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Honduras Free Zone Makes History

MEDIA / Newsletters / 2014 / January - Honduras Free Zones Makes History

Honduras Free Zone Makes History

Honduras is one of the poorest and most insecure countries in Latin America: an estimated 60 percent of the population lives below the poverty line, and it has the highest per-capita homicide rate in the world, according to the UN. It has a long track record of failing governments and corruption.

And possibly it is exactly because it so far has been a failure that it is willing to try something new, one might say: something the world has so far not yet seen; at least not in recent history!

In June 2013 the Honduran congress enacted a constitutional amendment, requiring a two thirds majority vote, approving the creation of independent areas called Zones for Economic Development and Employment ( “ZEDE”). A Honduras Free Zone!

What are these free zones?

These zones are not just freezones, which are zones typically created to allow for relaxation of import and export restrictions, labour laws, other regulation, local ownership requirements, and (partial) exemption from taxation and duties.
ZEDEs are supercharged freezones. Unlike traditional special zones that just address a single dimension by using only economic incentives, the Honduran ZEDE considers four critical dimensions and addresses Legal, Economic, Administrative, and Political (LEAP) factors. They are separate judicial areas, with their own system of laws, dispute resolution, and even police; almost entirely outside the legal, economic, administrative and political framework of the country where they are based.

The idea is to create areas that are seen to be outside the control of Honduran politicians and politics in general, realising that this fact in particular needs to be made very clear in order to convince investors that there investment is secure.
The idea has been promoted by several intellectuals for a while, but so far these ideas have been largely ridiculed as utopian. Luckily, the Honduran legislators saw that what is really utopian is to expect foreign investors to come to Honduras by – in effect – telling them: ”trust us, this time we’ll be different, we promise you the same thing we promised you last time around, that we’ll be less corrupt, that crime goes, down, that we’ll ‘create jobs’, that this time we’ll get the economy going, we won’t inflate the currency, except that this time we’ll really do it”.

They saw that there is only one way out and that is to tell them: “we’ll get out of the way, you can operate largely outside the regular Honduran framework, there will be a 21-member international oversight committee, and to top it off: in order to repeal the law enacting the ZEDEs the constitution needs to be changed (requiring 2/3rds majority in both houses)”.

Who's Behind The Free Zones in Honduras?

One of the main promoters was Paul Romer, Professor of Economics at New York University. In his variant which he termed “charter cities” the zones would operate under the oversight of a foreign country that is well run (relatively to Honduras). Strangely, for some reason he considered even the EU well-run. Even though the original ZEDE law was approved by Congress in 2012 it was subsequently declared unconstitutional by the Honduran Supreme Court since it would amount to ceding jurisdiction to another country. So last year the amended ZEDE law was adopted where this option was removed. Hence Romer is not involved in the project any longer.

It is Mark Klugmann’s version of the ZEDEs that won the day. He is one of three implementation commissioners for the ZEDE and the only non-Honduran. He is a libertarian who for a long time has been promoting LEAP zones as a model for economic development and to attract international investment. He describes LEAP zones as a means to achieve what he calls “institutional leapfrogging”: instead of trying to change existing institutions set up new institutions from scratch outside the normal legal framework of a country. He uses Shenzhen in China as an example. Deng Xiaoping, proposed the Shenzhen in the nineteen eighties, as a capitalist zone within China, with its own laws, conveniently located just across the border with Hong Kong.

He could have of course proposed to reform the communist system and limit the role of the central committee, but that would have been a much harder sell, and considering the vested interests he would have had to confront would likely have been a short-lived experiment. Instead he proposed something where the current system could remain in place and just get the central committee to allow for an experiment in a small, sparsely populated, area. Now, that was much easer to sign up to.

Standing on the Shoulder of Liberty

The other example of institutional leapfrogging is when Singapore became an independent nation it appointed as its supreme court the Privy Council in London, instantly gaining the creditability of a reliable legal system backed by centuries of legal jurisprudence that would otherwise have taken years to achieve. Dubai did something similar with its creation of Dubai International Financial City which also has its own laws and courts pertaining to the regulation of financial services.

The governance model establishes an international Committee for the Adoption of Best Practices. In essence, that committee will function as a board of trustees. It is set up to give investors the confidence that the zone operates mostly outside the realm of politics, that the rules of the game that are offered will be respected and maintained, placing a central emphasis on transparency and the rule of law.
The last hurdle was the presidential election last November where one of the candidates vouched to attempt to repeal the laws. However, Juan Orlando Hernandez, a strong proponent of the ZEDEs, won the elections and he was inaugurated January 27th. According to the ZEDE law he will now have to appoint the 21 members of the Committee which must be people of “known honourableness, leadership, executive ability and international prestige”. After being confirmed by a two thirds majority in congress, this committee then has a number of duties, including deciding the boundaries of ZEDEs and appointing the “Technical Secretary”, effectively the governor, for each ZEDE.

This is a historic step, because with the Honduras Free Zone Honduras might just become the new Hong Kong or Dubai of Central America!

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