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Special Economic Zones
1990s was the fact that all the crucial conditions with regard to infrastructure, free zone policy, trade policy, and committed domestic investors were in place. When foreign MNCs started to shift their assembly lines to Honduras, the small Central American republic with its turbulent political past (and present) quickly developed into a leading exporter of textiles and clothing products to the United States. Over the course of 22 years, the Honduran government enacted several pieces of new legislation that broadened the geographic reach of the free zone policy to finally cover the entire country. The government learned from its early mistakes: for example, the implicit discrimination against domestic manufacturers up until the enactment of the EPZ Law reduced domestic investors’ interest in developing the local free zone environment and consequently had a discouraging effect on foreign investors. In more recent years, manufacturers have suffered from the unfavorable macroeconomic climate and the difficult security situation, which raise the cost of capital and risk of doing business. The country has gotten many things right. The in-house customs solution is a widely lauded PPP that is expedient and efficient. The professionally managed Puerto Cortés has been crucial to the competitiveness of the free zone industry. The zone operators’ decision to differentiate their free zones from other free zones in the region by investing in quality infrastructure and focus on providing high-quality services appears to have been the right strategy. Foreign anchor investments helped signal to foreign investors that Honduras was a potentially attractive supply base of clothing for the U.S. market. A professional trade and investment promotion agency also plays a seemingly important role. Honduras has been fairly successful at developing backward linkages. The lesson for small economies is that the design of the rules of origin in trade agreements may have a huge impact on the country’s ability to sustainably integrate new industries into the domestic economy. Honduras benefited greatly from preferential market access to the United States extended first in the CBI and later in DR-CAFTA. The rules of origin incorporated in these agreements, however, had a huge impact on the types of textiles and clothing product categories the country exports: at times, the rules have had a negative effect, and at other times, they have had a positive effect. Despite the success of the free zones program, it remains highly concentrated in terms of exported product categories and geographic coverage of the zones. The government’s selective geographic expansion of free zone policy did not have any significant effect, and the zone operators