Honduras and the Future of Charter Cities

The recent Honduran elections may have ramifications for the greater charter cities movement.

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On Sunday November 28th, Hondurans elected opposition candidate Xiomara Castro, who self-identifies as a socialist, as President. Her party, Libre, has a nearly 20 percentage point lead over the incumbent National Party. Castro campaigned against charter cities, putting repealing the ZEDE (zona de empleo y desarrollo económico) legislation at the top of her list of priorities for her first 100 days in office (the priority list was taken down shortly after the election).

Before getting into the implications of the election, it's worth reviewing the history of charter cities in Honduras. In 2009 Honduras underwent a constitutional crisis. The President at the time, Manuel Zelaya, husband of the recently elected Castro, attempted to hold a constitutional referendum which critics argue was an attempt to extend his time in office past the one-term maximum. The Supreme Court, supported by Congress and the Attorney General, ruled that the referendum was unlawful. The Attorney General indicted Zelaya. The Supreme Court ordered the Chief of the Armed Forces to detain Zelaya and present him to court. When Zelaya continued to pursue the referendum, the military, fearing riots and social instability, put him on a plane to Costa Rica.

The National Party took power after the removal of Zelaya from office. In 2011, Honduras invited economist Paul Romer to visit and passed legislation inspired by his vision of charter cities. Just one year later, Romer was gone, and shortly thereafter the legislation was ruled unconstitutional by the Honduran Supreme Court.

Romer’s departure and the Supreme Court’s ruling dampened expectations about charter cities, but Honduras, or more specifically, the National Party, persevered, passing a revamped version of the original charter cities legislation—now called the ZEDE law— in 2013. The judges who had voted against the previous legislation had been removed from the Supreme Court in the interim, and the reconstituted Supreme Court upheld the new legislation.

After passage of the legislation, it took until 2020 for the first project, Próspera, to be announced. Today there are three ZEDEs: Próspera, Ciudad Morazán, and Orquidea. All three ZEDEs are relatively small. None, to my knowledge, have over 100 residents. The business activity is similarly nascent, though Orquidea has begun exporting agricultural products. The three projects have self-reported an estimated $700 million total investment over the next 5 years, a number likely to be curtailed with the recent election. 

In sum, the Honduran branch of the charter cities movement was born in a constitutional crisis and lacked widespread public support. With Castro being elected in a landslide, campaigning against the ZEDEs -- and considering the infancy of ZEDE developments -- the future of charter cities in Honduras looks dim.

However, there are several reasons the situation might not be so dire. First, Castro needs a supermajority to repeal the ZEDE legislation. Her party doesn’t have the votes, and it's unclear whether they’ll be able to build a sufficiently large coalition in Congress.

Second, the ZEDEs have legal protections. The U.S. - Central American Free Trade Agreement (CAFTA-DR) and the U.S. - Honduras Bilateral Investment Treaty protects projects that have American investors. If the concessions are repealed those projects will be able to sue Honduras to recover damages for the regulatory taking. Honduras is also part of the ICSID Convention and has formalized investment protection treaties with dozens of countries including the U.K., France, Germany, Canada, South Korea, the Netherlands, and several Latin American nations.

Additionally, the ZEDEs have ‘acquired rights’ under Honduran law. If the legislation is repealed, the concessions will stay in place for the term of their respective Stability Agreements, which have a minimum transition period of 10 years. There is precedent in Honduras for free zones and other special regimes continuing their tax concessions even after the legislation enacting those concessions was repealed

The primary question regarding the future of the ZEDEs is the priority the new administration places on eliminating them. Assuming the legal protections are strong, and the attorneys I have spoken with believe they are, there are still many options for a motivated government. The ZEDE’s autonomous nature protects them to a large degree from indirect attacks, but the new government could attempt to require additional customs inspections and audits, as well as harassing individuals involved in the ZEDEs. Such pressure might not rise to a regulatory taking but could be sufficient to dissuade investment and talent from the ZEDEs, starving them until the next presidential election.

This is a serious blow to the charter cities movement. Honduras has the most far reaching charter cities legislation in the world, legislation that inspired our model legislation. Honduran projects, particularly Próspera, were among the best known. Even if the ZEDEs survive, their growth will be lower than had Castro not won the election.

There are two important lessons from Honduras for the charter cities movement. First, legitimacy is key. Despite Honduras having great legislation, charter cities lacked legitimacy because of the circumstances under which the legislation was passed. There was never broad public support, which increased the risk of any development. Second, diversification is important. With the challenges in Honduras, it is more important than ever to diversify and engage different projects in different countries. Charter cities cannot have a single failure point.

Despite this setback, the charter cities movement is still strong. When Romer left Honduras in 2011, the momentum died for the better part of a decade. While the charter cities space has yet to influence comparable legislation to that inspired by Romer, the fundamentals are better. There are more projects, more conversations, and more interest. Ten years ago, charter cities were centered around a single man. Now they’re centered around an ecosystem of ideas, supporting organizations, and on-the-ground projects.