What Are the Zones for Employment and Economic Development in Honduras?
In the early morning hours of April 21, the Honduran Congress unanimously repealed a 2013 law governing the establishment of Zones for Employment and Economic Development (Zonas de Empleo y Desarollo Económico, or ZEDEs). The ZEDEs featured in President Xiomara Castro’s election campaign, where they were often connected to the policies of the former president, the recently extradited Juan Orlando Hernández. Indeed, following the vote, Castro took to Twitter to thank congressional president Luis Redondo for “defeating those who tried to steal our sovereignty,” a pointed reference to the former president.
Yet, while the ZEDEs are fiercely opposed by the Castro government, the political rhetoric around the zones is often exaggerated when it comes to how the ZEDEs truly operate, whether they actually threaten Honduran sovereignty, and what lies ahead for the Honduran economy following the recent vote by Congress. Given that the ZEDEs are home to thousands of employees and have been the recipients of tens of millions in foreign investment, answering these questions ought to be high priority for determining Honduras’s growth and future. They also offer a strong warning to the Castro administration about how international investors will see the new government in Honduras, its commitment to rule of law, and facilitating greater investment for economic growth.
Q1: What are the ZEDEs?
A1: The ZEDEs are a type of special economic zone (SEZ) that stand out for giving zone administrators a high degree of autonomy. Adopted in 2013 as an amendment to the Honduran constitution, ZEDEs act as special subdivisions of Honduras. Within their borders, ZEDEs are free to adopt their own taxation systems and legal regimes, subject to oversight by a national committee discussed below. The latter is critical to ZEDEs, as it enables them to borrow from the best practices of, for instance, French, U.S., or Japanese law, should the administrators find that framework more conducive to establishing a business than Honduran law. Indeed, within the ZEDE, laws could even be drawn from a mixture of different systems depending on the best fit. In addition to organizing their own legal systems, ZEDEs are empowered to provide their own civil services, including housing, utilities, and law enforcement.
However, ZEDEs must comply with Honduran law “in all topics related to sovereignty, application of justice, national defense, foreign relations, electoral matters, and issuance of identification documents and passports.” Further, any legal framework or combination of legal regimes adopted by a ZEDE must provide equal or greater protection of human rights than those found within the Honduran constitution. An international body consisting of 21 members called the Committee for Adoption of Best Practices (known by its Spanish acronym as CAMP), was also organized to manage the approval, constitution, and oversight of new ZEDEs.
Since its adoption, the ZEDE model has faced accusations by opponents that the zones have a connection to corruption in President Hernández’s government. These opponents contend that there is no practical difference between the 2013 ZEDE law and the 2011 “Special Development Regions” law (known by its Spanish acronym, RED), advocated for by Nobel Prize-winning economist Paul Romer, which the Honduran Supreme Court struck down as unconstitutional in October 2012. Based on this premise, opponents of the ZEDE framework argue that the January 2014 Honduran Supreme Court decree upholding the constitutionality of the 2013 ZEDE law was a result of corruption, pointing to the congressional impeachment and replacement of four justices who opposed the 2011 RED law, which was overseen by Hernández.
The merits of this contention are subject to scrutiny because the vote sustaining the 2013 ZEDE law was unanimous, and there are significant differences between the 2011 RED law and the 2013 ZEDE law from a sovereignty perspective. For example, the 2011 RED law allowed non-Hondurans to have a direct policymaking role in its national oversight committee, whereas the 2013 ZEDE law did not. Also, the 2013 ZEDE law included a specific savings clause barring it from being interpreted to supersede core attributes of sovereignty, whereas the 2011 RED law did not. However, ZEDEs continue to find themselves under attack, and from nearly their inception, have been the target of allegations that they serve as vehicles for the erosion of Honduran sovereignty.
Q2: What are the controversies surrounding the ZEDEs?
A2: Criticisms of ZEDEs are diverse. They range from the way in which the ZEDE project came into existence to the project’s connection to the administration of highly unpopular President Hernández, and from corruption and transparency allegations to alleged violations of the rights of Indigenous peoples. Some opponents have also raised concerns that ZEDEs do not achieve the main goals implied by their name: serving as zones of employment and economic development. Others have claimed that ZEDEs abrogate the constitutional rights of Hondurans by giving the enterprises tasked with running the zones a voice in decisionmaking within the zone (often, a certain number of votes on the local council).
Corruption in Honduras is widespread. Some have speculated that the level of capital inflow attracted by a ZEDE make it susceptible to corruption and lack of financial transparency. However, ZEDEs that are organized by U.S. promoters and organizers are subject to a number of important regulatory safeguards, including the Foreign Corrupt Practices Act (FCPA). ZEDE operators make a strong point when they reference Honduras’s endemic corruption, showing a marked improvement in ZEDEs over the baseline.
Thus far, there have been no substantiated cases or prosecutions of ZEDE investors or operators engaged in the payment or solicitation of bribes. Given the contentious nature of the ZEDEs within Honduras’s current domestic politics, these organizations have likely been incentivized to become even more rigorous and transparent in their anti-corruption efforts, not less. Moreover, one ZEDE has both adopted a rigorous eResidency program that applies investor-grade customer (Know Your Client) rules against money laundering and has also published all its official actions and meeting minutes online in an effort to enhance transparency.
The issue of Indigenous rights often arises in discussions about ZEDEs, especially in the context of the approval process. Some have raised the issue of consultation and prior consent regarding the land on which ZEDEs are constituted. According to the laws governing ZEDEs, they should be placed in areas that are not being used for anything else, thus making prior consultation unnecessary. Opponents have voiced concerns about the establishment of ZEDEs near lands with large Indigenous and Afro-Honduran populations. Historically, these populations have been excluded from conversations about rights to ancestral lands.
However, the ZEDE Organic Law further obligates the zones to protect the property rights of Indigenous communities and to apply to International Labor Organization Convention No. 169 concerning the protection of Indigenous and tribal peoples. More broadly, the law encourages ZEDEs to make every effort to include Indigenous and Afro-Honduran communities in the economic opportunities they generate. Combined, these provisions led one study to conclude that the ZEDEs offer some of the most innovative mechanisms for the protection of Indigenous rights found among SEZs.
A list critique is that ZEDEs do not deliver on their promise of delivering jobs or promoting economic growth. Here opponents point to an estimate from the Forum on Foreign Debt and Development of Honduras (FOSDEH), which claimed that ZEDEs would generate a maximum of 15,000 jobs, a small fraction of the 200,000 that the National Party claimed they would provide. Given that the primary goal of the ZEDEs was to spur economic growth, these allegations are worthy of careful examination. Unpacking them, however, gives cause for skepticism.
While the job creation estimates are highly debatable, FOSDEH’s research more likely reveals a premature prediction on the part of the ZEDEs’ marketing than a fundamental flaw with the ZEDE framework. In Panama, the Colón Free Zone and Panamá Pacífico SEZ, two of the most productive and well-established SEZs in the hemisphere, directly employed a combined total of just 22,000 workers in 2010. However, the zones show much higher levels of formal employment, higher wages, and significant spillover effects for surrounding communities.
Additionally, a series of studies have highlighted the potential for ZEDEs to rapidly meet and surpass the growth rates of Panamanian SEZs. A 2021 report from the University of Virginia’s Darden School of Business outlines how a single ZEDE could be responsible for generating nearly 150,000 jobs early in its development process. Not only is this figure an order of magnitude higher than FOSDEH’s estimate, but the University of Virginia report also offers a more in-depth treatment of ZEDE employment, calculating job creation figures across 10 different projects.
Q3: What is the promise of the ZEDEs?
A3: ZEDEs are far from the only option for SEZ organization and governance being considered in Central America. In recent years, China has worked assiduously to consolidate its own special economic zones throughout the hemisphere. Beijing has found significant success in El Salvador, where it has forged an agreement to develop a zone encompassing around 14 percent of Salvadoran territory and nearly half the country’s coastline. In addition to the sheer amount of territory this zone would encompass, U.S. and European construction, telecommunications, tourism, and shipping companies would be barred from attempting to operate within the zone.
Furthermore, while China boasts some of the largest SEZ success stories, there is little indication that Beijing is seeking to replicate in Central America the systems and practices that made zones like Shenzhen so successful, namely, local-level autonomy and openness to a wide array of foreign businesses. Indeed, around the world, Chinese development projects typically employ few local workers and often result in the client countries assuming unmanageable levels of debt. Should the Chinese model become ascendant in the Americas, the result will be a far less open and competitive environment for private business.
In contrast to this relatively opaque, anticompetitive vision of SEZ development, ZEDEs are promising as a vehicle for the introduction of capital in a manner closely aligned with U.S. development, strategic priorities, and geopolitical objectives. In particular, the existence of the ZEDE Organic Law and CAMP as a mechanism for the approval of new ZEDEs helps to mitigate the ability of other countries or state-owned enterprises to extract large territorial concessions with extensive restrictions on the types of companies that can compete inside a zone’s borders.
Another feature of the ZEDE model worth noting is the explicit intent of many of the original drafters and developers that this form of SEZ could be exported to countries beyond Honduras. An interested country would need only to look at the ZEDE Organic Law as a starting point. This ease of adoption also makes ZEDEs appealing as a credible counteroffer to other SEZ regimes. The development of a regional network of ZEDEs would also be in line with recommendations published by the World Bank outlining the need for improved cross-country networks in the Central American SEZ space. Should the Honduran ZEDEs continue to bear fruit, the model could lead to a new surge in private sector led investment and development throughout Central America.
Q4: What does the recent vote mean for the future of the ZEDEs and Honduras’s economic development generally?
A4: The April 21 vote alone does not dissolve the ZEDEs. Since the ZEDEs have been established in the Honduran constitution, a constitutional amendment is needed to remove them from the relevant articles. This requires a two-thirds majority vote within the Honduran legislature over two successive legislative sessions, of which the recent vote would only be the first, and would need to be ratified in the 2023 legislative session.
After these political hurdles, the Honduran government would face a raft of legal consequences. It would need to manage its obligations to ZEDE investors under constitutional due process principles, international law, and myriad treaty commitments. Most notably, the Honduras-Kuwait Treaty of Reciprocal Investment contains a provision guaranteeing the stability of the ZEDE law for a period of no less than 50 years. Additionally, Article 45 of the ZEDE Organic Law promises a “transitional period” that ties the guaranteed legal stability of the ZEDE law to the length of any legal stability agreement which the ZEDE may have entered with investors. Combined, these provisions mean there is no legal mechanism to end the ZEDEs overnight. Even if the constitutional amendment is ratified in the next Congress, the Castro government would be obligated to respect the transitional period before the ZEDEs would truly be annulled.
If the Honduran government insists on moving forward with abolishing the ZEDE law, investors have a number of legal mechanisms at their disposal. Domestically, they could bring an argument before the Supreme Court, which is currently comprised of mostly National Party appointees not up for reelection until 2023. Investors could also raise their case under Chapter 10 of the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) to seek interim injunctive relief to preserve the status quo, as well as damages for any lost investment and future profits. Investors, however, might face difficulties collecting.
Consequently, unless existing ZEDE investments are grandfathered with a transitional period to coincide with the duration of the Honduras-Kuwait Treaty and/or internal legal stability agreements, the Honduran government faces significant litigation risk and arbitral exposure, both within its own court system and under CAFTA-DR’s arbitration mechanism. The government could face hundreds of millions and perhaps billions of dollars of liability, especially if the land purchased by ZEDE investors were to be expropriated.
In order to wage these messy political and legal battles, the administration would need to make the case to its constituents that “ending” the ZEDEs ought to be prioritized over investment in other policies aimed at generating new sources of employment and economic growth for Honduras. Recent polling done by Gallup suggests this would be a hard sell, with just 3 percent of those polled reporting that they voted for the Castro government on the basis of eliminating the ZEDEs, while 70 percent reported they would accept a job within a ZEDE. The latter figure is especially important—and given that ZEDEs have already proven themselves capable of creating jobs, seeking to eliminate the zones completely would likely run against the new administration’s own interests.
Lastly, the April 21 vote sends a strong negative message to international investors about the erosion of rule of law and investment security in Honduras. The Castro government’s support for the repeal of ZEDEs will likely deter future investment in Honduras—certainly in ZEDEs, but also investment outside of the ZEDE framework—and risks turning some of the criticisms leveled by ZEDE opponents regarding job creation into self-fulfilling prophecies. This comes at a time when foreign investment will be critical to Honduras’s ability to rebuild and return to economic growth after the pandemic. Lastly, the repeal law has profound implications for the Biden administration’s “root causes” strategy to address irregular migration, which features a principal focus on job creation, mostly through public-private partnerships, as a means of preventing further migration and keeping people in place.
Ryan C. Berg is senior fellow in the Americas Program and head of the Future of Venezuela Initiative at the Center for Strategic and International Studies in Washington, D.C. Henry Ziemer is a program coordinator and research assistant with the CSIS Americas Program.
Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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