This Time, Try Supporting Honduran Democracy

Imagine a future in which countries desperate for investment give up a patch of their territory and subcontract governance to a board chosen by a foreign corporation. Sound like the East India Company of the past? Until the 2021 election of Honduran president Xiomara Castro, the past was now—Zones for Employment and Economic Development (Zonas de Empleo y Desarrollo Económico in Spanish, or ZEDEs) had been permitted to establish their own near-tax-free paradises in company-governed territorial fiefdoms.

The investor-governed territories include one that accepts its own cryptocurrency and allegedly tramples rights of indigenous and Afro-Caribbean populations, another where small farmers were forced to sell their land—all were criticized by the United Nations as threatening basic human rights and criticized by Honduran civil society for worsening problems of tax evasion and narcotrafficking. What is clear is that they violated basic democratic principles of representative government and undermined national sovereignty, including denying the validity of international labor and environmental treaty obligations agreed by the Honduran state.

It all began when a 2009 Honduran military coup ousted a democratically elected president. The next Honduran president and the Congress passed a law to cede portions of its territory to corporate investors as “charter cities” but were blocked by the Supreme Court. In response, Congress impeached the judges, packed the court, and engineered a new law to create ZEDEs. According to a study published in Central American Journals Online, ZEDEs are comparable to the Spanish colonial model, creating foreign-controlled economic zones on Honduran territory. The president of the Congress, Juan Orlando Hernández, went on to be the next president, governing two terms after his handpicked Supreme Court-sanctioned reelection. Eight years later, Hernández now sits in a U.S. jail awaiting trial for narco-trafficking, the same charges on which his brother was sentenced to life in a U.S. prison.

Last year, the first opposition government elected since the coup made doing away with ZEDEs part of its electoral campaign, and among the first laws passed by the new Congress was ZEDEs elimination. The law passed unanimously, including votes from the very party that had put the ZEDEs in place. The reversal was the culmination of a broad civil society movement that brought together women, indigenous, Afro-Honduran, labor, and local business interests. Predictably, only the foreign investors want the paradises to remain.

It is worthwhile to look at the record of the ZEDEs. They found resonance among conservative Honduran economists and were championed by Paul Romer, an economist who extrapolated from the experience of places like Singapore and Hong Kong to presume that cities could carve out independent regulatory regimes to promote development in the midst of poorly governed areas. Originally part of an oversight board to the charter cities, Romer resigned in response to Honduran government evasion of oversight processes and lack of “transparency.” Romer’s fears appear to have been well-founded, as the oversight board established for the ZEDEs is now a self-perpetuating body that even a think tank founded to support charter cities views skeptically for including "Ronald Reagan’s son (a conservative media personality), anti-tax activist Grover Norquist, and a member of the Habsburg dynasty.” It goes on to say that “the ZEDEs were clearly more of an ideological exercise than a practical exercise to generate development.”

Romer may have gotten out just in time for additional reasons, as the record of the ZEDEs has been poor in terms of economic, environmental, and democratic impacts. Compared to what Honduras would have collected otherwise, even conservative estimates suggest the tax exemptions offered to the ZEDEs would cost equal to almost half of current sales taxes by 2025 and a value equal to all current import taxes by 2026. Worse, some of the ZEDEs build investor paradise workplaces and residences but appear to provide almost no public services, except their private police, even as they deny the Honduran state sufficient tax revenue to provide schools, health clinics, and courts. Pitched as model cities, ZEDEs are actually far from that, including one that offered preferential treatment for agricultural investments and mining concessions, evading existing environmental and other regulations on decidedly nonurban activities. In the face of social opposition to the ZEDEs, the Honduran Congress had toughened punishments for blocking property or businesses, making it easier for ZEDEs private security forces to repress protesters. Private security force and paramilitary violence against opponents of megaprojects like ZEDEs is common in Honduras—and in one case a lawyer representing indigenous communities opposed to the original charter cities law was murdered, sparking condemnation from the State Department, but impunity for the killers meant there was no proven link to his political work.

In spite of this poor record, most of those who want to preserve the ZEDEs point to potential benefits without any evidence. Supporters claim ZEDEs will be a boon to employment, but rates of unemployment have remained unchanged since ZEDEs began, estimates of the actual number of ZEDEs jobs created hover around 15,000 in the eight years ZEDEs have been on the books, and ZEDEs undermine and evade existing labor legislation. Supporters present ZEDEs as complementary to U.S. nearshoring, but estimates of benefits to Honduras from nearshoring lag behind eight other Latin American countries, none of which have ZEDEs. Supporters argue ZEDEs will head off growing Chinese influence, but China is one of the countries interested in investing in ZEDEs. Supporters suggest ZEDEs will address problems of corruption, but the director of the ZEDE oversight board was secretary of the presidency to the jailed former president and has continued to draw a salary even after fleeing to neighboring Nicaragua to escape his own corruption and narcotrafficking investigations. Supporters argue ZEDEs will generate trade, investment, and growth, but since the ZEDEs law was passed in 2013, trade as a percentage of GDP dropped in five of eight years and is now lower than it was before, foreign direct investment decreased as a percentage of GDP every year except 2018, and GDP growth was below 4 percent in six of the eight years. Overblown aspirations have two main problems: first, they violate basic democratic principles of citizen representation, adherence to rule of law, and international treaty obligations; and second, in the eight years since ZEDEs were allowed, none of these promises have been fulfilled.

Why the sudden kerfuffle about an obscure scheme abandoned by its founder, instituted by a corrupt politician now in jail in the United States, revoked by the country that adopted it, and that showed minimal actual impact? Perhaps because one ZEDE investor has provided grants to think tanks to start a dialogue on the issue, the results of which may have convinced some in the State Department, the U.S. Embassy in Honduras, and a few members of Congress, even threatening the newly elected Honduran government with reprisals such as withdrawal of aid, forced restitution payments, or limiting the Honduran share of the Partnership for Central America, the private sector investment plan led by Vice President Kamala Harris. For the richest country in the hemisphere to threaten to withhold or extract resources from the third-poorest country lends credence to the critiques of those who viewed the ZEDEs as colonial. Worse, withholding funds or forcing restitution would undermine the core intent of the Harris plan—invest in Honduras to stem outmigration, address low growth, and improve governance. Instead of listening to those who are advocating for a few private corporations’ desire to cash in on their fiefdoms, the United States should be supporting stronger Honduran institutions, starting with respecting the democratic will of the Honduran people.

Aaron Schneider is Leo Block Professor of International Studies at the University of Denver. Mark L. Schneider is a senior adviser with the Americas Program and the Human Rights Initiative at the Center for Strategic and International Studies in Washington, D.C., and former director of the Peace Corps.

Originally produced by the Center for Strategic and International Studies (CSIS). All views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).