Incentivizing Honduran Prosperity And Reducing Migration To The U.S. Through ZEDEs

However devastating the Covid-19 recession was in the U.S. it pales in comparison to the economic devastation wrought in Latin America. As the OECD noted, Latin America “will be the most affected emerging and developing region in the world in terms of GDP growth and this crisis is hitting particularly the most vulnerable groups.”

The consequences from this crisis have reached the U.S. border. The economic devastation in Latin America is driving record number of migrants to the U.S. Thus far in the current fiscal year, there have been 1.82 million arrests at the southern border, which far exceeded the record of 1.66 million arrests set at the same time last year.

Neither the problems at the U.S. border nor the unconscionable economic malaise devastating too many families in Latin America will be adequately resolved unless the countries of Latin America support economic policies that generate broad-based sustainable economic growth over the long-term. These fundamentals include secure property rights, an efficient regulatory system, and a low-cost tax regime.

This reality makes the backlash against economic development zones in Honduras – referred to as Employment and Economic Development Zones (ZEDEs based on the Spanish initials) – all the more troubling. When implemented as intended, these zones establish the policy environment that enables long-term economic growth to flourish.

In the case of Honduras, the ZEDEs establish an area where businesses can find a reprieve from the burdensome and arbitrary taxes and regulations that the Honduran state imposes. As summarized by the Center for Strategic and International Studies,

ZEDEs act as special subdivisions of Honduras. Within their borders, ZEDEs are free to adopt their own taxation systems and legal regimes, subject to oversight by a national committee…. [ZEDEs are able] to borrow from the best practices of, for instance, French, U.S., or Japanese law, should the administrators find that framework more conducive to establishing a business than Honduran law.

Freed from the country’s anti-growth policies, the ZEDEs can implement pro-growth economic policies that attract the necessary capital investments. This free-market approach reflects the policies that transformed formerly low-income countries – most famously the Asian Tigers of Taiwan, Singapore, and South Korea – into prosperous nations that “lifted the boats” of all citizens. Given that the post-Covid-19 global supply chains are re-orienting, the ZEDEs’ upside potential is only growing.

Prospera, a ZEDE on the island of Roatan, exemplifies the promise. According to its website, Prospera’s investment plan will leverage the island’s tourism industry and investments in healthcare infrastructure, light high-tech manufacturing, FinTech innovation, and residential and commercial real estate development. The hope is that these investments will spark robust economic activity and tens of millions of private dollars have been devoted toward these efforts already.

If successful, investors will earn strong returns, but more importantly, the investments will jumpstart the economy, create desperately need jobs and incomes, and foster optimism about the region’s economic future. In short, these efforts will help generate the sustainable long-term economic growth that Hondurans so desperately seek.

Even if the current investment plans are unsuccessful, always an option in a truly free market, there are still great benefits to Hondurans. Failures provide invaluable information just as much as successes so long as the foundation of secure property rights, a light regulatory structure, and a simple low-burden tax structure is maintained. In such an environment, Roatan will continue to attract investments and entrepreneurial ideas that will drive the desired economic development.

However, achieving the desired ends requires that the environment remains supportive of entrepreneurial efforts, but there are mounting concerns.

The underlying ZEDE enabling law has been repealed, which provides the appearance of legitimacy to the claims of ZEDE opponents that the current zones should be shut down. However, many legal experts argue that the repeal cannot lawfully apply to existing ZEDEs such as Prospera due to the past guarantees of legal stability through at least 2064 and the protections granted current ZEDEs under the CAFTA-DR investment treaty.

Growing rhetoric from leftists’ parties accuse ZEDEs of being “a state within a state” and the critics make accusations that these zones could become havens for drug lords and other criminal enterprises. Other unsubstantiated claims include investors forcing locals to sell their property at unreasonably low prices.

If such accusations had merit, there would be cause for concern. But these concerns are antithetical to the entire purpose of the ZEDE – the establishment of a zone where the rule of law is enforced, and property rights are secure. As Peter Milhalik noted, an alternative explanation is that

local elites oppose ZEDEs because they don’t want any new competition. And the hard left looks unfavorably on any structure that promotes property rights and consent of the governed because they favor collectivism and the idea that government, not the people, needs to make decisions relating to sovereignty, property and individual rights.

History teaches that regardless of whether the country is Singapore, the United States, or Honduras, individuals and entrepreneurs drive broad-based economic growth and rising prosperity. But only when the policy environment secures fundamental rights. ZEDEs establish such an environment, which is why the current backlash against these zones threatens to make Hondurans’ economic plight worse, not better.