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Show Notes:
In this episode, Mark Lutter sits down with Kurtis Lockhart to discuss his transition from the Charter Cities Institute to spearheading the Africa Urban Lab at the African School of Economics in Zanzibar. Kurtis highlights the pressing need for new universities in Africa to capitalize on the continent’s demographic potential and address gaps in education quality. The conversation unpacks the challenges of launching a university, the emphasis on practical skills within the curriculum, and the strategic advantages of Zanzibar as a hub for innovation and education. Kurtis also shares the ambitious vision for the Africa Urban Lab and its role in shaping urban development across the continent, alongside CCI’s broader goals for the years ahead.
In the second half of the episode, we turn to Mark who delves into the complexities of charter cities, with a focus on Honduras. They examine the political risks involved, the importance of integrating with local communities, and the invaluable lessons from historical transformations. The discussion touches on the role of institutions in fostering economic growth and the hurdles faced by societies with fragmented ideologies. Tune in to explore how bold ideas are driving transformative change in education, urban development, and economic growth.
Key Points From This Episode:
- Kurtis transitioned from CCI to focus on a new university in Zanzibar.
- The African School of Economics aims to address educational gaps in Africa.
- Zanzibar was chosen for its strategic location and political support.
- The university will start with a diploma in urban development.
- The Africa Urban Lab (AUL) curriculum will emphasize practical skills for urban planners.
- Investment in education is crucial for Africa’s demographic future.
- CCI aims to implement urban development projects in the next three years. Political risk is a significant concern for investors.
- Historical examples like Japan’s Meiji Restoration provide insights into modernization.
- The political landscape in Honduras has shifted dramatically, impacting charter cities.
- Local integration can mitigate political risks and enhance stability.
- Understanding the social dynamics is crucial for successful economic reforms.
- Incremental changes can lead to substantial impacts in economic growth.
- Institutions are essential, but their nature and function must evolve with society.
- The success of economic zones depends on their regulatory environment and local context.
- A multi-tiered institutional approach can drive economic growth effectively.
Quotes:
“Africa will have half of humanity’s minds.”
“We need to invest in Africa’s future talent.”
“Political risk is always a factor.”
“Prospera was like an island on an island.”
“What are the conditions necessary for modernization?”
Links Mentioned in Today’s Episode:
African School of Economics Zanzibar
Charter Cities Institute on Facebook
Charter Cities Institute on Instagram
Transcript
[INTRO]
Mark Lutter: Why does Africa need new universities?
Kurtis Lockhart: I zoom out and at a very high level I look at humanity as a species and the world and demographic trends over the next century. By 2100 Half of humanity’s minds will be African minds. And then I look to state of African education and it’s at a very, very, very low bar, the biggest self-own that humanity can do to itself if it doesn’t start with urgency, investing in what will be shortly half of humanity’s brainpower. Current status quo curriculum around cities and urban related issues. It’s way over indexed on these students are graduating and oftentimes they lack the sort of basic technical skills needed to do the day-to-day job of an urban planner in a rapidly growing town or city. And so, what we said, okay, if this is the status quo, we can really, really improve upon this by really focusing the curriculum at the diploma on building these technical skills demanded by the labor market.
So, you’re back at CCI, thinking bigger picture, what do you want CCI to have accomplished by its 10th anniversary?
Mark Lutter: One of the goals of charter cities in a lot of contexts is like can you create self-sustainable systems of productivity of economic growth that hopefully can have a positive mimetic influence on the broader country. When thinking about social change, identifying really what the underlying conditions that allowed certain outcomes to happen in certain places actually have a clear sense of why some places end up being successful and why some are not then what levers you can pull to yourself to hopefully have a positive impact.
[INTRO ENDS]
Mark Lutter: Hi Kurtis, welcome to the Podcast.
Kurtis Lockhart: What is this? When I have had you on the podcast, I think I had a much better welcoming and intro than that Mark. I’m a little offended at this point.
Mark Lutter: Well, the question is, is our average listener offended? Because this is going to go on the podcast and they will judge you for your response.
Kurtis Lockhart: Okay. Well, thank you for having me, Mark.
Mark Lutter: So, Kurtis what are you building?
Kurtis Lockhart: Yeah. So, I mean, to give listeners a bit of background, I sometimes less frequently than I like, they’re used to hearing me on this podcast. So, in the interim, in the last few months, I made the transition from executive director of CCI to stepping, stepping aside, Mark is now back as executive director of CCI, which we can chat about and we’re really excited for it.
And instead, I’m now working full time on helping get this new university set up in Zanzibar. This new university is the African School of Economics Zanzibar, and it’s going to be a really high-quality anchor tenet for one of CCI flagship new city projects Fumba Town, Zanzibar. And then specifically under the university, the first building block of the university is this new research center called the Africa Urban Lab, which is focused on African cities and the challenges and solutions to rapid urbanization across the continent.
So obviously there like a ton of ties into what I was working on for the last two and a half plus years at CCI. And what I’m doing now, it’s set them on the ground in the tropical island paradise instead of Washington, D.C. So, it’s great.
Mark Lutter: How reliable is the electricity in your tropical island paradise? Okay, we shouldn’t we shouldn’t do that. Let’s be serious. So why are you building a new university in Zanzibar? How did that come about?
Kurtis Lockhart: Yeah, so in addition to this opportunity in Fumba town, right, CCI has been involved in this new city project and one of our board members, Leonard Wanchekon, is a professor at Princeton University, is a CCI board member for the last several years and somehow in his non-existent spare time, he’s also the founder and president of this Pan-African University called the African School of Economics.
So, I knew Leonard had this Pan-African system. He started the first ASE campus back in 2014 in his home country of Benin, and it went really successful. Really well. After the initial success, he expanded to a second campus in Abidjan, Cote d’Ivoire, and then just last year expanded to two more campuses in Nigeria. So, one in Abuja, the capital, and one in Lagos, Nigeria.
And he’s talking to several other state governors across Nigeria to expand other ASE campuses pending on the interest of the governor. So really firm footing ASE has in West Africa, except Leonard is an ambitious guy. He has Pan-African ambitions Ideally, he wants one high quality ASE university in each of the 55 African Union member states. And so, there’s tons of scale opportunity.
I knew he wanted to expand, and so last year, Mark, you and I were in Fumba Town giving our first talk here. I think this was February 2023. We chatted about charter cities here and like I fell in love with the place and I saw a huge potential for Zanzibar being the East African hub of ASE. So, I think like literally that day or the day after we arrived last year in Zanzibar, I gave Leonard an email and I said, hey, I think I found your East African site location.
I think two months later, Leonard was on a plane here to Zanzibar. He met with the Minister of Education. She’s obviously super excited and was very encouraging to set up a new university campus here. And then he spoke with the developer of this new town that CCI is engaged with. The developer of Fumba Town is called CPS, and obviously the developer is super happy to have a high-quality anchor co-locating in their new city and so with those encouragements, Leonard made the decision to expand. And then over time, it became clear I was being stretched very thin, trying to do all the work involved in leading CCI and also all the work involved in setting up a new university and a new urbanization focused research center. So, I think all organizations are better served by me being able to dedicate a full, full time to this university in this research center. And then CCI having, I guess I have to be nice to you. Having a high-quality leader dedicated full time to its success.
Mark Lutter: And why does Africa need new universities?
Kurtis Lockhart: So yeah, this is a big ask. Another reason that informed my decision that this was a low hanging fruit and a neglected area. So, I just I zoom out and at a very high level I look at humanity as a species and the world and demographic trends over the next century and the glaring fact that strikes me when I do this exercise is that by 2100 half of human babies being born in 2100 will be African babies. Half of humanity’s minds will be African minds. And then I look to the state of African education and in particular African tertiary education and it’s at a very, very, very low bar, no kind of frontier research takes place on the continent. All of all of most of, I should say, like the vast majority, 99.99% takes place elsewhere. And those ideas, some of them are imported from abroad. And I think we do a great it’s like the biggest self-own that humanity can do to itself if it doesn’t start with urgency, investing in what will be shortly 75 years is not a long-time half of humanity’s brainpower. And so that’s the big motivation at a high level. And then there’s obviously all the more like micro work by people like Hanushek and Wiseman write a lot about how education is tied and human capital is tied to economic growth. So, like one of their papers finds that superior skill test performance and these testing and pieces scores rather than just school years because you get quality rather than quantity. So, a higher proportion of students and a higher proportion of the country’s population that gets superior test scores results in about it is associated with an increase of 1.3 percentage points in annual economic growth per year. So, we need get into the nitty gritty details of education’s connections with growth but that’s another spur but really, it’s at a high level, this kind of broad demographic wave of Africa being the only region driving human population growth after 2040 or 2050 and there being very, very little investment in the minds of what will be the bulk of humanity in short order.
Mark Lutter: And let’s get, I guess, into this on a more granular level like what does it actually take to establish a university? What does it actually take to establish a research center? Right. Like, what have you done so far? What are your priorities over the next few years?
Kurtis Lockhart: Yeah. So, we’re starting with one program, and this is through the first research center here. It’s through the Africa Urban Lab. It’s a professional Diploma in Urban Development. And so really focused on cities and challenges and solutions to rapid urbanization. That starts next month so we opened the applications for this diploma program a few months ago. We got over 225 applications from across the continent even got random applications from like Argentina and Ireland and Canada and Russia but bulk of them came from across the continent about 50% came from here in East Africa. I would say about 80% of those applicants were the type we wanted, which was kind of professionals, oftentimes civil servants working in planning or urban finance agencies either at their local government level or at the national government level. And so, we’ve now admitted we’ve given out admissions letters in about 45, 40 to 45 students will be here next month in November for the diploma program in person, which we’re really excited about that the pedagogy or the curriculum of the program is also something I’m stoked about. One of the things we did before structuring the program was basically talk to anyone and everyone who would listen to us currently giving urban related curriculum and programs across the universities across East Africa, and the overwhelming glaring response we received was one current status quo curriculum around cities and urban related issues. It’s way over indexed on theory and so these students are graduating and oftentimes they lack the sort of basic technical skills needed to do the day-to-day job of an urban planner in a rapidly growing town or city. And so, they lack skills like kind of basic Excel skills to do rudimentary municipal budgeting and municipal finance. They lack kind of GIS mapping software so GIS is used to proactively predict the urban growth patterns of these fast-growing towns and cities accurately and reliably, so that’s often lacking. And so, what we said, okay, if this is the status quo, we can really, really improve upon this by really focusing the curriculum at the diploma on building these technical skills demanded by the labor market.
And so, part of the diploma isn’t just classroom work, but it’s also real-world work. It’s also pairing these students with urban development projects, with real world organizations so that they can apply in practice what they learned in the classroom, in the real world, and we think how you flex your muscles by actually using them, by going to the gym. And so, to with skills, you flex your skills and consolidate your skills by using them. And so that’s part of the curriculum I’m most excited about. And so that’s step one that’s happening next month and then next year and beyond. So, we want to scale to more programs and scale to more schools at ASE Zanzibar. So, the next program will be a master’s in economics that we start in the fall of 2025.
Beyond that, again, contingent on funding and demand, we want to extend to a school of business where we offer an MBA program. And then, you know, beyond that, we wanted to start a school of public administration and to an MBA, the thinking behind the sequencing of this with the cities related program, economics related program, a business and then a public administration is that these three areas or perhaps you say four areas are kind of taken together really important. And so, cities are these places that create little islands of productivity and enabling environments. They’re oftentimes where firms locate where the best and brightest in a particular country go to locate so they’re important. Economic policies is super important and the notion of tradeoffs and so we find that and it’s also ASE’s bread and butter and where a lot of their graduates have gone on to great successes. An MBA, then we want to expand to because we think that having kind of business minded folks that are able to take ideas generated at the university and commercialize and then scale those ideas, bring them to market, is a skill that’s lacking and then you know, manage actually use business acumen to manage these scaling and growing firms. And then lastly, a School of Public Administration, because we think that even if you have the ideas coming out of the university and the business people to take those ideas and scale them and commercialize them, if those ideas and those business, those business people are entering into a policy environment that’s totally not conducive to their firms operating and those ideas scaling, then all is for naught.
And so, you do need some sane kind of government officials and skilled government officials to create a policy environment for this to happen. So that’s the rationale behind first the cities and then the scaling to other programs across ASE Zanzibar.
Mark Lutter: And what is the theory for social change for ASE Zanzibar?
Kurtis Lockhart: So, I have a very simple at base like two factor model of the way development happens. Like one is attract or inculcate high human capital talent and two is like, get out of their way. And so, you could call it like one human capital, two institutions. And those two combined can be a really powerful thing. So that’s my theory of change. I don’t want to speak for Leonard about what the ASE as an institution theory of change is, you know, I can guess at it, but that’s my theory of change of how development happens and obviously universities are a great place to churn out high human capital talent, and in particular in Africa, as I stated at the beginning of this podcast, I think the status quo for the quality of universities across the continent is sorely lacking. And so, ASE can enter as this much better place to train up the minds of Africa’s future and humanity’s future.
Mark Lutter: You can sell it better than that.
Kurtis Lockhart: Well, so I mean, this is a whole other question right? So, what I’ll try and channel Leonard Right. If we look at what’s important to spurring economic growth, technological change and ideas are the long run driver of growth. And those technical innovations and ideas are typically discovered and then diffused through high human capital talent and elites. And so having places, nodes in poor and lower middle-income countries where ideas can not only be imported and diffused from abroad, but also discovered organically and domestically is super important. And right now, that is lacking on the continent and ASE already has a proven track record of churning out some of the best and brightest the continent has to offer have gone on to our one universities and PhD programs we’re talking Harvard and Princeton and New York University and others, and they’ve gone on to tenure track jobs at Dartmouth and NYU. And but not only that, there are so also like non nerds that go into the private sector and industry and top international policymaking orgs like the World Bank, IMF, they’re advising presidents and prime ministers. And so having ASE as the place where frontier ideas are being imbued and inculcated in the minds of future policymakers, future business operators and future top tier researchers is super, super important. And that’s what ASE stands for.
Mark Lutter: Cool, and why Zanzibar? What convinced you in your first day that it was the right place for an ASE campus?
Kurtis Lockhart: So, I mean, this is a pretty short answer. It’s a guy named Daniel Yu. Mark, you and I got a random email one time and he had just chosen to relocate a small unit of his fast-growing company with SOCO to Zanzibar and he kind of just like went over the rationale for the reasons in favor of Zanzibar and why he sees it as this huge potential and I agree with most of these so there are several like one is Zanzibar is already a sort of semi-autonomous unit and so it can already do some interesting things and experiment with different policies relatively easily. It’s got its own president and prime minister here and it’s a relatively small islands just 1.8 million people. So, the political leaders that president and cabinet ministers are much easier to get a hold of and oftentimes more proactive in looking for opportunities like firms coming here, high quality universities, then a country like Tanzania mainland has like 55, 60 million people. It’s much tougher to get the time of the political leadership. So that’s number two. Number three is this is kind of less for the university and this was more for CCI’s initial involvement. But Fumba Town, the new city that ASE Zanzibar is going to locate in, is located in a special economic zone and so that already gives it an ability to introduce and implement a more favorable business environment that can attract firms and other organizations because things in theory should be more streamlined and then its location right on the outskirts of Stone Town, which is the capital of Zanzibar, is really strategic because Stone Town is growing at 4% per year. That means its population is going to double in size in the next 17 years. And Stone Town proper is a lot of it is like a UNESCO heritage site where it’s really tough to build housing to accommodate this wave of 800,000 people being added in the next 15 years. And so, you do need to pick strategic locations on the urban periphery. And Fumba town is like right in the growth path of this wave of population growth. And then it’s also just a short 15-minute drive from the international airport, which is really well-connected, 25 minutes from downtown Stone Town. And so, the location is great. And then lastly, I already said Leonard you know, we got the support of the Ministry of Education and the developer here to help out with the physical building of the campus. So obviously that’s great. But I mean, the last and I think most important point is it’s Zanzibar, right It’s like well-known and it’s got this great international brand as a great destination. It’s a tropical island paradise and people actually want to be here and I’ve experienced the benefits of that already. It was like shockingly easy to get some world class lecturers to commit a few weeks of their time to come and teach, and then it’s also been shockingly easy to get some amazing researchers and professors to fly in and give public talks and lectures so we’re already, you know, a Lamberto, who’s a great urban researcher from NYU, and I think now at Mercatus Center is flying in next month to give the first public talk lecture series. We have Jim Robinson, the now newly minted Nobel Prize laureate, coming to speak at a conference we’re hosting at ASE Zanzibar next year. And so, I do think like sure they care and they do these things regardless. But I do think you know, Zanzibar as a location makes it a much easier yes than it otherwise would be. So yeah, those are some of the reasons why Zanzibar is a great location.
Mark Lutter: Cool, what other questions that I’ve not asked you. Should I ask you about ASE?
Kurtis Lockhart: I mean, so I think just maybe a little bit more on the Africa Urban lab because we talked about the university, but the first kind of building block as I said of the university is starting with this urbanization focused lab. So maybe just a little bit on the Africa Urban Lab. So, it’s all vision and obviously these ties into CCI’s work. We want to conduct frontier urban research and then more importantly, we want to actually translate that research into policy action by helping train up the African city builders, urban planners, municipal leaders of tomorrow to harness rapid urbanization occurring across the continent or human prosperity.
And I think, you know, Mark, you can attest to this and I can attest to this as part of CCI’s work. One of the big barriers that I think we head up against repeatedly is in sort of talent and skills at the local level. I think even if you give the legal empowerment to cities that CCI advocates for, even if you empower these cities fiscally with resources to potentially build roads and install water and sanitation, if you don’t have the skills kind of technically to build and manage these municipal organizations, then that legal empowerment and that fiscal empowerment is just kind of all for naught. And so, we do need some base level of skills and human capital at the local level and this is really one thing that the Africa Urban Lab wants to address. And, we’ve gone over this, like why cities historically have been the places where economic growth happens, where magical human transformation happens across social, cultural and technological innovations. But that link between cities and human progress is breaking down in African towns and cities. Today, there’s research by Jed Web and Golan and Bahrain showing that while historically urbanization went hand in hand with industrialization. In Africa and a few other places today, urbanization is not resulting in industrialization, there’s basically no link between the two. And that’s a huge, huge, huge challenge because as I said, African towns and cities are adding almost 1 billion people to their ranks over the next less than three decades to 2050. And if those masses of humans don’t have adequate jobs to be employed in and be deriving a livelihood from, then that you know, that obviously spells challenges for things like political stability and could lead to social unrest and a bunch of other bad things. So, these cities, they really need to be equipped to be engines for growth rather than sort of places where industrialization is not spurred and you’ve got a bunch of unemployed youth wandering around.
Mark Lutter: Cool.
Kurtis Lockhart: Okay, I get to ask some questions, right?
Mark Lutter: Sure, let’s do it.
Kurtis Lockhart: So, you’re back at CCI, thinking bigger picture, what do you want CCI to have accomplished by its 10th anniversary?
Mark Lutter: Projects, projects, projects. I think we are starting to see some kind of green shoots in the last month or two having had some inbounds that appear as though they could be relatively serious. And so, I mean, I think what we have done is like, build a let’s call it model for rapid urbanization and economic growth as well as to some extent a light model for like innovation in some areas. And that model has not really been deployed like historically it’s been deployed in a handful of places that we weren’t really involved with and then obviously you have Honduras having charter cities legislation. However, currently it appears as though those projects are under a lot of pressure from the government. And so, I think like the goal of CCI was always to not just talk about ideas but make change actually happen. And I think what we’ve kind of garnered an increasing sense of is, yeah, not just to like what this idea looks like, but what this implementation process is so one concrete example from that is I spent the last two and a half years when you were running CCI. I spent focusing on a project in the Caribbean. Unfortunately, did not go as quickly as I would have liked still might happen at some point, but there were a lot of lessons to be learned from it in terms of like how to negotiate with government counterparties, with private sector landowners, with capital, how to like structure a project, a charter city project kind of more mechanically, right just in terms of this is what the ideas are. This is what like idea legislation looks like, but actually like the nitty gritty mechanics of it’s basically this kind of like large multi-stakeholder engagement and how you engage all the stakeholders, how you think about these kinds of intermediate steps and that’s already kind of paid dividends. There’re varying experiences in terms of how we approach the kind of modernization of the special economic zone in Zanzibar. We recently had engagement with an Indian nonprofit that’s looking to do kind of charter city slash urban expansion, slash special economic zones. And I think the experience in the Caribbean helped inform that conversation have started early conversations in Central Asia that again are informed by this like real world on the ground experience. So, the 10th anniversary of the next three years, what we want to see is like legislation being passed, zones, boundaries being drawn, people relocating to zones, businesses relocating to zones to cities. Right this process scaling up projects, projects, projects.
Kurtis Lockhart: And you talked about kind of experience and learning from the project you were working over the last two years. I think also related to recent experience with Charter Cities projects, there’s been some recent happenings on with Prospera, which is probably one of the better-known charter city projects. What are your thoughts on recent events and I guess they haven’t been great for the charter city space? So, what got it to this point in the first place or what are your thoughts on that.
Mark Lutter: Yeah. So, I mean, I guess just for kind of background and context, right. Honduras passed this; the original charter cities legislation was I believe in 2011. Right. Maybe was 2010. There was a constitutional crisis, a coup where the president of Honduras was put on a plane by the military and shipped to Costa Rica. Now military putting President on plane bad. At the same time, the president was trying to run for a second term that was unconstitutional. The Congress, which was his party, had turned on him. The Supreme Court had also turned on him. And so, if you have somebody that’s trying to abrogate kind of significant institutions in a very substantial way. Right. Like how do you deal with it? So, I’m not Honduran this is kind of external viewpoint, but it was whatever you want to call it. It was a major constitutional crisis. And so, you had
Kurtis Lockhart: Like a question of legitimacy basically?
Mark Lutter: Yeah, yeah. Major question of legitimacy. And the right-wing party came in, stepped in after this constitutional crisis and their experience over the previous decade has been like, okay, we get like market-oriented reforms, then we get voted out of office and then those reforms are reversed. And so, they wanted to figure out a way to create more durable economic reforms. And they saw Paul Romer Charter Cities TED Talk and were like, okay, this is like along the lines of what we’re thinking. And at least when I spoke with the Hondurans right, they kind of viewed Paul as like a figurehead, not as the Idea Progenitor Paul might have had different perception. Paul gets involved the Supreme Court rules it unconstitutional, Paul leaves because there are some issues with the Transparency Committee in 2013, they pass a similar law that addresses the constitutional issues and after that everything is kind of quiet into, I think 2021 Prospera launches. I think they might have incorporated 2017, but their public launch was 2020 and all of that time it remained the National Party, the right-wing party remained in power. And so Prospera launched and they’re looking at Roatan, which already has, it was a British colony. They speak many people on Roatan speak English. So there’s a bit of a cultural boundary between like Roatan and the rest of Honduras That too, a lot of Prospera’s marketing focused on kind of digital ads like American expats. It didn’t feel like something that was really grounded in the Honduran experience. And so I think that caused a lot of perhaps like polarized people on the left as well as just the fact that like many countries in Latin America, the right wing or kind of I don’t know, some people will probably yell at me for this, but the right wing are like proto fascist and the left wing are like literal communists. And so right within the US, at least the US left tends to be like center left in the US, right? At least historically, it tended to be like a kind of center right moderate. But in Latin America, the electoral swings are much wider. And so when the left-wing party was elected, what was it, 2022
Kurtis Lockhart: Yeah.
Mark Lutter: Late 2022. One of their primary election campaign issues was the ZEDES, the charter cities. And they took a very aggressive posture against Prospera and the others ZEDES and like Prospera responded by filing a lawsuit in international court that’s currently working its way through the judicial system or of an arbitration system for $11 billion. And then more recently, the Honduran Supreme Court ruled the legislation enabling Prospera and other ZEDES as unconstitutional. And that was only like a partial ruling of like a subset of the Supreme Court and the full ruling is supposed to come out any day now. But I think that makes things very difficult. So I think what are the lessons learned, like general lessons learned are like political risk is always a factor, right? When you speak with any investor that political risk is going to be the first thing they ask.
And that is a very valid question. Two is I think political risk is higher in jurisdictions that have far left and far right swings right. If you’ve got a jurisdiction where both the political parties are more populist or where there’s kind of a more agree upon general economic strategy that would be more stable than something where there’s far left and far right swings. I think the third is you want to integrate with the local economy as much as possible, right? I think Prospera could have done a better job of this, and I think they’re trying to improve. But it felt like Prospera was a little bit of an island on an island and in Roatan, where it took them time. Right. They did have I think relatively good relations with some of the neighboring villages.
But like if you think about what the dominant economic sectors in Honduras are like it’s maquilas as manufacturing and textiles and that one doesn’t exist on Roatan. Roatan is primarily kind of tourism driven. And so, if you want to be really integrated as part of like advancing a country’s objectives, this means you should figure out how to get local investors either directly in the operating company or right building factories. It means you want to be integrated in the local community, figuring out how to create like jobs, be competitive on the relevant margins __ for example, another Zedes in Honduras they were located outside of Choloma which is near San Pedro Sula, the commercial capital, and kind of was basically, is a kind of integrated into local and regional supply chains that I think allows them to scale very effectively.
If there wasn’t this government pressure in terms of selecting a location, one that has a relatively stable government, not left right swings, you want to figure out how to integrate effectively in the local population. Those are probably the main lessons. I mean, you want yeah, the branding to be focused. I think local first, not international. And it is pretty sad to see what’s happening because a lot of jobs, a lot of excitement, a lot of capital might go down the drain. And I think this really put Honduras on the map in a way otherwise wasn’t. You had very high profile people coming to visit Honduras, being excited about this project. And this could be very negative for investment in Honduras, for job creation in Honduras in a way that really condemns a continued stagnation in a way that I think is very unfortunate in a kind of low income country that should be doing everything they can to create jobs, to create wealth, to help kind of lift their residents out of poverty.
Kurtis Lockhart: That’s interesting because so like one of the things you mentioned that struck a thought was that Prospera is on Roatan in Honduras is like an island on an island. And I’ve always thought like that’s this is to me one of the big benefits of a here in Zanzibar and I say that because I look at other times of industrial take off like the Meiji restoration in 1868 in Japan me and you were chatting about this the other day and other than in Nagasaki. Nagasaki was like one city where the Portuguese and then the Dutch were able to operate and trade everywhere else and in Japan it was sort of restricted there, their presence was restricted and it was literally this artificial island off of Nagasaki called Dejima that was created for the Portuguese and then the Dutch merchants to interact with. Yes, Nagasaki merchants and that’s basically a charter city by the definitions of a new city with new rules. And it was strategically used first to import I guess Portuguese ideas and then Dutch ideas. And there was even like a school set up in Nagasaki called first Dutch Studies and then Western studies about, you know, how the Dutch functioned at that point it was one of the most prosperous, the most prosperous place on the planet. And then I guess through that interaction, the Japanese sent some of the I they were from Nagasaki and Edo, now Tokyo sent them to Europe and one of the guys was Fukuzawa Yukichi, who then absorbed and basically did a fact finding mission across Europe and France in the UK, and at some point California and then came back and lived with those ideas, but also imbued with local Japanese cultural context and basically helped write the Maji constitution and the post Maji governing structures of Japan and then to disseminate those ideas and proselytize the importance of the discovery of ideas and then also the diffusion of ideas and adoption of ideas from abroad established a new private university, Keio University. I think it was one of the first chartered universities in Japan and then a newspaper to disseminate the ideas from the university. So I read this story and it struck me as like this is basically one of the big things that these universities in across the continent want to do is first, I guess, train up the best and brightest here on the continent, but also be nodes of idea and technology diffusion. And I feel like kind of islands on an island it’s like it’s not the biggest differentiating advantage but it is a kind of geographical advantage to do just that that’s the ramble I don’t know if you have to thoughts but there it is.
Mark Lutter: The Meiji restoration is obviously fascinating, but it’s unclear to like, I guess maybe I’m drawing different lessons from it than you because you had what was a very closed society that had very restricted interaction with foreigners. Two, you had much higher social distance than almost any society does today. Where how many Japanese people actually spoke Dutch? Right. Like five. How many Hondurans speak English? 100,000, 500,000. And so I guess part of the question is what are the barriers to modernization and idea spreading. In Japan, at least at the time, there was a relatively coherent push towards modernization that was embraced by almost all levels of society.
And because of that, the challenge was more technical, right? It was less of like there’s obviously a lot of social upheaval in that process but like within 20 years or so after Matthew Perry’s gunboat landed, almost every level of Japanese society like agreed, we need to modernize. Right? And some disagreed on the pace. Right? But there was a direction and so it was mostly a technical challenge of like, what does modernization mean? How do we take their ideas? How do we build better guns, how do we reorganize society? Right? They they’re all marching in the same direction. But there is this tactical exercise where whether you look at a society like Honduras you’ve got, I don’t think they’re all marching in the same direction. There’s no lodestar. You’ve got the right wing that is like wants markets.
And like some degree it’s a relatively conservative religious society, some degree of like social control, anti-abortion, etc. Then you’ve got the leftists who are kind of defied by like Margaret’s being bad wanting to break up dominant business power structures and with like no theory of economics or economic growth. Those are probably gross characterizations of both sides. But I think the broader point remains that like a side like Honduras is not facing a technical challenge of like, how do we get there? They’re facing a social challenge of not agreeing what there is, not agreeing where they want to go. And so what I think you have to think about like information diffusion, right? Like to me the more interesting aspect, the two aspects of the Meiji Restoration is one like all right, how does a society go?
What are the conditions necessary fine they’ve all agreed like we need to march in the same direction, like they had a like functional todo like somewhat unified social order of the previous 200 years. Right. Like Japan because it’s an island had relatively few like major threats. So like one of the preconditions for everybody to agree like, alright, we need to like substantially change the direction we’re marching in and the two like, yes, what are the technical measures we need to do to actually like achieve that?
But I think in thinking about like where the analogies come from, right, like we have to be careful cause right now the binding constraint to social change in most places is not like technical knowledge per se, right? Like the vast majority of technical knowledge is very easy to is available online for free. There are not great barriers to additional technical knowledge. It’s this kind of like, I don’t know, social knowledge. We all agree that we want to move in this same direction. That is a binding constraint and then two even if you do agree, you want to move in approximately the same direction, right? Some people are going to lose status, some people are going to get in status. And how do you manage that transition. And so I guess back to the point on charter cities, right? The reason why this relates to charter cities and why it kind of makes me think of the importance of like great local integration is twofold is one, right? You need the local integration because. Right. If the point of the charter city is like economic growth, poverty reduction, mitigating political risk, right? Like more local integration will be more job creation, it will be seen less as a threat to the existing political order. I think that substantially mitigates political risk and makes it potentially more stable. Two is if we think about the purpose of the charter city as like broader social change in terms of setting the stage not just for sustained economic growth in the city itself, both in the broader region, within the broader country.
I see that as a better model than maybe the Meiji Restoration model, where Meiji restoration model is really one of elite transfer is a society agree we need to march in this direction and then there needed to be like substantial elite transfer so the elites can say, all right, here are the technical things we need to do to achieve that versus let’s call it like a more democratic knowledge transfer where you need to like less of we agree we need to march in this direction and more of like here are skills that make you a little bit more productive, that make your kids a little bit more productive, that allow you to start scaling up the value chain, that allows society to kind of build out these muscles for. Like if you are primarily agrarian society allows you to build out the muscles for cow processing or some early-stage resource processing that gets you started on that industrial value chain that allows you to go up in this kind of more of a like less of a kind of top-down modernization process, like the Meiji Restoration was and more of just kind of like socio-modernization process by people just like doing the thing that I see as important in for most instances for, for charter cities.
Kurtis Lockhart: That’s interesting because so there’s like there’s a few things there so one of the things I feel like I heard is it’s a bit unique in a place like Japan and I guess you could argue for, for China to, you know, and broadly the East Asian miracle countries, it’s like, yes, those places were once the elite agreed able to grow faster than any other place in human history because they just the elites too decided and then importantly to I think when your point getting it the country was pretty kind of homogenous socially. So once the elites decided what their decision was, kind of was much easier to sort of diffuse and get agreed upon and spur consensus amongst the entire society such that the whole place was united behind this new vision. And you could argue that happened in Meiji Restoration, that happened in China. Post 1978, although that’s probably too simple in China, given how big it was and there was the conservatives and the reformers.
But yeah, like South Korea, same thing, Taiwan arguably, and Hong Kong and Singapore. Whereas in a place like Honduras or like especially Africa, there’s a bit more fragmentation. In Honduras I think it’s more and broadly Latin America, it’s more ideological fragmentation to your point of like these polarized ideas like behalf of society is kind of for the right. And half of the society is a literal communist. And in Africa it is you know, these states where the borders of these states were artificially drawn such that not much attention was paid to different social groups in different countries. So you have, you know, brothers separated by this random border in two different countries. And then you have blood enemies and because of these random borders in the same country, and that’s probably caused a bit of fractiousness for getting behind a new vision that an elite sets.
Am I characterizing what you just said like adequately and accurately?
Mark Lutter: It’s also important to characterize like what elites mean in context, right? Like it was in Japan for the Meiji restoration. It wasn’t like five people, right? This was a, the samurai, for example, was like semi noble class, which I think they outnumbered like French nobleman. There are three samurai, like three more three times more samurai than there were French noblemen on the eve of the French Revolution. So this was not a like light transition by any means, right? They basically disempowered the samurai, which were a non-trivial part of the population as well as a warrior class. So how do you disempower the warrior class that has the means to resort to violence in a way that’s largely nonviolent and reorganize your society around that? It wasn’t just like you need to convince ten people, a hundred people, a thousand people.
It was a very substantive, like social reorganization, but it was one in which like feels more top down in the sense that everybody agreed on the need for the social reorganization and that the learning was primarily like elite learning versus the primary challenge being just like really one of the goals of charter cities in a lot of contexts is like can you create self-sustainable systems of productivity of economic growth that hopefully can have a positive mimetic influence on the broader country. And so those are kind of two different things. And just like I think it’s very important to When thinking about social change, identifying really specifically like what the causal mechanisms are, what the underlying conditions that allowed certain outcomes to happen in certain places to actually have a clear sense of why some places end up being successful and why some are not.
And then what levers you can pull to yourself to hopefully have a positive impact
Kurtis Lockhart: Yeah, I guess I’m pushing back so I think like yeah and I guess I think one of the things that fascinates you is like broad social change and social transformation. And I think I probably showed myself to be a little more like we can do some smaller like technocratic things that move the margin. We don’t always have to be going after like broad based, you know, social transformation and like one of the success stories that I am like fascinated with right now and talking to a lot of people about and reading about is the story of the AERC, the African Economic Research Consortium. It was established, I believe by IMF and at that time the UK development agency and a few others, as like this consortium of economic departments across Africa.
And basically, after the craziness and macro volatility of the seventies and eighties on the continent and they were like, you know, nothing else good can happen without a relatively more stable macroeconomic environment. Like inflation’s got it hyper, no hyperinflation, inflations got to come down to like some semblance of rational levels. And in order to do that, like one of the most important institutions to start with first is like having more competent central bankers and so they created AERC and brought in kind of the latest of what we know and tied up a bunch of Ph.D. economists that then went out and got employed by the central banks of African countries across the continent. And like you can like actively see and I attributed a lot of it to AERC it might not be everything attributable to AERC but a lot of it because they literally hired from the staff, from graduating from AERC you literally see after its establishment, much lower levels of macro volatility, which I think was in large part responsible for the much higher growth rates we saw across Africa in the sort of late nineties or especially post 2000 to like 2015 or so. So yeah, I guess I’m putting myself in this category of like sure, like big broad social transformation hard but there are some like some smaller things that can be hugely impactful if we pull those smaller more, I guess technocratic levers. I don’t know. Again, am I characterizing you fairly.
Mark Lutter: Yeah, I mean, I don’t disagree with that. I mean, don’t come in and make not having no specifics is right. There was also a large commodity boom from the 2007’s 2008 that was responsible for some of Africa’s growth. No idea. Like, I don’t know enough of the history to be able to disaggregate and I’ve got no problem with smaller incremental changes. I mean, those are always necessary, right? One of the Daron Acemoglu had a recent tweet or something, or somebody asked them like, how do you think about how we need to respond to the current challenges? And his response was, we need to strengthen institutions. And to me, like that is a very dumb responsive like it’s kind of like it doesn’t mean anything. It’s like what institutions need to be strengthened, right? In my mind, institutions are human constructed like devices for specific purposes and so we have to think about like, okay like why do you need to train Ph.D. students for central banks because the central banks are incompetent and are printing too much money and causing like macroeconomics, instability. Right. And there it’s yes, you need to like you can say strengthen central banks, but not even strengthen central banks in some ways it’s like weakening central banks. It’s like diminishing their freedom of movement so they actually have a specific path they follow that is predictable, that allows for macroeconomic stability.
Similarly, like sometimes like you have right now, a lot of discussion on free speech going on. And there are some government institutions that are basically anti free speech, I mean, especially in Europe. And like those institutions should be weakened in my opinion. And if you believe they should be strengthened I mean fine but like there should be explicit argument, which is like the institution leads to x x is a good thing, therefore institution is a good thing or strengthening institutions feels like it, I guess misses the like underlying points. And yeah, there are a lot of intermediate like I get more excited, the more ambitious the bigger a thing is there are a lot of like smaller intermediate things that are good and they should be done to. But I do think it’s important to at least think clearly about like what the causal mechanism is. I mean, you could just be like you saw the big Port thing in the U.S. like a few weeks ago where the Port guy threatened to strike and his argument was, I have a choke point and I’m going to choke you unless you give me a shitload of money. And it’s like, okay like he has a very clear position of where he stands, which is I have leverage and like, I would use that leverage to get more things and that’s like it’s at least honest, it’s at least respectable. And like, in my view, society should say, okay, and then like, fire all the longshoremen and automate the ports because like, that is a socially negative activity. But if you’re, if you’re saying you’re going to engage in some like socially positive activity and want to have some like broader view of what that role is, then I think it’s really important to understand like, yeah, like what is that thing you’re trying to fix? What is the causal mechanism to do it? Are there any second order effects that like should be incorporated into the thinking and then go from there.
Kurtis Lockhart: So yeah I mean now you’ve opened the rabbit hole of the recent Nobel win and institutions and we’ve seen some nice Twitter reactions from pseudo Erasmus and you and ___ has been on a tear she’s also been on our podcast and she’s great and I love her work I it’s interesting because CCI like we do have this theory that you know institutions are one of the most important determinants to long run economic growth and therefore we need to focus on them but our position is sometimes it’s politically feasible to engage in institutional change on the national level is much more feasible and tractable to get needed institutional reforms on the local level. Have a demonstration effect at that local level, pinpoint what works, what doesn’t at that local level, and then scale up those reforms more broadly to the host country.
This is exactly the story that ____ tells in her book “How China Escaped the Poverty Trap” but she also tells the story of like, you don’t need, you know, a perfect institution to kickstart growth. And in fact, Asia proven it’s right, none of them were democratic, etc., etc. So I guess my point is like do CCI like should we in kind of explaining our thinking and our theory of change should we stick with the institutions main determinant of economic growth thing or should we also start to frame more that actually cities are really useful, even if institutions aren’t perfect, if they attract an entrepreneurial class that starts firms that actually grow to a size where they have some clout and can pull in, then once that they’re at a certain side, they can pull in and demand better policies and institutional change.
So it’s sort of more it’s more of an endogenous evolution than it is kind of in the ___ story, having really high quality institutions from the get go. What do you think?
Mark Lutter: If you’re framing AJR story as having really high-quality decisions from the get go that’s like obviously not true. I mean like the classic example is just like look at the U.S., right? In the 19th century, the U.S. was extremely corrupt. The institutions were probably not inclusive by modern definition. Right. It was still obviously successful and industrialized. So, the question is like, do institutions matter? Like, of course institutions matter. But like the question is like, I guess what institutions matter?
And like, how does that change as a society develops? There’s the kind of classic Milton Friedman example where he goes to Romania or somewhere, and they’re like, look, we want to modernize. We have the exact same like labor laws as the US does. And then Friedman’s like, okay but right now your per capita income is like $2,000. The U.S. at per capita income of $2,000 in 1880. So you should copy U.S. labor law from 1880 if you really want to modernize. And I think that has a degree of truth and I think it’s important to. This story has to be accurate and like do institutions matter and then two I think it also depends on like what is going to be the primary driver of development, like what is the lever that you’re trying to pull.
So if you look at China, for example, like even in Shenzhen, most of the investment for the first seven or eight years is basically all from Hong Kong. Like over 90% of capital was from Hong Kong. They weren’t pretty international firms; they were bringing Chinese firms that spoke the same language that were often cousins or brothers or uncles or whatever that were just in a much more liberal jurisdiction than honk Kong. If you think about Zanzibar, where is Zanzibar going to get most of its capital from. Domestic savings rate are low in Tanzania, the entrepreneurial class is like okay in Tanzania. Zanzibar is probably going to get a lot of their capital from foreign firms. And so you have a very different regulatory environment
Kurtis Lockhart: Or from the from the Gulf right.
Mark Lutter: Gulf, maybe Europe, maybe China. I mean, I don’t know specifics exactly, but like it’s not going to be domestic and it’s not going to be like there’s going to be some degree of social distance between the capital source and the recipient. Similarly, you can look at. Right, like Dubai International Financial Center, right. They’re creating a financial center and capital has very low cost of moving. Like from go from one financial center to the next the exact cost is very low. So they need to start off with a very high level of legal credibility and base slide in the DIFC compared to what you might want to do if you were a right like interior city in China in 1888, that was starting to liberalize. And so I think you have to think very carefully about what is the problem that you’re trying to solve and how does governance or institutions help solve that problem.
And you can think about this in like multiple layers in terms of, okay, if you think about Africa, right, Africa should target having like one or two financial centers for Africa that are kind of the DIFC or Abu Dhabi global market equivalent for Africa. Right. And that’s going to require some degree of like high degree of institutional planning, paying consultants a lot of money etc. Then you’re going to want probably a much larger number of like large zones that are kind of following China’s model, where these are very large areas of rapidly urbanizing regions that have a high degree of regulatory autonomy and start off from a very low base and very low amount of specificity. But as they grow, as they track capital over time they become more sophisticated, you should have a probably a high number but in terms of total amount of land area, a much smaller number of like industrial zones and parks that are explicitly aimed at getting foreign investment for these outputs that you’re going to need a higher degree of regulatory specificity than these like basically like urban expansion programs, but probably lower degree of institutional of legal specificity than the financial centers. And right there you can figure out what exactly works. And you basically have this kind of multi-tiered institutional approach to solve the immediate problem. And as you learn, as you change, as you update then you can take lessons from the different success stories, apply them to other success stories in the same category or the other stories in other categories. And that’s how you build kind of a “institutional machine” that drives economic growth, that attracts capital, that updates its rules and changes to respond to the relevant conditions on the ground.
Kurtis Lockhart: Yeah, agreed.
Mark Lutter: Thank you for coming on the podcast, Kurtis. I hope Zanzibar remains an island paradise for as long as you stay there.
Kurtis Lockhart: Thanks Mark.
[OUTRO]
Mark Lutter: Thanks for listening to the Charter City podcast. I hope you enjoyed the conversation. You can follow us on your favorite podcasting platform or subscribe to our YouTube channel. If you enjoyed this conversation, we’d appreciate you sharing it on social media. Thanks for listening and we hope to see you again.
