2012-09-10

Co.Exist

Coming Soon: A Privately Run City To Create Development In The Developing World

A group of businessmen are building a city from scratch in Honduras to overcome the country’s corruption and poor infrastructure. Does it make sense to let money hungry investors take over the government’s job?

Honduras is set to play SimCity for real, albeit without the economist who devised the rules of the game. Last Tuesday, the government signed an agreement with private investors led by Michael Strong—a libertarian entrepreneur and close associate of Whole Foods co-founder and CEO John Mackey—to construct a city-from-scratch in one of at least three special development regions (“las Regiones Especiales de Desarrollo” or “REDs”) scattered around the country.

REDs possess the legal right to establish—or outsource to foreign governments and companies as necessary—their own hospitals, schools, judges, and even police, all independent of Honduran law. The first is for profit, and if its founders have their way, it will look and feel a little like the Mosquito Coast’s answer to Austin.

The REDs are the brainchild of Paul Romer, the New York University economist who has proposed building “charter cities” as a solution to endemic poverty. Romer believes that importing sound laws and policies into small corners of badly run countries will help leaders reform their governments from the inside-out. Honduras certainly qualifies—the original banana republic is still grappling with the political fallout of a 2009 coup while cocaine traffickers have pushed its murder rate to the highest in the world.

In early 2011, aides to Honduran president Porfirio Lobo invited Romer to the capital of Tegucigalpa to make his case to Congress. Within weeks, Congress passed a constitutional amendment granting Lobo’s government the power to create and administer the REDs.

They won’t be built in Romer’s image, however. The Lobo government has instead signed a deal with the MKG Group, a consortium of investors led by Strong that intends to spend $15 million to begin building basic infrastructure. It appears Romer was never consulted.

On Friday night, he published an open letter to Lobo asking that he not proceed with the formal appointment of a five-person “transparency commission” to oversee the RED, of which Romer would be chairman. In effect, he is asking for permission to resign from his own creation. Lobo’s aides told The Guardian that Romer is overreacting, and that nothing can go ahead until the Honduran Supreme Court rules on the project’s constitutionality—which may take anywhere from a week to a decade.

With Romer having second thoughts, the spotlight shifts to Michael Strong, who I met with in February to discuss what his version of a RED would look like if it were actually built. At the time, it seemed unlikely—a few weeks later, Lobo’s chief of staff Octavio Sanchez told me point-blank in the presence of Romer’s deputy that Strong would never receive the legal right to run a RED—but he was optimistic.

Prior to starting MKG, Strong co-founded a movement named FLOW (“Freedom Lights Our World”) and wrote an entrepreneurial manifesto with Whole Foods’ John Mackey. More recently, he joined the board of the Seasteading Institute (whose founder, Patri Friedman, has started his own for-profit company with the stated aim of building cities in Honduras) and co-founded the Free Cities Institute, a think tank based at the Universidad Francisco Marroquín in Guatemala. (UFM, which I visited last spring, has a library named after Austrian economist Ludwig von Mises and a bas-relief of Atlas shrugging at the entrance to its business school.)

While Romer imagined his charter cities as Hong Kong circa 1950—filled with sweatshops beginning the long, hard climb to cleaner work and better pay—Strong envisions something closer to Bangalore-meets-Austin, with locals working in Spanish-language call centers and business-process-outsourcing (BPO) shops while jump-starting a local software industry with an influx of Americans.

“I’ve spent a lot of my life in places like Austin and San Francisco—cultural and creative hotbeds,” Strong said. “One of the people I know is a Honduran software entrepreneur who would love to have a much more robust ecosystem for software companies in Honduras. But in order to get software guys to go down to there, you need cool restaurants and music places. They’re not going to go if it’s factories and so forth.”

While Strong readily conceded this aim was “aspirational,” he insisted that locals were much more receptive to clean work for good pay than a wholesale expansion of the maquiladora sweatshops, which mainly produce textiles. He also plans to recruit a number of educational institutions—including vocational and charter schools (which he has founded in the past)—to create “an education enclave.” “Good education institutions increase land value, and they’re a huge attractor,” he said.

In the short run, however, MKG will focus its efforts on building affordable housing and attracting employers to the first half-square mile of the city, which will begin construction sometime in the next six months. Strong told the AP last Wednesday that tenants have yet to sign on, but that he and his [undisclosed] investors hope to have two or three within 18 months.

While MKG may have been awarded the first RED, it certainly won’t be the last project of its kind. Congressional president Juan Hernandez told the AP that two other sites have already been chosen—one in the Sula Valley in northern Honduras, and another in the south—but the agency tasked with implementing the RED has at least 10 potential sites under consideration. The question now is: Who’s next?

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10 Comments

  • Dave Loder

    "...does it make sense to let...etc etc"  Does sound sort of familiar, DOESN'T it??

  • Dan Dascalescu

    Unsurprisingly, the Honduran Supreme Court ruled on 2012-Oct-19 that the decree that allowed the creation of ‘private cities’, with their own laws and police, was unconstitutional.

    Special development regions (Regiones Especiales de Desarrollo) are now illegal.

  • Joe Holler

    This idea sounds good on paper but it is an optical illusion of sorts. Knowing offhand the stratospheric crime rate, the levels of corruption and the fact that the Honduran government changes the rules of the game every other minute, only a reckless investor would put his money into such a venture. I got out of there 2 years ago and trust me, this idea would have a better chance of success in Afghanistan or Pakistan!

  • miketodaro

    Actually, and not just technically or legally, but actually what happened in 2009 was not a coup d'etat. The military was asked by the elected government to get the bad guy out and they did. But at no time did Honduras - the presidency, the congress, the judiciary, the military or even either political party - violate the country's rule of law, and the military was never 'in charge' of the government. To casually call it a 'coup' is sloppy reporting. No question, it was a bad deal, if only because the US government picked the wrong side, the Chavez side. In any event, I was there. Yes, the country has issues, but so does the U.S. Otherwise, fine article about a noble experiment. 

  • David McCrea

    Sounds like a disaster waiting to happen, where some "haves" who are unhappy where the are want to move and impose their vision of "how things should be done" on the have nots. (Jonestown anyone?)

    How will Honduras benefit?  The lack of fiscal control almost guarantees that any payments made by the comune will go directly to politicians pockets or companies run by their families, just like so many billions of AID dollars over the past 4 decades.Low paying jobs for menial work won't help the communities out-side the wall and will only increase the social inequalities that have created so many of Honduras' current social problems.  Let's remember, Honduras has the highest murder rate of any country in the world (http://www.bbc.co.uk/news/maga... and basically lawless beyond Teguc and San Perdo city limits.

  • allanhenderson

    The Hondurans plan to create more than one of these free zones. This means that their developers will have to compete with one another in order to attract taxpaying investors and residents. A greedy or incompetent developer who failed to deliver affordable, high-quality public goods to his customers would quickly be driven out of business by his competitors. In order to survive, developers will have to employ world-class researchers and managers to make their territories ever more pleasant and affordable. This unremitting discipline of the marketplace will guarantee that all Hondurans have access not only to good governance, but to the very best governance that human ingenuity can devise.

  • min amisan

    For all the pontificating about charter cities and free economies, I don't see how the Honduran experiments will end up any different to the myriad Special Economic Zones that exist in almost every developing country these days, following China's example. SEZs are proven economic performers but vibrant cultural and lifestyle places they usually aren't. Any Honduran attempt will have a lot of competition, and they'll need to pull off something unique if they want to keep getting attention. 

  • Leif Smith

    Hope for better may be inspired when you become familiar with Michael Strong's work on education. If things go well this project may set a higher standard.

  • craigpurcell

    It seems worth a try as design and real estate execs with a vision could create an urban place that works better than gov't led expansion. The idea of doing a globally city based upon the Internet with "digital merchants" driving growth seems sound and you would think better than manufacturing because it seems industry just goes for cheap labor and bottom line while spewing out pollution and despoiling the local environment.