Honduras’s Experiment With Free-Market Cities

Posted on February 15, 2011

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A poor country considers a new way to stimulate private investment.

By Mary Anastasia O´Grady

What advocate of free markets hasn’t, at one time or another, fantasized about running away to a desert island to start a country where economic liberty would be the law of the land? If things go according to plan, more than one such “island” may soon pop up here.

Honduras calls these visionary islands “model cities,” and as the Journal’s David Wessel reported from Washington 10 days ago, the Honduran Congress is expected to soon pass an amendment to the constitution that would clear the way to put the concept into action.

The idea is simple: A sizable piece of unpopulated government land is designated for use as a model city. A charter that will govern the city is drafted and the Congress approves it. A development authority is appointed by the national government. The authority signs contracts with the investors who will develop the infrastructure. The city opens for business under rules that act as a magnet for investment.

Sound fanciful? Perhaps, until the chief architect of the plan, 35-year-old Octavio Sánchez, points out that “model cities” are nothing new. “What I love about the concept,” President Porfirio Lobo’s chief of staff tells me in an interview, “is two things. First, that we will employ the best practices from similar projects around the world that have been successful. Second that it is entirely voluntary for people to move in. They are the ones who will protect it.”

During the Cold War, Honduras was known mostly for its loyalty to the U.S. In 2009 it gained fame for deposing Manuel Zelaya because he was trying to extend his presidency in violation of the nation’s constitution. Honduras refused to comply with international demands to restore Mr. Zelaya to power. Now the little country that stood up to the world to defend its democracy seems to be affirming a belief that it needs to change if it wants to ward off future assaults on freedom.

New York University economist Paul Romer is a global champion of the same concept by another name. Here’s how Mr. Romer described his “charter cities” in a Jan. 25 interview with the Council on Foreign Relations’ Sebastian Mallaby: “Some group of people who are willing to try something different say: Let’s go off by ourselves. We’ll develop both different laws, perhaps, but importantly, different norms about right and wrong. We’ll reinforce that in our little culture that operates separately. And then, if these turn out to be a success . . . we’ll not only demonstrate to others that there’s something better, but we’ll also provide a mechanism where people can move from the equilibrium where one set of rules and norms prevails to this other one.”

The germination of model cities for Honduras started in Honduras. The reason is not hard to discern. Reformers have spent years trying to liberalize the economy only to be thwarted by special interests.

As Mr. Sánchez, who also worked in the government of President Ricardo Maduro (2002-06), puts it: “For me, for a very long time, it has been obvious that with the current system, we are going nowhere.” The young lawyer says that almost a decade ago he began thinking about whether it would be possible to designate a small place where all the pro-market reforms would be law. He had no doubt that such a zone would grow fast and that the ideas behind it would spread.

Over time the concept evolved and the 2009 political crisis seems to have generated interest in new ideas. In an interview here last week President Lobo told me that his polling shows that among Hondurans familiar with the proposal, there is broad support.

The amendment is expected to pass Congress within the next three months. This week Mr. Sánchez and Mr. Lobo will travel to South Korea and Singapore, where they will analyze successful model cities to aid in drawing up the first charter. They will also be looking for investors. Mr. Sánchez says that it is important that more than one model city is launched so that rule designers will have to compete.

Can it work? The critics—who interestingly enough seem to be mostly failed planning or development “experts”—say it is unlikely because, well, this is Honduras. But Mr. Sánchez is not deterred. He points out that both Japan and Chile were once proclaimed culturally incapable of development. He also argues that history is on Honduras’s side. Separate legal systems inside cities generated untold prosperity as far back as the 14th century in Northern Europe’s Hanseatic League and more recently in places like the Chinese city of Shenzhen.

Former president Ricardo Maduro is also a fan. “If we want to develop we have to find a way to counterbalance the populism that causes us so much harm. The model city is a way of decentralizing power and connecting people to their government.”

SOURCE: http://online.wsj.com/article/SB10001424052748703843004576139000748751220.html

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