Inside Central America’s free market paradise

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The UK is the place where free markets first unlocked what the economist Deirdre McCloskey calls the ‘Great Enrichment’ – the extraordinary wealth and human flourishing made possible by the industrial revolution. Yet today, the UK – as well as much of the rest of the western world – is economically stagnant, and has drifted away from the free market ideals that made it rich. So the question is – how can we release the power of free markets once again in the 21st century?

At Próspera, a startup city in Roatán, Honduras, we believe that the answer is to reinvent the very way governments provide services to their residents – its governance framework. Próspera’s model is to partner with countries to deploy its governance model, which includes a set of laws, regulations, taxes and dispute resolution forums.

The basic insight driving Próspera is this: to get a truly free commercial market, you need to inject market mechanisms into the underlying framework that governs that jurisdiction.

Without good governance, particularly rule of law, you can’t have effective markets or meaningful growth. It was only because the UK was the first country in history with real rule of law that the industrial revolution could take off almost 100 years before the rest of continental Europe. Several things made UK c.1700 unique:

• Constraints on the king: It was the only jurisdiction with a real constitutional constraint on the Crown’s power. Starting with the Magna Carta in the 1200s and evolving into the Bill of Rights in the late 1600s, English monarchy became uniquely constrained, in contrast to the royal absolutism that was the standard in the rest of the world.
• Competitive legal forums: England developed a uniquely competitive legal marketplace. Merchants could choose between royal courts, merchant courts, ecclesiastical courts and local courts. This competition drove innovation in commercial law and forced courts to maintain reputations for fairness – a merchant could simply take future business elsewhere if a court showed bias.
• Common Law: such law was based on precedent from actual cases, rather than a specific, more arbitrary code developed by the political or military leaders of the day. It also allowed for more competition – you could move to a different city if you wanted to deal with different judges.

Today, the system is crumbling, with the Government regularly overreaching in each one of these dimensions.

Looking at the last 300 years of empirical data, we’ve been able to deduce which policies actually lead to good outcomes, and which hinder it. Here’s how the Próspera governance platform works.

Regulatory system

In most jurisdictions, regulated industries – healthcare, finance, construction, energy, etc – face monopoly regulators with no competition. The result is years of waiting and millions in compliance costs. At Próspera, markets are created by allowing companies to operate under any OECD country’s regulations (Singapore, Sweden, New York, etc) or propose their own framework, opening the door to actual legal innovation.

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Rather than monopoly regulators, we use insurance. Getting an operating license means obtaining adequate third-party coverage. Insurers make better regulators than bureaucracies: they pay out if something goes wrong (so they care about real risk) and they earn premiums when things go right (so they don’t over-regulate safe products).

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Dispute Resolution

Courts are generally slow and expensive, making it difficult for normal people and small companies to receive justice. At Próspera, all non-criminal disputes go directly to a private arbitration venue, which through competition and profit motives has become quick and affordable, many times allowing resolutions in just 1-2 months that otherwise would have dragged on for years in traditional courts.

Right to Exit

As a landowner inside the jurisdiction, you can choose to leave the jurisdiction at any point, whether by incorporating into the national Honduran regime, or by ‘forking’ our jurisdiction and creating your own version of it inside the zone. Always being exposed to the risk of competition ensures everyone performs at their best.

The Social Contract

The social contract is usually a metaphor – a fiction used to justify whatever the state decides to impose.

At Próspera, it’s an actual contract. Every resident signs an Agreement of Coexistence before moving in. It specifies what Próspera will provide (dispute resolution, security, etc), what residents agree to (following the rules, paying fees), and critically – how either party can exit. If we breach our obligations, residents have legal recourse. If residents don’t like the terms, they can leave without penalty.

The results so far

The first hub has only been active for a few years, but has already yielded massive results

• From zero to hundreds of residents.
• More than 400 incorporated companies.
• Raised almost $200M, incl from Coinbase, Tim & Adam Draper, Peter Thiel.
• Generated over 3000 local jobs, each with a salary at least 25% higher than the national average.
• In 2022, the zone accounted for more than 30% of all greenfield Foreign Direct Investment into Honduras.

The lesson isn’t just relevant for special economic zones – it’s relevant for anyone who believes competition produces better outcomes than monopoly. Including, perhaps, for the country that first proved it.

Próspera will be hosting a networking event in London on January 9.

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