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Honduras: Country Economic Memorandum/Poverty Assessment


Honduras FY95 PA

Full Report (15.1Mb PDF)

Poverty remains one of the main problems in Honduras. Over the last two decades, economic growth has often been slower than population growth. Income distribution is highly unequal. Recently, agricultural growth has lessened rural poverty and, with it, nationwide disparities. During the same period, however, urban poverty may have worsened.

Poverty Profile

A low per capita GDP, a high rate of population growth (almost 3 percent per year), and a highly unequal distribution of income determine the existence of high poverty levels in Honduras. In 1992, around 50 percent of households were living in poverty, and 30 percent were in extreme poverty. Most of the poor live in rural areas and are engaged in agricultural activities or in agriculture-related services. Inequality of land tenure is a major determinant of rural poverty. About 7 percent of the poor live in urban areas. Women, especially in rural areas, are a particularly vulnerable group among the poor.

Following two decades of protectionist and interventionist policies that produced large macroeconomic disequilibria, an adjustment and stabilization program was initiated in 1990. The economy reacted with an initial contraction in 1990 after which growth was re-established. Despite an initial increase in poverty levels during the recession of 1990, the number of households under the poverty line decreased substantially once growth was re-established. The proportion of the total population below the poverty line was slightly lower in 1993 than before the adjustment program began.

The rural poor suffered less from the recession and gained more during the period of renewed growth than the urban poor. In 1993, the proportion of the rural population living in poverty was considerably lower than in 1989, while the proportion of the poor in the urban population had increased. Despite these trends, most of the poor continue to live in rural areas.

Incentive and Regulatory Framework

A necessary ingredient for sustained poverty reduction is the deepening of the reforms in agriculture and a reform of the labor markets. Most of the poor are concentrated in agriculture. Agricultural output increased in response to the reforms of the structural adjustment program after over a decade of stagnation. The main underlying cause of the stagnation was the decline in real agricultural prices, which reflected world market price trends, exacerbated by an increasingly overvalued exchange rate and by trade policies biased against agriculture. The exchange rate and trade reforms initiated a five-year recovery in the sector that embraced virtually all product lines, with real agricultural GDP growing by 5 percent per year and earnings from both traditional and non-traditional exports increasing rapidly. The rural poor benefited significantly from this recovery. To achieve and maintain a higher rate of growth in agriculture, remaining distortions in marketing and rural credit must be eliminated. New products and new technologies will have to be adopted, which will require more investment and an effective system of research and extension. To attract new investment, the prevailing insecurity of land tenure must be eliminated. To make growth environmentally sustainable, new natural resource management policies need to be implemented, especially in forestry.

Most labor markets are flexible, which is reflected in the fact that adjustments to economic fluctuations in the labor market occur mainly as a result of changes in incomes and not of changes in the unemployment rate. Rates of unemployment are low and the fluctuations in real wages are very large. However, misguided policies have introduced ineffectual and costly rigidities in segments of the labor markets. Minimum wage policies are generally ineffective, as 40 percent of wage earners have wages lower than the minimum. However, the existing system imposes high transaction costs on firms seeking to circumvent the legislation. Movements of the minimum wage are also not correlated with movements in wages.

Public Expenditures

Public expenditures in the social sectors, at over 9 percent of GDP (including social security), are high relative to income by international standards. This relatively high share of GDP was maintained during the stabilization and reform period. International comparisons of resources allocated to education and health and of the relative efficiency of these efforts show that, controlling for income levels, the proportion of GDP used for public spending in health is close to the international average, and the results in terms of life expectancy are better than average. In education, by contrast, the proportion of GDP spent is higher than the international average, while educational achievement is lower.

In spite of ample coverage of primary education (86 percent), major quality issues remain. Low achievement levels, reflected in high ratios for repetition and dropouts, arise from three main factors: a lack of prioritization in the government's strategy for the sector, insufficient resources for non-salary items in the budget, and lack of technical criteria for hiring or evaluating teachers. In addition to being inefficient, expenditures in education are also inequitable as the poor do not sufficiently benefit from the services. The poorer regions have lower primary coverage and higher student/teacher ratios than the richer regions, current expenditures per student are lower in the poorer areas, and 18 percent of the educational budget is spent on the 3 percent of relatively well-off students enrolled in higher education.

Safety Net

A social investment fund and an income support program were introduced in 1990 to provide a social safety net for the poor. These programs are supported by IDA credits. The social investment fund is designed to generate emergency employment and to build social infrastructure. The income support program's main objective is to deliver subsidies in the form of food coupons to poor primary-school children from female-headed households, low-income children under five, and pregnant and nursing mothers. Expenditures for these social safety net programs were in the order of 1 percent of GDP during 1991 and 1992.

Poverty Strategy

A three-pronged strategy for addressing these issues is required. First, poverty reduction requires that policies to promote growth be sustained and be inclusive of the poor. Distortions that reduce the demand for labor, such as special tariff regimes for capital imports, should be avoided. Self-employed activity, especially in agriculture, should continue to be encouraged through extension, credit, and the elimination of ad hoc restrictions on agricultural exports. The new land tenure policies that eliminate discrimination against the poor and women will be important to stimulate the kind of growth that includes the poor. Second, since a crucial determinant of poverty is the low productivity of the labor force caused partly by the limited access that the poor have to social services, especially education and health, public expenditures in the social sectors need to be more effective and the access of the poor to education, health, and family planning services should be increased. Third, the social safety net created to channel public expenditures and nutritional assistance to the poor should be strengthened and the targeting mechanisms should be improved. A key to more accurate targeting will be the generation of more reliable poverty data.

Monitoring

Despite several attempts, the government has failed to develop a good statistical monitoring system. Annual labor force surveys were carried out between 1989 and 1993, but these suffer of important flaws in the design and do not provide important information for the monitoring of poverty. The government is presently looking for funding and technical assistance to establish a program for monitoring poverty.

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