When Politicians Step Aside

The economic data are conclusive: private firms typically deliver better products and services, and they do it more efficiently than government agencies. But some parts of civilization must be run by a public government, right? How would individual rights, contracts, and public safety work without a state? And who will build the roads?

These are fair questions. No fully private country exists. The human mind is hard-pressed even to imagine what a privately run territory would look like.

Libertarian thinkers, such as Hans-Hermann Hoppe, David Friedman, Robert Murphy, and others, have developed the idea in theory, but there are also practical examples. Some small jurisdictions today operate on private-governance models.

Despite variations in implementation, they rest on the same idea. You join, or leave, the city like a cell-phone plan: upfront price, clear service levels, cancel-anytime terms, and competitors down the road if you’re unhappy. You do not face surprise levies or any BECAUSE WE SAID SOs. Instead, prices are posted for policing, streets, water, and courts. And you decide if it’s worth it.

Beyond Próspera

One such territory has made headlines in recent years. Chances are, you’ve heard of “Próspera” if you move in liberty circles. But it’s not the only example. Privately run zones are not a pipe dream of libertarian idealists; they are real.

The Free Cities Foundation aims to advance the practical implementation of privately run areas:

“We work with zones across the world that have achieved some autonomy and are using it to create environments where people can associate voluntarily, conduct business, and live their lives with minimal intervention from the state. Our long-term vision is ambitious yet achievable: to establish a global network of hundreds of Special Economic Zones that empower their residents with new governance models.”

—Free Cities Foundation, 2024 Annual Report

They maintain the Free Communities Directory, which “seeks to provide up-to-date information about projects around the world that strive to provide their residents with greater individual freedom and to highlight those that do so by employing innovative and alternative governance models.”

The directory lists projects labeled “Projects in Preparation,” “Intentional Communities,” and “Autonomous Zones.” Most are in early stages but have achieved some wins. Among the most advanced are Próspera and Ciudad Morazán.

Próspera, the renowned Honduran ZEDE (Zone for Employment and Economic Development), is a functioning jurisdiction with over 1,700 residents and 318 businesses. (Próspera provides an easy and inexpensive pathway for companies to set up as “globally recognized entities.”) Real estate is being built, and the area is active and growing.

While Próspera leans toward services and remote-friendly entrepreneurship, another Honduran ZEDE is more residential and industrial, geared toward blue-collar Hondurans and factory tenants. Ciudad Morazán hosts 200 residents and 15 businesses.

Both have been facing sustained political and legal challenges. The new Honduran government repealed the ZEDE laws, and the courts declared ZEDEs unconstitutional in September 2024. Nonetheless, both continue to operate and report growth.

Drivers of Progress

Special Economic Zones (SEZs) aren’t a new idea. In these geographically limited areas, laws differ from the national baseline and are typically more market-oriented. Although the first modern SEZs began less than a century ago, by 2019, there were 5383 SEZs in 147 countries, according to a UN report.

SEZs are a tacit concession by governments that their own red tape blocks growth. According to a World Bank report, politicians who launch such zones “aim to develop and diversify exports while maintaining protective barriers, to create jobs, and to pilot new policies and approaches.“

The most familiar examples are in China and the UAE. China pairs targeted tax incentives with streamlined customs and lighter regulation in these zones. Launched in 1980, they helped drive much of the country’s subsequent growth.

The World Bank reports that “SEZs have contributed significantly to China’s development. … In recent years, national SEZs have contributed 22% of China’s GDP, 45% of total national foreign direct investment, and 60% of exports. SEZs are estimated to have created over 30 million jobs, increased the income of participating farmers by 30%, and accelerated industrialization, agricultural modernization, and urbanization.”

For many, Hong Kong comes to mind in this context. Although it isn’t an SEZ, it is a separate customs territory and free port with free capital flows. One indicative metric is GDP: Hong Kong’s nominal GDP doubled from 1984 to 1989. In recent years, amid unrest, the pandemic, and policy shifts, growth has been comparatively subdued.

Beyond Oil

Arab governments use SEZs to drive non-oil growth. To leverage its new deep-water port, Dubai established the Jebel Ali Free Zone (JAFZA) in 1985. Over the following decades, the region’s template, characterized by simplified customs and light regulations, spread.

The UAE replicated the model across multiple zones. Neighbors followed suit. To date, many Arab countries host free-trade zones. Some have delivered outsized results: Dubai’s integrated Jebel Ali ecosystem contributes 36 percent of the emirate’s GDP. Abu Dhabi’s KEZAD Group, which operates integrated economic zones, accounts for 21 percent of the emirate’s non-oil GDP.

In line with the regional trend, the UAE reduced its reliance on oil, even through repeated oil price booms. Exact measures of oil dependence vary, but oil rents (profits from oil extraction) give an indication. Although fluctuating, we can see a clear trend: When JAFZA launched in 1985, oil rents were 24 percent of GDP. By 1990, they rose markedly to 35 percent, and by 2020, they hit a historic low of ten percent.

At the same time, some zones have delivered mixed and weak results. Kuwait, for instance, revoked the status of the Shuwaikh Free Zone in 2019. Others, launched more recently, are up-and-coming. Special zones in Saudi Arabia, Qatar, Oman, and Egypt are gaining importance.

The World Bank finds SEZs thrive when governments focus on streamlining regulations, providing clear and predictable laws, and maintaining basic infrastructure. It stresses smart liberalization paired with strong institutions as the recipe for success.

The Right Conditions

Where does this leave us? The picture is mixed. Some SEZs demonstrate clear successes, while others do not. Territories that are at least partly privately run are emerging, but beyond Próspera, which is still young, there are no large-scale success stories.

Even so, some politicians are recognizing the obvious: for rapid growth, the state has to get out of the way. Strong institutions and infrastructure matter, but these don’t require a government to provide. In Próspera, businesses can choose from among multiple regulatory frameworks.

One valid objection goes like this: “You sound like a communist. ‘Under the right conditions, this will work.’ But what if those conditions never emerge?”

Any civilization depends on the right conditions. Most countries around the world are at least partly democratic. Yet, many have descended or are descending into totalitarianism. Individual rights are under attack almost everywhere. If 80 percent of the public says the other 20 percent can be disposed of (because of race, class, religion, age, eye color, etc.), that’s democracy. Conditions for a peaceful, prosperous civilization exist only when enough people stand up for individual rights.

And in contrast to communism, socialism, or any other form of collectivism, privately run territories don’t run counter to human nature.

Overall, despite strong global trends toward centralization, SEZs show how prosperity emerges when the state steps back. Individuals are beginning to form communities in such zones. 50 years ago, no one knew what Dubai was. Maybe these new territories can write a similar history.