startup cities - a new approach to reform.pdf

8/11/2019 Startup Cities - A New Approach to Reform.pdf

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Startup

Cities

NEW PPRO CH

TO REFORM


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Table o f

ontents

The Challenge of Traditional Political Reform......................................................

The Startup Cities Approach: Low Risk Pilot Projects for Reform........................

Benefits of the Startup Cities Approach...............................................................

From Startup Cities to National Reform...............................................................

How Feasible are Startup Cities?........................................................................

Cases.................................................................................................................

Startup Cities on the Rise....................................................................................tartup Cities on the Rise....................................................................................

Profile of Startup Cities Institute..........................................................................

Further Reading..................................................................................................

Contact...............................................................................................................

1

4

7

8

10

11

166

17

20

23



The hallenge of Traditional Political Reform

After a victory in a heated election reformers are full of new ideas from their campaign platform. Inspire

citizens are ready for change. The new administration has plenty of money and its staff have

committed to improvement.

Governments may have everything on their side yet many reforms still fail. In the early years of a new

government the failure of a reform demoralizes officials. Failure can cost a government the

support of citizens. Few administrations recover from defeat.

Reformerseformers themselves often misunderstand the failure of reform. Many think that a reform has ‘failed’ on

when Congress struggles to pass a new law or when courts strike down an idea. With a strong coalitio

in Congress and no concerns about legal challenge reformers assume they have everything they nee

to change the nation. When the benefits of a policy don’t arrive things take a turn for the worst. Peopl

blame ‘lack of political will’ ‘insufficient spending’ or ‘an inexperienced new president’ for the defeat.

Reformers and analysts alike underestimate the risk of failure. Like entrepreneurship reform is a high

riskisk project where failure is the norm rather than the exception. Sometimes special interests capture

reform twisting it into something the reformers never intended. Special interests may control the govern

ment agencies in charge of executing a reform. These agencies may even behave like interest groups

themselves standing in the way of change. This phenomenon known as regulatory capture can also

corrupt a reform.

Even with few special interests in the way it’s easy to misunderstand a political problem. Entrepreneurs

sometimes design a fancy new product that no one wants to buy.

Reformers sometimes design policies that just don’t solve the problem. Worse reformers may be so

mistaken about complex new policies that they end up ‘doing bad while trying to do good.’

Despite anyone’s best efforts political reform is complex. Complexity plagues attempts to remake

education to restructure the legal system or to fix security problems. National reform is a risky and

difficult process.

1



Traditional approaches to political reform increase the risk and likelihood that

reforms will fail. Reformers often hire the best and brightest ministers and advisor

available. They design a reform from the safety of an office or ministry and impos

that reform onto the entire nation with the hope it will succeed.

“Complex problems do not lend themselves to easy solutions,” writes Yaneer Bar

Yam of the New England Complex Systems Institute, “any action may have hidde

effects that cause matters to become worse and the whole strategy we are

using may be moving things in the wrong direction.”

1

No matter how smart the hired experts may be, the complexity of politics is st

greater. Immense complexity means that it s unlikely that any particular reform w

solve a problem. When governments design reform from the safety of their offices

it becomes even harder to cope with complexity.

Reformseforms get no feedback from the real world until they’re already in place. Even th

best reformers are likely to miss important aspects of a new policy. Complex

problems of law and governance often need several pieces in place all at once fo

a reform to be effective. But it’s hard to know what those pieces will be until after th

reform begins.

Failureailure to consider the complexity of reform can lead to disastrous results. Durin

the privatization of large industries, the late Soviet Union broke firms up into share

and sold them on the market. But there was no strong legal structure in place fo

high-level financial transactions. Reformers quickly discovered that the reform

would fail.

Sureure enough, corrupt trading by political insiders dominated the sale of thes

industries.

2

Even as the government became aware of their failure, it was too late

After seizing control of these firms, insiders then blocked future reform efforts

These firms remain ‘politicized’ and controlled by a tiny elite in Russia today.

Entrepreneurs often say “a business plan rarely survives contact with th

customer.”

3

For the same reasons of uncertainty and complexity, a reform rarel

survives contact with the citizen.

p. 14.

2



Traditional

approaches

to politica l reformo politica l reform

increase the risk

and like lihood

that reform s w ill

fail S tartup C ities

help reform ers

cope w ith



Traditional Approaches to Reform

are Expensive and Gamble the

Nation’s Future

Governments gamble the fate of the entire

nation with a reform designed in this

traditional way. If the reform is not well

designed, the entire nation suffers.

Citizens have no choice but to comply,

whether reform helps or harms them.

Ineffectiveneffective and unpopular reforms may be

met with protests or even violence. This is

risky for the nation as well as for a reformer

government. A single high-profile failure

can destroy the political support enjoyed

by reformers. Political realities often give

reformers only one chance to get it right.

Reformeform designed at the national level also

leads to expensive mistakes. The launch of

the medical exchange website for the

Affordableffordable Care Act in the United States,

Healthcare.gov, was a high-profile failure.

At launch, security holes and broken code

riddled the website. The price tag: between

677 million and 1 billion.

Thehe failed launch of Healthcare.gov spread

through the internet. The government

faced a public relations nightmare. Even

with good intentions, a big budget, and

popular support, complexity overwhelmed

the reformers. In large nations with high

populations, any new program or change

introduced everywhere at onc

comes at a high cost – particularly if

fails.

Startup Cities: A New Tool for

Reformers

A growing movement called Startup

Cities offers governments a new too

to reform with less risk and a highe

chance of success.

Startup Cities take their name from

the organizational methods of

technologyechnology companies. ‘Startups

work on the risky, complex frontiers

of innovation. Both reformers and

innovative entrepreneurs share siminnovative entrepreneurs share simi

lar problems: too much complexity

too little feedback, and huge risks fo

making small errors. Business has

adapted well to these harsh realities

Reformers, who you might call

‘political entrepreneurs’, have only

begun to realize the power of the

Startup Cities approach.

The Startup Cities Approach:

Low Risk Pilot Projects for

Reform

Startup Cities are small, highly

autonomous municipalities create

by host nations that want to reform.

Governments designate new or

existing municipalities as special

jurisdictionsurisdictions with significant autonom

over tax and regulatory policy,

security, education, and other area

of public policy.

Startup Cities are politically neutra

Within the constraints of the nation’s

constitution,onstitution, a city can test any ne

bundle of public policies, technolo

gies, or other reforms. Startup Citie

may be broad and enjoy a great dea

of autonomy in administration, wit

independent courts, and a separat

municipal police force. Or Startu

Citiesities may focus on a specific are

like education or attracting inves

ment for a port.



Startup Cities bring the dynamic of agile, competitive entrepreneurship that works well in technology bu

is absent from politics. The autonomy of Startup Cities’ jurisdictions create competition between zone

Citizens are able to ‘vote with their feet’. People can move between cities much more easily and safel

than they can cross into another nation.

Competitionompetition between zones creates tighter feedback for governments to know if their reform is working

This competition between zones also creates strong incentives for innovation. Competing cities all nee

to attract capital, citizens, and ideas to their municipality. So cities must be responsible and work to satis

citizens’ needs if they are to compete. Startup Cities create incentives for constant improvement in publi

policy.

Competitiveompetitive zones in the same nation have strong precedents. Douglas Zeng, an economist at the Wor

Bank, writes about China’s Special Economic Zones, “the hundreds of SEZs are highly competitiv

among themselves. Each SEZ strives to distinguish itself in service, quality of infrastructure, and appea

ance to attract new enterprises and reach the targeted development goals. Such competition helps mak

them more efficient and competitive.”

4

Competition also seeds innovation. Innovations pioneered by one zone can be easily copied by rival citie

In the case of China’s many special economic zones, competing jurisdiction quickly adopted successfu

innovations like a new stock market.

5

Think of Startup Cities as prototypes for reform. They re a way for a government to immediately start t

change the nation without the risks and expense of traditional, national reform.

Althoughlthough they share some elements, Startup Cities are not traditional Special Economic Zones. SEZ

have a mixed history. Some generate many jobs and growth and others fail entirely. SEZs focus on ta

and regulatory policies. Some subsidize favored industries.

Startup Cities are not just tools of fiscal and regulatory policy. Yes, governments can use municipal au

tonomy to offer streamlined regulations and attractive tax rates. These are important parts of a health

business environment. Broader autonomy gives Startup Cities better options to attract business and als

empower citizens. Nations already compete to offer low tax rates. Startup Cities give nations even mor

options to compete: comprehensive legal reforms, anticorruption measures, security reform, educatio

and social services, and new projects in infrastructure and urban design.

by D.Z. Zeng 2010),



Startup C ities

bring

to politics

the agile

competit ive

dynamic

that drives

progress inrogress in

technology.



Benefits of the Startup Cities Approach

Many benefits for a host nation arise from the Startup Cities approach.

Startup Cities:

1 Lower the risks of reform and allow governments to cope with the complexity of their projects

2 Significantly lower the cost of pursuing reform

3 ncrease the chance of discovering effective reforms for the national level

4 Help overcome special interest opposition to reform

Lower Risk Localized Failure

With Startup Cities any failures or oversights by reformers are confined to the city. While still unfortunate

failures do not affect the entire nation. Startup Cities localize risk and error.

Working first at the municipal level allows the government to see their reforms in action with real citizens

before they commit to new policies on the national level. Citizens and reformers can get real-world

feedbackeedback in a safe, controlled environment. Cities are smaller and more agile. A safe environment is even

more important with sweeping or radical reforms. It’s easier to switch directions in a small startup than in

a large corporation. For reformers, it’s easier to switch directions in a city than in a nation.

In Startup Cities governments can refine policies until they’re ready to deploy on the national level.

Lower Cost of Reform

Reforms are cheaper to execute at the city level than the national level. New agencies and staff gain

experience at the city level before managing a massive national project. The size of the zone contain

costly errors and budget overruns. Costs don’t spread across the entire nation. Startup Cities allow reform

ers to test and check the effectiveness of reforms before the government commits millions or billions o

dollars at the national level.

Nations often subsidize reform projects. Instead, Startup Cities can raise money for the central

government. Startup Cities may pledge a part of their revenue to the central government in exchange fo

autonomy and as payment for national services like defense. This revenue can go straight into a genera

fund. Or, governments can commit revenue to a sovereign wealth fund or national trust. These trusts ca

pay for education, security, women’s empowerment, or any other important cause.



From Startup ities to National Reform

Startup Cities are ideal incubators for national reform. Although reforms start at the

level of the municipality they don’t need to stay there.

Existing zones with less autonomy than Startup Cities have already proven to be

pioneers:

Shenzhen a special economic zone in China was the first to introduce a free

labour market and opened China’s first stock exchange; Zhuhai implemented

the first system of local legislation; Shantou was the first to legalize individual

self-funded enterprises; and Hainan radically streamlined the process ofelf-funded enterprises; and Hainan radically streamlined the process of

registering companies. All of these reforms were pioneered by one of the

zones then seen to be successful and adopted by the other zones and finally

gained sufficient confidence from the national government to be implemented

nationwide.

6

Startuptartup Cities create safe environments to test and develop reforms. Governments

can then bring these reforms to the national level. One scholar calls the highly au

tonomous Special Economic Zones on the coast of China an “assembly line” fo

national reform.

Laboratories for Capitalism:

p. 50. Published by SCI.

Overcoming Special Interests

Large coalitions of special interests often block reform. National reform commits

the entire populace to new policies. Any change at the national level encourages

special interests to join together against reform.

Startup Cities do not commit the entire nation to reform – at least not at first.

Pilotingiloting reforms in a small area does not threaten the entire national network o

special interests. If new policies are first tried at the local level it’s harder for specia

interests to form large coalitions to oppose them. Some special interests may actu

ally stand to gain from better governance in a small area. This pits one group o

special interests against the other in favor of reform. While still a challenge reform

ers may find it easier to organize coalitions in favor of reform at the city level. Size

changes the structure of reform.



Startup C ities

are safe

politically

neutral

environments

to test and

develop



The visible, real-world experience of

citizensitizens in Startup Cities generates its own

spontaneous support. It’s hard to argue

with results. Some skeptics or those previ-

ously uninterested in reform will join coali-

tions to support it. These are the seeds of a

national reform movement. What begins in

a small area can grow into a national pro

gram.

As Startup Cities succeed under new

reforms, opposition becomes more difficult

for groups who stand in the way. Political

conversations are often caught in the

abstract. Neither side is able to test their

views. Startup Cities help cut through the

rhetoric. It’s hard to argue with more jobs,

safer streets, or successful new schools.

How Feasible are Startup Cities

Every year, nations incorporate new

municipalities to accommodate

populationopulation growth. These new cities are

usually just administrative units, without

much control over their future. The first

step to Startup Cities reform is simple.

Governments only need to grant new and

existing municipalities wider autonomy.

Manyany precedents already exist for highly

autonomous, small, competitive political

units. Small nations have alread

proven their ability to compete on th

international stage. Liechtenstein an

Switzerland have used powerful and

effectiveffective local governance to becom

some of the wealthiest and safes

places on earth.

7

Singapore an

Hong Kong grew from poor backwa

ters to economic powerhouses. Na

tions like Estonia and Georgia hav

proven that smaller political units ca

be more agile and reform faster tha

large nations.

Nations with a tradition of federalism

through states or provinces, like th

United States and Canada, also appl

these principles. The “laboratory o

the states” enjoys a long tradition in

American politics. Cities bring eve

more vigorous competition than larg

states or provinces create.

Occasionally, developing nations

experiment with ‘free trade zones,’ o

‘import-exportimport-export processing zones

These may seem superficially lik

Startup Cities. But they do not enjo

the autonomy necessary to be

completeomplete tools for reform. Their lac

of autonomy has given them a mixe

history, where some succeed an

many others fail completely.

Startup Cities bring all these tools

together.ogether. While free trade zones

focus just on business or tax policy

the greater autonomy of Startu

Cities allows reformers to address a

public policy problems

comprehensively.omprehensively. Startup Cities don

need radical changes. No one need

to refound a nation on the model of

Switzerland. Startup Cities just need

competition between highly

autonomous municipalities.

Countriesountries have already begun to tak

steps towards Startup Cities.



In 2002, Dubai designated a small 110-acre patch of desert as the Dubai Interna

tional Financial Center.

Two years later, the DIFC opened its doors. Besides offering traditional

incentivesncentives like lower taxes, the DIFC also enjoyed an independent legal system

Built on English Common Law, this legal system attracted over 750 firms by 2008

The DIFC began to competitively market its services to firms around the world

They even issued press releases that advertise the credibility and transparency o

their institutions. None of this would have been possible in a traditional Specia

Economic Zone focused only on taxes.

Greaterreater autonomy gave the DIFC the agility it needed to behave like a startup com

pany. The results were clear. By 2008 the zone attracted more than 18 billion in

infrastructure investment from the private sector – more than all Sub-Saharan

Africa, excluding South Africa, combined.

8

See “The Legal Autonomy of

Cases

With the Startup Cities approach now outlined, we can look at some possible use

for Startup Cities reform. These examples reflect real problems and proposals

though not all are real-world projects.

Case : Education

A nation with low-performing schools wants to reform their school system.

Reformers are at a dead end. They study successful nations but find the same

problems everywhere. Even wealthy countries like the United States constantly

tinker with their national education systems. Yet they rarely achieve their goals.

Nationalational education reform seems impossible. Teachers’ groups can be powerfu

special interests that meet every new change or reform with hostility. Bureaucracy

and financial commitments seem to stop all change. Education workers are

unwilling or unable to retrain or change their habits.

The new government designates multiple jurisdictions as Startup Cities focused on

education. Within the cities, neighborhood boards administer schools. This allows

the government to run many experiments in education at once.

Reformers within the cities tailor the existing network of schools to the localeformers within the cities tailor the existing network of schools to the local

conditions. Some give students practical skills to join the workforce.



Nations

com m itted to

reform have

already begun to

take steps tow ard

Startup C ities



Others build high-achieving training centers for innovation and technology.

It was easy to allow for new models of schooling operated by private entities too.

Independent courts and a common law legal system attracted investment in education

Labor law reform at the municipal level loosened the hold of special interests.

Autonomy and the smaller scale of the reform gave the government a cheaper and les

complex job when they worked to retrain restaff and reform. After 5 years of

experience in these zones one approach outshined all the others. The nationalxperience in these zones one approach outshined all the others. The national

government decided to adopt that approach throughout the country.

Case : Security

Violence and crime haunt the streets of a large developing city. A new governmen

takes power on a platform to restore law and order. Without enough resources the

government is unable to control large portions of the countryside. In the fight agains

organized crime the government looks to municipalities for security reform.

After a popular referendum passes the government designates several

populated areas as Startup Cities. They also choose several sparsely inhabited

regionsegions near their coast as Startup Cities hoping to attract investment and build a

major port.

Reformed labor and contract law allows the municipality to restructure the police force

from the ground up. First they train a small elite new force. Rigorous

background checks ban any officers with a history of corruption or criminality from the

force. This elite security team deploys into the most dangerous parts of the cities. Al

officers wear cameras at all times. The city advertises this policy as part of their

commitmentommitment to transparency and anti-corruption. To outfit this small team of officers

was cheap and simple for the reformers.

As it turned out police cameras lowered both police abuse and violence against the

officers.

9

New methods of policing borrowed from private security agencies helped cu

violent crime even more. As this new municipal force proved its effectiveness the city

phased out their old force and replaced it with police known for integrity and effective

ness. The government eventually brought new techniques

“In California A

21 2013.



tested by these cities to the national police.

The municipal government paired security reform with new software to make

finances more transparent. After its successful use by several zones the nationa

government adopted the same software.

Withith security improved people returned to the streets at night. New businesse

opened no longer fearing extortion. New business and investment meant greate

jobs which helped get young men prone to violence off the street. Tourists even

started coming to the city’s historic districts. Already the nation was on its way to

virtuous cycle of peace and economic development.

10

Case : Jobs

After decades of sluggish economic growth a reformer government took power wit

one goal: create jobs. Government officials consulted with several business leader

about their biggest obstacles to growth. Then they designated several jurisdiction

as Startup Cities focused on economic development.

These zones did not rely on the aging and corrupt bureaucracy inherited from

pastast administrations. Each zone offered a simple one-stop shop to incorporate

business or notarize contracts. Small business owners could complete all thes

processes in days rather than months or years. Borrowing a system from

Singapore citizens began to pay taxes online in minutes through a secure stream

lined website.

With low taxes independent courts and easy access to private arbitration

businesses from abroad were eager to set up shop in these cities. Autonomy gav

zones the flexibility to negotiate with international trading partners and attract

investment.

At first only large businesses flocked to the zones to incorporate. Soon small an

medium-sized enterprises from the host nation began moving as well. After 7 years

these zones became some of the fastest growing jurisdictions in the world with

Lawson Published by



Startup C ities

allow

governments

to em ulate the

bottom-up trial

and error process

of startup



annual GDP growth of 10 or more.

11

Citizens flocked to the city, eager to open

small formal businesses rather than selling

their wares in the street. Unemployment

started to fall for the first time in decades.

of 14 for 2013

Case 4: Public Private Partnerships

Streets filled with potholes slowed the

arrival of government ambulances and fire

trucks on their way to accidents. Even on

better streets, these unreliable services

sometimes still did not show up at all.

Feded up with corruption and waste in public

services, a reformer government creates

several Startup Cities. The autonomy

enjoyed by these municipal governments

allowed them to create sweeping reform of

city services.

The administration put out clear,

competitiveompetitive contracts for everything from

road building to the issuance of building

permits. One year later, a foreign logistics

firm with an international reputation beat

out all other applicants on price and

quality.

Cityity services were completely restructured

from the inside. The firm handled nearly

everything. The municipality was able to

drastically cut back their workforce.

Citizens were thrilled as quality

improved. Reformers were happy t

see that these competitive contract

allowed them to pay only one third o

what they used to.

Withith roads and other services take

care of, municipalities were able t

focus themselves on security. Citie

were able to take their savings from

competitive contracting to better figh

crime in the streets.

Learnearn more about this model as it wa

used in Sandy Springs, Georgia i

our publication The Contract City

municipal reformer Oliver Porter.

Startup Cities on the Rise

The world is urbanizing quickly. Th

U.N. estimates that by 2050 the

overwhelmingverwhelming majority of the world

population will live in cities: 6.3 billio

people. Human beings will soo

become an urban species. Cities ca

become ungovernable hot beds fo

unrest and crime. Or they can b

powerful, effective tools to improve

governance in the 21st century.overnance in the 21st century.

Startup Cities signal to the populac

that a government is serious abou

change. Cities need municipal

autonomyutonomy to become tools for reform

Governments can show their commi

ment to the nation in a credible

public, and swift way with Startu

Cities.

Startup Cities also allow government

to show their commitment to

prudence. Autonomous municipalitie

to pilot reform is a bold vision that ca

inspire citizens. By mitigating risk

Startup Cities allow governments t

avoid charges of being ‘reckless’ o

pursuing ‘utopian’ policies that ignor

the needs of citizens.



Startup Cities give reformers the chance to cut through complexity, to learn whic

reforms will stick at the national level, and to avoid massive national failures

something goes wrong.

The rise of small reformer nations like Georgia and Estonia, the growth of specia

zones like the Dubai International Financial Center and Hong Kong, and the

growing economic importance of cities all point to a common future.

The tools and precedents for Startup Cities are available. They only need bold an

visionary reformers to bring them to life.isionary reformers to bring them to life.

Profile of Startup ities Institute

Startup Cities Institute SCI) is a nonprofit research organization that studies th

use of startup communities for legal and political reform. These special governanc

zones, called Startup Cities, are small and highly autonomous jurisdictions

established within pre-existing nations. Governments use Startup Cities to create

inclusive economic growth, combat corruption and insecurity, and to test publi

policy innovations in public services, transparency, and environmental stewardshi

SCICI has grown to be the world’s leading resource for this approach to reform. We’r

working to find answers to the hard questions that reformers face. Most of thes

tough questions arise as governments execute Startup Cities reform. For

infrastructure and design, how can you build a ‘minimum viable community’ that

attracts citizens but doesn’t waste investment? What kinds of laws are the most ef

fective to create adaptable city governments? How can you build an accountabl

police force from the ground up?

Startup Cities Institute was created in 2013. SCI began to promote the idea that law

and governance is a technology just like a cell phone or a computer. Startup Citie

are a tool to bring the experimental, entrepreneurial methods of startup culture t

political reform. The Startup Cities approach allows host nations to pilot new form

of governance in a low-risk environment of competing zones, similar to competin

technology startups. SCI is based in Guatemala City at Universidad Francisco Ma

roquín, one of Latin America’s leading universities.



Startup C ities

Institute focuses

on the

nuts and bo ltsuts and bolts

challenges faced

by nations as

they pursue

Startup C ities .



Startup Cities Institute is not a traditional think tank. It’s structure reflects its

commitment to startup thinking. SCI maintains a small team in Guatemala that

remotely manages projects from an international network of collaborators. This

‘distributed think tank’ allows people from all over the world to stay involved.

SCI draws on all the resources of Universidad Francisco Marroquín. It merges

project-basedroject-based learning at the university with research on Startup Cities. Student an

faculty teams research and generate business or design prototypes for concrete

solutions to public policy problems. Projects range from areas like healthcare to la

to public transit.

Speakerspeakers from SCI are sought after by media outlets and events around the worl

SCI has worked with mayors reformers ministers entrepreneurs activists an

technologists from the United States Africa Europe and throughout Central an

South America. SCI has been profiled by Virgin.com’s Entrepreneur magazine an

interviewed by numerous international media outlets including Foreign Policy.

Events by SCI all run a unique format of open collaboration – no weekends spent

listeningistening to lectures. Participants self-organize into teams. These teams build proto

types over the course of a few intense days to compete for a prize.

SCI also publishes work relevant to the entrepreneurial approach to communi

building. SCI´s books include a reprint of Spencer MacCallum´s

The Art of

Community

and a new work by American municipal reformer Oliver Porter

Th

Contract City

SCI’sCI’s other projects include Locality a library of laws and legislation that show ho

nations create local autonomy around the world; Ulex an open-source legal system

and Lean City Lab a partnership with Nobel Laureate Vernon Smith’s Center for

Experimental Economics to guide reforming nations with randomized controlle

trials and economic experiments.

We are growing and always searching for new ways to improve the Startup Citie

approach to reform.

1



urther

eading

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