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The SDRs would be “autonomous legal entities” with “their own system of administration,” armed with the power to “promulgate their own rules and have their own judicial entities.” The national government in Tegucigalpa would retain control over defense, foreign affairs, elections, ID documents, and passports. Honduras would not be responsible for any debts or financial commitments of the SDRs and could not tax them. The SDRs’ own tax levels were capped by statute at 12 percent for individual income, 16 percent for corporate income, and a 5 percent sales tax.
Judges in the zones would have to be approved by a two-thirds vote of the Honduran Congress, but the jurists themselves need not be Honduran. SDR residents would be free to “contractually consent to arbitration of judicial proceedings outside the SDR’s judicial entities and arbitration forums.” Ports and airports would be the SDR’s responsibility, and it could collect whatever related fees it saw fit.
Initially, the Honduran president would appoint a governor and a Transparency Commission to oversee the charter cities; the commission would then appoint governors, as well as a consultative council that could veto a governor’s rules, plus an audit committee. According to Romer’s Charter Cities website, the governors’ powers would disappear in favor of a popularly elected “normative council” after the SDR had reached “population and economic benchmarks” set by the Transparency Commission.
Romer began telling the press he was chairman of the Transparency Commission, a role in which he would help guard against the skullduggery and corruption that so many associated with the Honduran government and business world. His involvement seemed a natural fit. But as Romer prophetically if jokingly warned in his TED talk, “Don’t send academics out in the wild.”
From the beginning, there were conflicts of visions between Romer, the Honduran government, and the libertarian activists and theorists attracted to the free cities model. Romer imagined not a small, organically growing project but one built from the beginning to house 10 million mostly immigrant residents (more than the population of the whole Republic of Honduras, now 8 million), on the theory that such size was necessary for economies of scale.
Romer’s grand plans ran afoul of Honduran politics. The Honduran Congress included in its initial legislation a requirement that 90 percent of SDR employment go to Hondurans, a rule that could be amended in specific cases. Worse, contends Michael Strong, a major player in the free cities movement, Romer’s vision was impractical and relied too much on a sort of pre-central planning of how the zones would function, not allowing for the organic growth Strong prefers. Romer also wanted to contract out operations directly to a foreign sovereign, which smacked of neocolonialism to some. “We wanted a small startup near existing urban areas,” says Strong, “where one could prove the concept that improving law will attract capital” without having to spend the tens of billions upfront that Romer’s plan required.
Strong was at the vanguard of a loose community of mostly libertarian policy and business entrepreneurs excited by Honduran free cities as an example of competitive governance. Just as competition and free entry and exit in markets create wealth and consumer satisfaction, they believed, so would governments work better if new entrants arose to compete over rules with existing sovereigns. The rules that allow citizens to thrive—which to the libertarian-minded meant lower taxes, less regulation, and free movement of people and capital—would provide a competitive example for other states to emulate.
Among the most prominent advocates of competitive governance was Patri Friedman, grandson of Nobel Prize–winning economist and libertarian intellectual giant Milton Friedman. Patri first promoted the concept in the context of the Seasteading Institute, which he founded in 2009 with the financial support of Peter Thiel, the billionaire co-founder of Paypal, who loves financing seemingly outrageous ideas on the cutting edge of physical and political science. Seasteading advocated a free city model based not on land ceded by an existing sovereign but on land freshly built, floating in international waters.
In April 2011 the Seasteading Institute co-sponsored, along with Giancarlo Ibarguen of the libertarian-leaning Guatemalan University Francisco Marroquin, a Future Cities Conference that spun off into a Ibarguen-run think tank dedicated to promoting the free cities model. One of the conference speakers was Michael Strong, who had helped promote “conscious capitalism” with the organization Flow, launched with Whole Foods founder John Mackey.
After meeting the Honduran free cities team run by Sanchez, and after some initial collaborative meetings with one another, Friedman and Strong each launched his own company seeking partnership with the Hondurans. Friedman’s was called Future Cities Development (FCD); Strong’s, co-founded with Kevin Lyons, an entrepreneur and co-founder of Consent Unlimited (a nonprofit studying how to “expand the sphere of human consent at the expense of politics”), was called the MGK Group.
The idea seemed as close to actuation as it had ever been. But conflicts both within and without Honduras soon derailed the project.
‘Don’t Send Academics out in the Wild’
Paul Romer proved very useful in attracting international press attention from the likes of The Economist and The New York Times. But in September 2012 he left the project in a public huff after the Honduran government announced that it had signed a memorandum of understanding with the MGK Group to manage and operate an SDR. In a letter to President Lobo that he posted on the Charter Cities blog, Romer complained that the Hondurans not only failed to discuss the deal with him beforehand but also refused to let him review the agreement after the fact. As head of the Transparency Commission that was supposed to have executive power over SDRs, Romer believed the lack of consultation represented a breach of trust. In an October interview with The Economist, he condemned the MGK deal as an “overt act of deception.” MGK was “not really very serious,” he told the Canadian National Post in December. “They are kind of a nuisance and a distraction.”
According to everyone else involved, Romer actually was not head of the Transparency Commission, which did not yet exist. Romer said Lobo told him he had been appointed and even signed something to that effect in front of him but for whatever reason never formalized the appointment.
Others close to the project think Romer assumed his starring role was in the bag and in talking to reporters tried to make it a fait accompli by acting as if it were already true. Among other things, many involved in the RED zone project found it suspicious that Romer frequently pointed to the website red.hn to buttress the claim that he was running the Transparency Commission. While red.hn appeared to be an official Honduran page, the site was launched in August 2011, registered in California, and has since disappeared from the Internet. Sanchez acknowledges that Romer “had been promised he would be part of that” but claims the “right political moment” to officially launch the Transparency Commission had not arrived. “I believe in essence he just got tired of waiting,” Sanchez says. Romer provided this comment on the controversy via email: “When the auditors resign from an account saying that they can’t vouch for the honesty of a firm’s financial statements, and the firm replies by saying that technically the auditors have no basis for commenting because the firm never notarized the engagement letter that it signed with the auditors, everyone knows what conclusion to draw.”