Economic Development in Honduras: Banana Republic Legacy

Introduction

In many Latin American countries such as Honduras, the historical emphasis placed on agriculture as a money industry for export purposes has resulted in the term "banana republic" (Nash & Jeffrey 1994). Following their independence, most Latin American countries continued to depend on the export of raw materials for their revenue, rather than investing in an economic infrastructure that would provide value-added services. This pattern only further contributed to dependence on foreign states. This is largely what has taken place in the Republic of Honduras as well, and the country continues to suffer from sporadic and inequitable foreign investment, much of which has been illegally diverted into private hands rather than channeled into infrastructure development.

Background and Historical Overview

This paper provides an overview of the Republic of Honduras, an assessment of the contemporary constraints to its economic development, and an analysis of current economic indicators. A summary of the research is provided in the conclusion.

The formation of the modern state of Honduras began in the early 1820s; however, the process did not assume any degree of strength until well after the 1870s, and has languished periodically ever since (Euraque 1996). At that time, Honduras — like other newly independent former colonies — was faced with a wide range of problems following its independence in 1821. According to Euraque, most of these difficulties originated in the colonial period and only intensified between the 1820s and the 1870s. As a result, Honduras emerged from this period with a specific economic structure whose connections to the world economy affected the country's different geographic regions in distinctive ways. "The Honduran North Coast slowly accumulated a social and political prominence intimately associated with the peculiarities of the region's geography and class structure" (Euraque 1). The vast majority of the Honduran population lives a generally isolated existence in the mountainous interior, a fact that may help explain the country's insular policy in relation to Latin and Central American affairs (Euraque 1996).

During its colonial period, Honduras was a province of the Captaincy General of Guatemala, which itself was under the administration of Mexican authorities. Civil wars during the 1820s and 1830s aggravated the collapse, but these problems did not disappear when the country achieved independence. In fact, "the new nation was born in debt" (Euraque 4). For example, in 1821 the Honduran treasury acknowledged outstanding debts totaling over four million pesos, an amount that subsequently increased to about five million after independence from Mexico. According to Euraque, more loans were quickly assumed by Honduras, and in 1825 Central American federal governments contracted for additional loans in British financial markets. "By 1826 the first loan succumbed to a British stock market collapse, and the Central American government was saddled with debts largely for expenses, commissions, government salaries, and cash advances" (Euraque 4). The collapsing regional economies and civil wars did not help in obtaining resources to pay off the debts that had accumulated during the 1860s, almost three decades after Honduras had separated from the Central American Federation (Euraque 1996).

Prior to the 1870s, the Honduran economy could not afford to support a strong, centralized federal state. During this period, three commodities took turns as Honduras's most lucrative exports: (1) cattle, (2) hardwoods, and (3) mineral products — primarily silver and gold (Euraque 1996). The exports of cattle, hardwoods, and mineral products to markets beyond Central America also helped fuel commercial growth in certain areas of the territory during given periods:

Cattle to the Caribbean, especially to Cuba (1850s–80s); hardwoods to the UK via Belize (1840s–70s); and gold (1830s–40s) and particularly silver (1850s–70s) to the UK and the US (Euraque 1996).

Contemporary Constraints to Economic Development

Nevertheless, the fiscal revenues realized from these exports never truly helped Honduras achieve the level of investment in infrastructure needed to avoid the economic stagnation that would continue to characterize the nation throughout the 20th century. Euraque and others point to rampant corruption as being responsible for diverting much of the proceeds from foreign investments into private hands during these early years — a process that continues to constrain economic development today. "The fact is that economic relations connecting Honduras and world markets from the 1830s to the 1870s did not sustain a state capable of producing the 'nation' imagined by elite Hondurans" (Euraque 4).

The history of Honduras since the late 19th and 20th centuries has been characterized by economic turmoil and inordinate distributions of wealth. Since January 1984, the Caribbean Basin Initiative (CBI) has provided American businesses with an attractive investment option through trade and economic assistance in 27 countries in the Caribbean, including Honduras (Befus, Mescon, Mescon & Vozikis 1988). Governmental agencies that continue to be active in the initiative include the International Trade Administration, the Caribbean Agency for International Development, and the Commerce Department's CBI Business Information Center (Befus et al. 1988).

Despite these and other incentives for foreign investment, Honduras remains one of the poorest countries in the Western Hemisphere, characterized by an extraordinarily unequal distribution of income and massive unemployment (Honduras 2004). "Honduras, like its neighbors in the region, is a developing nation whose citizens are presented with innumerable economic and social challenges, a situation that is complicated by rough topography and the occasional violence of tropical weather patterns, including the devastation wreaked by Hurricane Mitch in 1998" (Woodward 2004). According to Lewis (2002), prior to 1998 many countries in Central America were making some progress on social, economic, and political reforms. Then Hurricane Georges hit the Dominican Republic in September 1998, and Hurricane Mitch devastated Nicaragua and Honduras in October 1998. Taken together, these disasters caused almost $10 billion in damage to infrastructure, agriculture, industry, and housing. "In Honduras alone, 35,000 homes were demolished and another 50,000 damaged" (Lewis 24).

To help overcome these constraints to development, the country continues to rely on expanded trade privileges under the Enhanced Caribbean Basin Initiative and on debt relief provided through the Heavily Indebted Poor Countries (HIPC) initiative (Honduras 2004). Although Honduras has achieved the majority of its macroeconomic targets, it has still failed to attain the IMF's goals to liberalize its energy and telecommunications sectors. Further, domestic growth remains inordinately dependent on the economic health of its major trading partner, the United States, concerning commodity prices — particularly coffee — and on reduction of the high crime rate (Honduras 2004).

Conclusion

The research showed that the historic constraints to economic development that have plagued many Latin American countries are even more pronounced in the Republic of Honduras. The country continues to languish in many economic areas, even compared to its neighbors in Latin America, with only its average annual GDP growth and gross capital formation indicators slightly edging out its Latin American counterparts. In the final analysis, it may well be several more decades before Honduras is able to shake off the lingering effects of its former status as a "banana republic" and the impact of natural disasters such as Hurricane Mitch to join the international community as a competitive trade partner.