left wing, and the right wing parties tend to be very, very right wing. So that just makes kind of policy consistency over time much more difficult. So the left-wing party takes power, makes attacking the Charter City's legislation, one of their prime goals.
[27:19] The Próspera, the city on Rotan is now suing the government. How this will turn out, I don't know. Speaking with some people on the ground whose opinions I trust, they think that Próspera will be able to survive this administration and cut a deal with the next. So that seems probable. But it just demonstrates how difficult these projects are when you don't have effective alignment with the host country if you're trying to fight them.
[27:41] Can you survive? Yes. Can you succeed? Difficult, right? It's hard to imagine investor coming in and saying, I wanna build a resort. I want to build the factory that costs $20 million when the jurisdiction has such uncertainty about it. I think the other things that I think about with Próspera is, there's a lesser known project on the mainland of Honduras called Ciudad Morazán.
[28:04] And Ciudad Morazán is basically a gated community for poor people. Honduras is a very violent country and see that Morazán is outside of San Pedro Sula, which is the commercial center of Honduras and also the most dangerous city. And many of the women there are effectively single mothers because their husbands are in the US or dead.
[28:24] You can't speak on a phone outside because you'll get robbed. You don't want to leave the house after dark because you might get robbed or worse. And so the question is, what is the value proposition? And see that Morazán, their value proposition was we're just going to figure out how to lower the price point for rent and then allow people in, and you can walk outside at dark, you can talk on your phone because they have controlled entry and exit.
[28:46] And by lowering the price point, you basically make gated communities accessible to a much wider percentage of the population. And their goal was to pair that with kind of traditional manufacturing. However, before they were able to attract many tenants, the government changed, and then no tenants wanted to take the legal risk.
[29:01] They've instead just focused on the residential aspect. So if you look at Próspera, which tends to target a higher income expat community, it doesn't have a lot of relationships with locals. Versus Ciudad Morazán, which targets locals. Particularly, bottom of the income spectrum locals that are facing many of the threats of the general lawlessness in Honduras.
[29:22] It's possible to imagine the response to the Honduran government would be a little bit different if there were more projects like Ciudad Morazán just given its relationship with the locals, then its interaction effect with them. And I think there's one point I guess I'd quibble a little bit with you.
[29:34] When I think about a charter city, it's kind of two things. It's city with better laws. So the laws Próspera has, but I'm not sure it has the city aspect. Now it's more of a town or a village or a community. It's possible to become a city in the future, but at a minimum for a city, I would say tens of thousands of people.
[29:50] There's lots of historic cities that have those population levels. But when we think about cities today in the US, it's kind of the minimum of hundreds of thousands of people. And obviously this can be quibbled, it depends. I'm not sure I would consider somewhere that has a thousand acres under their jurisdiction, and I think their population is in the hundreds now, to be a fully fledged city.
[30:08] And I think in terms of thinking about the benefits of charter cities, the agglomeration is a very important benefit and that requires a degree of scale that Próspera currently does not have.
[30:17] Rasheed Griffith: Yes, that's a fair point. I just said it's directionality wise a Charter City. Now, sticking in the Caribbean. You are also now working on a project in the Caribbean. That is why I'm pretty excited about it. If you could kind of explain some contours of what that project is supposed to be like.
[30:32] Mark Lutter: So what we're looking at is a charter city with, emphasizing the city aspect and so, we're exploring a potential location that has a very large amount, tens of thousands of acres, of undeveloped land. Combined with a special economic zone that's not working out as the government originally hoped it would.
[30:51] And our goal is to figure out how to partner with government and the current owners of the land and related assets, to turn this into a city development. And so I think the key features of this are one, just have really effective, competent governance. If somebody wants to build a house, make it very easy for them to get a building permit.
[31:13] If somebody wants to move from another country to get a job, make it very easy for them to get a job. Of course given politics, it's unlikely that there will be interest in the host country for low skilled labor, but we've had early discussions with them about the potential for high skilled labor that have been quite positive.
[31:30] I think there is the possibility for some degree of regulatory arbitrage, allowing for drone and VTOLs to do tests and experiments that might be legally difficult to do in the United States, as well as for medical tourism, including some degree of biotech innovation. But I don't think that those are sufficient to drive the city development.
[31:48] The city development initially will be driven just by tourism and hospitality. There is an airport in the location. However, it needs a lot more flights to become a competitive destination. And the best way to get more flights is to improve hospitality offerings. And this is just going to look like large resorts, hotels that have a target.
[32:05] Mostly American, some Canadian, some Mexican, maybe some European, but it's a longer flight. Demographics that gets butts in beds, improves the flights, the connectivity. And currently this location we believe, because of bad luck in history, it's underdeveloped in this respect.
[32:20] So that will be, let's call it 5 to 10 years of, a heavy focus on hospitality and tourism. We'd want to combine that focus of hospitality and tourism with a expansion of the technology sector. And this is going to look like, targeting companies like Google, like Apple, like Amazon, and saying, hey, you tried to hire 6,000, 10,000 H-1 visas annually.
[32:44] You only get about I mean, last year it was 780,000 total and only 85,000 given. So we're at under 15% of applicants receive it. So if you apply for 8,000, right? There's a 7,000 delta between the number that you receive and the number that you submit. So you go to these companies and say, Hey, would you like to open a campus here?
[33:03] It's a very close flight to Miami. Close to New York. On the eastern time zone. We guarantee everybody gets a visa. And so most of these large companies probably are not going to want to open these campuses in the first five years. It'll take time before there to be kind of trust in the system for there to be enough flights that people would consider it.
[33:23] Let's say Indian or Chinese, you're looking at US Canada. Oh, here's this small island that I've heard about in movies, but don't really know what it is. Am I sure? I don't have a cousin who lives there or anything. I'm like, do I really wanna move there? Over time, as it becomes a little bit better known as people visit, as there is kind of a base population, it becomes a little bit easier to sell.
[33:40] That demand starts compounding and picking up. And there's some other industries that you can do. There's some manufacturing on the island already, so we could expand on that. There's the possibility for logistics. It has a very good port. And I'd want to also emphasize a heavy focus on community.
[33:55] This is a project that one of the taglines we've actually trademarked a 21st century renaissance city because we do believe that we can attract people pushing the frontiers of art, of innovation, of technology. I spent two and a half weeks in Montenegro at Zuzalu, which was a popup village, city, community, run by Vitalik Butrin.
[34:17] 200 people full time with about a hundred people cycling in and out every week. And that was quite interesting just because seeing the talent that would agglomerate in that, for a short time period, even though it was not very easy to get to, relatively expensive. I think in a decade or two we could possibly compete with New York and San Francisco for young talent just by offering very high quality networks, low cost of living, and amenable lifestyle. That's something that I would want to explore, have a very heavy emphasis on community development as well.
[34:47] Rasheed Griffith: I'd also add that the reason why I have a bias towards the Caribbean, for besides the obvious reasons, is that the Caribbean is notoriously stable. It is so stable. The governments don't actually have much idealogical differences. There are essentially, to me, all in the center in many ways. Some are less competent, some are more competent.
[35:06] That's the kind of variation. The actual ideology doesn't change. The laws are very stable. It's all British common law in the English speaking Caribbean. Centuries old institutions, more or less. There are two countries, Jamaica and Trinidad, that are a lot more violent than what we would like to be.
[35:20] But that's two. The rest are quite fine. And that kind of stability, you can't really find in Africa. You can not find in Latin America. You can not find in Asia either. It is a very stable place to have these kind of things being designed, and I hope that more people kind of do it as well as a huge, huge, huge good blank slate, in many respects.
[35:36] Mark Lutter: Yeah, I would add to that there's high degrees of stability. There's proximity to the US so you can tap into the global demand to be in a high income country. Even if they're not in the US physically, they still can tap into US labor market and economy by being close enough.
[35:51] Three is there are enough islands that you can run experiments that have lower risk of spilling over to other places where it's much easier to issue a place-based visa if somebody's on a literal island where they can't get in a car or a bus and go to the next place. And you can experiment with a different class of visas that you might not want to roll out countrywide immediately.
[36:11] But you might want to say, look, we're going to have this test kitchen here, and depending on how it goes, we'll scale it up, scale it down. Or implement some of these things in other places. So, I think the Caribbean has a lot going for it. I think I'd point out that the two kind of hesitations there are: One is, there is with climate change, there's definitely increased, let's call it climate risk, where the capital depreciation is much higher.
[36:37] And in some other parts of the world, Florida, for example, which has pretty liquid insurance markets, is seeing a lot of insurance providers pull out because of the increased cost of insurance. And so my impression is that many Caribbean islands, because the markets are less deep, just the insurance offerings are much fewer.
[36:53] And actually kind of having a city scale development that's very capital intensive. We'll require deep financial markets that can ensure against large hurricanes, et cetera. Two is, as you mentioned, the governments are stable, right? They're long term democracies. I think Barbados is like, what their oldest parliamentary system in the Americas?
[37:13] However, some of the countries have varying degrees of corruption. And so having spoken with investors that have done business in the Caribbean, I've heard a handful of war stories that are, kind of bad.
[37:23] I think that offers an opportunity for charter cities because if you can create this kind of zone that minimizes some of those risks, that can attract a lot of capital, a lot of talent. But also demonstrate some of the problems in that, to overcome some of these entrenched cultures where like the Caribbean has their natural resources, beautiful beaches, and proximity to the US.
[37:43] And so that to a certain extent has formed a resource curse, and that tourists are to a certain extent, one-off transactions. Some people have vacation homes that they go every year, but a lot of people might go to The Bahamas or Barbados or Jamaica once every five or 10 years. So there isn't as much repeat interaction and that instills a bit more of a one shop prisoner's dilemma mindset where the local population is a little bit more exploitative than in scenarios where there might be kind of this, long-term relationships that form.
[38:13] Rasheed Griffith: Yes, I agree with that. I would just temper one thing on the comment on tourism. So one of the big variations in Caribbean tourism market which is very important, is for example, Barbados let’s say something, contrast Barbados, let’s say to Dominican Republic. Where when you check for example, the average spend for tourists with DR is like less than $700, where in Barbados it is more than $2,500 per actual stay and so on.
[38:35] So the kind of tourists that kind of variate in the Caribbean countries, depends on the model that the countries chose, has a lot of variation in the tourists they attract also. And usually when people say the tourist numbers decline, yeah, tourist numbers can decline, but the actual decline and so on won't really have a big effect depending on which country you are talking about. Like Barbados for example, versus Antigua. That has all of the cruises and St. Kitts and so on. So that is like a big variation also in just that market alone.
[39:00] Thank you so much Mark, for coming on the show today. I had a really good time with this conversation.
[39:03] Mark Lutter: Thanks for having me!