Why do thousands leave Honduras each year and risk their lives to get to the United States, where most of them will become illegal immigrants with no rights? Conversely, why is China becoming prosperous so rapidly?
In the past 20 years, hundreds of millions of Chinese have escaped poverty. Average urban wages in China today are more than five times what they were 20 years ago. The Chinese Special Economic Zones (SEZs) were key to this burst in prosperity.
As Nobel laureate Ronald Coase and economist Ning Wang show in “How China Became Capitalist,” the SEZs created the conditions under which the Chinese working class began the path towards dramatically higher wages.
Free zones were created in Honduras in the late 1980s. At the time it was predicted that they would create more than 100,000 jobs. At their peak, they did exactly that. But due in part to competition from China, they did not result in significant wage growth.
How can Honduras up its game so that it can bring higher-quality, higher-wage jobs to the country? Traditional free zones and special economic zones have been on balance a spectacular success at reducing poverty around the world.
In Mauritius, Mexico, Ireland, China, and elsewhere zones have begun the booms that later resulted in greater economic liberalization and increased economic growth. Jeff Sachs lists export-processing zones as one of the very few successful approaches to reducing poverty.
The management guru Peter Drucker was blunter: “zones are the only anti-poverty program that works.” But traditional zones only reduce taxes and regulation. This is often an important step in attracting investment, creating jobs, and creating prosperity because most developing nations have byzantine tax structures and/or excessive regulation.
The next step in zone development consists of the creation of zones that provide access to higher quality law and adjudication.