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  • Erick Brimen

The Key to Effective US Foreign Policy in Latin America: Prosperity Hubs

In a recent New York Times op-ed, columnist Bret Stephens laments the lack of a cohesive or effective US foreign policy in Latin America broadly, and in Honduras specifically. Stephens highlights violence in the Northern Triangle region and points to the fact that Honduras has lacked an official US Ambassador for more than two years as evidence of the United States’ great neglect of the Northern Triangle. As a solution, Stephens advocates for spending far more on international counternarcotics efforts.

While this may well benefit the current state of affairs in the Northern Triangle, it will ultimately fail to achieve the impactful, lasting change needed. Focusing more attention only on counternarcotics would continue to focus on the symptoms instead of treating the disease: lack of economic opportunity and economic growth in the region.

An effective American foreign policy would involve far more than just higher funding for counter-narcotics efforts. It would instead focus on creating the conditions for people in the Northern Triangle to thrive. More specifically, the US foreign policy in Latin America should focus on leveraging proven strategies for catalyzing rapid economic growth to reduce crime and migration.

The logic of such a foreign policy imperative is intuitive. As crime (and its cousin corruption) fall, economic activity and thus economic growth should increase. Lower crime reduces the transaction costs of doing business and forming contracts, which in turn creates a positive feedback loop of higher social trust and, in turn, lower transaction costs and higher economic growth.

To put it in more simple terms: it’s easier to conduct business when you aren’t afraid of your business associates killing you, or of your supply trucks getting robbed while running supply routes.

Crime and economic growth have a bi-causal relationship, though.  As an economy grows, it helps reduce crime by providing employment opportunities for at-risk individuals who would otherwise turn to crime. By creating more higher-paying employment opportunities, economic growth serves to reduce crime by bringing criminals out of the underworld and into formal markets.

A seminal World Bank research paper on the causes and effects of crime supports these theoretical claims with empirical research. Importantly, in a review of the existing academic literature on the topic, the authors state that previous researchers “…find a significant crime-inducing impact of unemployment and income inequality.” A more recent paper from the National Bureau of Economic Research found similar evidence for the claim that economic growth reduces corruption (a close correlate with crime), stating that “This paper uses cross-industry heterogeneity in growth rates… to test empirically whether growth leads to lower corruption. We find that it does.”

It is thus clear that economic growth and creating economic opportunity is key to alleviating crime, poverty, and migration in the Northern Triangle.

The question then remains: what should US foreign policy do to create the necessary economic opportunity to reduce violence and poverty?

The answer is simple: support the efforts of Northern Triangle countries to create Prosperity Hubs.

As I have written about in detail before, the core issue holding back entrepreneurship and economic growth in Latin America remains poor governance institutions. These dysfunctional institutions scare away foreign direct investment, reduce the ability of entrepreneurs to create wealth, and discourage innovation, the lifeblood of economic growth.

All previous attempts to remedy this issue through national-level reform have failed because it is nearly impossible to get the needed reforms enacted while entrenched elites who benefit from the current status quo hold the levers of power.

The solution to the issue of poor governance and intransigent national political bodies is instead to focus deep reforms into narrower geographic areas. In this way, the ire of entrenched elites is assuaged, but the needed reforms are still enabled to unlock prosperity.

I have come to call these areas of improved governance and unleashed potential Prosperity Hubs. For more details on what a prosperity hub is and how it works, please see my previous discussion of the topic.

Now that the need for and efficacy of Prosperity Hubs has been established, the role of the US foreign policy should become clear. To truly help the Northern Triangle and advance US interests in the region, the United States should focus its foreign policy on supporting the efforts of countries like Honduras to cultivate these Prosperity Hubs.

This support could take many forms. With its recently expanded budget and mandate, the Overseas Private Investment Corporation (OPIC, soon to be the U.S. Development Finance Corporation) could work with American and regional firms alike to provide financing for key infrastructure and economic development projects within Prosperity Hubs. The United States could likewise provide critical public administration and law enforcement training programs to Prosperity Hubs in an effort to increase the efficiency and effectiveness of the public administration and safety mechanisms there. USAID could focus its efforts towards helping MSMEs (micro, small, and medium enterprises) and funding social impact and economic development efforts in Prosperity Hubs, where they can rest assured that the institutional environment will not render their efforts fruitless.

Some individuals might take issue with the Prosperity Hub approach, pointing out that it is exclusionary and will only catalyze growth within the confines of the Hub, not the country as a whole. However, this is not true for a number of reasons.

First, these Hubs will not operate in isolation. They will, by their very nature, transact with businesses throughout the rest of the country to create supply lines, distribution networks, and more. This means the second and third order effects of activity within the Hub will benefit the broader economy of the country.

Second, it is important to ensure that the legislation enabling Prosperity Hubs is not exclusionary by confining the Hub jurisdiction to one particular location and prohibiting it from expanding. It is important that everyone in the country have the opportunity to enjoy the benefits of the Prosperity Hub’s jurisdiction.

Amazingly, Honduras’ ZEDE legislation already enables such inclusivity. According to the ZEDE Organic Law, any project, business, or area can voluntarily opt to join the ZEDE jurisdiction so long as they follow the procedure for doing so defined in the law. This means the ZEDE jurisdiction can be extended to cover the most economically destitute areas of Honduras, unlocking their potential and unleashing economic opportunity in those places which need it most.

Finally, Prosperity Hubs should not be seen as an end unto themselves, but an effective foreign policy tool for encouraging nationwide reform in Latin American countries. Once central governments see just how effective Prosperity Hubs are at generating economic opportunity, they will have a powerful incentive to “get in on the action” by copying or adopting the elements of Prosperity Hubs which make them so effective.

This exact pattern has played out in China. Shenzhen, a small and sleepy fishing village of roughly 30,000 people in 1979, was transformed into the first Chinese special economic zone in 1980—a proto-Prosperity Hub. This lowered tax rates, increased economic freedom, and opened Shenzhen up to foreign direct investment from the outside world. The effect was profound: Shenzhen’s GDP per capita has risen from $195 in 1980 to $25,000 in 2017. To put that into perspective, Shenzhen’s GDP per capita grew 12,720% at the exact same time its population increased by 39,900%.

The explosive economic growth of Shenzhen acted as an example for the Chinese government to emulate. Today, there are 19 special economic zones, 15 free-trade zones, and over 80 development zones blanketing all of mainland China.

The lesson is clear: special zones like Prosperity Hubs are not only effective at catalyzing economic growth in the short-term, but also at catalyzing inclusive institutional reform at the national level.

In this way, Prosperity Hubs can build local capacity and resilient institutions within regional governments, reducing the long-term need for US aid and support in the process.  Prosperity Hubs can catalyze a regional transition to self-reliance for developing nations.

American Foreign Policy in LATAM: Focused on Prosperity

Contrary to Bret Stephens and the New York Times, an effective American foreign policy in Latin America would go far beyond counter-narcotics efforts. Instead, the United States should focus on the root cause of Latin American violence, poverty, and instability by improving governance and catalyzing prosperity in the region.

However, these efforts do not have to be led by American government officials. In fact, entrepreneurs in the United States and Latin America should lead the charge in creating these Prosperity Hubs so that American foreign policy influence has an outlet through which to channel.

My team and I have been working diligently to do just that.

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