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The Economist Gets It Wrong

December 12, 2011

While I’m happy to see coverage of the developments in Honduras, the Economist decided to frame its side story as yet another wild episode of Randian fantasy. This spin does everyone involved a great disservice. Both Kevin Lyons and Michael Strong took to the comments of the online article to clarify some misconceptions. I’m going to reprint Kevin’s here:

In “Free Cities: Honduras Shrugged” I am incorrectly described as a “libertarian activist” though I am neither. I am a scientist focused on solving the poverty problem, through both policy advising and entrepreneurship as necessary.

On that same theme, framing this story with an Ayn Rand reference and a history of failed libertarian new country projects is amusing, but also a missed opportunity to foretell a better and truer story that has nothing to do with ideology. The real scoop in Honduras is one of thoughtful innovation in political governance as part of a concerted attempt to better citizen’s lives. I hope to read a proper chronicling in these same pages someday and am happy to suggest an outline below.

The Hondurans want to get out of poverty, citizens and politicians alike. Fifty years ago they were doing slightly better than South Korea. Today they compare better to North Korea, so they are rightly convinced that whatever they have been doing is not working.

Like all poor countries, they find themselves stuck in a system of law and government that is overrun with bad deals and incentives. The existing framework encourages people to do too much taking and breaking things and (thus) not enough making things. The result is anemic wealth accumulation and stunted prosperity. Everyone knows that they need reforms that credibly protect persons and property to encourage more positive sum behavior.

So far Honduras sounds like every other poor country on earth. Their problems have nothing to do with knowing what “good policy” looks like. Their challenge is figuring out how to eliminate bad institutions and create good ones, given their political realities. (Before you snicker at this being a third world problem due to bad leadership, ask yourself why the USA still has a mohair wool subsidy or why most European governments are insolvent). Special zones have been one partial answer to this problem around the world for many decades. But as the persistence of widespread poverty suggests, they are an imperfect one. One problem is that the tax breaks and other policy adjustments they contain are generally time limited or not perpetually credible in the way that real capital accumulation demands. Companies come in reluctantly with very limited fixed capital and expect to leave overnight when governments renege and things go bad again.

But what if a special development region was designed with credible commitments to good policies in perpetuity? What if through grants of authentic autonomy and other structural safeguards it could be more than the least bad place to do business in a struggling country? What if a region could legitimately strive to be the best business and residential environments in their country or region or hemisphere? This is the real narrative that we are composing in Honduras and why the government there should be loudly applauded.

Making fun of democracy is unfair. Yes it can mean awful things like two wolves and one sheep voting on what to have for dinner, but what if the wolves and the sheep both have to approve the menu by voting as separate, similarly situated groups? Their meal is suddenly guaranteed to exclude predation by either side. Extrapolate to each sheep or wolf getting their own veto in matters negatively affecting them (civil rights) and the system looks even better. This barely scratches the surface of this topic, but suffice it say that there are very good reasons that democratic voting is voluntarily and privately adopted in everything from corporations to condominium associations.

The special development regions in Honduras will simply be applying the best known practices for ensuring good governance, whatever they are. There will even be some experimenting in this arena to create future best practices for other regions of Honduras and other countries. The best ideas will come from an in-depth understanding of the real economic hazards that need to be addressed by real safeguards in the real world, and not by academic scribbling on a blackboard. There is no place for ideology because we are talking about solutions that have to attract investors and residents. The result is that the finest democratic, republican and libertarian concepts will all be implemented and the lesser ones will not.

I look forward to the day that this story is correctly covered for being a novel example of customer-driven government that is designed to continuously improve and serve its residents. In the meantime I’ll be working on building that delightfully apolitical reality.

(As a side note, I encourage interested readers to discover the New Institutional Economics recognized by the 2009 Nobel Prize in Economics. This is arguably our best scientific thinking in matters of political and economic theory. For a great introduction in the development context, read the forthcoming book “Solomon’s Knot” by Cooter and Schaefer, then peruse past conference paper titles at www.isnie.org )

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