Since Donald Trump’s return to power, his administration has been undertaking a massive push for deregulation of the U.S. economy. The administration has, for example, loosened oversight of the cryptocurrency industry and made large cuts to regulatory agencies such as the Food and Drug Administration (FDA) and the Environmental Protection Agency (EPA). At the same time, a new advocacy group called the Freedom Cities Coalition, along with more established groups like the American Enterprise Institute, are pushing Trump to keep a 2023 campaign promise: the establishment of “Freedom Cities” in the United States.
What is a charter city, exactly?
Trump was sparse on the details about these freedom cities in his campaign speech, suggesting holding a contest and then chartering the ten best development ideas on federal land. However proponents of charter cities – areas “governed by a unique ‘charter’ stipulating its own rules and regulations…distinct from the rules and regulations of the country in which it is situated” – have a more concrete vision of what these cities might become.
Charter city proponents – including representatives from Próspera, Honduras, one of the few existing charter cities in the world – have been preparing draft legislation and meeting with members of the Trump administration. Proponents are advocating for the development of U.S. freedom cities within a legal framework that exempts them from “many state and federal laws and regulations.”
Honduras is one of the few countries that – at least for a time – had a legal framework allowing charter cities. And two Honduran charter cities continue to operate despite the repeal of the enabling legislation in 2022. What can the Honduran experience with charter cities tell us about how these zones work?
The birth of Honduran charter cities
There are many examples across the globe of special economic zones (also known as free trade zones or industrial parks), in which governments provide fiscal, regulatory, or infrastructural incentives to facilitate industrial activity. But the charter city model is far rarer. Charter cities do not simply offer incentives, but shift governance away from the host state.
Honduras’s experiment with charter cities began under the administration of Porfirio Lobo, who was elected president of Honduras in 2009 after a coup ousted the previous president. Lobo’s chief of staff, Octavio Sánchez, was interested in experimenting with special economic zones. At the time, nearly 70 export processing zones, the oldest dating back to 1976, were operating in Honduras, but these zones still operated under Honduran law.
In 2011, Sánchez invited U.S. economist Paul Romer, who had delivered a TED talk on charter cities, to Honduras to serve as an advisor and lend the project international legitimacy. This partnership led to the initial charter city legislation passed in 2011, which set up a framework for what the Honduran government called Special Regions of Development (REDs).
Constitutional questions
Within a year, the project hit a roadblock. In October 2012, the Honduran Supreme Court ruled the charter cities’ enabling legislation unconstitutional. The court argued that the law violated the country’s sovereignty by placing territory outside government control.
Several months later, in a late-night legislative session called by the president of Congress, Juan Orlando Hernández, Congress sacked four of the justices that voted against the charter cities. This paved the way for new legislation under a new name – Employment and Economic Development Zones (ZEDEs) – which passed in 2013.
The final ZEDE law required changing the constitution to create a new type of territorial jurisdiction allowed to operate outside of Honduran law. The enabling law then stipulated that the ZEDEs were “entitled to their own laws, police forces, currencies, tax collection procedures, social services, and, most importantly, their own common-law courts…not subject to appeal to the Honduran Supreme Court.”
Próspera and the freedom to biohack
So how did these cities work in practice? The first Honduran charter city, Próspera, was founded in 2017 by Venezuelan-born Erick Brimen through a company incorporated in Delaware. Touted as the “first modern startup city in operation,” the city now has around 2,000 residents and e-residents, “many of whom have paid a fee for the option of living in Próspera or remotely incorporating a business there.”
Private armed guards stand in for police. Arbitration carried out by three retired Arizona judges stands in for a court system. Taxes are low and there is no fixed regulatory framework. For health and biotech companies, this means that there’s no regulator like the FDA assessing safety concerns. Rather, a company can choose an existing regulatory framework or create a new one. So long as they can secure regulatory insurance – which combines traditional liability insurance with fidelity bonds, which protect against damages from employees’ misconduct – they can bring their products or therapies to market.
Thus, Próspera has become a destination for people interested in experimenting with biohacking, an unconventional or do-it-yourself approach to biotechnology. Patri Friedman, whose venture capital fund invests in charter cities, has gotten various medical interventions in Próspera that are unavailable in the United States. He explained that after signing an informed consent agreement – and presumably paying a nontrivial fee (a single gene therapy treatment at a Próspera clinic was reported to cost around $25,000) – he has had gene therapy, replaced his mouth bacteria, and implanted his Tesla key in his hand.
Property and rights
Ciudad Morazán, a Honduran ZEDE founded by an Italian businessman named Massimo Mazzone, was designed for blue collar Honduran workers, rather than global digital nomads. The urban development plan proposed that the ZEDE and its industrial zone would become home to 9,000 working-class and middle-class residents. As of 2023, however, Ciudad Morazán had only 200 residents.
Próspera was in some ways a model for Mazzone. It not only showed him that creating a ZEDE was possible, but he was also able to learn from the Próspera incorporation process and copy many of the regulations. That said, the two ZEDEs are different not only in their target audience but in their conceptions of property ownership and how that relates to individual rights.
In Próspera, residents can buy or incorporate property – and property is linked to political voice. Under current rules, Próspera has an elected nine-person governing council. Physical residents each have a vote for some positions, and property owners, defined as “natural persons or legal entities who are the title owners to at least one square meter of land within Próspera” have additional votes for each square meter of land they own.
Ciudad Morazán, on the other hand, is an entrepreneurial community or entrecomm. Under this setup, a single owner “leases or rents out all of the different spaces, commercial or residential, and also maintains the common spaces.” There is no elected governing body. In Ciudad Morazán, leases are all for three-month terms with the understanding that if a person creates a problem, their lease will not be renewed.
Repeal of the ZEDE laws
The Honduran ZEDEs have been contentious since the first Supreme Court ruling of their unconstitutionality. In 2021, the United Nations released a statement expressing concern that the ZEDEs posed serious risks to Honduras’s ability to guarantee human rights. Shortly after, a Honduran NGO published a 90-page report condemning the ZEDEs on constitutional and economic grounds.
It didn’t help that the ZEDEs were highly associated with Porfirio Lobo and Juan Orlando Hernández (who became president after Lobo), who were both in the midst of public scandals. In July 2021, the U.S. State Department banned Lobo and his family from entering the U.S. due to allegations of corruption. And in February 2022, less than a month after leaving office, Honduran national police arrested Hernández after U.S. prosecutors requested his extradition for drug-trafficking and firearms charges.
In 2022, the Honduran Congress unanimously repealed the ZEDE enabling law. They also passed – but never ratified – a constitutional amendment that would abolish the existing ZEDEs. Then in 2024, the Supreme Court nullified the 2013 amendments to the constitution that were required to pass the enabling law. The court unanimously agreed that the ZEDEs violated the constitution.
What’s next?
What will now happen to the two existing ZEDEs in Honduras? That’s a good question. At the end of 2022, Próspera and its affiliates filed a $11 billion claim against Honduras in the World Bank’s international arbitration tribunal. The claim argues that this sum represents the amount of Próspera’s “lost future returns.” It also represents about a third of Honduras’s GDP. Próspera’s representatives are lobbying the U.S. government to apply sanctions if Honduras continues attempting to abolish the existing ZEDEs.
As the Honduran ZEDE drama plays out, the arbitration claim could force Honduras to allow the ZEDEs to continue operating despite the ruling of the Supreme Court. Paul Romer, who helped start the first version of the ZEDE project, warns that Próspera is “not even close to what anybody would recommend for a model of what to pursue if you are trying to help a country develop.”
If Trump follows through on his “Freedom Cities” campaign promise, the experiences with charter cities in Honduras offer a cautionary tale. In these experimental cities, as city founders imagined, the market replaced the government. Explicit links between money and power effectively made residents customers or clients – not citizens. And while ZEDE residents are technically still citizens or legal residents of Honduras, the Honduran government has limited power to ensure human rights are upheld.
Heather Sullivan is a 2024-2025 Good Authority fellow.
.jpg?uselang=es){kind=link}