JOSH: Hello and welcome to Clearer Thinking with Spencer Greenberg, the podcast about ideas that matter. I'm Josh Castle, the producer of the podcast, and I'm so glad you've joined us today. In this episode, Spencer speaks with Erick Brimen about creating a new city, models of municipal governance that promote innovation, and balancing incentives in developing regions.

SPENCER: Erick, welcome.

ERICK: Thank you.

SPENCER: So I hear that you've created a new city. How did that come to pass?

ERICK: Yes and we are working on it and creating more. It came to pass by combining a vision for how to catalyze prosperity, in this case, anywhere in the world, but starting in partnership with Honduras. The country of Honduras passed enabling legislation called ZEDEs that makes a very unique form of special economic zone possible, such that a city can emerge over time.

SPENCER: People might wonder, "Why create a new city? There are plenty of cities already existing."

ERICK: A couple of reasons. Generally speaking, there's a population growth trend, so there is a need for expanded physical places to house people. Fundamentally, and more importantly, creating a new city on a greenfield site gives you a clean slate upon which to better design, not only the physical infrastructure, but more importantly, the intangible dimension of governance that will underpin that city. What that allows for is the creation of a space that would be much more productive and competitive. With a clean slate, if you are allowed to, you can create a much more competitive regulatory environment that attracts companies and tenants and empowers them to do more innovative things, perhaps with lower costs or more degrees of freedom. That comes together to create a vibrant environment of human progress and generalized prosperity.

SPENCER: Because in Honduras, people could just start buying up land, and they could convince people to move to that area, and essentially they'd have a city — but that wouldn't be the same as what you're doing. How would that differ from what you're actually creating?

ERICK: Yes, so when people think of cities, the first visual that comes to mind is the skyline, but the governance layer is more important. Generally speaking, when you live in a city, you have several layers of governance that apply to you. If you're in the US, you have the local government, which could be a city council, you have the state government, and you have the federal government. The types of cities that we are creating in partnership with countries enable a rewrite of the legal and regulatory frameworks that apply specifically within those cities. It is important because beyond the physical infrastructure, the thing that makes the biggest difference is the legal and regulatory environment. It dictates what is possible. It dictates the cost of operations. It dictates just how quickly you can innovate, fail, and try again. What is unique about the prosperous cities approach is that it innovates in the realm that makes the biggest difference to drive productive economic activity, which is the legal and regulatory framework.

SPENCER: I've never been to Honduras, but my understanding is it's a fairly poor country. There's also quite a bit of crime. I think it's number five in the world in murder per capita, if I'm not mistaken. How do you think about having a city in Honduras that doesn't have the same general perception that people have of Honduras itself?

ERICK: Yeah, it's a challenge, no doubt about it. But where we are operating on the Caribbean island of Roatán, which is part of Honduras but physically detached, it's a very safe place. It's a tourism destination that has been growing significantly, although it remains largely underrated and undiscovered. Because it's an island that depends heavily on tourism, particularly cruise ship tourism, there is not much crime, and people know that if the conditions deteriorate, it will directly affect their livelihoods, because cruise ships won't dock in an area that's deemed relatively unsafe. Having said that, the country as a whole does have a challenge with crime, but so do certain cities in the US. There are areas of crime and areas of relative peace and security, and where we are operating is more of the latter than the former.

SPENCER: Another thing that makes Próspera really different from other cities is that it's operated by a company. How do you think about the fact that you're operating it from a company's point of view, and what kind of advantages and disadvantages does that have?

ERICK: It's important to give you a nuanced answer, because there definitely is a private company involved in the operation. But the overall legal and regulatory dimension of the city is still handled by a political subdivision of the state of Honduras. The legal regime of the ZEDEs creates a type of municipality that is a governmental entity that's part of the state of Honduras. It's headed and led by a Honduran who must be a naturally born Honduran, and so it's a governmental body that comes up with the internal norms and policies for operationalizing and running the day-to-day. That is indeed hired out through contracts to a private company that serves as the general service provider. In this regard, it is similar to how Sandy Springs in Georgia essentially contracted out all of the city services. But the difference in Honduras with Próspera is that it was a newly created municipality that had a much higher degree of empowerment to come up with public policies and internal rules and norms that are massively optimized to attract more foreign direct investment and enable innovative industries to be set up. The reason for having a private party involved from inception is that the incentive structure is aligned with creating a successful environment that attracts and retains investments over time, maintaining the highest possible level of productivity, because in the end, a significant amount of the financial upside of the private operator is directly derived from the success of the economic activity within the jurisdiction. The alternative model of just having a public and political institution in charge is that their incentives are not aligned with the financial gain and overall productivity of the jurisdiction. It's more aligned with the political needs of those in power from time to time. This enables a realignment, as well as opens the door to a far greater source of innovation in how to do things to successfully bring foreign direct investment and empower companies to operate productively.

SPENCER: So it sounds like you're saying, if the governance is profit maximizing, that's actually good for the people, or good for Honduras.

ERICK: Absolutely, with some caveats, but let's get into it. Governance is a service for which we all pay a significant amount of money for whatever reason, and most of it has to do with the historical evolution of how governance institutions have emerged. We don't think of it in the same way as healthcare or telecommunications, but it is a service, and we pay a lot for it. In fact, it's the service that we pay the most for of all industries in the world, more than housing, more than defense, more than healthcare. If you quantify it as a percentage of GDP, when you look at it from this perspective, the average cost of governance services in countries around the world is in the high 30% of all our income. Now we don't have one bill that says, "Pay 35% of your income," but we do have an aggregation of taxes and fees from which we cannot get out and which are imposed by our governance service providers, and that tends to be a local government, a national government, sometimes a state government as well, and we're paying for services. What services? Well, generally, it's the management of public registries, the provision of security. In some instances, they are much more active in the provision of certain services like education or healthcare, the judicial system. These are all services that we have access to and which are essential for a civilized society to operate with rule of law. It's a service we pay for, but is it done efficiently and competitively? The reality is that if you look at the customer satisfaction of most consumers with governance services, or think differently, most citizens, they're not very happy with the quality and the value that they're getting for the money that they're paying their governments. So you could say that the quality and the level of satisfaction is quite low. You can also say, and everybody kind of knows this, and I think it's very interesting what's going to be happening in the US now with what Elon Musk and Vivek are going to do, but that the level of efficiency is quite low, or said differently, that they run things unnecessarily expensively. Now, how could you possibly take that? Well, the way that the private sector works is that in an environment of open competition, you must provide a good service at a low cost, or at least at a reasonable cost, or else you go out of business. When you are faced with competitive threats from other entrants providing the same service you're providing, you either do a good job or you're dying as a business. Injecting that dynamic with a profit motive into how the service of governance is delivered has the same effect. In our case, we are very incentivized to be successful, to bring investment, yes, where it all starts, but after that, we must do a good job at providing the services the company is hired to do, keeping a high level of satisfaction and a low level of operating costs. So in this regard, it's definitely good for the project, and it is very good for the people of Honduras and the country of Honduras, because the people themselves who live in this project have better access to services, have access to more jobs that otherwise wouldn't be there because the investments wouldn't be coming, and live a more secure and prosperous life. Just generally speaking, the government, on the other hand, aside from being responsible for creating such a positive environment for its citizens, has a revenue share agreement, so all the money that's generated from taxes within the zones, they get a percentage of it without having to have much operating costs whatsoever. They have a much higher degree of foreign direct investment into the country. And naturally, all those people that are now employed are not engaged in crime, or at least a lot less likely to be. And they have positive externalities because they consume, just through basic day-to-day consumption, as well as through supply chains that are there to provide services and products to the development and operation of these cities. So it's a model where everybody wins. What has been missing is to inject the right dynamics of incentives, competitiveness, and the profit motive.

SPENCER: I try to imagine what New York City would be like if the government was for profit and was really aiming to maximize profit. I don't necessarily think it would be a good thing. That being said, I don't know if that's a fair analogy, because the big difference between a place where there are millions of people already living and the government trying to maximize profit, versus a new place where everyone who moves there knows that that's going to be the arrangement.

ERICK: The main caveat is that the flip side to having a profit motive is that you have to have competition. In the realm of governance, the minimum standard must be that there is exit. So if you were to rethink your experiment, and you say, "What if the city of New York were run by a for-profit governance service provider?" And you leave it at that, it's very concerning because the switching cost of getting out of New York City is humongous, and the network effect of being in New York is quite substantial. So the governmental entity, if it has no checks on how much it can charge for taxes, is very likely to increase what it charges. It's going to try to maximize profit. I do think they would, at a minimum, run the government more efficiently, but the price is likely to go up to the moment in which people can pay at the fullest extent. But once you add competition, and the main way to do it, as I said, is to exit, and you imagine a world where you can be physically in what you call New York City, but you have the capacity to switch your governance service provider without having to physically move. You can say, "Sure, the city of New York is the government I'm going to pay taxes to because they're the ones that are providing me with this basket of services." But you could also say, "Actually, no, I'm going to work with the government of New Jersey," if you can literally exit without having to physically move. That injects a very powerful dynamic of competition, and combined with a profit motive, it creates a type of dynamic in the provision of governance services that you see in how Apple competes with Samsung or Microsoft competes with others, but you must have exit to have competition in the realm of governance. Otherwise, it can go wrong for sure, and it's not guaranteed that in the short term, you'll get all the gains from competition. You kind of need a bit of time for more options to emerge, and then you compete between cities that might be for profit, as opposed to within a city because of exit.

SPENCER: In Próspera, is there an idea that people can actually opt out of prosperity even though they live there physically?

ERICK: Yes, in fact, it's a fundamental feature of how prosperous charter and governance structures are created. Being physically in the place does not force you to also be a consumer of governance services from the jurisdiction. In order to be within the jurisdiction, you have to opt into it, and then that gives you coverage, if you will, at the expense of other governing entities in the jurisdiction. But once you are in, you can also exit jurisdictionally speaking; you don't have to leave physically if you exit. Of course, the question is, what applies? Our design was always that any other ZEDE in the country or pre-existing jurisdiction could apply. The Honduran government has decided to terminate the program in general. So there weren't many ZEDEs created, and therefore there are not as many options. But you still have exit from the ZEDE to, let's say, the pre-existing municipality that is still around, by the way. I mean, the island of Roatán is governed by the municipality of Roatán. Once you're in the ZEDE, you're out of their jurisdiction, but you can exit the jurisdiction while staying physically inside, and then you're governed by the municipality at large. It sounds complicated, but it really isn't. In fact, we have a whole bunch of properties and people that are physically inside, let's say, the master plan community, that what people would think of as the city, but jurisdictionally, they're not under the jurisdiction of the ZEDE. They're under the jurisdiction of the municipality. The ability to exit contractually is a constant, significant competitive pressure, which is literally a zero to one difference from what most people experience almost everywhere else in the world, where you're kind of stuck with your governance service provider, and the best thing you can do is hope that a democratic process causes a significant change in leadership that hopefully sometime into the future causes a significant change in the quality of services, which obviously are several degrees of separation. This is why most people are not happy with the services that they're getting.

SPENCER: So essentially, you need to outcompete whatever the default regulatory framework is so that people opt into your system rather than just going to the default.

ERICK: At a minimum, we have to outcompete it indeed. But when you're starting from scratch, the threshold, or the hurdle, if you will, is much higher. You can't just be a little bit better. You have to be substantially better to convince people who are, wherever they are operating, to make a pretty significant decision to move operations from where they are to a new place, and one that is basically a startup jurisdiction. So you have to be substantially better, a hundred times better, if you will.

SPENCER: In what ways are you currently aiming to be substantially better?

ERICK: You should think of it as two axes. There are the degrees of freedom, and then there is the ease of doing business. So on the first, essentially, is how restricted, or in our case, how much additional freedom to operate do you get? This is particularly relevant for highly regulated industries that, over time, are inheriting a regulatory apparatus that is detached from what a lot of these modern industries need to move at the speed of technological innovation. These would be healthcare, finance, construction, or whatever industry you think of that is generally highly regulated. Degrees of freedom let you do more, legally speaking. Then ease of doing business is that you might have the legal right to do it, but what is the compliance cost in order to go about it? This dimension of competitiveness revolves around how easy you make it to operate legally in a regulated industry such that you are minimizing the risk of negative externalities upon non-consenting third parties. That objective is the only justifiable objective for regulation to be imposed upon people that should otherwise have freedom of action when you're trying to minimize negative externalities upon unconsenting third parties. That's something everybody should agree with as an objective, but the way you go about minimizing risk makes a huge difference. The regulatory state, let's say, in the US, has evolved not just to have many regulations, but to create regulations that are of a prescriptive nature versus an objective nature. What this means is some bureaucrat, some regulator, perhaps even an expert in a given industry, identifies that there's a high degree of risk of, let's say, negative externality upon non-consenting third parties. Let's use as an example the amount of pollutants that a factory emits into the air. You can say you think carbon dioxide is a pollutant, but there are many others that are actually more dangerous. So everybody can agree that if a factory emits too many parts per million of pollutants, that's bad for people that are not buying cars necessarily or agreeing contractually to have their air and space polluted, thus regulation. Okay, fine, but the prescriptive approach is one in which the bureaucrat thinks through prescriptively how that factory should be operated, what technology should be implemented, what safety checks, what procedures, the whole detail of how that operation ought to be carried out so that that risk of harm is minimized or fully mitigated. So far, it sounds great, maybe not, but at least it doesn't sound so bad. The problem, of course, is that even if that expert came up with the most efficient way to do it, leveraging the best technologies at that moment in time, the very next day, or at least a year later, and certainly 10 years later, there are going to be new technologies. There might be more innovative and more effective ways to mitigate the risk, but the company is stuck with a prescriptive regulation that ignores the technological innovations or the procedural innovations that the company could be implementing to still do what they do fundamentally, but with minimized third-party harm. On the other side, instead of prescriptive regulation, objective regulation is where the experts define at what level of, say, parts per million, there starts to be a risk to non-consenting third parties, and in a very simplified approach, regulate objectively that that operation may not emit more than x parts per million. They don't go in and tell you what filter you're supposed to buy or what procedure you're supposed to follow. They just create an objective standard. They can audit, they can inspect, they can check, and if you're outside of that standard, then you can take all the steps that you need to down to shutting down an operation or imposing fees and fines, but you're not going in to prescriptively regulate operations. As you can imagine, the objective form of regulatory restrictions is way more permissive, less intrusive in how a company can operate. Thus, it permits a higher degree of ease of doing business without sacrificing the standard as a principle of not causing harm to unconsenting third parties. Then down to the specifics of however science would define where there starts to be risk of harm to third parties. So back to your fundamental question, how do we compete? We compete on the basis of higher degrees of freedom with a much higher ease of doing business by adjusting the way the regulatory framework actually works.

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SPENCER: I think there's something to be said for the approach of thinking of the goal of regulation as to prevent externalities on non-consenting third parties. I do want to point out that there are many people that disagree with that and that there are other justifications for regulation, some of which I think can be quite valid. For instance, sometimes people think you need regulation to prevent people from harming themselves. If people use drugs that only harm themselves but don't harm other people, many people might think those drugs should still be illegal. People also sometimes try to regulate behavior that they think of as fundamentally bad, like, for example, people who oppose gay marriage. Presumably, they're not making an externality argument; they just think gay marriage is bad. I completely disagree with them, but I think that that's what they would say. Then there's redistribution. Sometimes people pass regulations because they want to actually move money around, or they want to make things more fair, which is not really about reducing externalities.

ERICK: In most of those instances that you've mentioned, if not all, where the laws or regulations go to control behaviors of individuals is outside the realm of commercial activity and more in the realm of social standards and culture. Our project focuses on creating the optimal regulatory environment for commercial activity. We don't seek to meddle too much, or at all, in dimensions of social choices that a particular culture has decided to impose. In Honduras, for example, the Criminal Code is the Honduran Criminal Code, and we focus more on the commercial code. Our objective is to create human prosperity by catalyzing wealth creation, and we don't meddle with it and just kind of take a step back when it comes to a lot of those more social, cultural decisions. As a matter of personal opinion, I definitely subscribe to the idea that adults should be able to make decisions about their lives and their bodies, and that should apply fully across the board, up until the point when they start to represent a risk or actual harm to third parties. That's where you always draw the line. But that's not an area where Próspera, as an organization, primarily plays. We primarily focus on generating economic prosperity.

SPENCER: I understand, and how would you compare Próspera to places like Dubai or Hong Kong, which have acted as essentially places to attract capital and to allow certain kinds of economic activity that is not necessarily easy to do in other parts of those countries?

ERICK: We have essentially curated and aggregated the best of what has worked well in each of those examples, but we have repackaged it in a model that is deployable through public-private partnerships and which can scale. So if a country wants to have a Hong Kong, how do they go about it? Well, that's what we can commit. So we want to have a Hong Kong. Fantastic. Our Próspera governance platform has extracted the best of Hong Kong, Singapore, Dubai, and others, and can deliver that upon a mutually agreed-upon territory. It is always private. We don't ask for freebies or giveaways from the government, and it's private and acquired through a voluntary transaction, no forceful expropriations or anything like that. But with the right regulatory framework that allows for the importation of, call them international best practices of good governance, a country can essentially create their own Hong Kong, and we are the partner to make it happen in a private setting where the government doesn't have to invest the money, does not depend upon it already having the expertise, nor is it as exposed to the risk that four years later, or eight or however many years the electoral cycle is, that whatever they've done in the short term completely goes away because the next party might not like it. The design is to import those best practices, deploy them through what should be a legally stabilized mechanism, and have the private partner in the equation set it up and operate it under the conditions agreed upon, which are a win for all parties involved.

SPENCER: Assuming the city goes well, how do the investors make money?

ERICK: Great question. So divide, if you will, the business structure into two dimensions. One is the business of governance as a service, and the other is the business of just real estate. Let me talk about the latter first, because it's a more traditional business model. If, before Hong Kong became as successful as it is, a private real estate developer had acquired most of the land, which then became Hong Kong, developed an urban master plan, and then started capitalizing development, you can see how inside of a few decades, the increase in value of that asset would be exponential and astronomical. In fact, it's thousands of times the cost of raw land in Hong Kong pre-Hong Kong and then what it was worth later, never mind the appreciation value of the built environment itself. The value of a building obviously far exceeds the value of the land upon which the building is developed, even though the land itself definitely goes up in value because you have construction around it. One of the businesses I mentioned is the real estate dimension. Balaji, I think, coined the term venture estate, which is a combination of venture capital with real estate. But it's real estate that has the potential to appreciate substantially like a venture capital investment would. So that's the real estate side of it. The governance as a service side of it is basically that the key catalyst for that real estate asset to go up in value exponentially is that beyond land, you have radically better governance conditions. The value of real estate is a derivative of the value of the activity that you can carry out upon it, and the value of the activity is governed by the rules and regulations that apply. The better the rules and regulations to permit safely high-value activities surely accrue into the value of real estate. But as I established earlier, people are used to paying for the service of governance itself. The way we think about it is to say governments essentially have captured a percentage of the economic activity that gets carried out within the jurisdiction. They capture it through a bunch of often inefficient ways. But it adds up, as I said, to anywhere between 30 to 40% on average. Said differently, governments charge as a percentage of the economic activity within a jurisdiction. Applied to our model, we first seek to have a much higher quality service at a significantly lower cost. Our pricing cap is 7.5% of the intra-project GDP. The closest competitor in the world is Dubai, and Dubai's capture rate is 11%. Some people say, "Well, Dubai doesn't have taxes." It's not just taxes. It is any fee or tax that you have to pay in order to operate within a jurisdiction from which you cannot easily opt out. So it's like a coercive fee. Now, not entirely coercive, because you can be opting into work in a place, but basically, if you're there and you can't opt out of that particular fee or tax, we include it as part of the cost of service. Dubai is the most competitive in the world. They're at 11%, and they might be going closer to 15% because of this movement towards a global minimum tax or whatever. It's 11% right now. We have set our cap at 7.5% as a charter granted right to all residents and tenants, so that if the jurisdiction ever collects whatever taxes and fees that it comes up with, more than 7.5% of the inter-jurisdiction GDP, the excess has to be reimbursed annually to taxpayers in proportion to the taxes that they paid that year before. Okay, so it's got a price cap, which doesn't sound like a libertarian concept, but it was an essential component to add in an emerging industry that would help create before there's a lot of competition, and obviously competition keeps prices down. So 7.5% is the cap, which a pricing cap does not sound like a very free market or libertarian concept, but we inserted it because we realized that while we are in the early stages of creating this new industry, there isn't enough competitive pressure to guarantee that for-profit actors wouldn't jack up prices. So you institute a pricing cap. From our analysis, it seems sufficient to generate a profit, but that is not dependent upon a thriving world order where you have thousands of essentially city-states competing with each other. So that's the cap, 7.5%. Now you asked about what the business model is and how investors make money. The governance service can be a profitable service, obviously, if you can deliver it at a cost that is below the 7.5%, and we believe we can do that, and in fact, are showing it in reality. To make a profit, you have to grow the size of the economy, which means you have to incentivize people who come to invest, and you have to support them to be productive. As they are productive, they're paying into this 10.5%, and the way you do that, in our case, is through technology and through decentralization. If it costs you less money to offer the service than what you're collecting at the top, then that margin is a profit. In our model, since the operation itself is handed over via a contract to a private company, and that private company is responsible for operationalizing the public policy decisions that the governmental entity makes, if it does so at a discount to the revenue that it collects, then it has a profit. That is part of the business model. So governance as a service can be profitable, generating a lot of revenue subject to the statutory 7.5% cap, and operating at a cost that is below that, and then that's the profit margin. The other side of the business is real estate development and operations.

SPENCER: Does the Honduras government administer tax on top of that for people and companies?

ERICK: In the legal construct, they do not. Essentially, the design of these jurisdictions is one in which you have a single tax authority to which you're paying taxes. All your tax obligations are captured through that. But the Honduran government, in this case, and any partner government in the future, does get a percentage of that revenue through a revenue-sharing agreement. To simplify compliance and minimize friction to operate, you have a single tax authority that is doing the collections.

SPENCER: To what extent are people subject to Honduran laws when they're in Próspera?

ERICK: A 100% but in the following way, the laws that apply within the jurisdiction are Honduran law. The jurisdiction, as I said earlier, is a political subdivision of the state of Honduras. So in the same way, as if you were to ask me, "To what extent do people who live in Chicago have to follow city ordinances, are they following U.S. law?" I would tell you, "Well, city ordinances are part of U.S. law, right? It's not the federal government, but it is part of U.S. law." In that same way, the rules and norms that are approved by the Honduran government to apply within the zone are themselves Honduran laws. Now, they are laws that were preserved in the construct of the ZEDE, which cannot be changed. Those include the Criminal Code, for example, and all laws and regulations having to do with electoral democratic matters. The zone cannot change the representative rights that citizens and residents have. Those are there and they're enshrined. So basically, the zone can only propose changes that revolve around commercial matters, but those changes, if accepted, are Honduran law. It's just very differentiated from the Honduran law that applies outside of the zone.

SPENCER: Got it, but it also presumably gives you a lot of leeway to control the way the business operates.

ERICK: Well, sure, what it does is it creates a jurisdictional instrument through which a public-private partnership can propose better rules, which then the government of Honduras takes under consideration, and if they approve them, then they apply. But they only have to approve them in the context of those rules applying only within a small jurisdiction, which makes the political calculation and everything that goes with it much simpler to consider. If you're trying to make law for the whole nation and it's going to apply to everybody, that's one thing. When you're designing a new jurisdiction on a greenfield site where nobody's being affected, then that's a whole other thing. It's a lot easier to create far more differentiated legal constructs if you know nobody's been affected initially, and then everybody that will be affected is knowingly and willingly opting into that legal structure.

SPENCER: So if I go to Próspera today, what will I find there?

ERICK: [laughs] Well, it's too early. You will see that we have a Roatán, which is about 420 acres. For comparison, Monaco is about 535 acres, if I remember correctly. So we're about the size of Monaco, not quite there yet. In terms of infrastructure, you will see what currently looks more like a resort community. We have an 18-home golf course, a hotel, and a bunch of villas that people have acquired in the past. We have a beach club with wonderful beach amenities, and then you also see something that looks very different than a resort, such as the first high-rise tower on the island of Roatán. It's a 14-story tower, so not New York high-rise, but more than two times as high as any other building on the island before we started developing. You'll see a robotics manufacturing factory, if you will. It's more advanced carpentry stuff, using robotics manufacturing for building components. You'll see four working spaces, and then you see a lot of green and open space because most of the land is still very much undeveloped.

SPENCER: How many people live there now?

ERICK: It varies. I think that our peak population is probably around 1,000 people right now.

SPENCER: And the people that live there, why do they live there? What are they doing there? What brought them there?

ERICK: That varies, also. You have people who live there because they chose to retire; it was currently more of a golf resort viewing community. But the more recent residents have come in specifically because of the Próspera there. They're doing really cool stuff. It ranges from advanced biotech companies, for instance, gene therapies or stem cell therapies, medical research. They have the biotech guys. You have a lot of crypto people working specifically on real-world asset tokenization and leveraging blockchain for use cases that are otherwise hard to implement in other jurisdictions. Some of the entrepreneurs are focused on construction, leveraging the jurisdiction to do more advanced construction methodologies and different construction materials. The majority of the people are Honduran, and some of them are founders of innovative companies, but by number, the majority of them just have a job in the knowledge economy. They're in the jurisdiction, working for foreign companies that have set up operations within, leveraging the legal construct. What they're actually doing is architecture, engineering, accounting, legal, sales. If you can do it remotely, then you have a bunch of people there working within the zone for companies that operate largely outside of Honduras and are hiring Hondurans within the zone.

SPENCER: Is it fair to say that most of the companies there would not be in Honduras otherwise, but they wanted to specifically found themselves in Próspera?

ERICK: Yeah, absolutely, almost 100% of the companies wouldn't be there were it not for Próspera. They have a legal construct.

SPENCER: And so, when you talk to these folks, what do they say about why they're choosing Próspera? Because presumably they could have picked other cities all around the world, right?

ERICK: Yeah. In the specifics, it varies — I will give you some examples — but in general, pretty much everybody there has chosen to operate in Próspera. They feel identified with their vision of creating more prosperity at large, doing well and doing good while pursuing the highest degree of freedom and the best ease of doing business, whatever it is that you're there to do. So they share that ethos, but in the specifics, it varies. So let's say Mini Circle, which is one of the early movers into the jurisdiction. They're there because their type of gene therapy has not yet been approved by the FDA in the US, even though they have been able to demonstrate how the therapies that they're commercializing are safe for human usage and, in fact, reversible, which makes them particularly unique. So they saved probably 10 years and probably $500 million of expenses in trying to get approved by the FDA in the US. They get to operate safely in Próspera within a legal system that frankly provides a lot more guarantees to the consumers than would otherwise be the case in the US. Under the circular factory that does robotics manufacturing or building components, they're there because setting up a robotics factory of this nature and being able to produce building components that don't necessarily follow archaic building codes, but that perform equally well or better on all metrics of, let's say, resistance and safety, fire retardation, whatever it is, trying to get those things approved through the building code that generally applies elsewhere would be very expensive and take forever. But within Próspera, as long as they have the adequate level of insurance, then they can create very different looking buildings and build on the factory floor with robots, and that's unique. In the specifics, it varies quite a bit, but in general, they're looking for higher degrees of freedom with a higher amount of ease of doing business.

SPENCER: The two examples you gave, one: medical treatments, and the second: buildings that would be difficult to get approved. It seems that both of those cases involve complicated regulations that they essentially don't want to have to deal with, or that would be very costly or time-consuming to deal with, and so they go to Próspera in order to not have to deal with those regulations. Essentially, is that true of many other companies there as well?

ERICK: Yeah, I would say that that's true. That applies even in dimensions that don't occur to us as highly regulated industries. One of the most highly regulated industries is the labor industry. What companies have to do to hire employees in many countries is observed in terms of the complexity of the unknown risk. The cost is just so much more than simply signing an agreement between two consenting adults saying, "I need you to do X. Are you willing to do it? And if you do it, you know, I'll tell you why." It should be just that simple, but often it isn't. If you have a higher degree of ease of doing business where just adults can agree on terms and then rely on the contract as the principal set of terms, then that actually makes a difference. For example, a lot of the Honduran workers that are in the knowledge economy are employed by US-based companies that would not touch with a ten-foot pole employees outside under a regular labor regime, just because it's unknowable sometimes what type of risk they're exposed to, no matter what the contract says, because a way of interpreting labor rights that are not explicitly in the contract creates uncertainty. We try to make things much more certain and clear. Even in that industry that most people don't think of as a highly regulated industry, having clarity, certainty, and ease of doing business makes a difference.

SPENCER: A lot of the reason that people create regulations is because they're trying to reduce risks. And so you take something like a new medical technology, you've got regulations about what you have to do to show that it's safe and show that it's effective in order for doctors to prescribe it. If you circumvent those rules, some people would worry that it actually creates danger. How do you think about that if you're allowing medical technologies that haven't been approved? How do you keep them safe, and what happens if they turn out to be dangerous?

ERICK: Well, it goes back to the prescriptive versus objective form of regulation. Obviously, nobody we included is after an environment where there is excessive risk, but we are also not after an environment that guarantees harm by preventing innovation, or even worse, not innovation, but distribution of proven technology, simply because you have to go through a bunch of prescriptive regulatory hurdles that do nothing to actually enhance safety or efficacy. It only goes to tick boxes of rules that were developed often decades ago, even before basic computing technology was available. So, there's risk on both extremes, and there are significant costs. This is something that often people miss, that a regulatory structure comes with a cost and comes with risk. Can you imagine? It's hard to quantify the number of people that die each year because of excessive regulations, trying to be too careful in theory and then procedurally in a very obtuse way, so people die because they don't have access to proven technologies that would have saved their lives or alleviated their harm. In Próspera, the standards are objective, and there are procedures that must be followed before a novel medical treatment can be offered commercially to patients. Principally, the way we operate is the first thing is, you can choose an existing regulatory framework from an OECD country. That already is a huge advantage because you're not stuck with any given national framework. You leverage whatever improvement any of the OECD countries comes up with at any given point in time.

SPENCER: And they could just pick one that they prefer among those countries.

ERICK: Yes, absolutely. For example, you could work with a doctor that is licensed in the US who is going to perform a surgical procedure that has been approved in Canada, is going to implant a medical device that has been approved in the UK, and that will later prescribe you a drug to make sure you don't get infected or that you recover faster, that is approved in Germany. But any one of those things is not yet approved in all the other places, but in every single one of those places, and we're talking OECD countries, so none of these countries have not a fine regulation, but that instantly you can aggregate the best of what is available worldwide without skipping any regulatory provisions. It's just fast forwarding that, "Hey, you know what? This drug, if it's approved in Germany, is probably safe enough to be used now." One of the key high standards of Próspera is informed consent. So all of this has to be disclosed to the patient. There has to be clear evidence of informed consent. If there isn't, then the physician, the doctor, or whoever's administering the service acquires a higher level of personal liability. Clearing that hurdle of informed consent, imagine the amount of gain that you get just from that allowing aggregation of otherwise approved medical treatments, devices, physicians, drugs, elsewhere in the world, in one place. It's already huge. It's a border magnet. It's better than waiting in your particular country for all these dimensions to be approved by your monopolistic healthcare regulator, in the case of the US, the FDA. But then beyond that, often there are novel technologies that would take a long time and be very expensive to approve in a country like the US, not because the process is fundamentally better at minimizing risk, but because it's just the way it has evolved, and a lot of it has to do with the big players in the industry that lobby the regulators and cause barriers to entry because they're the big guys. They want to keep disruptive competitors out, and so you make it expensive for people to comply, and therefore you have less competitive pressure. If you're in big pharma, that's exactly your incentive. You're not going to go out in such a frontal way and try to wink at the regulator and say, "Hey, can you erect a barrier that protects?" They aren't going to do it that way; they come up with all sorts of Think Tank-sponsored papers and justifications for how this additional hurdle doesn't cost that much by itself. It doesn't cost that much, but imagine they could save this and some off-the-chart, low-probability event, but they make it very emotional to put a grandmother, whatever. And so now you have one more thing, and then you get another one. These things add on top of each other exponentially, such that eventually smaller companies that might have great technology but don't have hundreds of millions of dollars to foot forth to go through all these hurdles are out of the market. You get Pfizer more competitive. So that's what ends up happening. In Próspera, we focus on what's objectively required. Safety is key. Informed consent is key. Shared liability is key. If you comply with those things, you're good to go.

SPENCER: So what would happen if a medical technology in use there turned out to be making people really sick?

ERICK: It really depends on the specifics of the case, but let's break it down as to why they might be getting sick. It might be that a provider developed something that they knew was not performing at the level of safety that they communicated, and they nevertheless peddled whatever it is that they're peddling. That would be fraud or perhaps negligence. Maybe they didn't do enough safety checks, or they didn't keep enough accurate records. So you get negligence. Under fraud or negligence, the level of liability exposure is very substantial. You have travel damages that go along with it, and you need not wait for harm to occur in order for corrective action to be taken within the Próspera jurisdiction. What this means is that instead of just waiting for somebody to be hurt, to then be sued, this is a right that every resident has to seek enforcement of the regulatory framework, which requires proper due diligence and transparent communications before harm occurs, without having to go to the government for the government to be the one that initiates legal action. Often in the traditional common law system, let's say in the US, in order to bring about a legal case against somebody, you have to have a legal cause of action. What that means is you must have gotten hurt already. Otherwise, you don't have a legal cause of action. Then if you go into realms of public policy, let's say pollution or even criminal matters, a civilian cannot bring forth that case. That case can only be brought forth by a government representative, the Attorney General, the district attorney, or whatever. In Próspera, we created a decentralized form of enforcement where the failure to comply with the elected frameworks, which include no fraud, no negligence, just the failure to comply, gives any other resident a legal cause of action to bring forth an arbitration or otherwise against the party to force compliance or to prevent further activity from taking place. So that is a preemptive, proactive way of making sure everybody's being objective with how they handle business. Now, obviously, the flip side to that is that the loser pays. So while you have the right, because you have the legal cause of action to bring a position in front of the arbitration center that you think is not compliant with the common law standards of practice, safety, and what have you, if you're wrong, if you're doing it in a provost way, or worse, with ill intent, because they might be your competitor, then you are exposed to not only paying your costs and their costs of the legal proceeding you've initiated, but if it's demonstrated you have no intent, or you do not have a real, justifiable basis to bring forth the action, then you can be exposed to damages as well. So it's this very well-balanced system. We really thought through all of the incentive structures here, making sure that everybody has an incentive to keep the system honest and the capacity to exercise the rights to preserve a system where everybody is better off.

[promo]

SPENCER: My understanding is that there has been pushback against the ZEDE system from some people in Honduras and that President Castro actually initiated a repeal of the ZEDE system. What led to that? And what's the current status with that right now?

ERICK: Yeah, so you're correct about that. What has led to that? The combination of factors, a big part of it is the typical flinging of the political pendulum, and in particular, one in which you have a substantial change in philosophy from one administration to the next, with a lot of animosity between the elected representatives. So in the US, you can think of Obamacare, where that passed under Obama and the Democrats, and then the Republicans just had to kill it. It was the mind that disagreed with it, intellectually or ideologically, but politically, they decided that that was a legacy project of Obama. They wanted to get rid of Obama, and by extension, they needed to get rid of his legacy projects. In Honduras, something similar happened, where the prior president, who had been in office in an unprecedented second term, which was supposed to be unconstitutional, developed a lot of antibodies just for that, forcing himself to be reelected, but in reality, had been a key political figure in the country for at least 12 years. President of Congress. This individual developed a lot of antibodies, politically speaking. On top of it, members of his family and then himself were extradited to the US and have been thrown in jail for narco trafficking. A lot of bad things collided in that key figure who had attached himself to the ZEDE program as a legacy project. I think he believed that they had transformative potential, but also it sold very well politically. No other project had the potential to generate hundreds of thousands of jobs, except something like that. So in trying to get reelected, you promise jobs. You promise goodies. It became highly politicized, directly attached to a person who became hated in the country. The next administration naturally had this political instinct and necessity to go after the legacy project of our enemy. That's one reason. Another reason is their ideological opposites. The way that Próspera works is that it enhances pre-market dynamics, because that is what empirically is proven to generate wealth. You have to have competition, the profit motive, private property, rule of law, and contract rights. That philosophy goes against a more socialist, communist way of looking at the world where we should have common ownership of the capital base, and everybody should have equality of outcomes. All these ways of looking at the world are fundamentally opposite to a more free market environment, which is what Próspera optimizes for in some regards. This new administration won through an alliance, a coalition of multiple factions, some of which, the most impactful on the ground, were radically socialist, and they have a fundamental opposition to what they perceive the project to be. It's important to say they perceive the project to be, because Próspera is not a political project. It's not about capitalism per se or socialism per se. It's simply about what works to generate human prosperity. Empirically, that does require property rights and individual liberty. It's just science, if you will. You combine those two things, plus the typical dynamic of a newly elected politician having to deliver on their campaign promises, and having to do things to be perceived as fighting for the good of the people. You have to create these enemies, whether they're real or not, and then you have to fight to destroy them, whether it makes sense or not. We kind of got caught in the middle of all that, without being a political actor, and really having a bit of our hands tied behind our back and being the victim as a result. That's my prescription of why the credit status is one in which, unfortunately, the Honduran government did terminate the program. They were unsuccessful at repealing the constitutional provisions through Congress, which is the legal way to do it. They did not get enough support in Congress, in part because we were demonstrating that it's working, even in a short amount of time. Honduras wants more investment, wants more jobs. They failed to do it through the legal pathway, then they stacked the Supreme Court. The current administration essentially convinced, or demanded, or forced — I'm not sure — but the packed Supreme Court issued a ruling recently, November 20, declaring in an unprecedented way that it is unconstitutional and that ruling ought to apply retroactively. They are trying to state that not only on a go-forward basis can there be no more created, but that those that were created in the past should not have been created and should therefore be dissolved. They're making a very fuzzy argument, saying that they never existed because the provisions were unconstitutional somehow. This is despite the fact that the Supreme Court before them on three different occasions had deemed them fully constitutional. The reality right now is that there is a tremendous amount of uncertainty in Honduras because of how this ruling has come about, and it's uncertainty politically more than anything. Legally speaking, all serious legal scholars that have looked at this and the international treaties that apply and the Honduran Constitution itself agree that that ruling is basically null and void. Even if they were to try to make it valid, the Honduran Constitution itself under different provisions that were not challenged guarantees the continual existence of consolidated legal arrangements. Generally speaking, we can't retroactively change the law. Even if we were to say, "Okay, in this one instance, they're going to allow it," it cannot undo legally consolidated acts that the government has participated in. The creation of the city itself, the creation of all the legal entities, the property registries, all of those things are consolidated legal acts which cannot be undone. Even if they were to somehow make an exception for this, to apply the legal change retroactively, it's a bit of a politically uncertain moment, to say the least. Legally, there is a debate between what scholars and serious analysts say versus the politically motivated people. Because of this, there is an international arbitration that has been filed by the Próspera group that the World Bank has already accepted and is in the middle of litigation. I can't go too much into the details, other than to say that on that front, again, anybody who is familiar with how international law works and how all these treaty rights apply has a very strong opinion that what the Honduran government is doing is not only wrong, but it's going to cost them a lot of money to keep going down that path. We are hoping that either this administration or the next one, and frankly, it would be great if this one realizes that they're kind of stuck. If they want to do things legally, they have to negotiate, and we're willing to negotiate. There are things that you can always address when you have willing parties to explore options, and they have a year left in office this administration, so there's plenty of time to reach an agreement that can give them a victory from their perspective while preserving all the things that are demonstrably working about the Próspera ZEDE system. That's what I'm hoping will happen. I think there are plenty of reasons why it should happen, but it'll take a bit of time, hopefully not more than six months, but we'll see.

SPENCER: So in the meantime, do you just operate as though everything's fine and just wait for the proceedings?

ERICK: Essentially, that's the position the Próspera area is taking, backed by legal scholars and the Honduran Constitution itself. So yeah, pretty much.

SPENCER: And my understanding is that Próspera also sued the government. Is that still ongoing?

ERICK: Yeah, that's their international arbitration that I just mentioned, the Próspera group of the private partner in the public-private partnership, of which I'm the CEO, called the lawsuit. Essentially, the lawsuit is international arbitration against the state.

SPENCER: That's asking for something like 10 billion from the government. Correct?

ERICK: The $10.7 billion estimate comes from a third party that was brought in to calculate the damages that the government would have to pay if they expropriate the project, which is kind of what they're doing. If they were to enforce that ruling, that's deemed expropriation, and then they would be liable to pay not only the investments that were made but the foregone profits of what should have reasonably been expected after the full term of the contract, which should have been no less than 50 years. To do the math in your mind, to some extent, the project was a $500 million investment program in just the first phase, 2025, and we had 50 years to operate the zone and monetize that. As you can imagine, investors only put money in if they feel they are going to get a reasonable return on investment. If you apply whatever return you think is reasonable, whether 10%, 20%, or 30%, if you look at country risk, you're probably on the upper range of that. If you apply it to $500 million compounded over 50 years, you can see how ten billion is actually a fairly low estimate, and that's the way these things go. If the country incorporates an investment and they're under CAPTA and exit, they can do it. It's a sovereign decision, but then they have to pay the consequence, which is for non-profits and direct investments. That's what the $10.7 billion estimate is.

SPENCER: I don't know if any surveys have been run of the Honduran people, but what is the sentiment of just average Hondurans towards Próspera?

ERICK: Interestingly, it's mostly favorable, with a 70%+ favorability rate. If we were running for office, that would be one of the most popular presidents in Honduran history. Obviously, it's a flawed analogy. We're not one president, but it has a fairly high favorability rating. There is a small constituency of people who, because of misinformation and the way the issue has been politicized, are adamantly against Próspera, but it's against what they think Próspera is, not what prosperity actually is. These false notions lead them to believe that expropriation or environmental issues are problematic. Naturally, a lot of people are against those, but that's not reality. I would say the last survey indicated that around 70% of people are generally favorable to the concept, and about 3 to 5% are very significantly against it.

SPENCER: My understanding is that some people were concerned that Próspera could take their land. Is there any truth to that concern?

ERICK: Not at all. Próspera cannot, in any way, shape, or form, benefit from land expropriations. The ZEDE law, in a generic sense, has articles that talk about expropriation, but to anyone who actually reads it and understands it, the reason it discusses expropriation is to restrain the way in which the government of Honduras, which already has expropriation rights, operates. Eminent domain is a fundamental governmental power. The US has it; every government has it. In fact, it's considered one of the basic sovereign powers of the nation-state. The ZEDE law talks about expropriation and describes how, if the state wants to expropriate land related to Próspera, it must go about it in a specific way, but it does so to create additional barriers, not to make it easier. If you read just the law, you're only seeing a process by which the government of Honduras can expropriate if it's to benefit Próspera. However, if you read it in the context of what the Honduran government can already do without the ZEDE law, you realize that the ZEDE law is actually adding a lot of additional friction. It requires the approval of two bodies that are generally not involved at all. One of the bodies is the committee set up by the Honduran Congress to oversee all matters related to this, and that is an autonomous, apolitical body. It doesn't change with whatever president is in power. It's set up as a trust, and the trustees elect each other on a perpetual basis. So it has that additional barrier, and it also requires the approval of the beneficiary of the expropriated land. That is why I can unequivocally say that Próspera would never be able to benefit, because Próspera proactively renounced that through its charter and essentially stated it will always be null. So don't even come asking to accept expropriated land linked to the jurisdiction. The answer is absolutely not. But on the surface, it's very inconvenient that the law talks about expropriation, even though the intention is to regulate it essentially out of existence, as opposed to make it easier.

SPENCER: Can anyone move to Próspera that wants to, either from Honduras already or from other countries?

ERICK: Of course, pretty much. You have to understand, there is ZEDE itself, Próspera, which is the political subdivision, the jurisdiction. It's a public entity, and it does not own land, per se; it's a governmental jurisdiction. Then you have the land, which is in the hands of the real estate development company, which is a private entity, and the land is private. So regardless of the ZEDE, there is private property in Honduras. Obviously, you can't just go into private property and say, "It's my right to be there; I have to go through buying the land or renting it or whatever." But the ZEDE itself is not a blocker to people going into land that is incorporated into the ZEDE, provided, however, that people coming in acknowledge that they're coming into the ZEDE and that there is a very specific rule set. So basically, it's informed consent, where they walk in and say, "Okay, I understand ZEDE. I understand that the rules outside and inside are different, and they consent to the rules inside." That's the minimum standard, and the ZEDE is obligated to do essentially KYC on anybody who wants to be a permanent resident. Part of the disqualifiers in the KYC is if the individual is on any of the criminal lists, or if they're on the international terror watch list or in the Honduran arrest warrant list; they can't be a permanent resident. They can't be a resident in ZEDE. They can come in and out, but they can't be a resident. So there are some restrictions, but they're very sensible. In any case, Hondurans have a constitutional right of passage, even if it's private property, provided that the path they seek to follow is the only reasonable one that they can follow to get from a place that they have the right to be in to another place that they have the right to be in as well. So if they go from public property to private property, both sides have the right to be in. And the only way to get there is essentially through third-party private property; then there's an automatic easement right. They would get anywhere in Honduras, and it also applies [inaudible].

SPENCER: A final question for you before we wrap up. Obviously, Próspera is one attempt to create a special economic zone to create more prosperity. What do you hope to see broadly happening in the world five years from now, ten years from now? How would you like to see this kind of expansion?

ERICK: Great question. I think what the world needs is a significantly higher number of competing jurisdictions that are optimally designed to deliver governance as a service, with a profit motive involved that will achieve the realization of that space of opportunity and then sustain it competitively. I think both because of economic developmental needs in poor countries, where people desperately need more opportunities, on the one hand, but also in advanced or developed or rich nations, to push the productivity frontier beyond what is currently possible given the regulatory molasses that we've accumulated over the decades. In both cases, there is a very significant positive case to be made as to why you need innovation in how governance is delivered, and that the best way to get there is by creating a space to which small actors can innovate and compete, and to do so in a for-profit manner. It's kind of like the equivalent of having intrapreneurship, where you have a world right now of only approximately 200 service providers. The whole industry of governance, which is the biggest industry in the world, at least $30 trillion, probably closer to $50 trillion right now in revenues per year. That's what the governance industry is. There are only 200 providers, 200 nation-states or so, 200 providers, of which less than 5% control more than 80% of the industry. That is true whether you measure it by revenues or by market share, let's say the number of humans under various territorial jurisdictions. Most of them lose money every year. Almost all of them are highly indebted, and in almost all cases, the customer base is highly dissatisfied. That's an industry that, under any measure, you would say, "Oh, my goodness, that's a broken industry." But since it's an industry that controls the course of power of the state, it's one that is very allergic to new entrants. You don't see new countries being created easily left and right. That generally only happens through wars, civil wars, or otherwise. It's a very bloody, very high-friction process to create new entrants into the nation-state club. But what you can do is what has worked in the corporate dimension, which is big companies that want to prevent disruption create intrapreneurial divisions, and they give them a high degree of autonomy, but whatever innovations they come up with are sort of owned by the mothership. The mothership benefits from it. So if they do come up with something extremely disruptive against the mothership business model, it's sort of okay because inside of the mothership, you are accruing all those benefits. In essence, that is the paradigm that we're trying to create here, as opposed to trying to fight the war of somehow capitalizing new countries. It's just to recognize that the world is this way right now. Maybe it'll be different in 50 years, but for now, that's the paradigm, and yet it is desperately necessary to innovate governance. So how do you do it? Our model of public-private partnership, where the nation-state becomes a host, a custodian, and a direct beneficiary, directly for its people, indirectly through the government getting more revenues, is a viable model that over the next few decades, I think will explode because the world needs it. We have proven that it can be very successful, almost against all odds and tremendous headwinds, in a place that you would never imagine would house some of the most innovative technologies and innovations. So the cat's out of the bag, so to speak. Fortunately, we've proven that it works against all odds. Now it's a matter of replicating and for others to copy and do it for the betterment of humanity as a for-profit endeavor, which is super exciting. I think this is the only business model where actually succeeding at creating generalized human prosperity as an objective is a highly lucrative, financially profitable endeavor. Almost every other form of for-profit business that I know of has to be very transactional and exposed to significant negative externality risk because you're not dealing with the overall system that society needs; you're just dealing with whatever widget you're selling. There's a tendency to externalize costs, and you don't care so much about whatever harm might be getting caused, as long as you don't have to pay for it. Here, the business model is to create the fabric, the environment, the context, the platform, and in so doing, you are creating fundamentally societal good, and you're doing so for profit. It's the biggest industry, and I therefore think it will create the biggest companies of maybe the 2050s into the future.

SPENCER: Erick, thanks so much for coming on.

ERICK: Absolutely. You're welcome, and it's been a pleasure.

[outro]

JOSH: A listener asks, "Do you serve food at your social experiment events? And if so, how do you handle the plethora of allergies and restrictions?"

SPENCER: At some events, I'll ask people to bring a snack to share with the group. But at a lot of events, I'll just provide snacks. I don't worry about allergies and things like that. I assume that people are autonomous and they won't eat food, or they'll ask about it before eating it if they actually have a serious allergy. So I'll just buy a variety of pretty simple healthy snacks like baby carrots, hummus, and pita and things like that.