It is easier than ever to be swept away by novel concepts in economic development. Conversations are dominated by topics like bitcoin, central bank digital currencies, special economic zones (SEZs), private equity and venture capital. 

However, today’s entrepreneurs and economic developers actually face the same challenges as their peers from throughout history. The pace of change makes it only natural for foreign direct investment practitioners to get caught up in the present. But ignoring the past carries the risk of ignoring the future.

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The development of financial instruments in Renaissance Italy is a case in point. They transformed society, bringing about a revolution in the arts, sciences and social relations. Some scholars go as far as attributing the birth of financial markets to the immense progress experienced during the period. 

New technologies are leading us to be on the verge of a dramatic social transformation in our own day. Now is the perfect time to reflect on the lessons that we can learn from our Venetian past.

The origins of trading ports and free zones

Today there are more than 10,000 SEZs located in 100 countries. They are business parks or cities that have been granted unique incentives to stimulate economic activity, including tax breaks, arbitration for contracts, unique labor laws and one-stop shops — which are mostly online portals in which SEZ companies can obtain all they need to set up and operate their business.

These SEZs are direct descendents of the trade colonies of the Italian maritime republics. The oldest references to jurisdictions that share key traits with SEZs can be found in Roman and early Islamic histories, and were already ancient by the time of the Renaissance period, which stretched from the 14th to 17th century.

Venice, as well as its rival Genoa, operated a wide variety of trading outposts across the expanse of the known world. One means by which Venice and Genoa acquired these colonies was through conquest. During the crusades, European armies carved out small feudal estates in the Muslim-controlled territories of the Levant region of the Eastern Mediterranean. 

But crusading came with a very heavy price tag. Weapons needed to be forged, food needed to be purchased and transportation was expensive. Venetian merchants began issuing loans backed by ‘quarters’ of captured cities as collateral.

While historians debate the exact terms of these crusading loans, here is how one might work. First, crusaders would approach the merchants and propose plans to capture coastal cities. The crusaders would also come up with a budget for the military campaign. 

The Venetian merchants would then inspect plans of the cities and the crusaders would pledge districts, should they be captured, as collateral for the loans. If the merchants approved the ‘business plan’, then a contract would be signed. 

Upon capture of the cities, the crusaders would either need to pay back the loans or hand over the city districts. Most of the time, the loans went unpaid, and as a result the Venetians and Genoese ended up with dozens of “quarters” of cities across the Middle East.

Genoa obtained one-third of the income from the port of Acre (now in Israel) as well as key berths and docks through this process. Genoa also obtained a quarter in the city of Gibelet (now Byblos in Lebanon). Venice obtained quarters in Tyr (now in Lebanon) and Antioch (now in Turkey).

Purchasing strategic land

Sometimes, Venice and Genoa simply purchased their colonies outright. After a conflict with the Venetians, the Byzantine Emperor sold trading rights to Genoese merchants for the entire Black Sea in the 1261 Treaty of Nymphaeum. This granted Genoa dozens of tax exempt ports including Gazaria, a port on the Crimean Peninsula located in present-day Ukraine.

In another example from 1409, the King of Hungary sold the cities of Cres, Rab, Pag, Zadar, Vrana and Novigrad to Venice for 100,000 ducats. Around the same time, the Genoese government opened a bank — the Bank of Saint George — to compete with Venice and purchase additional colonies. As a result, it ended up with colonies in locations such as Spain, Tunisia, and Egypt.

Venetian and Genoese colonies enjoyed many unique incentives within these colonies. Tax exemptions, the right to mint and use their own currencies, exemption from all labor laws and private courts to arbitrate their contracts. Incentives varied greatly depending on location, but nearly all land purchases came with these types of attached benefits.

Putting the conflicts aside, we see this today with private developers across the globe. They often buy land, upon which they build free zones with integrated infrastructure and special business conditions aimed at attracting companies.

Bringing the model home

The model was so successful that the Italian city states began importing the business model to Italy itself. Historian Corey Tazzara describes how the Medici banking family opened the world’s first explicit freeport (Porto Franco) in Livorno in the 1580s. This meant that goods could be traded in the town duty-free. 

In 1593, the town also established its own regulatory body to protect merchants from crime, racketeering, and monitor international trade — in many ways, this was the world’s first one-stop shop. 

The port also enjoyed freedom of religion, attracting large communities of wealthy Muslims, Jews and Protestants. Martin Luther, the protestant priest who first translated the bible from Latin to German in the 16th century, briefly lived there while fleeing Catholic authorities. The Medici also funded a redesign of the city, creating a master plan to build the “ideal town”.

The population of the Porto Franco of Livorno boomed and the town became incredibly wealthy. Other city states, like Venice, soon copied Livorno’s model. Venice designated the nearby mainland port of Treviso as a porto franco, replicating its success.

Freeports would be continuously built and maintained throughout the 17th, 18th and 19th centuries. Modern SEZs directly evolved out of Italian freeports, making them a tried and true formula. In an area with good business conditions that is stymied by inefficient government bureaucracies, the right incentives can foster economic growth.

A shorter version of this article first appeared in the June/July edition of fDi Intelligence. Read the online edition here.