Disruption! What the Honduran Elections Mean for the CAFTA Economies
EspañolThe competitive balance of the countries inside CAFTA may be transformed by the results of Sunday’s election in Honduras in a way that few people have begun to think about, but that could have far-reaching effects.
One issue that will be determined by the outcome of the election revolves around a new Honduran investment regime called Zones of Economic Development and Employment (ZEDE). Honduras reformed its constitution this year to enact the ZEDE legislation. The several congressional votes were almost unanimous, offering a mandate that stretched across the breadth of the ideological spectrum and brought government and opposition together. Public opinion polls also show 70 percent support for the measure.
But elections produce disagreements, and on this initiative the two leading candidates disagree. While Juan Orlando Hernández, the candidate of the governing party, took the lead on this legislation and is committed to implementing the new special ZEDE investment regime, his closest rival, Xiomara Castro, the wife of former president Mel Zelaya, has declared that she would attempt to repeal the ZEDE law.
For Honduras as well as its CAFTA neighbors, the future of the ZEDE is waiting for the results of Sunday’s election.
There are some indications regarding who is most likely to win. While the publication inside of Honduras of election polls is not permitted in the last month before the election, there is no restriction on conducting the polls. Two weeks ago, a serious poll showed Hernandez ahead by 7 points over Castro, while last week another serious poll showed him leading by 8 points. The last published polls done in late October showed Hernández ahead by about 5, and having grown his support significantly in the previous weeks, that tendency appears to have continued.
What would a victory for Hernández mean in terms of the comparative investment competitiveness of the countries within the region? Tremendous disruption.
El Salvador, Guatemala, and Nicaragua, the countries that border Honduras, all typically compete for the same foreign investment that locates production in the Central American region in order to export to the United States market under the CAFTA trade protection.
The Honduran ZEDE, if well-implemented, would become a uniquely attractive jurisdiction, likely to create a new leadership within the CAFTA space.
Other Central American countries have not yet paid much attention to what Honduras has done, in part because of the confusion that this is simply another variety of Zona Franca, Special Economic Zone, or Free Zone — of which there are about 3,000 in the world. Indeed, the names can at times be confusingly similar: Cuba has just created a new special economic zone under the ZED designation, while Ecuador also has free zones called ZEDE.
The Honduran LEAP
The difference is that the new Honduran special zones are not just about reduced tax rates or similar financial incentives, but rather about creating new jurisdictions with unique Legal, Economic, Administrative, and Political (LEAP) characteristics that are designed to produce unique competitive advantage for creating jobs and attracting productive investment.
Within the CAFTA space, the challenge for other countries is how will they compete with an integrated LEAP framework to attract new investment, and avoid the risk that existing investors and employers decide to relocate.
The competitive challenge that Honduras presents to its CAFTA rivals is in four dimensions:
The implementation of the concept of “institutional leapfrogging” can mean that the ZEDE will offer investors a level of legal credibility and predictability that far exceeds anything in the region. The legal institutions for the Honduran zones are based on the use of dispute resolution by mandatory arbitration and the creation of a distinct judiciary that will operate under British Common Law.
The economic framework for the Honduran zones goes beyond low taxes and free trade, to emphasize transparent property rights, protection of contracts, use of international currencies, and best international practices to maximize competitiveness.
The administrative dimension determines whether what actually happens on the ground is the same as what was written on paper. For that reason, the Honduran zones are designed to create a non-political executive administration with business-friendly efficiency, plus customized, simplified, and predictable regulatory frameworks to attract key industries. In addition, the Honduran ZEDE will include a special security regime to preempt the problem of rampant crime in the region.
The governance model establishes an international Committee for the Adoption of Best Practices. In essence, that committee will function as a board of trustees designed to accelerate the arrival of productive investment by guaranteeing investors that the rules of the game that are offered will be respected and maintained, placing a central emphasis on transparency under rule of law, while protecting political stability so that the zone is attractive for the major long-term investment needed to quickly eliminate poverty. Unlike the “Charter Cities” idea, there is no neocolonial arrangement and no foreign government is involved.
In the short run, the potential success of the Honduran ZEDE may appear to be a threat to the economies of the neighboring countries, and there may be fears that it will cause some jobs and investment to leave other CAFTA countries to relocate to Honduras. However, the more important and lasting effect may be to spur the other CAFTA countries to begin creating their own LEAP jurisdictions, and in the process the entire region will dramatically increase its competitiveness relative to Asia.
By creating special LEAP zones that are diversified and flexible, Central America has enormous potential to become a comprehensive “near-sourcing” alternative to China in the worldwide supply chain of the United States market. In fact, the economic success of China means that it has largely lost its wage advantage over the CAFTA space.
With an integrated LEAP strategy, Central America could soon become — as southern China has been — the fastest growing economic region in the world. That first, historic step is one thing that may be decided in the Honduran election on Sunday.