Archive for the ‘Charter Cities in Honduras’ Category

Honduras experiments with charter cities

https://www.economist.com/news/americas/21726121-central-american-country-has-bold-plan-attract-investment-it-not-going

The Central American country has a bold plan to attract investment. It is not going well

ONE sunny Wednesday in Amapala, off the coast of Honduras, 33 working-age men settled themselves on rows of chairs on the main street under a tarpaulin to watch a football game. There was not much traffic to disrupt. The dilapidated town on the island of El Tigre had once been a bustling port, dispatching coffee and other commodities to Europe. Herbert Hoover and Albert Einstein thought the place worth visiting. But the German merchants and shipowners who had managed Amapala’s commerce left after the second world war; in 1979 the port moved to the mainland. The football fans now work intermittently as fishermen, farmers and drivers of three-wheeled mototaxis, most earning less than $2 a day. Some of the peeling pastel-coloured buildings bear signs in English, put up in expectation of a tourism revival that never happened.

Honduras’s government is promising a return to the glory days. In 2013 it announced plans to build a “megaport” in Amapala, along with a customs office and processing plants for exports such as shrimp, textiles and bananas. The money would come from private investors, who would be enticed by the establishment of three “employment and economic development zones” (ZEDEs). More ambitious than typical free-trade zones, these would be independent jurisdictions with their own laws, courts and police. The capital they attract would create jobs and relieve poverty. Rather than fleeing to the United States, Hondurans threatened by the country’s ubiquitous gangs could find security and livelihoods in ZEDEs.

The government has such faith in this idea that in 2013 it passed a law that adds ZEDEs to municipalities and departments as units of the republic. It is considering proposals for 20 ZEDEs across the country and has signed more than ten memorandums of understanding (MoUs) with investors, says Octavio Sánchez, one of the project’s leaders. Some are “ready to go—land bought, maps drawn and capital raised”, he says. The government may announce the first few projects at the end of August. They might be as small as a call centre or cover an entire city.

Sweet dreams are made of ZEDEs

It is easy to see why Honduras might want to create enclaves of safety and efficiency on its territory. It is one of the world’s most violent countries; laws and contracts are spottily enforced; its bureaucracy is a hindrance rather than a help to its citizens; infrastructure is rudimentary and in poor repair (see chart).

The government’s proposal for overcoming these defects draws inspiration from the idea of “charter cities”, new jurisdictions on empty land that bypass weak institutions to attract investment and jobs. Paul Romer, now the World Bank’s chief economist, popularised the idea after noticing that autonomous cities like Hong Kong and Dubai became magnets for investment. In 2010 Mr Sánchez, chief of staff for Porfirio Lobo, Honduras’s president at the time, asked Mr Romer to help set up the first “model cities” after seeing a TED talk that he gave.

Like Dubai’s free-trade zones, ZEDEs are to be “seamlessly integrated into the city”, says Mr Sánchez. But they also hark back to an older model from Honduras’s banana-republic days, when the country in effect turned over swathes of territory to giant firms like the United Fruit Company. “Banana enclaves are an example of the successful functioning of models from other states,” says Ebal Díaz, the secretary of Honduras’s council of ministers.

But the plan to correct the country’s faults one ZEDE at a time is causing alarm. The zones can be created in thinly populated areas without the consent of the locals. Hondurans inside them will lose some rights. Under the law creating ZEDEs, just six of the constitution’s 379 articles must apply within them, points out Fernando García, a lawyer in Tegucigalpa, the capital. These do not include those underwriting such rights as habeas corpus and press freedom.

The project is beset by conflict between foreigners brought in to help monitor it and Honduran officials responsible for putting it into practice, and by strife among the Hondurans themselves. What decisions have been made and who has made them are a mystery to people outside the process, and even to some who are supposedly part of it. Outsiders assume the worst. A recent report by the Carnegie Endowment, a think-tank, calls Honduras “emblematic” of countries in which “corruption is the operating system” of networks formed by government, business and “out-and-out criminals”. The ZEDE saga suggests that such a system will have great difficulty in creating one that is free of its own shortcomings.

The ZEDE plan has its origins in a coup and the complicated politics that ensued. The government of Mr Lobo, who won hastily arranged elections after the army ousted a predecessor in 2009, passed a law creating a forerunner to ZEDEs. After the constitutional court struck down the law, saying it violated Honduran sovereignty, congress dismissed the four justices who had voted against it and amended the constitution to allow passage of the current “model-cities” statute in 2013.

By then Mr Romer had broken with the project (after he realised that the “transparency commission” he was supposed to chair would never in fact exist). But it still has plenty of political support. The current president, Juan Orlando Hernández, who is running for re-election, sees ZEDEs as a vote-winner. He recently posted on Facebook a (perhaps fanciful) map showing how they would transform Honduras into the Americas’ “logistics centre”. A motley group of foreign libertarians, who like the idea of lightly regulated mini-Utopias for enterprise, are still involved. The Inter-American Development Bank has said it may lend $20m to back their development.

Even after seven years of work, the scheme is as vague as it is ambitious. No one outside a small group knows what the first project will be. Agile Solutions, a Brazilian software firm, talks of investing $200m to open a “startup village” in Tegucigalpa, creating 6,000 jobs. Its Honduran boss, Carlos Cruz, sees the zone as a “blank slate”, which the company could use as a laboratory for new approaches to health care, education and tax.

Another candidate to be the first ZEDE is a public-private partnership with Canadian investors to create an “energy district” in Olancho department, where wood would be harvested for fuel. The ZEDE itself would be confined at first to a 1.6 square km (0.6 square mile) patch, which will be occupied by a power station. But it could eventually expand to an area covering 8% of Honduras’s territory and including 380,000 people. HOI, a Christian NGO based in the United States, is to provide health care and education from the outset in this “area of influence”.

After spending millions of dollars on feasibility studies for Amapala, South Korea’s development agency concluded that the area is not ready for a megaport. So the Honduran government decided to start with a tourism project that scoops into several fishing villages on the bay, plus factories and a customs centre nearby. Some proposed ZEDEs are based on “Plan 2020”, a master plan for the country drawn up by McKinsey, a consultancy. It suggests creating 600,000 jobs by attracting vehicle-assembly operations, call centres and other industries from Asia.

Even now, just how ZEDEs will work is a matter of argument among their supporters. The law places effective control in the hands of investors and a “technical secretary” who will administer each zone (and must be a Honduran citizen). They are answerable to an independent “commission for best practices” (CAMP). Civil and criminal cases will be adjudicated by special ZEDE courts, though it is not clear whether each zone will have its own or whether they will join a single parallel system. They could employ foreign judges to hear civil and criminal cases, just as Honduran football teams hire foreign players, suggests Mr Díaz. A “tribunal of individual rights”, guided by international conventions, will protect residents. Its decisions can be appealed to international courts.

But this governance structure is not settled; participants do not agree on what has been decided or even on who is part of it. The original CAMP, appointed by Mr Lobo, had 21 members, including Grover Norquist, an American anti-tax campaigner, Richard Rahn, then of the libertarian Cato Institute in Washington, DC, and Mark Klugmann, a former speechwriter for Ronald Reagan. This body met just once, in March 2015, on the resort island of Roatán.

According to Mr Sánchez and Mr Díaz, it has been pared down to 12 members. Seven are Hondurans from the ruling National Party; the five foreigners include Mr Rahn and Barbara Kolm, an economist with links to Austria’s far-right Freedom Party, but not Mr Klugmann. This group has been meeting secretly in Miami. But power is now exercised by a five-person standing committee led by Ms Kolm, who is the only foreign member.

Mr Klugmann denounces the sidelining of the original CAMP as “illegitimate” and illegal. Arnaldo Castillo, Honduras’s minister of economic development, denies that it has occurred. The argument over which CAMP is in charge is also about principle. Mr Klugmann thinks good governance matters more to investors than cheap labour and light regulation. He wants ZEDEs to perfect their institutional set-up before they start operations. Mr Rahn seems to be losing heart. He was “asked to try to bring in best practices of corporate governance”, he says. But it has been an “uphill struggle”. Although the CAMP is supposed to be independent, Mr Rahn has “the strong impression that there is government interference”.

Mr Sánchez’s Honduran faction seems more eager to sign deals, and more willing to cut corners. One proposal is for a public-private partnership with Conatel, the state-owned telecoms company. Its boss is Mr Díaz, who is also the member of the CAMP authorised to sign MoUs and the head of the agency that registers land titles. Mr Sánchez sees no conflict of interest in this accumulation of roles. “It’s the same government,” he says.

The fuzziness about governance will increase suspicion that ZEDEs are a further way to enrich an entrenched elite and erode the rights of ordinary Hondurans. The National Lawyers Guild, a left-leaning American NGO, fears that the CAMP and the technical secretaries will wield unchallengeable power over ZEDEs and the people who live and work within their boundaries. Once established, ZEDEs can seize land to expand the zones. That may provoke conflict: 90% of Hondurans do not have titles to their homes and scores have died in land disputes in recent years. Hondurans living in areas marked out for ZEDEs have little idea what is in store. “We have never been in the loop,” says Julio Ramírez, Amapala’s bespectacled town clerk.

It is possible that nothing will change in sleepy Amapala. Salvador Nasralla, the leading candidate to unseat Mr Hernández in elections on November 26th, says he would repeal the ZEDE law (though that would require a two-thirds majority in congress). The CAMP chaos may drive away investors. But if they come, the football aficionados of Amapala may learn what it is like to be guinea pigs in a daring economic experiment. Their little island will be in Honduras, but no longer of it.

This article appeared in the The Americas section of the print edition under the headline “A shadowy experiment”
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“I’ve Seen All Sorts of Horrific Things in My Time. But None as Detrimental to the Country as This.” U.S. conservatives are about to run a dangerous economic experiment in Honduras

By

It’s lunchtime at Maritza Grande’s oceanside restaurant in the Fonseca Gulf of Honduras. She scurries from the kitchen, where she is frying fish and plantains and chopping lettuce, to the bar, where she pries caps off soda bottles. Teenage boys sit at the restaurant’s picnic tables, drinking cokes and listening to reggaeton on their cell phones while on their work break: They ferry tourists in thin motorboats from the Honduran mainland to their island municipality of Amapala in the Pacific Ocean.

At 11:30, Maritza’s husband Raul Garcia arrives. He’s on a work break, toofrom his first-grade classroom at a local public school. Of the nearly 13,000 municipal residents, Raul is one of 300 who have formal employment, according to the mayor’s estimate. The majority are self-employed fishermen who make 3,500 – 7,000 Lempiras (about $167-334.00) per month. Amapala, like many Honduran communities, relies on remittances from Amapalans who leave and work abroad.

Raul slides into a barstool beside Maritza. They talk about the Honduran government’s newest development plan, an idea from New York University economist Paul Romer: Charter cities. In 2013, the Honduran government passed a law based on many aspects of Romer’s idea, which is to create autonomous free-trade zones that are governed by corporations, instead of the countries in which they exist. The first Special Economic Development Zones (ZEDE, for its name in Spanish) is being conceived in Honduras, financed by $40 million from the South Korean government. It will likely be located in Amapala.

Maritza is unsure what to think about the ZEDEs. “I don’t know how much this project will really benefit us,” she says.

Raul shakes his head. “We need this,” he says. “Sure, it could have a dark side, but the truth is that in countries like oursthird world countriesthat’s a necessary evil if we want development.”

Like Raul, many Hondurans hope the ZEDEs will bring jobs. But many fear the “dark side” will outweigh potential benefits. Even economist Romer cut his ties with the ZEDE project in 2012 when the government abruptly signed with an investor group led by American libertarian activist Michael Stronga move Romer called “an overt act of deception.” Strong’s project later disappeared, but nine Americans remain key players in the ZEDEssix of whom served in the administration of former President Reagan.

According to Romer’s vision, the charter city should be established in abandoned territory because it is far more complicated to change an existing townlike Amapalathan to create a new one. Doing so would imply a “frontal attack on those who depend on the current system,” former Reagan speechwriter Mark Klugman has argued.

Danielle Mackey
Former President Mel Zelaya (center).

Romer isn’t the only one with doubts. Like Maritza, many wonder if charter cities will bring development to average citizens or only enrich wealthy investors. Many believe the project will allow multinationals to violate labor and environmental rights, and some argue that it’s unconstitutional and violates national sovereignty. According to the charter city law, Honduras will sell territory to investors; that territory becomes an autonomous region no longer governed by Honduran laws or police. “This is nothing more than a plan to get rid of the national debt by auctioning off the country,” ex-president Manuel Zelaya, overthrown in a 2009 coup, told me at a rally on the coup’s fifth anniversary.

In a post-coup Honduras gripped by violence, many fear the ZEDEs will become a tool for organized crime to strengthen its hold on the country. “What’s attractive to some about the ZEDE is the extreme extent to which it takes freedom,” said Eugenio Sosa, a sociologist at the country’s public university, the Autonomous National University of Honduras (UNAH). “But that’s the same part that will let in illicit groups and mafias.”

Sandra Maribel Sanchez has been a journalist in Honduras for 30 years. “I’ve seen all sorts of horrific things in my time,” she says. “But none as detrimental to the country as this.”

Danielle Mackey
A boy plays soccer on a beach in Amapala.

 

Octavio Sanchez is one reason charter cities came to Honduras. Harvard-educated and dimpled, Sanchez is young but powerful. As the chief of staff to ex-President Pepe Lobo, he searched for privatized solutions to national problems: impunity, poverty and violence.

Danielle Mackey
Octavio Sanchez

When Sanchez looks at his country’s history, he sees that times of peace came in periods where it seemed possible to make a profit at homeeven if that profit came by powerful multinational corporations, like the United Fruit Company. He believes that business is the surest way to peace, and a better life for his countrymen. “It’s the way to a police force that works, quality education and health care, and to overcome impunity,” Sanchez says.

Sanchez heard Romer’s argumentthat cities are the best, cheapest way to offer people a good life, and therefore building new cities for the world is a smart approach to solving povertyand he brought it home. Its Honduran and U.S. promoters compare the ZEDEs to Hong Kong, Singapore, and the Cayman Islands.

According to the ZEDE law, the project will work like this: An investor, either international or local, builds infrastructurea port, a mine, or a textile factory, for instance. The territory in which they invest becomes an autonomous zone from Honduras, like Hong Kong nominally is to China. The investing company must write the laws that govern the territory, establish the local government, hire a private police force, and even has the right to set the educational system and collect taxes.

For Sanchez, the money that may follow ZEDEs would be a collateral benefit to their true value: the chance to fix impunity. He believes ZEDEs override corruption by allowing foreign investors to set their own laws, essentially importing functioning legal systems. “The theme in Latin America is justice. If we’re able to create a system that works, this will become the most revolutionary process in the history of Latin America,” Sanchez says. “And if we have to bring justice from outside, we will.”

A central ZEDE government, called the Committee for the Application of Best Practices, oversees all of this. These people are responsible for deciding the bottom-line environmental, legal, and labor standards investors must follow. They also appoint one Honduran per ZEDE as on-site local administrators.

There are 21 people on the committee. Three are Honduran. U.S. members include Mark Klugman, speech writer for presidents Reagan and George H.W. Bush, and image consultant to Honduran post-coup president Lobo; Grover Norquist, founder of Americans for Tax Reform and vice president of Polaroid; Richard Rahn, vice president of the Chamber of Commerce during the Reagan administration and senior member of the Cato Institute; Loren A. Smith, federal judge and chief campaign advisor to Reagan in 1976 and 1980; Reagan’s son, Michael; and Mark Skousen, former CIA economic analyst and Forbes columnist. The list also includes a Danish banker, a Peruvian economist, and an Austrian general secretary of the Friedrich Hayek Institute.

That the ZEDE’s central government is stacked with libertarian foreigners causes skeptics to consider the plan yet another instance of neocolonial collaboration between U.S. and Central American elitesone that’s sold as “development,” but only concentrates wealth, says Roberto Ortiz, a lawyer from Tegucigalpa. He cites the United Fruit Company, which intervened in the early 1900s in Honduran politics to assure its own exorbitant profit, while the majority of Hondurans remainedand still remainvery poor. “There has been strong U.S. intervention in Honduras from the time of the bananeras until now,” he says. The ZEDEs “may be development, but only for a small group of Hondurans. And the majority will suffer the consequences.”

Whether the ZEDE project will be good or bad for Honduras isn’t only about whose interpretation of history is right, or whether the economic philosophy works. It’s also about the context that ZEDEs will enter: ubiquitous corruption and violence. This is a concern that even pro-ZEDE factions, like the libertarian magazine Reason, cite as a reason the project may fail.

Exhibit A is the way charter cities went from idea to reality in Honduras.

Oscar Cruz is a silver-haired 64-year-old lawyer in Tegucigalpa. “The coup in 2009 unleashed the voracity of the groups with real power in this country. It gave them free reins to take over everything,” Cruz says. “They started to reform the Constitution and many lawsthe ZEDE comes in this contextand they made the Constitution into a tool for them to get rich.”

In 2011, he submitted a claim of unconstitutionality to the Honduran Supreme Court on behalf of civil society groups that balked at the sweeping powers charter cities award to investors.

“We need international investment, yes,” Cruz says. “But why at the cost of our national sovereignty?”

On October 18, 2011, the constitutional chamber of the Supreme Court agreed with Cruz. Four of the five sitting justices ruled that the charter city law was a violation of sovereignty and the constitutionally established form of governance in the country.

What happened next made it clear to Cruz that powerful people in the country want the ZEDEs, badly.

“We need international investment, yes. But why at the cost of our national sovereignty?”

The president of Congress at that time was Juan Orlando Hernandeznow president of the country. Hernandez responded to the court’s ruling by calling lawmakers together at 1:35 a.m. Within two hours, Congress unseated the four justices who ruled against the charter cities. They kept the fifth justice, who ruled in charter cities’ favor; and when Hernandez became the country’s president, he nominated this judge to be the country’s attorney general.

Hernandez’s official explanation was that the four justices were unseated because days earlier they had rejected the use of polygraph tests to root out corrupt police. (In the majority opinion, the justices argued that the polygraph isn’t scientifically accurate enough, so using it would violate the constitutional rights of police officers subjected to the test.) But legal experts in the country felt that Hernandez illegally routed the law to force ZEDEs through. A former attorney general decried “the imminent dictatorship of Juan Orlando Hernandez.”

ZEDE supporters hailed Hernandez’s act as a brave, politically expedient move. In an article for the Caiman Financial Review, Klugman called Hernandez a “brilliant young politician” and described his handling of the Supreme Court as “a great testament to the legislative leadership of Mr. Hernandez.”

The congress, led by Hernandez, rewrote and re-passed the law.

One month earlier, officials in Tegucigalpa had signed a memorandum of understanding with the Korean government to begin the first ZEDE. The document, soon leaked, tasks the Honduran government with, among other things, “clearing all legal and political obstacles to the charter cities.”

On May 26, 2014, the new Supreme Court gave ZEDEs its blessing.

Danielle Mackey
A street in Amapala.

 

The island of Amapala is located in the state of Choluteca. Choluteca is rural, flatter, and warmer than the chaotic national capitol of Tegucigalpa. Main street isn’t divided into lanes, so cars drift lazily about the road like Labradors trotting on loose leashes. Few buildings stand taller than two stories. Cholutecans have lived there for generations; this is a place where residents give directions not by street names, but in relation to where the fish market is, or where the rubber tree used to be. They boast that their state is the only safe place left in the country.

Ricardo Espinoza sits in his sparse office off the main street. Espinoza has a Master’s degree in business management, and he helps Cholutecans living on $2 per day start small businesses with microloans. He believes in smart investment as a solution to poverty, and recognizes that his country needs more economic development. “But development is not just economic,” he says. “Poverty is not only a salary that’s too small. It’s also the lack of basic necessities like health, education, and the social exclusion of youth. Already, 40-50 percent of our youth are leaving for the U.S. or joining gangs.”

One cause for alarm, Espinoza says, is how little control the residents of Choluteca have over something that will change their lives. “Historically, Latin America has been a place for imported economic experiments. But experiments aren’t exciting for the people who live here; it’s different when it’s your house that’s being experimented with.”

Danielle Mackey
Saul Montufar

Saul Montufar, a fourth-generation artisanal fisherman, stands on the curb of the Choluteca highway and describes how he thinks this story will end. “Multinational companies won’t have to uphold any environmental standards they don’t want to. ZEDEs will destroy our livelihood,” says Montufar. “They will allow investors to kidnap the state.”

In June 2014, Amapala mayor Santos Alberto Cruz Guevara spent 15 days in South Korea to see charter cities first-hand. He came back cautiously optimistic. “In Korea, what I saw is a city that used to be poor but is now rich, so I feel that ZEDEs create employment opportunities,” the mayor told me in June.

But even after his visit, Cruz Guevara still didn’t know fundamental details about how the program would work. Who, for instance, would have authority to intervene if the private police hired by the investor harmed the Amapalans?

“I listen to my people, and they’re saying to me, ‘Mayor, they’re going to kick us off the land! Mayor, where are we going to go, we have no where else to go!,’” Cruz Guevara said. “And I tell them, ‘Calm down, nothing’s happening yet, we still don’t know anything.’ And as the mayor, my commitment above all else is to protect the best interest of the majority of my people.”

No one but the investors and the Honduran negotiators know how far into Amapala the autonomous charter city could reach. But Cruz Guevara seemed unaware that once the zone is established, he would have no authority within that land.

Danielle Marie Mackey is a freelance journalist based in New York and San Salvador.