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Honduras: How a Start-Up Utopia Became a Nightmare for Honduras

U.S. investors are suing Honduras over special economic zones, and the dispute could bankrupt the country.

In June 2009, Honduras was rocked by a military coup that saw the country’s elected president, Manuel Zelaya, bundled out of the country at gunpoint. What followed was 12 years of deeply corrupt and oppressive post-coup governments that proved incapable of addressing Honduras’s extremely high levels of poverty or curtailing an unprecedented spike in migration to the United States, peaking in 2021. Today, Hondurans are focused on rebuilding their democratic institutions and undoing some of the most harmful policies of the post-coup era. The task ahead for the center-left administration of Xiomara Castro, who was elected as Honduras’s first female president in November 2021, is anything but easy—particularly as some key reform measures are openly opposed by the U.S. ambassador in Tegucigalpa.

One such measure, which Castro appears deeply committed to, is the elimination of the country’s “employment and economic development zones,” or ZEDEs. ZEDEs are part of a long history of special economic zones, duty-free zones, and freeports that have gained renewed momentum in recent decades for the supposed purpose of attracting foreign investment to developing economies. But Honduran ZEDEs are far more extreme than economic zones found in other countries such as Singapore, the Cayman Islands, and Panama. They allow private corporations to enjoy an astonishing level of autonomy, including establishing their own courts, laws, tax systems, and private police forces—all with virtually no transparency or accountability mechanisms.

In 2021, the United Nations expressed strong concern over Honduran ZEDEs, stating that they posed a potential threat to human rights in Honduras. The U.N. estimated that ZEDEs could wind up controlling approximately 35 percent of the country’s territory. That same year, a Honduran corruption watchdog published a scathing report on the ZEDEs, highlighting the opportunity they provide for corrupt actors to engage in money laundering and other illegal activities.

Understandably, ZEDEs are highly unpopular in Honduras. The slogan “No to the ZEDEs” featured prominently in Castro’s electoral campaign. Shortly after Castro’s inauguration, the Honduran Congress voted to repeal the law that allowed for the creation of ZEDEs. A broad-based National Movement Against the ZEDEs and in Defense of Sovereignty, which was formed under the prior government and includes unions, Indigenous groups, human rights organizations, and prominent academics, is also pressing Castro to shut the ZEDEs down.

However, investment provisions under the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) have provided ZEDE investors with a powerful means of fighting back against Castro’s proposed reform. Citing potential future losses, Honduras Próspera, a Delaware-based U.S. company that is operating a ZEDE called Próspera on Roatán island, off the northern coast of Honduras, is suing the Honduran government in an investor-state dispute settlement court located at the World Bank. Though U.S. President Joe Biden has announced his opposition to such investment-state arbitration in future trade agreements, the ZEDE investors’ claim has received a potent boost from the State Department and the U.S. ambassador in Tegucigalpa.