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The New Republic Knew Not What It Was Doing

By: Mark Lutter - Dec 17, 2014, 4:49 am

EspañolThe New Republic has published a hit piece on the Zones for Employment and Economic Development (ZEDEs). The gist of the critique is that Hondurans are selling their sovereignty to multinational corporations with the hopes of economic development, but that this will in fact lead to more poverty and greater wealth inequality.

I previously wrote a response in a snarky tone, but I have decided that would be unhelpful. So first, there are two factual errors in the piece. Danielle Marie Mackey, the author, names the Committee for the Application of Best Practices, though it is actually the Committee for the Adoption of Best Practices (CAMP being the Spanish acronym). Second, Grover Norquist is listed as a vice president of Polaroid, a position held by his father.

Mackey is also unfamiliar with the current state of the economics profession. It would be wrong to blame her for this, as it is not her specialty, but it is important to state certain facts, because they are necessary to understand the ZEDEs in a more scientific light.

Rich countries are rich because they have good institutions. Poor countries are poor because they have bad institutions. This is not some conspiratorial conservative viewpoint (though most of the CAMP members Danielle named identify as libertarian). Rather, that institutions matter is a consensus among economists. It is supported by some of the most cited economists: Daron Acemoglu and Andrei Shleifer, as well as numerous Nobel Laureates. Even the World Bank, a renowned bastion of conservatism, publishes a Doing Business Index that captures part of the importance of institutions.

This does not mean privatizing everything, as Danielle seems to imply. It means functioning courts, functioning police, and predictable government. Nor is it a left-right issue. For all the differences between Sweden and the United States, Honduras would do well to become half as rich as Sweden. Good institutions are entirely compatible with a welfare state.

The murder of Miss Honduras 2014 (pictured right) and her sister in November reminded the world of the Central American nation's perilous crime and impunity, and the need for reform that the ZEDEs offer. (@alvarado_majo)
The murder of Miss Honduras 2014 (pictured right) and her sister in November reminded the world of the Central American nation’s perilous crime and impunity, and the need for the ZEDEs alternative. (@alvarado_majo)

The basic problem is that Honduras, along with many other third-world countries, does not have functioning courts or police. Nor do they have basic rights to engage in commerce with others. If a Honduran wants to start a business, he must pay 39 percent of his per capita income, and he must wait 82 days to get the requisite construction permits. Economic growth is not possible without the creative destruction that comes with new businesses.

Further, experiences around the world have shown that when a country or region adopts good institutions, economic growth follows. Hong Kong, Singapore, and Dubai are classic examples. China, following Special Economic Zones, and South Korea are two more. Moreover, it is difficult to underestimate the importance of economic growth. A 5 percent annual growth rate, half that of China, would increase a countries GDP eightfold in 42 years. Such growth would turn Honduras into a middle-income country with a per capita GDP of US$18,000. To further emphasize this point, economic growth means fewer babies dying.

Now, while I have advocated for private cities, the ZEDEs are not that. The executive of the ZEDE is the technical secretary who is appointed by CAMP, a government committee. CAMP also nominates a set of judges, of whom the Honduran Judiciary pick one. The Hondurans have thought long and hard about how to set up different legal systems, so as to jump start economic growth.

Of course, this does not mean the ZEDEs will be successful. As in most third-world countries, as well as a number of first-world ones, corruption is always a problem. The ZEDEs might be used to enrich already wealthy politicians and their families. However, Honduras would not need ZEDEs if it already had good institutions. The trick is getting a first-world legal system out of a third-world one.

Herein lies the dilemma, which Honduras has taken more steps to solve than any comparable country: how do you move from bad institutions to good institutions? England took hundreds of years. Japan took a US occupation. South Korea and Singapore took benevolent despots. None of these are realistic options for Honduras, or the rest of South America and Africa.

Honduras should be celebrated for taking a substantive step toward alleviating poverty. As Danielle acknowledges, the ZEDEs are only going to be built in rural land. The worst case scenario is for a lot of rich white investors to lose money. The best case is a far richer Honduras, which, I remind you, means fewer babies dying.

Edited by Fergus Hodgson.