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Are you interested in new forms of governance?
Our debate today works with the article titled The Honduran ZEDE Law, from ideation to action from 2021, by Jeffrey Mason, Carl Peterson, and Daniela Ivette Cano, published in the Journal of Special Jurisdictions.
This is a great preparation to our next interview with Niklas Anzinger in episode 386 talking about the opportunities in the Prospera Honduras governance experiment.
Since we are investigating the future of cities, I thought it would be interesting to see how new forms of governance in special economic zones could work. This article presents the legal framework for the Honduran special economic zone, highlighting and contrasting economic and governance models within this innovative legal framework.
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Welcome to today’s What is The Future For Cities podcast and its Research episode; my name is Fanni, and today we will introduce a research by summarising it. The episode really is just a short summary of the original investigation, and, in case it is interesting enough, I would encourage everyone to check out the whole documentation. This conversation was produced and generated with Notebook LM as two hosts dissecting the whole research.
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Speaker 1: our focus today is on one of the most compelling and I think controversial experiments in modern governments, the Zonas de Empleo y Desarrollo Económico, or ZEDEs in Honduras. These zones established through a major constitutional amendment and a statute in 2013 are a really radical attempt to solve entrenched poverty by granting vast legal, fiscal and regulatory autonomy, essentially creating small self-governing jurisdictions within the national territory.
Speaker 2: The concept is undoubtedly dramatic. It’s modeled in part on the Charter City’s idea developed by economist Paul Romer. It seeks to replicate the success of special economic zones you might see in say, China. But the core question for us is whether this sweeping autonomy, which includes devolved administrative power, fiscal independence, and even independent court systems, is truly a legitimate and sustainable mechanism for spurring economic transformation.
Speaker 1: And I’ll be arguing that this autonomy isn’t just beneficial. It’s entirely necessary. The Zeds provide the crucial governance structure and legal predictability needed to attract the sustained international investment that can move Honduras toward economic parity. The existing national institutions have frankly failed, and this model is the essential intervention.
Speaker 2: I come at it from a different angle. I believe the Zeds framework is fundamentally compromised not by its economic goals, but by its political origins. The structure itself poses, I think unacceptable risks to national sovereignty and fundamentally challenges the notion of democratic self-determination, especially when you consider the land rights of already vulnerable Honduran populations.
Speaker 1: To understand the necessity we really have to look at the economic reality. Honduras lags dramatically. Its average income is significantly lower than its neighbours El Salvador and Guatemala. The ZEDE model was designed to leapfrog that bureaucratic inertia and historical corruption. Article four of the ZEDE statute. It establishes explicit legal and fiscal independence. It gives the zones the power to create their own budgets, collect and manage taxes locally, and sets service rates. This cuts the dependency on a central government that’s proven unreliable. The most transformative innovation, though, I would argue, is judicial autonomy, which is laid out in Article three. The zones are authorized to establish independent court systems that can adopt sophisticated legal traditions like common law or specific foreign models like the Dubai International Financial Center model. For international investors, this judicial independence is vital. It addresses the key barrier of a weak national rule of law. And furthermore, the political history you mentioned while troubled, it actually led to legal refinement. Articles, 2 94, 3 0 3 and 3 29 of the Constitution were amended precisely to anchor the ZEDE law in the highest law of the land, avoiding the constitutional trap that struck down its predecessor,
Speaker 2: right? That emphasis on technical legal mechanics is understandable, but let’s talk about the legitimacy deficit created by the political process itself. You mentioned the precursor effort, the reds, which were declared unconstitutional by the Supreme Court back in 2012. Now the basis for that ruling was Article 3 74 of the Honduran Constitution, which prohibits constitutional amendments that alter the form of government or the national territory. The court ruled the Reds violated this fundamental restriction. What followed that ruling was an unprecedented political crisis. The four constitutional chamber justices who voted against the Red Amendment were swiftly and illegally removed by Congress. They were escorted out during a session conducted in the middle of the night. That image judges being removed at 4:00 AM It cast an indelible shadow over the institutional integrity that was necessary to pass the subsequent ZEDE law in 2013. The new ZEDE legal language may have been engineered to technically survive Article 3 74, but the resulting quasi corporate governance structure supervised by the committee for the adoption of best practices or camp. It just lacks popular consent.
Speaker 1: I acknowledge the drama surrounding the 2012 crisis. The fact that the ZEDE law did go through subsequent robust constitutional amendments that survived judicial scrutiny suggests the legal deficiencies of the precursor were successfully addressed. They didn’t just tweak the language. They amended the articles related to the integrity of the state and territorial boundaries. They explicitly reaffirmed that the ZEDEs operate under the constitutional umbrella of Honduras. Avoiding that claim of creating a state within a state. They found a legal pathway to governance innovation, ensuring the framework is grounded in the constitution.
Speaker 2: But the legal gymnastics, however sophisticated, they don’t erase the origin story. A legislature overriding judicial independence to install a development model favoured by a narrow political elite. Moreover, the vast evolution of administrative, fiscal, regulatory and judicial authority still creates a potentially unaccountable quasi corporate structure. This fundamentally challenges the notion of popular sovereignty, article five of the Honduran Constitution, which states that all power emanates from the people.
Speaker 1: But that brings us back to judicial autonomy.
Speaker 2: exactly which you lauded as the core innovation. And while the Z Day statute mandates a court of protection of individual rights, and it allows appeals to international tribunals, the system is being built from scratch within a state that ranks in the 15th percentile globally for rule of law. When international businesses come in, they rely on a known system. But the shift to exclusive common law or tailored foreign jurisdictions like the UX system used by Prospera may fundamentally alienate local Hondurans who operate under a civil law tradition. They lose familiar recourse for the sake of attracting foreign capital. Your substituting accessibility for predictability,
Speaker 1: I see why you’d frame it that way, but I would frame the judicial shift as a critical elevation of standards, not an alienation. The independent courts adopting systems like the UX model, which is essentially a commercial common law system tailored for the ZEDE, provide predictability that the national system simply cannot offer. And this predictability is a protection for all residents, not just foreign investors. And crucially, the statute includes real checks. Article 16 explicitly requires ZEDEs to indemnify Honduras. If the central government is ever condemned by an international body for rights violations that originated in the zone even more powerfully, ZEDE are mandated to comply with recommendations from international human rights bodies. So this mandated adherence to international standards means the justice standard inside the ZEDE is intentionally held higher than the national average. It’s an insulated system designed to be more robust.
Speaker 2: That sounds compelling. On paper. A ring-fenced legal standard. The institutional weakness persists. I mean, who controls the integrity of that ring fence? The ZEDE judicial system is ultimately overseen by a judicial council tied back to the politically appointed camp. So if the political conditions that led to the judicial crisis of 2012 reassert themselves, the perceived independence of the ZEDE courts could just vanish instantly. Institutional trust can’t be legislated overnight, and legal certainty for a foreign investor is very different from legal justice for a local resident. This question of justice is most acute when we look at land rights. The threat of expropriation is a massive concern, particularly for historically marginalized Afro indigenous groups like the Garifuna, whose claims to communal land, hof and tenuous in the National Registry. Now, article 43 of the ZEDE statute attempts to address this by prohibiting violations of indigenous property rights and incorporating ILO Convention 1 69, which requires free prior and informed consent.
Speaker 1: That’s a valid point given the historical context of land dispossession in Honduras. However, the statute itself provides stronger land protections than past hon and governmental policies. Article 28 guarantees just compensation for titled land. That’s a necessary benchmark, and as you noted, article 43 mandates ILO 1 69 compliance, which while challenging to enforce perfectly. A significant legal safeguard that passed regional development efforts entirely lacked. What’s perhaps more persuasive is the behaviour of the ZEDE developers themselves. They recognize the public relations and legal risk here. Ciudad Morazán, the industrial ZEDE goes beyond national law requiring compensation at 200% of fair market value or sustained loss, whichever is greater, even more dramatically. Prospera has publicly issued a resolution affirming that it will not use any expropriation powers, and will only incorporate new territory via voluntary transactions. This demonstrates a clear intent by the developers to mitigate that historical risk and ensure that their projects are built on consent, not coercion.
Speaker 2: I’m sorry, but I just don’t buy that. The voluntary actions of a single developer, however well-intentioned, negate the latent power granted to the Honduran government under Article 25. That article still allows the government to expropriate land to create a zone, especially in areas deemed low population. And while Article 28 requires just compensation, who defines just compensation when you’re dealing with communal land that may not be formally titled. Where its cultural value far exceeds any market valuation. The power imbalance between a multinational corporation and an indigenous community during a negotiation for a voluntary transaction, it remains highly coercive. Regardless of the promise of 200% compensation.
Speaker 1: I see the cynicism regarding the power imbalance, but the voluntary public commitment by Prospera to forego expropriation powers sets a valuable precedent. Why would they do this? Because their entire economic model relies on trust instability. If a Z were to become embroiled in human rights violations or forced displacement, the entire economic project, which relies on attracting sophisticated knowledge workers and finance, it collapses. The economic incentive structure works to protect the land rights because abuse would instantly jeopardize the very foreign investment the Zed exists to attract.
Speaker 2: That assumes the Zeds always prioritize long-term reputational integrity over short-term fiscal gain, which is a big assumption for an autonomous quasi corporate entity. But
Speaker 1: that autonomy when applied to economic strategy is where the ZEDE model demonstrates true innovation. And we can see that in the case studies. Let’s look at the two distinct models. Prospera on the island of Roan targets high income knowledge sectors. Finance, specialized tourism. Its regulatory approach is focused on maximum streamlined registration and adopting the most flexible commercial codes. Contrast that with Soat Mosan near the industrial hub of Troma, which focuses on industrial development, maquila style operations, specifically targeting Honduran residents. This diversity shows the intended flexibility. They aren’t one size fits all. Moreover, both demonstrate commitment to improving labour standards. Prospera mandates a minimum wage 10% above the national minimum, and so that moans labour statute detailed in chapter four includes explicit legal protections for collective bargaining and union membership. This directly addresses the criticism that ZEDEs promote weak labour protections. In fact, they’re mandating higher standards.
Speaker 2: That’s a compelling argument for economic specialization, but we have to consider the risk inherent in such massive autonomy in social policy. Article 33 gives ZEDE’s Broad authority to create their own separate systems for education, health, and social security. When you couple this with Article 34, which is a radical market oriented move to prohibit mandatory professional licensing. You create conditions where national social welfare standards could deteriorate workers might be forced to accept ZEDE specific social security systems or unregulated professional environments simply to get a job. Furthermore, the fiscal autonomy granted in chapter four prioritizes extreme fiscal competitiveness above national contribution. Article 29 mandates a policy of low taxes. Article 30 allows zones to create their own monetary policy, potentially bypassing national exchange controls. And crucially, article 32 allows CDEs to operate as offshore tax and customs areas. This framework risks creating internal tax havens that primarily benefit foreign capital without really integrating into or contributing proportionally to established national social frameworks.
Speaker 1: The intent isn’t to undermine national frameworks. To create functioning models that can eventually be scaled nationally, like a laboratory for effective governance, and the integration is mandated, not optional. The ZEDE e statute requires that no less than 90% of workers behind Doran, and that those workers receive at least 85% of the total wages paid out. This ensures that the economic activity and wealth generation remain fundamentally connected to the national workforce. The goal is rapid sophisticated development that uses international standards and clear property protections achieving economic success, vital for lifting millions out of poverty.
Speaker 2: And while the statutory language promises robust safeguards, the fundamental issue of legitimacy. Stemming from the political origins and the creation of this highly autonomous, quasi corporate governance, it can’t be ignored. The risks to communal land rights and the erosion of national standards for social welfare and democratic participation, they remain high creating specialized, insulated jurisdictions no matter how sophisticated. Cannot fully compensate for a lack of foundational institutional trust in the national government that authorized them.
Speaker 1: We’ve rigorously examined the structural safeguards, the mandatory compliance with international human rights bodies, the constitutional reframing to overcome that article 3 74 hurdle, and the voluntary actions by developers to mitigate historical land risks. The ZEDEs represent a calculated, constitutionally tested effort. Establish rule of law and economic opportunity where the traditional state has long failed,
Speaker 2: and I maintain that the concentration of quasi sovereign powers in the hands of appointed bodies represents a significant forfeiture of popular sovereignty for the promise of market efficiency. The foundational legitimacy deficit remains the ZEDE experiment’s greatest vulnerability, threatening to unravel any economic gains. It political instability, resurfaces.
Speaker 1: The true measure of the ZEDE experiment will ultimately rest on whether these autonomous zones can deliver on their promise of sustained equitable economic opportunity. While adhering faithfully to their constitutional and international commitments to protect the rights of the Honduran people, it’s an unprecedented test of development theory in practice.
Speaker 2: Indeed and the divergence in models between prospers the high-end legal innovation hub and Ciudad Morazán. The Industrial Employment Center offers a rich landscape for continued analysis as they mature.
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