The Inter-America Dialogue recently released a well-timed report on the issue of Central American migration. Although the report was well-researched and insightful, the IAD’s suggested solutions to the issue don’t go nearly far enough to be impactful in the short term. To truly have the kind of impact on economic development the report says is necessary to reduce migration, Central American nations must turn to Special Economic Zones like the Honduran ZEDE regime.

The Scope of the Migrant Crisis

To understand the importance and urgency of reducing migration, its important to first establish the context of just how intense Central American migration has been recently. According the IAD report, the number of Central American migrants has more than doubled from 2000 to 2017, going from 2.6 million to 4.3 million people. Moreover, a vast majority—80%—are making their way to the United States. This table from the IAD report of Central American migrants by country of origin and country of destination is illustrative:

Immigration Stats Chart

Figure 1: Central American Migrants since 2000 by Country of Origin and Country of Destination

This massive movement of people has a negative effect on the countries from which they are fleeing, reducing both the labor and human capital available in those regions. It also puts a strain on American resources, which is why curbing migration from Central America has become a US foreign policy imperative.

The Inter-American Dialogue report recognizes this fact and also recognizes the only viable solution to it: economic growth. Migration can only be reduced by addressing the issues which drive Central American individuals to migrate in the first place; that is, addressing the lack of economic opportunity in the region.

Inter-American Dialogue Solutions and The Importance of Institutions

The report concludes by offering a few solutions to catalyze economic growth in the region:

  • annually formalize and mobilize 25% of the savings among 3 million remittance recipients in Central America
  • Expand 10% of the financial sector’s credit to formal microbusinesses
  • Invest in the knowledge economy
  • Formalize 2% of informal businesses every year

These solutions, if carried out, will certainly help moderately improve the economic malaise of Central America. However, they do not strike at the root of the problem, and for that reason will be ineffectual at achieving their intended aims. Only deep institutional reform, spearheaded by special economic zones such as the ZEDE regime in Honduras, will actually have a powerful enough impact to truly create the type of economic opportunities necessary to reduce migration to the United States.

Institutions—that is, the “rules of the game” for economic actors—are what determine the success or failure of nations. This fact was first elucidated by economist Douglass North, who won the 1993 Nobel Prize for his lifetime of work illustrating how institutions effect economic growth.[1]  In their New York Times bestseller on the topic, Why Nations Fail, Darron Acemoglu and James Robinson pull together all of the most important lessons from developmental and institutional economics to show what it is that makes some nations fail while others prosper. They decisively show that nations fail when they have “extractive” institutions and succeed when they have “inclusive” institutions. Extractive institutions are known for corruption, with a small group of elites leveraging the government to extract as much wealth as they can from society at the expense of the nation as a whole. Inclusive institutions are marked by strong protection of property rights, the rule of law, and freedom to innovate and create (also known as economic freedom).

Numerous other scholars from such disparate institutions as the University of Hohenheim,[2]  the University of Groningen,[3] and Florida State University.[4]  The lesson is clear: institutional improvements, especially improvements in economic freedom, cause economic growth and prosperity. The graphic below drives the point home succinctly:

Economic Freedom And Standard Of Living Graphic

Figure 2: Economic Freedom and Standard of Living[5]

Northern Triangle Institutions in Need of Reform

These lessons have even been internalized by the World Bank. In 2008, the World Bank published a paper detailing the paramount role of institutions in economic development.[6] A few years prior, it developed an entire comprehensive index to evaluate and rank nations based upon their institutional strength or weakness called the Doing Business index. The Doing Business index “captures several important dimensions of the regulatory environment as it applies to local firms. It provides quantitative indicators on regulation for starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.” This index provides a rough snapshot of a nation’s institutional quality.

The table below displays some of the Doing Business Index indicators for all three countries in the Northern Triangle compared to OECD nations:

Doing Business Table

Looking at other indexes that contain indicators for protection of property rights, general rule of law, and corruption—all important aspects of institutional quality—the Northern Triangle fares just as poorly. The best index for this, the Economic Freedom Index, has El Salvador ranked 75th, Guatemala ranked 73rd, and Honduras ranked 94th.[7] No matter the source, the story is the same: The Northern Triangle’s current institutions are low quality and in need of deep reform.

Zone-Based Institutional Reform

A more direct and impactful solution to the problem of poor institutions in Central America is the utilization of special economic zones like the ZEDE regime in Honduras. These zones enable deep structural improvements in institutions without the usual resistance and barriers of entrenched elites who prevent such important reforms from taking place at the national level. In this way, the root cause of the lack of economic opportunity in Central America can be addressed in a way that has proven successful around the world.

Special Economic Zones (SEZs) have been utilized extensively in the far east to catapult impoverished peoples into prosperity. The first SEZ to prove the power of the zone-based reform model was Shenzen, China. Shenzen was little more than a sleepy fishing village of 30,000 people before it was declared an SEZ in 1980. This lowered tax rates, increased economic freedom, and opened Shenzen up to foreign direct investment from the outside world. Today, Shenzen is a world economic powerhouse, home to 12 million people and producing 90% of the worlds electronics hardware.[9]  Even more importantly, the Chinese people living in Shenzhen have seen their GDP per capita rise from $195 in 1980 to $25,000 in 2017.[10] To put that into perspective, Shenzhen’s GDP per capita 12,720% at the exact same time its population increased by 39,900%. China has since created dozens more SEZs, all of which have drastically increased economic growth thanks to their superior institutional environment.[11] Other examples of similar zone-based reform have likewise yielded unimaginably rapid economic growth, from the deserts of Dubai to the Straits of Singapore to the waters of Panama.[12]

ZEDEs in Honduras: A Powerful Tool for Poverty Alleviation and Economic Growth

The most difficult part of such zone-based reform is already complete in Honduras, the country in most need of institutional reform. In 2014, the ZEDE (Zones of Economic Development and Employment) law as passed by a supermajority of both parties in Congress, then reaffirmed by the Honduran Supreme Court.[13] The law allows for the creation of a new governmental entity, equivalent to a municipality, which is empowered to introduce best-practices governance institutions within the ZEDE jurisdiction. Perhaps most importantly, ZEDEs can also import more business-friendly common law legal systems and judges, something which Dubai and other special jurisdictions have done to great success. This solves the problem of corruption which currently plagues the Honduran legal system while greatly reducing the barriers which Honduran entrepreneurs will face in attempting to create businesses and hire workers. ZEDEs are also required by law to have a 90% or higher Honduran labor force, thus ensuring the lion’s share of the gains from the zones go to the Honduran people themselves.

These ZEDEs have the potential to alleviate poverty and reduce migration on a scale orders of magnitude more powerful than other reforms. A recent meta-analysis by Michael Clemens at the Center for Global Development decisively shows that economic development doesn’t actually begin to reduce migration until GDP per capita exceeds $6,000.[14] If a Honduran ZEDE’s economy were to grow as fast as Shenzhen did in its first 10 years as an SEZ, the ZEDE’s GDP per capita would cross the migration-reducing $6,000 threshold in a mere 3 years.[15]

Even the IAD’s own suggested solutions for creating migration-reducing economic growth would be more efficacious within a ZEDE or similar special economic zone. Take the target of formalization of 2% of informal businesses, for example. With a reduction of bureaucratic and institutional barriers coupled with the clear title to property enabled within a ZEDE, the number of days and costs of starting a new business could be reduced by orders of magnitude. With this reduction in time and cost, the incentive to remain in the informal sector is drastically reduced. When coupled with the promise of a rapid and judicious common law dispute resolution system, Honduran entrepreneurs will now have an incentive to formalize rather than remain in the shadow economy. Similarly, investment into the knowledge economy and formalization of savings will be easier in a ZEDE regime with fewer regulatory and bureaucratic hurdles to investment and savings.

Reducing Migration by Creating Hubs of Prosperity in Central America

The only real way to rapidly reduce migration is by creating hubs of prosperity in Central America via zone-based reform. Such zones can rapidly and radically improve the institutional environment for Central American entrepreneurs and businessmen, enabling them to hire more workers and create economic opportunity for would-be migrants at home.

By leveraging the ZEDE regime, Honduras is well-positioned to lead the development of these prosperity hubs, reducing migration and improving the lives of the Honduran people in the process.

References

[1] https://www.nytimes.com/2015/11/25/business/economy/douglass-c-north-nobel-laureate-economist-dies-at-95.html

[2] Pitlik, Hans. “The path of liberalization and economic growth.” Kyklos 55, no. 1 (2002): 57-80

[3] De Haan, Jakob, and Jan-Egbert Sturm. “On the relationship between economic freedom and economic growth.” European Journal of Political Economy 16, no. 2 (2000): 215-241

[4] James D. Gwartney, Robert A. Lawson and Randall G. Holcombe, Economic Freedom and the Environment for Economic Growth, Journal of Institutional and Theoretical Economics (JITE), Vol. 155, No. 4 (Dec. 1999), pp. 643-663

[5] Heritage Foundation & Wall Street Journal (2018). The Index of Economic Freedom. Washington, D.C: Heritage Foundation.

[6] Acemoglu and Robinson, “The Role of Institutions in Growth and Development,” World Bank, 2008, https://siteresources.worldbank.org/EXTPREMNET/Resources/489960-1338997241035/Growth_Commission_Working_Paper_10_Role_Institutions_Growth_Development.pdf

[7] Heritage Foundation, Economic Freedom of the World Index, 2018, https://www.heritage.org/index/

[9] https://www.forbes.com/sites/wadeshepard/2016/07/14/a-look-inside-shenzhens-high-tech-empire/

[10] https://www.bloomberg.com/news/articles/2017-09-05/as-shenzhen-overshadows-hong-kong-the-ex-colony-keeps-its-jewel

[11] https://www.worldbank.org/content/dam/Worldbank/Event/Africa/Investing%20in%20Africa%20Forum/2015/investing-in-africa-forum-chinas-special-economic-zone.pdf

[12] Tom Bell, Your Next Government?, Cambridge University Press, 2018

[13] https://panampost.com/adriana-peralta/2014/06/21/honduran-supreme-court-rejects-claims-of-zede-unconstitutionality/

[14] https://www.cgdev.org/sites/default/files/does-development-reduce-migration_final_0.pdf

[15] Assuming a 40% annual growth rate, which Shenzhen attained from 1980-1993. Wei Ge (1999). “Chapter 4: The Performance of Special Economic Zones”. Special Economic Zones and the Economic Transition in China. World Scientific Publishing Co Pte Ltd. pp. 67–108