Editor’s Note This is the third part of a three-part article on Paul Romer and charter cities. Read the first part here,, and the second part here. Honduras created special development zones once before. More than a century ago, the United Fruit Company and its twin subsidiaries, the Tela Railroad Company and the Trujillo Railroad Company, ran vast banana plantations from private enclaves in Tela Nueva and La Lima known as the Zona Americana–the American Zones. These were your classic company towns, complete with golf courses, hospitals and schools–a few of which are still around.

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“They’re some of the best in the country,” insisted Daniel Facussé, president of the Honduran Maquila Association, the trade group for the tax-free textile factories that employed 133,000 Hondurans prior to the financial chaos of the coup. He drew a straight line for me from the zonas to the REDs. “Yes, it’s true that all of them were made by the companies,” he said, “but they were physically set up in a small town. At the time, they also had their own rules and regulations.” “There was also a change of culture,” he added with a note of admiration. “A culture of saying the company is not only responsible for the benefits of their workers, but also for the benefits of their families…[and for] society itself.” To say the fruit companies played by their own rules would be an understatement. Honduras was the original “banana republic,” molded by United Fruit and its competitors in their own competing interests. Successive Honduran presidents ceded huge tracts of land for infrastructure that stopped at the plantations’ edges. (To this day, Tegucigalpa lacks a train station.) At one point, United Fruit’s fiercest competitor–and later, its controlling shareholder–sponsored a successful coup to overturn a rival’s concessions. The United States intervened seven times between the turn of the century and 1925; the fruit companies continued to back local military governments until the 1980s. The real coup is the privatizations they have planned. Opponents of President Porfirio Lobo’s government see similar parallels between the zonas and the REDs, with the latter a tool to finish the job started by the coup. When Manuel Zelaya was elected president in 2006, he appeared to be the latest in a long line of entrenched elites to hold office, dedicated to preserving the status quo. But by their standards he turned out to be a reformer, lowering school fees while increasing the minimum wage (which didn’t extend to the maquilas). He cut a deal with Venezuela for oil at below market prices in exchange for closer ties to its president, Hugo Chavez. He also hindered the privatization of the telecommunications industry, which eventually proved to be a massive success. And most alarming of all, in 2008 he called for a referendum to rewrite the constitution drafted under the generals. Zelaya’s enemies (and by then there were many) labeled this a power grab. The first thing to be erased, they charged, would be his term limit. As a compromise, he pushed for a non-binding national referendum in June 2009, on what would turn out to be the day of the coup. Explanations for his ouster tend to pivot on the referendum and his relationship with Chavez, although some activists insist the real reason was his tepid support for privatizing state-owned utilities. Dragging his feet on selling off the water, power and telecom industries brought him into direct conflict with the handful of families controlling large swaths of the economy, they say.

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“Zelaya was stopping that stuff; they were looking for a pretext,” says Dana Frank, a professor of Latin American history at University of California, Santa Cruz who has lobbied on Capitol Hill to suspend all U.S. military and police aid to Honduras. (The 2013 Obama budget would more than double it.) “The real coup is the privatizations they have planned.” As an example, Frank points to the law passed in March 2011 passing control of the national education system to the municipalities, which are now free to fund for-profit charters. Simultaneously, Zelaya’s predecessor will lead a program dramatically curtailing the pay of new hires in the public system. Unsurprisingly, the law’s passage prompted a nationwide teachers strike, which was met with teargas in Tegucigalpa and the threat of mass suspensions. Land reform is another sticking point. Fallow banana plantations in the northeast were converted to palm oil cooperatives in the 1960s and 1970s, until a law passed in 1992 permitted wealthy landowners to buy the struggling co-ops. Today, one of the largest plantations belongs to Corporation Dinant, which in turn is controlled by Miguel Facussé, the uncle of former president Roberto Flores. Following the coup, thousands of campesinos occupied Dinant farmland they claimed had been stolen from them, leading to clashes with soldiers, police and Dinant’s private security forces, resulting in the deaths and disappearances of dozens–including five campesinos acknowledged to have been killed by Dinant employees. In April, several thousand campesinos briefly occupied 30,000 acres of private farmland around the country before being dispersed–in some cases peacefully, in others with the use of force. Miguel Facusse described the occupation as horrorosa (appalling) to the newspaper El Tiempo. You see here the problems of impunity. “You see here the problems of impunity,” Antonio Maldonado told me in Tegucigalpa. Maldonado was appointed as the United Nations’ human rights advisor to Honduras in 2010 and has been frustrated in the role ever since. “We don’t know of one important case which has been duly investigated”–not one, he emphasized. The problem wasn’t a lack of resources, no matter what the government claimed, nor could it be solved by outsiders setting a good example. (“You can bring in the best trainers in the world and keep the same behaviors,” he said.) The problem, simply put, was institutional rot (“Prosecutors, judges and police officers don’t do their work!”), and it was slowly corroding democracy in Honduras. He described the REDs’ vow of judicial integrity as a “promise that is impossible to keep.” This corrosion is visible in the annual Latinobarómetro poll. Less than half of Hondurans presently believe democracy is preferable to any other type of government, while more than a quarter admit an authoritarian regime is occasionally preferable. Proportionately more Hondurans felt this way than residents of any other nation in Latin America. “The danger is the hollowing out of the rule of law,” said Kevin Casas-Zamora, a Latin America expert at the Brookings Institution and a former vice president of Costa Rica. “People are just willing to put up with the encroachment on their civil liberties for the sake of fighting crime. They’re terrified.”

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Market-ready Reform In Why Nations Fail, James Robinson and his co-author, MIT economist Daron Acemoglu, stress the difference between “inclusive” and “extractive” economic institutions. Inclusive institutions such as property rights, contracts, education and competitive markets embody rules designed to maximize opportunities for everyone; extractive institutions such as monopolies and conglomerates consolidate wealth in the hands of a few, squelching growth and innovation. This dichotomy explains the development gap between Sierra Leone and South Korea–the same gap Romer is trying to close in Honduras through the REDs. But telling President Lobo and Congress which rules to adopt will never work, the authors argue. Failing states “get it wrong not by mistake or ignorance, but on purpose.” The reason we can’t simply transplant inclusive rules from one state to another has to do with a second set of institutions–political ones–and whether they manage to balance power between elites, the people and the state. Successful nations do this well, begetting the economic rules Romer cherishes. Failing states produce dictatorships, kleptocracies, and banana republics–or in Honduras’ case, all of the above. It’s clear that Romer envisions charter cities as a new kind of inclusive institution, engineered to cram centuries of socioeconomic evolution into decades. What’s less clear is whether Honduras’ entrenched elites are invested in reforming themselves. Is it true that “the politicians recognized they themselves were the biggest obstacle,” as Mauro De Lorenzo, the deputy director at the Urbanization Project, told me in Tegucigalpa? Can an extractive regime spin off inclusive institutions? Robinson is firm in his answer: no. Close observers of the region agree. “They control the game,” said Casas-Zamora, “and they will find a way to benefit from this.” They control the game, and they will find a way to benefit from this. If Romer has any qualms about his partners, he isn’t saying–he declined multiple requests for interviews–but Peter Henry leapt to his defense. “It’s a fallacy, in some sense, to think the markets are the enemy of the poor,” Henry told me, dismissing the charge that charter cities amount to neoliberal neocolonialism. “If you look at the last 35 years of human history,” he said, “there is overwhelming evidence that markets are helping people out of poverty.” For mayors across the developing world who are already swamped by the leading edge of the world’s final, epic migration–Solly Angel predicts urban populations will double in 40 years while the built environment triples in size–there may not be time to create a better option. Regardless whether the REDs work as Romer intended, they may still prove to be the template for privatizing urbanization. The size of the market dwarfs even Henry’s optimistic projections–a recent study by Booz & Company estimates the cost of building, running and maintaining the world’s cities at an astounding $350 trillion over the next 30 years. A land rush is underway in more ways than one.

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“The success or failure of the Urbanization Project doesn’t hinge on the success or failure of the Honduras experiment,” said Henry, who is already looking ahead to the opening of NYU Shanghai in 2013. “The story in emerging markets is cities.” With twin campuses in both the Middle East and China, perhaps no business school is better positioned to lead the charge than Stern, with Romer in the vanguard chartering new ones. If the REDs are really a tool for imagining an urban future, then the one thing everyone involved wants to see–or fears–are dollar signs. This article was first published in Next American City.