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Plan for Charter City to Fight Honduras Poverty Loses Its Initiator

Paul Romer is a respected economist with an unconventional plan to lift people out of poverty. And in Honduras, he thought he had found a government eager to put his ideas into practice.

What if you simply sweep aside the corruption, the self-interested elites, and the distorted economic rules that stifle growth in many poor countries and set up a brand new city with its own law and governance?

The charter city, as Mr. Romer calls it, would be administered by countries that have developed strong institutions and rule of law. If it sounds crazy, think of Hong Kong.

Once Honduras signed on and its Congress passed a law at the beginning of 2011 to start the process, the concept moved from big idea to a tentative possibility. Stories followed in The Economist, The Wall Street Journal and The New York Times Magazine.

But now, Mr. Romer, an expert on economic growth, is out of his own project, tripped up by the sort of opaque decision making that his plan was supposed to change.

An internal contradiction in the theory is playing out: To set up a new city with clear new rules, you must first deal with governments that are trapped in the old ones.

"I do feel disappointed on behalf of the people I have gotten to know," said Mr. Romer, an economist at New York University's Stern School of Business and the director of its Urbanization Project. "The Hondurans who hoped this would be a way to escape from business as usual."

The tipping point came with the announcement a few weeks ago that the Honduran agency set up to oversee the project had signed a memorandum of understanding with its first investor group.

The news came as surprise to Mr. Romer. He believed that a temporary transparency commission he had formed with a group of well-known experts should have been consulted. He withdrew from the project.

The law setting up Honduras's experiment in a charter city, a special development region, or RED in its Spanish initials, creates flexibility that promotes innovations, but requires strict disclosure along the way, Mr. Romer said. "The one absolute principle is a commitment to transparency," he said.

Octavio Sánchez, the chief of staff to President Porfirio Lobo of Honduras and the government's point person for the project, agreed that a transparency commission with foreigners on it would be essential once all the laws were in place. "We would love him to be there," he said of Mr. Romer. "Because he really believes in this."

The investor group is led by Michael Strong, an activist who has worked in the past with libertarians like John Mackey, the founder of Whole Foods. He promises that his investors include Silicon Valley entrepreneurs and Central American investors, but when pressed for details, named only one Guatemalan businessman.

With $15 million on hand, he said, the group will begin with a small pilot project to build infrastructure and is already talking to prospective tenants.

Mr. Strong also said he had plans in the future to build low-cost housing and set up schools, but he admitted that "A lot of things we don't know until the RED government goes up."

With so few details made public, even the normally pro-government newspapers in Honduras have begun to question whether there is any real money behind the project.

Opponents on the left have been filing challenges with the Honduran Supreme Court against the charter cities plan. The news of the investment deal brought more.

According to Mr. Strong and others involved in the project, including Mark Klugmann, an American consultant who is working with Mr. Sánchez, the transparency board never legally existed. Mr. Sánchez agreed, although he had never disputed the existence of the board in the past.

Mr. Romer said that President Lobo signed the decree in his presence in December. But he acknowledged that the board was on tenuous legal footing because of the challenges in the Supreme Court. The decree was never published.

Indeed, the challenges have held up other parts of the plan, like a bill in Congress to define where the city would be. (Mr. Strong is moving ahead with options to buy land on the Caribbean coast near Puerto Cortés anyway.)

Nobody disputes that impoverished, violent Honduras needs some kind of shock therapy. "You put the bucket list of everything that needs to be changed -- you do all the things at once in a small place," Mr. Sánchez said. "We needed to create the right conditions in the midst of political turbulence."

Mr. Sánchez, 37, who has a law degree from Harvard, had already been thinking for a decade about many of the same ideas as Mr. Romer, and was working with Mr. Klugmann on ideas for autonomous development zones when a friend gave him a copy of a video talk by Mr. Romer. "The possibility of a foreign country ruling, that didn't fit. But everything else fit," he said.

The idea, Mr. Sánchez explained in a telephone interview, is to adopt ideas that have worked in other countries. A team from the government went to South Korea and Singapore. In the nation of Georgia, they found a model in Lazika, an instant city that the government has begun building that is inspired by the charter-city concept.

Mr. Strong has his own version of Mr. Romer's relationship to the project. "When Sánchez finally saw Romer's video talk, he saw that this was a high-profile source of external validation that could help push their ideas through," he wrote in an e-mail. Mr. Romer's project was "a marketing catalyst."

Mr. Romer is now looking elsewhere.

"If it were easy to undertake social reform, it would have happened," he said. "You just have to keep trying."

[Source: By Elisabeth Malkin, The New York Times, 30Sep12]

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