103239 v2 Honduras Unlocking Economic Potential for Greater Opportunities Systematic Country Diagnostic Marco Antonio Hernandez Ore Liliana D. Sousa J. Humberto Lopez S y s t e m at i c C o u n t r y D i a g n o s t i c Honduras Unlocking Economic Potential for Greater Opportunities Marco Antonio Hernandez Ore, Liliana D. Sousa, and J. Humberto Lopez © 2016 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 19 18 17 16 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Contents Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix 1 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Crime and Emigration: The Emergence of Two Cycles Locking in Low Growth . . . . . . . . . . . . . 3 1.2 Beyond Crime and Emigration: Long-Standing Challenges to Competitiveness and Opportunities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.3 Deep Roots of the Challenges Faced: Institutional Quality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.4 Priorities Ahead. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1.5 Process and Knowledge Gaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.6 Structure of the SCD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2 Poverty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.1 Trends in Poverty Reduction and Shared Prosperity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.2 Causes of Poverty and Drivers of Poverty Reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 3 Economic Growth in Honduras: Challenges and Opportunities . . . . . . . . . . . . . . . . . . . . . . 31 3.1 Drivers of Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 3.2 Recent Job Growth Has Been Concentrated in Low-Productivity Sectors. . . . . . . . . . . . . . . . . . 36 3.3 Selected Industries and Their Growth Challenges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 3.4 Challenges to Competitiveness in Honduras . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 3.5 Chronic Constraints to Economic Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 4 Equity, Equality, and Social Inclusion in Honduras . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 4.1 Limited and Unequal Access to Basic Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 4.2 Lack of Opportunities in the Labor Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 4.3 Challenges to Effective Public Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 5 Sustainability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 5.1 Macroeconomic Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 5.2 Fiscal Sustainability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 5.3 Social Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 5.4 Environmental Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 6 Taking Stock and Priorities Ahead. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 6.1 Challenges Facing Poverty Reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 6.2 Deep Roots of the Challenges Faced. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108 6.3 Priorities Ahead. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 iii Appendixes A Definition of Peer Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 B Poverty Measurement in Honduras. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 C Outcomes of the Poor Have Improved between 2003 and 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 D Labor Force Participation Correlates, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 E Emerging Research Area: What Has Been Affecting Low Returns to Investment in Honduras?�������������������������������������������������������������������������������������������������������������129 F Maps of Access to Services, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 G Gender Gap Regressions, 2003–13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 H Minimum Wage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 I Gender Labor Market Indicators, 2003–13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 J Employment, 2003–13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 K Wages, by Skill Level, 2003–13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 L Labor Market Indicators for Agriculture, 2003–13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 M Wages and Employment, by Formality Status. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .147 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 Boxes 2.1 International Benchmarking: Poverty and Inequality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.2 Indigenous Peoples and Afro-Descendants in Honduras. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2.3 Improvements in Honduras’ CCT System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 2.4 Characteristics of Migrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 2.5 Analyzing the Determinants of Remittances in Honduras. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 3.1 Honduras’ Exposure to Natural Hazards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 3.2 Quality of Schooling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 3.3 Governance Challenges in ENEE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 3.4 Examples of Special Regimens and Fiscal Benefits in Honduras. . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 4.1 The Minimum Salary and Inequality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 4.2 The Social Security System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 4.3 The Education System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 4.4 Public Procurement in Honduras. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 5.1 Recent Measures Aimed at Reducing the Fiscal Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 5.2 Improving Environmental and Social Safeguard: Corporación Dinant Case . . . . . . . . . . . . . . . . . 97 5.3 Measures to Improve Resilience and Disaster Risk Management. . . . . . . . . . . . . . . . . . . . . . . . . . 103 Figures 1.1 A Vicious Cycle between Crime and Violence and Low Growth. . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.2 A Vicious Cycle between Emigration/Remittances and Low Growth. . . . . . . . . . . . . . . . . . . . . . 4 1.3 A Cycle between the Quality of Institutions and Development Outcomes . . . . . . . . . . . . . . . . . 6 2.1 Gains in Reducing Poverty during the Mid-2000s Were Erased after 2008. . . . . . . . . . . . . . . . 13 B2.1.1 Honduras Is Poorer than Most Structural Peers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 B2.1.2 Honduras Has Higher Inequality than Its Structural and Aspirational Peers . . . . . . . . . . . . . . 14 iv Contents 2.2 Poverty Reduction in Honduras Has Been Slow and Uneven Compared with Regional Averages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2.3 Poverty Rates Have Been Consistently Higher in Rural Areas than in Urban Centers. . . . . . . 16 2.4 Growth in Honduras during the Mid-2000s Was among the Most Pro-Poor in LAC . . . . . . . 19 2.5 Honduras Remains One of the Most Unequal Countries in LAC. . . . . . . . . . . . . . . . . . . . . . . . 20 2.6 Recent Income Growth Has Been Pro-Poor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2.7 Honduras Has a Small Middle Class Compared with Other LAC Countries . . . . . . . . . . . . . . 20 2.8 Honduras Suffers from a Missing Middle Class. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 2.9 Income Growth Drove Changes in Poverty between 2003 and 2013 . . . . . . . . . . . . . . . . . . . . . 21 2.10 Remittances and Labor Income Have Been Key Factors in Poverty Reduction. . . . . . . . . . . . . 22 2.11 Fluctuations across Sectors Contributed to Changes in Poverty before and after 2008. . . . . . 23 2.12 Cash Transfers Are an Important Part of Social Programs in Honduras . . . . . . . . . . . . . . . . . . 23 2.13 Bono Vida Mejor Has Reduced Poverty among Its Beneficiaries. . . . . . . . . . . . . . . . . . . . . . . . . 24 2.14 Honduran Emigration to the United States Has Grown over the Past Several Decades. . . . . . 25 B2.4.1 There Has Been an Increase in Unskilled Migration from Honduras in Recent Cohorts . . . . 26 2.15 Remittances Rose Substantially in the Years before the 2008/09 Crisis. . . . . . . . . . . . . . . . . . . .27 3.1 Growth in Honduras Has Been More Volatile than the LAC Average . . . . . . . . . . . . . . . . . . . . 32 3.2 Growth in Honduras Has Been More Volatile than in All Other Regions Except Sub-Saharan Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 3.3 The Growth Rate of GDP per Capita Has Been Both Low and Volatile . . . . . . . . . . . . . . . . . . . 33 3.4 The Past Two Decades Saw Only Two Periods of Sustained Poverty Reduction. . . . . . . . . . . . 34 3.5 Productivity Growth in Honduras Has Generally Been Negative. . . . . . . . . . . . . . . . . . . . . . . . 35 3.6 Growth Is Being Driven by Private Consumption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 3.7 Young and Small Firms Are Responsible for a Larger Share of Job Creation. . . . . . . . . . . . . . . 37 3.8 Patterns of Job Creation Changed Dramatically before and after the Crisis. . . . . . . . . . . . . . . . 38 3.9 Wages Rose before the Crisis as Urban Growth Reduced the Rural Labor Supply. . . . . . . . . . 38 3.10 Sectoral Growth Patterns Are Consistent with Employment Patterns . . . . . . . . . . . . . . . . . . . . 39 3.11 The Gap between Average Real Wages in Honduras and the Region Grew between 2003 and 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 3.12 Self-Employment Accounts for 4 Out of 10 Jobs in Honduras. . . . . . . . . . . . . . . . . . . . . . . . . . . 40 3.13 Compared with the LAC Average, Productivity in Honduras Is Low Across All Sectors. . . . . 40 3.14 While Average Productivity Increased in the Transport and Communication Sector, Agricultural Productivity Stagnated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 3.15 The Cycle between Low Growth and Violence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 3.16 The Real Effective Exchange Rate Has Appreciated as Remittances Have Risen. . . . . . . . . . . . 48 3.17 The Cycle between Low Growth and Migration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 3.18 Sustained Fiscal Deficits Have Been Punctuated by Sporadic Attempts at Fiscal Consolidation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 3.19 The Government Spends a Significant Amount of Its Revenues in Servicing Debt . . . . . . . . . 50 3.20 The Fiscal Deficit Is a Key Determinant of the Current-Account Deficit. . . . . . . . . . . . . . . . . . 51 3.21 Honduras’ Labor Force Is Less Educated than Those of Similar Countries; Access to Post-Elementary Education Is Low. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 B3.2.1 Honduran Students Are Performing below Average in Mathematics. . . . . . . . . . . . . . . . . . . . . 53 3.22 Returns to Education Are High. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 3.23 The Poor Performance of the Logistics Sector Is Due Not Only to Infrastructure Gaps, but Also to Lack in Service Quality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Contents v 3.24 Industrial Tariffs of Electricity Are the Highest in Central America. . . . . . . . . . . . . . . . . . . . . . 55 3.25 High System Losses Undermine the Efficiency of the Electricity Sector . . . . . . . . . . . . . . . . . . 55 3.26 Access to Credit in Honduras Is Low in Comparison with LAC. . . . . . . . . . . . . . . . . . . . . . . . . 57 3.27 Honduras’ Regulatory Environment Appears to Be More Restrictive to Competition than the Regional Average. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 3.28 Government Intervention in Markets Hinders Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 3.29 Regulations Often Protect Incumbents, and Administrative Barriers Inhibit Competition, Particularly in Services Sectors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 3.30 Labor Costs in Honduras Are Higher than in Many Other Apparel-Exporting Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 4.1 Income Inequality in Honduras Is Both High and Volatile. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 4.2 Access to Flush Toilets Varies across Income Groups. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 4.3 Fewer than Half of Honduran Children Have Access to Improved Sanitation or Running Water. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 4.4 Inequality in Children’s Access to Services Is Largely Based on Rural Status, Parents’ Education and Income Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 4.5 Higher Income Groups Have Significantly Better Access to Secondary School. . . . . . . . . . . . .69 4.6 A Significant Share of Rural Students Do Not Transition to Secondary School . . . . . . . . . . . . 70 4.7 Education Quality Remains Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 4.8 Higher-Income Households Opt Out of the Public School System. . . . . . . . . . . . . . . . . . . . . . . 71 4.9 Labor Force Participation in Honduras Is Low by Regional Standards, Especially among Workers in the Bottom 40 Percent of the Income Distribution . . . . . . . . . . . . . . . . . . . 72 4.10 Women and Young People Are Less Likely to Participate in the Labor Force. . . . . . . . . . . . . . 72 4.11 Unemployment Is Especially High in Urban Areas and among Women and Youth. . . . . . . . . 73 4.12 The Least-Skilled Work Largely in Agriculture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 4.13 There Is a High Premium for Workers with Tertiary Education . . . . . . . . . . . . . . . . . . . . . . . . . 73 B4.1.1 High Minimum Wages Act as Weak Signals for the Informal Sector. . . . . . . . . . . . . . . . . . . . . 75 4.14 Honduras Has One of the Highest Minimum Wages in the Region. . . . . . . . . . . . . . . . . . . . . . 75 4.15 Public Sector Wages Exceed Private Sector Wages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 4.16 The Public-Private Wage Gap Varies by Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 4.17 Women Are More Likely to Work in Retail and Services, while Men Are More Likely to Work in the Primary Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 4.18 The Gender Wage Gap Varies by Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .78 4.19 A Significant Share of Public Spending Is Allocated to the Top 60 Percent. . . . . . . . . . . . . . . . 79 4.20 Public Salaries Have Risen in Nominal Terms, yet Declined as a Share of GDP. . . . . . . . . . . . 81 4.21 The Wage Bill Continues to Dominate the Education and Health Budgets. . . . . . . . . . . . . . . . 81 5.1 Surveys Increasingly Identify Crime and Corruption as Honduras’ Main Problems. . . . . . . . 92 5.2 Homicide Rates in Honduras Have Grown Dramatically since 2000. . . . . . . . . . . . . . . . . . . . . 93 5.3 Confidence in the Government Is Low and Declining Over Time . . . . . . . . . . . . . . . . . . . . . . . 93 5.4 Young People Who Neither Attend School Nor Are Employed Are from Poorer Households. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 5.5 Poorer Young Women Are More Likely to Be Out of School and Not Working. . . . . . . . . . . . 96 5.6 Half of Honduran Youth Are Out of the Education System by Age 15. . . . . . . . . . . . . . . . . . . . 96 6.1 Institutions and Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 6.2 A Cycle between Quality of Institutions and Development Outcomes. . . . . . . . . . . . . . . . . . . 109 6.3 Honduras’ Institutional Quality Indicators Are below Regional Average. . . . . . . . . . . . . . . . . 111 6.4 Proximate and Root Causes of Development Challenges in Honduras . . . . . . . . . . . . . . . . . . 111 vi Contents E.1 Honduras’ FDI Has Grown Significantly Since 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 E.2 Honduras’ Investment-to-GDP Ratio Has Been Higher Than That of Its Regional Peers. . . 130 E.3 Returns to Capital Have Been Consistently Lower in the Last Four Decades . . . . . . . . . . . . . 131 E.4 Investment in Construction Is Highly Concentrated in Residential Investment. . . . . . . . . . . 131 H.1 Honduran Minimum Salaries Were Already High before the 2009 Increase. . . . . . . . . . . . . . 137 H.2 Minimum Salaries for Agricultural Workers Have Fallen Behind. . . . . . . . . . . . . . . . . . . . . . . 137 Maps 2.1 Indigenous Peoples and Afro-Descendants Often Live in Areas with Lower Access to Basic Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 B2.2.1 Honduras’s Indigenous Peoples and Afro-Descendants Are Distributed across the Country. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4.1 Access to Sanitation Is Especially Limited in More Remote Parts of the Country . . . . . . . . . . 67 5.1 Though Homicide Rates Vary by Region, They Are High Throughout the Country . . . . . . . . 92 F.1 Percentage of Households with Access to Electricity Networks in Honduras, 2013. . . . . . . . 133 F.2 Percentage of Households without Access to Piped Water in Honduras, 2013. . . . . . . . . . . . 133 F.3 Percentage of Children Aged 6–14 Years Not Attending School in Honduras, 2013 . . . . . . . 133 Tables 1.1 Priorities Ahead: Policy Levers and Complementary Measures . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.1 Poverty Rates, by Age and Gender of Household Head, 2003–13. . . . . . . . . . . . . . . . . . . . . . . . 18 3.1 Chronic Challenges to Competitiveness in Honduras. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 5.1 Main Macroeconomic Indicators and Projections in Honduras, 2010–18. . . . . . . . . . . . . . . . . 86 5.2 Homicide Rates per 100,000 Inhabitants, by Age and Gender, 2014. . . . . . . . . . . . . . . . . . . . . . 94 6.1 Priorities Ahead: Policy Levers and Complementary Measures . . . . . . . . . . . . . . . . . . . . . . . . 113 C.1 Profile of the Poor and Non-Poor in Honduras, 2003–13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 D.1 Labor Force Participation Correlates, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 G.1 Gender Gap Regressions, 2003–13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 I.1 Gender Labor Market Indicators, by Type of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 I.2 Gender Labor Market Indicators, by Type of Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 I.3 Gender Labor Market Indicators, by Type of Category. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 J.1 Employment Levels, by Type, Sector, and Category. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 J.2 Share of Self-Employed, by Sector and Skill Level. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 K.1 Wages, by Skill Level and Type of Employment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 K.2 Wages, by Skill Level and Type of Sector and Category. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 L.1 Agricultural Wages, by Skill Level and Type of Employment. . . . . . . . . . . . . . . . . . . . . . . . . . . 145 L.2 Share of Employment in Agriculture, by Skill Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 M.1 Wages, by Type of Category, 2008–13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 M.2 Share of Employment, 2008–13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 M.3 Share of Employment, by Skill Level, 2008–13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 Contents vii Acknowledgments We thank the members of the World Bank Carol Mejia, Ana Funes, Noris Salinas, Desiree Group’s Honduras Country Team from all Gonzalez (LCCHN), Mariano Gonzalez Serrano, Global  Practices and the International Finance Javier  Aguilar, Odile Ivette Johnson Naveo, Corporation (IFC), as well as all the Honduran Melisa Gaitan Fanconi (GEEDR), Juan Jose authorities, partners, and stakeholders, who con- Miranda Montero (GENDR), Jane Hwang, tributed to the preparation of this Systematic Alfonso García Mora (GFMDR), Diego Dorado, Country Diagnostic (SCD). We are grateful for José Rezk, Irina Luca, Ezequiel Miranda, Arun their inputs, knowledge, and advice. Arya, Pablo Guzman Abastoflor, Elin Bergman, The team was led by Marco Antonio Hernandez Evelyn Hernandez (GGODR), Christine Lao Ore (Senior Economist) and Liliana D. Sousa Pena (GHNDR), Javier Posas, Mia Rodriguez, (Economist) under the guidance of J. Humberto Jose Lleo Mark Constantine, Eduardo Wallentin, Lopez (Country Director). The following people Giancarlo Ortega, Hama Makino, Jose Masjuan, provided overall guidance: Frank Sader (Principal Luc Grillet (IFC), Elizabeth Ruppert Bulmer Strategy Officer, IFC), Giorgio Valentini (Country (GCJDR), Laura Chioda (LCRCE), Gianfilippo Manager), Pablo Saavedra (Practice Manager), Carboni (MIGA), Jaime Frias, Guillermo Arenas, Oscar Calvo-Gonzalez (Practice Manager), Tanja Goodwin (GTCDR), Marcela Silva, Cecilia Maryanne Sharp (Country Operations Adviser), M. Briceno-Garmendia (GTIDR), Gabriela Manuela Francisco (Program Leader), and Grinsteins (LEGLE),  Augustin Maria, Ana Augusto de la Torre (Chief Economist, LCR). Campos Garcia, Carolina Diaz Giraldo, Bontje The team that prepared this report included Marie Zangerling, Guillermo Siercke, Enrique Giselle Del Carmen, Emma Monsalve, German Pantoja, Marcelo Fabre, Rocio Calidonio, Leonie Reyes, Mateo Salazar, Sarah Hause Van Wie, Willenbrink (GSURR), Marco Agüero, Antonio Elizabeta Perova (GPVDR), Jennifer Keller, Rodríguez, Carlos Aguilar, Gustavo Perochena Miguel Angel Saldarriaga Noel, Susana Sanchez, and Jose Antonio Silva (GWASL), and Sara Luis Alvaro Sanchez, Jorge Loyola, Ewa Korczyc, Haddock (GCGDR). Laura Olivera Garrido, Rodrigo Sanchez-Gavito, The team thanks the peer reviewers, Anna Sean Lothrop, Maryam Ali-Lothrop (GMFDR), Fruttero, Yasuhiko Matsuda, and Gallina Pablo Acosta, Gonzalo Javier Reyes Hartley, Andronova Vincelette, as well as Alma Kanani and Nancy Banegas, Junko Onishi (GSPDR), Norman Jorge Araujo for their comments and suggestions. Piccioni, Ramon Arias, Eli Weiss, Holger A. Kray, Thanks are also owed to colleagues with whom the Luz  Diaz (GFADR), Juan Diego Alonso team was able to discuss the SCD, including mem- (GEDDR), Martin Ochoa, Ezequiel Miranda, bers of the 2017 World Development Report team. Acknowledgments ix Chapter 1 Overview Honduras is Central America’s second-largest support diversification. Trade liberalization country with a population of more than 8 million ­ policies were furthered with the integration to and a land area of about 112,000 square kilome- the World Trade Organization in the 1990s and, ters. It has coastlines on both the Caribbean Sea, in the 2000’s, when the country joined a free including the three Bay Islands, and the Pacific trade agreement between Central American Ocean via the Gulf of Fonseca. Its inland terri- countries and US (the CAFTA-DR). tory is largely mountainous, with plains along Honduras possesses multiple strengths with the coast, and its rain forests, cloud forests, the potential to form a base to propel the country savannas, pine forests and the Mesoamerican towards faster growth and shared prosperity: Barrier Reef System boast a wealth of biodiver- sity. The country’s two largest cities, Tegucigalpa • First, its strategic location places Honduras as and San Pedro Sula, are home to almost a quarter a potential investment destination. Indeed, the of its population, yet approximately half of the country has relatively high levels of Foreign population lives in rural areas, where most are Direct Investment (about 6 percent of GDP) engaged in semi-subsistence agriculture. flowing into fast-growing sectors including The 20th century witnessed a profound eco- telecommunications, manufacturing, and nomic transformation and modernization in financial intermediation. Honduras’ location Honduras. While agriculture continues to play is  also helped by the connectivity provided an important role in gross domestic product by its deep water port in the Caribbean Coast (GDP), the manufacturing sector, driven by the (Puerto Cortés) which has good access to US product-assembly maquila industry, has become ports in the Caribbean Gulf and the East Coast. increasingly important. During the first part of Puerto Cortes was also part of the first wave of the twentieth century, Honduras’ exports cen- ports included in the Secure Freight Initiative tered mostly on bananas. In pursuit of a diversi- by which US officials can inspect the merchan- fied and modern productive structure, the dise before departing the port towards the US. country invested in infrastructure and promoted • Second, the country’s industrial base can sup- credit markets to the primary sector in the port an expansion of the tradable sector. At mid-twentieth century (Euraque 2004). In the about 20 percent of GDP, the manufacturing 1960s, the Central American Common Market sector is relatively large compared to countries was created to promote industrial production in Latin America and the Caribbean (LAC) and further develop this sector. These policies and other middle-income countries, and given resulted in a more diversified export structure. the country’s small size, this expansion could By the end of the 1960’s, other commodities such have plenty of benefits due to economies of as beef, cotton and sugar had become important scale or the possibility of specialization. players, while the share of bananas in total Although the maquila model (mainly concen- exports halved. Moreover, exports of industrial trated in textiles) still plays an important role, products to other countries within the region the country has been making efforts to diver- increased. With the creation of its first free sify to other areas including machinery and trade  zone in Puerto Cortés in the late 1970s electrical devices. and an export processing zone in the late 1980s, • Third, the Honduran economy has the second the country continued to implement policies to largest trade-to-GDP ratio in LAC and its Overview 1 efforts to diversify exports in the last decades 150 percent of the low- and middle-income not only have been successful in increasing c ­ ountries (LMICs) per capita income, 13.5 the number of exported goods and destination percent of the high-income countries (HICs) per markets, but also have developed internal capita income and 5.6 percent of the US per capita competencies in the management of external income. In 2014, when per capita was about trade, a valuable platform from which to fur- US$2,300 (the third lowest in LAC), these same ther grow the country’s presence in interna- indicators had fallen to 86 percent, 6.2  percent tional markets. and 4.3 percent respectively. In other words, • Fourth, with a young and growing population, Honduras has been diverging from these three Honduras has the opportunity to harness a comparators for more than half a century, a demographic dividend. With about a third of reflection of the country’s sustained lower growth its population between the ages of 10 and rates. Indeed over the 1960–2014 period, 24  and population growth rates declining, Honduras average per capita income growth Honduras is in the early stages of the demo- (1.2 percent) was well below the one observed in graphic transition and therefore in position to the LMIC group (3.1 percent), the HIC group benefit from a demographic dividend. (2.3 percent), and the US (2.0 percent). Honduras’ persistent poverty is the result of And yet, despite the potential associated with long-term low per capita growth and high its strengths, and the modernization efforts that inequality, perpetuated by the country’s high transformed Honduras in the early 20th century, ­ vulnerability to shocks. the country has the third lowest per capita income in LAC and is among the poorest coun- • First, over the past 40 years the country has tries in the Western Hemisphere. Nearly one in experienced modest growth rates marked by five Hondurans lives on less than US$1.90 per considerable volatility. This growth, however, day, the second highest rate in LAC. According has not been sufficient to keep pace with its to official poverty lines, in 2013 almost 65 percent rapid population growth, resulting in a widen- of Honduran households lived in poverty and 43 ing per capita income gap between Honduras percent lived in extreme poverty, including two and the world. Its low average growth masks out of three rural Hondurans. Nearly 80 percent high volatility: over 1960–2014, the standard of Hondurans younger than 15 live in impover- deviation of growth in Honduras was 44 ished households and approximately one in four percent, 83 percent and 52 percent larger than is undernourished, with negative implications that of Low and Middle Income Countries, for learning abilities and future earning capacity. High Income Countries, and the US. Low Even when there have been periods of poverty growth has limited the ability of the private sec- reduction, shocks have periodically erased gains. tor to generate jobs, resulting in weak employ- For instance, following a political and economic ment outcomes. For instance, Honduras has crisis in 2009, poverty rates increased for three one of the lowest labor force participation rates consecutive years; by 2013 poverty rates had in LAC, a small formal s ­ ector (accounting for returned to the levels seen a decade earlier. In only 20 percent of jobs) and the highest self-em- other words, there are forces at work that may ployment rate in Central America. result in poverty continuing to future genera- • Second, high levels of inequality have weak- tions unless an ambitious development plan is ened the ability for growth to reduce poverty by implemented. limiting the extent to which a large segment of While already behind standard comparators the population is able to fully access physical in 1960, the income gap between Honduras and and human capital. Making comparisons for the world has widened. In 1960 Honduras per earlier periods is difficult due to data limita- capita income (in current US$ terms) represented tions, but existing proxies suggest that the 2 Overview country’s inequality has historic roots. In 1925, number of critical factors affecting the country’s for example, only 29 percent of Hondurans 10 development outcomes, the SCD concludes that years old and above were literate. This com- there is a need for a comprehensive agenda that pares to 36 percent in Mexico, 40  percent in tackles simultaneously the problems that have Colombia, and 64 percent in Costa Rica. For kept the country in a low development equilib- LAC countries for which comparable data exist, rium for many decades, as well as emerging only Guatemala, at 15 percent, had lower liter- challenges that have the potential not only to ­ acy rates. In the early-1990s, the country’s Gini prevent progress but also worsen the current sit- coefficient (0.56) was already among the high- uation. The SCD also argues that the policy est in LAC after Brazil (0.59). With a Gini of agenda needs to be ambitious and move away 0.54 in 2013, Honduras has the second most from marginal interventions in order to move inequitable income distribution in LAC which Honduras from a situation where its economic means that growth has not been able to lift potentials are just potentials to another where many Hondurans out of poverty. While LAC they become actuals. has been moving towards becoming a middle class region, Honduras’ middle class has not grown over the past decade and remains among the smallest in the region. 1.1 Crime and Emigration: • Third, a large share of the population is The Emergence of Two Cycles vulnerable and exposed to regular shocks— ­ Locking in Low Growth both large and small—which has exacerbated Honduras’ history of low and volatile economic poverty by destroying or slowing asset accu- growth and high inequality have created the mulation. For example, in 1998, Hurricane conditions for the emergence of two mutually ­ Mitch caused 11,000–18,000 fatalities and reinforcing cycles: (a) a high crime-low growth destroyed 70 percent of the country’s crops cycle; and (b) an emigration/remittance flows- and 70 percent of the nation’s transport low growth cycle. Over the last 15 years these infrastructure, with an economic damage ­ cycles have shaped the challenges faced by estimated at around 81 percent of GDP. Honduras and have continued to impact the Beyond natural hazards, “smaller” shocks— country’s growth prospects. such as periodic floods, droughts, and Honduras has one of the highest levels of outbreaks of blight including the “coffee ­ crime and violence in the world, undermining rust”—have damaged agricultural produc- growth and stifling economic opportunity tion and hurt the poor. As a small open econ- figure  1.1). With 67 murders per 100,000 (­ omy, Honduras is also exposed to terms of inhabitants in 2014, Honduras’ homicide rates ­ trade shocks which at times have disrupted are among the highest in the world. Honduras periods of economic expansion. Evidence has been strategically important to the drug suggests the poorest households struggle the trade since the 1970s, but in the last 15 years the most with shocks, as the effects on assets last country has witnessed an increase in gang activ- longer and are felt more acutely relative to ity and a rise in violent crimes such as extortion wealthier groups. and kidnapping.1 Young men are particularly This Systematic Country Diagnostic (SCD) vulnerable to crime, both as victims and perpe- explores the drivers of these development out- trators. The cost of crime in Honduras is esti- comes in Honduras, and reflects on the policy mated to have reached a staggering 10 percent of priorities that should underlie a development GDP (US$900 million) per year, and the health strategy focused on eradicating poverty and costs alone are estimated at 1.3 percent of GDP boosting shared prosperity. After identifying a (World Bank 2011a). Security costs slash an Overview 3 FIGURE 1.1  A Vicious Cycle between Crime and FIGURE 1.2  A Vicious Cycle between Violence and Low Growth Emigration/Remittances and Low Growth Low Low economic Low Low economic profitability growth competitiveness growth Perception High security High reservation Lack of of instability costs wages and REER opportunities appreciation High Lack of violence opportunities Remittance Migration Violence estimated 9 percent from private sector profits. emigration and remittances flows have also nega- Crime reduces competitiveness, discourages tively impacted productivity by shrinking the size entrepreneurship and investment, and slows the of the labor force and increasing reservation wages. pace of job creation. To put it simply: crime acts At the same time, the data suggest the presence of as a barrier to growth. However, the dynamics effects similar to “Dutch disease” as remittance are more complex considering that low growth inflows appear to distort domestic prices in has a negative impact on the creation of eco- Honduras, causing an appreciation of the real effec- nomic opportunities, and this in turn lowers the tive exchange rate. Both the impact on the labor opportunity cost of joining criminal groups. The supply and the exchange rate damage the interna- implication is that high crime and low growth tional competitiveness of Honduran producers, can create a vicious cycle that locks the country hindering growth and economic opportunities. in a low level equilibrium. Despite the significant development impact of Large levels of emigration and remittances high levels of crime and large emigration/remit- flows are also presenting challenges to growth tances flows, these cycles do not provide a com- (­figure 1.2). Large-scale emigration from Honduras plete picture of the development challenges in is a relatively recent phenomenon that can be Honduras. As noted above, high poverty has per- traced back to the aftermath of Hurricane Mitch in sisted for decades. Yet, both crime and emigra- 1998. Today over half a million Hondurans (or tion emerged in the late-1990s: the country’s 13 percent of the working-age population) live in homicide rate in the early-1990s was below 20 the United States alone. Remittances approached per 100,000, similar to other Central American 18 percent of GDP in 2014, the largest rate in countries, while remittances flows in 1997, Central America and among the top fifteen world- just  before Hurricane Mitch, represented only wide. The average monthly remittance reported by 4  percent of GDP. This implies that neglecting recipients is US$477, almost 2.5 times the country’s pre-existing structural forces that were already average monthly per capita income. Migration preventing Honduras from developing in the opens new possibilities for workers, and remit- 1990s before the surge of crime and emigration tances have contributed to poverty reduction. Yet, would result in an incomplete picture of the evidence from Honduras indicates that the large country’s development challenges. 4 Overview 1.2 Beyond Crime and sustainability fronts: (a) continuing with the country’s fiscal instability that led it to benefit Emigration: Long-Standing from the Highly Indebted Poor Countries initia- Challenges to Competitiveness tive, Honduras is again experiencing a debt and Opportunities buildup that limits the use of domestic resources Growth Challenges for productive activities such as social and infra- structure investments; (b) beyond its impact on An analysis of the barriers to growth uncovers the investment climate and the allocation of long standing chronic constraints that have investment, high levels of crime and violence undermined productivity growth (on average, undermine the country’s social contract; and (c) total factor productivity fell between 1960 and the impact of natural hazards on Honduras is not 2013), the development of a dynamic formal sec- simply a symptom of the country’s geographical tor of the economy, and by extension, the creation location, but rather of its low resilience. Structural of high quality jobs—key to sustainable poverty sensitivity to economic shocks, chronic fiscal reduction. Elements identified in previous analyt- instability, low resilience to natural hazards, and ical works and confirmed in the SCD include: (a) high levels of crime and violence represent mul- an imperfect regulatory framework affecting both tiple dimensions of vulnerability that together the labor market and certain product regulations pose a persistent risk to the achievement of that hinder competition in the domestic markets; Honduras’ economic and social development (b) a lack of fiscal discipline and high levels of objectives. debt which have undermined macroeconomic stability in Honduras; (c) inadequate infrastruc- ture; (d) a persistent shortage of skills and limited 1.3 Deep Roots of the access to education for much of the population; and (e) relatively low access to capital (finance Challenges Faced: and property rights), particularly for SMEs. Institutional Quality The fact that there are so many factors that Inclusion Challenges emerge as development challenges may be an There are also a number of critical elements indication of a missing critical element in the affecting the unequal distribution of income. ­ diagnostic. The picture that emerges from the These include: (a) low access to, and poor quality discussion indicates that poverty is high and per- of, basic services—approximately half a million sistent, affected by low growth, high inequality, Honduran children do not have access to potable and limited sustainability due to exposure to water and 1.1 million children do not have access shocks across various fronts, and in turn, each of to basic sanitation; (b) an unequal distribution of these are affected by a number of bottlenecks. access to services related to household income and That is, the focus thus far has been on identifying location resulting in children from poor house- the proximate causes of Honduras’ weak develop- holds facing limited access to essential services; ment outcomes (e.g., crime, fiscal instability, and (c) a high minimum wage and other labor access to services, resilience). Is there a root cause market regulations that provide formal workers affecting the proximate determinants? with relatively high wages and labor protections, This SCD argues that a plausible root cause but do not reach the 80 percent of Honduran behind the country’s development outcomes is workers who remain in the informal sector. the  low quality of its institutions (figure 1.3). Institutions are defined as the basic pillar of the Sustainability Challenges state and include the following three elements: The sustainability analysis also reveals challenges formal and informal rules and regulations (rules); ­ along the economic, social, and environmental the bureaucratic structure that implements and Overview 5 FIGURE 1.3  A Cycle between the Quality of The literature on the role of institutions in eco- Institutions and Development Outcomes nomic development suggests that institutional weaknesses can lead to lower growth (through reg- Bargaining ulatory framework imperfections or inadequate power enforcement, macroeconomic instability, negative effects of human capital accumulation and public infrastructure, limited access to finance, and, more generally, inefficiencies of the public sector affect- Growth ing the implementation of programs), and high Quality of institutions Inclusion inequality (through governance effects on educa- Sustainability tion and health, and the redistributive capacity of the state). For example, in Honduras: Capacity • Macro-fiscal instability is, in part, the result of Rules institutional quality. Inadequate fiscal man- agement has played a large role in preventing Accountability Honduras from achieving sustained economic Source: Adapted from the proposed framework of the forthcoming growth, and the devastating impact of both 2017 World Development Report. natural hazards and economic shocks is explained, in part, by low fiscal resilience and enforces these rules (capacity); and the mecha- insufficient expenditure controls. nisms to hold agents accountable for their actions • High electricity costs result from losses of the (accountability). An examination of Honduras’ state-owned electricity company, driven by rankings across different dimensions reported in inadequate electricity pricing mechanisms, the Worldwide Governance Indicators (WGI) high levels of theft and fraud, and poor main- ­ suggests significant institutional challenges. For tenance of the distribution network. High instance, Honduras scores in the lowest quartile in energy costs can dramatically reduce economic the world in the areas of control of corruption, rule returns not just for individual projects but to of law, and government effectiveness, and below the entire infrastructure stock. average in the areas of political stability, voice and • Limited and unequal access to basic services is accountability, and regulatory q­ uality. While these affected by the country’s inefficient public aggregated measures provide limited information, spending. Public spending accounts for over a they are corroborated with other measures: on the fifth of GDP, but most goes to public sector institutions pillar of the World Economic Forum’s salaries. Driven by high minimum salaries (WEF) Global Competitiveness Index, Honduras and a lack of hiring oversight, the public wage ranks 105th out of 144; on the Corruption bill now represents an estimated 9 percent of Perceptions Index (CPI), Honduras ranks 126 out GDP and accounts for more than half of cur- of 175 countries; the Government of Honduras rent expenditures. Education spending alone provides the public with limited budget informa- accounts for 5.5 percent of GDP, yet at present tion and has scored 43 out of 100 in the Open an estimated 1,000 additional secondary Budget Index (OBI); on Judicial Independence, schools would be needed to achieve universal Honduras ranked 77 out of 142 in 2011–12; and, secondary education; instead, more than two- on the Press Freedom Index, Honduras ranked thirds of education spending is personnel 135 out of 179 countries in 2011–12. costs. Poor targeting mechanisms, limited Beyond aggregate indicators, the analysis of the budget flexibility, and a weak accountability bottlenecks to growth, inclusion, and sustainability framework have been worsened by fiscal insta- underscore issues related to institutional quality. bility and a lack of budgetary credibility. 6 Overview • The persistence of crime is attributable at would imply that countries can enter into a vir- least  in part to the judicial system’s lack of tuous circle where high growth tends to reduce enforcement capacity. Challenges regarding corruption and this feeds into higher growth, or law enforcement emerge from the United conversely that corruption negatively affects Nations Convention on Anti-Corruption growth and this feeds back an increase in cor- (UNCAC) self-assessment of chapter III on rupting activities. Another channel relates to Criminalization and Law Enforcement and income inequality. This is largely attributed to chapter IV on International Cooperation. This the importance of social cohesion, captured, for assessment reveals that the legal and regula- example, in the role of a sizeable middle class tory framework of Honduras complies with that both demands institutional quality and most provisions of the UNCAC in relation to increases institutional quality through its will- criminalization of bribery and with most ingness to contribute through taxation (Ferreira requirements relating to international cooper- et al. 2013). ation by signing of a series of international As with the cycles of crime and emigration, treaties, which are now part of domestic law. breaking the weak institutions-poor develop- However, it also reveals that major challenges ment outcomes cycle can be particularly chal- remain in terms of law enforcement, with few lenging given its self-reinforcing nature. The cases being investigated, prosecuted and even- existence of vicious cycles can make the task of tually punished with convictions. reducing poverty and boosting share prosperity more complex because of the self-reinforcing Development outcomes, in turn, can also mechanisms at play. affect the quality of institutions, suggesting the presence of a third cycle affecting Honduras (­ figure 1.3). The literature linking institutions with development outcomes is complemented 1.4 Priorities Ahead with another strand which emphasizes that the The discussion above concludes that Honduras quality of institutions is endogenous to develop- may be trapped in a low level equilibrium result- ment outcomes and hence has the potential to ing from three self-reinforcing cycles: (a) low create a feedback loop. The upcoming 2017 WDR growth and high levels of crime and violence; (b) framework identifies this feedback loop as a low growth and high migration/remittances function of the power structure and norms pres- flows; and (c) low growth/high inequality and ent in the society; that is, the bargaining power of poor institutional quality. These cycles reinforce different groups can influence the evolution of each other and have important implications for a the quality of institutions. policy prioritization exercise (table 1.1). Changes in the bargaining power of agents A first implication is that escaping Honduras’ and groups can influence the development path low level equilibrium will require actions on sev- of institutional quality. One channel emphasizes eral fronts. Looking for a single action or policy that higher income levels are likely to lead to to act as an engine of development is insufficient; higher demand for quality institutions, while addressing the challenges emerging from some also implying more availability of resources of the cycles and leaving aside those of others with which to build institutional quality (Alonso would risk leaving intact low growth attractors. and Garcimartin 2013). For example, as growth Obviously, this is not to say that a single policy increases the profitability of firms, they are able implemented in isolation will not have a positive to move away from areas where officials demand development impact. Yet, when the objective is bribes and to areas with lower bribes (Bai et al. to dramatically alter the development dynamics, 2013). In this way, growth acts as a push factor a coordinated effort along different fronts will and low bribes as a pull factor. In practice, this be needed. Overview 7 TABLE 1.1  Priorities Ahead: Policy Levers and Complementary Measures Policy levers to break or revert the vicious cycles Crime and growth •• Strengthening violence prevention and law enforcement Migration and growth •• Improving education and skills to compete Institutions and development outcomes •• Improving the quality of institutions through - strengthening of the rule of law and the judiciary, - capacity building, and - improvements in the accountability framework Complementary measures Boosting growth •• Promoting macroeconomic stability, including fiscal sustainability •• Improving infrastructure Fostering inclusion •• Strengthening the targeting and coverage of conditional cash transfers •• Improving access to basic services •• Promoting active labor market policies to improve job matching, particularly for low skilled workers Promoting resilience •• Strengthening prevention and disaster risk management A second implication is that the needed The poor stand to gain the most from a reduction actions will need to generate a “big push,” strong in crime and violence since they are often the enough to alter the existing dynamics. Marginal victims. Less crime implies reductions in pro- interventions are unlikely to break or revert the duction costs as expenditures associated with self-reinforcing forces that have kept Honduras buying protection are reduced. Smaller enter- in a low level equilibrium. It is not that modest prises will gain, with a potential positive impact interventions that go in the right direction will on employment generation and hence inclusion. not have a positive impact on development out- Lower crime and violence is likely to improve the comes, but rather, that these interventions are investment climate, support domestic entrepre- limited in what they can achieve given the com- neurship and increase foreign investment plexity of the challenges involved. inflows. A drop in crime and violence can also Third, it is important to identify entry points, create stronger value chains, potentially contrib- or policy levers, that can help break or revert the uting to an increase in exports and open space existing cycles—and, given the magnitude of for other areas of economic activity to grow, such challenges, they might need to be supported as tourism. In addition, it may reduce Honduras’ through additional policies that will foster com- out-migration and incentivize migrants to plementary progress in growth, inclusion and return, invest and transfer skills back into the sustainability. Priority areas to attack the chal- economy. lenges created by the cycles would have to focus Skill upgrades can be a powerful tool in fight- on (a) improving education and skills to com- ing crime and violence. For example, the pete; (b) strengthening violence prevention and Programa de Apoyo Temporal al Empleo (PATI) law enforcement; and (c) improving the quality implemented in El Salvador contributed to low- of the institutional framework, with a focus on ering the levels of crime. The program offered rule of law, capacity building and fostering income support to vulnerable individuals in accountability. urban areas with program beneficiaries commit- Breaking the cycle between violence and low ting to participate in community activities and growth requires a concentrated focus on preven- capacitation programs to improve their employ- tion and improved law enforcement to reduce ability and entrepreneurial abilities. This type of the high social and economic costs imposed by program increases the opportunity cost of ­joining crime and violence. Reducing crime and violence a criminal group by increasing both the present enhances social sustainability and improves the income as well as participants’ future potential credibility and legitimacy of the government. income.2 At the same time, addressing crime will 8 Overview also require a strategy that reduces impunity, capacity for implementation and enforcement, strengthen the judicial system, and enhance the and (c) improvements in the accountability accountability of the government, including its framework. actions to reduce impunity (Calvo-Gonzalez and Addressing the challenges emerging from the Lopez 2015). three cycles feeding into Honduras’ weak devel- Improving education and the skills to com- opment outcomes will also require policies that pete can help break the cycle between migration complement those priorities identified as entry and low growth by lowering the pressure of high point to the cycles, particularly those that have a reservation wages. Excessively high reservation direct impact on (a) reigniting economic growth wages, which are partly the result of large and (b) fostering inclusion. inflows of remittances, hamper labor market Promoting fiscal sustainability is perhaps the development as workers require wages that are most critical objective to reigniting economic above their marginal productivity. Increasing growth over the medium term. While measures labor productivity through investment in edu- for reigniting growth in the short term are diffi- cation and skills would help bridge this gap and cult to identify, a stronger fiscal position that is would positively impact growth, inclusion, and achieved now and sustained over the medium to sustainability, including crime prevention. the long-term will set the basis for progress on Better learning outcomes, even at the current service delivery, and growth and employment. levels of enrollment, would help equip the youth Fiscal deficits and slower economic growth since for the acquisition of skills demanded by the the 2009 crisis have increased public debt, affect- labor market. In this regard, tackling the coun- ing investor confidence. While the authorities try’s low secondary school completion rate and have recently made strides to reduce the fiscal low access to vocational training is fundamental deficit, fiscal consolidation will require addi- to promote improved job outcomes and ­generate tional reforms that enhance public financial greater productivity and innovation. Moreover, management and rebalance expenditures from the country may follow an active policy of train- current spending towards capital spending. ing adults focused on skills that facilitate entry Curtailing the fiscal losses in the power sector into better occupations, including providing will also bolster the fiscal position, and in this training to those formerly involved in crime and regard the current environment of low oil prices gangs. It is also likely that improved educational does provide an opportunity to advance an elec- outcomes contribute to higher retention rates at tricity subsidy reform. At the same time, there is the secondary level. Education, as noted above, scope for mobilizing additional tax revenues by is also a key building block for other priorities, improving tax and customs administration and in particular reducing crime and violence. reducing tax exemptions which represent a large The country’s institutional framework has share of GDP. implications for growth, inequality, and resil- With a view to generating sustained growth ience. Even though improvements to the quality and facilitating further insertion into global mar- of institutions are difficult to achieve, Honduras’ kets, it is important to address the constraints ability to harness its potential hinges on improv- of  expensive and low quality infrastructure ing the capacity of the public sector to plan and ­services. Key objectives should include a modern- implement effective policies, execute public ization of the state owned electricity company investment projects, deliver services, and (Empresa Nacional de Energía Eléctrica [ENEE]) increase accountability. The discussion in the through actions aimed at improving: (a)  energy SCD concludes that improvements to the qual- pricing and energy efficiency mechanisms, such ity of institutions in Honduras will require a as modernizing the energy matrix towards cleaner broad agenda that includes: (a) strengthening and cheaper energy sources to reduce the domi- of the rule of law and the judiciary, (b) building nance of thermal power; (b) the legal framework Overview 9 to reduce fraud and theft; and (c) the corporate assets both to create and to profit from opportu- governance of ENEE, including ­ building capacity nities. Similarly, reducing child malnutrition of the newly created energy regulatory agency. should figure as a high priority: studies estimate To promote further insertion into global markets, that malnutrition is responsible for approxi- a focus on port infrastructure and improved road mately 45 percent of under-five mortality and maintenance is warranted and should be com- that stunting, in particular, is estimated to con- bined with improved logistics and regulations to tribute to GDP losses of up to 11 percent (Black reduce waiting times while improving customs et al. 2013; Horton and Steckel 2013). In order to enforcement. Expanding the road network is improve the chances that each child in Honduras important to promote the inclusion of poorer reaches his or her potential, the country needs to rural areas and small producers, accounting for ensure that young children have access to ade- many of the country’s extreme poor. These invest- quate food, health services, and a healthy envi- ments, if planned and executed well, also rep- ronment (including access to clean water and resent an opportunity for growth in the near term, sanitation facilities), and appropriate medical providing opportunities for Public Private care, especially during pregnancy and the first Partnerships and the creation of jobs. two years of age. A solid insertion of Hondurans Measures aimed at boosting growth also sup- into the labor market is the best bet for the coun- port a more competitive private sector and help try to achieve sustainable inclusion. This calls for generate more demand for labor, creating much active labor market policies that work towards needed jobs. As in other economies, small and making markets more efficient and inclusive by young firms generate a disproportionate share of addressing issues of information, lack of skills, job creation. Reducing their exposure to economic and low job creation. Minimum wages set in line volatility through a healthier fiscal environment with market wages have the potential to unleash allows these firms, which are often the least able to investment and production in high productivity survive shocks, important economic space to sectors and contribute to a better allocation of grow. Reducing operating costs through improve- resources in the economy. Addressing skills and ments in the energy sector and transportation information problems can translate to improved would boost productivity—bolstering the poten- employment opportunities for the young and tial for productivity growth in key industries, poor and, in turn, can be a countervailing force including agribusiness and manufacturing. to violence and crime. Combined with the policy levers designed to One final reflection regards the need to focus address the cycles of crime, emigration, and insti- on policies that go beyond average higher growth tutions identified above, these measures would be rates and lower inequality, and include vulnera- expected to promote a better business climate, a bility considerations. For this, it will be critical more skilled workforce, and lead to more job cre- that Honduras continue building resilience to ation by the private sector. natural hazards as these are expected to increase The challenge of fostering inclusion cannot in frequency and severity due to the expected wait for education and skills to have an impact. impacts of climate change. An ample agenda is Eighty percent of Honduran children live in pov- already under implementation for building insti- erty and a majority do not finish secondary tutions and improving infrastructure and local school. There is strong evidence that the current planning to build resilience to natural hazards. social assistance programs are having an impact Greater attention is needed, however, to the in the reduction of poverty and should be impact of “small” natural events that affect the expanded to cover all eligible families living in lives of the poor in a localized but dramatic man- extreme poverty. Over the long-term, efforts at ner. In this regard, the capacity of households to inclusion need the support of good-quality basic manage the impact of natural hazards can be services that empower the population with the enhanced by linking them to saving mechanisms 10 Overview and increasing the availability of financial instru- • What is the full cost of crime to the Honduran ments, such as agricultural insurance. Similarly, economy? improved capacity to manage natural resources, • What is the effect of labor market regulations including water and forests, can decrease vulner- on job creation, informal employment and ability of households to hazards like droughts unemployment in Honduras? and landslides. • What is the impact of the country’s high min- There is no doubt that this is a complex agenda imum salaries on job creation, particularly for that will require persistence and commitment unskilled workers? over time. But it is a worthwhile endeavor as it • What are the challenges facing increased would allow Honduras to move from being a female inclusion into the labor force? country of potentials to one of actuals. • How does crime affect the welfare of the bottom 40 percent in Honduras? ­ • What is the relationship between vulnerabil- ity, extreme weather events and poverty? 1.5 Process and Knowledge Gaps This SCD draws on existing analysis and publica- tions, new analysis, and, importantly, consulta- 1.6 Structure of the SCD tions and ongoing dialogue with stakeholders in This SCD is structured as follows: the second Honduras. Throughout discussions, there was chapter examines trends in poverty and shared broad consensus on the diagnosis of challenges prosperity in Honduras and identifies the roles of faced in Honduras, in particular the country’s economic growth, labor markets, and social high rates of crime and violence and institutional policy for poverty and inequality reduction. The ­ quality, as well as priorities ahead. following three chapters provide analyses of the Although there are some analyses of the main factors affecting inclusion, growth, and nature and causes of Honduras’ high and persis- sustainability. Chapter 3 analyzes the drivers of tent levels of poverty and inequality, as well as its growth and identifies the key constraints to volatile growth, this SCD identifies several further growth. Chapter 4 assesses the drivers ­ knowledge gaps in the existing analyses. In iden- associated with the country’s limited inclusion tifying knowledge gaps, the SCD focused on and high inequality. Chapter 5 identifies risks to areas where new information could help inform the sustainability of development, including ade- specific actions in the priority areas. Eight con- quate fiscal policy, the role of crime and violence, crete knowledge gaps were identified: and environmental hazards. The final chapter • What are the determinants of low returns to takes stock of these elements and identifies prior- investment in Honduras? ities ahead. Notes 1. The global average homicide rate in 2012 was Generation in Poor Urban Neighborhoods, which 6.2 per 100,000 while countries with more than targeted at risk youth and unemployed heads of 20 per 100,000 are considered to have high household with young children. The project also homicide rates. Source: United Nations Office included a number of crime and violence preven- on Drugs and Crime. 2014. “Global Study on tion training and development of human capital, Homicide, 2013.” including conflict resolution and preparation for 2. The World Bank supported a similar cash employment. for work  project in Honduras, Employment Overview 11 Chapter 2 Poverty In 2013, more than half of the Honduran popula- mid-2000s, these were wiped out during the final tion lived below the poverty line, with six out of ten years of the decade, when the impact of the global rural families living in extreme poverty. Honduras financial crisis was magnified by domestic politi- also ranked among the most unequal countries in cal instability. By 2012, both the moderate and the region, and its middle class was among the extreme poverty rates had returned to their 2003 smallest in LAC. Low levels of economic inclusion, levels. This repeats what has become an unfortu- limited social mobility, and the vulnerability of nate pattern in Honduras, marking the fourth lower-income households to a wide range of shocks time since 1990 that sudden shocks have undone have made poverty in Honduras especially deep years of progress in poverty reduction. and intractable. Over the past 15 years, many Despite these setbacks, the share of the popu- Hondurans have left the country to seek opportu- lation living on less than US$1.90 per day—the nities abroad, and due to years of large-scale global extreme poverty line—has declined over migration Honduras now has one of the world’s time, falling from about 44 percent of the popula- highest levels of remittances as a share of GDP. tion in 1990 to 19 percent in 2013. Nevertheless, Although remittances have enormous potential to Honduras’ extreme poverty rate remains the sec- reduce poverty and increase household incomes, ond highest in the LAC region and trails that emerging evidence suggests that they may also be of  peer countries (box 2.1).2 Meanwhile, the causing Dutch Disease effects, as well as draining moderate poverty rate also experienced a modest the country’s human capital stock and potentially and uneven long-term decline, falling by roughly discouraging labor force participation among 20  percentage points since 1990, though it too domestic workers. Remittances, together with remains one of the highest in LAC. In 2013, both labor income and employment, have driven pov- erty trends over the last decade. Cash transfers have had a positive impact on extreme poverty FIGURE 2.1  Gains in Reducing Poverty during and social indicators, but their scope is relatively the Mid-2000s Were Erased after 2008 limited. (Official household poverty rates, %, 2003–13) 70 66.5 65.3 64.5 Percentage of households 2.1 Trends in Poverty Reduction 60 58.8 and Shared Prosperity 50 46.7 46.0 Due to the severe multidimensional vulnerability 42.6 of both individual households and the country as 40 36.4 a whole, poverty rates in Honduras are among the highest in the Latin America and the 30 Caribbean (LAC) region. In 2013, almost 65 09 03 13 11 05 07 20 20 20 20 percent of Honduran households were below the 20 20 poverty line, with 43 percent in extreme poverty Moderate poor Extreme poor (figure 2.1).1 Although modest gains were made Source: Work Bank estimates based on data from the Honduran authorities. during the global economic expansion of the Note: This figure reports the share of households living in poverty. Poverty 13 BOX 2.1  International Benchmarking: Poverty and Inequalitya Honduras’ global extreme poverty rate is higher than its structural peers and four times higher than its aspirational peers; its inequality rates are the highest among both structural and aspirational peers. As of 2012, the last year for which comparable global poverty rates have been published, Honduras’ extreme poverty rate was slightly higher than the average poverty of countries identified as structural peers (­figure B2.1.1). Compared to aspirational peers, Honduran poverty was four times, or about 19 percentage points, higher. Similarly, inequality, measured using the Gini Coefficient, has been consistently higher in Honduras relative to its peers (figure B2.1.2).b On average, both structural and aspirational peers have inequality of around 0.40 throughout the period even while Honduras’ fluctuates near 0.60. Notably, Peru and El Salvador have decreased their inequality levels over the last decade: Peru’s Gini decreased from 0.53 in 2003 to 0.45 in 2011 while El Salvador’s decreased to 0.42 during the same period. FIGURE B2.1.1  Honduras Is Poorer than FIGURE B2.1.2  Honduras Has Higher Most Structural Peers Inequality than Its Structural and (Poverty headcount ratio at US$ 1.90 a day Aspirational Peers (2011 PPP) Peers, 2002–12) (Gini Coefficient, Peers, 2003–11) 35 0.60 30 0.55 25 Poverty rate (%) Gini coefficient 20 0.50 15 0.45 10 0.40 5 0 0.35 04 09 10 08 03 02 06 05 11 10 09 20 1 04 03 05 11 07 07 02 06 12 08 0 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Honduras Honduras Structural peers Structural peers Aspirational peers Aspirational peers Source: World Development Indicators and PovCalNet. Note: See appendix A for how the aspirational and structural peers were identified. The average Gini coefficient was calculated for structural and aspirational peers. For Nicaragua and Chile values were interpolated using WDI data for years in which data were unavailable. For Senegal, only 2001, 2005 and 2011 were available. For Morocco only 2001 and 2007 data were available. For Latvia 2001, 2003, 2005, 2007, 2009 values were missing. Finally, for Lithuania 2007 and 2009 were missing. a. For global comparisons, two sets of countries have been identified. Structural peers and aspirational peers (see appendix A). b. Care should be taken in interpreting the Gini coefficient across regions as many countries outside of the LAC region rely on welfare aggregates based on consumption, while in LAC, the welfare aggregate is based on income. Income-based inequality measures tend to be higher than consumption-based measures. the moderate and extreme poverty rates decreased Honduras is one of the poorest countries in a for the first time since 2009 (figure 2.2). growing region. The aggregate LAC poverty rate Slow and inconsistent poverty reduction in fell from 41.3 percent in 2003 to 25.3 percent in Honduras is a departure from regional trends. 2012. Meanwhile, Honduras’ poverty rate fluctu- Poverty rates in LAC have declined steadily ated between 53 and 65 percent, and it is now and  substantially over the past decade. With a more than double the LAC average. While gross domestic product (GDP) per capita of Central America has lagged the broader regional US$2,291, just 30 percent of the LAC average, trend, its overall poverty rate has modestly 14 Poverty FIGURE 2.2  Poverty Reduction in Honduras index is a measure of poverty based on access to Has Been Slow and Uneven Compared with basic goods and services, rather than income or Regional Averages consumption. Using municipality-level rates of (Headcount poverty rates at $4/day, 2001–13) access to basic goods and services, the UBN is 70 approximated in this report as the average of the 55.9 59.4 share of households without access to six funda- 60 mental services. It identifies the share of families 50 45.5 which: (a) include children aged 6–14 who are P rc nt 40.9 40 42.6 not attending school, (b) lack access to running 30 water, (c) lack access to improved sanitary 24.3 facilities, (d) lack access to electricity, (e) live in ­ 20 housing with a dirt floor, or (f) live in over- 10 20 4 09 20 3 13 20 8 02 12 20 6 11 05 1 07 0 0 0 0 0 crowded housing. Honduras’ average UBN 20 20 20 20 20 20 20 20 20 Honduras score  across all administrative departments is Rest of Central America 26.3 percent. However, a breakdown by adminis- Latin America and Caribbean trative department reveals substantial geographic Source: World Bank estimates using SEDLAC (CEDLAS and the differences, ranging from Islas de la Bahía, which World Bank). has the lowest UBN score at 6.6 percent, to Gracias a Dios, which has the highest at 47.7 percent. The urban centers have lower levels declined, and since 2009 poverty rates in of UBN as shown in map 2.1. Departments in Honduras have diverged substantially from those which the majority of the population is com- of its neighbors. prised of Indigenous Peoples (IP) and Afro- descendants (AD) (Gracias a Dios, La Paz and Who Are the Poor? Intibucá) have UBN scores that are worse than In Honduras more than half of the poor, and the national average (box 2.2). two-thirds of the extreme poor, live in rural areas Children in Honduras are especially likely (figure 2.3). Reductions in both extreme and to  live in poverty and suffer the consequences moderate poverty between 2003 and 2013 were of  malnutrition and inadequate access to driven by gains in rural areas, while the rest of clean  water and sanitation. In 2013, nearly the country experienced a slight increase in both. 80 percent of Hondurans younger than 15 lived Rural poverty is most heavily concentrated in the in poverty, in contrast to 64 percent of prime-age western and southern areas of the country, adults (table 2.1). Approximately one in four known as the “Dry Corridor” (Corredor Seco) children in Honduras is so undernourished that (Weiss 2014). The rural poor overwhelmingly their  ­development is stunted, with negative rely on agriculture as their principal livelihood. implications for their future learning abilities and Seventy-two percent of agricultural families in labor capacity.3 The World Food Program esti- Honduras are engaged in semi-subsistence farm- mates that 60 percent of Hondurans are food ing, which is typically characterized by low mar- insecure, and in the Corredor Seco, where poverty ginal productivity and high vulnerability to is most acute, 58 percent of children under five shocks (Weiss 2014). Between 2008 and 2013, suffer from chronic malnutrition. Contributing self-employment represented about half of total factors  include limited access to clean water, a employment in rural areas. ­nutrient-deficient diet, poor sanitation and insuf- Nonmonetary poverty is most acute among ficient breastfeeding (World Bank 2015c).4 the rural population, and rural households are Chronic malnutrition is about twice as common far more likely to suffer from a lack of basic among children in rural areas (28.8 percent) than services. The Unsatisfied Basic Needs (UBN) ­ in urban centers (14.6 percent). Poverty 15 FIGURE 2.3  Poverty Rates Have Been Consistently Higher in Rural Areas than in Urban Centers (National Poverty Rates by Region, 2003 vs. 2013, percent) a. All poor b. The extremely poor 80 7169 80 70 64 64 60 70 60 56 62 54 60 56 Percentage (%) 51 51 Percentage (%) 50 48 50 4543 40 40 30 30 27 29 20 19 21 18 20 20 10 10 0 0 pa la n pa la n l l l l ra na na ra ba ba Su Su al al Ru Ru tio tio Ur Ur ig ig o o c c dr dr Na Na gu gu Pe Pe Te Te n n Sa Sa 2003 2013 Source: World Bank estimates based on the Honduran household surveys (Encuesta Permanente de Hogares de Propositos Múlitples, EPHPM). MAP 2.1  Indigenous Peoples and Afro-Descendants Often Live in Areas with Lower Access to Basic Services (Map of unsatisfied basic needs) Unmet Basic Needs 5.1%–14.5% 14.6%–21.9% 22.0%–29.5% 29.6%–39.2% 39.3%–58.2% Source: World Bank estimates based on tabulations from the XVII Population and VI Housing Census (2013), provided by the Honduran authorities. Note: Departments in which the majority of the population is comprised of IP and AD are outlined in red. 16 Poverty BOX 2.2  Indigenous Peoples and Afro-Descendants in Honduras An estimated 8.6 percent of the Honduran population is made up of Indigenous Peoples and ­Afro-descendants.a There are seven indigenous groups (Miskito, Pech, Tawahka, Nahua, Tolupán, Chortí y Lenca), one group considered both indigenous and Afro-descendant (the Garifunas) and one ­ Afro-descendant group, the Creoles. While the IP are concentrated in the southwest and northeast corners of the country, the AD are primarily along the Caribbean coast (map B2.2.1). Social structures ­ in these groups remain strong and, except for the Lenca and the Chorti, the groups have kept their ­ languages. Given the lack of information about the IP and AD populations in the Honduran household surveys, there are no official estimates of the poverty rates for these groups. However, other analysis suggests that poverty rates are high among indigenous groups: rough estimations from indigenous organizations indicate that over 70 percent live in poverty and over half of the population is not employed (Faúndez-Meléndez and Valdés-Castillo 2011). Agriculture is the predominant activity for most IP and AD groups in Honduras. MAP B2.2.1  Honduras’s Indigenous Peoples and Afro-Descendants Are Distributed across the Country (Map of indigenous peoples and Afro-descendants) Afro-descendants (population) 0–200 201–900 901–3,100 3,101–5,800 5,800–8,000 Indigenous people (population) 0–3,600 3,601–5,800 5,800–10,800 10,801–19,800 19,801–43,200 Source: World Bank estimates based on tabulations from the XVII Population and VI Housing Census (2013), provided by the Honduran authorities. Note: For each department, only the population of the group (IP or AD) with the largest population is reported. For this map, the Garifunas are included as AD even as they are considered both AD and IP. a. Estimates are based on tabulations from the XVII Population and VI Housing Census (2013), provided by the Honduran authorities. Poverty 17 TABLE 2.1  Poverty Rates, by Age and Gender an annualized rate of 9.4 percent, faster than the of Household Head, 2003–13 rate for the population as a whole (figure 2.4). Year Age group Gender of head In fact, Honduras outperformed most LAC <15 15–25 25–65 65+ Female Male countries in promoting shared prosperity dur- 2003 77.5 65.4 63.5 71.2 71.1 69.4 ing this period. However, these gains were par- 2008 76.9 64.9 60.3 67.9 69.8 66.1 tially erased in the wake of the political and 2012 79.8 68.3 65.5 67.9 70.7 70.6 economic crises at the end of the decade, and 2013 79.3 67.2 64.0 66.5 70.5 69.2 from 2009 to 2013, the average income among Source: World Bank estimates based on the Honduran household surveys (Encuesta Permanente de Hogares de Propósitos Multiples, the bottom 40 percent contracted by an annual- EPHPM). ized rate of 2.9 percent, while average incomes fell by 4.3 percent. These outcomes were the worst in the LAC region and underscore the Extreme poverty remains pervasive in importance of vulnerability in perpetuating Honduras, yet there are signs of improvement in poverty in Honduras. education and labor force participation among households below the extreme poverty line. The  Government has made substantial invest- Income Inequality: The Missing ments in the human capital of the extreme poor Middle Class over the past decade (appendix C). As a result, Income inequality in Honduras is among the school enrollment rates among children aged highest in LAC, and periods of inclusive 6–12 ­ living in extreme poverty rose by growth  have been followed by contractions 16  percent, and the average years of education and  ­regressive recoveries.6 Between 2003 and among heads of extreme poor households 2013, inequality fell substantially across the increased by more than 1 year to 3.6 years. LAC region (figure 2.5).7 After spiking in 2005, Nevertheless, the share of 13–18 year olds inequality in  Honduras declined rapidly enrolled in school remains low for both the through 2009 as income growth among the poor and extreme poor at just 15  percent. poorest households outpaced growth among Labor  market outcomes show mixed signs of the better off (figure  2.6). GDP contracted in improvement for the poor and extreme poor. 2009, yet inequality continued to decline as Unemployment rates have fallen, particularly the  initial effects of the crisis fell hardest on for men, while the female labor force households in the top decile, which saw their ­ participation rate among the extreme p ­ ­oor aggregate income drop by 13.8 percent.8 Poor increased. Even so, female labor force participa- and middle-class households also suffered as tion among the extreme poor remained at just the economy contracted, and they were far 37.1 percent, below the labor force participation slower to recover. From 2010 to 2011, inequal- rate of 49.8  percent for the population as ity  again increased as rebounding growth a whole. benefited  the top of the distribution, even as ­ incomes  ­ continued to fall among the bottom Households in the Poorest 40 Percent 90  percent. After plateauing between 2011 Continue to Live in Extreme Poverty and  2012, the Gini coefficient fell sharply Hondurans in the bottom 40 percent of the to  0.53  in 2013 as GDP growth slowed. This income distribution have an average income of drop in inequality was due to a combination less than US$1.70, just half of the average for of  income  growth among lower deciles and LAC as a whole.5 The economic expansion of ­ declining income among the top decile. This the mid-2000s was generally pro-poor, and may signal a return to a more progressive incomes rose among the bottom 40 percent at growth pattern, as income growth at the bottom 18 Poverty FIGURE 2.4  Growth in Honduras during the Mid-2000s Was among the Most Pro-Poor in LAC a. Income growth among the bottom 40% of the distribution and overall, 2003–08 Annualized growth rate 9 4 –1 –6 8 9 9 8 8 8 8 8 8 8 8 8 8 8 8 6 7 –0 –0 –0 –0 –0 –0 –0 –0 –0 –0 –0 –0 –0 –0 –0 –0 –0 03 04 05 03 3 03 02 03 03 04 02 03 04 03 03 00 03 00 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 I2 V L C EX L R G L Y Y U A M D M N CR CH BO CO SL NI UR AR PR PE BR EC HN PA DO GT M Mean income bottom 40% Overall population b. Income growth of the bottom 40 percent and overall, 2008–13 12 10 Annualized growth rate 8 6 4 2 0 –2 –4 –6 3 3 3 3 3 2 3 3 3 13 3 3 3 3 3 1 –1 –1 –1 –1 –1 –1 –1 –1 –1 –1 –1 –1 –1 –1 –1 0– 06 08 08 08 08 08 08 08 08 08 08 09 08 08 08 01 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 I2 M EX V A L U R D M N G Y L L Y CR CH CO BO UR PR SL BR AR HN PE EC PA GT DO M Mean income bottom 40% Overall population Source: World Bank 2015e. surpassed growth of the distribution has again ­ one of the smallest in LAC (figure 2.7). In many at the top. countries a large and growing middle class has After expanding modestly during the mid- been associated with stronger economic growth, 2000s, Honduras’ middle class contracted in the better governance quality and a more stable wake of the domestic and global crises.9 As pov- ­ society. In Honduras, the share of low-income erty fell from 2005 to 2009, the middle class households—those that are above the poverty expanded from 10.9 percent to 15.7 percent of line but not yet in the middle class—rose in the the population. However, by 2011 the middle years prior to 2009, reflecting the economy’s class had shrunk to less than 13 percent and by modest success in enabling households to escape 2013 it had returned to 10.9 percent, making it poverty. After 2009, however, the share declined Poverty 19 FIGURE 2.5  Honduras Remains One of the FIGURE 2.6  Recent Income Growth Has Been Most Unequal Countries in LAC Pro-Poor (Gini coefficient, 2003–13) (Growth incidence curve, 2003–13) 0.60 25 20 15 Gini coefficient 0.55 10 Percent 5 0 0.50 –5 –10 0.45 –15 5 15 25 35 45 55 65 75 85 95 08 06 09 03 05 04 07 10 13 12 11 Percentile 20 20 20 20 20 20 20 20 20 20 20 Honduras LAC Central America 2003–08 2008–12 2012–13 Source: World Bank estimates based on the Honduran household Source: World Bank estimates based on EPHPM. surveys (Encuesta Permanente de Hogares de Propositos Múlitples, Note: The bottom and top 1 percent are not reported in these GICs as EPHPM) and the Central Bank of Honduras. the estimates of income at the extremes are particularly noisy in household surveys. FIGURE 2.7  Honduras Has a Small Middle Class Compared with Other LAC Countries (Population distribution by income level, 2013) 100 80 Percent of the ppopulation 60 40 20 0 a ia o a n an ca a ile as ic u y r or il al bi ic do am ba r ua liv bl az Ch Pe Ri ur ad rb ex em m pu ua ur g Bo Br n nd -u lv a lo ra M Pa at Re st Ec - a Co Ho Pa lS y a Gu Co ua in an E nt ug ic ge in Ur m Ar Do Rich ($50+) Middle class ($10–$50) Vulnerable ($4–$10) Poor ($4) Extreme poor ($2.50) Global extreme poor ($1.25) Source: World Bank estimates based on SEDLAC (CEDLAS and the World Bank). Note: Estimates are based on harmonized national household surveys using 2013 surveys whenever possible. All monetary values are reported in 2005 US dollars adjusted for purchasing power parity. 20 Poverty FIGURE 2.8  Honduras Suffers from a Missing population currently living in poverty together Middle Class accounted for less than a third of total house- (Kernel density of per capita household income, 2013) hold income in 2013. Meanwhile, the wealthiest 0.45 one percent received 13 percent of total income 0.40 in 2013. Kernel density estimation 0.35 0.30 0.25 0.20 2.2 Causes of Poverty and 0.15 Drivers of Poverty Reduction 0.10 0.05 Poverty and Vulnerability in 0 Honduras: the Role of Resilience 0 2 4 6 8 10 12 in Development Outcomes Log of household per capita income Source: World Bank estimates based on SEDLAC (CEDLAS and the It is difficult for poor household in Honduras to World Bank). rise above the poverty line, and those that do Note: The vertical lines represent US$10 and US$50, defining the middle class. The income of individuals with more than US$50 per day remain highly vulnerable to shocks that can push is plotted as US$50. them back into poverty. Only 6 percent of house- holds that escaped from poverty between 2003 FIGURE 2.9  Income Growth Drove Changes in and 2007 were still out of poverty in 2011.11 These Poverty between 2003 and 2013 (The contribution of income growth and income households saw their income grow by almost distribution to poverty reduction, %) 50  percent over the period. Chronically poor households in rural areas experienced stronger 10 income growth (around 40 percent) than those 8 1.5 in urban areas (around 20 percent).12 At both 6 individual and household levels, rural residence (percentage points) Change in poverty 4 7.0 2 5.4 is associated with much greater levels of chronic 0 poverty. Sixty-five percent of rural households –2.4 –2.1 –2 were chronically poor, compared to 31 percent –4 –7.1 of urban households, and rates of extreme pov- –6 erty were particularly high among agricultural –8 –1.9 –10 workers. Credit constraints, low marginal pro- 2003–08 2008–12 2012–13 ductivity of land and labor, limited educational Growth Prices Redistribution attainment, and the absence of effective risk-­ Source: World Bank estimates based on EPHPM. mitigation strategies prevent the poor from accessing new economic opportunities and again as many households fell back below the increase their susceptibility to negative shocks. poverty line. These factors reduce social mobility and increase The country’s small middle class and high the likelihood that households that escape pov- level of income inequality is a concern among erty will be pushed back into it. the Honduran public. Most households are Natural hazards can have a particularly devas- ­ clustered at the far ends of the income distribu- tating effect on the poor, and in Honduras the tion, leaving a “missing middle” between them absence of crucial physical, institutional and eco- (­figure 2.8). Opinion polls indicate that almost nomic infrastructure leaves poor families espe- 47 percent of Hondurans find the current distri- cially vulnerable to natural disasters. Honduras bution of income to be unjust, and 34  percent suffers from environmental hazards ranging from regard it as very unjust.10 The 70 percent of the hurricanes and tropical storms to droughts and Poverty 21 erratic rainfall patterns.13 World Bank Group with a weakening US labor market, leading to a research has shown that catastrophic events have simultaneous drop in both labor income and led to drops in household consumption per remittances. The reduction in remittances alone capita, compelling individuals to decrease calorie increased moderate and extreme poverty by 2 and consumption, sell vital assets, work longer hours 2.3 percentage points, respectively. However, fall- and pull children out of school (Baez et al. 2013). ing male labor income consistently increased pov- The adverse impacts of disasters may also dispro- erty over the entire period, raising the poverty rate portionately affect women, who often experience by 3 percentage points in 2003–08 and by 4 per- higher rates of mortality, morbidity and dimin- centage points in 2008–12.15 ished earnings (World Bank 2012c).14 Before 2012 income growth was the key deter- Poverty rates are particularly sensitive to minant of poverty trends; however, changes in changes—both positive and negative—in labor income distribution played a dominant role in income, employment and remittances. During the poverty reduction in 2013. A decomposition period of inclusive growth between 2003 and analysis can shed light on the relative contribu- 2008, rising employment among both men and tion of income growth and income distribution women drove poverty reduction. Increases in to changes in poverty rates, along with the role of female employment reduced moderate poverty by prices (figure 2.9).16 Gains in overall poverty 2.4 percentage points and extreme poverty by reduction achieved prior to 2008 were mainly 2.5  percentage points, while increasing male due to income growth supported by a modest employment was associated with 3.2 and improvement in the distribution of income, 3.3 ­ percentage-point reductions in moderate and though these gains were mitigated by higher extreme poverty, respectively (figure 2.10). prices. This situation was reversed between 2008 Remittances also contributed to poverty reduction and 2012, when weakening economic growth during this period, cutting moderate poverty by and an increasingly unequal distribution of 1.3 percentage points and extreme poverty by 2.1 income pushed poverty rates up, while price percentage points. However, during 2008–12, a changes partially offset this effect. By contrast, reduction in employment in Honduras coincided almost all poverty reduction observed in 2013 has been attributable to improvements in the FIGURE 2.10  Remittances and Labor Income income distribution. Have Been Key Factors in Poverty Reduction Job and wage growth in manufacturing, con- (Poverty reduction by income source, 2003–13) struction and agriculture contributed to poverty reduction prior to 2008, while declines in those 10 same sectors caused poverty to rise after 2008. 8 Increased earnings from manufacturing reduced 6 3.3 Percentage point change the poverty rate by 2.2 percentage points between 4 0.6 2003 and 2008, whereas construction and agri- 2 4.0 2.0 culture contributed 1 and 1.5 percentage points, 0 respectively (figure 2.11). Conversely, during –2 2008–12 declining earnings in these sectors –4 –1.3 increased poverty. Manufacturing contributed –6 –3.2 the largest share, accounting for 1.4 percentage –8 points of the increase in poverty. –10 2003–08 2008–12 2012–13 Men labor income Men employed Social Assistance Programs Women labor income Women employed Remittances Other The expansion of social assistance programs has Source: World Bank estimates based on EPHPM. had a modest but positive impact on extreme 22 Poverty FIGURE 2.11  Fluctuations across Sectors Contributed to Changes in Poverty before and after 2008 (Huppi-Ravallion decomposition 2003–08, 2008–13) Mining and utilities Transport Household services Commerce and hospitality Intrasectoral Construction Other services Agriculture and fishing Manufacturing Interaction effect Population shift –2.5 –2.0 –1.5 –1.0 –0.5 0 0.5 1.0 1.5 2.0 Change in poverty (percentage points) 2003–08 2008–13 Source: World Bank estimates based on SEDLAC (CEDLAS and the World Bank). Note: The figure is the result of the Huppi and Ravalion (1991) decomposition of labor income poverty. The decomposition calculates the change in poverty that is due strictly to changes in labor income. This approach abstracts from the effects of changes in non-labor income, such as public transfers or pensions. To accomplish this, changes in poverty are calculated using labor income poverty rates–the proportion of households with labor income of less than US$4 per day per capita. The intrasectoral component refers to the sector of employment of the main earner in the household. FIGURE 2.12  Cash Transfers Are an Important child healthcare and school attendance (box 2.3). Part of Social Programs in Honduras The Bono is relatively well-targeted compared (Social programs in Central America, in % of with other interventions in the country and with GDP, 2012) other CCT programs in Central America, though 3.0 substantial coverage gaps among the extreme 2.6 poor remain. Estimates for 2013 show that Percentage of GDP 2.5 2.0 75  percent of beneficiary households are 1.5 1.5 extremely poor.17 Only 14.4 percent of beneficia- 1.1 1.1 1.0 0.9 0.9 ries are in the top two quintiles. This is in line 0.5 with other CCT programs in the region and 0 compares well with other social assistance pro- grams in Honduras. Since 2013, the Bono has a a ca a as r al gu am do Ri ur em improved its targeting to the extreme poor. ra a n nd lv a Pa ca at st Sa Ho Ni Gu Co Improvements in targeting and coverage will also EI Subsidies ALMPs be critical to improving the country’s other social Other social assistance Cash transfers Disability assistance and subsidy programs. The Bono has reduced poverty among its Source: World Bank 2015b. Note: ALMPs stands for Active Labor Market Programs. beneficiaries while increasing primary school ­ attendance and demand for health services in poverty over the past decade. In recent years program areas. A 2013 impact evaluation these programs have proliferated throughout the found that the program had reduced the overall region (figure 2.12). Honduras’ Bono Vida Mejor poverty rate among beneficiaries from 88.8 (formerly Bono 10,000) is a conditional cash percent to 83.8 percent, and the extreme poverty transfer (CCT) program designed to incentivize rate from 73 percent to 63.7 percent (figure 2.13). Poverty 23 BOX 2.3  Improvements in Honduras’ CCT System In 2010 the Government launched a national consolidated conditional cash transfer (CCT) program, Bono 10,000, which rapidly became the country’s main social assistance vehicle. Its annual funding was equal to 0.7 percent of GDP (US$ 130 million), and by 2013 the program reached almost 20 percent of the population, including 270,000 rural households and 50,000 urban households. Before 2009 the Government had operated two CCT programs that provided income transfers to extreme poor rural households in extreme poverty: Bono Solidario, which encouraged regular health checkups for infants, and Bono Escolar, which promoted primary school enrollment among children aged 6–13. Bono 10,000 consolidated these programs and expanded its targeting to include both extreme and moderately poor families with children under the age of 5 or in primary school. The program paid a benefit of 10,000 lempiras (US$500) per year to its beneficiaries, ranking it among the most generous CCT programs in the world. In 2014 the CCT program, now called Bono Vida Mejor, was enhanced, and it became the core intervention of the government’s social development strategy, Estrategia Vida Mejor. To improve the fiscal sustainability of the program, the targeting formula was revised to restrict eligibility to beneficiary families classified as extremely poor. Coverage was expanded to students in lower secondary school to address the country’s relatively high dropout rate. Benefits are now based on the number of eligible children in the household and capped at 10,000 lempiras. The program’s expansion prioritized areas that (a) had high rates of extreme poverty, (b) were prone to severe droughts, (c) were home to indigenous communities, and (d) suffered from a high child incidence of child migration during the recent surge in undocumented child migrants leaving for the US. The program is still evolving and the government is keen to strengthen the institution that executes the program. FIGURE 2.13  Bono Vida Mejor Has Reduced national extreme poverty rate of 1.7 percentage Poverty among Its Beneficiaries points. The impact evaluation also revealed that (Poverty impact, nationally and among primary school enrollment in program areas had beneficiaries, 2012 and 2013) increased by 3.1 percentage points, and atten- 100 dance rose by 3.5 percentage points. While child 88.5 83.8 visits to health centers increased by 4.1 percent- Poverty headcount 80 15.5 64.9 64.5 20.1 age points in program areas, the evaluation did (percentage) 60 not find a significant correlation with nutritional 21.6 21.9 40 73.0 outcomes, vaccinations or prenatal care.18 63.7 20 43.3 42.6 0 Migration and Remittances: Before After Before After A Complex Relationship Poverty-national Poverty-among beneficiaries Over the past 15 years, migration and remit- Moderate Extreme tances have come to play an increasingly Source: World Bank calculations based on EPHPM and using ADEPT important and complex role in the Honduran ­ SP software. economy. As of 2013, an estimated 8 percent of Honduran nationals were living outside of Among rural beneficiaries the poverty rate fell by Honduras, including as much as 13 percent of 3.1 percentage points, while per capita consump- the  ­working-age population.19 There were over tion increased by 7.8 percent. Simulations of the half a million Honduran-born immigrants ­ living recent improvements in targeting and reduction in the U.S. in 2013, representing over 80 percent in benefits suggest a potential reduction in the of Hondurans living abroad (­ figure  2.14).20 24 Poverty FIGURE 2.14  Honduran Emigration to the Large-scale migration to the US and elsewhere United States Has Grown over the Past Several has accelerated rapidly in recent years; over 25 Decades percent of Honduran migrants in the US arrived (Honduran immigrants in the US, 1960–2013) after 2006, and migration grew at an average rate 600,000 550,700 of 5.2 percent per year between 2000 and 2012. Recent emigrants have lower levels of educational Number of individuals 500,000 attainment than earlier cohorts, suggesting that 400,000 emigration is increasingly common among the 282,900 300,000 less well-off (box 2.4). An estimated 60–77 percent 200,000 of Honduran immigrants in the US are undocu- 109,900 mented,21 and a lack of legal status limits their 100,000 6,500 19,100 39,200 earnings potential. Even so, remittances skyrock- 0 eted in the years prior to the global financial 60 70 00 80 90 13 crisis, rising from less than US$1 billion in 2000 ­ 20 19 19 19 19 20 Source: World Bank estimates based on Migration Policy Institute to US$2.8 billion in 2008. Remittances fell to database (using US Census and ACS data). US$2.47  ­ billion in 2009 as the crisis weakened BOX 2.4  Characteristics of Migrants The first significant wave of Honduran migrants to the United States left in the aftermath of Hurricane Mitch in 1998. After the hurricane devastated much of the country, Honduran immigrants were granted Temporary Protected Status (TPS) by the US government, granting them work authorization and protection against deportation. Even though the TPS only applied to those arriving before the end of 1998, increasing numbers of Hondurans continued to migrate to the US. Today, the majority of the Honduran-born population in the US is undocumented. In recent years Honduran migrants have become increasingly bimodal in terms of their education and skill levels, revealing the changing dynamics that motivate and facilitate migration. Since 2010 Honduran migrants have become more likely to have either a primary education or less, or a completed secondary education or more. Whereas those with an incomplete secondary education accounted for more than half of post-Mitch migrants, they accounted for just one in ten adult migrants after 2010 (figure B2.4.1). The job profiles of Honduran immigrants have also changed: prior to 2000, only 25 percent of Honduran migrants worked in construction or food service, but by 2010 this share had doubled. These patterns reflect increasing emigration by poorer Hondurans. This is confirmed by the change in the distribution of receipt of remittances observed between 2003 and 2013. In 2003, the bulk of remittances went to the top quintile, but most now go to the middle quintiles. Recent Honduran migrants to the US are younger on average and include more children. While in the initial wave, approximately 80 percent of migrants were 25 or older, this age group accounted for 70 percent of those arriving in the US between 2010 and 2013; instead, more than a quarter of migrants were 15 or younger during this period, suggesting more family migration and reunification. The recent surge in child migrants to the US has led to a joint effort with El Salvador and Guatemala to address the structural causes of migration. Fleeing poverty, lack of opportunity and some of the highest crime rates in the world, the number of unaccompanied minors from Honduras detained at the box continues next page Poverty 25 BOX 2.4  continued FIGURE B2.4.1  There Has Been an Increase in Unskilled Migration from Honduras in Recent Cohorts (Educational attainment of Honduran migrants at age of entry, 1998–2000 and 2010–13) 100 22.6 33.1 Percentage of migrants 80 42.1 50.1 60 10.8 68.1 40 21.8 54.5 47.1 20 28.1 9.3 12.4 0 1998–2000 2010 onwards 1998–2000 2010 onwards Aged 15–24 at entry Aged 25+ at entry Year of entry Skilled Low-skilled Unskilled Source: American Community Survey (ACS) 2013 and 2000 US Census. Note: Information for the most recent arrival cohort (2010 onwards) are from the ACS 2013 while information from the post-Mitch cohort (1998–2000) are from the 2000 US Census. The figure presented breaks workers into three skill levels: the unskilled, who completed primary schooling at most (including those with no formal schooling); the low-skilled, who completed some secondary education; and the skilled, who have at least a secondary-school education. US-Mexico border rose from fewer than 7,000 in 2013 to over 18,000 in 2014, creating an international humanitarian crisis.a In 2015 Guatemala, El Salvador and Honduras proposed the “Plan of the Alliance for the Prosperity of the Northern Triangle” to expand economic opportunities and develop human capital. The crisis at the border has triggered increased interest and investment in the region, including a US-sponsored US$1 billion “Plan for Central America” to support the tripartite strategy. a. U.S. Customs and Border Protection (http://www.cbp.gov/newsroom/stats/southwest-border-unaccompanied-children); accessed June, 2015. the US labor market, but then gradually recov- Remittances are increasingly important to ered to US$3.1 billion in 2013, equivalent to households at the lower end of the income dis- 17  percent of GDP. In real per capita terms, tribution, reflecting changing demographics of however, they are yet to return to their pre-crisis ­ Honduran migrants (box 2.4). In 2013, they (figure 2.15). value ­ represented just over 20  percent of per capita Remittances have become increasingly pro- household income among households in the poor and have decreased poverty rates. There is bottom two quintiles, up from just 8 percent evidence that remittances in Honduras have led in  2003. The share of poor households that to poverty and inequality reductions.22 Between receive remittances also more than doubled in 2003 and 2008 remittances contributed to fall- the last decade, rising from 1.7  percent to 3.4 ing poverty rates, but the drop in remittances percent for households in the  lowest quintile following the global financial crisis increased and from 3.4 percent to 7.3 percent for house- poverty from 2008 to 2012 (figure 2.10). holds in the second-lowest, while the share of 26 Poverty FIGURE 2.15  Remittances Rose Substantially in the Years before the 2008/09 Crisis (Per capita remittances in real lempiras, 2001–13) 4,500 4,000 3,822 3,085 3,500 Per capita, in real lempiras, $ 3,025 3,000 2,500 2,000 1,500 1,215 1,000 500 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Work Bank estimates based on data from the Honduran authorities. BOX 2.5  Analyzing the Determinants of Remittances in Honduras Although external factors are the most relevant explaining changes in remittance flows to Honduras, domestic factors are also important. A time-series Vector Autoregressive Regression (VAR) analysis conducted for this SCD finds that, in line with findings in the literature, the economic cycle in the U.S. is the most important factor explaining changes in remittance flows to Honduras: almost 40 percent of the variation in remittance flows is explained by U.S. economic activity. Similarly, a deterioration of employment among Honduran workers in the U.S. is associated with weaker remittance flows back home. Conditions in global financial markets and the stance of monetary policy in the U.S. also appear to influence remittance flows. But not everything is external, as Honduras’ GDP explains around 25 percent of the variability in remittance flows. Higher economic activity in Honduras implies a greater demand for labor and higher wages, as well as an increase in wealth. Hence, as GDP growth in Honduras accelerates, the demand for non-labor income falls and so remittances decrease. households in the richest ­ quintile receiving rates are approximately 12 percent higher for remittances fell from 8.2 percent to 4.3 percent. those aged 12–17.23 Among households in the first two quintiles While migration and remittances have that received remittances, those remittances become important contributors to household represented almost half of their income income and poverty reduction in Honduras, (48.9  and 49.2 percent, respectively) in 2013. and can help insulate households against Children from families reporting remittances domestic volatility, their macroeconomic impli- are more likely to stay in school and enrollment cations can  exacerbate poverty and increase Poverty 27 household income volatility. As discussed in Similarly, exchange-rate fluctuations can impact chapter 3, remittances can erode international the real value of remittances.24 However, remit- com­ petitiveness and slow the pace of job tances can also stabilize consumption against creation. Dependence on remittances can also ­ domestic shocks. The sensitivity of remittances exacerbate external vulnerability, as it ties to growth in Hondurans suggests that they may household income to trends in foreign labor be part of household strategies to cope with markets (box 2.5). For example, the sharp local economic trends and smooth consump- decline in remittances following the global tion over time. Finally, with limited access to financial crisis contributed to rising poverty credit and insurance markets, migration and rates in Honduras, underscoring the vulner­ remittances may serve as an insurance strategy ability of poor households to external shocks. for low-income households.25 Notes 1. Internationally comparable moderate and extreme and 2011 to look at movements into and out of poverty are measured US$4 and US$2.50 per day poverty using the international poverty line of in 2005 purchasing-power parity terms. US$4 per capita per day. See World Bank (2015a). 2. Comparable extreme poverty data are avail- 12. This is corroborated by sharper falls in the poverty able for 18 LAC countries. These data exclude gap indicator for the rural population than for the most Caribbean countries, as well as Republica urban population (18.3 percent versus 15.5 percent Bolivariana de Venezuela. Poverty rates for Haiti, reduction) between 2003 and 2013, indicating Guatemala and Nicaragua are from 2012, 2011 that the poor in rural areas, while still poorer than and 2009, respectively. those in urban areas, saw their incomes rise faster. 3. Statistically, stunted children complete one fewer The poverty gap measures the distance between the year of school than non-stunted children, and income of those living in poverty and the income stunted adults earn 20 percent less than non needed to exit poverty ($4/day). World Bank -stunted adults (M. Shekar 2014). estimates using SEDLAC (CEDLAS and the World ­ 4. Only 31 percent of children under 6 months Bank). of age are exclusively breastfed, and on average 13. The probability of disasters also affects people’s children in this age group are only exclusively perceptions of uncertainty, disrupting their nor- breastfed for 2.5 months instead of 6 months mal decision making. Disasters have the potential (ENDESA2010/11). to destroy part of the capital stock and impair pro- 5. Per capita income has been adjusted for 2005 ductivity; thus they are characterized by declines purchasing power parity. ­ in investment, corporate leverage, output, and 6. It is the highest out of the 17 LAC countries with employment, and account for part of increased comparable inequality measures. risk premium in financial markets. 7. See box 2.2 for international benchmarking of 14. Several underlying factors exacerbate women’s inequality. vulnerability to the impacts of disasters, such as 8. World Bank estimates based on SEDLAC lack of means to recoup lost assets, limited live- (CEDLAS and the World Bank). lihood options, restricted access to education 9. For international comparability “middle class” and basic services, and in many cases, also socio-­ is defined as having a daily per capita income of cultural norms. between US$10 and US$50. 15. Due to how the decomposition is calculated, men’s 10. See Latinobarometro Honduras, 2013. falling labor income may be due to fewer men in 11. A synthetic panel was constructed based on Dang the household (resulting from to increased out-​ et al. 2014. Measures of poverty taken at one point migration, for example) rather than falling wages. in time, or even multiple points in time provide Additional analysis reveals a small increase in little information on intra-generational mobility. the average wage of men during the three peri- Honduras does not collect the panel data required ods while the share of the male share of the adult to follow individuals over time. However, a meth- ­ population fell slightly. odology that simulates panel data was applied to 16. The price level effect captures changes in the household surveys in Honduras for 2003, 2007 poverty line due to changes in the price of the ­ 28 Poverty basket of goods rather than changes in the income more likely to be found among highly educated of households. This is important for official pov- individuals, and remittances income is distributed erty lines as they are not based on a constant more unequally than total income. monetary line but rather on the cost of a constant 23. Acosta et al. (2008) using the 2007 Honduran basket of goods. household survey. 17. World Bank calculations based on 2013 EPHPM 24. For example, in the case of the Philippines (Yang and using ADEPT SP software. 2008). 18. One possible explanation could be the insufficient 25. Relying on data from the Philippines, Yang supply of health services in rural areas. Increase in and Choi  (2007) estimate that about 60 percent nutritional outcomes is also typically challenging of exogenous falls in household income were since they are a result of multiple factors—water, replaced by remittance inflows. As a result, house- sanitation, food, practices, etc. holds with access to remittances did not see 19. World Bank estimates based on KNOMAD migra- consumption fall, while similarly affected their ­ tion data and 2013 American Community Survey. households without remittances saw signifi- 20. Estimates based on Migration Policy Institute and cant consumption effects. Clarke and Wallsten KNOMAD data. (2004) find that remittances were similarly used 21. Pew Research Center estimates for 2005–12 based as insurance in Jamaica, where they replaced on augmented American Community Survey damages from Hurricane Gilbert 25  percent of ­ data from Integrated Public Use Microdata Series in  1992; The World Bank has also found that (IPUMS). remittances increased following natural disasters 22. Acosta et al. (2008) estimate that in 2002 remit- in Bangladesh, the Dominican Republic, Haiti tances decreased the Gini coefficient in Honduras and Honduras (Acosta et al. 2008). Using data for by 1.1 percent and moderate poverty by 0.37 26 LAC countries, Acosta et al. (2008) find that percent for each 1 percentage point increase in the remittances are largely countercyclical, respond- remittances to GDP ratio. In addition, the study ing to reductions in real output below trend with finds that remittance recipients in Honduras are more than a proportional increase. Poverty 29 Chapter 3 Economic Growth in Honduras: Challenges and Opportunities Over the past 30 years, Honduras has experienced Yet  during the same period Honduras’ popula- modest economic growth marked by considerable tion grew at an annual average rate of 2.4 percent volatility. Meanwhile, economic growth has not per year, far higher than the LAC average of kept pace with rapid population growth, preventing 1.6  percent and on par with the average for Honduras from converging with h ­ igh-performing Sub-Saharan Africa of 2.7 percent (figure 3.2). ­ countries in Central America and elsewhere in the An increase in the size of the labor force has the LAC region. External macroeconomic vulnerabil- potential to yield a demographic dividend. ity, exposure to natural hazards, and a history of However, this will be contingent on the ability of fiscal instability have repeatedly erased years of the private sector to generate a sustained increase progress in raising incomes and reducing poverty, in high-productivity jobs sufficient to accommo- contributing to a set of mutually reinforcing vicious date the growing workforce. If job growth is cycles that have trapped the country in a low- inadequate or confined to low-productivity sec- growth equilibrium. The Honduran economy’s tors, demographic trends may further depress small size and high degree of external openness, its wages and contribute to negative economic and large agricultural sector, its sensitivity to exogenous social outcomes. shocks, and the presence of both chronic and emerg- While periods of robust growth have gener- ing challenges to competitiveness have inhibited ated important gains in productivity, employ- diversification, thereby undermining productivity ment and poverty reduction, persistent volatility growth and preventing the private sector from sus- has repeatedly erased these gains, lowering taining robust job creation in high-value sectors. Honduras’ long-term growth trajectory and A  burdensome regulatory structure and capacity exacerbating poverty and inequality. Between constraints, limited investment spillovers, inade- 1960 and 2014 there were only two periods in quate infrastructure, low access to capital, a trou- which economic growth was sustained for more bling rise in crime and violence, and large than five consecutive years. Growth in Honduras emigration flows not only slow overall growth but has occurred in a series of fits and starts, and also narrow the distribution of its returns. since the mid-1970s, year-on-year growth has Opportunities for sustained growth may come from varied by more than 80 percent in almost half of the demographic dividend associated with the all years, a degree of volatility that exceeds global, increasing labor force, provided the private sector is LAC and Central American averages.1 Natural able to generate high-productivity jobs sufficient to disasters and global economic shocks have had a accommodate the growing workforce. major impact on Honduras’ growth perfor- Decades of modest, highly volatile economic mance, while a combination of weak institutional growth, combined with a rapidly expanding capacity and limited fiscal space have hindered ­population, has resulted in slow, uneven improve- efforts to build resilience (box 3.1). ments in gross domestic product (GDP) per Honduras’ low per capita growth rates have capita. Over the past 30 years, Honduras’ average prevented it from converging with high-income annual real GDP growth rate (3.6 percent) countries or top performers in LAC. In 1960 exceeded both the LAC average (3.4 percent) Honduras’ per capita income (in current US$ and the global average (2.9 percent) (figure 3.1). terms) was equal to 13.5 percent of the average Economic Growth in Honduras: Challenges and Opportunities 31 FIGURE 3.1  Growth in Honduras Has Been More Volatile than the LAC Average Average annual GDP growth in Honduras and comparators, 1961–2016 12 1962–68: 10 6.0% 8 2002–08: 5.4% 6 Percentage 4 2 0 –2 –4 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 Honduras GDP annual growth Latin America GDP annual growth Source: World Development Indicators and World Bank estimates. FIGURE 3.2  Growth in Honduras Has Been for high-income countries (as defined by the More Volatile than in All Other Regions Except World Bank) and 5.6 percent of US per capita Sub-Saharan Africa income. In 2014, these same indicators fell to Growth volatility and per capita GDP growth rates, regional averages, 1961–2013 6.2 percent and 4.3 percent, respectively. In other words, rather than converging with wealthier Sub- countries over time, Honduras has been diverg- Saharan ing from them, with most of this divergence 2.9 Africa occurring between 1960 and 1990 (figure 3.3). External and domestic shocks have repeatedly Volatility of growth 2.4 Honduras erased gains in poverty reduction, and post-crisis 1.9 recoveries are often far less progressive than Middle East and North Africa pre-crisis expansions. There have only been two Central 1.4 America periods in the past two decades in which poverty LAC High South Asia has fallen for three or more consecutive years, and income East Asia 0.9 World EU Lower both were periods of robust growth (figure  3.4). and Pacific OECD middle Middle However, each period ended with a sharp contrac- income income 0.4 tion followed by multiple years of poverty increases. 0.7 1.7 2.7 3.7 Between 1991 and 1994 GDP growth averaged GDP per capita growth 5 percent per year, and the poverty rate2 fell by 10.8 Source: World Development Indicators and World Bank estimates. percentage points; between 2006 and 2009 growth 32 Economic Growth in Honduras: Challenges and Opportunities BOX 3.1  Honduras’ Exposure to Natural Hazards Disasters associated with natural hazards, in particular climate-related events, have repeatedly derailed growth. Honduras’ inherent vulnerability to natural hazards and climate change is an additional source of macroeconomic uncertainty. The country is highly exposed to hurricanes and tropical storms, mainly from the Atlantic, as well as dry periods associated with the El Niño weather cycle.a Between 1994 and 2013 Honduras suffered the highest average annual economic losses due to climate-related disasters in Central America. During this period the cumulative impact of small-scale climate-related disasters ­ (without taking into account damages from Hurricane Mitch) resulted in average economic losses of 2.5 percent of GDP per year (Global Climate Risk Index 2015). Hurricane Mitch, the worst disaster in Honduras’ recent history, devastated the country in 1998, abruptly ending a period of economic expan- sion. It affected 90 percent of Honduras’ territory, resulting in over 5,700 dead, 8,000 missing, and almost half a million people displaced (GFDRR 2010). It also destroyed more than 50 percent of the country’s road infrastructure and 70 percent of its water network and damaged about 400,000 houses (ECLAC 1999). Subsequent extreme hydro-meteorological events since Hurricane Mitch suggest that Honduras’ disaster vulnerability is on the rise. Most recently, eight tropical storms and hurricanes of various magni- tudes had pronounced damages on the Atlantic coast with effects extending to the entire territory, nota- bly Hurricane Felix in 2007, Tropical Depression Sixteen in 2008, and Tropical Depression 12E in 2011, which caused economic losses estimated at US$ 200 million (ECLAC 2010). a. Honduras is also vulnerable to earthquakes, though in recent years only a single major earthquake has struck the country. Nevertheless, probabilistic risk models estimate losses associated with an event of a 500 year return period at approximately US$2.2 billion, represent- ing 6.3 percent of GDP, and an average annual loss due to earthquake equivalent to US$ 35.5 million, or 0.103 percent of 2013 GDP (CCRIF SPC 2014). FIGURE 3.3  The Growth Rate of GDP per Capita Has Been Both Low and Volatile (GDP per capita, in constant 2005 US$ and as share of US GDP per capita) 5.3 1960 It took Honduras 20 years to Converging 4.8 1965 reach the same GDP per capita than in the 80s. 1980 Share of US per capita GDP 1970 4.3 1975 Only in the last decade Honduras has started to converge to US GDP. 3.8 1985 2010 2013 1990 1995 Diverging 3.3 2005 2000 2.8 750 850 950 1,050 1,150 1,250 1,350 1,450 1,550 1,650 GDP per capita, constant 2005 US$ Source: World Development Indicators and World Bank estimates. Economic Growth in Honduras: Challenges and Opportunities 33 FIGURE 3.4  The Past Two Decades Saw Only Two Periods of Sustained Poverty Reduction (Annual GDP growth and poverty changes, 1991–2013) 15 10 5 Poverty 0 –5 –10 –15 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 20 20 20 19 20 20 19 20 19 19 19 19 20 20 19 19 19 20 20 20 20 20 20 Change in poverty ($4/day) GDP growth Source: World Bank tabulations based on the World Development Indicators, SEDLAC (CEDLAS and the World Bank), and Honduran Authorities. Note: Poverty changes are based on US$ 4 per day using 2005 PPP. Note that there is a break in the comparability of the poverty series in 2001, so the change in poverty rate is not reported for that year. averaged almost 6 percent per year, and the poverty Private consumption has reemerged as a key rate fell by 14.2 percentage points. The sharp down- driver of growth. Prior to the 1990s, growth was turns that ended each of these high-growth periods led private consumption, supported by relatively resulted in years of rising poverty, particularly the modest rates of investment growth. From the 2009 crisis, which completely reversed the progress early 1990s through the mid-2000s growth pat- made during the expansion. And while in each terns shifted toward investment, boosted by case poverty reduction resumed as the economy reconstruction efforts following Hurricane Mitch recovered from the shock, in neither case was this and the rise of maquila ­ industry. From 1990 recovery sufficient to return the poverty rate to its through 2008, investment growth contributed an pre-­crisis low crisis. average 47 percent of GDP growth, up from only 3 percent in the 1980s (figure 3.6). Even though the investment rate in Honduras was consistently 3.1 Drivers of Growth higher than in other countries with similar levels Factor accumulation has been the primary of per capita GDP, this did not translate into driver of GDP growth, while the contribution of accelerated economic growth. In the wake of the total factor productivity (TFP) has been almost 2009 crisis, aggregate demand again shifted uniformly negative. Growth accounting estimates toward consumption, supported by high inflows based on a wide range of assumptions reveal a of remittances. Real investment declined, and as pattern of low and frequently negative rates of imports stagnated a gradual recovery in net TFP growth combined with relatively high rates exports supported growth. of physical and human capital formation. From Labor’s contribution to growth has occurred 1981 to 2013 TFP contracted by an  average of primarily through the expansion of the labor 1.1 percent per year (figure 3.5). This long period force rather than improvements in the marginal of negative TFP growth was not unique to productivity of labor. Labor accumulation has Honduras, but the overall decline in productivity accounted for roughly 2.2 percent of economic was more severe in Honduras than among most growth in recent years, as high fertility rates of its regional peers (World Bank 2011b). and  increased life expectancy have caused the 34 Economic Growth in Honduras: Challenges and Opportunities FIGURE 3.5  Productivity Growth in Honduras Has Generally Been Negative (Solow growth decomposition, 1981 to 2013) 0.10 0.05 Percentage contribution 0 –0.05 –0.10 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 20 20 19 19 20 19 19 20 19 19 19 19 19 20 20 19 20 Capital stock Labor force (adjusted for human capital) TFP Real GDP growth Source: Honduran authorities and World Bank estimates. FIGURE 3.6  Growth Is Being Driven by Private Consumption (Growth decomposition by sources of aggregate demand, 1981 to 2013) 15 10 5 Percentage contribution 0 –5 –10 –15 –20 11 12 13 01 10 07 02 04 03 05 06 09 08 0 0 20 –9 20 –0 20 20 20 20 20 20 20 20 20 20 20 81 91 Net exports Consumption Investment GDP Source: Honduran authorities and World Bank estimates. Economic Growth in Honduras: Challenges and Opportunities 35 Knowledge Gap  What Are the Determinants of Low Returns to Investment in Honduras? Since the 1990s Honduras’ investment-to-GDP ratio has been high by regional standards, yet productiv- ity gains have been persistently low. This strong accumulation of capital was sustained throughout the period but did not result in higher productivity growth and hence faster economic growth. A majority of this investment is private, including substantial FDI inflows, with public investment making a limited contribution. However, in contrast to other countries Honduras demonstrates no significant positive ­ correlation between the investment ratio and GDP growth. Capital accumulation has contributed an average of just 1.7 percentage points to GDP growth since the early 1980s. The reasons for the apparently low impact of investment on growth are not fully understood. Possible explanations may involve the sectoral allocation of investment or the high cost of doing business. Appendix E presents preliminary ­ research on the relationship between investment and growth in Honduras. labor supply to increase consistently for the past TFP  growth again turned negative, and labor four decades. and capital accumulation were the exclusive Honduras’ most recent period of robust drivers of an anemic recovery. The contraction pro-poor growth occurred during the global ­ affected nearly all sectors of the economy, though ­ economic expansion of the mid-2000s. Between export-oriented industries such as maquilas and 2001 and 2008 strong simultaneous increases in tourism were hit the hardest. Turmoil in global labor, capital and TFP pushed Honduras’ growth financial markets curtailed investment and dis- trajectory toward convergence with the devel- rupted the construction sector, while worsening oped world. Accelerating growth in the early conditions in the US labor market caused a 2000s was supported by large-scale investments ­dramatic decline in remittances, which adversely in reconstruction following Hurricane Mitch. affected retail and non-tradable services. A sharp Meanwhile, the global economy entered a period decline in income at the top end of the distribu- of remarkable growth, and Honduras’ high tion briefly reduced inequality, but the Gini coef- degree of trade openness left it well positioned ficient soon began to rise as wealthier households to  take advantage of rising commodity prices. recovered faster than their poorer counterparts. Robust export revenues and high rates of invest- Poverty rates increased for three consecutive ment supported an average growth rate of years, and though progress resumed in 2013, 5 percent per year for a full 8 years. This was the poverty remains well above its pre-crisis level. country’s strongest performance since the early 1960s, and its growth rate exceeded the LAC average of 3.9 percent. Moreover, the returns to 3.2 Recent Job Growth Has growth were clearly progressive, and both pov- Been Concentrated in erty and inequality indicators fell substantially during the period. Low-Productivity Sectors However, Honduras’ robust growth came During the strong growth period of the mid- to  an abrupt end in 2009, as the impact of the 2000s, the secondary and tertiary sectors drove global financial crisis was exacerbated by a  balanced pattern of job growth, and wages domestic political instability, causing GDP to ­ rose  modestly as the economy diversified away contract by 2.7 percent in a single year. The from agriculture. From 2003 to 2008, as an post-crisis recovery was slow an uneven, with expanding global economy supported robust growth averaging 3.3 percent over 2010–14. export-oriented growth, Honduras’ industrial, 36 Economic Growth in Honduras: Challenges and Opportunities commercial and service sectors led job creation. impact on the manufacturing sector, where firms Employment growth in the agricultural sector reported a reduction in employment of almost 5 was positive, but far below the population growth percent on average. Even though small and young rate. As the urban economy absorbed an increas- firms have been responsible for creating a dispro- ingly large share of the labor force, wages rose portionate share of jobs, they face a number of among remaining agricultural workers. challenges that impede their further growth, Enterprise surveys reveal a steep decline in thereby affecting employment opportunities. job creation in manufacturing following the cri- Most jobs created since the 2009 crisis have sis, and the importance on young and small firms been in low-productivity sectors. The impact of to generate jobs both before and after the crisis the 2009 crisis radically altered the pattern of job (figure 3.7). In 2006, young firms (those 5 years creation (figure 3.8). Between 2009 and 2012, job old and under) reported employment growth of growth ceased in the service sector, and the num- 13 percent on average, while small firms (those ber of industrial jobs declined. Commerce contin- with less than 20 employees) reported 7.3 percent ued to make a positive contribution, but it was not more jobs. Even in 2010, a year in which the enough to accommodate the growth of the labor private sector was still feeling the effects of the ­ supply. As a result the agricultural sector absorbed 2009 crisis, young firms were able to generate a large share of excess labor, and the sudden influx new jobs, though at a lower rate than in 2006. of workers caused agricultural wage rates to plum- Enterprise surveys reveal that both exporters met, wiping out the gains made during the middle and  non-exporters, as well as domestic and of the decade (figure 3.9). Overall, since 2009, new foreign-owned firms, created jobs at about the ­ job opportunities were mostly concentrated in same rate in 2006. Yet, in 2010 domestic firms less skill-intensive, less technologically sophisti- and those who were exporters reported a larger cated activities such as commerce (a sector destruction of jobs. The crisis also had a large with  high rates of self-­employment), hotels and FIGURE 3.7  Young and Small Firms Are Responsible for a Larger Share of Job Creation (Employment growth by firm characteristic, 2006 and 2010) 14 12 10 Employment growth (%) 8 6 4 2 0 –2 –4 –6 n rs s s tic er rs er 9) ) g ) ar ce ig 99 + in a ea rt rt 00 es –1 re ye ye i ur rv po po 0– +y m (1 Fo (1 ct Se 10 5 Ex ex Do (2 l 10 0– e al fa 6– rg n- m Sm u La No an iu ed M M Initial size Firm age Sector Export status Ownership (Permanent employees) 2006 2010 Source: World Bank tabulations using the Enterprise Survey, 2006 and 2010. Economic Growth in Honduras: Challenges and Opportunities 37 FIGURE 3.8  Patterns of Job Creation Changed restaurants, rather than higher-value-added sec- Dramatically before and after the Crisis tors like manufacturing, telecoms and finance. (Jobs creation by sector and changes in poverty rate) Agriculture was the second largest source of employment creation and accounted for roughly 10 10 40 percent of new jobs, particularly in the coffee Sector percentage contribution and palm oil industries. However, this increase 5 was not driven by demand for more agricultural Poverty change 5 labor, but rather by an excess supply of workers 0 who turned to agriculture as an employer of last resort. Manufacturing was a key driver of job cre- 0 ation in the pre-crisis period, but its recovery has –5 been weak due to challenges in the maquila sub- sector, as described further in the next section. –5 –10 Poverty rates fell fastest during periods when high-value-added sectors contributed the most to 3 2 8 –1 –1 –0 12 08 03 job creation. During the mid-2000s the poverty 20 20 20 Services Commerce rate declined by 6 percentage points, as labor Construction Manufacturing incomes increased. During the 2003–08 period Agriculture Poverty reduction (RHS) the main contributors to job creation were Source: World Bank estimates based on the EPHPM. manufacturing, telecommunications and finance. ­ However, during 2008–12, as poverty rates rose, job creation was driven by the low ­ value-added commerce and agriculture sectors, while manu- facturing and services largely stagnated FIGURE 3.9  Wages Rose before the Crisis as Urban Growth Reduced the Rural Labor Supply (figure 3.10). These were also years in which the ­ (Wage growth by sector) agricultural sector suffered from an outbreak of rust leaf disease in coffee production, hurting out- 5 put. From 2012 to 2013, when poverty reduction resumed, job creation was still driven predomi- nantly by the low value-added commerce sector, Sector percentage contribution 0 but it was accompanied by a modest but rising contribution from manufacturing and other ser- vices and a slight reduction in agricultural –5 employment. These trends suggest that the cre- ation of jobs in higher value-added sectors is closely linked to poverty trends. –10 The concentration of job growth in low-­ productivity sectors has caused a range of nega- –15 tive labor market outcomes. Honduras has one of the lowest labor force participation rates in the 3 2 8 –1 region. The labor force participation rate among –1 –0 12 08 03 20 20 adults age 25–54 is just 72 percent, well below the 20 Agriculture Manufacturing LAC average of 81 percent. While Honduras’ Construction Commerce overall unemployment rate of 6 percent is not Services Wage growth exceptionally high by international standards, it Source: World Bank 2015b. Note: The category “other” is primarily made up of unpaid family is elevated by the standards of regional compara- workers. tors, particularly El Salvador, which recorded an 38 Economic Growth in Honduras: Challenges and Opportunities FIGURE 3.10  Sectoral Growth Patterns Are Consistent with Employment Patterns a. Contribution to GDP growth b. Contribution to employment growth 8 10 percentage contribution percentage contribution 6 4 5 2 Sector Sector 0 0 –2 –5 –4 –6 –10 20 8 08 20 2 20 3 20 7 09 10 11 12 13 20 4 20 5 06 02 03 04 05 06 07 09 10 11 12 13 0 0 0 0 0 0 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Agriculture Manufacturing Agriculture Manufacturing Construction Commerce Construction Commerce Services GDP Services Employment Source: Honduran authorities and the World Bank estimates. Note: Manufacturing sector includes utilities and mining, Services sector includes transport and communications, financial services and other services. unemployment rate of just 3.8 percent in 2013. FIGURE 3.11  The Gap between Average Real Furthermore, the unemployment rate has been Wages in Honduras and the Region Grew growing since the 2009 crisis. Salaried employ- between 2003 and 2013 (Average hourly wage rates, Honduras and ment represents fewer than half of all jobs in comparators, 2004, 2008, 2013) Honduras, and self-employment accounts for 41 percent of total employment, the highest share in Panama Central America (figure 3.12). Self-employment has been the main driver of recent job growth, El Salvador accounting for 212,000 of the 230,000 jobs cre- LAC ated between 2011 and 2013. Guatemala Honduran workers continue to earn less than the LAC average, and the wage gap has grown Honduras over the past decade (figure 3.11). In 2003, the Nicaragua average worker in Honduras earned approxi- 0 0.5 1.0 1.5 2.0 2.5 3.0 mately $1.39 per hour, compared to a regional Average hourly wage (2005 US$) average of $1.70. By 2013, the average wage in 2013 2008 2003 Honduras had grown by just 2 percent, while the regional average had grown by 37 percent. The Source: World Bank tabulations based on SEDLAC (CEDLAS and the World Bank). average hourly wage in the LAC region reached Note: Wages are reported as average hourly wages adjusted to 2005 USD using 2005 purchasing power parity. Average wages are $2.33 in 2013. Low average wages hide significant calculated for all workers age 18–65 who are not classified as unpaid workers. wage gaps between different types of workers.3 Persistently low levels of labor productivity have suppressed wage growth across the Honduran the more productive manufacturing and service economy. Agricultural workers, who account for sectors, marginal output remains well below the 57 percent of the extremely poor, are the least pro- LAC average (figure 3.13). Due to low and stagnant ductive in the economy, and the agricultural sector labor productivity most poor households can only has registered only small gains in labor productiv- increase their labor income by extending their total ity in recent years (figure 3.14). However, in even working hours. Economic Growth in Honduras: Challenges and Opportunities 39 FIGURE 3.12  Self-Employment Accounts for 4 Creating the conditions for robust employ- Out of 10 Jobs in Honduras ment growth in high-productivity sectors is a (Employment by type, circa 2013) pressing challenge, as demographic trends are causing a large number of new workers to enter Honduras 2013 46.1 40.7 10.4 the labor force. Roughly 60 percent of the Nicaragua 2009 50.3 36.6 11.6 Honduran population is under the age of 26, and a third is under the age of 14. Honduras’ median Guatemala 2011 59.5 25.7 12.7 age is the second lowest in the region and among El Salvador 2013 59.7 27.9 8.5 the lowest 25 percent worldwide. Over the Panama 2013 70.1 22.6 4.9 medium term the ratio of working age adults to Costa Rica 2014 77.2 17.3 1.4 dependent children and retirees is expected to increase substantially, creating the conditions for 0 100 a “demographic dividend” in economic growth. Percentage However, the extent to which Honduras is Wage workers Employers able to benefit from its changing demographics Self-employment Other will depend on the ability of the private sector to Source: World Bank 2015b. Note: The category “other” is primarily made up of unpaid workers. create new jobs in high-productivity sectors. If  the ongoing recovery generates a balanced FIGURE 3.13  Compared with the LAC Average, Productivity in Honduras Is Low Across All Sectors (Sectoral employment and productivity, 2011) 18,000 16,000 LAC 14,000 Sectoral productivity (2005 US$) 12,000 10,000 8,000 6,000 Industry Services 4,000 Agriculture 2,000 0 20 40 60 80 100 Cumulative sectoral shares of employment Source: World Bank (2015a). Note: Colored boxes represent Honduras and outlined boxes represent LAC. Sector productivity is calculated as the ratio of sector’s value added and the number of employees working in that sector. The shares of employment are the fraction of the workforce that works in that sector. 40 Economic Growth in Honduras: Challenges and Opportunities FIGURE 3.14  While Average Productivity Increased in the Transport and Communication Sector, Agricultural Productivity Stagnated (Value added per worker by sector) 240 210 Thousands of lempiras of 2000 180 150 120 90 60 30 0 01 02 03 04 05 06 07 08 09 10 11 12 13 20 20 20 20 20 20 20 20 20 20 20 20 Financial services and real estate 20 Transport and communication Manufacturing Construction Average Commerce, hotels and restaurants Agriculture Source: Honduran authorities and World Bank estimates. ­ attern of employment growth in manufacturing p following section analyzes key industries in the and high-value-added services similar to that agriculture, manufacturing and service sectors, observed in the pre-crisis period, the private each of which is either a major driver of employ- sector will be able to leverage the demographic ­ ment and output, or a possible catalyst of income dividend to accelerate growth and poverty growth and poverty reduction. The potential ­reduction. However, if employment growth slows impact of the further expansion of these indus- or remains confined to agriculture and low-­ tries is assessed, along with the constraints to value-added industries, the influx of new work- their development. ers could further depress wage rates, exacerbate poverty and contribute to a range of negative social outcomes. At present, educational indica- 3.3 Selected Industries and tors and youth employment opportunities in Honduras remain inadequate, as described in Their Growth Challenges Chapter 4, underscoring the urgency of reforms Agriculture, manufacturing and services each in social services and the business climate. play an important role in the Honduran econ- While the Honduran labor market suffers omy. In the agricultural sector the coffee and from serious weaknesses, employment dynamics sugarcane industries remain a major source of differ by sector. Before addressing the broader employment and income for rural households, economy-wide challenges facing Honduras, while palm oil production has recently emerged including the constraints imposed by a rigid as a new force in the sector. The maquila light labor market, it is important to examine growth manufacturing model has led the growth of the and job creation in specific industries. The industrial sector since its emergence in the 1990s, Economic Growth in Honduras: Challenges and Opportunities 41 yet it has struggled to recover in the wake of the Coffee.  Coffee accounts for about a third of global financial crisis. Before the crisis, transpor- total agricultural production, represents about tation, communications and financial services 5 percent of GDP, and directly employs 10 percent drove the expansion of services, but in recent of the labor force. Two-thirds of coffee producers years tourism, including hotels and restaurant live below the poverty line, and half live in services, has become an increasingly important extreme poverty. About 90 percent of Honduran component of the sector. coffee is exported, and it is the country’s second most valuable export after maquila manufac- tures. 92 percent of Honduras’ 110,000 coffee Agriculture: Coffee, Palm Oil, growers are small farmers, who also account for and Sugarcane the majority of coffee production. Output has Agriculture has long been the mainstay of the increased in the last decade driven by productiv- Honduran economy. Historically, agriculture has ity gains. Between 2001 and 2012, coffee produc- accounted for a larger share of output and tion rose from 150 to 354 million kilograms, as employment in Honduras than in comparable farmers adopted new quality-control practices LAC countries. The sector directly employs one- and introduced disease-resistant seeds, increas- third of the Honduran labor force and accounts ing marginal yields. Productivity gains have for about 30 percent of total exports. In 1970, been  especially strong in specialty coffee. agriculture represented 32.4 percent of GDP, However, access to finance remains an important double the LAC average of 16.6 percent for challenge. While access to short-term credit countries with available data. Today, agriculture ­ for  ­ coffee  farmers (e.g., pre-export credit) has represents 14 percent of Honduras’ GDP, the improved, affordable long-term financing to second-largest share in LAC. And if agribusiness ­ ­ support ­ investments in infrastructure, technol- activities are included, the sector accounts for ogy, and enhanced inputs remains limited. This over 40 percent of GDP. Most small and medium leaves the industry highly exposed to shocks. For producers grow low-value crops for consump- example, the 2012–14 outbreak of rust-leaf dis- tion in the household and local markets and ease (“roya”) affected about 25 percent of cultivated land is often on hilly terrain with poor ­ Honduras’ coffee crop, causing over US$100 mil- access to water, roads, credit, modern production lion in losses, much of which was borne by small technology, improved seeds, tools, and basic farmers. inputs. Over the last two decades farmers and agricultural firms have gradually transitioned Palm Oil.  Honduras is currently the into higher-value products. Sector legislation ­ ninth-largest crude palm oil producer in the promoted foreign and domestic investment in world and the largest in Central America. Three- export commodities such as coffee, palm oil and quarters of palm oil p ­ roduction (about 500,000 sugar, which have also benefited from proximity metric tons in 2015) is exported, and palm oil and preferential access to large consumer mar- accounts for over 5  percent of total exports. kets, persistently low land and labor costs in rural Production has grown  at an average rate of areas, and the adoption of improved production 10  percent per year since 2008. There are cur- processes. Agribusiness exports experienced rently 12 oil-extraction plants operating in the robust growth over the past decade, rising from country, and three more are expected to open in US$600 million in 2006 to US$3 billion in 2014. 2015–16, increasing total extraction capacity by Agribusiness currently accounts for 63 percent of 31 percent. In contrast to other Central American total exports. However, the agricultural sector countries, palm oil production in Honduras remains highly vulnerable to both shifts in inter- involves a large share of independent smallholder national prices and exogenous production shocks producers. About 98 percent of palm oil produc- such as diseases and natural hazards. tion comes from approximately 18,000 small and 42 Economic Growth in Honduras: Challenges and Opportunities medium-sized  farmers. These farmers are orga- in sugar production remain common, especially nized into producer groups, some of which oper- among sugarcane cutters. The burning of fields ate their own extraction plants. Land tenure before the harvest is also a dangerous activity for issues and environmental and social risks con- workers, who often lack appropriate protective strain the expansion of palm oil production. equipment, and causes environmental damage. Uncertain property rights have led to conflicts Child labor is a major challenge. A 2013 human over land, including armed confrontations and rights report by the US State Department claims violence in the Bajo Aguan Valley. Producer orga- that approximately 170,000 children between five nizations are committed to adopting best prac- and fourteen years old work as child laborers in tices for environmental and social responsibility, Honduras, and many are engaged in harvesting but the capacity of most local producers remains sugarcane. weak. A public consultative process is currently underway in support of the prospective adoption of the International Responsible Palm Oil Manufacturing Criteria. Natural hazards are also a source of con- The maquila industry has played a major role in cern, as the majority of palm oil plantations are Honduran manufacturing since the late 1990s located in areas affected by hurricanes and floods. and represents an important source of poverty Finally, high energy costs are a major constraint reduction. The maquila model, in which on profitability, and producers have been forced imported components and intermediate inputs to invest in biomass and biogas plants to generate are assembled and re-exported, emerged follow- their own electricity. The sector is also highly vul- ing the trade liberalization reforms of the late nerable to international prices, but Honduran 1990s. Maquilas currently comprise two-thirds palm oil producers have demonstrated resilience of the manufacturing sector and 6 percent of and a capacity to adapt to market dynamics. GDP. Total maquila exports amount to about US$3,900 million, of which around 80 percent Sugarcane.  While its share of GDP has fallen are textiles, and over 70 percent of exports are over time, sugarcane remains one of the largest bound for the US market. Over the past decade employers in the agriculture sector, directly gen- the industry has transitioned from a simple erating over 16,000 jobs. About 40 percent of assembly-based production model to an increas- Honduran sugarcane is exported and the rest is ingly sophisticated, vertically integrated indus- consumed in the domestic market. Productivity try, driving technological innovation and gains have driven growth; between 2008 and attracting a large amount of investment. Maquilas 2014 yields improved by a full 39 percent, and now account for the second-largest share of FDI production reached 11.3 million pounds of after telecommunications. Maquilas employ sugar  per year. Enhanced refining processes three percent of the Honduran workforce (over and  increased demand spurred by Free Trade 120,000 workers), 75 percent of whom produce Agreements with the United States, the European textiles and garments, while another 12 percent Union, and other countries further boosted out- produce automotive parts. Though it employs a put, though exports to the US remain constrained relatively small share of the labor force, the emer- by regional quotas. A revised legal framework gence of the maquila industry has reduced pov- was approved by Congress in 2014 to regulate the erty by an estimated 1.5 percentage points and production of biofuels derived from sugarcane expanded employment opportunities for women and palm oil as additives for imported gasoline. (De Hoyos, Bussolo, and Nunez 2008). This framework should expand opportunities for The growth of the maquila industry has the sector over the long term. However, key chal- slowed since the global financial crisis due to lenges include ensuring adherence to environ- increasing international competition, particu- mental and health standards. Industrial accidents larly in textiles, combined with rising costs. Economic Growth in Honduras: Challenges and Opportunities 43 Honduran maquilas benefit from special tax rates are relatively high by regional standards. In regimes and employment incentives, but these 2013, the ratio of total deposits to GDP reached are not sufficient to offset the erosion of compet- 48 percent, well above the average of 34 percent itiveness caused by high minimum wages and in Central America (excluding  Panama), while rising electricity costs. The industry is also con- the loans-to-GDP ratio reached 69 percent, strained by a lack of new opportunities in the compared to an average of 60 percent in Central global market for manufactures. Since 2009 a America (excluding Panama). However, ban- number of maquila firms have relocated to other carization rates remain low (World Bank Global countries, including neighboring Nicaragua, Findex 2015). Just over 20 percent of Honduran where labor costs are lower. adults have an account  at a formal financial institution, and only 5 percent have credit cards; Services, Commerce and both rates are far below the Latin American Construction averages of 39  percent and 18 percent, respec- Led by the transportation, communications and tively. The bankarization rate for individuals in financial services, Honduras’ service sector has the bottom 40 percent is just 13 percent and only been the main contributor to recent economic 14 percent in rural areas. Despite the impor- growth. Yet at 25 percent of GDP the sector tance of remittances in the Honduran economy, remains far smaller than the regional average (50 only 4 percent of Hondurans report using for- percent). Despite the impact of remittances on mal financial accounts to receive remittances.4 consumption, the country’s high poverty rates And only 8  percent of Hondurans use bank and small middle class limit the scope of the accounts to receive wages (World Bank Global domestic market for services. By contrast, invest- Findex 2015). ment in the export-oriented maquila industry and agriculture sector has been relatively robust. Tourism.  Tourism is an emerging industry in Honduras. It is the country’s fourth-largest Communications.  Growth in the communica- source of foreign exchange and employs around tions industry has been boosted by large invest- 6 percent of the workforce. However, the sector ment inflows, particularly FDI in the telecoms has been waning in importance since the global industry, which have financed technological financial crisis, and its share in total goods and upgrades and network expansion. Over the last services exports fell from 11 percent in 2009 to decade, mobile services companies have increased 7 percent in 2013. Tourism represents a smaller the geographical coverage of their networks and share of exports in Honduras than in neighbor- diversified into cable and satellite television ser- ing countries such as Belize (31 percent), Costa vices, as well as data transmission. The 4G spec- Rica (14 percent) and Panama (12 percent). trum was allocated in 2013, improving the scale Honduras has the potential to compete with of internet access and data transmission. However, other top destinations in the western Caribbean, telecommunication quality indicators have not as it boasts impressive beaches and Mayan substantially improved over the past decade. ruins,  and in the last five years the number of international arrivals has increased rapidly. Financial Services.  The financial services sub- Improved infrastructure, notably the opening of sector has grown at a robust pace of around a new ­ airstrip in Copan and a new cruise ship 5 percent per year over the last decade, and the port in Colon in 2014, has also helped the sector. industry currently generates about 21,000 jobs. There are currently about 2 million tourism Increasing loans to the commercial, agricultural arrivals per year, roughly half of which are cruise and manufacturing sectors, combined with ship passengers. However, a number of impor- ­ rising consumer credit, have driven the growth tant challenges constrain the sector’s growth, of financial services. Honduras’ deposit and loan including the high cost of both international and 44 Economic Growth in Honduras: Challenges and Opportunities domestic airfares, a growing reputation for crime with the international drug trade. The following and violence, and limited infrastructure develop- section examines the impact of these factors on ment.5 The government is attempting to over- the Honduran economy and explores options for come these challenges through innovative sector alleviating transversal constraints to growth. development strategies such as establishing ­ public-private partnerships to improve tourism infrastructure.6 3.4 Challenges to Competitiveness in Honduras Construction.  The construction industry Over the past 15 years, two major issues have employs about 6 percent of the Honduran work- arisen as threats to Honduras’ continued eco- force and accounts for 3 percent of GDP, down nomic development: high levels of crime and by half since 2000. The sector was hit hard during emigration. These two forces have implications the 2009 crisis. Due to weakening residential and for growth and competitiveness as both imply commercial investment, the sector contracted by an increase in business costs. On the one hand, 8 percent per year during 2009–10, losing about Honduras has one of the highest rates of crime 500,000 jobs. Construction output and employ- and violence in the world (see chapter 5.3). All ment both remain well below their pre-crisis lev- three countries in the Northern Triangle— els. The share of total private investment allocated El Salvador, Guatemala and Honduras—have to residential construction is high in Honduras, suffered from elevated crime and violence rates, indicating that the country’s housing deficit as drug traffickers and gangs have grown more presents opportunities for domestic investors. violent. These three countries top world rank- Yet the high cost of construction materials is a ings of homicide rates. On the other hand, the major constraint in the sector, as cement prices combination of violence and lack of opportuni- are rising faster than inflation. The Honduran ties has driven a large wave of out-migration cement industry is an imperfectly competitive from Honduras, largely to the US. These duopoly, and the projected growth of demand migrants have become a significant source of over the next 3–5 years could create an opening income, with remittances accounting for 17 for entry of new firms as existing producers reach percent of GDP. As in neighboring El Salvador, maximum production capacity. Increased com- this has led to symptoms of Dutch disease in petition in the production of cement and other the economy. Combined with the country’s rel- inputs could lower prices and accelerate con- atively high minimum wages, this has led to struction activity. increased labor costs. While each of these industries faces specific constraints, a number of transversal challenges Security Costs: The Economic Impact affect the competitiveness of the Honduran econ- omy and deter job creation. Some of these issues of Crime and Violence have emerged recently, while others have inhib- Crime, violence, and insecurity distort incentives ited Honduras’ development for decades. Key to invest in human capital, impose direct and cross-cutting issues include limited infrastruc- indirect costs on firms, lower household welfare ture, including energy and transportation; an directly through lost wages and labor, and divert underdeveloped financial sector; land tenure government resources from public investment insecurity and limited administrative capacity for and poverty alleviation to law enforcement and adjudicating and enforcing property rights; a bur- criminal justice. The economic cost of crime in densome regulatory environment that contributes Honduras is staggering, reaching an estimated to labor market rigidities and limited competi- 10  percent of GDP (US$ 900 million) in 2011. tion; and the rise of crime and violence, particu- Insecurity substantially increases the cost of larly organized criminal syndicates associated doing business in virtually all sectors, and private Economic Growth in Honduras: Challenges and Opportunities 45 firms spend an average of about 9 percent of FIGURE 3.15  The Cycle between Low Growth their  annual profits on security costs (World and Violence Bank 2011a). Crime impacts firms in a number of ways, and extortion, kidnapping and other forms of racketeering are becoming increasingly common. Low Low economic Crime and violence increase operational profitability growth costs, erode competitiveness and discourage pri- vate investment. In some cases, such as the maquila sector, international firms may shift Perception High security of instability costs investment to more secure destinations. And while sectors such as extractive industries and fixed-crop agriculture are more likely to remain High Lack of in operation despite high crime rates, insecurity violence opportunities costs will inevitably diminish profit margins. There is mounting evidence that fear of crime, particularly extortion, has prompted some busi- nesses to exit the marketplace altogether. For instance, the World Bank’s Enterprise Surveys identify crime and violence as one of the most countries where criminal enterprises have devel- important problems facing Honduras. oped a strong organizational infrastructure and Low economic growth and criminal violence enjoy high rates of impunity. As crime and vio- have become locked in a vicious cycle (­figure 3.15). lence damage economic competitiveness, discour- Low growth limits income and employment age investment and drive firms from the market, opportunities, creating incentives to profit from they improve the conditions for their own survival crime, and widespread poverty reduces the ability and proliferation. The rise of crime and violence of the population to resist crime and demand also contributes to increased migration, spurring action from public agencies. These incentives a second vicious cycle that further constrains eco- and  vulnerabilities become increasingly acute in nomic growth. Knowledge Gap  What Is the Full Cost of Crime to the Honduran Economy? Media reports suggest that gang violence and extortion have resulted in the closure of small businesses, causing employment losses. While some gangs profit from the international drug trade, others gener- ate income primarily through extortion payments from businesses and citizens, commonly known as the “impuesto de guerra,” or “war tax”a. Extortion demands range from US$20 to US$5,000 per month, and failure to pay often results in harassment, death threats, or violence by gang members. In 2012, the impuesto de guerra was estimated to have caused the closure of approximately 1,600 businesses in Tegucigalpa alone. Together these firms employed nearly ten thousand workers and consisted primar- ily of bakeries, beauty salons, food stands, hardware stores and other small and medium enterprises (El Heraldo 2014). Extortion payments have also affected activity in the capital’s central market, Mercado Las Américas, where by 2015 an estimated 500 food and clothing vendors had been reduced to just 50 (La Prensa 2015). a. United Nations Office on Drugs and Crime. 46 Economic Growth in Honduras: Challenges and Opportunities Migration, Remittances and producers of tradable goods also widens the Labor Costs ­ urrent-account deficit, weakening the country’s c macroeconomic position. Migration also has Since the late 1990s the emigration of Honduran direct implications for growth by reducing the workers has dramatically increased, spurred by size of the labor force as workers self-select out of low growth rates and accelerated by rising levels the country, potentially generating brain drain of crime and violence. Migration and remittances and slowing the accumulation of skills in the play a complex role in the Honduran economy, economy. And, as household income rises, reser- one that generates both positive and negative vation wages increase and the labor supply falls. outcomes. Migration can offer productive work- There is evidence of a vicious cycle between ers a means to escape from limited labor market migration and low growth in Honduras. Low opportunities, and remittance inflows have had a growth and a resulting lack of opportunities, fur- demonstrably positive impact on poverty rates. ther exacerbated by the country’s high violence, Honduras receives the largest remittance inflows drive migrants to seek work outside of Honduras. in Central America as a share of GDP (over These migrants, in turn, send home millions of 17  percent in 2014), and remittance levels have dollars in remittances. Evidence of Dutch disease increased over the past decade. According to the as a result of the country’s high remittances can be Central Bank of Honduras’ biannual remittances seen in the relationship between real exchange survey, the average monthly remittance reported rate and remittances (figure 3.16). Between 1995 by recipients is US$477, or almost 2.5 times and 2013, there has been a strong correlation Honduras’ monthly per capita income. Yet, by between growth in remittances and in the real drawing off a significant share of the labor force, exchange rate. At the same time, there is evidence migration adversely impacts aggregate produc- of lower labor supply among recipients of tivity. Moreover, the process of migration itself remittances—both in the literature and from ­ requires capital to achieve. As a result migrants chapter 2 (Acosta et al. 2008). This implies a higher rarely come from among the poorest households reservation wage and thus upward pressure on in Honduras, and remittance income rarely wages. Through a higher real exchange rate and reaches them. higher wages Honduras loses competiveness in Low growth rates and high migration rates world markets, limiting, in turn, opportunities for can be mutually reinforcing. Remittances have further economic growth. This loss of competi- ­ been found to contribute to “Dutch disease” tiveness, and its negative effect on the business cli- effects, as high capital inflows result in real mate, closes the negative cycle of migration on exchange-rate appreciation (Acosta, Fajnzylber, economic growth (figure 3.17). and Lopez 2008). A rise in household income through the inflow of remittances leads to an increase in consumer demand, which raises 3.5 Chronic Constraints to prices for domestic nontradables, prompting a reallocation of labor away from the tradable Economic Growth goods and a real exchange rate appreciation. While high crime and violence combined with Among LAC economies, a one percentage point high migration pose serious challenges to growth, increase in remittances as a proportion of GDP is the reality is that Honduran growth challenges estimated to lead to a real-exchange rate appreci- predate these two cycles. Earlier comprehensive ation of 2.5 percent if remittances are taken as studies, cross country regressions, and micro eco- exogenous to 18–24 percent if the models correct nomic data reveal that some challenges have been for reverse causality in which real exchange rates chronic or persistent in hindering growth since also affect remittances.7 Rising domestic demand the 1960s (table 3.1). Well-documented evidence and the decreased competitiveness of domestic on competitiveness and growth challenges in Economic Growth in Honduras: Challenges and Opportunities 47 FIGURE 3.16  The Real Effective Exchange Rate highlighted as a major issue in cross-country Has Appreciated as Remittances Have Risen regressions. (REER index and remittances inflows) • Second, low endowment of human capital and a limited supply of skilled labor were mentioned 4,000 120 in all the comprehensive reports reviewed and 3,500 has been identified as an important growth Remittances (millions of US$) 100 3,000 deterrent. Low educational attainment is also 80 significant in cross-country regressions and the REER index 2,500 2,000 60 lack of a skilled workforce is among the major 1,500 constraints reported by firms in the World 40 1,000 Bank’s Enterprise Surveys. 500 20 • Third, inadequate infrastructure was cited in the 1999 IMF report on Honduras’ growth as 0 0 an issue since the 1970s, also appearing in the 99 03 09 13 95 97 01 05 07 11 20 20 20 2004 Development Policy Review (DPR) 19 19 20 20 20 19 20 REER index (Dec 2009=100) report as one of the four major challenges to Remittances (millions of US$) competitiveness and growth, and also high- Source: Honduran authorities and World Bank estimates. lighted by the cross-country regressions. • Fourth, limited access to capital was men- tioned as one of the four major constraints to FIGURE 3.17  The Cycle between Low Growth growth in the 2004 DPR report, was among and Migration the top five concerns for firms in the Enterprise Surveys, and is statistically significant in the cross-country regressions. • Fifth, weak governance, with particular atten- Low Low economic competitiveness growth tion to a poor regulatory environment, was highlighted in the 1987 CEM report which mentioned the complex legal and institutional regulatory framework. The 1999 IMF report High reservation Lack of also mentions an inadequate institutional infra- wages and REER opportunities appreciation structure, while the cross-country regressions also highlight this challenge. Remittances Migration Violence Fiscal and Macroeconomic Instability High levels of debt have repeatedly destabilized the public finances, undermining investor confidence Source: Honduran authorities and World Bank estimates. and wealth creation, slowing growth, and limiting the authorities’ ability to cope with both unex- Honduras identifies five long-term challenges that pected disasters and cyclical downturns.8 This vul- harm firm productivity, and job creation, and nerability is illustrated by Honduras’ experience make investment in Honduras more expensive: following the global financial crisis, when an government ill unsustainable fiscal stance left the ­ • First, persistent fiscal instability and macro- prepared to combat the effects of a deteriorating economic imbalances were mentioned as a external environment combined with an internal major challenge in the 1987 CEM, were the political crisis which led to the temporary sus- main focus of the 1994 CEM report, and were pension of aid from most of the international 48 Economic Growth in Honduras: Challenges and Opportunities TABLE 3.1  Chronic Challenges to Competitiveness in Honduras (Summary of findings from previous studies) Key constraints identified 1. Comprehensive growth reports 1987 CEM Fiscal & macro Regulatory Low human instability framework capital 1994 CEM Fiscal & macro Low human instability capital 1999 IMF Institutional Low human Low infrastructure capital infrastructure 2004 DPR Weak governance Low human Low Limited access to capital infrastructure finance 2. Cross-country benchmarking Loayza et al. (2005) Cyclical volatility Education Infrastructure Financial depth Araujo et al. (2014) Macro instability Government burden Education Infrastructure Access to credit 3. Microeconomic evidence 2010 Enterprise Political instability Inadequate Access to finance Corruption Crime Survey workforce Microeconometric Regulatory Crime analysis compliance Chronic challenges to competitiveness and growth in Honduras Fiscal & macro Weak governance Low human Low Limited access to instability capital infrastructure finance Note: Comprehensive studies on Honduras’ growth include the 1987 and 1994 World Bank’s Country Economic Memorandums (CEM), a 1999 growth report by the IMF, and the 2004 World Bank’s Development Policy Review (DPR). These studies are complemented by evidence from cross-country regressions on the constraints to growth, including Loayza et al. 2005 and Araujo et al. 2014, as well as microeconomic data. community. While any economy would suffer fac- increased following the global financial crisis, with ing those conditions, the effect in Honduras was external debt rising by 26.3 percent in 2013 alone particularly negative resulting in a multi-year following the government’s issuance of US$ 1 bil- period of losses in social gains—poverty rates and lion in international sovereign bonds. Moreover, income inequality increased between 2010 and financing costs have increased from 0.7 percent of 2012, erasing the gains made since 2003. Fiscal GDP in 2009 to close to 3 percent of GDP in 2015, consolidation efforts and an improvement in exter- and the stock of public debt has almost reached nal conditions resulted in a partial recovery in eco- 50 percent of GDP. nomic growth after the crisis, but growth slowed Rising fiscal deficits have contributed to the again in 2012–13 in a context of worsening terms deterioration of Honduras’ external position of trade (figure 3.18). figure 3.20). Government expenditures have (­ Despite support by the Multilateral Debt Relief ­ urrent played a crucial role in the dynamics of the c initiative for Heavily Indebted Poor Countries account deficit; every extra US$100 spent by (HIPC), which cut the public external debt stock Honduras’ government is associated with an by half in 2005–07, in 2014 the Government was increase in the current account deficit of US$14, spending a higher share of its revenues to service keeping everything else constant (Varela et al. debt payments than it had in 2004 before the debt 2015). Honduras has consistently run ­ current relief (figure 3.19). The accumulation of debt account deficits for the past 20 years. From 2009 to implies that the government must spend a signifi- 2011, the widening in the current account ­ deficit cant amount of its revenues in servicing its debt, can largely be attributed to a recovery of national leaving little room for countercyclical policies. investment in the aftermath of the global financial Notably, both domestic and external debt levels crisis–up from around 20 percent of GDP in 2009 Economic Growth in Honduras: Challenges and Opportunities 49 FIGURE 3.18  Sustained Fiscal Deficits Have to 26 percent in 2011, which was not matched by a Been Punctuated by Sporadic Attempts at commensurate rise in domestic savings. However, Fiscal Consolidation the continued widening in  the current account (Timeline of the fiscal deficit, 12-month moving deficit since 2011, from 2.8 percent of GDP to 7.6 average) percent in 2013, has coincided with declines in 10 national investment and by even greater declines in national savings. 8 Global and financial crisis 6 (2009) Low Endowment of Human Capital Percentage of GDP Mitch 4 Hurricane Honduras’ low endowment of human capital cre- (1998) ates a competitiveness gap with peer countries, 2 making it difficult for Honduras to compete inter- nationally and may partially explain its labor pro- 0 ductivity deficit. While education and access to Fiscal reform approved other basic services are discussed in greater detail –2 (Dec 2013) in chapter 4, it is important to stress that despite –4 relatively high levels of public spending on educa- 1990 1994 1998 2002 2006 2010 2014 tion, Honduras faces challenges in c­ overage, equity Source: Honduran authorities and World Bank estimates. and quality. Despite the universalization of primary FIGURE 3.19  The Government Spends a Significant Amount of Its Revenues in Servicing Debt (Debt-to-GDP ratio and debt service as a share of revenues) 80 55 70 60 45 Percentage of revenues (%) Percentage of GDP (%) 50 35 40 30 25 20 15 10 0 5 10 06 08 09 12 13 00 01 02 03 04 05 11 07 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Total debt (% of GDP) Total debt service (% of revenues) Source: Honduran authorities and World Bank estimates. 50 Economic Growth in Honduras: Challenges and Opportunities FIGURE 3.20  The Fiscal Deficit Is a Key demand for workers. The average Honduran over Determinant of the Current-Account Deficit the age of 15 has only 6.2 years of schooling, (Determinants of the current account deficit in lower than the Latin America average of 8.4 Honduras, 1992–2012) years, and this gap has widened since 1990.11 6 While other countries in the region have seen larger increases in educational attainment over 4 the last 20 years, the educational attainment of 2 the labor force in Honduras has increased by 0 only 1.3 years of schooling (figure 3.22). This has Percent –2 resulted in an increasing human capital gap between Honduras and Latin America, in terms –4 of years of education: in 1990, it was of 1.7 years –6 but by 2010 it had increased to 2.2 years. A lack of –8 skilled labor is among the top five business envi- –10 ronment constraints identified by business own- Inflation FDI ers and more than one in ten firms (11.4 percent) Relative openness Relative income identified an inadequately educated workforce as Oil prices change Other the biggest obstacle for their business (World Credit growth NFA lag Bank Enterprise Survey 2010). Moreover, this Government could be an underestimate as many firms in expenditures Honduras may not be more skill-intensive as Source: Varela et al. 2015. Note: NFA is Net Foreign Assets. a consequence of the low levels of human capi- tal in the country. In other words, the scarcity of education, access at all other levels of education talented labor prevents highly-productive indus- continues to be strikingly low. High dropout rates tries from emerging (ILO 2013). To address the in Honduras exist despite high returns to educa- scarcity of skills, a third of private companies tion, reflecting low educational access and quality offer in-house training for their employees (figure 3.21).9 The tertiary enrollment rate is just 20 (World Bank Enterprise Survey 2010). Training percent, compared to 45 percent in large LAC for technical careers can help reduce the lack of countries and 25 percent in neighboring Central skills in the economy and, in fact, in 2011 around American countries. Low quality of schooling fur- 190,000 workers (5.8 percent of the labor force) ther compounds this effect: only one third of the were certified by technical institutions. However, students who finish secondary education are able it is worth mentioning that of these workers, less to achieve satisfactory scores in tests to enter higher than 90,000 were fully employed (ILO 2013), education (box 3.2) (ILO 2013). Poor schooling though this was during a period in which overall outcomes also impacts the crime and migration employment creation slowed down. cycles detailed above; for example, high dropout rates increase the nini ­population—youth who are Inadequate Infrastructure, Especially neither working nor in school, an especially vul- nerable group for joining criminal activities.10 in Transport and Energy Finally, lack of proper nutrition and access to basic Weaknesses in core infrastructure, especially health and water and sanitation also have negative transportation and energy, and logistics com­ implications for learning abilities, labor capacity, promise the international competitiveness of and earnings potential. Honduran firms, reducing gains from trade and Low levels of schooling imply a limited supply increasing prices for traded goods. On the two of adequately trained labor, which has resulted in most widely used international rankings of trans- a mismatch between the supply of skills and the port service provision—the World Economic Economic Growth in Honduras: Challenges and Opportunities 51 FIGURE 3.21  Honduras’ Labor Force Is Less Educated than Those of Similar Countries; Access to Post-Elementary Education Is Low (School attendance rates by age, 2013) 120 100 % attending secondary school 80 60 40 Age for attending secondary education 20 0 5 6 7 8 9 10 11 12 13 14 15 16 17 Age Panama Honduras Costa Rica El Salvador Nicaragua Guatemala Source: World Bank 2015b. Forum’s Global Competitiveness Index and the goods utilize multiple transport modes, usually Logistics performance Index—Honduras ranks road and sea or road and air. Rail service is limited slightly below the median among the 140–160 to a few dedicated short-distance routes used for countries ranked, scoring below neighboring transporting lumber or agricultural products to Central American countries. Honduras’ poor per- nearby ports, while the overwhelming majority of formance in logistics is across both infrastructure overland freight is transported by road. Despite its gaps and service quality (figure 3.23). Despite importance, the road network has been deterio- efforts to increase infrastructure coverage, rating as a consequence of limited public resources Honduras still lags neighboring countries. Road and setbacks in the capacity of the agencies density in Honduras is only 15 percent of Costa responsible for road pavement. As a result, more Rica’s road density, and it lags behind Nicaragua, than 50 percent of roads in Honduras are in a Panama and El Salvador. Moreover, Honduras has poor condition. one of the lowest rural electrification rates in the High rates of crime and violence and logisti- LAC region, with a quarter of the rural population cal weaknesses, including empty backhauls, long lacking access to electricity. wait times, and corruption issues, all increase In the case of transport infrastructure, key road transport costs. Over the past three years challenges include low access and deficient ­quality. average security costs related to transportation Inefficiencies in the road transportation network have increased by close to 20 percent, and they affect both international trade and domestic com- now represent about 5 percent of total trucking merce. A large share of internationally traded costs. Long loading times and delays at weigh 52 Economic Growth in Honduras: Challenges and Opportunities BOX 3.2  Quality of Schooling Quality of schooling in Honduras remains internationally low, with Honduran students underperforming in language, mathematics and science. International assessments in 2011, the Trends in Mathematics and Science Study (TIMSS) and Progress in International Reading and Literacy Survey (PIRLS), confirm that Honduran students are performing below average. Even though 4th grade tests were applied to 6th grad- ers in Honduras, by recommendation of the TIMSS and PIRLS International Study Center, Honduran 6th graders underperformed in TIMSS Mathematics (figure B3.2.1) and PIRLS. Similarly, despite the 8th grade test being applied to 9th graders, results in TIMSS Mathematics were even lower. FIGURE B3.2.1  Honduran Students Are Performing below Average in Mathematics TIMSS 2011 Mathematics 4th grade in relation to GDP per capita (6th grade for Honduras) 650 600 KOR SGP JPN 550 FIN RUS USA TIMSS 2011 Mathematics 4th grade SRB HUN ITA (6th grade for Honduras) 500 NOR ROM NZL CHL 450 GEO ARM BHR ARE HND SAU QAT 400 OMN TUN 350 KWT MAR 300 250 YEM 200 2,000 8,000 32,000 128,000 GDP per capita 2011 (PPP, US$) Source: World Bank 2015b using TIMSS 2011 Assessment,a EdStats. a. Copyright © 2012 International Association for the Evaluation of Educational Achievement (IEA). Publisher: TIMSS & PIRLS International Study Center, Lynch School of Education , Boston College, Chestnut hill, MA and International Association for the Evaluation of Educational Achievement (IEA), IEA Secretariat, Amsterdam, the Netherlands. stations represent around 20 percent of total international routes. Moreover, a large share of shipping time along the country’s main routes. overland shipments return with empty back- Administrative costs are especially high for inter- hauls, which pushes up prices in order to cover national freight, as wait times at customs and the cost of the empty return trip. Trucking com- inspection stations can represent as much as panies report high informal payments to the 15–20 percent of the total shipping time on police along both national and international Economic Growth in Honduras: Challenges and Opportunities 53 FIGURE 3.22  Returns to Education Are High living in poverty, connecting rural areas to (Returns to education in Honduras, 2003–13) urban markets is one of the country’s main transport and logistics challenges. Good trans- 1.8 1.65 portation infrastructure is especially important 1.49 1.64 1.6 for ­agricultural trade, in order to open access to 1.4 international markets for small farmers. Road Years of schooling 1.2 infrastructure efforts could connect the large 1.0 0.92 agricultural population to global markets, con- 0.82 0.85 0.8 tributing to poverty reduction by increasing the rural poor’s opportunities. Additionally, 0.6 0.4 due to the perishable nature of most agricul- 0.4 0.31 0.36 tural products, there is a particularly high pre- 0.2 mium on improved and speedy transportation 0 options. Any primary Any secondary Any tertiary High energy costs undermine competitive- 2003 2009 2013 ness and productivity by increasing production Source: World Bank 2015b. costs. At approximately 25 percent above the LAC average, the industrial price of electricity FIGURE 3.23  The Poor Performance of the in Honduras is one of the highest in the region Logistics Sector Is Due Not Only to figure 3.25). High electricity cost and unreli- (­ Infrastructure Gaps, but Also to Lack in able service erode competitiveness, especially in Service Quality those sectors with higher energy intensity, and (Logistics performance index; 5=best) divert investments to neighboring countries Customs with lower industrial electricity prices. In 2013, 5.0 Honduras’ industrial tariffs were the highest in 4.0 Central America, surpassing Nicaragua’s rates Timeliness 3.0 Infrastructure (figure 3.24). Moreover, 7.6 percent of the 2.0 ­ electricity comes from back-up generators, a 1.0 higher share than in Latin America (4.8 percent) 0 (World Bank Enterprise Survey 2010). To coun- Tracking and International teract the unreliable and expensive electricity tracing shipments service in Honduras, the maquila industry in the country produces its own electricity from Logistics biomass. This implies a significant sunk cost, ­ quality and competence which may discourage new entrants. The high share of obsolete, inefficient and Honduras Top 5 LAC average expensive thermal generation in the energy Source: WBG Logistics Performance Index 2014. Note: Top 5 countries for Logistics Performance Index include: matrix and price tensions in an under-supplied Germany, the Netherlands, Belgium, the United Kingdom, and Singapore. LAC countries include: Chile, Panama, Argentina, market are the main structural reasons for high El Salvador, Brazil, the Bahamas, the Dominican Republic, Jamaica, electricity prices. First, Honduras’ energy mix Peru, República Bolivariana de Venezuela, Guatemala, Paraguay, Ecuador, Costa Rica, Uruguay, Nicaragua, Colombia, Honduras, Bolivia, relies heavily on thermal generation (55 percent), Guyana, Haiti and Cuba. surpassed in Central America only by Nicaragua overland routes, as well as border clearance pay- (59 percent). The cost of thermal generation is ments to both official and unofficial customs not only influenced by oil prices but also by agents (Osborne et al. 2014). expensive thermal generation power purchase Given the importance of agriculture to the agreements. Second, power demand exceeds Honduran economy, particularly to households supply by around 100 MW. This gap is driven by 54 Economic Growth in Honduras: Challenges and Opportunities FIGURE 3.24  Industrial Tariffs of Electricity in 2014. To fill this supply gap, the Government Are the Highest in Central America is promoting different efforts: 1) bolstering (Average electricity price for the industrial sector) supply in the short run through costly agree- ments with private energy generating firms, 250 particularly during the summer time when 200 water reservoirs are at low levels, affecting hydroelectricity production; 2) reducing future USD per KWh 150 production costs through a recently signed 100 agreement with Guatemala to import gas via the planned Mexico-Guatemala gas pipeline;12 50 and 3) pushing for further expansion of renew- 0 able energy. Inefficient transmission and distribution 08 09 10 06 12 13 07 11 20 20 20 20 20 20 20 20 systems exacerbate the impact of expensive and ­ Nicaragua Honduras Guatemala limited generation capacity on electricity prices Panama El Salvador Costa Rica (box 3.3). ENEE, the state-owned electricity com- Source: Bloomberg New Energy Finance. pany is in charge of electricity transmission and distribution, while private companies generate two-thirds of the electricity produced. It lacks an FIGURE 3.25  High System Losses Undermine the Efficiency of the Electricity Sector adequate cost recovery scheme: the tariff (System losses, percent, circa 2013) adjustment mechanism is inefficient, there are ­ substantial non-commercial loses, and there are 40 deficiencies in the billing and collecting s ­ ystems (figure 3.26). Together, these contribute to large 33 32 company losses—in 2013, for example, ENEE 30 registered a deficit equivalent to 1.8  percent of GDP. Recent reforms have improved the target- 19 ing of subsidies, but until recently, the residential 20 16 sector was significantly cross subsidized by the industrial and commercial sectors. After the 10 10 10 recent subsidy reform in 2014, ­ estimates show that the cost recovery ratio in the residential sector has increased to 95 percent, from ­ 0 65 percent. The tariff adjustment mechanism was also ­modified in 2014, resulting in a tariff increase a y bl n ca a s ra am ua bi pu ica Ri ic m du ug Re in n ta lo estimated at 15 percent. Even  so, total loses Pa n m Ur Co Ho s Do Co amount to about 30 percent. ENEE’s  losses are Source: World Bank staff calculations based on information from Grupo ICE (Costa Rica), UTE (Uruguay), CDEEE (the Dominican borne by the government and thus reduce fiscal Republic), EDEMET (Panama), ENEE (Honduras) and Colombia space for public initiatives and investments in (EPM Energy Colombia). Data for Colombia are for 2011. other sectors. In a context of limited fiscal space, the gov- limited generating capacity, but demand is also ernment has begun promoting private sector artificially inflated through distorted price sig- investment in public infrastructure. In 2010, nals produced by electricity subsidies, theft and it  created COALIANZA, a commission tasked fraud. Insufficient supply prompted Honduras with  promoting public-private partnerships for to increase its electricity imports, which rose public works. COALIANZA is still a relatively from 3.5 percent of GDP in 2010 to 4.9 percent new institution, and strengthening its capacity Economic Growth in Honduras: Challenges and Opportunities 55 BOX 3.3  Governance Challenges in ENEE ENEE is one of the few remaining vertically integrated power utilities in Latin America and faces governance challenges. In Honduras, only the generation business has been opened to private investors. ­ ENEE is solely responsible for the transmission and distribution businesses, which are aggregated in regional clusters with a high level of decision autonomy in expenditures. In contrast, ENEE’s decisions on power purchases to meet the demand are centralized, and billing and collection are outsourced to the pri- vate sector, with suboptimal control from ENEE. As a result of this decentralized/centralized structure, the regional clusters hold limited accountability for financial results and hinder corporate control on loses and expenditures, impacting negatively on ENEE’s performance. At the same time, ten CEOs have led ENEE since 2005; this has resulted in weak governance, lack of a long-term strategy, limited internal control and has deteriorated the company’s operational and financial performance. Obsolete internal control systems lessen the management capability to run the company efficiently. Information provided by the internal control systems to the decision-makers is usually inadequate, unreliable and frequently not available in a timely manner. A symptom of this deficiency is the unsuc- ­ cessful attempt of ENEE to go through an audit process of its financial statements in the past. The lack of reliable information and acceptable internal control procedures have been central arguments raised by the Auditing Companies for not subscribing ENEE’s financial statements. Last auditing took place in 2010 with negative results. Based on the comments of the auditing company and supported by multilat- eral organizations, including the World Bank, ENEE has undertaken the auditing of its 2014 financial statements. This exercise is expected to be concluded by 2016. The World Bank Group is collaborating with the Government of Honduras to improve ENEE’s institutional framework. The Bank has supported the implementation of adequate internal control ­ ­ systems and the definition of a modern organizational structure, in line with best international practices. These instruments altogether with ENEE’s further modernization, legislative reforms in the power sector–General Law of Electric Industry approved in 2013—and strong political willingness and support, ­ will be key to overcome the current situation and improve the governance of the institution. The Government of Honduras has given first steps towards a structural change in the sector, by appointing the three Commissioners of the recently created Regulatory body (Comisión Reguladora de Energía Eléctrica, CREE) on June 19, 2015 and by approving ENEE’s new organization structure. and that of its regulatory body will help to ensure firm-level competitiveness (­ figure  3.27). About that purchasing power parity (PPPs) are struc- 81 percent of Honduran firms have a checking or tured around principles of competitiveness and savings account, more than 10 percentage points good governance. The existing legal and opera- below the LAC average. Moreover, only 31 percent tional framework for PPPs allows for private sec- of these firms have a line of credit, well below the tor investment in certain large infrastructure LAC average of 46 percent. About 15 percent of projects. PPP contracts have been tendered, both firms identified access to finance as a major con- by COALIAZA and by private banks serving as straint to doing business, the third most-cited trust agents, for projects involving the develop- constraint after political instability and corrup- ment of maritime ports, toll roads and urban tion (World Bank Enterprise Survey 2010). Small road infrastructure. firms were 20 percent more likely than medium- sized firms and 94 percent more likely than large Limited Access to Capital firms to identify access to finance as a major con- While access to finance in Honduras has improved straint on their operations.13 While short-term in the last decade, access to credit remains a working capital can be secured with guarantees ­ challenge, and high interest rates undermine on future production, long-term financing for 56 Economic Growth in Honduras: Challenges and Opportunities FIGURE 3.26  Access to Credit in Honduras Is Low in Comparison with LAC (Selected financial indicators) 80 74 70 60 57 51 50 Percentage 40 40 31 30 28 22 20 14 10 8 6 0 Account Credit card Debit card Domestic credit Small firms using (% age 15+) (% age 15+) (% age 15+) provided by banks to finance financial sector investments (% of GDP) (% total firms) Honduras LAC Source: Honduran authorities, FINDEX, and World Bank estimates. FIGURE 3.27  Honduras’ Regulatory investment in infrastructure and technology is Environment Appears to Be More Restrictive to limited. Consequently, only 17 percent of firms in Competition than the Regional Average Honduras reported having investments financed (OECD Product Market Regulation Indicator, circa 2014) by a bank, compared to an average of 33 percent in LAC. The proportion of loans requiring collat- eral (81 percent), and the average value of the col- Product market regulation score 3.5 lateral required (222.4 percent of the loan), are 3.0 both relatively high. In LAC, 72 percent of loans 2.5 29.0 require collateral, and its average value is 204 2.0 24.7 percent of the loan (World Bank Enterprise 1.5 40.1 1.0 38.9 11.1 Survey 2010). High interest rates further hinder 0.5 opportunities to access financing, and real lend- 30.9 37.7 0 36.4 51.1 ing rates in Honduras are higher than in many Honduras LAC Top 5 OECD LAC countries, as well as other countries with Barries to trade and investment similar income levels. Interest rate spreads (the Barries to entrepreneurship lending rate minus the borrowing rate) in State control Honduras are among the highest in Central Source: World Bank Group/OECD PMR data 2013–14; World Economic America, behind only Costa Rica, and above the Forum Global Competitiveness Report 2014–15; and World Bank estimates. average for Latin America. While investment Note: Higher values are associated with regulations more restrictive to competition. Non-OECD LAC countries include: Argentina, Colombia, rates are relatively high in Honduras, high inter- Honduras, Peru, El Salvador, Costa Rica, the Dominican Republic, est rates and collateral requirements suggest that Nicaragua, Jamaica and Brazil. Top 5 OECD countries include: the Netherlands, the United Kingdom, Austria, Denmark and New Zealand. investment could be expanded. Economic Growth in Honduras: Challenges and Opportunities 57 Financial inclusion remains low and credit owners to investment in improving their property. concentrated. Banks are profitable, liquid, well- However, according to the Doing Business Report capitalized and domestically funded, and their (2014), Honduras ranks 81st in the Registering recent performance on key financial-soundness Property Indicator, while the WEF Global indicators has been robust.14 Private sector credit Competitiveness Report ranks Honduras 98th in to GDP is 54.1 percent and domestic bank the Property Rights Indicator. deposits represent 47.5 percent, both above the regional averages (41.0 and 41.3, respectively) Institutional and Regulatory and above the expected medians compared to its level of development (32.5 and 44.3, respec- Challenges tively).15 While Honduras’ banking system is Honduras has made progress in reducing the cost sound, financial inclusion indicators are among of doing business and expediting administrative the ­lowest in the region, with the percentage of procedures. These advancements have focused on adults  with access to a bank account reaching different investment-climate fronts: the ease of only 32 percent, while LAC averages 51 percent. starting a business, simplification of tax payments, Moreover, credit is highly concentrated; 90 the ease of getting credit, property registration and percent of all outstanding banking loans are construction permits. Reforms led, among other concentrated in three provinces: Francisco things, to an impressive reduction in time spent on Morazán, Atlántida and Cortes. In addition, the different administrative procedures. According to recent expansion of credit was concentrated in Doing Business, while in 2006 it took more than 60 consumption and housing, rather than produc- days to open a business, it now takes only 14 days. tive activities. Driven by the increased use of The number of days to deal with construction per- credit cards, consumer credit as a share of total mits was halved from 165 in 2006 to 82 days in new credit rose from 25 percent in 2007 to 50 2015. Time spent to register property also percent in 2012 (ILO 2013). decreased from 35 to 22 days. The number of hours Despite the importance of agriculture in the per year it takes for an average firm to pay taxes economy, rural sector lending remains limited was also halved from 424 in 2006 to 224 in 2015. and agricultural loans represent only 5 percent of Nevertheless, despite this important progress, total outstanding loans. The appetite for rural- a substantial regulatory burden continues to based lending has diminished, and private banks constrain Honduras’ business environment. ­ view rural borrowers as very risky. This is driven Compet­ itiveness in Honduras continues to lag by high default rates after disasters associated inter­ tionally. According to the 2015 Global na­ with natural events, compounded by the govern- Competitiveness Index, which pools 144 coun- ment’s loan forgiveness program for the sector. tries, Honduras ranks 101st, the lowest in the Issues surrounding property rights are another Central America region. The Doing Business challenge to access to capital in Honduras. report ranks Honduras 104th out of 189 coun- Approximately 80 percent of privately held land in tries, and the OECD Product Market Regulation rural areas and 30 percent in urban areas is unti- (PMR) indicators rank Honduras 45th out of 48 tled or improperly titled.16 As a consequence of this countries. Honduras also ranks poorly in firm uncertainty in property rights, informal land mar- governance and transparency (174th out of 189 kets are active in urban and rural areas.17 Moreover, countries), the ease of enforcing local commer- mortgages and other forms of credit are difficult to cial contracts (166th), the simplification of the obtain due to the unclear nature of land tenure. An administrative burden and cost of paying taxes adequate provision of property rights increases (153rd), the ability to deal with insolvency chap- incentives to invest (particularly long-term invest- ters and secure recovery (140th), the cost for ment) and prevents distortions in investment deci- launching new enterprises (138th) and the time sions. Clear property rights provide incentives for and cost to access electricity (110th). 58 Economic Growth in Honduras: Challenges and Opportunities Although Honduras was among the first Additionally, a quota is set for new importers of countries in the region to introduce a Compe­ basic grains, deterring market entry. Honduras tition Law, evidence suggests that the country’s controls prices for products that are not usually regulatory environment is more restrictive to ­ under government control in LAC countries competition than peer economies (figure 3.28). such as freight transport. For example, the OECD’s PMR indicator sug- In the service sector, regulations often protect gests that PMRs in Honduras are less conducive incumbents, and administrative barriers inhibit to competition than in most countries in LAC.18 competition (figure 3.30). For example, transport Regulation restricts competition mainly through associations are consulted on the entry of new barriers to entrepreneurship (complex regula- market players, constituting an anticompetitive tory procedures) and state intervention in barrier to entry in a key sector, and the accoun- markets. Levels of public ownership and involve- ­ tancy profession has an exclusive right to pro- ment in Honduras in business operations are vide nine different businesses services for which higher than all LAC countries included in the it sets minimum prices.19 There is no “silence is PMR index, except for Argentina and Jamaica. consent” rule in place for any sector, increasing Moreover, the complexity of regulatory proce- the complexity of the procedures to obtain dures (in particular license and permits systems), licenses and permits. administrative burdens for sole proprietor firms The government also maintains special tax and barriers in network sectors remain high. The regimes for specific products or industries that extent of restrictiveness in PMRs is reflected in can distort the allocation of investment. Special the perception that few business groups domi- regimes, including tax incentives, create an nate in the market. Honduras ranks 83rd out of uneven playing field that can distort investment 144 countries in terms of the “extent of market allocation. Benefits include tax incentives for dominance” in the 2015 Global Competitiveness banana production and the tourism industry, Report, and scores low in the effectiveness of free-zone regimes for exports, agricultural export anti-monopoly policy. Honduras has recently zones, industrial export processing zones  and adopted a legal provision that allows for a even tax holidays for the fast food industry leniency program, which could increase the (box 3.4). Moreover, tax exemptions and exclu- effectiveness of its efforts to prevent price-fixing sive economic benefits hinder government reve- or other forms of cartelization, as it enables the nues and the capacity of the state to transfer authorities to shield cooperating firms from resources to achieve shared prosperity. According prosecution. to the Revenue Agency, a complex list of exemp- By directly participating via its state-owned tions represented over 6 percent of GDP in 2014, enterprises and by fixing market variables, the with over 68 laws and 11 presidential decrees cre- Honduran government intervenes in markets ating tax exemptions, each with a specific policy where competition would otherwise be viable goal aimed at stimulating ­ economic growth and efficient (figure 3.29). Despite extensive through a particular sector. In some cases, these direct government participation in markets tax exemptions are concentrated on a somewhat (including in markets that are typically served by reduced number of ­ beneficiaries, as is the case only private enterprises throughout LAC), there with exemptions on the  tax  to support road are no adequate rules in place to ensure that state infrastructure, with 12 firms accounting for over involvement in the economy is neutral to compe- 77 percent of the total  sum of the exemption. tition. Furthermore, the Honduran government Furthermore, it is worth noting that despite the enables competitors (producers and industrial presence of high  tax expenditures, Honduras processors) to establish “agreements” (convenios) ranks 131 out of 144 countries in the “effect of on prices, domestic and import quantities and taxation on incentives to invest” ranking in the market quotas for some agricultural products. 2015 Global Competitiveness Report. Economic Growth in Honduras: Challenges and Opportunities 59 FIGURE 3.28  Government Intervention in Markets Hinders Competition (OECD Product Market Regulation Indicator; decomposition of restrictions to competition through state control) 3.0 4.0 4.00 Product market regulation score 3.5 3.50 2.5 29 3.0 3.00 2.0 8 2.5 2.50 18 1.5 2.0 2.00 35 40 1.5 33 1.50 1.0 1.0 1.00 65 0.5 31 0.5 0.50 40 0 0 0 Honduras Public ownership Involvement in business operation Barriers to trade Direct control over business Use of command and and investment enterprises control regulation Barriers to Scope of state-owned Price controls entrepreneurship enterprises State control Government involvement in network sectors Governance of state-owned enterprises Source: World Bank Group/OECD PMR data 2013–14. FIGURE 3.29  Regulations Often Protect Incumbents, and Administrative Barriers Inhibit Competition, Particularly in Services Sectors (OECD Product Market Regulation Indicator; decomposition of main barriers to entrepreneurship) 3.0 5.0 5.0 5.0 4.5 4.5 4.5 Product market regulation score 2.5 29 4.0 4.0 4.0 3.5 3.5 48 3.5 2.0 39 3.0 3.0 3.0 1.5 40 2.5 2.5 2.5 2.0 8 2.0 2.0 20 33 1.0 1.5 1.5 1.5 72.6 1.0 1.0 1.0 0.5 31 73 0.5 0.5 0.5 39 0 0 0 0 Honduras Regulatory Complexity of Administrative protection of regulatory burdens on incumbents procedures startups Barriers to trade Legal barriers Communication Administrative and investment Antitrust and simplification burdens for Barriers to exemptions of rules and corporations entrepreneurship procedures Administrative Barriers in State control network Licence and burdens for sole sectors permits system proprietor firms Barriers in services sectors Source: World Bank Group/OECD PMR data 2013–14. 60 Economic Growth in Honduras: Challenges and Opportunities FIGURE 3.30  Labor Costs in Honduras Are Higher than in Many Other Apparel-Exporting Countries (Minimum salary in the garment industry and ratio of minimum salary to GDP per capita, 2014) 1,400 18 16 1,200 Minimum wage as percent of 2013 14 Minimum wage (PPP US$) GDP per capita (PPP US$) 1,000 12 800 10 600 8 6 400 4 200 2 0 0 p. a n y ili as at ru ng nka m h sia M ia Tu m a Th pt Pa sia Tu a Pa cco M ina M ico a Sa tan do s re ng nd et r Ho nam In ine Ho r k e al si di Ca des Re Vi do d na e y Ph dur ni ne Ko Ko ay ex em Ch In bo la P Eg is o B a La a pp a, or la ai k lv al ng i Sr Gu El Highest relevant rate applicable to unskilled garment workers Lowest relevant rate applicable to unskilled garment workers As % of GDP per capita (PPP US$) Source: ILO and World Bank estimates. As a consequence of higher formal labor costs, minimum salaries in Honduras were similar to the country has experienced a loss of competi- those of Nicaragua and El Salvador and lower tiveness; this is evidenced in the manufacturing than in Panama and Costa Rica. After the sector, which has been a driver of poverty changes increases in 2009, these minimum salaries rose in the past decade. The textile industry, which to levels closer to those in Panama and higher represented more than 40 percent of exports in than Nicaragua and El Salvador. At the same 2013 in Honduras, is struggling with higher labor time, Honduran law offers some of the most costs in an international context with more com- generous severance payment policies in the ­ petitive wages in many other textile-producing region, further increasing the cost of formal countries (figure 3.30). Among the top apparel labor. These result of the minimum salary wage exporters to the U.S., Honduras has the sixth hikes and generous severance payments may dis- highest wage in the industry, almost doubling the incentivize the creation of formal employment. wages of nearby competitors Guatemala and El As already noted, only twenty percent of jobs Salvador, and significantly higher than China, are  in the formal sector and self-employment Cambodia, Vietnam, Mexico or India. Possibly as accounts for more than four out of ten jobs in a consequence of high wages, employment in the Honduras, the highest share in Central America, maquila sector has not returned to pre-crisis (and and has been the main driver of recent job pre-minimum-wage increase) levels. growth, accounting for 212,000 of the 230,000 High minimum wages not only affect the jobs created between 2011 and 2013. While there competitiveness of the economy, but also influ- are many factors at play, including a large ence the pattern of job creation in Honduras.20 unskilled pool of workers and a large rural sector, Since the 1970s minimum salaries have been the country’s labor market regulations imply a high relative to Honduras’ GDP per capita (see significant cost differential between hiring infor- appendix H). At the beginning of the decade, mal and formal workers. Economic Growth in Honduras: Challenges and Opportunities 61 BOX 3.4  Examples of Special Regimens and Fiscal Benefits in Honduras Law Fiscal benefitsa Sector data Temporary Temporary suspension of payment of customs duties Number of companies in the Import and sales taxes, from imports of inputs to produce regime (2013): 290 Regime—RIT. goods exported to non-Central American countries. Exports: US$ 1,694Mb Direct employment: 73,151b Free Zones Imports to Free Zones are exempt from tariffs, taxes, Number of companies in the Regime—ZOLI duties and other levies. regime (2013): 741 Sales and production within the Free Zone are exempt Exports: US$ 6,571Mc from payment of municipal taxes. Direct employment: 117,678c Profits are exempt from the income tax. Companies can sell goods in Honduras if they pay taxes Law of Tourism No income tax for 10 years from the beginning of incentives operations. Tax breaks on: • Imports necessary for the construction and initiation of operations ­ • Printed material for promotion • Replacement for impairment of goods • Imports of new vehicles • Imports of aircraft, maritime or waterway transport Law of The export company pays the independent producer Incentives to for every 40 pound box of bananas from rehabilitated the Banana and replanted areas US$ 0.50 during the first three Production years and US$ 0.30 for the next three years These payments to independent producers are recognize as expenses in the calculation of the ­ exporter’s taxable income ­ a. According to Decree 278-2013 Ley de Ordenamiento de las Finanzas Publicas, Control de las Exoneraciones y Medidas Antievasión, Article 23, all fiscal benefits will expire in 12 years, in the case where the law that created them did not stipulate an expiration period. b. RIT 2013 information based on affidavit—declaracion jurada—of 194 companies. c. ZOLI 2013 information based on affidavit—declaracion jurada—of 305 companies. Sources: Osmel Manzano et al. Partners or Creditors? Attracting foreign investment and productive development to Central America and the Dominincan Republic, IDB. Interviews and information provided by Secretaria de Desarrollo Económico, Dirección General de Regímenes Económicos. Knowledge Gap  What Is the Effect of Labor Market Regulations on Job Creation, Informal Employment and Unemployment in Honduras? Formal employment in Honduras is heavily regulated; these regulations may contribute to the high rate of informality by restricting the ability of firms to adjust their workforce. Evidence that these rigidities in regulation may hurt job creation is seen in the creation of 177,000 new jobs after the passage of the Hourly Employment Law of 2010, which allowed for the temporary hiring of workers for specific tasks at an hourly or daily rate. 62 Economic Growth in Honduras: Challenges and Opportunities Notes 1. These refers to the weighted average of the per- 12. Similarly, Honduras may be able to tap into centage of years between 1975 and 2013 in which ­ developments of liquefied natural gas in El a country has exhibited a year-on-year growth rate Salvador or Panama, projects currently in the change of more than 80 percent. pipeline, if excesses are sold regionally. 2. Measured at US$4 per day in purchasing-power 13. Small firms are defined as having fewer than parity terms. 20  workers, medium firms as having between 3. See chapter 4 for more discussion on wage gaps. 20 and 100, and large firms as having 100 or more. 4. This may be due in part to the fact that money 14. As of 2013, CAR was 14.5 percent, NPLs transfer firms are a relatively low cost option, ­ 3.4  percent, provisioning to NPL 123.7 percent. as banks charge an average of 4.6 percent for trans- Currency mismatches by borrowers remain a fers of US$200. World Bank (2015d). source of risk within the banking sector. One-third 5. Plan de Turismo Sostenible 2011–14, Instituto of bank deposits and lending is in foreign cur- Hondureño de Turismo, 2011. rency and mismatches are significant with about 6. It is projected that these new investments will 45 percent of foreign currency credit going to generate about 4,600 new jobs by the end of ­ unhedged borrowers. 2015. 15. FinStats (March 2015). The bulk of the credit 7. This assumes that remittances are exogenous to is based on consumption credit growing from 18–24 percent, if the models correct for reverse 15 percent in 2009 to 22 percent in 2013 and causality in which real exchange rates also affect 28 percent of credit growth is based on construc- remittances. See Lopez, Molina, and Bussolo tion and real estate. There is rapid private credit to (2008). Other studies finding evidence of Dutch deposit at 113.9 percent which is well above the disease resulting from remittances include: regional average of 85 percent. Bourdet and Falck (2006); Amuedo-Dorantes 16. See chapter 5 for more detail on land access in and Pozo (2004); Lartey, Mandelman, and Acosta Honduras. (2012); Vargas-Silva (2009); and Bayangos and 17. Land Governance Assessment Framework. Property Jansen (2011). Institute. 8. See chapter 5 for more discussion regarding fiscal 18. The indicator is divided in three sub-indicators: sustainability. barriers to trade and investment, barriers to entre- 9. Returns to secondary education in Honduras, for preneurship and state control. The ranking takes example, are twice as high as in Costa Rica. values from 0 to 6, and a higher value is associ- 10. See chapter 5 for a more detailed discussion of ated with regulations more restrictive to competi- ninis. tion. Source: World Bank Group/OECD PMR data 11. Levels are also the lower than most Central 2013–14. American countries: Panama (9.3 years), Costa 19. Ley Orgánica del Colegio de peritos mercantiles y Rica (8 years), El Savlador (7.8 years) and Contadores Públicos de Honduras (Art. 2.14, 7.8) Nicaragua (6.6 years) (EdStats using Barro and 20. See chapter 4 for further discussion on minimum Lee). salaries. Economic Growth in Honduras: Challenges and Opportunities 63 Chapter 4 Equity, Equality, and Social Inclusion in Honduras Honduras’ potential for inclusive growth is households at the lower end of the income limited by unequal access to basic services, slow ­ distribution. By 2013 the Gini coefficient was ­ job creation and inefficient public spending. only marginally lower at 0.54, the second-­ Ineffective targeting mechanisms, weak expen- highest level of income inequality in Latin diture controls and inadequate institutional America. Moreover, while the regional middle capacity distort the distribution of basic goods class has continued to grow, the distribution of and services in ways that disadvantage the income in Honduras remains highly bimodal. ­ country’s poor. A lack of access to social and High levels of income inequality have con- economic infrastructure not only diminishes the ­ strained poverty reduction in Honduras, even quality of life among households in the bottom during periods of robust growth. quintiles, it also reduces their employment Underlying the country’s long-term inequal- opportunities and earnings potential, perpetu- ity are institutional weaknesses which have ating entrenched intergenerational poverty. resulted in unequal access to public goods and Weak targeting mechanisms, limited budget services, as well as opportunities to build flexibility, and a weak public accountability human capital. A lack of access to education, framework reduce the efficiency, equity and health care, utilities, public economic infra- impact of ­ public spending in Honduras. A lack structure and private markets has increased of opportunities to build human capital has left the vulnerability of millions of Hondurans many Hondurans unable to compete for high-­ exposed to shocks. Moreover, low levels of productivity ­ employment, concentrating work- socioeconomic inclusion leave many poorer ers in low-­ productivity employment, causing households unable to benefit from all but the high unemployment among certain groups, and most robust periods of growth. Constraints discouraging labor force participation, particu- on  human capital formation have particu- larly among women. larly  important implications for growth and Honduras has long been among the most inequality. Children’s access to basic education unequal countries in Latin America, and while and health services is largely determined by income inequality has fluctuated over the last the  income and location of the household two decades, little progress has been sustained. into which they are born, systematically limit- In 1990 Honduras’ Gini coefficient (0.57) was ing human capital formation among the less the same as Chile’s, and both were close to that well-off. Low levels of human capital force of Brazil (0.60), the most unequal country in workers into low-productivity employment, LAC at the time (figure 4.1). Yet, while the diminishing their earnings potential and region as a whole has experienced a substantial curtailing the opportunities available to ­ reduction in inequality, with inequality in Brazil ­ subsequent generations. Structural institu- and Chile falling substantially since the mid- tional weaknesses reduce the effectiveness of 1990s, Honduras’ Gini coefficient has fluctu- public spending, constraining the ability of ated  dramatically and remained high overall, policymakers to break the cycle of limited reflecting the intense vulnerability of Honduran opportunities and low productivity. Equity, Equality, and Social Inclusion in Honduras 65 FIGURE 4.1  Income Inequality in Honduras Is Both High and Volatile (Gini coefficient, Honduras, Brazil and Chile, 1989–2013) 0.65 0.60 Gini coefficient 0.55 0.50 0.45 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Brazil Honduras Chile Source: World Bank calculations using PovcalNet. 4.1 Limited and Unequal Access A lack of improved water and sanitation ser- vices is associated with more missed school days to Basic Services and poor health outcomes in both children and Malnutrition and limited access to basic ser- adults. Higher maternal mortality rates, higher vices are a barrier to strengthening human levels of environmental contamination and expo- ­ capital in Honduras. Approximately one out of sure to a wide range of debilitating and often fatal five Honduran children suffers from chronic diseases are linked to poor water and sanitation malnutrition, affecting the country’s human systems (World Health Organization, UN-Water capital. Studies have shown that malnutrition 2014). While the coverage of water supply and is estimated to be responsible for approxi- sanitation services is gradually increasing, the mately 45 percent of under-five mortality Black distribution of access remains highly unequal, et al. (2013), stunting, in particular, is esti- and service quality is generally low (map 4.1 and mated to contribute to gross domestic product figure 4.2). In 2013, 14.4 percent of Hondurans— (GDP) losses of up to 11 percent (Horton and over a quarter of a million households—lacked Steckel 2013). Children who escape undernu- access to a water grid, and 580,000 households trition are more likely to survive and stay in lacked improved sanitation services, mostly in school; for example, stunted children have at rural areas.1 The urban poor also suffer from lack least one year less of schooling than a healthy of access, as investment has been insufficient to child (Martorell et al. 2010). Moreover, healthy keep pace with the country’s rapid urbanization. and better nourished children are 33  percent As a result, a smaller share of the urban popula- more likely to escape poverty as adults and tion has access to water systems now than in earn at least 20 percent more than adults who 1990 (World Bank 2014a). Quality varies widely, were stunted as children (Grantham-McGregor service interruptions are common and water is ­ et al. 2007). Women who escape undernutri- frequently rationed. Poor water and sanitation tion are also 10  percent more likely to own infrastructure in schools exacerbates inequality their own business. in education access, as 80 percent of urban schools 66 Equity, Equality, and Social Inclusion in Honduras MAP 4.1  Access to Sanitation Is Especially Limited in More Remote Parts of the Country (Share of households without improved sanitation by municipality, 2013) Sanitation 5.4–25.0% 25.1–40.0% 40.1–55.0% 55.1–70.0% 70.1–100.0% Source: World Bank estimates based on tabulations from the XVII Population and VI Housing Census (2013), provided by the Honduran authorities. Note: Areas that are majority Indigenous Peoples and Afro-descendant are outlined in red. FIGURE 4.2  Access to Flush Toilets Varies have access to improved sanitation facilities, com- across Income Groups pared to just 62 percent in rural areas. This leaves (Access to flush toilets by income quintile) approximately 500,000 children without access to potable water and 1.1 million children without 80 access to basic sanitation, with deeply negative impacts on health and education outcomes. Similarly, access to these services appears espe- 60 cially limited among indigenous groups. The Economic Commission for Latin America and the Caribbean (ECLAC/CEPAL) estimates that Percent 40 48 percent of indigenous households have limited access to improved water and sanitation services. Access to health services remains a key chal- 20 lenge, especially for poor and rural households (World Bank 2015b). While immunization rates have improved, rates of prenatal care provided by 0 2004 2006 2008 2010 a doctor and deliveries assisted by a health pro- Q1 Q2 Q3 Q4 Q3 fessional are uneven. In 2012, 93.5  percent Source: MAPAS HN Country Report, 2014, CONASA. of  pregnant women in urban areas received prenatal care from a doctor, compared to just ­ Equity, Equality, and Social Inclusion in Honduras 67 62.3  percent in rural areas. This gap reflects an to equalize access, approximately 20  percent of even larger disparity between the top and bottom water coverage and over 30 percent of sanitation income quintiles, at 97 and 53  percent, respec- coverage in Honduras would need to be redistrib- tively. The rate of deliveries assisted by a health- uted across groups (figure 4.3). The D-Index dis- care professional was similarly unbalanced, at aggregated by household characteristics indicates 98 percent for the highest quintile and 58 percent that rural/urban location, income level and for the lowest. Access to health insurance is lim- parental education largely explain inequality in ited for both the urban and rural populations, access to most basic services (­figure  4.4). These covering just 19  percent and 5  percent, respec- factors contribute to entrenched poverty, as inad- tively. This contributes to Honduras’ high out-of- equate access to opportunities in one generation pocket health costs, which exceed both the LAC conditions for similar deprivation in creates the ­ and Central American averages. These costs fur- the next. ther limit healthcare access among poor house- holds, as evidenced by the 2012 National Survey Both Access to Education and of Living Conditions (Encuesta Nacional de Education Quality Remain Low and Condiciones de Vida). Of the 60  percent of respondents in the poorest quintile who reported Unequally Distributed being sick during the survey period, 25 percent Deep and persistent disparities in education access did not seek medical attention due to cost and are a structural barrier to long-term ­ poverty 22  percent due to the distance to the nearest reduction. While Honduras has made progress in healthcare provider.2 Moreover, the departments expanding access to primary education, enroll- with the largest indigenous populations also have primary, secondary and ment in other levels (pre-­ the worst health indicators, reflecting further tertiary) remains low, and the quality of public disparities in access to health services across the country. Electrification rates in Honduras lag those of FIGURE 4.3  Fewer than Half of Honduran other countries in the region; service quality is Children Have Access to Improved Sanitation or unreliable, and access is especially limited Running Water in  rural areas.3 Despite high rates of public (Childhood access and Human Opportunity Index, spending on the electricity sector, 1.1 million 2013) Hondurans lacked access to electricity in 2012, 100 including a quarter of the rural population (International Energy Agency 2014). Low elec- 80 trification rates reduce living standards in rural areas, increase health and safety risks, and dimin- 60 HOI ish employment opportunities by slowing local 40 economic growth and inhibiting diversification. In Honduras, rural status, parental education 20 and household income largely determine chil- 0 dren’s access to services. The Human Opportunity ti de n t xt ar Sa ent ity et er en Index (HOI) examines the correlation between tio on gra El me si llul at rn ic lm llm ta W te tr Ce h ol ni ec ro In access to services and household characteristics. r en en g ol y in The HOI is an equity-adjusted measure that cap- ar ho et nd Sc pl co m tures the degree to which access would need to be Se Co reallocated to achieve full equality across a given HOI Coverage set of characteristics.4 The HOI’s equity-­ adjusted Source: World Bank estimates using SEDLAC (CEDLAS and the level of access to water and sanitation reveals that, World Bank). 68 Equity, Equality, and Social Inclusion in Honduras FIGURE 4.4  Inequality in Children’s Access to FIGURE 4.5  Higher Income Groups Have Services Is Largely Based on Rural Status, Significantly Better Access to Secondary School Parents’ Education and Income Level (Secondary gross enrolment by quintile 2007–13) (D-Index decomposition of children’s access to basic services, 2013) 100 85 84 35 80 68 70 30 60 Percentage 60 54 25 48 40 38 D-Index 20 32 26 15 20 10 5 0 2007 2013 0 Quintile 1 Quintile 2 Quintile 3 Sanitation Secondary Water enrollment Quintile 4 Quintile 5 Other characteristics Parent´s education Source: World Bank 2015b. Per capita income Urban or rural Source: World Bank estimates using SEDLAC (CEDLAS and the World Bank). Note: This figure reports the dissimilarity index (D-index). The following age of  25 were illiterate; however, the Maya, characteristics are reported under “Other characteristics”: gender of the child, gender of the household head, the presence of both parents Chortí, Tolupán, Tawahka, Nahua and Pech had in the home, and number of siblings. Of these, number of siblings accounts for half of the D-Index. even higher rates than the average for rural areas, ranging from 24 to 34 percent.6 A lack of schools in the areas where they live, difficulties attending education presents a serious challenge in both schools in neighboring non-indigenous commu- urban and rural areas. Overall access to secondary nities, deficient school infrastructure and low schooling is heavily influenced by area of resi- education quality are the main factors contribut- dence, parental education and household income ing to high illiteracy rates. level, all of which present barriers to intergenera- A growing gap between rural and urban areas tional mobility. The HOI reveals that the key fac- has increased disparities in education access tors influencing secondary school enrollment are over the last decade. Among the factors driving the ­education of the head of household, the per unequal education rates between urban and capita income of the household and its rural or rural areas are the poor quality of the Honduras’ urban location. Enrollment in tertiary education public school system, low estimates by parents of remains low at just 20 percent. In addition, boys the returns to schooling, and financial con- are less likely to remain in secondary and tertiary straints.7 Differences in rural and urban enroll- education. In 2013, female enrollment in tertiary ment rates magnify the impact of income education exceeded male enrollment by 6.5 per- inequality, and the richest quintiles have nearly centage points.5 twice the school attendance rates as the poorest Indigenous peoples have less access to educa- figure  4.5). While rural enrollment quintiles, (­ tion than other groups. Due to data limitations rates have increased in recent years, these the HOI cannot be disaggregated by ethnicity in improvements have been limited to the lower order to estimate the extent of exclusion among grades (­figure 4.6). Due to an acute shortage of minority groups. However other analyses sug- rural secondary schools the rural secondary gest that indigenous communities in particular enrollment rate is half the urban rate. Assuming have lower access than other groups. In 2013, that the 192 rural secondary schools operating approximately 18 percent of Hondurans over the in 2012 were already at full capacity, a staggering Equity, Equality, and Social Inclusion in Honduras 69 FIGURE 4.6  A Significant Share of Rural been added as a condition of the Bono Vida Students Do Not Transition to Secondary Mejor program. School Education quality is low in both urban and (Honduras urban-rural enrollment, ages 5–20, 2013) rural areas. National and international tests 100 indicate that the majority of Honduran students ­ do not achieve grade-appropriate literacy and 80 numeracy.9 Performance in grades 7–9 is partic- Percentage 60 ularly poor, with only 37–42 percent of students 40 reaching a satisfactory level in reading and just 3–8 percent in mathematics (figure 4.7). National 20 standardized test scores reveal no significant 0 differences in educational outcomes between ­ 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 students in rural and urban areas. However, since Age rural enrollment rates are much lower than urban Urban Rural rates, the rural sample may be biased towards Source: World Bank 2015b. students that are more committed to remaining in school. The low quality of public education in 1,079 additional schools would be required to Honduras leads wealthier families to opt out of serve all rural students. the public school system. While 88  percent of Driven by economic constraints, Honduras Honduran children attend public schools, the has the highest secondary dropout rate in 12  percent that enroll in private school are dis- Central America.8 In 2013, there was a relatively proportionately likely to come from higher small difference in primary enrollment rates income households (figure 4.8). This difference across Central America, but the trend diverges is  largest at the secondary and tertiary levels. rapidly at the secondary level, with Costa Rica In the urban school system, 30 percent of second- and Panama recording the highest enrollment ary students and 38 percent of tertiary students rates at around 75  percent and Honduras the attend a private institution, compared to just lowest at 46  percent. Moreover, Honduras is 13 percent at the pre-primary level and 9 percent the only country in Central America where the at the primary level. majority of students cite economic constraints as their main reason for dropping out. In 2013, 53 percent reported economic constraints as the 4.2 Lack of Opportunities in main factor, while only 29 and 14 percent cited a lack of interest in studying or access to school- the Labor Market ing, respectively (Adelman and Szekely 2015). Limited and inequitably distributed access While boys and girls drop out at roughly the to education, health and public utilities inhib- same rates, their reasons for dropping out differ: its  human capital formation, leaving many for boys ­economic reasons are most important, Hondurans unable to compete for high-­ while girls are more likely to cite other reasons, productivity jobs. Honduras suffers from low including responsibility for household tasks. rates of labor force participation, particularly High dropout rates have  important conse- among women, high unemployment among quences for economic pro­ ductivity and future certain groups, especially young people, and inequality. In  an effort to  address this issue, a  large concentration of workers in low-­ compulsory education has  recently been productivity jobs. extended through lower secondary school (up Honduras’ labor force participation rate has to 9th grade), and secondary education has increased in the last decade, yet it remains among 70 Equity, Equality, and Social Inclusion in Honduras FIGURE 4.7  Education Quality Remains Low (Percentage of students by performance level, reading and mathematics, 7th–9th grade, 2013) 100 4 6 3 6 8 5 33 29 36 52 57 70 Percentage 50 50 55 49 40 38 27 13 10 11 0 Reading Math Reading Math Reading Math 7th grade 8th grade 9th grade Advanced Satisfactory Needs improvement Unsatisfactory Source: World Bank 2015b. FIGURE 4.8  Higher-Income Households Opt countries in the region, workers in the bottom Out of the Public School System 40  percent have lower participation rates than (Urban attendance rate, ages 13–18, by type of school those in the top 60 percent. However, in Honduras and income quintiles, 2013) labor force participation among workers in the 100 bottom 40 percent has been growing at a faster 10 10 15 rate than in the top 60  percent. Between 2003 28 80 46 and 2013, labor force partici­ pation among the former increased by over 5  ­ percentage points, Percentage 60 compared to 2 percentage points for the latter. 40 90 90 85 Honduras’ unemployment rate is higher than 72 54 many of its Central American neighbors, and 20 unemployment is most common among women and youth. While the overall unemployment rate 0 Q1 Q2 Q3 Q4 Q5 of 6 percent is not exceptionally high by interna- Quintile tional standards, it is elevated by the standards of Private Public regional comparators, particularly El Salvador, Source: World Bank 2015b. which recorded an unemployment rate of just  3.8  percent in 2013. As is often the case, unemployment in Honduras is largely an urban the lowest in the region, and fewer than two of phenomenon and is particularly acute among the every three adults in the bottom 40 percent of the youngest workers. In 2013, the unemployment income distribution are active in the labor force. rate for workers aged 15–24 was 9.8  percent. The labor force participation rate among adults Unemployment is higher among women than age 25–55 is just 72 percent, well below the LAC men, and this gap has grown since 2007, when average of 81  percent (figure 4.9). As in most the two rates were practically the same. The Equity, Equality, and Social Inclusion in Honduras 71 FIGURE 4.9  Labor Force Participation in Honduras Is Low by Regional Standards, Especially among Workers in the Bottom 40 Percent of the Income Distribution (Labor force participation rates by country and income group, 2013) 100 80 Percentage 60 40 20 0 co n) n) ic r s r ru C il do il do bi l i bl LA xi Ch liv u ur rb rb m m pu P Br Bo nd lv u M lo (u (u r Ec t Co R Ho S P Gu in n El u nt ic u in Ur m Ar Do Country Bottom 40 Top 60 Source: World Bank 2015e. Note: This analysis is limited to adults ages 25–55 and based on harmonized household surveys to increase comparability across countries. female unemployment rate is now 3 percentage FIGURE 4.10  Women and Young People Are points higher than the male rate, with the highest Less Likely to Participate in the Labor Force rates among women between the ages of 15 (Labor force participation rate by gender and age, 2013) and  24. The unemployment rate for young 100 women is estimated to be 13  percent in rural areas and nearly 18 percent in urban centers. 80 High youth unemployment rates are a partic- ularly serious concern. One fifth of Hondurans are between the ages of 15 and 24, and this group 60 Percentage comprises a third of the ­working-age population. Yet young people face high rates of  unemploy- 40 ment, low rates of labor force ­ participation and low rates of school enrollment ­ (figures 4.10 and 20 4.11). Among young workers who are employed, low job quality is a serious issue. In 2013, fully a 0 quarter of all jobs held by workers aged 15–24 9 4 9 4 9 4 9 4 9 4 –2 –3 –4 –5 –6 –1 –2 –3 –4 –5 were unpaid family work, with similar rates for 15 20 40 30 50 25 45 60 35 55 men and women. The  difficulty of acquiring a Age quality education and a general lack of jobs dis- Male Overall Female courages young workers from building the skills Source: World Bank estimates using EPHPM. required by a competitive labor market. 72 Equity, Equality, and Social Inclusion in Honduras FIGURE 4.11  Unemployment Is Especially High FIGURE 4.12  The Least-Skilled Work Largely in Urban Areas and among Women and Youth in Agriculture (Unemployment rate for select groups, 2007–13) (Sector by education group, 2013) 12 100 Sector of employment (%) 10 80 Unemployment rate (%) 60 8 40 6 20 4 0 pl ry pl ry ry le te 2 ia m da m da o r ple ss e e rt et et co n co con m Te In eco co Se S y ar im 0 Pr 2007 2008 2009 2010 2011 2012 2013 Youth (15–24) Urban Female Other services Real estate and finance Overall Male Rural Retail, hotel, Transport and restaurants communications Source: World Bank estimates using EPHPM. Construction Manufacturing Note: Rates are for workers aged 15–64 unless otherwise noted. Mining and utilities Agriculture Source: World Bank estimates based on EPHPM. Low Rates of Educational Attainment Are Linked with Low-Productivity FIGURE 4.13  There Is a High Premium for Workers with Tertiary Education Employment (Wage gap by education group, 2007–13) Limited and inequitable access to education 350 translates into disadvantages in the labor market. Almost half of workers who did not ­ 301% 300 attend ­secondary school work in agriculture, while 20  percent work in the retail, hotel and 250 restaurants sector and 12  percent in manufac- Real wage gap 200 turing  (figure 4.12). Highly skilled workers are more likely to work in services and less likely 150 144% to work in agriculture. There are substantial 108% wage ­ disparities in the labor market, both by 100 65% economic ­ sector and skill level. Workers with a 50 tertiary education earn about 300  percent more  than the average wage, while those with 0 primary school education or less earn only 2007 2008 2009 2010 2011 2012 2013 65  percent of the average (­ figure  4.13). This Tertiary Secondary complete disparity perpetuates Honduras’ high rate of ­ Secondary incomplete Primary complete or less economic inequality. Source: World Bank estimates based on EPHPM. Equity, Equality, and Social Inclusion in Honduras 73 While the labor market should be expected to large increase in minimum wage in 2008, formal reward workforce skills, the small size of the sector workers earned nearly 30  percent more Honduran formal sector and the country’s rela- than informal workers, but by 2013 the wage gap tively high minimum wage exacerbate the gap in had widened to 65 percent. Yet informal employ- earnings between workers with different l ­evels of ment dominates the Honduran labor market, education (box 4.1). At approximately US$600 and only one fifth of workers are employed in the per month in 2011 purchasing-power parity formal sector. Formal employment not only (PPP) terms, Honduras has a higher minimum offers higher average wages, but also access to wage than Uruguay, Brazil and Chile, and at employment benefits, including one of the 13.5 percent, it is the highest in the region as a most  generous severance payment policy in share of per capita GDP (­figure 4.14).10 Before the the  region (equivalent to a month’s salary per Knowledge Gap  What Is the Impact of the Country’s High Minimum Salaries on Job Creation, Particularly for Unskilled Workers? Economic research has found evidence that high minimum salaries deter the creation of employment, ­ alary and jobs requiring low skills are the most likely to be affected. Evidence suggests that the minimum s increase has led to a widening earnings gap between formal and informal workers in Honduras. However, no analysis has yet measured the impact of this policy change in terms of lost employment in the formal and informal sectors. BOX 4.1  The Minimum Salary and Inequality The large gap between the minimum salary and the average wage in the labor market limits the extent to which the minimum wage can influence wages in the informal sector. In 2008 the minimum wage for most formal sector workers was increased by 60 percent, and it now significantly exceeds the average wage in the economy as a whole. Though they are not enforceable in the informal sector, minimum wages often operate as a strong pay signal by indicating what is considered “fair” or “adequate” compensation.a This effect can be observed in the wage distribution of workers in countries like Brazil and Colombia, for example (World Bank 2015e). However, evidence suggests that in Honduras, setting the minimum wage too high has weakened its effect on the informal sector (figure B4.1.1). The informal wage distribution shifted when the minimum wage was raise. In 2013, 62 percent of informal workers earned less than 90 percent of the minimum wage, down from 47 percent in 2008. By contrast, more modest increases in Brazil’s minimum wage between 2005 and 2006 (15 and 17 percent, respectively) did not affect the share of informal sector workers earning less than the minimum. This may be due to Brazil’s minimum wage being closer to the average wage. Minimum wages in Honduras are set by sector, and the low minimum wage for agricultural workers—who are among the poorest in the country—may be widening the overall wage gap. Between 2003 and 2013, the average minimum wage grew by 225 percent in nominal terms, but the agricultural sector’s minimum wage increased by just 159 percent. Meanwhile, the gap between the wages of agricultural workers and workers in all other sectors widened. In 2003, the maquila, utilities and financial sectors all had minimum salaries that were 123 percent higher than the agricultural sector. By 2013 all sectors of the Honduran economy had minimum wages that were at least 134 percent higher than agriculture. Notably, the minimum wage for ­maquila workers fell from the highest in 2003 to the second-lowest in 2013, with only agricultural workers earning less. Even so, the labor costs of the country’s maquilas are high by international standards.b box continues next page 74 Equity, Equality, and Social Inclusion in Honduras BOX 4.1  continued FIGURE B4.1.1  High Minimum Wages Act as Weak Signals for the Informal Sector (Kernel density distribution of wages by employer type, 2008 and 2013) a. 2008 b. 2013 1.0 1.0 0.8 0.8 0.6 Density Density 0.6 0.4 0.4 0.2 0.2 0 0 4.2 5.2 6.2 7.2 8.2 9.2 10.2 4.2 5.2 6.2 7.2 8.2 9.2 Small firms (Informal) Small firms (Informal) Large firms (Formal) Large firms (Formal) Public sector Public sector Source: World Bank tabulations using SEDLAC (CEDLAS and the World Bank). Note: These figures present kernel density plots for public sector workers, informal (proxied by firms employing 5 or fewer workers) and formal workers (proxied by firms employing more than 5 workers). The vertical line represents the minimum salary. The analysis is limited to full-time employees (those who worked between 30 and 50 hours) in urban areas who received wages and excludes the self-employed. a. “[The minimum wage] is binding if it actually affects wage distribution, whether through enforcement or other factors. It is completely binding if it creates a wage floor, whereas it is somewhat binding if it creates a distortion of the wage distribution, which may not be a wage floor” (Cunningham 2007). b. See appendix H. FIGURE 4.14  Honduras Has One of the Highest Minimum Wages in the Region (Minimum wages as a share of GDP per capita, 2013) 900 16 14 750 MW as a % of GDP per capita 12 MW (2011 PPP US$) 600 10 450 8 6 300 4 150 2 0 0 o ua ia a ic ile a ca a as r ru y r ay il do do bi al m ic ua bl liv az Ch Ri ur Pe ag gu ex m m na pu va ua ug Bo Br nd r te a lo ra M Pa ca l Re Ec st Ur Sa Co a Ho Pa Ni Co Gu an El ic in m Do MW (2011 PPP US$) as % of GDP per capita Source: World Bank staff tabulations using the Doing Business database and the World Development Indicators. Note: Indicators for Nicaragua are based on 2011 figures due to data limitations. Equity, Equality, and Social Inclusion in Honduras 75 FIGURE 4.15  Public Sector Wages Exceed year worked), and stronger worker protections. Private Sector Wages Nearly 80  percent of informal workers did not (Real wages, 2007–13) finish ­secondary school and approximately 10000 40  percent of informal jobs are in a ­griculture, while only 11 percent are in manufacturing. By Real wages (2007 Lempiras) 8000 contrast, only 3  percent of formal workers are 6000 employed in agriculture while 23 percent are in 4000 manufacturing.11 2000 The wage gap is also influenced by relatively high public sector salaries, and public sector 0 2007 2008 2009 2010 2011 2012 2013 workers earn more than similarly skilled workers Year in the formal private sector. In 2013, civil ser- Public sector vants earned about a third more than  similarly Private sector-formal skilled workers in private firms, but this gap fluc- Self-Employed tuated across sectors (­figure 4.15). For example, Private sector-Informal public transportation workers earned 50 percent Domestic more than their private ­ sector counterparts, Source: World Bank 2015d. while the gap was just 25 percent for public ­utility Note: Real wages are reported in 2007 lempiras. workers (­figure 4.16). FIGURE 4.16  The Public-Private Wage Gap Varies by Sector (Public sector wage premium, 2003, 2009 and 2013) 80 70 Wage premium over private sector (%) 60 50 40 30 20 10 0 rs n lth pp d io d io su an at n to a at ic e a ly ns He ec er as uc un ag ls at g Ed m or Al w ity, m st ic co rt, tr o ec sp El an Tr 2003 2009 2013 Source: World Bank estimates based on EPHPM. Note: Public sector wage premiums are estimated using Mincer equations, controlling for education, gender, age, urban status, and regional fixed effects. 76 Equity, Equality, and Social Inclusion in Honduras Knowledge Gap  What Are the Challenges Facing Increased Female Inclusion into the Labor Force? Approximately two thirds of agricultural workers’ wives do not report being in the labor force, even though production activities in small farms are typically undertaken by all family members. Low labor force participation rates among women in Honduras may be due in part to the underreporting of ­ women’s involvement in agricultural production, food processing and distribution (Dewalt et al. 1985; Colverson 1995). However, traditional gender roles, poverty, lack of access to capital, and violence may be limiting the ability of Honduran women to gainfully enter the labor force. Weak Labor Market Outcomes FIGURE 4.17  Women Are More Likely to Work in Retail and Services, while Men Are More for Women Likely to Work in the Primary Sector Female labor force participation is especially (Employment by gender and sector, 2013) low in Honduras. At 46  percent Honduras’ 100 female labor force participation rate is lower than both the male rate (85  percent) and the 80 Share of employment (%) female rate for LAC as a whole (53  percent).12 The gender gap affects Hondurans of all ages, 60 but is particularly significant for the youngest and oldest groups. Lower labor force participa- 40 tion rates reflect the limited employment oppor- tunities available to women, who face higher 20 unemployment rates and lower average wages. The leading sectors for female employment are 0 Female Male retail (38  percent) and services (32  percent) including the domestic services subsector, Domestic services Services Retail Construction and utilities which employs 11  percent of women who did Industry Primary not complete secondary school (figure 4.17). Source: World Bank estimates based on EPHPM. Industry, particularly the maquila subsector, Note: For more gender labor market indicators see appendix I. accounts for another 18  percent of female employment. However, despite the fact that half of the Honduran population lives in rural areas, Traditional gender roles and familial and the primary sector represents 10  percent of household obligations reduce female labor female employment, whereas it accounts for force participation. A married rural woman nearly 50 percent of male employment. A lack of with no children is 18 percent less likely to be employment opportunities for women in the in the labor force than an unmarried woman rural economy may partially explain Honduras’ with no children, while a married urban relatively low female labor force participation woman is 14  percent less likely than her rate. Moreover, due to the enormous amount of unmarried counterpart. The reverse is true domestic labor required by rural households— for men; married men in rural and urban particularly given their limited access to run- areas are 8 percent and 12 percent more likely ning water, sanitation, electricity and other basic to be in the labor force than unmarried men. services—rural women in Honduras may have ­ Each additional child in the household is an unusually high reservation wage. associated with a 1 percent decrease in female Equity, Equality, and Social Inclusion in Honduras 77 labor force participation. Honduras’ high FIGURE 4.18  The Gender Wage Gap Varies by crime rates may also deter female labor force Sector participation, and women in urban areas with (Hourly wages, 2013) high homicide rates are less likely to be in the 40 labor force. 30 Women with less education are less likely to 20 participate in the labor force and face worse Gender houly wage gap (%) 10 employment outcomes.13 The receipt of remit- 0 tances is correlated with a lower likelihood of –10 being part of the labor force across both the rural –20 and urban sectors, and the link is particularly –30 strong among women. However, education and –40 household characteristics are also closely cor- –50 related with labor force participation, particu- –60 larly for women. Ceteris paribus, women with –70 more education are more likely to be in the labor ry es ili nd y il ar ta st ic ut n a force; urban women who completed primary s im rv Re tie du tio Pr Se In uc and  secondary school are 6.4 and 19.5  percent tr ns more likely, respectively.14 This explains certain Co employment outcomes. For example, informality Source: World Bank estimates based on EPHPM. Note: For more gender labor market indicators see appendix I. is more prevalent among men in the labor force (85  percent) than women (78  percent), in part because women with the lowest education levels l ­andowners. This constrains women’s access to and most limited access to employment are least financing, as they are less likely to be able to use likely to participate in the labor force. land as collateral.16 In Honduras, 35  percent of Even though Honduran women, on average, men have a bank account, compared to less than earn less than men, the gender pay gap has a quarter of women. In LAC as a whole, male and decreased over the last decade. Average hourly female bankarization rates are comparable at wages are higher for men than for women in sec- 49  percent for women and 53  percent for men. tors with higher rates of female participation. As Women also face other challenges, as they tend of 2013, men earned nearly a third more than to have less access to training, capital, inputs and women in retail and industry and 13  percent markets for their goods. Women are also more more in the service sector. However, after adjust- likely to tend smaller plots on less fertile soil, and ing for socioeconomic and labor characteristics they are less likely to produce export crops than it appears that the gender pay gap has moderately male farmers. improved in the last decade.15 In 2003, the aver- age wage for male workers was approximately 20  percent higher than for comparable female 4.3 Challenges to Effective workers; by 2013 this gap had fallen to 12 percent (figure 4.18). Public Spending Further constraining women’s opportunities While social spending is relatively high in to enter the labor force is a lack of access to Honduras, weak institutional capacity hampers finance historically limited by their lack of access the ability of public agencies to deliver quality to land. Even though the law stipulates that land services that promote inclusive growth. The low can be registered under the names of both quality of public service delivery negatively spouses, in practice cultural norms generally impacts education, health and workforce skills ­ recognize men as the heads of families and among the poor, slowing the accumulation of 78 Equity, Equality, and Social Inclusion in Honduras human capital and perpetuating economic that prompted the redesign of the targeting inequality. Poor targeting mechanisms, limited mechanism. The social security system accounts budget flexibility, and a weak accountability for a large share of public spending, yet it covers framework have been exacerbated by fiscal insta- only 20 percent of workers, and its distribution is bility and a lack of budgetary credibility. Finally, steeply regressive (box 4.2). inadequate institutional capacity leaves public Weaknesses in policy design and limited insti- agencies susceptible to corruption, patronage tutional capacity further reduce the efficiency of and various forms of elite capture. public spending and limit inclusive growth. Labor Due to inefficient targeting, a large share of market policies suffer from particularly acute tar- the beneficiaries of social spending are in the top geting issues. Honduras lacks unemployment 40  percent of the income distribution. While insurance or individual savings accounts to pro- Honduras’ medium- and long-term development tect workers from unemployment risk. While strategies provide a degree of policy coordina- youth unemployment rates are higher than the tion designed to achieve specific development national average, less than 0.1 percent of GDP is targets, limited institutional capacity and data allocated to training programs for u ­ nemployed limitations diminish the effectiveness of strategic youth (Marques 2010; World Bank 2015b). Instead, planning. While the Bono Vida Mejor program is most resources go to training already-employed relatively well targeted, other programs are not. young adults through the National Training In 2013, households in the top 40 percent of the Institute (INFOP).17 As employment status is cor- income distribution received almost 60  percent related with income level, spending on workforce of spending on scholarships and 22  percent of training largely benefits wealthier workers. energy subsidies (figure 4.19). Before they were Similarly, the government’s employment service reformed electricity subsidies effectively covered (Empleate) explicitly excludes informal firms, only the top 62 percent of Honduran households and as a result most postings are for formal jobs, in 2011, creating an unsustainable fiscal burden often requiring secondary or tertiary education. This is a critical targeting weakness considering FIGURE 4.19  A Significant Share of Public that less educated individuals face serious infor- Spending Is Allocated to the Top 60 Percent mation constraints when looking for a job, are (Beneficiary incidence of major social protection generally unable to access job search programs, programs in Honduras, 2013) and comprise both the majority of workers in Honduras and the vast majority of those living in 100 3.7 poverty. Honduras also lacks employment-of- 6.4 12.0 10.7 90 15.2 30.2 last-resort programs to activate during emer- 80 17.5 19.5 gencies. However, projects executed by the Social 70 22.6 Investment Fund (FHIS) are usually small and % of beneficiaries 60 community-driven, and they have in some cases 23.5 24.1 27.9 50 offered temporary employment. 40 26.3 High wage bills limit the ability of policymak- 10.9 ers to reallocate resources in order to improve 30 25.3 44.7 17.0 service delivery.18 Trade unions in the public sec- 20 29.5 tor have negotiated beneficial labor conditions, 10 19.1 14.0 especially in the health and education sectors 0 as  exemplified by the large share of resources Bono 10 mil School Energy Scholarships feeding subsidies devoted to salaries and favorable tax exemptions Q5 Q4 Q3 Q2 Q1 (World Bank 2012b).19 Driven by high minimum salaries and a lack of hiring oversight the public Source: World Bank estimates based on EPHPM using standardized ADePT software (Social Protection Module). wage bill now represents an ­estimated 9.1 percent Equity, Equality, and Social Inclusion in Honduras 79 BOX 4.2  The Social Security System Though it covers less than 20 percent of workers, the government spends a considerable amount of resources on the social security system. In 2012 the country’s social security schemes, most of which operate on a pay-as-you-go contributory mechanism, amounted to 4.6 percent of GDP. The Honduran Social Security Institution (Instituto Hondureño de Seguridad Social, IHSS) is the country’s largest scheme. It covers formal workers in the private sector and offers health insurance and workers compensation in addition to social security benefits. Separate social security institutions cover public employees (INJUPEMP), teachers (INPREMA), police and military (IPM) and employees of the National University of Honduras (INPREUNAH). The social security regime at IHSS is a defined-benefits system funded by a 3 percent contribution rate with a cap that is currently lower than the minimum wage and therefore insufficient to finance any meaningful social security benefit. The government has made various efforts to reform the country’s social security institutions, all of which suffer from actuarial deficits and poor management. The most recent reform was carried out in 2011 at INPREMA and successfully reduced its actuarial deficit from 29 percent of GDP to between 9 and 13 percent. The IHSS social security regime suffers from structural weaknesses. The IHSS lacks a digitalized history of contributions. When applying for a benefit, the member is asked for a list of his or her former employers, and then IHSS manually reviews the paper records of the employer’s historical declarations to establish the history of contributions. IHSS only has a database of affiliates in digital form, some of whom may end up never contributing to the system. Weak information management also limits the information available to project future liabilities and analyze the impact of reform efforts. As a result of low ­contribution rates and an outdated benefit formula, IHSS members receive low benefits. Due to its focus on formal sector workers the IHSS is deeply regressive, and the system’s regressivity is exacerbated by its use of housing saving accounts. These are individual saving accounts financed through an uncapped contribution of at least 3 percent of salaries. Although all workers in the formal sector contribute ­ to this system, only those who earn more than double the minimum wage (approximately 20 percent of covered workers) are entitled to request mortgage credits backed by this account, making it steeply regressive. of GDP and accounts for more than half of cur- of  their education budget to teacher salaries. rent expenditures (figure  4.20). Capital invest- Meanwhile, capital investment amounted to ment has declined since 2008, dropping from just 0.9 percent of total education spending.21 Low 2.8 percent of GDP to 1.4 percent in 2012,20 and levels of capital investment intensify expenditure is expected to fall to 0.9 percent of GDP in 2015. inequalities by, for example, limiting the ability of Public sector gross capital formation reached education authorities to address the lack of rural a  decade low of 3.3 and 4  percent of GDP in secondary schools. 2010  and 2011, compared to 5 and 6  percent Staffing costs in the state-owned water in  2003 and 2004, respectively. In addition, and sanitation company (SANAA) increased by nearly 6 percent of GDP is spent on earmarked nearly 74  percent in real terms over a 10 year transfers, and the establishment of taxes with period, while almost no increase was registered earmarked revenue further restricts budget flexi- in the client base (World Bank 2013b). While a bility. This has left only a narrow margin for pub- large portion of the budget should be dedicated lic investment in other areas. to maintenance, rehabilitation and replacement In 2013, nearly 90  percent of education costs, there are currently no funding mecha- spending was allocated to wages (figure  4.21). ­ nisms designed for this purpose. At the same By contrast, countries with highly effective educa- time, implicit subsidies reduce rates for house- tion systems usually allocate around 50  percent holds with water access, while the poor are left 80 Equity, Equality, and Social Inclusion in Honduras FIGURE 4.20  Public Salaries Have Risen in While public health spending reached almost Nominal Terms, yet Declined as a Share of GDP 3.4 percent of GDP between 2007 and 2012, the (Central administration salaries as a share of GDP and wage bill accounted for nearly 66 percent of the in millions of lempiras, 2009–15) sector’s expenditure, leaving less than 25 percent 40,000 11 for medical supplies and 8  percent for capital 36,282 investment. The Ministry of Health’s average 10.9 10.70 from 2007 to 2012 is higher than the average for 10 9.7 middle-income countries (52 percent) (Clements Lempiras (millions) Percent of GDP 30,000 29,938 9.60 9.6 et al. 2010; World Bank 2015b) and higher than 9.1 9 in  El Salvador (57.4  percent)23 and Guatemala (48 percent). In the education sector, more recent 20,000 8 budgets have decreased the share of the wage 8.2 bill in total spending. Similarly, the 2014 budget allocated a lower share of health spending to sal- 10,000 7 aries (45.9  percent) and 12.7  percent to capital 09 10 14 13 12 11 15 expenditures. 20 20 20 20 20 20 20 Salaries as a % of GDP A weak accountability framework has given Salary (millions of Lempiras) rise to fraud, leakages and inefficient staffing, Source: Honduran authorities. Figures for 2014 and 2015 are estimated. which negatively affect service delivery. In edu- Government of Honduras “Lineamientos de Política Presupuestaria Plurianual 2015–18.” Secretaría de Finanzas. cation, for example, ghost workers and teacher absenteeism are recurrent concerns in terms of expenditure control, though recent reforms are FIGURE 4.21  The Wage Bill Continues to beginning to show results (box 4.3). In the health Dominate the Education and Health Budgets (Wages as share of sector spending, 2007–13) sector, there is evidence that the mismanagement of pharmaceuticals and medical supplies wastes 100 as much as 23  percent of the sector’s budget. Weak oversight and management at the central 80 level encourage systemic inefficiency, reducing the effectiveness of public expenditure in a con- text of fiscal constraints. A public sector person- Percentage 60 nel registry launched by the government in 2014 40 enabled the identification of ghost workers and facilitated a thorough analysis of staff qualifica- tions and benefits. The registry also identified 20 nearly 19,000 different positions in the civil ­service, compared to just 1,200 positions included 0 in the organizational structure of the Civil 09 10 08 12 13 11 07 Service Directorate. 20 20 20 20 20 20 20 Education Health Inadequate controls at the subnational level Source: World Bank 2015b. further increase the share of current spending. A Note: The numbers reported follow the IMF classification of social expenditure. 2013 Public Expenditure Review (PER) revealed that most municipalities do not comply with with little or no service. Inadequate cost recov- legal rules for earmarked transfers. Municipalities ery impacts service quality through underspend- are required to invest 54–69 percent of the trans- ing on maintenance and investment, further fers they receive from the central government, limiting the scope and quality of water coverage and they are allowed to allocate a maximum of in the country (World Bank 2014a).22 15–30 percent to administrative costs depending Equity, Equality, and Social Inclusion in Honduras 81 BOX 4.3  The Education System Poor teacher performance, including high rates of absenteeism, has been a core contributor to the country’s low educational outcomes. Although Honduras spends heavily on teachers’ wages, both in terms of GDP and as a share of the education budget, its student-teacher ratio is higher than in neighboring countries and twice as high as in comparable countries worldwide. Weak institutional oversight has led to the accumulation of ghost workers, which accounted for 23 percent of the public payroll in 2010.a In addition, an estimated 60 percent of teachers are not qualified for their position, and only 90 of the 200 official school days are spent on academic tasks (World Bank 2015b). Honduran teachers tend to score poorly on university entrance exams, suggesting negative selection into teaching. Over the last decade the school year has been frequently disrupted by teacher strikes and demonstrations, and between 2002 and 2011 Honduran schools were closed for approximately a third of the total number of class days.b Even when school is in session, teachers spend an average of just 64 percent of class time on learning activities (SEDUC 2011). Between 2012 and 2015 the government passed the Fundamental Law of Education, the Higher Education Law and the Law for Strengthening Public Education and Community Participation. These reforms extended the school year by about 25 days to compensate for lost days, and Honduran schools now regularly achieve the 200 school-day mark. In an attempt to increase enrollment in secondary school the targeting formula for Bono Vida Mejor was expanded to cover students in lower secondary education as well as primary. The government has also taken steps to ensure the timely payment of teacher salaries, thereby addressing a core complaint of teachers unions, and enacted new regulations designed to curb absenteeism and limit strikes. The government has also established an Integrated Education Management Information System (EMIS) consolidating student-level, teacher-level and administrative information. The EMIS helped eliminate ­ almost 3,000 ghost workers from the education payroll, saving an estimated US$20 million annually. The EMIS also helped prioritize capital investment in education through the creation of a sectoral ­master plan. a. Due to the inaccuracies of the Ministry of Education database, the true number of ghost teachers cannot be determined, in addition, it is possible that some teachers were actually working in other schools and not included in the sample or were not recorded at the time. b. Teachers represent about half of all civil servants and are highly organized with a strong union. The World Bank 2007 Country Assistance Strategy (CAS) suggests that much of the school year is lost to teachers’ work-stoppages. For further information on teachers’ unions in Honduras, see Arcia and Gargiulo 2010. on the size of the municipality. Yet the PER found service provision, however this process has been an inverse relationship between the ratio  of slow and uneven. In the water and sanitation sector, recurrent expenditures to total muni­ cipal expen- 40  percent of the Honduran population is now ditures and the level of transfer dependence. In served by 61 decentralized urban providers. addition, the PER also suggests that municipali- However, these providers have limited access to ties use the majority of their own  resources to financing and often suffer from low managerial finance personnel and other forms of recurrent capacity. Meanwhile, SANAA still operates 13 major spending, rather than capital investment. The urban systems covering 1.5 million people. In the absence of ex-ante commitment controls and a health sector, the decentralized model for primary lack of predictability in transfers has caused care now reaches 1.2 million people in 69 munici- municipalities to commit to future expenditures palities. Yet the questionable financial sustainability even when adequate resources are not available. of municipal service provision and the weak regula- The government is decentralizing certain func- tory capacity of the central  government threaten tions in an effort to improve efficiency in public recent progress. Limited  institutional capacity at 82 Equity, Equality, and Social Inclusion in Honduras both the central and local levels leaves many public Recent reforms and emerging multi-­ ­arget institutions unable to effectively service their t stakeholder initiatives demonstrate the govern- populations. ment’s commitment to improving the quality Accountability remains a persistent chal- of  public administration. The authorities are lenge, though recent reforms have yielded posi- mounting an aggressive campaign against crime tive results. Developments in the health sector and corruption. In 2013, the government under- underscore both the progress that has been made took a self-assessment of its compliance with the thus far and the obstacles that must still be over- United Nations Convention on Anti-Corruption come. The Ministry of Health is currently allo- (UNCAC), and in 2014, Honduras became the cating its budget based on an action plan linked first national government to sign an agreement to specific targets. It has signed ­performance-based with Transparency International on anticorrup- contracts with decentralized facilities, and it will tion priorities. The authorities have also taken be piloting performance-based contracts with steps to promote constructive multi-stakeholder select public hospitals in the near term, with the engagement through initiatives designed to goal of extending them to all public hospitals by achieve shared strategic goals. These include the 2018. The active participation of civil society Open Government Partnership (OGP), the groups has improved transparency by drawing Extractive Industries Transparency Initiative attention to sector weaknesses and potential (EITI), and the Construction Sector Transparency reforms. However, serious challenges persist in Initiative (CoST). Key challenges remain in human resources management, and especially in addressing strategic and structural issues, such as the  procurement and management of pharma- ensuring merit-based appointments in audit and ceuticals. Despite an increase in public scrutiny oversight institutions, professionalizing the pub- in the wake of a major pharmaceutical procure- lic sector workforce, and strengthening public ment scandal, inefficiencies in the health sector procurement (box 4.4). Action in each of these continue to negatively impact service quality areas will be required to sustain recent progress (World Bank 2015b). in public administrative reform. BOX 4.4  Public Procurement in Honduras Public procurement systems in Honduras suffer from institutional weaknesses, including a lack of clarity in the roles of leading agencies, inadequate staff and funding, and unreliable information systems, which negatively impact the efficiency of public spending. The National Procurement Office (ONCAE) recently launched a new electronic procurement platform (HonduCompras) linked to the public financial management system. However, ONCAE has consistently suffered from high staff turnover and is currently understaffed. This jeopardizes the consolidation of the savings achieved through the implementation of the electronic procurement system, as well as a first set of pilot framework agreements for interinstitutional coordination. The agency is attempting to perform a strategic analysis of public procurement trends and their policy implications, but the success of this work depends on the opening of staff positions in ONCAE by the Civil Service Directorate. During the development of the HonduCompras platform ONCAE lacked the institutional capacity to serve as a counterpart to the software development firm that installed the system. As part of the reorganization of the Executive Branch initiated by the new administration ONCAE was shifted from the Ministry of Finance to the newly created Presidential Directorate for Transparency and Modernization of the State (PDTMS), which has a distinctly different vision regarding the role of ONCAE. The government has also resorted to outsourcing the procurement of medical supplies to UNOPS in an effort to improve transparency and efficiency. Equity, Equality, and Social Inclusion in Honduras 83 Notes 1. World Bank estimates based on tabulations from 14. Among rural women, the correlations are 9 and the XVII Population and VI Housing Census 30  percent for those who completed primary (2013), provided by the Honduran authorities. school and for those who completed second- 2. World Bank estimates using 2011/12 ENCOVI. ary school. Given the low school access rates 3. See appendix F for sub-national access rates to in the rural sector, this may reflect profession- electricity, water, and school enrollment. moving to the rural sector for service jobs als ­ 4. See World Bank (2014b) for further details on the (schools, health sector), suggesting a highly HOI concepts and methodology. Household cir- self-selected group. cumstances included in this analysis are rural/ 15. See appendix G for gender wage gap regression urban status, gender (both of the child and the results. head of household), parental education, family per 16. Committee on the Elimination of Discrimination capita income, number of siblings, and the pres- against Women (CEDAW), Combined fourth, fifth ence of both parents in the home. and sixth report for States parties: Honduras, 2006. 5. World Bank World Development Indicators. 17. In 2012, INFOP’s budget reached 0.16 percent of 6. World Bank estimates based on tabulations from GDP, reaching 170,000 individuals, most of them the XVII Population and VI Housing Census already employed. (2013), provided by the Honduran authorities. 18. ICEFI, World Bank. (2013). Honduras: Ciclo 7. Lopez (2013) shows that the returns to education Presupuestario e Indice de Presupuesto Abierto. are higher for tertiary education (118  percent) 19. For example, Honduran teachers at all educa- than for secondary education (29 percent), which tion levels do not pay taxes. (See Article 55 of in turn offers a higher return than primary educa- Executive Agreement No.0760-SE-99, Government tion (17 percent). of Honduras.) 8. See chapter 3 for more discussion on education in 20. World Bank 2013a. Fiscal Sustainability and Honduras. Effectiveness of Social Investment in Honduras: 9. See box 3.2 in chapter 3. Social Sector Expenditure Institutional Review. 10. Based on the 2013 Doing Business survey. Both Human Development Department. Washington, minimum wages and GDP per capita are in 2011 DC: World Bank. US$ in PPP terms. 21. Honduran authorities, 2014 Tabulations: “Cuenta 11. See appendixes J–M for more detailed labor Financiera Segun el Manual Del FMI 1986.” ­market indicators. 22. The analysis considers investments, access to water 12. Honduran participation is calculated for all men and sanitation and the cost of improved technolo- and women between the ages of 15 and 64 using the gies. Countries like Honduras should invest at least EPHPM. The regional labor force participation rate one percent of their GDP in water and sanitation, is from World Bank (2015e). yet between 2002 and 2011 Honduras invested just 13. These results are based on linear probability 0.13  percent. An additional US$350 million per regressions of labor force participation by gen- year would be required for the Honduras to achieve der and urban/rural sector for adults aged 25–65. universal access to these services. See appendix D for detailed regression results. 23. Ministerio de Salud Pública, El Salvador. (2013). 84 Equity, Equality, and Social Inclusion in Honduras Chapter 5 Sustainability Over the past three decades Honduras has repeat- volatility and exogenous shocks, as the sector edly experienced the same unfortunate pattern, focuses on a narrow range of primary commodi- in  which gains achieved during periods of rela- ties produced with limited technological sup- tively robust, broad-based growth are wiped out port. On the demand side, the growing role by  an abrupt, devastating shock and then only of remittance inflows heightens external vulnera- partially reclaimed during the modest, uneven bility, as remittances are closely tied to the recovery that follows. These cycles are evident in US  labor market, especially the services and the country’s growth, income and poverty statis- ­construction sectors. tics, each of which reveal a gradually improving Agricultural output is volatile, and the sector long-term trend marred by recurring setbacks. has considerable scope for diversification. Thus, the crucial challenge facing Honduran poli- Honduran farmers are highly vulnerable to cymakers is not only to promote economic growth weather conditions, including erratic rainfall. or foster progress in poverty reduction and shared Although coffee production has begun to recover prosperity, but to reinforce the economy’s resilience following the recent outbreak of rust-leaf disease against shocks and sustain income and poverty (roya), coffee producers are no more resilient to gains in the face of unpredictable circumstances. blights and other natural shocks than they were Structural sensitivity to economic shocks, chronic in 2012. Diversifying the sector by introducing fiscal instability, exposure to natural hazards, high new crops and encouraging investment in levels of crime, violence and corruption, and lim- agro-processing could boost the sector’s exports ited public administrative capacity represent mul- and enhance its employment and income poten- tiple dimensions of vulnerability that together pose tial. In particular, increasing export-oriented a persistent risk to the achievement of Honduras’ fruit and vegetable production may provide an economic and social development objectives. opportunity to reduce the overall vulnerability of the sector and increase wages. A recent analysis by the International Food Policy Research 5.1 Macroeconomic Institute (IFPRI) estimated that shifting one third of the area dedicated to corn and beans to Sustainability higher-value crops such as fruits and vegetables The economy’s sensitivity to a wide range of could expand Honduras’ economic output by shocks—internal and external, endogenous and US$1.1 billion per year, equivalent to 4.4 percent exogenous—is largely responsible for its pattern of gross domestic product (GDP). However, of growth punctuated by repeated crashes. many farmers are unwilling or unable to assume Honduras’ economy is small, open, largely agri- the risk of diversification away from staple crops cultural and predominantly informal. A lack due to the sector’s vulnerability to environmental of  physical and institutional infrastructure, shocks, their own limited access to agricultural an adverse business climate, burdensome regula- credit and insurance mechanisms, and the lim- tions and high security costs discourage invest- ited extent of social protection policies and emer- ment, inhibit diversification and slow the gency preparedness infrastructure to counter the reallocation of capital and labor, creating struc- threat of food insecurity. tural rigidities on the supply side. Agricultural Although the contribution of mining to output is especially vulnerable to both market GDP  has decreased over the last few decades, Sustainability 85 Honduras is now presented with an important effectively  promote long-term growth and sus- opportunity to explore its untapped mineral tainable social  development, appropriate trans- potential. Currently, there are only seven metallic parency and accountability mechanisms must be mines and about 300 non-metallic mines in in place. In light of Honduras fragile ecology, Honduras. Yet, the country has significant environmental protection must also be accorded reserves of iron oxide, and there are about 160 a high priority. Finally, high-value extractable pending permit requests for exploration and fea- resources have a history of fomenting instability sibility studies. The revised Mining Law passed in developing countries, and steps must be taken in April 2013 provides an improved framework to ensure that any new resource development to promote investment in the sector. In addition, does not further undermine the rule of law. offshore oil exploration is underway, and a Honduras’ macroeconomic profile is expected commercially viable discovery could improve ­ to improve during 2015–16, as a positive exter- the  trade balance, encourage foreign invest- nal  environment supports critical efforts to ment  and  bolster government revenues, all of strengthen the country’s fiscal position and boost which would help to reinforce macroeconomic economic growth. Table 5.1 presents Honduras’ stability. However, for extractive industries to medium-term macroeconomic outlook. Growth TABLE 5.1  Main Macroeconomic Indicators and Projections in Honduras, 2010–18 2010 2011 2012 2013 2014e 2015f 2016f 2017f 2018f Real economy (Percent change) GDP 3.7 3.8 4.1 2.8 3.1 3.2 3.2 3.3 3.3   Agriculture and livestock 1.8 6.5 10.7 3.4 2.7 4.4 4.0 3.9 3.9  Mining –4.0 −10.6 −3.2 −6.9 −5.1 1.3 1.0 1.5 1.5  Manufacturing 4.5 4.4 1.8 3.4 1.5 3.3 4.1 4.1 4.0   Electricity and water −0.2 3.6 2.9 −2.5 1.3 2.5 2.5 2.5 2.5  Construction −2.4 4.4 2.4 −2.5 −8.2 0.0 1.0 1.5 1.5  Commerce 3.4 4.2 3.8 2.1 2.0 2.8 2.8 2.8 2.8  Services 4.8 2.9 3.6 3.2 5.0 3.1 3.0 3.0 3.0   Domestic demand 4.4 6.7 2.5 0.6 2.9 5.9 2.8 2.9 3.3   Private consumption 3.6 3.6 4.3 3.8 2.7 8.9 3.7 3.5 3.8   (percent of GDP) 78.1 77.6 78.6 81.3 81.1 77.2 78.6 79.1 78.9   Gross capital formation 12.0 24.1 −2.7 −11.4 6.8 1.7 1.7 1.7 1.9   (percent of GDP) 21.9 26.0 24.6 21.8 22.1 23.1 22.7 22.3 21.8   Exports of goods and services 15.7 8.4 9.8 −1.3 1.6 6.1 1.8 1.8 1.4   (percent of GDP) 45.8 51.3 50.9 48.3 46.9 43.2 40.4 38.1 35.7   Imports of goods and services 15.2 12.7 6.3 −4.1 1.5 10.4 1.4 1.4 1.7   (percent of GDP) 63.7 71.0 70.3 69.3 65.7 58.3 56.0 53.3 50.2 Consumer prices (end of period) 6.5 5.6 5.4 4.9 5.8 4.0 4.0 4.9 4.9 Fiscal accounts (Percent of GDP, unless noted) Noni-interest revenues and grants 24.1 23.1 22.5 22.9 24.4 25.6 25.9 25.9 26.1   Of which: Tax revenues 15.1 15.4 15.1 15.3 17.3 17.3 17.5 17.5 17.5 Total Non financial expenditures 26.1 24.8 25.4 28.4 26.6 25.4 24.7 24.2 24.0   Current expenditures 20.7 19.0 19.4 22.0 20.7 20.4 19.7 19.2 19.0   Capital expenditures 5.4 5.9 6.0 6.4 6.0 5.0 5.0 5.0 5.1 Primary balance −2.0 −1.7 −2.9 −5.6 −2.2 0.2 1.1 1.7 2.0 Interest payments 0.9 1.1 1.3 2.0 2.1 3.0 3.1 3.0 3.0 Overall balance −2.8 −2.8 −4.2 −7.6 −4.3 −2.9 −2.0 −1.3 −1.0 table continues next page 86 Sustainability TABLE 5.1  continued 2010 2011 2012 2013 2014e 2015f 2016f 2017f 2018f Balance of payments Trade balance (billions of US$) −2.6 −3.1 −3.0 −3.1 −3.0 −2.7 −2.7 −2.7 −2.7 Trade balance (percent of GDP) −16.8 −17.9 −16.3 −17.1 −15.7 −13.7 −13.7 −13.7 −13.7 Current account balance (percent of GDP) −4.3 −8.0 −8.6 −9.6 −7.6 −6.0 −6.0 −5.8 −5.6 International reserves (percent of GDP) 17.3 16.0 13.9 16.6 18.4 19.3 19.8 20.0 19.9 E: estimates, F: forecasts Source: Honduran authorities and World Bank estimates. is expected to recover during 2015–18, with 5.2 Fiscal Sustainability all  major sectors contributing. The ongoing recovery in coffee production combined with ris- The country’s fiscal situation is one of its biggest ing yields for other export-oriented crops will challenges to macroeconomic sustainability, as bolster the agricultural sector, while continued ­ growing fiscal deficits limit the resources avail- growth in manufacturing and construction will able for public investment, social service provi- have an  especially positive impact on employ- sion and environmental protection, and could ment indicators. Increasing investment will ultimately push the public debt to unsustainable boost the credit supply as the financial sector levels. Achieving fiscal sustainability will be crit- remains solvent, while expanding internet and ical to support strong, consistent growth and telecommunications infrastructure will spur enduring poverty reduction. growth in services. Finally, lower oil prices are expected to help reduce the current-account def- Fiscal consolidation icit. However, this forecast rests on the assump- Substantial imbalances in the public accounts tion that current fiscal consolidation efforts will and an unsustainable debt trajectory have at continue to be implemented as part of a broader times destabilized the Honduran economy, program of governance reforms, and that past undermining wealth creation, perpetuating pov- progress will be maintained. Consequently, a erty and exacerbating the country’s already high sustained political commitment to the reform degree of inequality. Fiscal instability intensifies agenda is critical to the positive outlook pre- poverty in two ways: by causing economic dis- sented below. ruptions, with which the poor are least able to Strengthening the business climate would cope, and by limiting the fiscal space available facilitate diversification and enhance the econo- for public spending, on which the poor are most my’s ability to adapt to changing circumstances. likely to depend. Historically, the performance of According the Fraser Institute’s 2014 Survey, public finances in Honduras has followed the Honduras’ Investment Attractiveness Index is electoral cycle, with higher fiscal deficits coincid- the lowest in LAC, and the country remains ing with presidential and parliamentary elec- last  globally in terms of the Policy Perception tions, making the realigning of the country’s Index. Improving how Honduras is perceived fiscal stance more difficult (World Bank 2015a). by the global private sector would help to attract Even though incoming administrations often increased foreign investment and promote the announce policies to reduce fiscal deficits, posi- development of new industries. However, mac- tive results have rarely been sustained. roeconomic growth and resilience are not deter- Honduras continues to run sizeable fiscal mined by economic policies alone, but are also deficits despite relatively high revenue inflows, ­ profoundly influenced by the fiscal, environ- and major expenditure rigidities constrain the mental and social dimensions of sustainability. available fiscal space for public investment and Sustainability 87 social spending. Recent fiscal reforms pushed instability over the past decade. Honduras’ public the central government’s current revenue intake to sector wage bill is among the highest in LAC and 18.0 percent of GDP in 2014, 91 percent of which has increased substantially since 2001, reaching came from tax collection. Yet, current revenues 12.7 percent of GDP in 2013 before moderating only slightly exceeded current expenditures, slightly in 2014. The health and education sectors which reached 17.9 percent of GDP and accounted account for almost 70 percent of the total wage for around 78 percent of total public spending. bill and have been the main drivers behind its This reflected a modest decline in ­ current expen- recent expansion. Education alone accounts for ditures from 20 percent of GDP in 2013 due to a more than 50 percent, and the teachers’ union is decrease in transfers and purchases of goods and one of the most politically active groups in the services. However, the expansion of the public country.1 At 5.1 percent of GDP Honduras’ rela- debt stock has caused interest payments and inter- tive pension spending is the highest in Central est rates to rapidly increase. Interest payments on America and one of the highest in Latin America public debt reached 2 percent of GDP in 2013 and at well above the regional average of 3.3 percent. rose to 2.3 percent just a year later. Similarly, the Yet all social security institutions combined cover total public debt stock increased from US$8.3 less than 20 percent of the employed population. billion in 2013 to US$9.3 billion in 2014. The rise ­ Efforts have been made to reform these institu- in debt service is limiting the resources available tions, but these efforts are hindered by a lack for social spending and investment. Social spend- of fiscal space and institutional weakness in the ing has declined as a share of GDP from 18.8 management of the pension system. These chal- percent in 2008 to 15.3 percent in 2012, with the lenges are exacerbated by a poor information-­ largest reductions concentrated in education management system, a lack of reliable beneficiary (which fell from 6.9 percent of GDP to 4.6 percent) data, low average benefit levels and a highly and social security (7.3–5.9 percent). regressive distribution of benefits. The state-owned electricity company (ENEE) Since December 2013 the authorities have has played a major role in the persistence of the launched a set of reforms designed to open new public sector deficit. In 2014, ENEE recorded fiscal space in an effort to overcome Honduras’ losses over US$1 million per day, equivalent to 1.3 legacy of chronic fiscal instability. The fiscal con- percent of GDP. This was a decrease from the 1.8 solidation agenda addresses both revenues and percent of GDP observed in 2013, but still above expenditures (box 5.1). The authorities have taken the government’s target. Though energy sector steps to boost tax revenues, tighten controls over reforms were implemented in 2014, the reduction current expenditures by strengthening payroll in ENEE’s deficit was mainly a consequence of and procurement oversight, and reduce loses in falling international oil prices. ENEE’s weak the electricity sector. Meanwhile, additional financial position is caused by its below-cost tariff ­ measures are being implemented to improve the structure combined with subsidies and high tech- targeting, monitoring and evaluation of social nical losses (i.e. poor utility infrastructure) and protection programs in order to enhance the non-technical losses (i.e. weak commercial man- cost-effectiveness of social spending. agement, theft and fraud). Even  though public The fiscal reform program is designed not spending on electricity is r­ elatively high, access to only to rectify imbalances in the public accounts, electricity remains l ­imited. Moreover, the trans- but to bolster confidence in the economy as a fers necessary to cover ENEE´s deficit come at the whole. Efforts to improve the government’s reve- expense of ­ public investment in productive sec- nue position, limit the growth of current expendi- tors and core infrastructure, with a clear impact tures and mitigate the fiscal risks posed by on economic growth. state-owned enterprises would establish the foun- The public sector wage bill and the pension dation for more robust long-term growth, though system have been critical contributors to fiscal the consolidation might have a temporarily 88 Sustainability BOX 5.1  Recent Measures Aimed at Reducing the Fiscal Deficit Tax policy and tax administration. Key tax policy measures include: (a) an increase in the VAT rate from 12 to 15 percent, bringing it slightly above the LAC average of 14 percent; (b) the elimination of selected VAT import and income tax exemptions; (c) the reduction of the minimum tax-exemption threshold for the income tax; and (d) an increase in the average fuel tax by about US$0.25 per gallon (excluding fuel used for electricity generation). The authorities are restructuring the Revenue Authority by: (a) strengthening the Large Taxpayers Unit (LTU); and (b) modernizing the DEI’s IT system. Public debt management: A medium-term debt management framework has been adopted, and the authorities have exchanged short-maturity bonds (due in 2016–18) for new bonds with longer maturities. Power sector: To reduce ENEE’s structural deficit, electricity tariffs were increased by 12 percent in October 2014 and by a further 9 percent in December 2014. Electricity subsidies were eliminated for those consuming more than 75 kWh per month. A new Electricity Law was adopted in 2014 which (a) defines sector responsibilities under the Ministry of Industry and Commerce; (b) creates a new Electricity Regulatory Commission responsible for defining methodologies for establishing tariffs and technical standards as well as overseeing transparency in bidding processes; (c) allows private sector par- ticipation in transmission and distribution; (d) establishes an Independent Market Operator to develop generation contracts and guarantee supply adequacy; and (e) restructures ENEE into a holding company with subsidiaries for generation, transmission, and distribution in order to improve accountability and cost efficiency, and reduce cross subsidies. In 2015 ENEE’s wage bill was reduced by 40 percent, reducing its deficit by 0.25 percent of GDP. Public financial management: Supported by a Fiscal Emergency Law the government has begun stream- lining the public sector through: (a) nominal wage freezes in 2014 and 2015, and (b) the elimination of 60 percent of positions that were unfilled at end-2013. As a result, the non-financial public sector wage bill declined by 1.4 percent of GDP in 2014, though the full impact of the reform will only materialize over the medium-term due to the cost of severance payments. A public employment census was com- pleted in 2014, and public sector employees are now recorded in a central database integrated with the automated payroll system. To enhance the scope of public-private partnerships (PPPs) the authorities have: (a) introduced a PPP framework law creating a fiscal risk unit within the Ministry of Finance; and (b) repealed the law allowing government guarantees for debt contracted by companies involved in PPP projects. The government has also implemented measures to enhance procurement mechanisms, includ- ing the adoption of an e-procurement law and the signing of shared services agreements to eliminate duplicate procurement functions. State-owned enterprises: The government adopted a plan to restore the medium-term financial sustain- ability of the state telephone company (HONDUTEL) by (a) appointing a new administration in 2014 with a plan to reduce the number of business units by half; (b) reducing non-essential spending, includ- ing a 35 percent reduction in the workforce, limiting overtime hours, curbing outsourcing and decreasing energy consumption; (c) improving network efficiency and enhancing maintenance and monitoring mechanisms; and (d) building a strategic partnership with a private company to provide bundled services. Monetary, exchange rate, and financial sector policies: The authorities adopted a multiyear plan to recapitalize the Central Bank through non-negotiable bonds bearing a positive real interest rate, and the central bank has implemented short-term liquidity-management policy. The Central Bank is also taking advantage of the flexible exchange-rate regime, allowing the Honduran lempira to depreciate by 5 percent during 2015. Financial sector reforms include: (a) stricter regulations aimed at reducing exposure to cur- rency mismatches by unhedged borrowers, (b) stronger pension fund investment policies designed to protect resources and maintain adequate returns, (c) the passage of Anti-Money Laundering and Combatting the Financing of Terrorism (AML/CFT) legislation. Sustainability 89 negative effect on growth in the short term. The to increase from 28.1 percent of GDP in 2013 to overall public sector deficit is expected to decline 32.9 percent in 2016, while domestic debt is pro- from 7.6 percent of GDP in 2013 to 2.2 percent by jected to remain at 17.7 percent of GDP through end-2016, supported by a combination of revenue 2016. Interest payments are projected to increase and expenditure measures. On the revenue side, from 2 percent of GDP in 2013 to 3 percent in tax reforms are expected to increase the tax-to- 2016, in line with the rise in the public debt stock. GDP ratio from 15.6 percent in 2013 to an aver- Under a number of alternative scenarios public age of 17.2 percent during 2014–16. Ongoing debt dynamics in Honduras will remain somewhat reforms in the energy sector are expected to vulnerable to both policy-related and exogenous improve the financial position of ENEE. Enhanced shocks, especially those involving lower economic public financial management, particularly in the growth and a worsening fiscal balance. The ratios areas of procurement and payroll, is expected to of the present value of public debt and public debt yield fiscal savings. Furthermore, ongoing efforts service to GDP are expected to remain well below to improve the efficiency of social protection sys- their indicative thresholds under the baseline sce- tems are expected to help cushion the impact of nario, and no alternative scenarios cause the debt- fiscal consolidation on the most vulnerable. to-GDP ratio to breach its threshold. The magnitude of the consolidation has been significant, with the total fiscal adjustment reach- Structural Risks ing 3.3 percent of GDP between 2013 and 2014, Serious structural challenges inhibit the govern- before rising to a projected 5 percent by 2016. The ment’s efforts at fiscal consolidation, particularly reforms implemented thus far represent important the lack of an effective expenditure-control s ­ ystem. steps in the right direction, but they will require Weak budgetary controls have caused spending to substantial political will to sustain over the repeatedly exceed projections, weakening the medium term. However, the consolidation effort credibility of the budget. During b ­ udget prepara- has already enabled the government to cut its fiscal tion the line ministries set unrealistic targets, and deficit, and the positive response of international the Ministry of Finance does not have a system in lenders is evident in the improvement in yields place to amend them. In addition, after the budget and maturities for new domestic bonds, as well as has been approved new expenditures are intro- the yields for international bond issues in 2013. duced on an ad hoc basis, and these supersede the External imbalances are highly correlated with ceilings set by the Ministry of Finance. Line min- the fiscal deficit, and fiscal consolidation could istries often demand that new projects be added to alleviate the pressure on the external accounts. the budget at different points throughout the fiscal Expansionary fiscal policies have exacerbated the year, and these expenditure lines are introduced impact of exogenous shocks on the current without a formal budget review or project evalua- account. Each additional US$100 in p ­ ublic spend- tion process. Moreover, line ministries sign con- ing is associated with an increase in the current-­ tracts for new projects before securing adequate account deficit of US$14, ceteris paribus. Moreover, financing, and these contracts often breach their fiscal consolidation could help Honduras restore respective budget ceilings. Recent legislation lim- its credit rating, which was downgraded in 2013, its the ability of Congress to increase the budget and thereby reduce the cost of foreign financing. without confirming the availability of funding. The fiscal consolidation program is intended to Over the last five years falling domestic stabilize the debt trajectory. Honduras’ risk of pub- demand for new government bonds and limited lic external debt distress is currently ­ considered access to official external financing have led to the moderate. The debt-to-GDP ratio is expected to accumulation of domestic arrears, the so-called increase from 45.1 percent in 2013 to a peak of 50.8 “floating debt.” As of December 2014, the stock of percent in 2017 and then decrease gradually to 36.1 floating debt was estimated at 3 percent of GDP. percent by 2034.2 External public debt is expected The growth of the floating debt is mainly due to 90 Sustainability weak budgetary controls and the poor financial trafficking. Inadequate mechanisms for assigning performance of state-owned enterprises, particu- and enforcing land tenure are a further source of larly ENEE. The accumulation of arrears to gov- social instability, and insecure property rights ernment contractors appears to have exacerbated have exacerbated violence and economic exclu- the recent economic slowdown. sion. Indeed, most privately held land in rural The low institutional capacity of the national Honduras is untitled or improperly titled, and revenue authority is a major obstacle to public the level of land inequality is high. The govern- financial management. Political interference in ment has pursued legal and institutional reforms the hiring process is a major liability, and the designed to strengthen land tenure but still lacks Ministry of Finance estimates that 70 percent of both a comprehensive policy and effective mech- revenue authority staff do not possess the appro- anisms for inter-institutional coordination. priate academic qualifications. Organizational deficiencies also affect revenue performance, Crime and Violence including inadequate information systems that Crime and violence are among the main chal- do not ensure transparent and effective tax col- lenges to social sustainability in Honduras today, lection. Moreover, income and sales tax collec- as the entire country suffers from elevated rates tion remains low due to a regulatory gap that of  violence (map 5.1). Hondurans increasingly prevents the correct application of the tax code, identify crime as one of the country’s biggest as well as the presence of about 200 legal excep- problems (figure 5.1). Even though the data tions to the tax code. The prevalence of the infor- suggest a modest decline in 2013 and 2014, ­ mal sector also hinders tax collection. Honduras’ homicide rates remain far above those While previous reform efforts have proved of any other country in the world (figure 5.2). short-lived, and this record should temper Gangs and drug trafficking drive high crime expectations, the authorities have thus far ­ rates, and young men are the most likely to be demonstrated a credible commitment to fiscal both perpetrators and victims of violence. The consolidation and macroeconomic stability. The cost of crime is estimated to represent 10 percent full impact of the government’s current efforts of GDP (US$900 million) per year, with crime-­ will not become apparent immediately, and cuts related health costs alone amounting to an esti- to current spending may even slow growth in mated 1.3 percent of GDP. A 10 percent reduction the  short term. However, over the longer term in crime would increase GDP by an estimated the successful consolidation of the public finances 0.7  percent (World Bank 2011a). Crime is a will be essential to reinforcing resilience and major obstacle to doing business, and its effects accelerating economic growth. are believed to fall most heavily on the poor. The majority of homicides in Honduras go unsolved, which has eroded citizens’ confi- dence in the police and the rule of law. Few 5.3 Social Sustainability homicides are investigated and fewer still are Addressing challenges in crime, lack of youth prosecuted. It  is estimated that 97 percent of inclusion and weaknesses in land rights would murders in San Pedro Sula go unsolved. Trust help build the country’s social sustainability by in public institutions is low and has deterio- fostering social cohesion and empowerment. rated over the past eight years (figure 5.3). In Rising levels of crime and violence represent 2012, Honduran respondents registered the both a threat to macroeconomic growth and a lowest level of police confidence in the region.3 major source of household-level vulnerability. In addition to demanding bribes, passing infor- Honduras’ crime and violence rates are among mation to criminal groups and allowing drug the world’s highest, and due to its location the shipments to pass unchecked, some elements of country has become a transit route for drug the Honduran police have reportedly Sustainability 91 MAP 5.1  Though Homicide Rates Vary by Region, They Are High Throughout the Country (Homicide rates per 100,000 inhabitants, by department, 2014) 8.9–37 37.1–68 >68 Source: Dirección de Estadística Policía Nacional/Observatorio de Violencia, UNAH. FIGURE 5.1  Surveys Increasingly Identify Due in part to its geographic location, Crime and Corruption as Honduras’ Main Honduras has become a transit country for Problems drug trafficking. In the 2000s Colombian drug (Main problem in the country, percent age of respondents, 2004–12) cartels cemented Honduras’ status as the prin- cipal trafficking corridor for cocaine bound for 100 Mexico, further undermining the country’s 80 security (Arnson and Olson 2011). San Pedro Sula, the country’s manufacturing capital, has Percentage 60 become a hub for cocaine trafficking, and its 40 homicide rates have been the highest in the 20 world for four consecutive years.4 Moreover, 0 arms trafficking has taken a heavy toll, and 83  percent of homicides in San Pedro Sula 04 06 08 10 12 20 20 20 20 20 Other Violence Corruption are committed with firearms. Most of the 18,000 Crime Poverty Unemployment Honduran children who have fled to the Economic issues U.S.  in  recent years were originally from San Source: Latin American Public Opinion Project (LAPOP). Pedro Sula.5 Youth violence and gangs (or maras) are a participated in, and even directed, violent critical concern in Honduras. Estimates of the criminal operations. In recent years some overall number of gang members in the country reforms have been made to the country’s law vary widely. In 2007, the U.N. Office on Drugs enforcement, including allowing the military to and Crime (UNODC) estimated 36,000 gang carry out police functions. members in Honduras whereas a 2012 report 92 Sustainability FIGURE 5.2  Homicide Rates in Honduras Have Grown Dramatically since 2000 (Homicide rates per 100,000 inhabitants, by country) 100 80 Homicde rate (per 100,000) 60 40 20 0 00 08 09 10 03 04 02 13 12 11 06 05 01 07 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Honduras El Salvador Guatemala Belize Mexico Nicaragua Source: UNODC Statistics. FIGURE 5.3  Confidence in the Government Is Low and Declining Over Time (To what extent do you have confidence in the national government?) 30 25 20 Percent 15 10 5 0 2004 2006 2008 2010 2012 1 Nothing 2 3 4 5 6 7 Very much Source: Latin American Public Opinion Project (LAPOP). claimed there were only 12,000 (United Nations through extortion, drug trafficking and kidnap- Office on Drugs and Crime 2007, 2012; World ping. Although the major gangs are most active Bank 2011a). Nonetheless, gangs have become a in the capital, Tegucigalpa, they are present pressing issue in the country. They control entire throughout the country. Policies aimed at reas- neighborhoods and generate income primarily serting public security through anti-gang Sustainability 93 Knowledge Gap  How Does Crime Affect the Welfare of the Bottom 40 Percent in Honduras? There is limited information on how crime affects the welfare of lower-income households in Honduras. Data collection in this area is challenging not only because of the high levels of violence in poorer neigh- borhoods, but also because of the reluctance of respondents to speak openly about crime. Efforts to improve data collection and analysis will be necessary to develop evidence-based policies in this areas. TABLE 5.2  Homicide Rates per 100,000 the age distribution of men and women suggest Inhabitants, by Age and Gender, 2014 some differences in causes of homicide as women Age group Female Male between the ages of 20 and 50 had approximately 0–4 3.2 2.2 the same homicide rate even as rates peaked 5–9 0.8 1.5 for younger men, possibly due to the latter group’s 10–14 4.0 8.9 higher involvement in drug trafficking and gangs. 15–19 16.7 130.4 Domestic violence and violence targeted at the 20–24 19.9 268.9 lesbian, gay, bisexual, and transgender (LGBT) 25–29 16.6 270.9 30–34 16.3 240.6 population is also a serious concern. More than 35–39 19.2 203.3 a  quarter of Honduran women over age 15 40–44 20.2 179.7 (27 percent) report being victims of physical vio- 45–49 19.1 158.7 lence.7 Spouses and partners were the main per- 50–54 12.4 130.1 petrators of violence (35 percent), followed by 55–59 13.3 143.2 ex-spouses or ex-partners (24 percent). Urban 60–64 9.8 123.9 women and those with less schooling were more 65+ 7.4 62.2 likely to report being victims of domestic vio- Total 11.9 125.6 lence. 26 murders of LGBT people were reported Source: Observatorio de la Violencia, UNAH- IUDPAS. Edition 36 (2015). in 2013, including 11 transgender women, 11 gay men, and 4 lesbians (Cattrachas 2013). Violence crackdowns and large-scale incarceration largely against transgender victims was  more likely to failed because they did not address the root take place in public places and involve excessive causes of gang membership or provide rehabili- force. Gender identities and norms shape both tation for gang members. Macro-social factors, male and female attitudes towards gender-based such as a lack of education and job opportunities violence; as a result, 16 percent of Honduran for at-risk youth and rising levels of poverty and women believe that wife-beating is justified under unemployment, have perpetuated the gang prob- certain circumstances.8 lem (World Bank 2011a). The country’s high crime and violence rates expose young people to risks and present serious Excluded Youth obstacles to education and employment. Men Honduras has the largest share of young people between the ages of 20 and 34 face a staggering who neither attend school nor are employed homicide rate of 240 per 100,000 (table 5.2). in  the region, and members of this group are Adolescents between the ages of 15 and 19 also ­ particularly vulnerable to crime, both as perpe- face elevated homicide rates, particularly boys. trators and victims. Approximately one in four While the majority of homicide victims are men, Hondurans between ages of 15 and 24 are neither between 2005 and 2013 violent deaths among employed nor enrolled in school. These young women increased by 263 percent.6 Differences in people are described as “ni estudian ni trabajan” 94 Sustainability (neither studying nor working), and are some- nearly a third of all births in Honduras are to times referred to as “ninis.” Nearly 40 percent of mothers under 19 years old. While the pregnancy girls aged 15–24 and 11 percent of boys in the rate in Honduras fell from 104.9 births per 1,000 same age group are part of this group. High rates teenage women in 2001 to 84 in 2012, it remains of male youth who are neither employed nor in well above the LAC average of 68.6. Honduras’ school in a context of violence and organized teenage pregnancy rate is the second highest in the crime is associated with an increase in the homi- LAC region (Azevedo et al. 2012). Access to con- cide rate (De Hoyos, Gutierrez, and Vargas 2015; traception has increased over the past decade, but De Hoyos and Székely 2015 ­ forthcoming). teenagers have the lowest rate of contraceptive use Moreover, there is a larger share of unattached at  56 percent and 71 percent for married and youth in rural areas and across the poorest income unmarried women, respectively. quintiles. Roughly a quarter of urban youth are In Latin America, the incidence of young neither in school nor employed, whereas this people who are neither in school nor employed share rises to nearly a third in rural areas. In addi- is  typically higher among poorer households. tion, more than a third of youth in the poorest Even though this pattern is evident among young income quintile are not employed and out of women in Honduras, there is no clear correlation school, compared to just 14 percent in the highest among young men (figure 5.5). The highest rate quintile (figure 5.4). Low rates of youth employ- among young men in Honduras is  found in ment and lower educational attainment reduce the  fourth quintile (13.9 percent), followed by the long-term productivity of the labor force. the second (12.7 percent) and third  quintile Marriage and pregnancy are the most impor- (11.4 percent). This suggests that the prevalence tant factors that cause young women to drop out of of young men in Honduras who are neither school and exit the labor force. In 2013, 44 percent employed nor in school may be  more closely of young women between the ages of  15 and 24 linked to a lack of educational opportunities or years old who were not working, including nearly an absence of applicable labor skills. a quarter of those under 18, were already married. Developing a strategy to reduce school drop- Teenage pregnancy remains a critical concern, as out rates, provide workforce training FIGURE 5.4  Young People Who Neither Attend School Nor Are Employed Are from Poorer Households (Non-working, non-student youth by gender and income quintile, 2013) 100 11 14 24 30 26 25 37 33 80 44 21 11 37 6 26 Percentage 60 28 15 20 40 29 58 20 48 43 41 40 38 35 30 20 0 Girls Boys Urban Rural 1 2 3 4 5 Gender Area Houshold income quintile Nini Enrolled in school School + Work Employed Source: World Bank estimates based on EPHPM. Sustainability 95 opportunities and rehabilitate young people who basic secondary education. Providing training, have been involved with gangs should be regarded job opportunities and outreach efforts to youth, as a key priority. Nearly half of Honduran including those who have been involved in gangs youth drop out of the education system by age 15 and drug-trafficking, would help to break the figure  5.6). This suggests that interventions to (­ cycle of poverty and violence in Honduras. promote ­ continued enrollment should focus on Land Tenure FIGURE 5.5  Poorer Young Women Are More Likely to Be Out of School and Not Working Issues related to land tenure pose a challenge to (Unemployed, out-of-school youth by gender and social sustainability, as violence has erupted over income quintile, ages 15–24, 2013) contested property rights, and they have impor- tant negative implications for economic and envi- 70 67.9 ronmental sustainability. As noted in chapter  3, 60 approximately 80 percent of privately held land in 54.6 rural areas and 30 percent of urban land is not 50 41.2 properly titled. During the last decade the gov- Percentage 40 36.6 ernment has pursued numerous legal and institu- 30 tional reforms aimed at strengthening rights to 20.7 real property, including the Territorial Ordering 20 13.9 9.5 12.7 11.4 Law of 2003, the Property Law of 2004 and the 10 7.3 Forestry Law of 2007. Yet despite an improving 0 legal and institutional framework land tenure 1 2 3 4 5 remains a major issue in Honduras. Land disputes Quintile represent between 10 and 30 percent of all cases Female Male in the judicial system. It is estimated that 70–90 Source: World Bank estimates based on EPHPM. percent of these cases are resolved in the first FIGURE 5.6  Half of Honduran Youth Are Out of the Education System by Age 15 (The transition between school and work in Honduras, 2013) 100 80 60 Percentage 40 20 0 15 16 17 18 19 20 21 22 23 24 Age Nini Employed School + work Enrolled in school Source: World Bank estimates based on EPHPM. 96 Sustainability instance,9 and delays are due to case backlogs, 28 percent is dedicated to seasonal agriculture and a  lack of documentary evidence and witnesses, 3 percent to permanent crops, 39 percent is forest, and the absence of a specialized tribunal for land and 20 percent is dedicated to national parks and cases. A socially inclusive and environmentally protected areas. Large and small farmers compete sound agenda for strengthening property rights over the country’s limited arable land. The poorest among the rural and urban poor should include 70 percent of farmers own 10 percent of the land supporting women’s access to land, formalizing as smallholdings, while the  richest 1 percent of the recognition of communal lands held by indig- farmers own 25 percent of the land as large plan- enous communities, and promoting the sustain- tations (USAID 2011). The growth of industry able use of water and forest resources. and tourism is intensifying competition for farm- Honduras has high levels of land inequality in land, at times leading to social conflict (box 5.2). rural areas. Only 9.5 percent of the country’s total Land reform programs have been unable to land area is arable, of which approximately solve the problem of land inequality. Between BOX 5.2  Improving Environmental and Social Safeguard: Corporación Dinant Case In 2009, International Finance Corporation (IFC) provided a loan to Corporacion Dinant a large verti- cally integrated Crude Palm Oil, snacks and food producer based in Honduras. IFC’s investment in Dinant was subsequently audited by the compliance advisor ombudsman (CAO) in 2013 following com- plaints from Human Rights NGOs referring to Dinant’s security forces involved in confrontation with armed farmer groups. Both campesinos and Dinant security guards died in the course of campesino land incursions on Dinant palm plantations. The CAO identified shortcomings in the environmental and social due diligence carried out by IFC at the time of its investment and during supervision. Improvements and Remedial Actions: At the institutional level IFC has taken a number of steps to strengthen its Performance Standards (particularly with respect to agricultural supply chains) in response to lessons learned from cases such as Dinant. At the micro level, and prepared in consultation with stake- holders, an Enhanced Action Plan (EAP) articulates IFC’s response to the CAO audit and is currently under implementation. The EAP seeks to address both Dinant-specific environmental and social improvements as well as some of the critical and more systemic social, security and environmental issues that are manifested in the agrarian conflicts around land in the Aguán Valley. In parallel, IFC with the support of consultants experienced in conflict resolution and the Voluntary Principles on Human Rights (Consensus Building Institute and Foley Hoag), are carrying out a stakeholder Engagement and Dispute Resolution process and monitoring Dinant’s security plan to ensure consistency with the Voluntary Principles for Security and Human Rights (VPSHR) and also advising on investigative protocols for past allegations regarding Dinant’s security personnel. To date, there has been significant progress in implementing the EAP. At the company level and as per IFC requirements, Dinant has undertaken a social baseline study for all project sites to better inform engagement with communities, is implementing a grievance management mechanism, and has hired new community liaison officers. The company has updated its security procedures following the VPSHR (reviewed by security consultant and Foley Hoag); hired a new Security Manager and currently in process of hiring a new private security contractor and now vets all new security personnel against defined proto- cols as per VPSHR. The company has carried out a security forum with communities in order to produce Community Risk Assessment for some locations and is the first company in Honduras to disarm its secu- rity guards to reduce the likelihood of armed conflict. box continues next page Sustainability 97 BOX 5.2  continued Under the stakeholder dialogue process led by Consensus Building Institute, campesino organizations, local communities, Dinant and the GoH are deeply engaged in a process which seeks to address systemic issues relating to impunity, land and the future economic development of the Aguán. The ­ Government of Honduras has expressed support for this initiative and has indicated at the highest ­ levels that it is committed to find sustainable solutions to address the structural issues related to the Bajo Aguán conflict by: a) promoting dialogue with key stakeholders; b) strengthening capacity and capacity of the investigative bodies looking into human rights crimes; c) clarifying and reviewing his- torical patterns of land titling in the Bajo Aguán; and d) designing socio-economic development pro- grams for the Bajo Aguán region. The Government is interested in using the synergies in the World Bank’s portfolio (land, safer municipalities and agricultural projects) to provide support in the Bajo Aguán region. 1973 and 1977 the government legitimized and titling of nine territorial ­councils represent- informal land holdings and transferred land ­ ing the Miskito people in the department of ownership to peasant farm cooperatives and Gracias a Dios. Honduran law allows for the associations. These reforms distributed 120,000 individualization of communal property, but hectares of land to 35,000 poor families, repre- this procedure has not yet been implemented senting 9 percent of rural households (Merrill and remains controversial among some indige- 1995). However, the Agricultural Modernization nous organizations and NGOs. Law in 1992 permitted members of cooperatives The government has implemented a number to individualize and sell their holdings. Some of legal and institutional reforms designed smallholders sold their land to large-scale to  strengthen land tenure. The approval of the agricultural producers, which resulted in the ­ Property Law in 2004 allowed for the establish- ­ re-­concentration of previously distributed land. ment of a new parcel-based registration sys- Indigenous and Afro-Honduran peoples are tem  known as folio real to replace the existing particularly vulnerable to land tenure insecu- owner-based system. Parcel-based registration rity. In 1995 the government signed Convention improved the management of land records and 169 of the International Labor Organization, facilitated the automation of land transactions. asserting its commitment to recognize the The law also created the Property Institute and land rights of indigenous peoples. Formalizing established the National Property System, collective tenure of traditional lands is more which  includes a unified registry of cadastral complex and costly than single-owner parcel information, regulations, and geo-spatial data. registration. The process requires that the group Since 2004 the World Bank-financed Land have a legally ­ recognized leadership capable Administration Program (PATH) has assisted in of  holding land title. It is estimated that only the implementation of these reforms. The pro- 10  percent of the land belonging to indige- gram is currently in its second phase and has nous and ethnic groups is formally demarcated invested in legal and institutional strengthening, and titled, which encourages encroachment cadastral surveying and titling. The automa- and expropriation attempts by non-indigenous tion  of registration procedures has reduced the farmers, powerful business interests and gov- transaction cost from 8.7 percent to 5.7 percent ernment elites. One of the most  significant of a property’s value and cut the average num- achievements in this areas is the  demarcation ber of days required to register a property from 98 Sustainability 35 to 22 according to the Doing Business report. disaster-risk management are critical for enhanc- The land registries  modernized by the Land ing resilience to climate change and natural Administration Program register transactions in hazards. In order to mitigate its inherent vulner- ­ fewer than 15 days. ability, Honduras must improve the management However, the government still lacks both of meteorological and geological knowledge, a  comprehensive land policy and an effective ­ further developing risk-assessment mechanisms mechanisms for inter-institutional coordination. at the sector level and strengthen local and sec- The national development strategy includes indi- toral planning processes. cators on territorial planning and formal land tenure but does not establish an overarching land policy. Instead, each agency and jurisdiction has Vulnerability to Natural Hazards its own set of policies. Some municipalities are Honduras’ vulnerability to extreme weather reported to have up to 200 territorial plans, and events has been a major challenge to its develop- government agencies and donors develop plans ment (Kreft et al. 2014). Honduras consists of independently of one another. Land administra- three main geographic regions with distinct tion functions are determined according to type weather patterns: the extensive interior high- of land tenure, which results in a complex legal lands, the Caribbean lowlands on the north framework ­ overseen by multiple agencies. This coast, and the Pacific lowlands in the south. creates overlapping competencies and inhibits Droughts and irregular rainfall are common effective enforcement. In addition, some sections in  the western, central, southern and southeast of older sectoral policies remain applicable, regions (the Corredor Seco). Tropical storms and further complicating land administration. For ­ cyclones can cause floods and landslides through- example, the titling of public land for coffee out the country, but are primarily concentrated growing is still allowed despite prohibitions on in the northeast and along the Caribbean coast. issuing private titles in protected areas. There are Between 1994 and 2013 Honduras suffered the a few examples of satisfactory inter-institutional highest average annual economic losses due to coordination when the instrument requires weather-related disasters in Central America, co-management, yet it is still unclear what impact driven mostly by Hurricane Mitch (Kreft et al. these plans have had on improving land tenure 2014). Although it has not suffered frequent in Honduras. earthquakes, Honduras is not exempt to seismic hazards.10 Adverse natural shocks combined with high vulnerability can cause serious long-term 5.4 Environmental damage to human, social and physical capital, especially for the poor. Sustainability Cyclical droughts also have an impact Honduras is among the countries most affected on  the  country’s development prospects. Dry by extreme weather events in the world. periods associated with the El Niño southern ­ Honduras is susceptible to periodic disasters oscillation phenomenon affect the western and such as hurricanes and tropical storms, as well southern areas of the country, which includes as cyclical droughts that may be exacerbated by the Corredor Seco and is home to a large share human activity. Moreover, rapid urbanization, of Honduras’ extreme poor. Considerable crop extensive land degradation and deforestation, air losses following periods of drought increase pollution, and inadequate water and sanitation the  prices of stapled foods and lead to acute represent major challenges to Honduras’ devel- food insecurity. In 2014, the government opment. Investment in physical and institutional declared a state of emergency following a infrastructure and continued efforts to strengthen severe drought that affected one million people Sustainability 99 in 165 municipalities throughout the country. water and the lack of appropriate drainage sys- It  was considered the worst drought to affect tems heighten the risk of floods in urban areas. Honduras in 10 years.11 In addition, deforestation and poor construction The Corredor Seco makes up more than half practices have led to the proliferation of settle- of  Honduras’ territory and includes many of ments on increasingly steep slopes or along riv- the  poorest municipalities in the country, with erbanks, increasing the risk posed by landslides nearly 91.7 percent of the population (650,000 (Gencer 2013). inhabitants) living below the extreme poverty line.12 The Corredor Seco experiences irregular precipitation levels and a longer dry season, Logging and Land Degradation which is intensified during El Niño periods when Extensive land degradation and deforestation rainfall is reduced by between 30 and 40 percent.13 from logging and the clearing of land for agri- Small-scale subsistence farmers and small rural culture and cattle ranching represent major communities are the most vulnerable to droughts, environmental challenges. The decline of forest which reduce access to fresh water sources and cover affects the Corredor Seco and small agri- negatively affect the livelihoods of the rural cultural producers, and 2 percent of the coun- population. Soil degradation is a major cause of ­ try’s land was deforested between 2005 and agricultural vulnerability due to its negative 2010 alone (FAO 2012). The deforestation rate of effects on water infiltration and retention capac- over 2 percent per year in Honduras exceeds the fertility, crop yields, and general resilience ity, ­ global average. It is nearly twice the average for to droughts. Diversification, innovation, and the Central America and one of the highest in Latin widespread adoption of climate-smart agricul- America. It is estimated that by 1987 about ture in efforts to secure the triple win of higher 750,000 ­ hectares of Honduran land was already agricultural productivity, increased resilience to seriously eroded as a result of cattle ranching on climate change, and lower greenhouse gas emis- unsuitable areas and slash-and-burn agriculture sions are essential steps for building resilience of (GFDRR 2010). From 2000 to 2013, the coun- small agricultural producers. try’s total forest area decreased by 4.4 percent, or approximately 486,000 hectares (Hansen et  al. 2013). Deforestation negatively affects Urbanization poor rural households given their dependence Rapid urbanization, high rates of overall popula- on forest resources, including food, fodder and tion growth and the growing concentration of fuels, as one of their main sources of income. settlements and assets in hazard-prone areas— Moreover it damages critical ecosystem services compounded by considerable environmental such as soil fertility and watershed protection, degradation—have intensified Honduras’ vul- with negative implications for poor households nerability to natural hazards. The country’s urban (SIDA 2006). population growth rate is higher than the national Exacerbated by poverty, households rely population growth rate at 3.16 and 2.01 percent, heavily on firewood, threatening forests and respectively. UN-Habitat projects that by 2025 imposing health risks due to indoor air pollu- more than 60 percent of the Honduran popula- tion. As of 2013, four out of five households in tion will live in urban areas. The rapid growth the bottom 40 use firewood as their primary of  urban areas has resulted in a sprawling and cooking fuel. Burning solid fuels produces unorganized pattern of residential development. high  levels of indoor air pollution, and indoor Over a third of urban dwellers live in slums and firewood smoke can have negative health conse- are not connected to regular services such as quences, particularly for children and women. waste collection and drainage. The limited provi- Women exposed to indoor smoke are three sion of public services such as electricity and times  more likely than women who cook with 100 Sustainability electricity, gas or other cleaner fuels to suffer run dry at least once during the dry season, and from chronic obstructive pulmonary disease, over half of existing rural water systems lack such as chronic bronchitis or emphysema (WHO functioning water treatment systems. Storage 2006). In 2010, damage associated with air pollu- facilities could mitigate the effects of seasonality, tion represented 5.6 percent of GDP. Driven by but few have been built. Although an effective indoor air pollution, this represents a 50 percent rural water and sanitation information system is increase in cost from 2005. in place, there is inadequate capacity at the cen- A substantial portion of Honduras’ forests are tral and local levels to provide up-to-date and protected areas, but limited state management consistent information to guide the planning capacity and high levels of corruption facilitate process and facilitate interventions. illegal logging (Ribot and Larson 2007). Extensive Investments in water and sanitation have cattle ranching and slash-and-burn agriculture, failed to keep pace with urban population closely associated with logging for timber, is a growth. Current annual investments represent driving cause of deforestation and the resulting just 0.13 percent of GDP, with an estimated vulnerability to natural hazards. A deeper under- shortfall of US$350 million between current standing of the factors underlying the rapid spending levels and the amounts needed to change in land use is needed, including the role meet national targets (World Bank 2013b). With of local institutions and forest tenure rights in approximately 93 billion cubic meters per year providing the incentives for sustainable land use of  fresh surface water and an annual water-­ and conservation of natural resources. availability average of nearly 11,381 cubic meters per capita the country is well above water stress  levels. However, Honduras uses less than Water Security and Sanitation 9.1 percent of its available water resources. In A number of major river basins and lakes Tegucigalpa just 83 percent of the population has throughout the country are strained by rising access to water, 70 percent has access to sanita- population levels and agricultural, industrial tion, 80 percent has access to solid waste and  mining run-off. Pollution from untreated management, and only 17 percent has access to ­ waste degrades the quality of water resources. In wastewater management. While the share of the Honduras approximately 99 million cubic meters population with access to water services is higher of wastewater are discharged per year into water than in the rest of the country, water resources in bodies without any type of treatment.14 Moreover, the capital do not meet demand, and the deficit is 2.2 million people do not have access to improved estimated at 60 million cubic meters per year. sanitation services, half a million of which still Shortages are most common in the dry season, practice open defecation. This, coupled with which accounts for 50 percent of total demand. unregulated fecal sludge management,15 further As a result, water restrictions are imposed during degrades aquifers and surface water quality, with most summers, which disrupts the water supply adverse impacts on health and economic growth. and increases the likelihood of waterborne dis- In Tegucigalpa alone deficient water infrastruc- ease outbreaks. The economic cost associated ture and poor sanitation services cost over with a lack of reliable water service and waste US$135 million per year.16 management in Tegucigalpa is estimated at Climate variability accentuates drought cycles US$160 million per year, or 2.5 percent of and impacts the water supply, particularly in Honduras’ GDP (World Bank 2012a). rural areas. Honduras has over 7,000 registered The process of decentralizing water and sani- rural water systems administered by local inhab- tation services is still underway, and limited itants, the majority of which face challenges in progress in this area undermines water secu- post-construction support. As a result of annual rity  and service quality in major cities. Under droughts about 28 percent of rural water systems the  current laws municipalities are responsible Sustainability 101 Knowledge Gap  What Is the Relationship between Vulnerability, Extreme Weather Events and Poverty? Heightened vulnerability to extreme weather events coupled with the challenges of a growing urban population compound the structural inequalities that create and sustain poverty and constrain access ­ to resources. Nevertheless, this relationship needs to be better understood in order to develop a compre- hensive vulnerability assessment for Honduras that takes into account the linkages between natural hazards and poverty, as well as measures to improve the coping and adaptive capacities of the poor. ­ Improving the availability, coverage and quality of data is crucial to develop qualitative and quantitative approaches to assess the determinants of poverty, measure the effects of disasters, and identify vulnerabil- ities at the household, sector and national levels. Time-series data on risk conditions, disaster impact assessments, household income and expenditure evaluation, a poverty index and an analysis of the geo- graphic distribution and socioeconomic characteristics of the poor are just some of the potential areas for further research. for providing water services; however, only Climate Change Strategy to prioritize programs 60 percent of the population is currently supplied and activities; (c) efforts to formalize and coordi- by a decentralized service provider. The National nate inter-institutional disaster response and Service of Aqueducts and Sewage Systems still risk-management capacity at the national level, operates in 13 urban centers and provides lim- as reflected in the consolidated legal framework ited services to over 1.5 million people, including established through the National System for Risk 71,000 poor families in the capital’s peri-urban Management in 2009; (d) the strengthening areas. Many water systems are located in areas of  technical and institutional capacities for highly vulnerable to climate change. The local disaster-risk management and adaptation to cli- ­ government in Tegucigalpa is in discussions with mate change in key agencies; and (e) efforts to the central government to take over the capital’s promote the active participation of municipali- water and sanitation system. ties in conducting risk analyses and preparing planning instruments. Despite recent progress in improving the Priority Policy Areas for Enhancing framework for disaster risk management and cli- Environmental Sustainability mate adaptation, Honduras should invest more In recent years the government has made key heavily in efforts to enhance resilience to climate political, legislative and institutional advances change and natural hazards. Honduras ranks 128 toward developing an integrated and proactive out of 178 countries in terms of climate change approach to disaster-risk management. This vulnerability and its readiness to improve resil- includes adopting guiding policies to reduce the ience.17 Among the most vulnerable countries, country’s vulnerability to the impacts of climate Honduras ranks as the 30th least prepared to variability and climate change, as well as a ­gradual improve resilience. Furthering efforts to move shift toward a culture of disaster-risk prevention. from a reactive to preventive response will be key Key achievements include (a) the incorporation to lower the social and economic costs associated of risk-reduction and mitigation considerations with natural hazards and improve the environ- in the 2010–38 Vision for the Country (Visión ment for growth, inclusion and sustainability. de  País) and the corresponding 2010–22 Box 5.3 identifies specific steps that Honduras National  Development Plan (Plan de Nación); should take to improve its resilience to disasters (b)  the ­ formulation of a 2010–38 National and climate change. 102 Sustainability BOX 5.3  Measures to Improve Resilience and Disaster Risk Management • Develop an effective budget management strategy that allows for the rapid mobilization of resources in the event of a natural disaster while still protecting fiscal accounts. When a disaster strikes, Honduras will have to mobilize resources quickly without jeopardizing its fiscal stability. A financial protection strategy that combines a number of instruments in a risk-layering approach could help the country meet its financial needs and manage fiscal volatility. The strategy should incorporate: (a) budget allocations and reserves, (b) contingent credit, and (c) risk-transfer instruments. • Improve the management of meteorological and geological knowledge, early warning systems and climate data to support informed decision making. Effective risk reduction and climate change adaptation policies should be based on reliable data. Improving monitoring, forecasting and early warning systems, and generating the required evidence base for climate variability and climate change would be important steps in this regard. The monitoring and modeling capacity of geological hazards should also be strengthened. This will require bolstering existing observation networks, as well as reinforcing the financial sustainability of the recently established National Center for Atmospheric, Oceanographic and Seismic Studies and improving other coordination mechanisms focusing on climate and geological information. • Assess and reduce the structural vulnerability of public assets. Focusing on the structural dimensions of resilience by conducting risk assessments of public infrastructure, including schools and other public buildings, would identify vulnerabilities and improve risk mitigation. At the same time, the capacity to understand infrastructure vulnerability and effectively incorporate this information into decision making at the local level must also be enhanced. • Strengthen territorial and sectoral planning processes to better integrate risk-reduction criteria and land-use planning. Effectively managing disaster risk and reducing vulnerability will require substan- tial efforts to build strategic planning capacity at the local and sectoral levels. The integration of risk-management strategies into planning tools would help reduce vulnerabilities associated with inefficient land use, poor water management and inappropriate building practices. This should be complemented by efforts to better incorporate disaster-risk management and climate change adapta- tion criteria into the public investment process. Notes 1. More than 90 percent of the budget for education 9. Land Governance Assessment Framework. Property is used to pay salaries, while investment in the sec- Institute. tor has never surpassed 1.5 percent of GDP. 10. Honduras has been mostly unaffected by the fre- 2. IMF 2014 Stand-by Arrangement. quent earthquakes. However, the country suffered 3. LAPOP 2012. a magnitude 7.1 earthquake on May 28, 2009, 4. Seguridad, Justicia y Paz http://www.seguridad​ killing 7 people and causing estimated losses of justiciaypaz.org.mx. US$100 million (EM-DAT 2013). Probabilistic 5. Based on data from the Department of Homeland risk models estimate losses associated with an Security as reported in http://www.pewresearch​ event of a 500 year return period at approximately .org/fact-tank/2014/07/01/dhs-violence-poverty​ US$2.2 billion, representing 6.3 percent of GDP -is-driving-children-to-flee-central-america​ and an average annual loss equivalent to US$35.5 -to-u-s/. million (0.103 percent of GDP of 2013) (CCRIF 6. IUDPAS, Observatorio de Muertes Violentas de SPC, 2014). Mujeres y Femicidos, January–December 2012. 11. COPECO, 2015. 7. World Bank tabulations based on data from the 12. Government of Honduras’ Proposal to the Global ENDESA 2011–12 survey. Agricultural and Food Security Program. May 8. World Bank tabulations based on data from the 2013. Calculations from the Technical Food and Reproductive Health Survey. Nutrition Unit of the Presidency (UTSAN), 2011. Sustainability 103 3. SERNA, FAO 2014. 1 16. Integrated Urban Water Management, Blue Water 14. FOCARD-APS-Regional Diagnostic on Waste Green Cities Initiative, p. 24, available online at Water and Excreta Management in Central http://siteresources.worldbank.org/INTLAC​ America and Dominican Republic (2013). /­R esources/2578031351801841279​ / 1Principal​ 15. LationSAN 2013 Central America Sub-Region Integrated​UrbanWater​Management​ENG.pdf. report, Chart 4. 17. Global Adaptation Index, ND-GAIN. 104 Sustainability Chapter 6 Taking Stock and Priorities Ahead 6.1 Challenges Facing Poverty was already well behind standard compara- tors, and its per capita income has diverged Reduction from that of wealthy countries over the last Honduras is one of the poorest countries in the 55 years. Western Hemisphere. Honduras’ poverty rate • Second, two challenges have emerged over stood at almost 65 percent in 2013, and the the past 15 years: crime and emigration. extreme poverty rate was close to 43 percent. With These challenges have created self-reinforcing almost one in five people living on less than cycles that contribute to an equilibrium of US$1.90 per day, Honduras is the second-­ poorest low growth, high crime rates and large emi- country in Latin America. Nearly 80 percent of gration flows. High crime rates—Honduras Honduras’ youth (population under 15 years old) generally leads the world in homicides per live in poverty, and approximately one in four capita, with 67 homicides per 100,000 inhab- children in Honduras is undernourished, with itants in 2014—­ negatively affect the invest- negative implications for their future learning ment ­climate and hinder growth. In turn, low abilities and earnings capacity. growth limits the ability of the economy to Honduras’ high poverty rates result from both generate ­economic opportunities for the pop- low per capita growth and high inequality, which ulation, encouraging criminality. Low growth are perpetuated by macroeconomic volatility and also incentivizes emigration and remittances. high exposure to natural hazards. These negative While remittances have had a ­ positive impact dynamics will continue to deepen and perpetu- on poverty, the ­ analysis also ­suggests that ate intergenerational poverty, unless ambitious, they affect the labor supply (i.e.,  through well-designed policies, and targeted interven- higher reservation wages) and drive real tions can break the mutually-reinforcing cycles exchange rate appreciation, reducing compet- that have kept Honduras locked in a low-growth itiveness and slowing growth. Both high equilibrium for decades. Understanding key crime rates and large emigration flows are rel- characteristics of Honduras and its social and atively recent challenges. According to data economic dynamics helps to inform the discus- collected for the 2011 World Development sion about such policies. Report Honduras’ homicide rate in the early 1990s was below 20 per 100,000 inhabitants, • First, poverty in Honduras is not only high similar to the level in other Central American but also persistent. Despite data limitations countries. However, the late-1990s and ear- both quantitative and qualitative indicators ly-2000s witnessed a dramatic increase in reveal the modest progress in poverty reduc- crime. Similarly, remittances flows in 1997, tion achieved over the past several decades. In just before Hurricane Mitch, r ­epresented 1960 Honduras’ per capita income (in current about 4 percent of gross domestic product US$ terms) was 5.6 percent of the US per (GDP), but have since risen to 17  percent. capita income and 13.5 percent of the average Neglecting the long-term structural forces per capita income for the World Bank’s High- that have slowed growth in Honduras since Income Countries group. In 2014 these same the mid-20th century would result in a partial indicators were 6.2 percent and 4.3 percent, and incomplete picture of the country’s devel- respectively. In other words, in 1960 Honduras opment challenges. Taking Stock and Priorities Ahead 105 • Third, because high poverty has persisted for households that may reduce their chances of many decades, it is necessary to look beyond escaping poverty. the challenges of crime and emigration, and understand the long-stranding drivers of low Low Growth growth and high income inequality. Unlike in some countries where poverty is the result of Breaking Honduras’ complex low growth/high either low growth or high inequality, in poverty equilibrium will require addressing Honduras both elements are present. Over the structural challenges. The analysis of the barriers 1960–2014 period, Honduras’ per capita GDP to growth in Honduras has noted several long growth rate was just 1.2 percent, about half standing chronic constraints that have under- the rate of the High-Income Countries group mined the development of a dynamic formal (2.3 percent) and well below the average rate ­ sector in the economy, and by extension, the for the Low- and Middle-Income Countries creation of high-quality jobs: ­ group (3.1 percent). Similarly, with a Gini • Lack of fiscal discipline in the past has led to coefficient of 0.54 in 2013, Honduras has the accumulation of debt that has undermined pub- second highest rate of inequality of Latin lic social spending and investment, and reduced America, which is itself one of the most the effectiveness of private investments. unequal regions in the world, and while the • A shortage of skills and limited access to regional middle class expanded over the past school for much of the population—despite decade, Honduras’ middle class remains the fact that Honduras has one of the highest small. Honduras’ Gini coefficient in the early education budgets in LAC as a share of GDP— 1990s (0.56) was already among the highest in hinders productivity, growth and innovation, the Latin America after Brazil (0.59) and sim- and contributes to a growing productivity gap ilar to that of Colombia (0.56). Comparisons between Honduras and its peers. for earlier periods are complicated by data • Inadequate infrastructure lead to high costs of limitations, but estimates suggest that inequal- transportation, electricity, and telecommuni- ity in Honduras has deep roots. In 1925, cations, reducing the country’s international Honduras’ literacy rate was 29 percent, com- competitiveness. pared to 36 percent in Mexico, 40 percent in • Relatively low access to capital (finance and Colombia and 64 percent in Costa Rica. Only land), particularly for SMEs and rural activi- Guatemala had a lower literacy rate at 15 ties, undermine the potential for profitable percent. business opportunities and job creation. • Fourth, tackling Honduras’ high poverty is fur- • A regulatory framework affecting both the ther complicated in a context of macroeco- labor market (e.g., high minimum wages) and nomic volatility. During 1960–2014 the standard in certain product markets (e.g., special deviation of growth in Honduras from the Low- regimes) hinders competition in domestic and Middle-Income Countries group, the US, markets. and the High-Income Country’s group was 44, 52, and 83 percent, respectively. Macroeconomic volatility has a profound impact on poverty High Inequality because the poor tend to have limited means to Constraints affecting both opportunities and absorb negative shocks, and because such outcomes in the distribution of access to basic shocks often have lasting effects on both growth services and income create obstacles for many to and equality. Indeed, there is a wealth of empir- move out of poverty. A lack of opportunities ical evidence that income volatility both con- results in many children not being able to accu- tributes to lower economy-wide growth and mulate human capital. When these children grow encourages coping behaviors among poor up, they are less likely to find good jobs and 106 Taking Stock and Priorities Ahead improve their living conditions. In turn, their in different sections of the report translate into children grow up in poor households with low social ­pressures. Yet, ­perhaps most importantly, access to opportunities. Specifically: challenges in budget formulation and ­execution, primarily due to institutional factors, diminish • Access to, and quality of, basic services is rela- the impact of social spending. Therefore, tively low. Approximately half a million Honduras needs to significantly improve the Honduran children do not have access to effectiveness and efficiency of its social potable water and 1.1 million children do not spending. have access to basic sanitation. Low levels of access is alarming since these basic services directly affect health and learning outcomes. Low Resilience A quarter of the rural population does not Honduras also faces challenges with regards to eco- have access to electricity, and only 14 percent nomic, social, and environmental sustainability. of rural adults have an account in a formal • On the economic front, achieving fiscal sus- financial institution. tainability is critical for Honduras to boost • Access is related to household income and growth and reduce poverty. Honduras benefit- location, with children from poor households ted from HIPC debt relief, yet its current debt having limited access to essential services such trajectory is pushing it back to its pre-HIPC as education and sanitation. Honduras ranks debt levels, and a large share of domestic reve- lowest among LAC countries in the World nues goes to debt service rather than produc- Bank’s Human Opportunity Index (HOI), tive investments in social development and which calculates how personal circumstances, economic infrastructure. such as rural status, income, or parental edu- • On the social front, reducing crime appears cation, impact the probability of a child to be fundamental. This is because of the neg- accessing services necessary to succeed in life, ative impact that crime and violence has on such as schooling, running water, or connec- the investment climate and investment allo- tion to electricity. cation, and thereby growth, as well as on the • Formal workers in Honduras benefit from social contract that citizens form with the high minimum wages and labor protections; government. however, 80 percent of workers in the country • On the environmental sustainability front, are in the informal sector, with half of the pop- Honduras is highly exposed to natural shocks, ulation relying on self-employment. which combined with low resilience, affect the Honduras has the highest secondary school poor disproportionally. Some shocks have dropout rate in Central America due to a combi- massive impacts, but a multitude of smaller nation of high poverty and insufficient second- shocks, including periodic floods and droughts ary schools in rural areas. According to the and repeated outbreaks of blight, such as cof- recent World Bank Central American Social fee rust (“roya”), have also had substantial Expenditures and Institutional Review these out- cumulative impacts on agricultural produc- comes result from the government’s limited tion and poverty. The combination of high ability to expand safety nets, increase the access exposure and low resilience to environmental and quality of public education and health ser- hazards leaves most Hondurans exposed to vices, engage in active labor market policies, and frequent income and consumption shocks. generally improve human development indica- Evidence suggests that the poorest households tors. This is in part due to low revenues and fis- are most affected by disasters; the impact on cal deterioration, which constrain the financing their assets is both more extreme and more of much needed social sector i ­mprovements. lasting, and prevent the poor from catching up This highlights that fiscal challenges discussed with wealthier groups. Taking Stock and Priorities Ahead 107 6.2 Deep Roots of the enforce the law and/or the judiciary to prosecute crimes. In other words, when considering the Challenges Faced identified proximate causes of development in The picture that emerges from this discussion Honduras, could it be that there is a root cause indicates that poverty is high and persistent, affecting the proximate determinants? affected by low growth, high inequality, and sus- The development economics literature high- tainability challenges, and in turn, each of these lights the importance of the quality of institu- are affected by difficult issues. When there are so tions.1 North and Thomas (1973) argue that many factors that are relevant and that therefore institutions are the fundamental determinant of need to be taken into account, any exercise to growth affecting total factor productivity, human identify policy priorities that may underlie pov- capital accumulation, and physical capital accu- ­ omplicated. erty eradication efforts becomes very c mulation (i.e., the three elements of the produc- Should one start by addressing the high levels of tion function) and these in turn aggregate income income inequality because high inequality is and growth. Shleifer and Vishny (1993) present itself a barrier to growth and, for a given growth both a theoretical model and empirical evidence rate, to poverty reduction, or, instead, focus on that is consistent with poor institutions affecting growth given the low per capita income levels the provision of social services, with evidence and hence the limits of redistributive policies? linking them to outcomes such as infant and And what about the challenges on the sustain- child mortality rates, literacy, low birth weight, ability front, given the difficulties of building a and primary school dropout rates.2 Rodrik (1999) long term strategy on footings that are not too studies other channels and presents evidence solid? And once the decision of which area needs from a panel of countries that better institutions to be tackled first is made, which policy options are associated with higher real wages and higher should be prioritized? labor share in national income. Lindert (1994, Most of the discussion above has focused on 2004) provides evidence from OECD countries identifying the proximate causes of lack of devel- indicating a linkage between institutions and opment in Honduras; but is there a root cause? public spending, particularly on education. And For example, take the case of macroeconomic sta- Acemoglu, Naidu, Restrepo, and Robinson bility which is a proximate cause behind the coun- (2015) find that better institutions are associated try’s low growth and a critical element behind the with higher tax collection as a percentage of GDP. economic sustainability challenges. Achieving In summary, the existing literature on the role of macroeconomic stability depends on the quality institutions in economic development suggests of policy. Likewise, low levels of education and that institutional weakness can lead to lower human capital hinder growth in Honduras and growth (through regulatory framework imper- hence the temptation to recommend improve- fections, macroeconomic instability, negative ments to education. But education levels (particu- effects on human capital accumulation and pub- larly considering that the country already spends lic infrastructure, access to finance, and more a relatively large share of GDP in education) are generally inefficiencies of the public sector affect- the outcomes of the set of country policies and ing the implementation of programs), and high institutional arrangements that may be problem- inequality (through the governance effects on atic and prevent progress on this front. And con- education and health, and the redistributive sider crime and violence, which appears as a key capacity of the state). Schematically, these rela- element underlying low growth and increasing tions are represented in figure 6.1. social sustainability challenges, but at the same One natural question that emerges in this con- time is also an extremely complex problem that text is what is meant and understood by institu- needs to be tackled taking into consideration fac- tions and their quality. Institutions, both broadly tors such as the capacity of the security forces to defined as the “rules of the game” and narrowly 108 Taking Stock and Priorities Ahead FIGURE 6.1  Institutions and Development Factor productivity Human capital Growth Physical capital Institutions Poverty Social services provision Redistributive power Inequality of fiscal policy Source: Adapted from North and Thomas 1973 and Acemoglu, Gallego, and Robinson 2014. defined as organizations, particularly in the ­public FIGURE 6.2  A Cycle between Quality of sector, pose challenges to development outcomes Institutions and Development Outcomes in Honduras.3 The discussion below relies on a definition of the institutional framework that Bargaining power encompasses notions of: (a) formal and informal rules and regulations (rules); (b) the bureaucratic structure that implements and enforces these rules (capacity); and (c) and the mechanisms to Growth hold agents accountable for their actions (account- Quality of Inclusion ability). Rules include both formal laws (de jure institutions level) and informal rules and regulations. Capacity Sustainability refers to the ability of the administration and society to operate and enact the rules; this Capacity includes the delivery of services and the protec- tion of rights and entitlements. And, in this con- Rules text, accountability refers to the mechanisms that Accountability shape incentives, including the application of Source: Adapted from the proposed framework for the WDR 2017. sanctions (or other consequences) if rules are not followed due to a lack of capacity or due to neglect, for example. The configuration of rules, capacity there is evidence that differences in institutional and accountability determine the extent to which quality explain differences in development out- the country’s institutional framework is condu- comes over a hundred years later, suggesting that cive to growth, inclusion, and sustainability. not only is this a strong effect, but also a challeng- Development outcomes can, in turn, affect the ing cycle to break (Acemoglu, Gallego, and quality of institutions, thereby creating a cycle as Robinson 2014). Indeed, this is the basis for the illustrated in figure 6.2.4 That is, institutional qual- conceptual framework of the World Bank’s forth- ity is endogenous to development outcomes. In coming 2017 WDR, which identifies this feed- other words, poor institutional quality and poor back loop as a function of the power structure development outcomes can result in a cycle, present in society. That is, the bargaining power of which can be either vicious or virtuous, and help different groups (e.g., the middle class, labor explain why both poverty and poor quality insti- unions, business groups) in society influence the tutions can be highly persistent overtime. In fact, quality of institutions. Taking Stock and Priorities Ahead 109 Development outcomes influence bargaining returns not just for individual projects but to the power, pressuring institutions to deliver; eco- entire infrastructure stock, and lead to lower nomic growth, for example, results in higher ­levels and less efficient provision of infrastructure income levels that can increase the demand provision (Castalia 2004; Dal Bo and Rossi 2006; for  better quality institutions (Alonso and Estache and Kouassi 2002; Kaufmann, Kraay, and Garcimartin 2013). For instance, research using Mastruzzi 2005). And deficiencies in the func- firm data finds that as growth increases the prof- tioning of the legal system (particularly the qual- itability of firms, these are able to escape areas ity of courts and their accessibility) that affect where officials demand bribes and move to areas enforcement of the rule of law hinder financial with lower bribes (Bai et al. 2013). Therefore sector access for firms, particularly among small growth may act as a push factor and low bribes as and medium enterprises (Love 2009). a pull factor. In practice, this would imply that International indicators suggest institutional countries can enter into a cycle where high challenges in Honduras. In three of the six indi- growth tends to reduce corruption and this feeds cators reported by the Worldwide Governance back into higher growth, or conversely that cor- Indicators (WGI)—control of corruption, rule of ruption negatively affects growth and this feeds law, and government effectiveness—Honduras back into an increase in corrupting activities. scores in the lowest quartile of the world, and in Another potential channel is related to how the one of those (rule of law) in the lowest decile level of income inequality affects the quality of figure 6.3). There is no single indicator among (­ institutions. This is attributed to the value of the WGI where Honduras is above the world social cohesion and is captured in the impor- median, though in the case of regulatory quality tance of a sizeable middle class that demands scoring in the 46th percentile the country is close institutional quality.5 In countries with lower to it. As for political stability, and voice and income inequality, interests are more closely accountability, Honduras appears in the lowest aligned between groups. one-third of the ranking. If one were to take This Systematic Country Diagnostic (SCD) the  average percentile of the six WGI as an argues that the quality of the country’s i ­ nstitutions ­ aggregate measure, Honduras would be in the is an important determinant of development out- 28th ­ percentile, the second lowest in LAC. comes in Honduras. A question that arises is how Findings of weak institutions in Honduras are to assess the quality of institutions in Honduras, not unique to the WGI. In its public institutions and whether this can be an explanation behind pillar, the World Economic Forum’s (WEF) the long-run development challenges in the Global Competitiveness Index ranks Honduras country. As discussed previously, institutional 105th among 144 countries (Error! Reference quality has several dimensions related to the rules source not found.). Honduras also ranks low in in place, the capacity to implement, and the asso- indicators such as the quality of public spending ciated accountability framework. For example, (127th), the reliability of public services (115th), problems on the regulatory front (either because diversion of public funds (117th), and costs of its quality of because it is not appropriately imposed by crime and violence (140th). It is implemented) affect a country’s macro stability worth noting that both the WGI and WEF indi- (Loayza, Oviedo, and Serven 2005, 2006; cators have important limitations in their ability Satyanath and Subramaian 2004) and through to capture the institutional challenges of a coun- this channel growth. Similarly, lack of capacity in try, nonetheless, there is a correlation between the public sector can lead to inadequate infra- these indices which appears to indicate he exis- structure provision (e.g., construction of the tence of institutional challenges in Honduras. wrong infrastructure, poor construction and The analysis of the bottlenecks to growth, inclu- quality of provision, or insufficient maintenance). sion, and sustainability underscore issues related This in turn can dramatically reduce e ­ conomic to institutional quality. Indeed the discussion of 110 Taking Stock and Priorities Ahead FIGURE 6.3  Honduras’ Institutional Quality Indicators Are below Regional Average a. Governance indicators in b. Global competitiveness report: Institutions pillar Honduras and LAC ranking, out of 144 countries Voice and 140 accountability 120 Rule of law 100 Regulatory quality Ranking 80 Political stability 60 Government 40 effectiveness 20 Control of corruption 0 0 10 20 30 40 50 60 70 80 90 ns s Bu en erf ibe ts po sp tio nt go in f e es kin f po Re en of ic f r p und of end s o im in a e o rv y o en an ula e rd t s uln s lic are n tio ve g g lic lia ce es ol s Tr eg rnm Percentile rank en p es vi st cr Bus ym nc se lit ve W nd m f itu c r d co ay y bi b i st l Ire ub an s In OECD LAC Honduras p la a r m t of gu rn as n io Source: Worldwide Governance Indicators 2014. rs Note: Percentile rank indicates the country’s rank among all ve go Di countries covered by the aggregate indicator, with 0 corresponding to lowest rank, and 100 to highest rank. Percentile Source: WEF, Global Competitiveness Report 2015. ranks have been adjusted to correct for changes over time in the Note: Numbers reported are from a rank of 144 countries. composition of the countries covered by the WGI. FIGURE 6.4  Proximate and Root Causes of growth of more formal employment. Challenges Development Challenges in Honduras on the growth side include lack of skills and low infrastructure, two areas also affected by inefficient Growth public spending. Access to capital, including issues challenges affecting property rights, can be traced back to Access to weaknesses in the rule of law. And as regards com- capital petition, special regimes and regulations in some skills Infrastructure markets appear to favor incumbents. All in all, these results are consistent with the discussion Fiscal policy Quality of Regulatory emerging form WGI and WEF data. The exception institutions framework might be the regulatory framework, which Access and ­ according to the indicators of the WGI and WEF Resilience quality of does not appear as a top policy priority. Even so, services Crime enforcement matters, and, the country analysis Sustainability Inclusion concludes that weak enforcement hinder the challenges challenges effectiveness of the rule in critical areas such as ­ ­ citizen security appears as a key constraint to the country development challenges has continu- growth and inclusion. ously gravitated towards issues directly related to As with the cycles related to crime and emi- the quality of institutions (figure 6.4). In the case of gration, reverting the cycle between institutions inclusion, for example, limited access to basic ser- and development outcomes cycle is challenging vices and unequal access can be traced back to the given its self-reinforcing nature. While admit- country’s inefficient public spending as discussed tedly it is difficult to present definitive evidence, in chapter 4. Furthermore, the country’s high min- this SCD argues that a plausible explanation for imum wages may be further increasing inequality the high levels of poverty is the quality of the in the country while potentially harming the country’s economic and social institutions, Taking Stock and Priorities Ahead 111 which, according to both internationally compa- area as a priority solely based on the criteria listed rable databases and country-specific evidence, above. Given that the analysis identified the exis- needs to be addressed. This hypothesis would tence of self-reinforcing vicious cycles, priority is help explain the many factors behind the low lev- given to entry points that could help break those els of growth, high levels of inequality, and sus- cycles. The basis for this emphasis stems from tak- tainability challenges. It would also help explain ing into account areas that complement progress in the persistence of weak institutions and poor other areas. Indeed, any effort to inform public dis- development outcomes, as these may be locked cussion of the country’s priorities would be rem- in a cycle in which poor institutional quality ised if it would obviate actions that would help leads to high poverty and this in turn leads to avoid the significantly negative consequences. This poor institutional quality. Moreover, this cycle of consideration led to a focus on “policy levers” that weak institutions-poor development outcomes could help address the vicious cycles. The identi- would be on top of the two vicious cycles identi- fied priorities were also informed by consultations fied previously (high crime and low growth, and with stakeholders and experts in Honduras. large emigration flows and low growth), and feed into them. For example, the low ranking in the Policy Levers and Complementary rule of law indicator of the WGI suggests difficul- Measures ties in law enforcement, an area that is critical to Addressing Honduras’ challenges will require a fight crime. Likewise, the presence of institu- “big push” through coordinated action. In addi- tional challenges in the provision of education tion to the need to deal with the vicious cycles services, and hence education outcomes would created by high crime and large emigration and also indicate difficulties in an area that appears remittances flows, one also needs to consider the key in explaining the challenges that emerge role played by the country’s institutions as this, between large emigration flows and low growth. through its negative impact on growth, inclu- sion, and sustainability, creates an additional and perhaps more complex cycle that could keep the 6.3 Priorities Ahead country in a low equilibrium. But what does this Approach to Prioritization view of the development challenges in Honduras imply for policy prioritizations? The prioritization exercise undertaken for this The analysis suggests three implications to analysis is anchored on a number of criteria. identify priorities ahead. First, the exercise considers the extent to which improvements in a particular area would have • A first implication is the need to attack these substantial impacts on tackling poverty and challenges from multiple angles rather than increasing the welfare of the bottom 40 percent from a single direction; otherwise the strategy of the income distribution. Second, the exercise would ignore the reinforcing nature of the dif- considers the time horizon of the expected ferent cycles. impacts by identifying measures that can gen- • A second implication is the need to identify erate short and long-term impacts. Third, policy options that can generate a “big push” emphasis is given to the complementarity of the to break the three cycles.6 Marginal interven- policy areas, in which an identified opportunity tions are unlikely to break the self-reinforcing in one area could also help address challenges dynamics of the different cycles. in other areas. Finally, the prioritization exer- • A third implication is that it is critical to find the cise gives more weight to areas where the evi- appropriate policy levers that can help break dence base is stronger. these vicious cycles (table 6.1). When the focus Noting the difficult development challenges is on breaking the institutions-poverty vicious that Honduras faces, the SCD does not discount an cycle, actions aimed at (a) strengthening of the 112 Taking Stock and Priorities Ahead rule of law and the judiciary, building state capac- development gains, complementary measures ity, and improvements in the accountability include (c) building resilience to natural hazards. framework. Likewise, when the focus is on breaking the crime and violence-growth cycle, Breaking the Cycle of High Crime and actions aimed at (b) strengthening violence pre- Low Growth: Strengthening Violence vention and law enforcement would appear Prevention and Law Enforcement essential. And when the focus is on breaking the Honduras currently finds itself in a serious wave of migration-growth cycle, actions aimed at (c) violence. While this rash of violence also affects improving education and skills to compete are neighboring El Salvador, Guatemala, Belize and needed so that the increased wage level resulting Mexico, the situation in Honduras is particularly from high remittances and changes in the real alarming. Between 2006 and 2011, the country’s exchange rate is accompanied by increases in homicide rate more than doubled from an already worker productivity. high 44 homicides per 100,000 inhabitants, to 92 in Against this background, there are comple- 2011, the highest in the world. For reference, in mentary measures that can support the policy 2012 the global homicide rate was 6 per 100,000. levers. These complementary measures would Even as homicide rates have fallen since 2011 to an tackle specific challenges to growth, inclusion, and estimated 67 by 2014, they continue being among sustainability. When the focus is on boosting the highest in the world and remain particularly growth, policies that support a competitive busi- high among young men, including a homicide rate ness climate, in particular (a) promoting fiscal sus- of 130 for older adolescents (ages 15–19).7 At the tainability and improving infrastructure and same time, there is a high degree of impunity, and financial intermediation would be justified. When the vast majority of homicides remain unsolved. the focus is on fostering inclusion, complementary High violence imposes significant economic measures would include (b) strengthening the tar- costs—on the public sector, the private sector, and geting and coverage of social programs (e.g., CCTs private households—​ including income losses, which have proven to be efficient and effective for security costs and health costs, even driving some poverty reduction), improving access to basic ser- enterprises out of business. It also has significant vices, and promoting active labor market policies. social costs, with implications for m­ ental health, And when the focus is on building sustainable social cohesion, and educational outcomes. TABLE 6.1  Priorities Ahead: Policy Levers and Complementary Measures Policy levers to break or revert the vicious cycles Crime and growth •• Strengthening violence prevention and law enforcement Migration and growth •• Improving education and skills to compete Institutions and development •• Improving the quality of institutions through outcomes - strengthening of the rule of law and the judiciary, - capacity building, and - improvements in the accountability framework Complementary measures Boosting growth •• Promoting macroeconomic stability, including fiscal sustainability •• Improving infrastructure Fostering inclusion •• Strengthening the targeting and coverage of conditional cash transfers •• Improving access to basic services •• Promoting active labor market policies to improve job matching, particularly for low skilled workers Promoting resilience •• Strengthening prevention and disaster risk management Taking Stock and Priorities Ahead 113 Reducing crime and violence would yield positive urban areas with ­ program beneficiaries commit- results for growth, inclusion and sustainability. ting to participate in community activities and For instance, lower security costs and fewer cases of capacitation programs to improve its employability extortion would increase the profitability of enter- and entrepreneurial abilities. The World Bank sup- prises and small businesses, boosting growth and ported a similar cash for work project in Honduras, leading to the creation of more job opportunities. Employment Generation in Poor Urban Addressing crime and violence requires an Neighborhoods, which targeted at risk youth and integrated agenda. Tackling crime and violence unemployed heads of household with young chil- requires raising the opportunity costs of crime dren. This project also included a number of crime through increased law enforcement (which and violence prevention training and development increases the expected costs of criminality) and of human capital, including conflict resolution and prevention through better opportunities (which preparation for employment. These type of pro- decrease the relative payoff of criminality). That grams have the effect of increasing the opportunity is, crime prevention must be thought of as a set of cost of joining a criminal group by increasing both broad interventions that go beyond law enforce- the present income and the future potential income ment and security measures so as to address the of those enrolled. Initial impact evaluations in El root causes, including the country’s lack of oppor- Salvador show that PATI contributed to lowering tunities. Thus, it is important to connect crime the levels of crime in the communities where it was prevention interventions with the underlying implemented. causes of criminal activity by addressing percep- tions of impunity, youth exclusion and general Breaking the Cycle of High Emigration poverty. This calls for capacity building for and Low Growth: Improving national, regional and local authorities and align- ment of strategies as well as coordination across Education and Skills to Compete sectors such as health, education, and criminal Educational access and quality in Honduras is rel- justice. Effective prevention strategies address atively low and improving it will help boost long multiple risk factors and across multiple levels term growth and poverty reduction. The country’s (individual, family, community, society). Because test scores are low and fewer than half of second- violence tends to concentrate geographically, pre- ary school aged children are enrolled in school. vention is more effective when it engages commu- While a lack of access to quality schooling exacer- nities and connects them to regional and national bates inequality and limits intergenerational prevention strategies. Social networks at the com- mobility, it also poses a challenge for growth with munity level can be effective in reducing violence 28 percent of firms identifying a lack of skilled and addressing the perceptions of safety and trust. workers as a major constraint according to the Another consideration is that crime prevention 2010 Enterprise Survey. The combination of a should also address the need for rehabilitating citi- small skilled labor force and the upward pressure zens committing acts of violence. Many former on wages resulting from the high levels of remit- gang members and drug traffickers would need to tances received in Honduras has fed into relatively be reintegrated into society for the sustainable pre- high wages for skilled labor even as, overall, wages vention of violence. From law enforcement to the have remained flat and labor outcomes are weak judiciary to the penitentiary, programs must focus for the average Honduran. Better quality and on holistic approaches to prevention, intervention more accessible education would enable more and rehabilitation activities. One example of a pro- Honduran workers to better acquire the skills nec- gram that has proved successful at preventing essary to compete for higher productivity employ- crime is the Programa de Apoyo Temporal al Empleo ment thus alleviating the pressure of high wages. (PATI) implemented in El Salvador. This program To foster more skills, a priority for Honduras is offers income support to vulnerable individuals in improving the quality of basic schooling and, in 114 Taking Stock and Priorities Ahead particular, addressing the country’s secondary The Honduran authorities have undertaken school dropout rate. Access to primary and sec- a self-assessment which identifies a number of ondary schooling of good quality is essential as it priorities to combat corruption and improve provides the basic building blocks necessary for the rule of law. A self-assessment of United learning more advanced skills. In the short-run, it Nations Convention on Anti-Corruption is also important to build skills in the current work- (UNCAC) Chapter III on Criminalization and force. Some possibilities include vocational train- Law Enforcement and chapter IV on ing for adults, including technical skills and English International Cooperation has revealed that, skills, so that more workers can participate in with few exceptions, the legal framework of skilled tradable sectors, opening the door to a more Honduras complies with most provisions of the diverse set of exports so that the country can reap UNCAC in relation to criminalization of brib- the rewards of its strategic geographical location. ery and with most requirements relating to Since agriculture continues to play a prominent international cooperation by signing a series of role in Honduras and employs a large share of the international treaties, which are now part of poor and the bottom 40 percent, it is also impor- domestic law.8 However, the self-assessment tant to improve agricultural and agribusiness skills reveals that major challenges remain in terms (for example, the adoption of new technologies to of law enforcement. The number of investiga- improve output, and technical skills needed to con- tions, prosecutions and conviction for crimes nect to larger markets) that can lead to improved such as domestic bribery, bribery, embezzle- income opportunities for rural households. ment, and trading of influence are low. According to statistics from the Honduras Improving Institutional Quality: Electronic Judicial Center for Documentation Strengthening of the Rule of Law and and Information (CEDIJ), the Sentencing Courts prosecuted only 16 cases related to the Judiciary, Building Capacity, and bribery in 2012–14. Ten cases ended with con- Strengthening the Accountability victions and 6 in acquittals. During the same Framework time period, there were 17 investigations A central question regards how to strengthen related to illicit enrichment, only one led to institutions beginning with improving the rule prosecution. The self-assessment identifies of law and the capacity of the state. Tackling weaknesses in the criminal justice system and corruption requires addressing gaps in the lack of capacity to conduct robust investiga- accountability framework. The 2009 World tions and obtain evidence as the main reasons Bank’s Institutional and Governance Review to the poor enforcement of the laws. The Self- (IGR) identified the need to strengthen the Assessment also reveals that the National Anti- country’s accountability framework and in par- Corruption Agency (CAN) needs institutional ticular, the accountability of policymakers support, and that there is demand for technical towards citizens and tax payers. The IGR sug- assistance in drafting new legislations as per gested three key recommendations that could the gaps identified in the legal framework; represent important steps towards improving developing a registration, monitoring and eval- accountability and governance conditions in uation system for corruption crimes; and estab- Honduras: (a) Improving transparency in key lishing IT-enabled asset declaration system. It policy- and decision-making processes; (b) also reveals Public Prosecutor’s need for capac- Strengthening mechanisms to hold policy- and ity building support in investigation techniques decision-makers to account, especially in cases and forensic audit, and management of crime of poor performance; and (c) Supporting citi- statistics from the relevant authorities. zen groups representing the broader public To address these challenges, the Honduran interest, to participate in policy discussions. self-assessment of chapters III and IV of the Taking Stock and Priorities Ahead 115 UNCAC revealed specific areas to strengthen the of both of these behaviors present in most legal, regulatory and institutional framework for countries with high prevalence of corruption, as ­ enhancing accountability and enforcing the rule well as evidence that the country’s general attitude of law. Major gaps identified in the legal frame- toward corruption is a strong determinant of the work include: 1) lack of necessary provisions on incidence of bribes (Alaimo et al. 2009). transnational bribery of foreign public officials Improving institutional quality will require and officials of public international organiza- actions along the three dimensions—rules, tions; 2) Laws criminalizing trade in influence do capacity and accountability; that is, there is a not cover “the promise, offering or giving to a need to develop effective rules to boost growth, public official of an undue advantage” or “solici- inclusion and sustainability while at the same tation or acceptance by a public official of an time building capacity to enforce these rules and undue advantage”; 3) the criminal code does not hold agents accountable. It is important to review include a definition of bribery in the private sec- the regulatory framework to create incentives tor; 4) obstruction of justice is not explicitly that benefit the public interest. Good rules, how- defined as a crime in the legal framework; 5) ever, can suffer from bad enforcement because of responsibility of collaborators or instigators is overly cumbersome procedures, lack of qualified not covered by the legal framework; 6) there is no personnel, or weak accountability mechanisms. specific provision establishing the possibility of Thus, administrative simplification, together mitigating penalties in the case of cooperation on with a more professional civil service (which in the part of the accused; and 7) extradition law is turn will help improving the capacity of the incomplete and only offenses related to orga- state), can be an effective tool for lowering the nized crime, drug-trafficking and terrorism allow cost and improving the efficiency of regulations, for extradition of Honduran nationals. At the thereby increasing compliance and reducing the same time, the self-assessment also revealed gaps opportunities for corruption or rent seeking. in enforcement, including a witness protection Moreover, it is important to improve enforce- program that, by law, only extends to individuals ment and accountability, such as by increasing who have appeared in court and excludes those efforts to monitor compliance and raising the who are in the preparatory stage of trials. costs of regulation infringement by adequately Administrative simplification can also support levying fines and sanctions. To achieve this, improvements in the rule of law. Bribe payments strengthening the judicial system is essential; for are the outcome of a wide range of factors and example, increasing the likelihood of punish- country circumstances that breed corruption, ment for both parties engaging in a corrupt rather than a policy variable that can be changed agreement (thus increasing the expected cost of at the will of policy makers (Alaimo et al. 2009). entering into such agreements) is likely to lead to One of the hypotheses, known in the literature as lower corruption levels. the “control rights” hypothesis, considers the pos- sibility of unscrupulous public officials exerting Complementary Policies to Support an implicit control on firms to obtain bribes. This control would stem from the inherent features of the Policy Levers complex rules (which in turn can be related to the Addressing Honduras’ challenges would also quantity and quality of regulation, either de jure require looking beyond the cycles and focus on or de facto) and the discretionary power of offi- policies that foster growth, inclusion, and sus- cials enforcing those regulations. The second tainability. The policy levers, identified as entry hypotheses, known as the “grease the wheels” points to tackling the cycles, can be comple- hypothesis, would postulate that firms may have mented with measures aimed at (a) reigniting incentives to bribe officials to skip regulations or economic growth; and (b) fostering inclusion. to secure contracts. In practice, there is evidence Note that these type of policies would be fully 116 Taking Stock and Priorities Ahead justified not only because of their static impact time, there is scope for mobilizing additional tax on poverty reduction and shared prosperity but revenues by improving tax and customs adminis- also because of the impact that they have on the tration and reducing tax exemptions which rep- identified country development dynamics, with resent a large share of GDP. higher growth feeding into lower crime and lower With a view to generating sustained growth migration pressures and hence these feeding and facilitating further insertion into the global back into future higher growth, and with higher markets, it is important to address the con- growth and lower inequality feeding into better straints of expensive and low quality infrastruc- institutions and these in turn into higher growth. ture services. As mentioned, a focus on the Lower inequality would also contribute to lower energy sector is warranted. Key objectives crime rates. Indeed Fajnzylber, Lederman, and include: (a) improving energy pricing and energy Loayza (2002) present empirical evidence sug- efficiency mechanisms, such as modernizing the gesting that even though criminal inertia is quite energy matrix towards cleaner and cheaper significant, declines in income inequality lower energy sources to reduce the dominance of ther- crime rates (this in addition to the beneficial mal power; (b) improving the legal framework to impacts on crime levels of economic growth). reduce fraud and theft; and (c) strengthening the Interestingly a second round effect of a lower corporate governance of the state-owned elec- inequality induced ­ lower-crime-rate would be tricity company, including building capacity at lower migration flows. the newly created energy regulatory agency. What are the policies that could be expected Regarding transport, a focus on port infrastruc- to have the highest impact on growth over the ture and improved road maintenance—both medium-term? The discussion in this report sug- which could benefit from the development of gests that there is no trivial answer to this ques- public-private partnerships that bring private tion but rather that tackling the bottlenecks to sector participation—is warranted and should be growth that cut across sectors will be key. For combined with improved logistics and regula- example, the impact that the macroeconomic tions to reduce waiting times while improving instability during 2012 and 2013 had on the customs enforcement. These investments, if investment climate highlights the need for ensur- planned and executed well, also represent an ing fiscal sustainability as a necessary but not suf- opportunity for growth in the near term, provid- ficient condition for reigniting economic growth. ing opportunities for Public Private Partnerships A stronger fiscal position that is achieved now and the creation of jobs. and sustained over the medium to the long-term These proposed measures to boost growth will set the basis for progress on service delivery, would support the private sector and help generate and growth and employment. Fiscal deficits and more demand for labor, creating jobs. To the extent slower economic growth since the 2009 crisis that a healthy fiscal environment leads to less mac- have increased public debt, reaching a concern- roeconomic volatility, this would reduce the fre- ing level and possibly affecting investment quency with which the private sector must absorb decisions. While the authorities have recently ­ severe shocks. Reducing operating costs through made strides to reduce the fiscal deficit, fiscal improvements in the energy sector and transporta- consolidation will require additional reforms that tion would boost productivity. Meanwhile, improv- enhance public financial management and rebal- ing financial intermediation including policies ance expenditures from current spending towards designed to promote increased savings of remit- capital spending. Curtailing the fiscal losses in tances in the formal financial sector is expected to the power sector will also bolster the fiscal posi- increase overall savings, and the improved access tion, and in this regard the current environment to finance would particularly benefit SMEs and of low oil prices does provide an opportunity to young firms, the source of a disproportionate share advance electricity pricing reform. At the same of job creation in Honduras. Combined with the Taking Stock and Priorities Ahead 117 policy levers designed to address the cycles of in frequency and severity with climate change. crime, emigration, and institutions identified There is already in place an ample agenda under above, these measures would be expected to pro- implementation for building institutions and mote a better business climate and lead to more job improving infrastructure and local planning. creation by the private sector. Greater attention is needed, however, to the impact The challenge of fostering inclusion cannot of “small” natural events that affects the lives of the wait for the indirect effects of growth and poor in a localized but dramatic manner. In this employment creation. As noted, 80 percent of regard, the capacity of households to manage the Honduran children live in poverty and a major- impact of natural disasters can be enhanced by ity do not finish secondary school. There is linking them to saving mechanisms and increas- strong evidence that the current social assis- ing the availability of financial instruments, such tance programs (CCT) are having an impact in as agricultural insurance. Additionally, improved the reduction of poverty and should be management of natural resources, particularly expanded to cover all eligible extreme poor. water, can help protect households and agricul- Over the long-term, efforts at inclusion need tural production from the effects of droughts. This the support of basic services of good quality is particular key in the Dry Corridor, an area of the that empower the population with the assets country characterized by 4–6 months of almost no both to create and to profit from opportunities. precipitation and low water availability. Besides the attention to education and skills, already noted, reducing child malnutrition should figure as a high priority. A solid inser- Conclusion tion into the labor markets is the best bet to a Honduras is a country with great potential; sustainable inclusion. This would call for active unlocking these potentials will foster the creation labor market policy that rather than focusing on of greater opportunities for its citizens. It has a minimum wages emphasizes making the mar- young population, is rich in natural resources, is kets work, by addressing issues of information, geographically well-located and open to trade, tailored skills, and linking with job creation. and already attracts high inflows of private Minimum wages in line with the market have investment. Yet, it is also a country facing long- the potential to unleash investment and pro- term and pressing challenges, particularly a duction in high productivity sector and contrib- self-reinforcing cycle between weak institutional ute to a better allocation of resources in the capacity and low development underlying the economy. Addressing skills and information self-reinforcing cycles between low growth and problems can be conduit of improving employ- high crime and large emigration flows. To address ment opportunities for the young and poor and these cycles the agenda is highly complex and be a countervailing for to violence and crime. will require a long-term commitment and a high There is also a need for measures focusing on level of political consensus. The priorities identi- addressing vulnerability. For this, it will be critical fied in this Systematic Country Diagnostic focus that Honduras continues building resilience to on breaking these cycles to bridge the gap natural disasters as these are expected to increase between potentials and actuals. Notes 1. Admittedly, the empirical literature on the impact be used to instrument explanatory variables of institutions on development has not produced measuring the quality of institutions. In others, refined enough results to assess the magnitude of because of the intrinsic difficulties at capturing the effects of institutions on growth and income the different dimensions of the quality of the insti- inequality. In some cases, this has been due to tutions. And finally, there are also problems dis- difficulties finding exogenous variables that can tinguishing the differences between de jure and 118 Taking Stock and Priorities Ahead de facto institutions. Yet, the causal relationship 5. For example, Loayza, Rigolini, Llorente (2012) linking institutions to development appears well and Ferreira et al (2013). Alonso and Carcimartin documented. (2013) argue that income distribution 1) “…causes 2. Kaufmann, Kraay, and Zoido-Lobaton (1999) find divergent interests among different social groups, that a one standard deviation improvement in the lead(ing) to conflicts, sociopolitical instability and Worldwide Governance Indicators was associ- insecurity”; 2) “… facilitates that institutions remain ated with a two-and-a-half to four-fold decrease captured by groups of power”; and 3) “diminishes in a country’s infant mortality rate, and a 15 to social agents’ disposition to cooperate action and 25 percent increase in literacy. Similar results are favors corruption and rent-seeking activities.” obtained by Gupta, Davoodi, and Tiongson (2000) 6. This implication was also presented in the who also find that corruption has adverse conse- Systematic Country Diagnostic for El Salvador quences for a country’s child and infant mortality (see Calvo-Gonzalez and Lopez 2015), the neigh- rates, percent of low-birth weight babies in total boring country that also faces the vicious cycles births, and dropout rates in primary schools. In related to high levels of crime and migration. particular, child mortality appears to be about 7. Observatorio de la Violencia de la Universidad one-third higher in countries with high corrup- Nacional Autónoma de Honduras (UNAH). tion, and infant mortality rates and the percent 8. The World Bank entered into a partnership with of low-birthweight babies almost twice as high. the United Nations Office of Drugs and Crimes Dropout rates are five times as high. (UNODC) in March 2015 for implementing 3. North (1994) refers to institutions as “humanely UNCAC in selected countries and Honduras devised constraints that structure human interac- was selected as the first country where this part- tion… made up of formal constraints (e.g., rules, nership would be piloted. The UNCAC requires laws, constitutions), informal constraints (e.g., that states establish and promote effective prac- norms of behavior, conventions, self-imposed codes tices aimed at preventing corruption, to establish of conduct), and their enforcement characteristics.” criminal and other offences to cover a wide range He defines organizations as “made up of groups of of corrupt acts, to cooperate with one another in individuals bound together by some common pur- every aspect of the fight against corruption, and pose to achieve certain objectives… [they] include to support each other in the recovery of stolen political bodies (e.g., political parties, the Senate, a assets. UNCAC is the only legally binding uni- city council, regulatory bodies), economic bodies versal convention on anti-corruption and in (e.g., firms, trade unions, family farms, coopera- many respects represents an accepted interna- tives), social bodies (e.g., churches, clubs, athletic tional standard regarding best practices for com- associations), and educational bodies (e.g., schools, bating corruption. The UNCAC Self-Assessment universities, vocational training centers).” is an objective and evidence-based instrument 4. The applied economics literature has typically to assess the gaps in the legal, regulatory and considered institutions endogenous to the devel- institutional framework for combating corrup- opment process, an implicit recognition of the tion. It provides a comprehensive overview of the feedback loop. Yet, similar to the difficulties of policies, legislation, institutions and implemen- quantitatively estimating the effects of institu- tation capacities.  The National Anti-Corruption tional quality on development outcomes, the esti- Council (CNA) is the Focal Point nominated by mation of the effects of development outcomes on the government to conduct the Self-assessment. the quality of institutions faces the same statistical The UNCAC Self-Assessment of Chapter II on challenges that limit the ability to parametrically Prevention of Corruption and Chapter V on assess the impact in practice. Stolen Asset Recovery is about to start. Taking Stock and Priorities Ahead 119 Appendix A Definition of Peer Countries In order to compare Honduras’ performance, the Aspirational Peers analysis features six comparable groups of peers: Central American countries, Latin American This classification aggregates countries that may peers, lower middle income countries, the World, be used as good examples of development for structural peers, and aspirational peers. In the Honduras using the following criteria for the case of the former two, both groups were pre- period 2001–13: pared using the “Find your friends” tool, which • Lower middle income and upper middle is mainly based on the World Economic Outlook income countries (WEO) database. • GDP per capita growth higher than 3.0 percent • Inflation below 5.0 percent • Credit risk rating better than B+ Structural Peers • Population below 35 million. Under this classification, countries with similar This classification delivers the following characteristics to Honduras were identified using group of countries: the following criteria for the period 2001–13: • Lower middle income countries Aspira- Popula- GDP per capita Real GDP Inflation Credit tional tion per capita risk • Population between 3.0 and 15.0 million peers (million) PPP growth (%) (%) rating (US$) • No land-locked Armenia 3.3 4,471 7.5 4.6 Ba2 • No fragile state Chile 17.7 14,244 3.3 3.1 AA- • Manufacturing share higher than 10 percent Honduras 8.3 3,152 1.9 7.2 B+ This classification delivers the following Latvia 2.0 14,448 5.5 4.7 BBB+ group of countries: Lithuania 3.0 16,385 5.9 3.0 BBB Morocco 33.2 4,118 3.6 1.7 BBB- Panama 3.8 10,632 5.3 3.2 BBB Structural Population GDP per capita Manufacturing Peru 31.4 7,806 4.1 2.6 BBB peers (million) PPP (US$) share (%) Source: World Economic Outlook. El Salvador 6.4 4,992 20.4 Note: Average data for 2001–13. Georgia 4.5 2,411 14.1 Honduras 8.3 3,152 19.1 Moldova 3.6 1,608 13.6 Nicaragua 6.2 2,846 16.4 Senegal 14.5 1,395 14.2 Source: World Economic Outlook. Note: Average data for 2001–13. Definition of Peer Countries 121 Appendix B Poverty Measurement in Honduras To measure the incidence of poverty, Honduras During the last decade, the headcount poverty uses two income-based poverty lines. First, the rate has been on average six percentage points extreme poverty, or “food poverty”, line reflects higher than the household poverty rates: in 2013, the cost of a locally obtained basic food basket for example, using both the extreme and the that meets minimum caloric requirements. moderate poverty line the headcount was Second, the overall poverty line is constructed by percentage points higher than the household 5.5 ­ taking the extreme poverty line and adding a set poverty rates. Finally, the real value of the urban of basic nonfood goods. These lines are priced poverty line may be set too high when compared differently for rural and urban areas to account to other countries in Central America, such as for differences in the cost of living. Using the Costa Rica or Panama, which have a higher gross national household survey, income estimates are domestic product (GDP) per capita than constructed at the household level, which include Honduras (Cadena et al. 2013). Specifically, both labor and non-labor income. This aggregate Honduras’ urban poverty line is the equivalent of income is adjusted by a factor to correct for $8.90 per day (2011 PPP), second only to under-reported incomes. The adjusted house- Uruguay in the Latin American and Caribbean hold income is then divided by the number of (LAC) region. household members to obtain the household To measure poverty across countries, the income per capita. World Bank Group and its partners have devel- It is important to take into account the follow- oped comparable welfare aggregates and interna- ing considerations when comparing poverty tional poverty lines. The figures produced by the measurements in Honduras. First, the methodol- Honduran authorities reveal the evolution of ogy used to adjust for non-declaration of income nationally-defined poverty indicators over time. is not clearly documented and may be outdated. However, poverty lines and estimation tech- Since a large share of households rely on infor- niques vary between countries, resulting in mal employment, including a significant share of poverty estimates that are not internationally ­ households relying on subsistence agriculture, comparable. The comparable figures, on the measuring income is not always straightforward. other hand, enable international comparisons Second, different poverty lines are used for urban and benchmarking. Hence, all cross-country and rural areas, but it is not clear that there are analyses presented in this report are based on spatial differences in cost of living as there is no these international lines. For Honduras and information on rural prices. Third, the poverty other countries in LAC, the source of compara- rate is reported as the share of households living ble household surveys is the SEDLAC project, a in poverty, not as a headcount. To the extent that joint project of CEDLAS, at the National poor households have more members, this yields University of La Plata in Argentina, and the a lower poverty rate than a headcount measure. World Bank Group. Poverty Measurement in Honduras 123 Appendix C Outcomes of the Poor Have Improved between 2003 and 2013 TABLE C.1  Profile of the Poor and Non-Poor in Honduras, 2003–13 2003 2013 Characteristics Extreme poor Poor Non poor All Extreme poor Poor Non poor All Household Percentage in each category 50.9 70.0 30.0 100.0 48.2 70.1 29.9 100.0 Daily per capita income (2005 US$ PPP) 1.8 2.6 13.3 6.4 1.7 2.6 13.3 6.4 Average household size 5.7 5.5 4.0 5.0 5.0 4.8 3.7 4.4 Average age of household head 46.6 45.8 43.6 45.0 49.2 49.1 49.2 49.2 Households with female head (%) 22.3 23.5 21.6 22.8 32.0 33.6 32.0 33.1 Living in urban area (%) 30.3 43.7 60.0 49.6 33.1 45.6 54.9 48.9 Average years of education of household 2.8 3.5 6.9 4.7 3.6 4.2 7.7 5.4 head School enrolment (% of ages 12–18) 50.2 53.7 67.6 57.6 49.7 53.8 65.8 56.8 School enrolment (% of ages 6–12) 78.7 79.8 86.5 81.3 91.2 92.4 97.1 93.3 Proportion of members 0–12 years old (%) 38.7 36.5 22.7 31.6 30.9 28.4 15.6 23.8 Proportion of members 13–18 years old (%) 13.9 14.0 11.5 13.1 15.0 14.9 11.1 13.6 Proportion of members 19–70 years old (%) 43.8 46.1 63.1 52.2 47.9 50.5 66.2 56.1 Proportion of members 70+ years old (%) 3.6 3.4 2.6 3.1 6.2 6.2 7.1 6.5 Labor force (ages 18–65) Female labor force participation (%) 32.8 38.2 60.7 46.4 37.1 42.5 63.0 49.8 Male labor force participation (%) 91.1 91.1 92.1 91.5 92.3 91.0 89.1 90.3 Unemployment rate (%) 4.6 5.2 3.2 5.1 4.6 4.8 2.6 3.9 Female 6.4 6.9 3.6 5.3 6.9 6.5 2.9 4.9 Male 3.9 4.4 2.9 3.8 3.6 3.8 2.4 3.3 Source: World Bank estimates based on SEDLAC (CEDLAS and the World Bank). Poverty status based on official poverty lines. Outcomes of the Poor Have Improved between 2003 and 2013 125 Appendix D Labor Force Participation Correlates, 2013 TABLE D.1  Labor Force Participation Correlates, 2013 Rural Urban Women Men Women Men Dummy of remittances (1 = receives) −0.0875*** −0.0688*** −0.119*** −0.0198 (0.0264) (0.0196) (0.0216) (0.0165) Amount of government transfers per capita −0.00251 −0.00193 0.000615 −0.00147 (0.00188) (0.00287) (0.000473) (0.00136) Homicide rate of the department −3.81e-05 −0.000368* −0.000558* 0.000132 (0.000494) (0.000214) (0.000327) (0.000202) Another member of HH is working −0.111*** −0.0206*** −0.0431** −0.00403 (0.0305) (0.00764) (0.0204) (0.0105) Primary & less than secondary 0.0899*** 0.0162** 0.0643*** 0.0260* (0.0199) (0.00781) (0.0207) (0.0138) Secondary and more 0.303*** 0.0102 0.195*** 0.0150 (0.0360) (0.0200) (0.0217) (0.0158) Marital status (1 = married) −0.178*** 0.0788*** −0.139*** 0.115*** (0.0202) (0.0133) (0.0159) (0.0139) Number of children −0.0106** 0.00538** −0.0140** −0.000453 (0.00539) (0.00234) (0.00587) (0.00355) Age 0.0482*** 0.00103 0.0553*** 0.0235*** (0.00641) (0.00295) (0.00558) (0.00411) Age squared −0.0005*** −0.0005 −0.0006*** −0.0003*** (7.39e-05) (3.44e-05) (6.42e-05) (4.86e-05) Constant −0.423*** 0.922*** −0.414*** 0.428*** (0.139) (0.0583) (0.122) (0.0868) Observations 2,960 2,607 3,922 2,977 R-squared 0.087 0.053 0.089 0.078 Source: World Bank estimates using SEDLAC (CEDLAS and the World Bank) and EPHPM. Regressions are linear probability models estimated for individuals aged 25–65 by gender and area (rural/urban). All regressions control for region-fixed effects. Homicides rates are not available for 2003. Note: Robust standard errors in parentheses. ***p<0.01, **p<0.05, *p<0.1. Labor Force Participation Correlates, 2013 127 Appendix E Emerging Research Area: What Has Been Affecting Low Returns to Investment in Honduras? Supported by strong inflow of foreign direct are lower than in other comparable groups. Over investments (FDIs), Honduras investment ratio the 1990s, returns to factor investments have to gross domestic product (GDP) has been con- gradually deteriorated (figure E.3) and have sistently high by regional standards. From 1990 to remained below the average return for Central 2014, investment as a share of GDP averaged America and other countries.3 Evidence suggests 23.5  percent, higher than the LAC, OECD and that high misallocation of capital among sectors, World average (22.2, 21.7 and 22.6, respectively). high costs of doing business, low value-added The growth in investment has been driven by the industrial activity, unsophisticated value chains private sector, while public investment has with access to international markets (with some shrunk. FDI inflows played a significant role in exceptions i.e. textiles, automotive parts, among expanding investment opportunities, especially few others), inefficient public investment and reg- since 2000s, driven by large investment in tele- ulatory structures, and limited investment spill- communication infrastructure and maquila overs on the economy may be eroding the possible sector. Both telecommunications and maquila ­ growth impact from Honduras’ high levels of sectors accounted for 53 percent of the total investment. FDI  between 2001 and 2013, a total of almost A large share of private investment in residen- US$5 ­ billion in 13 years.1 As a result, the share of tial construction might be a sign of possible capital FDI in investment went up from 6 percent in the misallocation. Within the private sector, residen- 1990–99 to 22 percent in 2000–13 (figure E.1). tial construction represents around 25 percent of The high levels of investment have not trans- the total investment, of which 20 percent is self- lated into high rates of economic growth. Over construction (figure E.4). The importance of resi- the past two decades, investment as a share of dential construction in Honduras stands out as GDP has averaged 25.5 percent, compared with compared to other benchmark countries and may real output growth averaging only 3.6 percent per explain the higher ratio of investment in GDP. In year (figure E.2).2 In contrast, during the same addition, this type of investment exhibits lower period, other lower middle income countries had returns to investment relative to commercial or average rates of investment of 23.1 percent of industrial construction as well as more capital GDP with an average growth rate of 5.1 percent intensive sectors. When purchases of machinery per year. In other words, for each unit invested in and equipment increased in 2000–13, the decline Honduras, the growth generated has been lower in the return to capital leveled-off, indicating than in peer economies. This represents a high that the low returns to capital might be associated investment/low growth paradox. with  capital misallocation towards residential Inefficiencies in the sectoral allocation of construction. investment and the high costs of investment could Adjusting levels of investment by purchasing be behind the low returns to capital. Honduras has power parity (PPP), Honduras’ investment share registered high levels of investment and large FDI in GDP decreases, indicating that investing in inflows despite the fact that total returns to capital the country may be costly. Although Honduras Emerging Research Area: What Has Been Affecting Low Returns to Investment in Honduras? 129 FIGURE E.1  Honduras’ FDI Has Grown Significantly Since 2000 (Investment-to-GDP ratio) 40 35 30 25 20 15 10 5 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 FDI/GDP Domestic investment/GDP Source: UNCTAD, World Economic Outlook, World Bank estimates. FIGURE E.2  Honduras’ Investment-to-GDP Ratio Has Been Higher Than That of Its Regional Peers (Investment-to-GDP-ratio) 30.0 25.5 25.0 24.1 21.8 22.1 22.3 22.0 23.0 23.1 21.1 21.1 20.4 20.5 20.0 19.0 18.7 Percentage 15.0 10.0 5.0 0 s a co le al be nd ld l ra ic na in idd ur or e er du rib a a an tio m ct W m m n Ca ic ra ru lA Ho er e er pi St w ra th Am As Lo nt Ce tin La 1990–2000 2001–14 Source: World Economic Outlook, World Bank estimates. 130 Emerging Research Area: What Has Been Affecting Low Returns to Investment in Honduras? FIGURE E.3  Returns to Capital Have Been Consistently Lower in the Last Four Decades (Average rate of return to capital) 30 25 20 15 10 1970 1975 1980 1985 1990 1995 2000 2005 2010 Aspirational peers Central America Structural peers Honduras Source: World Development Indicators, World Bank estimates. FIGURE E.4  Investment in Construction Is investment levels are still higher than in other Highly Concentrated in Residential Investment comparable countries, focusing on relative price (Construction, by sector, 2008–13) of investment suggests that Honduras could improve investment quality and its spillovers not only by reducing barriers to investment (business 11.3 climate constraints), but also by reducing the rel- 2.8 ative price of investment (see Hsieh and Klenow 2007). Why is it costly to invest in Honduras? As elaborated in chapter 3 under “Challenges to 20.7 Competitiveness in Honduras,” high costs of 65.2 investment in Honduras are associated with issues of low human capital and labor costs, infra- structure, access to finance, ease of doing busi- ness, security, and macroeconomic and political instability, all of which impose additional costs to firms operating in the country. For instance, the lack of a qualified labor force and the relatively Housing Commerce expensive wages, as well as high costs of energy in Industries Services industries such as maquila partly explain the Source: Honduran authorities, World Bank estimates. lower investment returns in these sectors. Emerging Research Area: What Has Been Affecting Low Returns to Investment in Honduras? 131 Notes 1. FDI and long term growth are usually positively growth, up from only 3 percent in the 1980s, and correlated. There is micro level evidence pointing about 26 percent in the 1970s. More recently, to positive externalities emanating from foreign there has been a return towards consumption owned companies to local industries in host coun- as the primary driver of growth, with remit- tries. Carkovic and Levine (2005) have shown that tances playing an important role supporting FDI does not exhibit a strong independent influ- consumption. ence on economic growth. 3. This analysis is confirmed by Honduras’ relatively 2. Historically sources of economic growth have high ICOR (Incremental Capital-Output Ratio), shifted between consumption-led and invest- which is an index that measures the effectiveness ment-led. Prior to the 1990s, growth was mostly of investment: the higher the ICOR, the lower the led by consumption. At the beginning of the productivity of investment. This analysis is also 1990s through to 2009, there was a market shift linked to the evidence of low productivity levels towards investment. Indeed, over the 1990s and in Honduras, which are confirmed through other the 2000–08 period, investment growth contrib- studies, including a recent IMF working paper uted on average 47 percent of observed GDP (see Sosa et al. 2013). 132 Emerging Research Area: What Has Been Affecting Low Returns to Investment in Honduras? Appendix F Maps of Access to Services, 2013 MAP F.1  Percentage of Households with MAP F.3  Percentage of Children Aged 6–14 Access to Electricity Networks in Honduras, Years Not Attending School in Honduras, 2013 2013 Not attending school (6–14) 5.5–11.8% Electricity 11.9–16.4% 1.9–16.4% 16.5–21.4% 16.5–28.8% 21.5–26.9% 28.9–44.6% 27.0–45.3% 44.7–65.4% 65.5–92.1% Source: World Bank estimates based on tabulations from the XVII Population and VI Housing Census (2013), provided by the Honduran authorities. MAP F.2  Percentage of Households without Access to Piped Water in Honduras, 2013 Water 1.9–12.2% 12.3–22.1% 22.2–35.9% 36.0–59.5% 59.6–98.8% Maps of Access to Services, 2013 133 Appendix G Gender Gap Regressions, 2003–13 TABLE G.1  Gender Gap Regressions, 2003–13 2003 2013 (1) (2) (3) (1) (2) (3) Male −0.105*** 0.103*** 0.193*** −0.262*** −0.0371* 0.121*** (0.0132) (0.0118) (0.0129) (0.0241) (0.0222) (0.0244) Years of education 0.0977*** 0.0715*** 0.0972*** 0.0600*** (0.00138) (0.00156) (0.00257) (0.00292) Age 0.0481*** 0.0417*** 0.0370*** 0.0475*** (0.00206) (0.00199) (0.00384) (0.00375) Age squared −0.000441*** −0.000407*** −0.000379*** −0.000464*** (2.59e-05) (2.44e-05) (4.63e-05) (4.46e-05) Urban setting 0.112*** 0.0420*** 0.210*** −0.0362 (0.0143) (0.0149) (0.0275) (0.0265) Formal sector −0.355*** −0.290*** (0.0150) (0.0278) Total hours worked −0.0147*** −0.0164*** (0.000338) (0.000584) Constant 2.724*** 1.054*** 2.483*** 2.653*** 1.157*** 1.578*** (0.0105) (0.0406) (0.0558) (0.0177) (0.0819) (0.108) Regional indicators ¸ ¸ ¸ ¸ ¸ ¸ Type of employment ¸ ¸ ¸ ¸ ¸ ¸ Sector of activity (1 digit ISIC) ¸ ¸ ¸ ¸ ¸ ¸ Observations 29,166 28,720 27,714 10,915 10,870 10,588 R-squared 0.002 0.266 0.381 0.010 0.209 0.350 Source: Own calculations using SEDLAC (CEDLAS and the World Bank). Note: The dependent variable is the log of real wage per hour. Column (1) controls for gender. Column (2) controls for gender, years of schooling, age, age-squared, urban setting and region. Column (3) controls for the previous variables plus type of employment (employer, salaried workers and self-employees), formality, total hours worked per week, and industry of employment. ***p<0.01, **p<0.05, *p<0.1. Gender Gap Regressions, 2003–13 135 Appendix H Minimum Wage FIGURE H.1  Honduran Minimum Salaries Were Already High before the 2009 Increase (Minimum salaries as a share of GDP per capita 2011 PPP, 1997–2013) 700 16 MW as a % of GDP per capita (2011 PPP US$) 600 14 Minimum salary (2011 PPP US$) 12 500 10 400 8 300 6 200 4 100 2 0 0 98 99 00 04 08 09 10 12 13 97 01 02 03 05 06 11 07 20 20 20 20 20 19 19 20 20 19 20 20 20 20 20 20 20 MW (2011 PPP US$) as % of GDP per capita Source: World Bank staff tabulations using Honduran Government data for minimum salary and the World Development Indicators for GDP per capita. Note: The minimum salary is calculated as an unweighted average of minimum salaries across sectors and firm sizes. FIGURE H.2  Minimum Salaries for Agricultural Workers Have Fallen Behind (Minimum salary for large firms by sector, 2003 and 2013) 8,000 6,000 Current Lempiras 4,000 2,000 0 re n nt , s s s e g g ra ce io / ce la tie nc io in in at rt tu s ui au er ct vi in ur na ns ic po ili ul aq m er ru M Ut t Fi ric un ns ac m M rs t ns m ra Ag Co uf he T st Co an Ot re M m Co 2013 2003 Source: World Bank staff tabulations using Honduran Government data. Note: Minimum salaries of large firms were used for this analysis. Sectors with the same minimum salary in 2013 are connected by lines. Minimum Wage 137 Appendix I Gender Labor Market Indicators, 2003–13 TABLE I.1  Gender Labor Market Indicators, by Type of Employment 2003 2013 Mean hourly Median hourly Share of Mean hourly Median hourly Share of wage wage employment (%) wage wage employment (%) Overall Male All 2.34 1.26 83.5 2.23 1.30 76.6 Female All 2.37 1.36 93.5 2.48 1.46 86.8 Gender gap All −0.01 −0.07 −0.1 −0.10 −0.11 −0.1 Type of employment Male Other 4.81 2.18 8.7 3.69 1.17 11.6 Public sector 4.63 3.24 3.3 4.53 3.37 2.8 Self-employed 2.13 1.10 19.7 1.65 0.84 18.9 Waged in large firm 2.31 1.58 15.9 2.50 2.07 13.7 Waged in small firm 1.09 0.83 17.1 1.31 0.98 16.1 Female Other 5.51 2.46 1 4.60 1.83 2.4 Public sector 4.53 3.65 4 4.71 3.87 3.8 Self-employed 2.18 1.11 15 2.08 1.05 17.1 Waged in large firm 2.29 1.59 9 2.60 2.20 7.7 Waged in small firm 0.91 0.59 6 1.30 0.95 6.0 Gender gap Other −0.1 −0.1 0.1 −0.2 −0.4 0.1 Public sector 0.0 −0.1 0.0 0.0 −0.1 0.0 Self-employed 0.0 0.0 0.0 −0.2 −0.2 0.0 Waged in large firm 0.0 0.0 0.1 0.0 −0.1 0.1 Waged in small firm 0.2 0.4 0.1 0.0 0.0 0.1 Source: World Bank estimates using SEDLAC (CEDLAS and the World Bank) and EPHPM. Note: Large firms are defined as those employing more than five workers. Gender Labor Market Indicators, 2003–13 139 TABLE I.2  Gender Labor Market Indicators, by Type of Sector 2003 2008 2013 Mean Median Share of Mean Median Share of Mean Median Share of hourly hourly employment hourly hourly employment hourly hourly employment wage wage (%) wage wage (%) wage wage (%) Type of sector Male Construction & utilities 2.31 1.50 9.7 2.80 1.71 10.8 2.24 1.52 9.3 Domestic services 1.03 0.90 0.3 1.78 1.20 0.4 1.60 1.36 0.4 Industry 2.16 1.55 9.1 2.83 1.93 7.4 2.32 1.82 6.3 Primary 1.61 0.81 29.5 1.88 0.81 28.2 1.55 0.73 29.9 Commerce 3.41 1.81 9.7 3.07 1.83 9.1 2.73 1.83 10.1 Services 4.07 2.48 6.6 4.52 2.75 7.5 4.02 2.49 6.8 Female Construction & utilities 4.02 2.58 0.6 4.67 2.31 0.5 3.41 2.66 0.6 Domestic services 0.64 0.48 3.2 1.07 0.90 3.3 1.17 0.84 3.1 Industry 1.69 1.32 9.1 2.14 1.54 7.8 1.80 1.38 6.8 Primary 2.15 0.91 2.5 2.71 0.88 3.5 3.64 0.96 3.5 Commerce 2.62 1.36 11.7 2.05 1.39 12.2 2.07 1.33 14.3 Services 3.47 2.46 7.9 4.25 2.89 9.4 3.56 2.64 8.8 Gender gap Construction & utilities −0.4 −0.4 0.1 −0.4 −0.3 0.1 −0.3 −0.43 0.1 Domestic services 0.6 0.9 0.0 0.7 0.3 0.0 0.4 0.61 0.0 Industry 0.3 0.2 0.0 0.3 0.2 0.0 0.3 0.31 0.0 Primary −0.2 −0.1 0.3 −0.3 −0.1 0.2 −0.6 −0.24 0.3 Commerce 0.3 0.3 0.0 0.5 0.3 0.0 0.3 0.38 0.0 Services 0.2 0.0 0.0 0.1 0.0 0.0 0.1 −0.06 0.0 Source: World Bank estimates using SEDLAC (CEDLAS and the World Bank) and EPHPM. TABLE I.3  Gender Labor Market Indicators, by Type of Category 2008 2013 Mean hourly Median hourly Share of Mean hourly Median hourly Share of wage wage employment (%) wage wage employment (%) Type of category Male Formal 3.26 2.25 55.3 3.27 2.41 53.1 Informal 2.57 1.27 65.9 2.02 1.05 63.6 Female Formal 3.28 2.25 44.7 3.55 2.74 46.9 Informal 2.48 1.28 34.1 2.13 1.11 36.4 Gender gap Formal −0.01 0.00 0.1 −0.1 −0.1 0.1 Informal 0.04 −0.01 0.3 0.0 0.0 0.3 Source: World Bank estimates using SEDLAC (CEDLAS and the World Bank) and EPHPM. 140 Gender Labor Market Indicators, 2003–13 Appendix J Employment, 2003–13 TABLE J.1  Employment Levels, by Type, TABLE J.2  Share of Self-Employed, by Sector Sector, and Category and Skill Level 2003 2013 Sector Skill level 2003 2008 2013 Type of employment (in % of total) Commerce Unskilled 5.9 4.6 5.0 Self employed 34.7 35.9 Low-skilled 4.4 4.3 5.7 Waged in large firm 25.2 21.5 Skilled 1.3 1.3 1.7 Waged in public sector 7.1 6.5 All self-employed 11.7 10.2 12.4 Waged in small firm 22.7 22.1 Construction Unskilled 1.1 0.8 0.6 & utilities Others 10.3 14.1 Low-skilled 1.2 1.4 1.5 Type of sector (in % of total) Skilled 0.3 0.3 0.4 Construction & utilities 10.3 9.9 All self-employed 2.7 2.5 2.4 Industry 18.1 13.1 Industry Unskilled 3.4 2.4 2.6 Primary 32.0 33.5 Low-skilled 2.2 1.9 2.2 Retail 21.5 24.4 Skilled 0.3 0.4 0.5 Services 14.5 15.6 All self-employed 5.9 4.6 5.4 Domestic services 3.5 3.5 Primary Unskilled 10.2 8.3 9.4 Type of category (in % of total) Low-skilled 2.5 2.4 4.1 Formal 17.4 Skilled 0.1 0.1 0.2 Informal 82.6 All self-employed 12.8 10.7 13.7 Source: World Bank estimates using SEDLAC (CEDLAS and the Services Unskilled 1.8 1.4 1.6 World Bank) and EPHPM. (incl. Low-skilled 0.8 1.1 1.7 Note: Formality is defined as workers that contribute to the social domestic) security system; the question for social security starts in 2005, thus Skilled 0.3 0.4 0.6 no data is presented for 2003. Wage refers to hourly labor income (2005 PPP dollars). All self-employed 3.0 3.0 3.8 All Unskilled 22.5 17.5 19.1 Low-skilled 11.3 11.0 15.2 Skilled 2.3 2.5 3.4 All self-employed 36.0 30.9 37.7 Source: World Bank estimates using SEDLAC (CEDLAS and the World Bank) and EPHPM. Employment, 2003–13 141 Appendix K Wages, by Skill Level, 2003–13 TABLE K.1  Wages, by Skill Level and Type of Employment 2003 2013 Mean hourly Median hourly Mean hourly Median hourly wage wage wage wage Overall Unskilled All 1.59 0.93 1.55 0.90 Low-skilled All 2.06 1.32 2.15 1.33 Skilled All 4.90 3.22 3.89 2.57 Type of employment Unskilled Public sector 1.72 1.44 2.26 1.83 Self-employed 1.67 0.90 1.45 0.77 Waged in large firm 1.39 1.22 1.77 1.54 Waged in small firm 0.91 0.71 1.16 0.90 Low-skilled Public sector 2.43 2.07 2.74 2.56 Self-employed 2.58 1.42 2.10 1.09 Waged in large firm 1.73 1.48 2.07 1.87 Waged in small firm 1.04 0.81 1.31 1.00 Skilled Public sector 5.54 4.32 5.34 4.39 Self-employed 4.16 2.36 2.66 1.46 Waged in large firm 4.04 2.72 3.32 2.57 Waged in small firm 2.59 1.63 1.87 1.46 Source: World Bank estimates using SEDLAC (CEDLAS and the World Bank) and EPHPM. Note: Employers and unpaid family workers are excluded from this table. Large firms are defined as those employing more than five workers. Wages, by Skill Level, 2003–13 143 TABLE K.2  Wages, by Skill Level and Type of Sector and Category 2003 2013 Mean hourly wage Median hourly wage Mean hourly wage Median hourly wage Type of sector Unskilled Construction & utilities 1.73 1.26 1.85 1.28 Domestic services 0.65 0.47 0.98 0.82 Industry 1.39 1.06 1.60 1.12 Primary 1.45 0.78 1.35 0.70 Retail 2.31 1.30 1.92 1.17 Services 1.59 1.07 1.96 1.40 Low-skilled Construction & utilities 2.14 1.55 2.03 1.48 Domestic services 0.66 0.53 1.33 0.93 Industry 1.79 1.45 1.88 1.63 Primary 1.77 0.92 2.18 0.80 Retail 2.82 1.48 2.23 1.46 Services 2.21 1.63 2.81 1.95 Skilled Construction & utilities 5.20 3.22 3.75 2.44 Domestic services 1.35 1.04 1.27 0.73 Industry 3.59 2.36 3.19 2.16 Primary 7.69 2.81 3.70 1.64 Retail 4.57 2.36 3.02 2.13 Services 5.30 3.91 4.80 3.66 Type of category Unskilled Formal     1.94 1.76 Informal     1.53 0.86 Low-skilled Formal     2.31 2.13 Informal     2.12 1.16 Skilled Formal     4.23 3.16 Informal     3.52 1.91 Source: World Bank estimates using SEDLAC (CEDLAS and the World Bank) and EPHPM. Note: Formality is defined as workers that contribute to the social security system; the question for social security starts in 2005, thus no data is presented for 2003. Wage refers to hourly total labor income (2005 PPP dollars). Employers and unpaid family workers are excluded from this table. 144 Wages, by Skill Level, 2003–13 Appendix L Labor Market Indicators for Agriculture, 2003–13 TABLE L.1  Agricultural Wages, by Skill Level TABLE L.2  Share of Employment in and Type of Employment Agriculture, by Skill Level 2003 2013 2003 2008 2013 Mean Median Mean Median Unskilled 71.34 65.38 56.82 hourly hourly hourly hourly wage wage wage wage Low skilled 26.98 32.24 39.81 Unskilled Skilled 1.68 2.37 3.37 Employer 3.56 1.23 2.12 0.65 Source: World Bank estimates using SEDLAC (CEDLAS and the World Bank) and EPHPM. Salaried worker 0.93 0.79 1.24 0.95 Self-employed 1.28 0.67 0.98 0.50 Low skilled Employer 3.99 1.62 4.29 0.75 Salaried worker 1.07 0.89 1.22 1.01 Self-employed 1.66 0.78 1.82 0.47 Skilled Employer 15.29 5.07 5.29 1.80 Salaried worker 3.21 2.27 2.80 1.68 Self-employed 2.26 0.88 2.90 0.31 Source: World Bank estimates using SEDLAC (CEDLAS and the World Bank) and EPHPM. Labor Market Indicators for Agriculture, 2003–13 145 Appendix M Wages and Employment, by Formality Status TABLE M.1  Wages, by Type of Category, 2008–13 2008 2013 Formal Informal Formal Informal Mean Median Mean Median Mean Median Mean Median All 3.27 2.25 2.54 1.28 3.40 2.53 2.06 1.08 Gender Female 3.28 2.25 2.48 1.28 3.55 2.74 2.13 1.11 Male 3.26 2.25 2.57 1.27 3.27 2.41 2.02 1.05 Region Rural 2.97 2.21 1.94 1.00 2.88 2.28 1.76 0.89 Urban 3.35 2.28 3.24 1.60 3.53 2.57 2.45 1.37 Type Employer 7.66 6.02 4.40 1.84 8.00 6.81 3.66 1.22 Salaried worker 3.23 2.24 2.22 1.29 3.35 2.53 1.57 1.15 Self-employed 3.26 1.60 2.07 1.09 4.54 2.25 1.94 0.97 Industry Hotels and restaurants 2.29 1.75 2.33 1.56 2.59 2.41 2.98 1.40 Mining and quarrying 3.25 1.73 1.96 1.48 0.47 0.47 1.33 0.81 Public administration 4.60 3.28 4.14 2.75 3.87 3.11 2.96 2.06 Transport, storage and communications 3.37 2.57 4.20 1.83 3.37 2.56 2.15 1.63 Activities of private households as employers 1.67 1.48 1.13 0.92 1.71 1.75 1.21 0.85 Agriculture, hunting and forestry 2.39 1.85 1.95 0.77 2.22 1.96 1.75 0.72 Construction 4.02 2.66 2.14 1.58 4.75 3.11 1.99 1.33 Education 5.62 4.81 5.45 4.26 5.04 4.40 3.35 2.34 Electricity, gas and water supply 3.53 2.89 4.22 2.89 3.79 2.93 3.04 2.10 Extraterritorial organizations and bodies 6.80 4.25 13.13 9.63 5.34 5.12 6.27 7.32 Financial intermediation 3.21 2.44 5.20 2.77 3.72 2.93 2.83 2.30 Fishing 1.89 1.60 2.76 1.90 1.95 1.94 1.74 1.25 Health and social work 4.27 2.89 4.85 3.21 5.44 2.99 3.80 2.17 Manufacturing 2.54 1.99 2.47 1.47 2.35 2.00 1.91 1.28 Other community, social and personal service 3.69 2.21 2.90 1.42 3.13 2.38 2.71 1.39 activities Real estate, renting and business activities 2.53 1.61 5.17 1.98 2.60 2.13 4.36 1.95 Wholesale and retail trade 2.69 2.00 2.52 1.51 2.81 2.42 2.14 1.29 Skills Unskilled 1.89 1.60 1.69 0.95 1.94 1.76 1.53 0.86 Low skilled 2.17 1.85 2.37 1.31 2.31 2.13 2.12 1.16 Skilled 4.40 3.21 5.32 3.04 4.23 3.16 3.52 1.91 Source: World Bank estimates using SEDLAC (CEDLAS and the World Bank) and EPHPM. Note: Formality is defined as workers that contribute to the social security system; the question for social security starts in 2005, thus no data is presented for 2003. Wage refers to hourly total labor income (2005 PPP dollars). Unpaid workers are excluded from this table. Wages and Employment, by Formality Status 147 TABLE M.2  Share of Employment, 2008–13 2008 2013 Formal (%) Informal (%) Formal (%) Informal (%) All Gender Female 44.7 34.8 46.4 35.4 Male 55.3 65.2 53.6 64.6 Region Rural 20.1 56.0 20.9 57.2 Urban 79.9 44.0 79.1 42.8 Type Employer 1.0 15.4 0.8 14.2 Salaried worker 98.3 40.6 98.5 35.0 Self-employed 0.5 32.9 0.5 38.2 Not salaried 0.2 11.1 0.1 12.5 Unemployed 0.0 0.0 0.0 0.0 Industry Agriculture, hunting and forestry 2.5 36.9 2.9 38.6 Fishing 1.0 0.4 1.2 0.7 Mining and quarrying 0.1 0.3 0.0 0.3 Manufacturing 33.8 11.3 23.4 10.9 Electricity, gas and water supply 1.2 0.2 2.0 0.2 Construction 2.0 8.4 1.6 6.6 Wholesale and retail trade 15.1 18.2 18.1 21.2 Hotels and restaurants 3.7 3.5 3.1 4.0 Transport, storage and communications 3.8 3.8 4.7 3.4 Financial intermediation 4.6 0.5 5.2 0.2 Real estate, renting and business activities 5.1 2.0 4.7 1.7 Public administration 8.9 1.5 9.0 0.7 Education 11.3 3.1 16.2 1.3 Health and social work 4.4 1.4 5.9 1.0 Other community, social and personal service activities 1.8 4.0 1.5 5.1 Activities of private households as employers 0.5 4.3 0.5 4.2 Extraterritorial organizations and bodies 0.2 0.0 0.1 0.0 Source: World Bank estimates using SEDLAC (CEDLAS and the World Bank) and EPHPM. 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