Prosperity Zones are regions within a Host State that are granted a high degree of legal, administrative, and economic autonomy. Rather than being governed by a politician with a fixed term of office, Prosperity Zones are run by a for-profit operating company (an “Operator”). This Operator provides basic internal security, judicial and infrastructure services, but otherwise allows businesses and residents within the Zone to manage their affairs freely.
Prosperity Zones are established through a legal agreement with a Host State. Through this agreement, the Host State retains formal sovereignty over the Prosperity Zone’s territory – including retaining control over its foreign policy and defense – but grants it autonomy in its internal affairs.
Example: Ciudad Morazán, Honduras
An Internally Autonomous Zone
Ciudad Morazán (Morazán City) is a Zone for Economic Development and Employment (ZEDE) on the outskirts of Choloma, Honduras. Although, due to a recent repeal of the ZEDE law, no new Honduran ZEDEs can be created, Morazán’s status will remain unchanged for the next 50 years.
Having ZEDE status means that the city enjoys a certain degree of fiscal and regulatory autonomy. It is operated by a private company, which offers municipal services either directly or subcontractors. The only existing tax is an income tax of 5% on earnings. Of the taxes collected in Morazán, 12% are paid to the Honduran state. Morazán has adopted a simplified version of the Honduran Civil Code, and future minor laws and regulations can be implemented with the approval of a government entity overseeing all ZEDEs.
A Complete City
In practice, Morazán functions as a gated community — one of the most fundamental services provided by the City Operator being security in an otherwise high-crime area. Nevertheless, the project plans to grow into a proper city with all the associated amenities, services, and public spaces. It features a comprehensive master plan developed with Honduran heritage in mind but based on the highest international standards.
Morazán is primarily designed to appeal to locals looking for safety, stability, and legal certainty, though foreign citizens are also welcome. It markets itself as a blue-collar ZEDE, targeting middle- and working-class individuals. When fully complete, Morazán is planned to house approximately 10 thousand residents, though it is designed with possible future growth in mind.
A Humble Success
Construction in Morazán is well underway, with first phases already built. As of mid-2022, there are around 50 finished residential units, with about 70 others being under construction. The city already hosts a small community of 32 permanent residents and 9 registered businesses. Although, through no fault of its own, Morazán has been a target of political attacks, it continues to operate and grow, looking for more prospective residents to move in.
Enhanced Special Economic Zones
Prosperity Zones can be thought of as the next stage in the evolution of Special Economic Zones (SEZs). In a world where there are already thousands of SEZs offering low taxes and tariffs, Prosperity Zones allow for the introduction of systems and policies that give them a competitive advantage. They include:
- An independent legal system (common law or otherwise), independent arbitration and contract enforcement, clearly defined property rights and efficient dispute resolution.
- Liberal economic policies. These could include financing of Operator services via a fixed annual fee (allowing variable taxes to be reduced or eliminated), zero tariffs, flexible labor rules, light regulation, and lack of mandated licensing.
- Improved administration. This could include entrepreneurial governance drawing on best practices from the business world, efficiency-driving and cost-lowering incentives, and liability for errors.
- Political stability, including greater transparency and a “live and let live” ethos. The fixed, contract-based relationship between citizens and Operators would make political lobbying redundant.
A Win-Win Partnership
Prosperity Zones aim to create a win-win partnership between the Host State and the Zone’s Operator. Both parties agree to a contract and legal framework that guarantees the Prosperity Zone’s internal autonomy in a manner that delivers benefits for both sides. The contract would likely require that the Prosperity Zone Operator pay a fee to the Host State to cover national defense and foreign policy costs. This fee would either be calculated as a fixed annual sum or a percentage of the Operator’s revenues or profits.
Prosperity Zones would aim to bring benefits not only to those who live and work within them, but also the regions that surround them. Such benefits can already be seen in the “wealth belts” that have developed around real-world city-states such as Monaco, Macau, Hong Kong. Inhabitants of these belts pay tax in the neighboring states, but often commute into the city-state to trade or access job opportunities. The same dynamic will likely play out in the case of Prosperity Zones.
Furthermore, Prosperity Zones can be created on previously underdeveloped or uninhabited areas, minimizing the probability of conflict and ensuring that the Host State can only gain from their establishment.
Learning from History
Why do we believe that Prosperity Zones will succeed? History shows us that developing nations can achieve affluence within a short period of time when they adopt liberal economic policies. Singapore serves as a good example. The Southeast Asian city-state was able to overtake the world’s average GDP per capita within 30 years of its independence, and that of the USA within 50 years. A similar dynamic played out in post-war Hong Kong.
Prosperity Zones also allow states that face significant obstacles to reform to trial policies on a small scale before they are rolled out nationwide. China’s Great Liberalization that began in the late 1970s demonstrates how this dynamic can play out in practice. Seven economic zones were created along the country’s coast, which allowed for experimentation with liberal policies. The relative affluence of cities like Shenzhen, Zhuhai and Xiamen today – and subsequent adoption of similar policies across China – attests to the success of this model.
The implementation of a Prosperity Zone requires a contractual agreement between the Zone’s Operator and the Host State. In this agreement, precise conditions are set out that guarantee the security and autonomous legal environment of the Prosperity Zone. To give investors and settlers confidence in the Zone’s long-term future, the legal framework would ideally be supported by constitutional protections or guarantees codified in international law.
The Host Government may decide to grant the Prosperity Zone:
- Business and commercial freedom, including autonomy in labor law, building law, environmental protection and currency regulation.
- Financial and social freedom, including the power to establish an independent tax, customs or social regime.
- Strong property rights, including the ability to manage the acquisition of real estate and other property in accordance with the Zone’s rules.
- Legal residency for the Zone’s inhabitants, including the right to enter and leave the zone freely. Additional rights could be set out in a Resident Contract, recognized by the Host State.
- Self-governance. Justice, police, and administration would be carried out solely by the Prosperity Zone’s Operator and its appointed agencies.
- Human rights. Within the Zone, residents would be granted fundamental freedoms such as freedom of opinion, freedom of assembly and equality before the law.
- Migratory control, including the power to expel unwanted persons or deny them entry, even if they are citizens of the Host State.
- Recognized autonomy, guaranteeing the status of the Prosperity Zone for a long period of time (ideally 99 years or longer), regardless of changes of administration within the Host State.
- Investor protection, guaranteeing protection of all investments made within the Prosperity Zone.
To ensure the success of the Prosperity Zone, it would be in the interests of its Operator and the Host State to provide as many of the above assurances as possible. These assurances are what distinguishes a Prosperity Zone from a Special Economic Zone. They help the Zone to secure long-term investment capital and attract skilled residents.
A Gamechanger for Development
Prosperity Zones represent a practical path to fast-tracking economic development. They allow for new policies to be trailed on a small scale, in a manner that circumvents the challenges of changing an entrenched political order from within. Through the adoption of a market-based framework, they stand to dramatically improve standards of living, not only for their own residents but for those of their Host State as well.