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  • Erick Brimen

Prosperity Hubs: A Solution to the Migration Crisis

The Scope of the Migrant Crisis

To understand the importance and urgency of reducing migration, it is important to first establish the context of just how intense Central American migration has been recently. According to a recent Inter-America Dialogue report, the number of Central American migrants has more than doubled from 2000 to 2017, going from 2.6 million to 4.3 million people. Moreover, a vast majority—80%—are making their way to the United States.

This massive movement of people has a negative effect on the countries from which they are fleeing, reducing both the labor and human capital available in those regions. It also puts a strain on American resources, which is why curbing migration from Central America has become a US foreign policy imperative.

The Inter-American Dialogue report recognizes this fact and also recognizes the only viable solution to it: economic growth. Migration can only be reduced by addressing the issues which drive Central American individuals to migrate in the first place; that is, addressing the lack of economic opportunity in the region.

The Importance of Institutions

Institutions—that is, the “rules of the game” for economic actors—are what determine the success or failure of nations. This fact was first elucidated by economist Douglass North, who won the 1993 Nobel Prize for his lifetime of work illustrating how institutions affect economic growth.[1] In their New York Times bestseller on the topic, Why Nations Fail, Darron Acemoglu and James Robinson pull together all of the most important lessons from developmental and institutional economics to show what it is that makes some nations fail while others prosper. They decisively show that nations fail when they have “extractive” institutions and succeed when they have “inclusive” institutions. Extractive institutions are known for corruption, with a small group of elites leveraging the government to extract as much wealth as they can from society at the expense of the nation as a whole. Inclusive institutions are marked by strong protection of property rights, the rule of law, and freedom to innovate and create.

Numerous other scholars from such disparate institutions as the University of Hohenheim,[2] the University of Groningen,[3] and Florida State University[4] have published papers echoing these ideas. The lesson is clear: institutional improvements cause economic growth and prosperity.

Northern Triangle Institutions in Dire Need of Reform

The World Bank has developed a comprehensive index to evaluate and rank nations based upon their institutional strength or weakness called the Doing Business index. The Doing Business index “captures several important dimensions of the regulatory environment as it applies to local firms. It provides quantitative indicators on regulation for starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.” This index provides a rough snapshot of a nation’s institutional quality.[5]

The table below displays some of the Doing Business Index indicators for all three countries in the Northern Triangle compared to OECD nations:

As this table makes clear, all three Northern Triangle nations are far worse than OECD nations on nearly every indicator. It is no wonder Central American entrepreneurs choose to migrate rather than stay in their home country when it costs almost half of their yearly income and weeks of lost labor dealing with regulatory hurdles to simply start a business.

Looking at other indexes that contain indicators for protection of property rights, general rule of law, and corruption—all important aspects of institutional quality—the Northern Triangle fares just as poorly. The best index for this, the Economic Freedom Index, has El Salvador ranked 75th, Guatemala ranked 73rd, and Honduras ranked 94th.[1] No matter the source, the story is the same: The Northern Triangle’s current institutions are low quality and in dire need of radical transformation.

ZEDEs: Creating Hubs of Prosperity to Reduce Migration

ZEDEs are the ideal solution to the problem of poor institutions which stunt Honduras’ economic growth and drive its people to illegally migrate to the US. As was mentioned previously, these zones enable deep structural improvements in institutions without the usual resistance and barriers of entrenched elites who prevent such important reforms from taking place at the national level. In this way, the root cause of the lack of economic opportunity in Central America can be addressed in a way that has proven successful around the world.

These ZEDEs have the potential to powerfully alleviate poverty and reduce migration. If a Honduran ZEDE’s economy were to grow as fast as Shenzhen did in its first 10 years as an SEZ, the ZEDE’s GDP per capita would cross the migration-reducing $6,000 threshold in a mere 3 years.[2] Only ZEDEs have the capacity to actually reduce illegal migration to the United States in a meaningful way by striking at the root cause of the migration: economic opportunity and social mobility.

[1] Heritage Foundation, Economic Freedom of the World Index, 2018, https://www.heritage.org/index/

[2] Assuming a 40% annual growth rate, which Shenzhen attained from 1980-1993. Wei Ge (1999). "Chapter 4: The Performance of Special Economic Zones". Special Economic Zones and the Economic Transition in China. World Scientific Publishing Co Pte Ltd. pp. 67–108

[1] https://www.nytimes.com/2015/11/25/business/economy/douglass-c-north-nobel-laureate-economist-dies-at-95.html

[2] Pitlik, Hans. “The path of liberalization and economic growth.” Kyklos 55, no. 1 (2002): 57-80

[3] De Haan, Jakob, and Jan-Egbert Sturm. “On the relationship between economic freedom and economic growth.” European Journal of Political Economy 16, no. 2 (2000): 215-241

[4] James D. Gwartney, Robert A. Lawson and Randall G. Holcombe, Economic Freedom and the Environment for Economic Growth, Journal of Institutional and Theoretical Economics (JITE), Vol. 155, No. 4 (Dec. 1999), pp. 643-663

[5] http://www.doingbusiness.org/en/rankings