Economy

Honduras [1] is an extremely poor country. Annual per capita income was US$1,330 in 2007 and a staggering 59 percent of the population lives below the poverty line, with 35 percent in extreme poverty (unable to meet basic needs). There has actually been a significant reduction in poverty in recent years, but clearly there’s still a long, long way to go.

The development of Honduras is a litany of bright ideas and fond hopes foundering on the realities of the country’s difficult circumstances in the world economy and ineffective, corrupt leadership. The Spaniards, quickly put off by endless mountains and precious little easy wealth, left it a colonial backwater of mainly self-sufficient farmers supplemented with limited mining and agricultural exports. The first real economic development came in the form of British and American mining concerns in the mid-1800s, followed by the banana companies of the early 20th century. The banana companies completely transformed the economy of the north coast in particular, basically creating the cities of La Ceiba [2], Tela [3], and Puerto Cortés [4], and fueling San Pedro Sula [5]’s rise as the country’s main business city.

This economy of basically subsistence farming along with mining and banana exports by foreign firms continued until the 1950s, breaking down on growing competition in bananas and the depletion of most large mineral deposits. During the 1960s and 1970s, the Honduran economy grew steadily, following a policy of import-substitution and promotion of nontraditional exports. This policy essentially banked on an economic boom to offset the inevitable fiscal difficulties, but the region’s military conflicts during the 1980s sent investment and production into a tailspin.

After the end of the Contra war and the implementation of fiscal reforms by President Callejas, Honduras [1] became a favorite for foreign investors, particularly Asians building tax-free export factories, called maquilas. The growth in maquila exports, combined with growing exports of coffee, bananas, sugar, and shrimp, fueled growth rates of 3 percent a year or better beginning in 1995.

Hurricane Mitch was a major setback for the Honduran economy. Growth for 1998 had been projected at 5 percent, and even though the storm hit with only two months left in the year, damage pulled the number down to 2.9 percent. The following year, when the full effects of the destruction were felt, saw the economy shrink by 2.5 percent. In terms of overall development, the widely held view is that the country was set back 25 years.

After a reconstruction-led rebound of 5 percent in 2000, the slowing U.S. economy and falling international coffee prices combined to pull GDP growth down to 2.5 percent in 2001 and 2002. Growth since then had been on the rise, up to 6.3 percent annually in 2006 and 2007, but fell to 3.8 percent in 2008 and is projected to drop further, to 2 percent, in 2009.

In terms of the economy’s structure, it’s a telling sign that remittance income—money sent back home from Hondurans working abroad, mainly in the United States—is the biggest foreign currency earner, exceeding US$2.5 billion in 2008. Number two is the maquila export factories, which earned more than US$800 million in 2004. Agricultural products, led by coffee and bananas, are third in terms of export earnings nowadays, totaling around US$650 million in 2004. Tourism earnings are on the rise at US$360 million, and mining still generates significant income, at US$127 million. Thus while the outlook for the Honduran economy is improving, it still fluctuates in large measure to foreign rhythms over which it has no control, principally those of commodity prices and the U.S. economy.