Honduras Moving Ahead with Private Cities

To most development economists, the key to economic success lies in the creation of good institutions, be they schools, corruption-free agencies, or the like. In 2010, the New York University Business School economist Paul Romer made quite a splash in the field by arguing that in countries where good institutions are lacking, new “charter cities” should be built and run by outside entities under their own laws as semi-sovereign entities. Institutions in the charter cities would be designed for success from day one. Romer could point to the historical success stories of Hong Kong, Macao, and Singapore, but most of his peers regarded the idea as, if not horrible in principle, as a curiosity that would never actually see the light of day.

On September 4, Romer’s theory gained a huge vote of confidence by the government of Honduras, which signed a memorandum of understanding with a group of investors led by Michael Strong, a U.S. libertarian educator. Strong and his associates will be allowed to develop one of Honduras’s new “Regiones Especiales de Desarrollo” (REDs), or “special development regions.” REDs will have their own judicial systems, their own police, their own tax structure, and even the ability to negotiate trade internationally.

Romer himself has been heavily involved in the effort to make REDs a reality in Honduras. President Porfirio Lobo’s economic advisers quickly took note of Romer’s charter cities idea, and in 2011 they invited Romer to Honduras to make his case. Romer spoke with Lobo, who was already sold on the idea, and addressed the Honduran Congress on behalf of a constitutional amendment allowing the creation of REDs. The amendment passed soon after, granting President Lobo the power to negotiate the development of three such regions. A specific site for the first RED has not yet been chosen, though the Caribbean coastal area near Puerto Castilla (pictured above) appears to be the front-runner. Romer, along with several others, has also been appointed to a “Transparency Commission” charged with “oversee[ing] the integrity of governance in the REDs.” The commission, however, remains unofficial pending a Supreme Court decision. In an open letter to President Lobo explaining the group’s legal limbo, Romer and his colleagues state that “we, as individuals, continue to believe strongly in the vision behind the Honduran RED initiative, and we stand ready to be of service when the impediments to the full establishment of the institutional framework of the REDs have been resolved.”

The one legal hurdle remaining to the RED system is the Honduran Supreme Court, which may yet rule the entire enterprise unconstitutional. What the Supreme Court will rule—and when that ruling will come—remain anyone’s guess. In the mean time, many Hondurans have reacted to the RED concept with skepticism and anger. Critics worry that REDs will use their legal status to implement lax environmental and labor regulations, becoming in effect 21st Century banana republics. Concern also arises over the possible loss of Honduran sovereignty. Even indigenous rights’ groups have entered the debate. According to The Guardian, the president of the Fraternal Black Organization of Honduras claims that the Puerto Castilla site proposed for Michael Strong’s RED “would threaten the continuity of the Garifuna people and culture.”

Project backers, government officials, and proponents tend to dismiss “banana republic” concerns, promising higher wages and affordable housing. Even without Supreme Court approval, Strong’s group plans to begin $15 million worth of construction work shortly. According to the government, construction will create 5,000 jobs in the next six months and 200,000 before work is finished. Eventually, Strong imagines the new city as a thriving free trade zone along the lines of Dubai, and believes that it will rank among “the most important transformations in the world.” Regardless of what one thinks of the idea’s merits, the prospect of a new development  theory, a somewhat corrupt central government, libertarian investors from the United States, and thousands of Hondurans people from diverse backgrounds setting out to create a new kind of semi-sovereign entity promises to be a fascinating process to observe.