Honduras - Growth and Structure of the Economy

Growth and structure of the economy

After Honduras achieved independence from Spain in the early nineteenth century, its economic growth became closely related to its ability to develop attractive export products. During much of the nineteenth century, the Honduran economy languished; traditional cattle raising and subsistence agriculture produced no suitable major export. In the latter part of the century, economic activity quickened with the development of large-scale, preciousmetal mining. The most important mines were located in the mountains near the capital of Tegucigalpa and were owned by the New York and Honduras Rosario Mining Company (NYHRMC). Silver was the principal metal extracted, accounting for about 55 percent of exports in the 1880s. Mining income stimulated commercial and ancillary enterprises, built some infrastructure, and reduced monetary restraints on trade. Other beneficial economic effects were few, however, because the mining industry was never well integrated into the rest of the Honduran economy. The foreign mining companies employed a small work force, provided little or no government revenue, and relied mostly on imported mining equipment.

Honduras's international economic activity surged in the early twentieth century. Between 1913 and 1929, its agricultural exports rose from US$3 million (US$2 million from bananas) to US$25 million (US$21 million from bananas). These "golden" exports were supported by more than US$40 million of specialized banana company investment in the Honduran infrastructure and were safeguarded by United States pressure on the national government when the companies felt threatened.

The overall performance of the Honduran economy remained closely tied to banana prices and production from the 1920s until after the mid-century because other forms of commercial export agriculture were slow to emerge. In addition, until drastically reduced in the mid-1950s, the work force associated with banana cultivation represented a significant proportion of the wage earners in the country. Just before the banana industry's largest strike in 1954, approximately 35,000 workers held jobs on the banana plantations of the United Fruit Company (later United Brands Company, then Chiquita Brands International) or the Standard Fruit Company (later brought by Castle and Cook, then Dole Food Company).

After 1950 Honduran governments encouraged agricultural modernization and export diversification by spending heavily on transportation and communications infrastructure, agricultural credit, and technical assistance. During the 1950s--as a result of these improvements and the strong international export prices-- beef, cotton, and coffee became significant export products for the first time. Honduran sugar, timber, and tobacco also were exported, and by 1960 bananas had declined to a more modest share (45 percent) of total exports. During the 1960s, industrial growth was stimulated by the establishment of the Central American Common Market (CACM--see Appendix B). As a result of the reduction of regional trade barriers and the construction of a high common external tariff, some Honduran manufactured products, such as soaps, sold successfully in other Central American countries. Because of the greater size and relative efficiency of the Salvadoran and Guatemalan industrial sectors, however, Honduras bought far more manufactured products from its neighbors than it sold to them. After the 1969 Soccer War with El Salvador, Honduras effectively withdrew from the CACM. Favorable bilateral trade arrangements between Honduras and the other former CACM partners were subsequently negotiated, however.

A political shift in the 1980s had strong and unexpected repercussions on the country's economic condition. Beginning in late 1979, as insurgency spread in neighboring countries, Honduran military leaders enthusiastically came to support United States policies in the region. This alignment resulted in financial support that benefited the civilian as well as the military ministries and agencies of Honduras. Honduran defense spending rose throughout the 1980s until it consumed 20 to 30 percent of the national budget. Before the military buildup began in fiscal year (FY) 1980, United States military assistance to Honduras was less than US$4 million. Military aid more than doubled to reach just under US$9 million by FY 1981, surged to more than US$31 million by FY 1982, and stood at US$48.3 million in FY 1983. Tiny Honduras soon became the tenth largest recipient of United States assistance aid; total economic and military aid rose to more than US$200 million in 1985 and remained at more than US$100 million for the rest of the 1980s.

The increasing dependence of the Honduran economy on foreign aid was aggravated by a severe, regionwide economic decline during the 1980s. Private investment plummeted in 1980, and capital flight for that year was US$500 million. To make matters worse, coffee prices plunged on the international market in the mid-1980s and remained low throughout the decade. In 1993 average annual per capita income remained depressingly low at about US$580, and 75 percent of the population was poor by internationally defined standards.

Traditionally, Honduran economic hopes have been pinned on land and agricultural commodities. Despite those hopes, however, usable land has always been severely limited. Honduras's mostly mountainous terrain confines agriculturally exploitable land to narrow bands along the coasts and to some previously fertile but now largely depleted valleys. The country's once abundant forest resources have also been dramatically reduced, and Honduras has not derived economically significant income from mineral resources since the nineteenth century. Similarly, Honduras's industrial sector never was fully developed. The heady days of the CACM (midto -late 1960s), which produced an industrial boom for El Salvador and Guatemala, barely touched the Honduran economy except to increase its imports because of the comparative advantages enjoyed by the Salvadoran and Guatemalan economies and Honduras's inability to compete.

Bananas and coffee have also proven unreliable sources of income. Although bananas are less subject to the vagaries of international markets than coffee, natural disasters such as Hurricane Fifi in 1974, drought, and disease have appeared with a regular, albeit random, frequency to take their economic toll through severely diminished harvests. Moreover, bananas are grown and marketed mostly by international corporations, which keep the bulk of wealth generated. Coffee exports, equally unreliable as a major source of economic support, surpassed bananas in the mid1970s as Honduras's leading export income earner, but international price declines coupled with huge fiscal deficits underlined the vulnerability of coffee as an economic base.

As Honduras entered the 1990s, it did have some factors working in its favor--relative peace and a stronger civilian government with less military interference in the politics and economy of the country than in past years. The country was hobbled, however, by horrendous foreign debt, could claim only diminished natural resources, and had one of the fastest growing and urbanizing populations in the world. The government's daunting task then became how to create an economic base able to compensate for the withdrawal of much United States assistance without becoming solely dependent on traditional agricultural exports.

In the 1990s, bananas were booming again, particularly as new European trade agreements increased market size. Small bananaproducing cooperatives lined up in the 1990s to sell their land to the commercial giants, and the last banana-producing lands held by the government were privatized. Like most of Central America, Honduras in the 1990s began to woo foreign investors, mostly Asian clothing assembly firms, and it held high hopes for revenue to be generated by privatizing national industries. With one of the most strikeprone labor forces in Central America, debt-burdened and aging industrial assets, and a dramatically underdeveloped infrastructure, Honduras, however, has distinct economic disadvantages relative to its Central American and Caribbean neighbors, who compete with Honduras in the same export markets.

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