“As economists, we commend (Honduran) President Castro and the people of Honduras, and hope that countries across the world follow their lead toward a fairer, more democratic trade system.”
In 2023, the small Central American country of Honduras (population: 10.7 million) was the second most sued nation at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID), with a total of nine ISDS (investor-state dispute settlement) cases against it (the only country with more was Mexico, with 10). Just one of those suits, brought by U.S. corporation Próspera Inc, a company financed by several Silicon Valley investors, including Peter Thiel, Balaji Srinivasan, and Marc Andreessen, is for $10.8 billion, equivalent to around a third of Honduras’ GDP.
Próspera Inc. filed its ISDS case with ICSID in late 2022 after Honduras’ left-leaning President Xiamora Castro (no relation to Fidel) partially repealed a law granting foreign investors like Próspera the right to create charter cities in Zones of Employment and Economic Development, or ZEDEs. Established in 2021 on Roatán, an island 40 miles off Honduras’ northern coast, Próspera was described by the tech news website Rest of World as a “crypto-libertarian paradise.”
Then, just a year later, the Castro government pulled the rug from under Próspera’s feet by doing away with part of the law allowing ZEDEs to operate as more or less autonomous territories on Honduran soil. In its ISDS suit, Próspera Inc. alleges that Honduras owes it more than $10 billion for breaking a “50-year legal stability guarantee” granting it sovereignty over Próspera, including the ability to create its own laws, courts, authorities and taxes.
Claws and Teeth
For those unfamiliar with this topic, ISDS clauses are what give most bilateral or multilateral investment treaties their claws and teeth, essentially enabling foreign investors to ride roughshod over domestic laws and regulations. Put simply, foreign investors get to sue governments for any loss of profit, including profits not yet earned, resulting from new laws and regulations, and they tend to have a chilling effect on pubic-interest regulatory action. The cases are decided by secret panels staffed by highly-paid, investor-friendly arbitrators and are always brought by corporations against governments, never the other way round.
But something almost unheard of is happening in Honduras’ case. Instead of waiting for the imposition of crippling fines that would almost certainly bankrupt her government, Xiaomi Castro decided in late February to withdraw her country from ICSID, arguing that the court was infringing illegally on Honduran sovereignty.
In taking this step, Honduras has become the first Central American country to walk away from ICSID, the world’s most important forum for the settlement of differences between investors and States, with a total of 149 government signatories. Until now, Latin America has been a hugely lucrative source of income for (mostly Western) corporations seeking legal damages against governments for passing laws or regulations that threaten their bottom line as well as the international arbitration lawyers that argue the cases. From an article I wrote in 2016:
[O]ver the last ten years, the region has been one of the primary sources of their exorbitant fees, which can range from $375 to $700 per hour depending on where the arbitration takes place.
By 2008, more than half of all registered claims at the International Centre for Settlement of Investment Disputes (ICSID) were pending against Latin American countries. In 2012, around one-quarter of all new ICSID disputes involved a Latin American state.
A Little Background
Xiomara Castro is the wife of former Honduran President Manuel Zelaya, who was ousted in a 2009 US-supported coup. In April, 2022, four months into office, she announced that she had already fulfilled one of her main campaign pledges by repealing a 2013 passed by the government of former strongarm President Porfirio Lobo Sosa that had allowed foreign investors to create charter cities in designated ZEDEs. According to Reuters, the law has only been partially repealed, though further steps to do away with the ZEDEs are expected in 2025.
The amount of autonomy that Lobo Sosa’s government had granted to the owners of the ZEDE’s is mind-boggling. As the Honduran daily newspaper La Prensa reported in 2021, the 2013 law clearly established that “each ZEDE will have its own internal security bodies (…), including its own police, crime investigation bodies, intelligence, criminal prosecution and penitentiary system.” The cities will also have an independent financial regime, and will not be subject to the exchange control of the Central Bank of Honduras; they are empowered to develop their own internal monetary policy.
Even before Castro’s election, local businesses were complaining that the law had granted too many privileges to foreign investors to the detriment of domestic capital. The US economist Paul Rohmer, the godfather of international charter cities who had initially worked with the Lobo Sosa government to develop ZEDEs, had disowned the project, warning that Honduras’ ZEDEs system was undemocratic, opaque, destined for collapse and shrouded in lies. As a recent article in The Intercept explains, the legal showdown between the Honduran government and the investors behind the charter cities presents an “almost impossible-to-believe scenario”:
A group of libertarian investors teamed up with a former Honduran government — which was tied at the hip with narco-traffickers and came to power after a U.S.-backed military coup — in order to implement the world’s most radical libertarian policy, which turned over significant portions of the country to those investors through so-called special economic zones. The Honduran public, in a backlash, ousted the narco-backed regime, and the new government repealed the libertarian legislation. The crypto investors are now using the World Bank to force Honduras to honor the narco-government’s policies…
The law that established ZEDEs — short for Zone for Employment and Economic Development — effectively carved out portions of Honduras and turned them over to American investors, who operate as effective sovereign governments. The ZEDEs could one day control 35 percent of Honduras’s territory, according to the United Nations, which has said that the zones raise human rights concerns.
It took enormous political muscle more than a decade ago to force the ZEDEs into law. They only became possible when Castro’s husband, Manuel Zelaya, was removed in a U.S.-backed coup in 2009.
After Zelaya was ousted, a new election brought in President Porfirio Lobo Sosa, who quickly moved to undo Zelaya’s social reforms, attacking workers rights and reneging on land reform efforts. The Supreme Court struck down the first version of the ZEDEs law as unconstitutional, but after the constitution was amended and four new justices were added to the Supreme Court, the law stuck in 2013.
“Economic Self-Harm”
Eleven years later, business lobbies in Honduras are warning of imminent disaster as foreign investors begin shunning the country. The Honduran Council of Private Enterprise described the Castro government’s decision to withdraw from ICSID as “economic self-harm,” putting at risk not only Honduras’ current economic stability, but also future opportunities for growth and development. The government’s move, it said, “slams the door in the face of foreign investors and the international community” and risks “triggering a flight of investors at a moment that we most need their confidence and capital to support our economy.”
A group of 85 international economists, including many whose names regularly appear on this site (e.g. Ha-Joon Chang, Yannis Varoufakis, Ann Pettifor, Jayati Ghosh and Daniela Gabor), could not disagree more. In a letter published in Progressive International the economists argue that they have found “scant economic evidence that mechanisms like ICSID stimulate meaningful foreign direct investment.” Instead, they say, “international arbitration courts like ICSID have allowed corporations to sue states and restrict their freedom to regulate in favour of consumers, workers and the environment” for decades:
Since 1996, governments in Latin America alone have been forced to compensate foreign corporations over $30 billion, intimidating regulators away from raising minimum wages, protecting vulnerable ecosystems, and introducing climate protections, among other domestic policy priorities.
The economists also describe Honduras’ predicament as a “powerful case of corporate abuse through the ISDS system”:
Since the 2021 election of the country’s first woman President, Xiomara Castro, corporations have brought a total of 10 ICSID cases against them. The largest, brought by the US corporation Próspera Inc, seeks more than $10 billion — two-thirds of the country’s annual budget — as compensation for the country’s decision to derogate the disastrous “ZEDEs” law that forfeited Honduran territory to foreign corporations like Próspera to found private cities that operate almost without regard for labour, environmental, or health regulations.
The letter closes with a bold assertion that “the era of corporate supremacy in the international trade system is coming to an end”.
The European Union recently announced its withdrawal from the Energy Charter Treaty (ECT). US President Joseph R. Biden, meanwhile, has pledged to not have provisions for these corporate courts in future trade deals. And major developing countries, such as Brazil and India, stand firm in their refusal to enter treaties like ICSID in the first place.
Now, the government of President Xiomara Castro has taken another important step to prioritise sustainable development over corporate profit. As economists, we commend President Castro and the people of Honduras, and hope that countries across the world follow their lead toward a fairer, more democratic trade system.
While it is hard to find fault with the letter’s overall message, especially the hope that other countries follow Honduras’ lead, the claim that corporate dominance of the global trade system is coming to an end, while certainly a desirable outcome, is perhaps a little optimistic. As Yves noted in the preamble to a recent cross-posted article on the gathering backlash against ISDS clauses, “while new ISDS provisions aren’t simply accepted as they once were, there are still plenty of trade deals in force with those stipulations.”
Rest assured that powerful international arbitration tribunals such as ICSID will do whatever they can to protect their racket for as long as possible. In other words, while the current ISDS system is most probably in terminal decline, especially after the collapse of the TPP and TTIP eight years ago, which in the eternal words of Obama’s US Trade Rep Michael Froman would become “the global benchmark for standards in a globalized world,” its death is likely to be painfully slow (for members of the global public, not the corporations that will continue to benefit from it).
Advanced economies like Australia and the EU may wish to disentangle themselves from their ISDS commitments but this will take time. Six years ago, the European Court of Justice ruled that the ISDS clauses contained within almost 200 bilateral investment treaties (BITs) between EU member countries are incompatible with EU law. Since then, the EU has modified the legal mechanism applicable to the trade agreements it signs while developing its own multilateral investment court system. However, as a 2022 European Parliament report notes, the number of IPAs (investment partnership agreements) signed by the EU has stalled since then, quite possibly due to the new arrangements.
Meanwhile, one hopes that Xiomara Castro’s defence of her nation’s economic interests against the rapacious demands of the ZEDE investors holds firm, and that her presidency doesn’t meet a similar fate to her husband’s. These are, after all, powerful forces — i.e., many of the world’s largest corporations — she is up against, and the last thing they will want is for countries in the Global South to begin abandoning the ICSID and other international arbitration panels.
To cap it all off, Castro’s government is currently negotiating a trade agreement with China after announcing the establishment of diplomatic relations with Beijing in October. In doing so, it became the latest in a long line of Latin American governments to jettison their decades-long ties with Taiwan, much to Washington’s chagrin. As the Washington Post ominously noted at the time, Honduras (emphasis my own) “was long among the most docile of U.S. regional partners.” Now, its government is cosying up to China, Washington’s principal strategic rival.