Towards a market for governance

How sclerotic institutions could allow for a market for governance to emerge

Governance is one of the most important determinants of economic outcomes. Well governed countries tend to be rich, poorly governed countries tend to be poor. Just by crossing the border into the US, a Mexican can see their lifetime income triple. Those migrating from poorer countries can see even larger increases in their productivity and income. 

Immigration advocates use these facts to advocate for open borders. However, there is another, rarely explored, interpretation of these facts: what if there was a mechanism for poorly governed jurisdictions to invite well-governed jurisdictions to improve their governance? In other words, is it possible to have a market for governance? 

Historically, jurisdictions changed administration via conquest. Territorial conquest is a feature of humanity. People, organized around tribes, religions, or nations, frequently conquer their neighbors or rivals. Sometimes this is for land, sometimes for slaves, and sometimes for the plunder. A best case scenario for many local populations was paying a tribute. Others were  subjugated. The very worst cases of conquest resulted in genocide. 

In the early modern era there were substantial territorial exchanges that were non-violent, including the Louisiana Purchase, the sale of Alaska, the sale of Manhattan to the British by the Dutch, and so on. Of course, these purchases did ignore the native populations of the territories and were often set against the backdrop of potential violence, e.g. Napoleon did not have the force projection capabilities to defend Louisiana and beyond. Nevertheless, they did demonstrate a mechanism beyond brute force was capable of allocating jurisdictional authority. 

One of the most interesting papers I’ve read recently is on jurisdictional competition in Europe in the late medieval and early modern era. The authors, David Schonholzer and Eric Weese, construct a dataset that allows them to test the impact of jurisdictional change on European cities. They find that the immediate impact is negative, whether the change was accomplished through violence or peacefully, but the long term change is positive, as the conquering jurisdiction was able to provide a better institutional environment for economic activity. 

Conquering a city is expensive. You need to raise an army, feed and arm it, not to mention potentially weakening your defenses in other parts of your territory. Jurisdictions would only embark on this path when they believed that the conquest would generate greater returns. These returns don’t have to be monetary, they could include acquiring a strategic position that would lower overall defense costs, or weakening a rival. However, that the cities experienced greater economic activity, as measured by urbanization rates, suggest that there was an implicit, if not explicit, economic factor to this decision making. 

This is not to suggest that armed conquest is good. One of humanity’s greatest achievements is limiting armed conquest and the death and destruction that it entails. It does, however, suggest, that there are economic benefits to be reaped by improved allocation mechanisms for jurisdictions. 

One recent example of this is Greenland, which President Trump offered to buy. Because of its strategic importance to the US, as well as economic benefits of joining America, it's conceivable that a supermajority of residents could vote to join. America could even offer cash to residents, $1 billion would buy around $20,000 for every Greenland resident. 

Given, however, the sclerosis of western governing institutions, it’s not clear that the best path forward is simply to allow jurisdictional change within the existing framework. Instead, new actors could emerge that offer governance services. ISIS, as a very extreme example, offered better municipal service, e.g. trash collection, road repairs, etc, than the Iraqi government. 

Today there are over 5000 special economic zones worldwide. A non-trivial number of them are privately administered. Most of these zones are on greenfield sites and focus on specific industries, though a few include residential as well. Sandy Springs, Georgia is another example of ‘privatizing’ municipal services, though they recently brought much of their work in house. 

In practice, this model of a market for governance would approach Ostromian polycentricity. Governments hold their sovereignty close, and are unlikely to give up core functions, e.g. diplomacy and national defense. However, it is possible to imagine a ‘governance services’ industry emerging. Governance service providers could contract with local or national governments to provide a set of services, potentially including services like infrastructure development and maintenance, investment promotion, and policing. In other words, governments would delegate some authority to quasi-governmental entities. 

This trend is already visible in certain sectors. Dubai Ports World, one of the world’s largest port operators, builds and operates ports around the world, sometimes negotiating for special economic zones that include industrial and residential sectors. In Somaliland, which has a relatively weak state, Dubai Ports World is effectively operating as a municipal authority. 

The hotel industry offers another useful comparison. Global brands like Hilton do not own or operate all of their hotels. The brand often partners with the hotel owners and an operating company, like Aimsbridge, to develop and market the hotel. The responsibility of the brand is to ensure quality and attract guests. The managing company hires the staff and ensures smooth operations. 

It’s possible to imagine a market for governance evolving similar to the hotel industry. The countries would be analogous to ‘owners’. They would have the relevant legislative and executive rights over the territory. They might, however, contract to governance service providers that are a combination of brand and manager. The governance service providers would be responsible for a set of governance obligations. In exchange they would receive a percentage of tax revenue. 

This model has already emerged in China. The China Fortune Land Development Co. works with municipal governments to develop satellite cities, bringing needed financial resources and capacity, effectively a new model of a public private partnership. Their most successful development is Gu’an New Industry City

Of course, consent is important. Any substantial institutional change should have the buy-in of the relevant stakeholders. Moving to a market for governance would require a vote, ideally a supermajority vote, of the residents of the relevant jurisdiction. However, as current institutions continue to underperform and lose legitimacy, it’s possible there is increased openness to alternate institutional forms. 

The long term outcome could be quite positive. As governance service providers emerge and learn by doing, they could develop substantial improvements over the current system. The capital, expertise, and legitimacy could be brought to regions and countries that have underperformed for generations, unlocking untold amounts of human talent. 

A dynamic civilization requires an ability to improve its institutions over time. With current institutions faltering, it’s important to work within to improve them. However, we should be open to alternative options that could inject a healthy competitive dynamic and help achieve human flourishing. 

Thanks to Jeffrey Mason for comments

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