Honduran ZEDEs: Their Past and Future

The ZEDE law in Honduras was repealed in April 2022 and with it, one chapter of the history of innovative governance has come to an end. This does not mean that the existing ZEDEs are doomed to ruin or that the ideas they represent have failed. It only signals that difficult negotiations are ahead and that the future is, for the moment, uncertain.

Over the last two decades, Honduras has been the site of remarkable developments. In this small Latin American country, innovation in governance has been given an opportunity to be explored. While the standard model of Special Economic Zones focuses simply on tax or customs concessions, the next stage in their development includes autonomy over wider areas. In Honduras, these jurisdictions came to be known as ZEDEs — an acronym for “Zone for Employment and Economic Development” in Spanish. They are enhanced special administrative regions designed to allow for more self-government and regulatory flexibility, with the goal of bringing about a stable legal and political environment that could attract foreign investment to the benefit of Hondurans.

Contrary to frequent media claims, the ZEDEs are not some private resorts of millionaires lying outside Honduran sovereignty, where there is no regulation and residents have no rights. Instead, the ZEDEs are public, municipality-like entities within the state of Honduras, led by Honduran-born elected officials, whose activities are overseen by a Honduran state commission. They are subject to the Honduran constitution, Honduran international agreements, and Honduran criminal code.

In public discussions, it is often claimed or assumed that ZEDEs have their origins abroad — in the minds of visionary entrepreneurs or idealistic academics. But such a narrative, stressing foreign influences, overlooks the central part of the story, which is that the ZEDEs were — and continue to be — Honduran above all.

How ZEDEs came to be

“It all started with three Honduran jurists: Octavio Sanchez, Carlos Pineda, and Ebal Díaz,” says Dr. Titus Gebel, President of the Free Cities Foundation. “It started with their vision to help Honduras tackle the grave problems it had been facing.” Sanchez in particular had been trying to figure out ways to bring reform to a country mired in corruption, weak rule of law, and the poverty resulting from it. Infamously, Honduras has for long been near the top of the list of countries facing the most violent crime. However, turning a country around is not at all straightforward and, as Sanchez started building his political career, the prospect of widespread reform seemed almost impossible.

In the early 2000s, Sanchez was working for future President Porfirio Lobo. They started a conversation with Mark Klugmann, a US development consultant who had worked in the Reagan and G.H.W. Bush administrations. Klugmann had been advocating for so-called LEAP zones. As Reason Magazine explained:

“Klugmann’s insight was that piecemeal attempts at enacting market reforms over entire economies tend to generate opposition from powerful coalitions of entrenched interests. Why not try doing the reforms all at once, but on a smaller level?”

If thorough reforms were indeed tried on a local scale, such experiments could then become beacons of prosperity that eventually end up having a profound influence on the rest of the country too — just like what happened with Hong Kong and China. The principles Klugmann was advocating convinced Sanchez, who then continued to develop these ideas in the Honduran context. Eventually, creating a new Hong Kong-style autonomous city in Honduras became a powerful shared vision in Sanchez’s circles.

The idea of transforming governance to achieve prosperity is not new. It is rooted in the fundamental insight of New Institutional Economics — that no matter how able or talented people might be, it is next to impossible for them to build themselves up if the institutional infrastructure does not only fail to facilitate growth but even creates further obstacles to development. And when it comes to Honduras, most observers agree: the Honduran people are smart, able, hard-working, and eager to create a better life for themselves. What stands in their way is an impenetrable bureaucratic and institutional maze.

A storefront in Honduras

In 2010, Lobo became President, and Sanchez his Chief of Staff. That was their chance; Honduran Hong Kongs could finally become a reality. But there was still one problem: how to sell something so unorthodox to the Honduran Congress?

Enter Paul Romer, a Nobel-Prize-winning celebrity economist, famous for his advocacy of charter cities. Romer’s ideas seemed to align well with Sanchez’s, the two men got talking and, before long, Romer put his weight behind Honduras too. This was decisive; it was Romer’s international credibility that helped persuade Congress. And so came the first iteration of Honduran special zones — the REDs (regions especial de desarrollo / special development regions).

The REDs were as promising as they were ambitious. Thorough autonomy in many areas was to be granted to them, allowing for unprecedented leaps in governance and institutional design. For example, as detailed in the Journal of Special Jurisdictions, the REDs were even to be allowed to “enter into treaties and international agreements”. However, they asked for too much. Though the legislature overwhelmingly supported the RED proposal, it went beyond what, in the eyes of the Honduran Supreme Court, the Honduran Constitution allowed. In October 2012, one year after the RED statute was passed, the Supreme Court struck down the RED constitutional amendment, which, consequently, made the RED statute itself unconstitutional.

By that time, the idea of special zones was already facing sustained criticism, though no actual zone had been established on the ground. During the short period in which the RED law was in force, conflicts already arose among the figures involved. A Transparency Commission to oversee the REDs had been created, and Romer was likely unofficially promised a leading position on it. However, when the Honduran government signed an MOU with a US entrepreneur Michael Strong to develop the first RED and Romer protested that he had not been consulted, it turned out that he had never been formally appointed to the Commission. Romer felt he was pushed out of the loop and left the Honduran scene shortly after.

Such conflicts gave ammunition to a small but loud minority of Hondurans who were firmly opposed to these special zones. Denunciations of corruption and neocolonialism, and claims of indigenous rights being at risk started spreading in the press. “Media all over are dishonest, but I would say that the Honduran media was egregiously dishonest,” contends Strong, who was working towards the establishment of the first special zone at the time. He maintains that the negative media attitude toward the zones was grossly unrepresentative of the general population. “At one point, somebody said ‘five percent of Hondurans are against this on anti-capitalist grounds, five percent of Hondurans are against this on nationalist or sovereignty grounds, ninety percent of Hondurans just don’t think it’s gonna happen — but if it did, they’d be delighted for the jobs.’”

Where others would give up, Sanchez and his team carried on. After the Supreme Court ruling, a new, improved version of the special zones legislation was prepared. The issue with the REDs had been that the Supreme Court thought that their design was a threat to the sovereignty and territorial integrity of Honduras. In the reformulated version of the legislation, the REDs became ZEDEs. With this new design, some of the autonomy previously afforded to the REDs was limited and all of the previous reservations regarding sovereignty were addressed in a new constitutional amendment that was later challenged again but this time approved by the Supreme Court. The enabling law for the new zones — the ZEDE Organic Law — was then passed in September 2013 by another overwhelming majority. Among other things, this law placed the ZEDEs clearly and unambiguously within the Honduran constitutional order. In place of the former Transparency Commission, the Committee for the Adoption of Best Practices (CAMP) was set up to oversee the ZEDEs.

With the ZEDE law in place and CAMP established, things could start moving forward. However, it took almost four years for the first ZEDE — Próspera — to actually be approved. According to the Journal of Special Jurisdiction citing a close but anonymous source, “[t]he delay […] has been attributed to a combination of infighting and fiscal mismanagement within CAMP, a lack of actual interest in developing ZEDEs from President Hernández [who had assumed office in January 2014], electoral distractions, and potential investors shying away amid political uncertainty”. Only after one of the three Honduran forefathers of the ZEDEs, Carlos Pineda, became CAMP Secretary in 2016 did things start moving forward. Próspera ZEDE was approved in December 2017 and Ciudad Morazán ZEDE one year later. A third ZEDE — Orquidea — then became operational in June 2021. A fourth ZEDE, Mariposa, was nearing its approval by election time in late 2021.

Each of the three existing projects has radically different ambitions and visions for its development. Próspera is focused on governmental and technological innovation, the knowledge economy, and connecting Honduras with international business. Ciudad Morazán is a “blue-collar ZEDE”, targeting working-class and middle-class residents, primarily from Honduras. Orquidea does not include a residential component at all but is purely focused on the production of fruit and vegetables for export. Thanks to the autonomy enjoyed under the ZEDE regime, each of the three zones has been able to choose the legal system and regulations that suit them best. Ciudad Morazán uses most of the Honduran civil code, the export-oriented Orquidea has adopted the law of the US State of Delaware, and Próspera has developed and put into practice a completely new Roatán Common Law Code based on best practices from all over the world together with the innovative open-source legal system Ulex, developed by Chapman University law professor Tom W. Bell. Moreover, Próspera has introduced an “agreement of coexistence” with each individual resident, granting them irrevocable rights and legal stability guarantees. 

“That is exactly the kind of innovation in governance I always talk about,” says Titus Gebel. “You can see it in practice. Here, they said, ‘Hey, let’s try out different things,’ and you have three ZEDEs with three very different models already.” What these projects have in common is an aim to create opportunities, stability, and prosperity for Hondurans in ways that are not possible to pursue elsewhere in the country.

The first row of occupied townhouses and a park in Ciudad Morazán.

Losing the battle for legitimacy

As the activity around these ZEDEs grew, so grew the opposition. From ideological opponents to entrenched interests, the ZEDEs have been subject to fierce attacks. Accusations of wrongdoing or even malintent started springing up everywhere, stoked among the worried public mostly by actors whose positions of power were in some ways threatened by the ZEDEs or whose ideological alignment was incompatible with them.

Massimo Mazzone, the founder of Ciudad Morazán, says that the most common criticisms of his project have also been the most easily shown to be false or inaccurate. The one angle which has received perhaps the most coverage over the years is expropriation. The accusation, which has been amplified and repeated by the press, is that the ZEDEs are threatening to dispossess natives of their land and real estate or even directly involved in their expropriation. 

These critics point to a clause on expropriation included in the ZEDE law (Article 25). However, this article only reserves the right to expropriate land to the state of Honduras, not to the ZEDEs themselves. This makes sense in the overall picture since the ZEDEs have no jurisdiction over land outside their approved zone limits. Furthermore, according to Mazzone, this is nothing but a red herring: “Regardless of what is in the ZEDE law, [the state of] Honduras already has eminent domain. For example, if somebody wants to build a highway or a pipeline, if they have good contacts and if they can convince the government to do it, they can expropriate with or without the ZEDE law under regular eminent domain which is unfortunately common all over the world.” With reference to Ciudad Morazán, he adds: “Of course, for us, that practice is ethically monstrous. We are completely opposed to any type of expropriation. We would never engage in it because it’s repellent from an ethical point of view and it would be suicidal from a political point of view.”

Though perfectly reasonable, such conciliatory statements by the ZEDEs do not tend to be particularly effective in stopping attacks that are launched in bad faith in the first place. In a hostile article giving comments about expropriation an air of legitimacy, The North American Congress on Latin America (NACLA) recounts the establishment of Próspera, highlighting that the locals have come to “understand that the municipal government no longer holds jurisdiction over the 58 acres now incorporated into the ZEDE model. The land has allegedly been transferred from the municipal registry to an independent Próspera ZEDE land registry.” This is immediately followed by the statement: “Land dispossession is an essential concern of communities.” 

It is clear that the authors are interested above all in presenting Próspera as a villain, regardless of the actual content of its actions. A transfer of jurisdiction to Próspera ZEDE’s land registry does not constitute any kind of dispossession — it is more akin to a change of municipality affiliation. Lost in this story is also the fact that the land involved was privately owned, previously unoccupied, and legitimately bought by Próspera’s affiliates, meaning the aforementioned change of municipality affiliation was undertaken with the full consent of the landowners.

Since Próspera has been at the center of many of these expropriation worries, it has repeatedly made it clear that it wants nothing to do with such practices. Próspera’s representatives point to its Charter, which does not include expropriation power in its list of powers (Article 2.04), as well as to a 2020 Resolution that unequivocally rules out all expropriation and reaffirms Próspera’s commitment to only incorporate land at the landowners’ own request. As noted above, all of the land incorporated into Próspera is privately owned and was uninhabited before becoming a ZEDE. Furthermore, special attention has been given to the clarity of the property titles concerned, which in Honduras are often conflicting or incomplete.

Nevertheless, despite all of these assurances and the seriousness with which Morazán and Próspera approach the issue of fairness and consensuality, this line of attack has persevered. For example, a recent article uncritically repeats a claim that “the areas mapped out for ZEDE construction are ancestral lands in the Garifuna region which has been inhabited by the indigenous people for thousands of years. As a result, the construction of ZEDEs would lead to the mass displacement of the native population.“ It should not be necessary to reiterate that developing uninhabited land cannot possibly lead to any displacement and, therefore, such claims have no connection to reality.

In an even more outrageous example of apparent malintent, another article attempts to defame ZEDEs by recalling them alongside examples of violent crime, leaving the unassuming reader with the impression that ZEDE representatives are somehow organized criminals working with the government to oppress the locals. The article features a local man who is afraid of the ZEDEs despite them not having done anything to threaten or harm him. In an instance of supposed displacement that is portrayed by the authors in the worst way possible, it is nevertheless admitted that no land has actually been expropriated. 

Such examples of dishonest or outright fantastical coverage eventually became daily bread for the ZEDEs. For instance, in a barrage of accusations and denunciations, the National Centre of Field Workers (CNTC) claimed that the “social impacts” of the ZEDEs include “forced displacement, increased conflictivity and violence, loss of cultural heritage, migration, and the increased repression of protests”. On what grounds such egregious accusations were being made was not explained, almost as if it was common knowledge that did not need any substantiation in the first place.

These characterizations are strikingly nonsensical. As already noted, all ZEDEs have been established on unoccupied land, so there has never been any potential for any displacement, much less “forced”. The ZEDEs have not engaged in any violence whatsoever, their mission being purely peaceful, lawful, and productive. The ZEDEs have not caused any migration, except where people have moved towards the ZEDEs to follow the job opportunities created in them. There have not been any protests inside the ZEDEs, so no protests could be repressed there; and as to protests happening outside the ZEDEs, the ZEDEs have no jurisdiction over law enforcement there and have no power to make any decisions over how any protests will be responded to. Consequently, rather than being genuine criticisms, such accusations seem to be levied only for reasons of publicity and personal-political gain.

Among other negative consequences, such destructive claims have brought the Technical University of Munich (TUM) to withdraw from their intentions of opening a campus in Próspera, because of “indications of human rights violations”. We reached out to TUM to ask how, in their view, could human rights be violated if only uninhabited areas had been incorporated into Próspera, but the University did not provide any further clarifications. 

Correction: After the TUM ceased their enagagement with Próspera, the University issued a letter in which it stated that it had “no evidence of human rights violations in or by Honduras Próspera” and that the withdrawal from Honduras had been “a result of a change in management” and a “reorientation of the business focus.”

When it comes to organized opposition to the ZEDEs, Mazzone notes that there are many organizations with vested interests whose powers have been threatened by the ZEDEs. Among them is the National Autonomous University of Honduras (UNAH), which enjoys a monopoly on the licensure of other (private) universities in the country. If universities used to be able to be founded only with the blessing of UNAH, but now anyone can establish one within a ZEDE, that is a direct threat to UNAH’s monopoly. Labor unions are another example of such a vested interest. Since the Honduran labor code does not apply within ZEDEs, the power of the unions is thus diminished. A similar principle applies to the Honduran lawyers’ association: if ZEDEs can choose to adopt a common-law framework instead of Honduran civil law (as Próspera has done), that decreases the potential market for local civil-law-trained lawyers. To this list of institutional opposition, Titus Gebel adds that part of the backlash comes from figures involved with the maquilas — Honduran export-based Free Zones that do not enjoy as many concessions and to which the ZEDEs pose a competitive challenge.

The public image of Próspera has not been helped by the zone’s difficult relationship with its immediate neighbor — the village of Crawfish Rock on the island of Roatán. Since its establishment, Próspera has been engaging in community outreach and assistance in Crawfish Rock, trying to build positive and productive relations. Próspera started offering small-business loans, carpentry workshops, and after-school programs to the Crawfish Rock population. A community building was constructed at the expense of Próspera. Later, a savings and mutual investment group was set up among the locals. Próspera also arranged daily school buses for the village children, covering 95% of the cost. In addition, since it broke ground, Próspera has provided employment to many Crawfish Rock residents, mainly through the construction projects in the zone. Even in mid-2022, about 10% of the population of Crawfish Rock is employed in Próspera.

Workers on a construction site in Roatán Próspera.

However, the ZEDE met its opposition when it connected the village to its water supply, providing running water where the only source in the village had been cistern truck deliveries that proved to be unreliable due to supply chain issues during the Covid pandemic. Próspera soon learned that the water from the truck supply had been sold to the villagers by local community representatives, whose position of power was threatened by Próspera’s new taps. Before long, they accused Próspera of profiteering off of the locals by charging for the water, despite the fact that the truck deliveries had had to be paid for as well (and at a higher price), and that Próspera actually asked the villagers what they themselves considered to be a fair price for the water tap, and then charged them that amount. In addition, during the Covid pandemic, Próspera stopped billing altogether and provided water to the village for free. 

One angle of the local leaders’ pushback against Próspera involved its supposed intention to incorporate Crawfish Rock into the ZEDE, presumably against the wishes of the locals. It is true that, on its website, Próspera showed a visualization that included the neighboring community as part of a vision for future development. Though this was certainly a major publicity oversight by Próspera, it was based on the assumption that the community would join the ZEDE voluntarily by referendum, as laid out in Article 38 of the ZEDE law. As already noted, such referenda, along with the decisions of landowners of uninhabited areas to join, are the only legally permitted ways for Próspera to grow. 

Próspera has always been careful to keep a paper trail of their activities to defend themselves against misinformation promulgated by the press. Therefore, when it learned that the Crawfish Rock leaders were looking to restore their old truck water supply, they sought written confirmation from them that they were interested in keeping Próspera’s water running, and that they would pay the mutually agreed bills. Even if the leaders do not actually speak for many (perhaps most) of the locals, Próspera is not in the position to disregard and circumvent them. Therefore, when the local leaders showed no interest in the continued service, Próspera proceeded to withdraw their supply. This episode was subsequently spun in the international press to paint Próspera as a villain trying to strong-arm the local population into submission. Not surprisingly, the detractors were not interested in telling an accurate story.

Roatán island, the main site of Próspera ZEDE. Pristine Bay resort, now part of Próspera, in the foreground.

Over the years, Honduran social media became filled to the brim with concerns and statements that were not based in reality but were repeated ad nauseam nonetheless, fueled by the widespread misinformation perpetuated by the press. A prominent example of this is the contention that the ZEDE framework is supposedly “illegal” because it has been found unconstitutional. This is simply not true. As recalled above, it was the RED regime that was deemed unconstitutional by the Supreme Court and the ZEDE framework was then explicitly designed to rectify the constitutional shortcomings of its predecessor, which the Court recognized and confirmed. Nevertheless, articles continued to be published conflating the two and making legal and moral judgments on that basis. The sheer volume of criticism and anger online created the impression that the whole country was against the ZEDEs and that the public was unanimous in their denouncement. 

Despite all this, an observation on which many proponents of ZEDEs seem to agree is that, whenever criticisms are voiced in a genuine way by ordinary members of the public, they usually stem from a lack of information about what ZEDEs are. “There is no grassroots opposition to the ZEDE law once people understand what it is really about,” explains Gebel. Polling statistics also support the notion that the opposition against ZEDEs is only organized by a loud minority of politically or ideologically motivated actors and vested interests, and that there has never been any broad movement against the zones.

But at some point, the combined force of the interests against it drowns out a genuine discussion about the benefits and drawbacks of special zones. In politics, it is often not the most popular side that wins, but the loudest and most visible. By the end of 2021, it was clear that the ZEDEs had lost the battle for their legitimacy.

The bumpy road ahead

When the negative press was at its loudest, it was easy for the opposition leader Xiomara Castro to include the anti-ZEDE position as one of the major planks of her Presidential campaign. When she emerged victorious in late 2021, she vowed to do away with ZEDEs, which she saw as vehicles for foreign exploitation — a position summarized by the ubiquitous slogan “Honduras is not for sale.”

In April 2022, Congress voted to repeal the ZEDE Organic Law and started the process of repealing the constitutional amendments that had allowed the law to be passed back in 2013. However, the process is not yet complete. Another vote will take place in early 2023 to confirm or reject the constitutional change. At the time of writing, the government remains ambiguous about what next steps it will take.

In addition, even with the law repealed, this only means that no new ZEDEs can be created. This part has indeed been fairly easy, but getting rid of the existing ZEDEs could prove very costly for Castro and her party. In public statements as well as recent interviews, Próspera representatives have made it clear that, as far as they are concerned, the repeal of the law changes nothing for them. Among other legal instruments, they point to investor protection in the form of international treaties that Honduras has signed. These include legal stability agreements that guarantee the status of the existing ZEDEs for the next fifty years. Consequently, abolishing the existing ZEDEs and their corresponding legal status would mean reneging on these obligations, which would make Honduras liable for enormous damages. Próspera has already partnered with White & Case of New York, an internationally renowned law firm in this legal field, to represent it in this conflict.

Whatever the result, one of the likely effects this controversy will have is to scare away some investors who are not comfortable with facing such political pressure. One era for the ZEDEs has ended — an era in which, despite bad-faith attacks from various groups, the Honduran government was essentially on their side. Titus Gebel sees this as a missed opportunity, regretting that so much time was lost due to inaction between 2013 and 2017. Had the ZEDEs started developing earlier, it might have been harder to politically oppose them now. “If you had — I would say — four more years, then a lot of jobs would have been created, people would be living in the ZEDEs safely, enjoying a higher quality of life… The same happened in the ‘80s with the maquilas. There was a lot of opposition to them but after the first twenty thousand jobs were created, no party has wanted to get rid of the maquilas since. The same would have been the case with the ZEDEs; especially in Morazán, which could offer incredible improvements in all aspects of life for the average Honduran worker in that region.”

A plot of land in Ciudad Morazán waiting to be developed. New construction has stalled in the ZEDE due to the recent political uncertainty.

Though fortune has not been on the ZEDEs’ side, they have attracted many innovators and entrepreneurs over their short lifespan, who have already generated considerable innovation in the field of governance. Several new concepts have been created, such as the constitution-like ZEDE Charters; a complete common law code based on the open-source legal system concept Ulex; an electronic land registration and transfer system; and a Citizen Contract — just to name a few. These innovations have now been developed and tried in Honduras and can be reimplemented in future projects all over the world, even if the ZEDEs were to be abolished completely.

But despite the opportunities missed, the Honduran dream is not yet over. The founding fathers who have fought for Honduran special zones are continuing to work to bring progress and prosperity to Honduras. They are now supported by prominent experts across numerous fields, be they entrepreneurs, lawyers, architects, investors, or visionaries. In 2013, Reason Magazine commented that “to become a 21st-century trailblazer [in innovative governance models], Honduras — or at least a small territory within it — must become, well, not Honduras.” But that has never been true. The ZEDEs are a Honduran idea and a Honduran project. They are a grassroots attempt to bring new hope to a country that has run out of options. 

The hope now lives on in the three existing ZEDEs. But elections come and go, and maybe, when the winds change again, all of Honduras will benefit from a kaleidoscope of ZEDEs, experimenting with improvements in systems and institutions to deliver a better world for us all.