Definition and rationale
Charter cities are developments that constitute separate jurisdictions from the surrounding country, possessing their own laws, their own courts, and their own police. Patri Friedman, who founded Pronomos Capital, described them as “sovereign communities” whose residents want to write their regulations locally, and he placed them at the center of what Pronomos invests in. The business model for a land-based charter city generally involves holding a share of the land, with revenue derived from rent and taxes where they are collected; if the economy grows, the developer captures a slice of newly created GDP through rents or taxes. Friedman characterized the arrangement as a public-private partnership with the host country rather than a unilateral declaration Patri Friedman’s Plan to Accelerate the Free Cities of the Future (2022).
Mark Lutter, appearing as a PhD candidate in economics at George Mason University, framed the underlying case in terms of governance rather than deregulation. Bob Zadek introduced the episode by arguing that libertarians who favor free markets and economic growth “desperately need strong government in certain respects,” because without a government that enforces a rule of law, enforces contract obligations, and creates a way to peaceably resolve disputes, the free market cannot function. Zadek described governance as the petri dish in which free markets need to survive, and noted that Lutter’s dissertation was on the subject of proprietary cities Mark Lutter on Proprietary Cities (2016).
Paul Romer and the charter city concept
Lutter credited Paul Romer, whom he called a world-famous economist probably on the short list for a Nobel Prize, with giving a TED talk on charter cities about nine years earlier. Romer had one opportunity in Madagascar to create a charter city and another in Honduras; political challenges in both countries led him to pull out and the projects were not successful. Lutter said Romer more or less walked away, at least publicly, from the concept, and that a great deal of energy and attention died with the subject as a result The End of Nation-States? (2018).
That dependence on a single person or a single country was, in Lutter’s account, the problem his own organization was built to solve. The Center for Innovative Governance Research, which he said launched three months before the broadcast, focused on creating the ecosystem within which free cities could be developed, so that the set of ideas would not depend on one individual. The goal was to produce foundational research so that entrepreneurs approaching governments, and new city projects approaching financiers, would share a high-level concept and be able to speak the same language The End of Nation-States? (2018).
The Honduras ZEDE program
Friedman described Honduras as the one program that was out there fully operating, while noting that the country had changed its mind and shut the program down, with the outcome going forward uncertain. In 2010, 2011, and 2012, he said, Honduras changed its constitution to create a program called the RED or ZEDE program—zones of economic development—which he called the first modern version of a special economic zone. Traditional special economic zones, in his account, offer only tax breaks, tariff breaks, or permission to hire foreign workers, and the jurisdiction is not very different; the ZEDEs were modeled instead on the Dubai International Financial Centre, where Dubai treated its laws and institutions as a tech stack and copied British financial regulations in English for the zone Patri Friedman’s Plan to Accelerate the Free Cities of the Future (2022).
Under the Honduran program, a private developer could apply to the regulator with a proposed investment, the industry it would bring, and the jobs it would create for Hondurans; part of the regulation required that jobs be at least 90 percent for Hondurans. The zones remained under Honduran sovereignty and followed the country’s constitution and international treaties, and they followed Honduran criminal law while being able to create their own commercial law with the approval of the regulator. Friedman said companies that would not be comfortable opening a factory within the Honduran regulatory system were comfortable with Delaware corporate law or other regulations combined into a zone’s commercial law, bringing in foreign investment, hospitals, factories, and schools. He also said some projects Pronomos was working with involved governments willing to let the zone handle criminal as well as commercial law Patri Friedman’s Plan to Accelerate the Free Cities of the Future (2022).
The ecosystem and interest groups
Lutter identified several constituencies that could be brought together around free cities. He estimated that about 10 to 20 percent of unicorn founders—a unicorn being a billion-dollar company—were interested in building a free city, and recounted conversations in which founders said they were building up a war chest so that when they had their exit they could go and build a free city. He said most economists are quite sympathetic to charter cities but do not get career points for discussing them, since published academic papers are difficult to write without much data. He also placed the humanitarian community in Europe alongside high-profile figures such as George Soros and Gordon Brown, who supported what they usually described as economic zones for refugees, which he called reasonably similar to free cities but targeted at refugees. Finally he pointed to dozens of new city projects around the world, multi-billion dollar real estate projects with 100,000 residents, citing Mwiya Musokotwane, who was building a new city project in Zambia outside the capital city of Lusaka The End of Nation-States? (2018).
The coordination problem, as Lutter described it, was that these groups were not talking to one another: the people in Silicon Valley who were interested were not talking to economists, who were not talking to the humanitarians, who were not talking to the new city developers, who were not talking to the financiers, who were not talking to the politicians. He contrasted the classic Silicon Valley startup—three people locked in a basement producing a minimum viable product after six months—with a charter city, which he called much more complex The End of Nation-States? (2018).
Federalism and foot voting
Zadek put it to Lutter that the concept amounted to federalism at the city level, invoking Brandeis’s observation that states were incubators of democracy where one state could experiment and others could adopt what worked. Lutter agreed that was one way to interpret it, adding that some policies belong at the national level—national defense, for instance, is more efficient there—while others are better done at the state or city level because they may be more responsive to the needs of the citizen The End of Nation-States? (2018).
Lutter said the most exciting area for charter cities was Africa and parts of Asia, because those places are urbanizing extremely rapidly, as China did over the last 30 or 40 years. Many of those cities, he said, are relatively poorly governed and do not provide basic public goods such as effective roads, sewer, or electricity. He noted that the country ranking highest on the World Bank Doing Business Index in sub-Saharan Africa ranks about 50, and argued that a charter city ranking 40 would become a magnet for every smart and entrepreneurial person in sub-Saharan Africa, changing the dialogue on the continent toward economic liberalization, freer markets, and more trade The End of Nation-States? (2018).
Zadek pressed on why, if the model was proven, hundreds of cities such as those in China, Hong Kong, and Singapore were not springing up, suggesting entrenched economic interests that lose their monopoly control were the obstacle. Lutter replied that he believed charter cities and free cities were inevitable, and that his organization’s goal was to accelerate them so people would be lifted out of poverty sooner, and to push them toward greater economic and political liberalization, including free speech, freedom of contract, and freedom of association. He said the primary constraint had been political, that he would not say the politics were any more mean-spirited there than in other countries, and that Singapore and Hong Kong were seen as anomalies in Asia rather than a model replicable in Africa. He recounted a friend at the World Bank describing a conversation about an African country that proposed creating a charter city, in which the question was whether the country knew what a charter city was or was just using the right buzzwords The End of Nation-States? (2018).
Zadek closed by characterizing the proposal as government that does nothing other than encourage free market activities, protect the rule of law, honor contracts, and give parties a peaceful way to resolve disputes—the core of essential government—while being at bottom a humanitarian system. Lutter agreed, saying the humanitarian community traditionally focused too much on aid and not enough on sustainable policy reform, and that unlike a food program requiring money and food every year, a charter city is more like teaching a man to fish because once set up it sustains itself. He said his goal was to move over to the for-profit side once the organization and the worldwide community of relevant parties were in communication The End of Nation-States? (2018).
Across episodes: from proprietary cities to Pronomos Capital
The excerpts show the same set of questions returning across three appearances by two guests, with the emphasis shifting rather than the argument changing. In 2016, Lutter appeared as a PhD candidate whose dissertation was on proprietary cities, and the discussion was framed around the Free City Movement, regulatory competition, voting with feet, and public choice economics Mark Lutter on Proprietary Cities (2016). By 2018, Lutter appeared as founder and executive director of the Center for Innovative Governance Research, and the treatment had acquired an institutional and historical apparatus: Paul Romer’s TED talk, the failed Madagascar and Honduras attempts, the roster of interest groups, and the urbanization argument about Africa and the World Bank Doing Business Index The End of Nation-States? (2018). In 2022, Friedman supplied the investor’s view, describing Pronomos Capital’s land-and-rent business model and the mechanics of the Honduran ZEDE program, including the 90 percent Honduran employment requirement and the split between Honduran criminal law and zone-made commercial law Patri Friedman’s Plan to Accelerate the Free Cities of the Future (2022). What changed between the earlier and later treatment is chiefly the locus of the argument: Lutter’s 2018 account treated the constraint as political and the need as ecosystem-building, while Friedman’s 2022 account treated the Honduran program as already shut down and the question as what happens going forward.
What the sources do not cover
The excerpts do not state the outcome of the Honduran ZEDE program beyond Friedman’s remark that the country changed its mind and shut it down, nor do they identify the legal challenge or legislative repeal that ended it. They do not report whether any charter city has been built at the scale its advocates describe, and they give no figures on residents, investment, or economic growth actually achieved in any zone. The excerpts also do not describe the terms of any agreement with a host country beyond the Honduran program’s employment requirement and the division between criminal and commercial law.