HONDURAS
Rank: 76 Regional Rank: 19 of 29
T
he economy of Honduras is 60.3 percent free, according to our 2007 assessment, which makes it the world’s 76th freest economy. Its overall score is 0.7 percentage point higher than last year, partially reflecting new methodological detail. Honduras is ranked 19th out of 29 countries in the Americas, and its overall score is slightly lower than the regional average. Honduras receives high scores for fiscal freedom, freedom from government, and financial freedom. Personal and corporate income tax rates are fairly low, and overall tax revenue is just 17 percent of GDP. Government expenditures are similarly moderate, although the level of revenue from state-owned businesses is significant. Honduran financial freedom is boosted by the developing banking sector, which has been instituting stronger rules and better, more transparent oversight. Honduras suffers from weak property rights, freedom from corruption, investment freedom, and business freedom. Starting a business takes about as long as the international average, but closing a business and obtaining commercial licenses are difficult. Public administration is inefficient and widely corrupt. The rule of law is undermined by weak basic security. BACKGROUND: Honduras is one of Central America’s poorest nations, and three-quarters of the population lives below the poverty line. Approximately 34 percent of the labor force works in agriculture, and the estimated unemployment rate is 28 percent. However, peaceful democratic elections have been held regularly since 1981, and an economy that once subsisted on coffee and banana exports has been diversified to include shrimp, melons, tourism, and a growing clothing-assembly industry. The government has met targeted macroeconomic objectives and is reducing debt under World Bank and International Monetary Fund initiatives. Ongoing problems include drug trafficking, youth gangs, and violent crime.
The economy is 60.3% free
100
80
@ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @@ @ @ @ @ @ @@ @@ @ @ @ @ @ @ @ @ @@ @ @@
60
40
Americas Average = 62.3 World Average = 60.6
20
0
1995
2007
QUICK FACTS
Population: 7.0 million GDP (PPP): $20.3 billion 4.6% growth in 2004 3.8% 5-yr. comp. ann. growth $2,876 per capita Unemployment: 28% (2005 estimate) Inflation (CPI): 8.1% FDI (net inflow): $293 million (gross) Official Development Assistance: Multilateral: $363 million Bilateral: $337 million (33% from the U.S.) External Debt: $6.3 billion Exports: $3.1 billion Primarily coffee, shrimp, bananas, gold, palm oil, fruit, lobster, lumber Imports: $4.4 billion Primarily machinery and transport equipment, industrial raw materials, chemical products, fuels, food
How Do We Measure Economic Freedom? See Chapter 3 (page 37) for an explanation of the methodology or visit the Index Web site at heritage.org/index.
203
HONDURAS’S TEN ECONOMIC FREEDOMS
Business Freedom Trade Freedom Fiscal Freedom Fdm fm Government Monetary Freedom Investment Freedom Financial Freedom Property Rights Fdm fm Corruption Labor Freedom 56.6 69.2 87.8 82.9 71.5 50 70 30 26 59.2
0
monetary freedom score to adjust for measures that distort domestic prices.
L L L L L L L L L L
50 100
INVESTMENT FREEDOM — 50%
Honduras welcomes foreign investment, which is generally accorded the same rights as domestic investment. The investment climate is hampered by high levels of crime, a weak judicial system, and high levels of corruption. Government authorization is required for foreign investment in basic health services, telecommunications, electricity, air transport, fishing and hunting, exploration and exploitation of minerals, forestry, agriculture, insurance and financial services, and private education. Foreign ownership of land near the coast or along borders is generally prohibited but may be allowed in some cases with government permission. Both residents and non-residents may hold foreign exchange accounts. Payments and transfers are not restricted, and few capital transactions require approval.
100 = most free,
= world average
BUSINESS FREEDOM — 56.6%
Starting a business takes an average of 44 days, compared to the world average of 48 days. Entrepreneurship should be easier for maximum job creation. Obtaining a business license and closing a business are difficult. The government does not always publish regulations before they enter into force, and obtaining government approval for investment activities commonly involves procedural red tape. The overall freedom to start, operate, and close a business is restricted by the national regulatory environment.
FINANCIAL FREEDOM — 70%
The Honduran financial sector is developing. The banking sector has undergone consolidation through mergers and closures in recent years. The collapse of several banks has led to stronger capital-adequacy rules, clarification of the role of the central bank, and greater oversight. There were 16 private commercial banks (several with foreign ownership), two state-owned banks, and about a dozen other small financial institutions operating in 2005. Foreign investors face few formal restrictions on accessing domestic credit, but informal constraints can be significant. The insurance sector is very small, accounting for only 4 percent of financial sector assets, and consisted of nine domestic and two foreign insurance companies as of October 2004. There are two small stock exchanges.
TRADE FREEDOM — 69.2%
The weighted average tariff rate in Honduras was 5.4 percent in 2004. Non-tariff barriers include differential import taxes, customs corruption, some limitations on market access in the services sector, subsidies, coffee export fees, and restrictive sanitary and phytosanitary rules. Consequently, an additional 20 percent is deducted from Honduras’s trade freedom score to account for these non-tariff barriers.
FISCAL FREEDOM — 87.8%
Honduras has moderate tax rates. Both the top income tax rate and the top corporate tax rate are 30 percent (a 25 percent corporate tax rate plus a 5 percent temporary social contribution tax). Other taxes include a value-added tax (VAT) and a capital gains tax. In the most recent year, overall tax revenue as a percentage of GDP was 17.3 percent.
PROPERTY RIGHTS — 30%
Protection of property is weak. The lack of judicial security, a deteriorating security environment, and endemic corruption pose real risks, making business disputes difficult to resolve. Expropriation of property is possible, but compensation, when awarded, is in 20-year government bonds.
FREEDOM FROM GOVERNMENT — 82.9%
Total government expenditures in Honduras, including consumption and transfer payments, are low. In the most recent year, government spending equaled 24.1 percent of GDP, and the government received 10.8 percent of its total revenues from state-owned enterprises and government ownership of property.
FREEDOM FROM CORRUPTION — 26%
Corruption is perceived as widespread. Honduras ranks 107th out of 158 countries in Transparency International’s Corruption Perceptions Index for 2005.
LABOR FREEDOM — 59.2%
The labor market operates under restrictive employment regulations that impede employment and productivity growth. The non-salary cost of employing a worker can be low, but dismissing a redundant employee is costly. Restrictions on contracting or increasing the number of work hours are rigid.
MONETARY FREEDOM — 71.5%
Inflation in Honduras is relatively high, averaging 8.5 percent between 2003 and 2005. Relatively high and unstable prices explain most of the monetary freedom score. The government regulates the price of petroleum products, steel, pharmaceuticals, and services from state-owned utilities and reserves the right to impose price controls across other goods and services as needed. Consequently, an additional 10 percent is deducted from Honduras’s
204
2007 Index of Economic Freedom