Honduras Ponders an Extreme Economic Makeover

In Latin America, branding someone a neoliberal is an offense that falls somewhere in between imperialist and pedophile. So it seems passing strange that Honduras, a poor unassuming isthmus in Central America, is cooking up the most brazen free-market proposal the Western Hemisphere has seen for decades. The idea driving the program: turbocharge the nation's backward economy by creating a semiautonomous, free-market charter city, raised from scratch and run by its own laws, taxes, labor code, police force, and trade rules. Think Hong Kong or Singapore, only with guayaberas, a Central American oasis of economic dynamism chartered to tap investment, migrant workers, and innovation from around the world. Boosters predict a windfall of 5,000 new jobs in just six months and eventually another 200,000 from spinoff industries and suppliers.

this new city-state, inspired by New York University economist Paul Romer, has the backing of the libertarian-minded government in Tegucigalpa. It has also received plaudits from noted economists, pundits, and policymakers across the globe since it emerged nearly two years ago. Many of these wonks see the proposal as a real-world test of a set of economic principles that have been floating around academia since the 1980s. The thrust is simple: the most powerful tools for sparking growth and busting poverty are not just jobs and financial capital but a suite of intangible assets like fair government, reliable rules, and independent courts, plus something even bolder—allowing workers and investors maximum freedom to join or quit a market. As financial writer Sebastian Mallaby put it in an op-ed piece for the Council on Foreign Relations, "the opportunity to opt in to and out of a political system can be at least as valuable as the conventional package of democratic rights."

Among some Hondurans, however, fears abound that these special zones could turn into enclaves of corruption or extraterritorial fiefdoms where national authorities have no role or influence, and all the power is outsourced to investors who answer only to their bottom lines. Never mind that Hong Kong and Singapore consistently rank among the cleanest and easiest nations to do business in. The diablo is in the details, of course, and a number of sponsors have now pulled out or dialed back their support, as Honduran authorities have fiddled with the statutes and doubters have taken their qualms to the country's courts. This comes as little surprise. Since 2009, when the Supreme Court dismissed President José Manuel Zelaya for violating the Constitution in a bid to remain in power, and the Honduran military bundled him off to exile in his pajamas, the country has been one of the most politicized patches in the hemisphere. Over the past three years, Honduras has seethed with drug-related violence, censorship, and a partisan divide that has poisoned politics, hobbled the economy, and spooked investors. The current impasse sadly undermines the best parts of the government's plan, which could do much to help Honduras escape the kind of poverty and red tape that typically sabotage development and chase away investment. "In many poor countries, bad rules stifle growth disastrously," writes Mallaby. It's poetic justice, perhaps, that it's precisely those barriers that are standing in the way of Latin America's best chance in years to try a new approach to development.