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Monday, November 26, 2012

No Exit: Are Honduran Free Cities DOA?

Eager to bring Hong Kong-style growth to their beleaguered Central American country, Honduras amended its constitution in 2011. The new provisions allowed the creation of quasi-sovereign special development regions. Libertarians thrilled at the prospect.

By making it easier to escape from bad government to better government, the Honduran plan would put the forces of competition and choice in the service of the Honduran people. Formerly, Hondurans who voted with their feet had to flee their homeland. Now, they could stay and wait for good government to come to them–or at least to the neighborhood.
Those grand visions came to nothing, however.  Instead, the Honduran Supreme Court struck down the constitutional amendments as . . . unconstitutional. Does that spell the end of the Honduran experiment in newer, freer cities?

The Plan

The Honduran special development regions, called “REDs” after their Spanish acronym, were supposed to attract foreign investors with low taxes, free trade, and transparent government. Instead, the plan attracted academic grandstanding, critical news accounts, and crippling litigation. Opponents of the REDs have even demanded treason prosecutions of those who voted for the program. If failure represents a learning opportunity, the REDs have a lot to teach us about government reform.
Few people doubt that the Honduran people deserve better government. According to the U.N.—and thanks largely to a drug war imported from the U.S.—Honduras has the world’s highest per capita murder rate. The World Bank reports that over 59 percent of Hondurans fall below the poverty line; over 36 percent fall below the extreme poverty line. Politicians in other countries woo voters with t-shirts or civil service jobs; Honduran politicians hand out free coffins.
One bright spot: Honduran free-trade zones, created in the mid-1980s, generated around 140,000 jobs on-site and another 400,000 jobs in the rest of the country. REDs, the brainchild of Octavio Sanchez and other Honduran reformers, were meant to build on that success. These special development regions would offer low taxes, streamlined regulations, and institutional safeguards against political interference. The plan gained momentum when President Porfirio Lobo Sosa appointed Sanchez as his chief of staff, and in January 2011 the Honduran Congress voted 124–1 in favor of a constitutional amendment authorizing the creation of REDs.
The REDs were designed to implement decentralization from above, bringing something like federalism to what was otherwise a system of government run largely out of Tegucigalpa, the capital. The REDs were afforded a great deal more independence than U.S. states enjoy, however—theoretically at least. 
Once up and running, the REDs were to have far-reaching authority to set up their own public administration, commercial and civil laws, police forces, and courts. REDs would be able to establish and spend taxes (subject to mandatory caps), enter into international agreements (with congressional approval), and set immigration policies (so long as Hondurans were not barred entry).
An independent Transparency Commission and Normative Council elected by each RED’s permanent residents was to oversee the new cities, ensuring respect for certain fundamental rights. Despite those limits, the REDs heralded a revolution in governance—free-trade zones have been around awhile, but nobody's ever seen a free-law zone.

Celebrity Economists and REDs

Around the same time that Sanchez and his fellow reformers were developing REDs, American economist Paul Romer began promoting a facially similar idea: charter cities. Under Romer’s plan, a host country would invite a trusted first-world counterpart—he often cited Canada as an example—to help govern a portion of its territory. In this way, Romer argued, people languishing under poor governments would not need to emigrate to better ones. Instead, charter cities would bring good government to the developing world.
Thanks to his fame as a respected academic and successful entrepreneur, many came to see Romer as the genius behind the Honduran RED project. He wasn’t, but it must be admitted that citing Romer’s work—including his very convincing TED talk—helped the Lobo administration sell REDs to the Honduran Congress. Romer visited Honduras, advised the government, and evidently viewed the REDs as an opportunity to implement charter cities. It was not to be, however.
The Hondurans balked at Romer’s proposal to have foreigners—even ones as friendly and competent as Canadians—govern their territory. Romer, who admits that others find him “like Spock,” failed to appreciate the powerful emotions that nationalism can stir up, especially among people who, like the Hondurans, have suffered colonial rule.  
Romer also presumed too much about his role in forming the REDs, taking offense when the Hondurans proceeded without his approval and making a public show of resigning his position on the interim Transparency Commission (a position that Honduran officials say they never gave him anyway).

Charter City, Free City, or Nativism?

Instead of inviting in foreign countries to govern the REDs, the Hondurans planned to implement local but independent control. On September 4, 2012, through a public-private partnership, the Honduran government gave approval for Grupo MGK to find investors, buy land, and begin building the first RED. After that promising start, however, Honduran courts got involved.
On October 18, 2012, the Honduran Supreme Court ruled the REDs unconstitutional on grounds that they violated the country’s sovereignty and alienated its territory. Grupo MGK left the country for more promising venues. 
Will Honduras resurrect REDs in a form more agreeable to the Honduran Supreme Court?  By all knowledgeable accounts, we will not know until after Honduras holds its next general election, in November 2013.
The failure of the Honduran REDs disappointed a great many people, not least among them libertarians. The REDs were never designed to become private cities, much less Galt’s Gulch-style utopias. The Hondurans’ bold attempt nonetheless deserves the admiration and support of all who rue the human toll of statism. Should they try again and succeed, the Hondurans may well show the world a better way to better government.


  • Professor Tom W. Bell is a professor at Chapman University School of Law.