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Thursday, June 27, 2013

Startup City Redux

Honduras: from RED to ZEDE to … Freedom?

A small country in Central America may just have created the freest cities in the world.*

This column reported in November 2012 on an effort in Honduras to establish a unique kind of special development region. These regions, called REDs after their Spanish acronym, would have created new cities with unprecedented independence from the central government. The RED had many supporters in the Honduran government’s executive and legislative branches, who aimed to bring low taxes, free trade, and the rule of law to their fellow citizens. The judicial branch did not share their enthusiasm, however.

The Supreme Court, worried that the RED statute would allow foreign sovereigns to rule Honduran territory, struck it down as unconstitutional. The first effort to establish in Honduras what have been called “startup cities” thus died. But Honduran reformers did not give up.

Honduras Tries Again

In January 2013, to safeguard their renewed effort to create startup cities, the Honduran Congress amended Articles 294, 303, and 329 of their Constitution. The changes addressed the objections that the Supreme Court had raised against the RED and set the stage for another attempt. 

Soon the Honduran National Congress was considering legislation that would create zonas de empleo y desarrollo económico (zones for employment and development of the economy), called “ZEDEs” for short. The legislation triggered fierce opposition by municipalities, which feared competition from the new entities. Those objections were answered in floor debate by the observation that municipalities could themselves convert to ZEDEs, winning all the same advantages. On June 12, 2013, the ZEDE legislation passed by a vote of 102 to 26.

In broad terms, the ZEDE legislation authorizes the creation of startup cities that will operate under the supervision, but not direct control, of the central government. So described, the ZEDE might not sound much different from China’s special economic zones or Dubai’s International Financial Centre. The details reveal, however, that the Hondurans have authored a daring new approach to governance.

Before launching a tour of the ZEDE legislation, however, I feel compelled to offer some caveats. Although I serve as legal advisor to Elevator City Development, Inc., a company that has been active in Honduras, I here speak solely for myself. Because the ZEDE legislation has not yet appeared in La Gaceta, the official publication of the Honduran National Congress, it has not yet come into force. The English translations used here come from native Hondurans, Google translate, and me—not from legislators themselves.

Strapped in?  OK. Let’s go.

A Quick Tour of the ZEDE Legislation

Article 1 of the ZEDE legislation makes clear that Honduras will go only so far in granting sovereignty to startup cities. They must remain “an inalienable part of the State of Honduras.” The article immediately follows up, however, by calling the ZEDEs “autonomous entities” and granting them the power to set their own immigration regulations and to control transportation systems within their jurisdictions.

In Article 3, the Hondurans show they want only the best for the ZEDE legal system: “They will have autonomous and independent courts with exclusive jurisdiction, which will be able to adopt judicial systems and traditions from other parts of the world,” subject to obligations to guarantee respect for basic human rights. The legislation imposes similar requirements on the ZEDE, including substantive and procedural rights, at many other points.

You cannot understand how a government functions without following the money. Article 5 of the ZEDE legislation makes it clear: “The special fiscal regime of the ZEDE authorizes them to create their own budget, the right to collect and administrate taxes, to determine the rates charged for services provided, [and] to enter into all types of agreements,” even those lasting over many years. 

The legislation also provides that the ZEDEs must keep their budgets balanced (Article 24), that taxes are optional and cannot exceed specified levels (Article 29), that the ZEDE cannot impose currency exchange controls or other restraints on capital flows into and out of their jurisdictions (Article 30), and that imports into the ZEDE shall be free of taxes, tariffs, fees, or other charges (Article 32). The ZEDEs will help pay their way by allocating 12 percent of all tax revenues collected to trusts established for the benefit of various branches of the Honduran government.

What about the structure of the ZEDE government?  

Article 11 defines the Committee on the Adoption of Best Practices (CABP), made up of 21 “people of known integrity, leadership, executive capacity, and international reputation,” and empowered to approve internal laws, appoint and remove the technical secretary (about which more anon), and exercise other oversight functions. The president of Honduras can unilaterally appoint CABP members but the National Congress must approve them (Article 11).

The technical secretary, described in Article 12, plays a more hands-on role in ZEDE governance. As the highest executive officer and legal representative, the technical secretary runs the ZEDE both directly—by implementing policies set by the CABP and issuing administrative orders—and indirectly, through trusts the technical secretary establishes for the provision of services, control of revenue, and property management within the ZEDE.

Who provides judicial functions in a ZEDE? Articles 14–15 of the legislation authorize the creation of courts having special and exclusive jurisdiction, operated “under the Anglo-Saxon (common law) legal tradition,” and staffed by judges appointed by the judicial counsel of the Honduran judiciary from a list of candidates provided by the CABP. It also affirms, however, that parties under ZEDE law “may contractually agree to submit [their dispute] to arbitration or a jurisdiction different from the ZEDE.”

The ZEDEs enforce their laws with their own security services, which have exclusive authority over all police, prosecutions, and prisons within the ZEDE (Article 23). The ZEDEs must implement a variety of programs designed to ensure that their people will enjoy adequate education, health care, social services, labor rights, and environmental protections (Articles 33–37). The ZEDE will be bound by Honduran criminal law, which includes bans on drug trafficking, money laundering, human trafficking, and child exploitation, unless and until the Congress approves substitute laws (Article 40[6]).

How are ZEDEs created? 

Basically, through one of two processes. In densely populated areas, voters must approve the creation of their local ZEDE through a referendum (Article 37). Low-population areas near the coasts are “hereby declared subject to the present regime,” though property owners must take special measures to opt into ZEDE jurisdiction (Article 38).

What Comes Next?

Honduran reformers have won a great victory in passing the ZEDE legislation. Many hurdles remain before they cut the ribbon on their first startup city, however. As noted above, the statute itself requires a number of developmental steps. Litigation may break out again, leaving the ZEDE subject to delays and uncertainties. Nobody has done this before; it might not even be possible.

Honduran reformers have already won many victories in their fight for startup cities, though. Twice they have amended their constitution; twice they have passed comprehensive enabling legislation. They have given a bold and uniquely Honduran answer to one of the world’s oldest and hardest questions:  How can we live together in peace and prosperity? They have dealt a mortal blow to stasis, the enemy of all progress, and cleared the way toward newer, freer cities.

*Editors' note: This article has been updated to reflect the most recent version of the statute.

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