Honduras^[34]

1 Introduction

Honduras is well endowed with agricultural land, forest and marine resources. Its territory of about 11.2 million hectares is mostly covered by forested mountains. Arable land is estimated at 1.8 million hectares, and pastures extend over 2.5 million hectares (World Bank, 2001). Irrigation is relatively undeveloped, and it is estimated that only 15 percent of the irrigable land has been developed in that form. Honduras is the second country in the region in terms of arable land with respect to its population, at about 0.28 ha per capita. It has productive fishing grounds in two oceans and coastal resources that have made Honduras the second largest exporter of shrimp in Latin America.

The northern coast has very fertile land, with a tropical climate that is well suited for banana, sugar cane, palm oil and tropical fruits. Also, the southern region has a tropical climate, with recurrent drought periods, and is oriented towards the production of sugar cane, sorghum, cantaloupes, cattle, and cultivated shrimp. The central regions have more mountainous lands and temperate weather suitable for the production of coffee, wood, grains and cattle.

Honduras has the potential for a significant and continuous increase in its agricultural growth: (1) it has a variety of microclimates which allow product diversification, especially towards highly demanded fruits and vegetables; (2) it is close to the markets of main developed countries; (3) for all crops, there exist proven production technologies that provide much higher yields than the current national averages; and (4) a considerable amount of land is underutilized in lowyielding activities such as corn under traditional technologies and extensive livestock operations on natural pastures. The greatest potential source of sector growth is the opportunity to shift large areas from low-value crops to high-value crops, a phenomenon that has already occurred for a considerable number of nontraditional export crops.

1.1 Agricultural production

The share of agriculture in current GDP has decreased sharply from 21.6 percent in the late 1980s to 17 percent in the late 1990s. This decline is mainly explained by the negative tendency in world agricultural prices transmitted through the domestic market into low production values and by the impact of Hurricane Mitch on production in the last three years. Lately, the contribution of manufacturing to total GDP has become higher than that of agriculture. When agricultural processing and marketing activities are included, this more broadly defined sector still generates around 40 percent of GDP.

Four lines of production continue to represent around 60 percent of the agricultural production value: coffee (26 percent), beef and dairy products (19 percent), forest products (8 percent) and bananas (7 percent). Banana production had been decreasing since the early 1990s, but it suffered a drastic cut after Hurricane Mitch, which hit the northern coast banana plantations hard. Maize output, together with other basic grains output (sorghum, beans and rice) are currently about 9 percent of the agriculture production value, well below their average share in 1988-1990. Other crops of significance include pineapples, plantains, tobacco, cantaloupes, citrus and potatoes. Cotton used to be important but has disappeared, owing to the combination of declining real world market prices and the high cost of pest control.

Existing information on labour intensity by agricultural activity indicates that, for example, cantaloupe generates more than five times the employment and gross output value per hectare than maize does. Bananas and coffee generate about three times the employment per hectare of maize, and maize about twice that of beef and dairy cattle operations. Shifting into export crops (except livestock) instead of basic grains would mean a significant net gain in employment and income per hectare.

1.2 Agricultural exports and imports

Honduras has succeeded in diversifying its export basket. Currently, agricultural exports generate less than 50 percent of total exports, down from the more than 80 percent share at the end of the 1980s. Main agricultural export products are: coffee (47 percent), shrimps (21 percent), bananas (11 percent), melon (7 percent), lobsters (6 percent) and pineapples (3 percent). However, very promising new lines of exports appeared during the last decade, like cigars, wood furniture, and fresh and processed vegetables.

Agricultural imports continue to be diversified, but their share in total imports has increased substantially. Whereas, in 1988-1990, their share was around 10 percent, now it is up to more than 15 percent. The main food imports are: wheat (9 percent), dairy products (6 percent), rice (5 percent), breakfast cereals (4 percent), maize (4 percent) and poultry (4 percent). The main imported inputs of agricultural origin are raw tobacco (7 percent) for the cigar industry and soybean cake (5 percent) for poultry production.

1.3 Trade policy trends

Honduras began to liberalize its foreign trade in 1990 and to emphasize sustainable export activities as part of its overall development programme after a decade of slow economic growth.^[35] Old development strategies based on importsubstitution policies and government intervention were replaced by a comprehensive economic programme that included: (1) tariff reductions to a 5-20 percent range, elimination of non tariff barriers and import exemptions; (2) liberalization of agricultural trade by removing price controls and guarantees; (3) exchange rate liberalization through the floating of the lempira; (4) improved legal framework to secure property rights; and (5) liberalization of financial markets that eliminated interest rate controls (World Bank, 1994). Compliance with the reform programme was relaxed in 1993, a presidential election year, and this backtracking resulted in a sharp increase in the public deficit and the trade imbalance, accelerated inflation, and foreign exchange controls.

After 1994, macroeconomic performance improved gradually, but the government commitment to trade liberalization faded away. The main macroeconomic indicators showed evident progress: an increase in GDP growth rates, substantial reduction of inflation, growth of international reserves, and stronger public finances.^[36] However, the trade imbalance has continued to grow, real interest rates have increased, and the real exchange rate continues to appreciate steadily. The performance of these variables is explained by the significant capital inflows received after Hurricane Mitch, in the form of increased remittances from Honduran immigrants in the USA and by transfers from donors for the reconstruction efforts. The relative dollar abundance has kept its real price low in terms of domestic currency and has made imports cheaper than otherwise. The Central Bank has been buying part of these abundant dollars and, to counteract its effect on the domestic money supply, has been selling saving certificates in domestic currency putting upward pressure on interest rates in the banking system. These two factors have affected the competitiveness of Honduran exports and import-competing production.

Although there has been no explicit setback in trade legislation, the occasional use of non-tariff barriers to discourage imports of competing agricultural products has created distrust over the free trade environment, hampering trade transactions and investments. However, Honduras continues to be an active member of the Central America Common Market and has approved, and is implementing, the regional decision to reduce further its CET to a range of duties between 1 and 15 percent.

Honduras is a founding member of the WTO and receives the special and differential treatment established for developing countries in the agreement. As a country with less than US$1 000 per capita, it is allowed to continue application of export subsidies, in the terms specified in Annex VII of the Agreement on Subsidies and Countervailing Duties. At the bilateral level, Honduras has negotiated in the last five years, together with some of its regional partners, free trade agreements with Mexico, Dominican Republic and Chile. Honduras is also one of the recipients of unilateral tariff concessions provided by the United States through the CBI. The main beneficiaries of this system are the exporters of coffee, but exporters of bananas, zinc, cigars and wooden furniture are also important beneficiaries of those schemes, although each of these products made up less than 5 percent of the total value of products traded at the end of the first quarter of 2000.^[37]

The above-mentioned accomplishments in the overall economy were obtained in the midst of the impact of Hurricane Mitch in 1998 and heavy rains during the 1999 rainy season, which exacerbated the difficult situation. Although reconstruction occurred at a faster pace than had been anticipated, rebuilding of the country’s infrastructure and productive capacity will require several more years.

2 Experience implementing the WTO agreements

2.1 Tariff concessions

Honduras committed to a general tariff binding level in WTO of 35 percent, with some exceptions for “sensitive” products. These “sensitive” products refer to a few cases in which domestic producers confronted low international prices because of market distortions such as the appearance of low-priced rice exports from Viet Nam, or cheap dark chicken meat parts from the United States. In other cases, it refers to products which are highly subsidized in developed countries, and their international markets are significantly distorted, like sugar and feed grains (maize and sorghum; Table 1).

Most of the bound import tariffs were set at higher levels than their respective applied tariffs at that time. Honduras, as for most other Latin American countries, wanted to maintain greater flexibility for its national policies and to preserve some margin for future negotiations.

In the five years following the UR, Honduras has deepened its tariff reduction programme. Today, applied tariffs in Honduras are even lower with respect to their bound levels than in 1995. This is the result of the CET revision made in 1997 within the framework of the CACM, where a reduction of duties to a range between 1 and 15 percent was approved.

Table 1. Bound and applied tariffs for sensitive products

Source: Data from the Consejo Regional de Cooperación Agrícola (CORECA) y de la Secretaria de Integración Económica Centroamericana (SIECA).

The Honduran import duties schedule is determined by the Central American Custom System (SAC, 1992), where most of the duties assigned to the tariff lines are commonly determined at the regional level. However, there are around ten percent of the tariff lines whose duties are still left to be determined by each of the member countries. The tariffs on those items are not necessarily the same between the member countries. A significant number of these “exceptions” to the Central American CET correspond to products classified in the first 24 chapters of the tariff nomenclature containing agricultural products.

The current average for the whole tariff schedule is about 7.5 percent, with a maximum tariff of 55 percent and a minimum of 1 percent. The average agricultural tariff is 11 percent, greater than the overall average tariff, with peaks for the “sensitive” products (Tables 2 and 3).

Recent debates and studies on agricultural policy options in Honduras have not pointed to the agricultural tariff level as an obstacle or constraint for sector development.^[38]

Table 2. Characteristics of Honduras’ tariff structure, 2000

Source: Boye and Lord (2001).

Table 3. Honduras: Average and range of agricultural import tariffs (percent ad valorem)

Note: CET is the Common External Tariff of the CACM.
Source: Author estimations based on 2002 tariff data from the Central American Economic Integration Secretariat (SIECA).

2.2 Non-tariff barriers

Honduras eliminated quantitative restrictions, minimum import prices, import licenses, and agricultural marketing state monopolies at the beginning of its structural reform programmes. This elimination was not accompanied by a “compensating” rise in import tariffs for products formerly protected by such mechanisms; in other words, there was no tariffication of these past restrictions. Honduras did not consolidate tariff quotas in its agricultural schedule with the WTO. Some mechanisms that remain are as follows.

Import price bands

This system was one of the main mechanisms used for contingent protection of basic staples in Honduras since 1992.^[39] The system was created within the structural reform programmes as a way to allow reduction of tariffs on sensitive products, while maintaining the possibility of increasing them in case of abnormal low international prices. The products included were maize, rice and sorghum, in their different qualities and presentations, excluding seeds.

The main purpose of the price band system was to smooth the impact of wide fluctuations in international prices on the domestic market. The mechanism was designed to avoid short-lived international price movements being transmitted completely to the domestic market. Medium- and long-term international price trends were reflected gradually in the corresponding domestic markets. The floor and ceiling prices of the band were established for maize, rice and sorghum each year before the first main sowing season. These levels resulted from the consideration of the world prices of the commodity during the previous 60 months, discarding the 15 lowest and 15 highest average monthly prices of the series as “abnormal”, and choosing the remaining lowest value as the “floor” and the remaining highest value as the “ceiling” of the price band for the next agricultural commercial year.^[40]

The Honduran Institute for Agricultural Marketing (IHMA) is the administrator of the system and has the responsibility to monitor the evolution of the corresponding prices through the world price series specifically selected as a reference. There is a bi-weekly revision of the tariffs according to the movement of the world price registered in the selected series. If the current world price falls below the floor price, the import tariff is increased in ad valorem terms by a magnitude equal to the percentage difference between both prices. Therefore, all imports of the product entering the country in the following two weeks will pay the same non-discriminatory additional ad valorem duty. Likewise, when international import prices registered in the selected series exceed the price ceiling fixed by the band, tariff reductions are applied to the imports entering in the following month. In any case, the resulting tariffs do not exceed the bound tariffs agreed upon in the WTO.

Nowadays, the system applied by Honduras for the import of maize is a blend of price bands, tariff quota, and “buy national” incentive. Prior to the harvest season, the maize producers and grain processors reach an agreement on the purchase of the national white maize production, and define prices and quantities. The government grants tariff exemptions on the imports of yellow maize to processors in proportion to the acquired quantities of local maize. The rest of the required maize imports are made with the payment of the current tariff derived from the price bands.

IHMA

This marketing agency was completely reformed during the structural adjustment process. It has already privatized half of its grain storage facilities, and its function now is to manage a “strategic grain reserve” for maize and beans, in the form of physical stocks, equivalent to 3 percent of the current annual demand for those grains. Even though the IHMA will have to buy and sell in the domestic grain market to maintain the quality of the reserve, given the relatively small volumes, this function should not affect market prices significantly. Another function of the IHMA is the management of the price band system for maize and sorghum.

Other administrative barriers

As in other trade liberalization processes, in Honduras several more subtle occasional protection mechanisms to confront agricultural imports remain in the hands of the public administration. Of particular importance to exporters in foreign countries attempting to penetrate the local market are health and sanitary regulations and labelling requirements. Sanitary regulations have been applied to imports of poultry, and are considered a barrier by many United States exporters. Labelling and registration of processed foods have also been considered a deterrent to trade. Honduran law requires that all processed food products be labelled in Spanish and registered with the Ministry of Health, which has been reported by both suppliers to the domestic market and by local manufacturers as problematic owing to the lengthy approval process. Phytosanitary measures have also been cited by local businesses as detrimental to new product development and as hindering new export possibilities. In particular, the Ministry of Health was cited as delaying the approval of certification of food and other products, resulting in loss of time and interest in the launching of a new product.

2.3 Application of contingency measures (safeguards, anti-dumping, countervailing duties)

Under the current norms, Honduras has no right to apply the special agricultural safeguard, because it did not make use of the tariffication option open in the negotiations of the Agreement on Agriculture,^[41] and it has not applied any temporary protection mechanisms allowed in other safeguards (Article XIX GATT) or unfair trade remedies (anti-dumping measures or countervailing duties).

In spite of the continuous argumentation concerning unfair trade in the Honduran agricultural market derived from dumping actions or the application of subsidies by enterprises or supplier countries, antidumping or countervailing duties have not been used. Domestic legislation is in place to deal with unfair trade practices, issued within the context of the Common Central American Market and in accordance with the WTO agreements. The limited utilization of this legislation is due to several factors: (1) its complexity; (2) the high cost of the process in relation to the magnitude of the market in dispute; and (3) the limited capacity of the affected organizations or enterprises to provide the required information to justify the opening of an investigation, carrying out the studies, and doing the follow-up the WTO’s rules require.

2.4 Domestic support

Between 1990 and 1992, Honduras made a deep revision of all its agricultural support mechanisms that affected the production costs or volumes of all basic agricultural products, like the price guarantee systems, the sale of subsidized agricultural inputs and loans at preferential interest rates.^[42] These support mechanisms were badly targeted, created undesirable market distortions, and consumed fiscal resources with better alternative uses. In most cases, the end of the market intervention function by governmental institutions was a purely formal event, for in practice these functions had been discontinued because of the lack of budgetary resources in the responsible institutions, as was the case of the IHMA.

At the present time, the assistance provided by Central American governments to their agricultural sectors refers to their support of agricultural research and extension services, SPS services and rural development. Loans at preferential rates have been revived in a limited way, in many cases financed with funds from donor countries. Possibly, the most important support programmes for the sector over the last few years are those instituted as a result of disasters caused by climatic phenomena, like Hurricane Mitch.

Based on this information, it is clear that Honduras is under the de minimis limit allowed for the application of potentially market distorting support measures (Table 4). It seems unlikely that, in the near future, Honduras would be able to build any significant agricultural support system, owing to budgetary restrictions and the poverty reduction commitments for investments in health and education.

Table 4. Honduras: Domestic support measures

Note: All these programmes are implemented by the Ministry of Agriculture.
Source: Secretaria de Industria y Comercio (SIC).

The only support mechanism currently applied in Honduras for agro-industrial activities, and lately to agricultural activities as well, are the very generous incentive mechanisms on investments, based on exemptions for income and property taxes. These mechanisms, which are hard to sustain over time because of their fiscal cost, favour sectors like assembly factories (maquila), tourism, mining and, recently, agriculture.

2.5 Export subsidies

Export subsidies were eliminated at the beginning of the structural reforms in Honduras. The only instrument that could be labelled as a subsidy were the tax rebate certificates, paid on a flat rate over the exported value to non-traditional exports and de-linked from the tax amount effectively incorporated in each export shipment.

Nowadays, agricultural export activities use a temporary import regime (RIT), which is compatible with WTO obligations. The most important export incentive mechanisms are the laws on industrial processing zones (ZIP) and free zones, which provide exporters with import duty, income tax and local tax exemptions. Recently, a law instituting the “agricultural free zone” was approved by Congress, which allows not only free import of supplies and capital goods to those zones, but also the exemption of income and property taxes for enterprises located in such zones. Some instruments of these laws, like the income tax and local tax exemptions, could be labelled as “export subsidies”. However, Honduras is temporarily exempted from the obligation to dismantle export subsidies because it has been included in the list of countries (less than US$1 000 annual income per capita) contained in Annex VII of the Agreement on Subsidies and Countervailing Measures.

Presently, about 510 companies take advantage of the RIT. The companies are mainly agro-industrial, such as those involved in coffee, bananas, wood, cantaloupes, watermelon, pineapple and aquaculture. The number of ZIPs is 21 and has remained relatively unchanged in recent years. However, there has been a high turnover in the number of firms that use these 21 parks to assemble their products for export (mostly garments), apparently because of conflict between local and national laws over tax payment. Also, there are problems with the sales tax legislation. While imports of inputs and machinery enter the “free zones” completely duty-free, the same products are taxed if they are sourced locally. This type of tax penalization discourages the development of backward linkages to domestic industries.^[43]

2.6 SPS agreement

The legal framework for the reform of the sanitary and phytosanitary system in Honduras was set in 1994 through a law that created the National Agricultural Sanitary Service (SENASA). The Decree No. 157-94 includes important institutional changes oriented towards strengthening the normative capacity, decentralizing its services, increasing private sector participation in the implementation of the sanitary regulations and improving the administrative efficiency of the leading public institution. It allows SENASA to certify private sector laboratories and professionals as legal providers of sanitary services. However, implementation of these reforms has proceeded at a slow pace, even though the sector authorities are clear about the importance and priorities in this area. Honduras has neither promulgated nor implemented the good manufacturing practices (GMPs) or the sanitation standard operating procedures (SSOPs), which represent the accepted protocols of food handling and food manufacturing. Although the SENASA technical group is very familiar with the appropriate GMPs and SSOPs, these practices are not formal regulations in the country. SENASA has limited technical and budgetary capacity to conduct inspections of farms and food-processing plants on a regular basis.

2.7 TRIPS agreement

Honduras has advanced significantly in the process to comply with the WTO Agreement on TRIPS. In December 1999, Congress adopted reforms on copyright legislation, adding more than 20 different criminal offences related to copyright infringement and establishing penalties for offenders. With respect to patents and trademarks, Honduras has signed the Paris Convention for the Protection of Industrial Property and has enacted a 1999 Law on Industrial Property to provide improved protection for both trademarks and patents. However, WTO provisions related to plant variety protection are still awaiting legislative action.

2.8 Other issues

Honduras has taken two important complaints to the WTO dispute-settlement mechanism. The first refers to the EU banana policy, which operates through discriminatory import quotas in favour of ACP countries and which penalizes other developing countries like Honduras. The first request for consultations on the issue of the regime for importation, sale and distribution of bananas in the European Community was presented in October 1995, together with Guatemala, Mexico and the United States. In other stages of the process, the complaint was seconded by Ecuador (main exporter) and Panama. Despite repeated WTO rulings against it, the EU banana policy remains. There exist proven alternatives to deliver the same amount of subsidies to the beneficiary ACP countries without the harmful effects of the current policy.^[44]

The second issue was about the discriminatory surcharge of 35 percent ad valorem applied by Nicaragua to all imports coming from Honduras. This surcharge was a retaliatory action taken by the Nicaraguan government against the signing by Honduras and Colombia of a reciprocal agreement recognizing their respective territorial boundaries. This agreement is considered by the government of Nicaragua as being harmful to its legitimate interests. This claim was presented in June 2000, and the surcharge is still there.

3 Review of food and agricultural trade

3.1 Changes after the reform: Agricultural trade

After the reforms of the 1990s, Honduran total imports increased tremendously. They began to grow at almost 12 percent per year during 1990-1995 and increased further to more than 12 percent in the next five years. Imports of agricultural products increased at a faster pace than total imports: They grew at almost 16 percent in the first half of the 1990s and more than 17 percent during the second half (Table 5).^[45] Much of the increase was in primary food imports like rice and poultry; some inputs for fast growing activities like raw tobacco and soybean cake; and a diversity of processed products (breakfast cereals, fruit juices, sugar confectionary, tomato paste). The response of imports to the liberalization of trade and exchange rate controls has been fast, significant and spread across a wide variety of products.

Table 5. Honduras trade growth 1985-2000 (percent average annual growth)

Source: Indicadores Básicos sobre el Desempeño Agropecuario 1971-2000 (INE/Zamorano); FAO Statistical Data Base (FAOSTAT).

Table 6. Honduras: Volume of main exports (thousand tonnes)

Source: Elaborated by author based on data from “Indicadores Básicos de Desempeño Agropecuario 1971-2000” (INE/Zamorano), 2001.

In the same periods, the growth of Honduran exports lagged well behind its import upsurge, increasing its foreign trade imbalance. During 1990-1995, total exports grew at a notable rate of 8.0 percent and, later in the decade, at a diminished rate of 1.6 percent. Agricultural exports were less dynamic than total exports, growing at 2.8 percent during 1990-1995 and diminishing at an average annual rate of -6 percent thereafter. However, agricultural non-traditional exports (cantaloupes, shrimps, lobsters, tobacco, vegetables and fish) continue to have great dynamism (see Tables 5 and 6).

These results are heavily influenced by the following factors:

• Reduced production and export capacity as a result of Hurricane Mitch in October 1998, which destroyed over 70 percent of the country’s road network, completely ruined or severely damaged 90 bridges, and virtually destroyed the entire banana plantations. It also created import necessities to supplement domestic food availability and materials and equipment for the reconstruction.

• Deep world price decline for main Honduran exports and importcompeting products, which (1) reduces export market opportunities and profitability for main crops (e.g. coffee) and (2) transmitted into the domestic market promotes substitution of domestic agricultural products by cheaper imports (e.g. rice).

• Serious resource and institutional constraints to enter new profitable activities made possible by agricultural market globalization (low supply elasticity). Changing crop patterns to respond to new market opportunities generated by trade requires technical abilities, financial resources, managerial capacities and information to identify and develop the investment opportunities, a process which, even with adequate resources and functioning markets, will take time.

• Constraints resulting from macroeconomic policies which have adversely affected the competitiveness of the Honduran agricultural sector arising from monetary and fiscal policy, by promoting relatively low prices for its products and high production costs.

3.2 Changes after liberalization: Agricultural production

In general, the Honduran economy has performed satisfactorily after its macroeconomic adjustment process and structural reform initiated in the early 1990s and implemented partially throughout the last decade. On a macroeconomic level, the results show an evident improvement in GDP growth rates, which reached an average of 3.6 percent after adjustment, with a later decline to 3.0 percent per year. The agricultural sector, too, had a good performance up to the mid-1990s, with growth rates increasing to 3.7 percent, but afterwards, its dynamism was severely weakened by multiple factors, like the coffee crisis and Hurricane Mitch (see Table 7).

Table 7. Honduras GDP growth

Source: Honduras en Cifras, Banco Central de Honduras, 1985-2000.

The aggregated figures do not allow us to detect the influence that adjustment programmes, including the agricultural reform, may have had in the growth of the agriculture and livestock sectors in the Honduran economy. The agricultural sector in Honduras was strongly penalized before the reforms by an overvalued and multiple exchange rate system (lower exchange rates for agricultural exports and imports), discriminatory tariff treatments (relatively low or exempted agricultural tariffs), export taxes (on coffee, bananas) and price controls (protecting consumers). Benefits from some compensating instruments (credit subsidies, input subsidies, guaranteed prices) were concentrated in a few medium to large producers who reaped most of the benefits. Just before the reform, the amounts budgeted to finance these “positive” interventions were insignificant. Given these initial conditions, many of the sector’s producers had something to gain, in terms of higher prices and incomes, from the floating of the exchange rate and elimination of import tariff discrimination and price controls. Only a few producers would have noticed the elimination of the guaranteed prices and input subsidies, and the reduced and better targeted credit subsidies.

As expected, the agricultural export subsector reacted positively to these policy changes with increased production. During 1990-1995, most of the higher growth rates were in productions mainly oriented to export markets like fish products (shrimps, lobsters) with 7.7 percent, oil palm with 7 percent, and coffee and tobacco with around 6 percent each. One important exception to this expansion of export production was banana production, which has been on a decreasing trend since 1985 and has had a negative growth rate of -5.6 percent for the period. The highest growth rate of over 10 percent per year was in chicken production for the domestic market. A drastic reduction in domestic real prices for chicken meat, made possible by economies of scale in production, spurred a doubling in its consumption in a ten year period. It is a phenomenon that has occurred in most parts of Latin America since the 1980s.

Results from detailed studies on the impact of the Honduran reforms on rural income concluded that between 1988 and 1993, the real income of agricultural workers (three-quarters of whom are poor) grew on average by almost 10 percent per year. Small farmers also benefited from the increase in the domestic real prices of their typical product mix, and from the expansion of production. Nonagricultural real income also increased in rural areas, although at a slower pace (Table 8).

Table 8. Rural income by employment category and sector

Source: From “Honduras: Impacto de las Reformas de Políticas sobre el Ingreso de las Familias Pobres del Área Rural”, Informe 14396-HO, World Bank, 29 June 1995.

During the second half of the decade, two external factors affected agricultural sector performance in Honduras. First, the world price for its main export product, coffee, collapsed. Coffee prices dropped from around US$130 per quintal in 1998 to US$86 in 2000, and to US$52 in 2001. Although the coffee harvest has had high yields in recent years, and export volumes were increasing, farmers’ incomes have been significantly lower than in 1995. This income drop affects more than 100 000 small farm families that depend directly on coffee for their livelihood. Another wide sector affected are seasonal workers who earn subsistence wages picking cherries during November to March each year to supplement their own farm incomes.^[46] Second, Hurricane Mitch severely damaged banana plantations and worsened the negative production trend of the second most important income-generating crop in the country. These crises in both of the main Honduran crops have caused real agricultural incomes in 1999 and 2000 to fall below income levels prior to the economic and sectoral reforms (see Table 9).

Table 9. Purchasing power of agricultural GDP (1995 = 100)

Source: Elaborated by the author with data from Honduras en Cifras, Banco Central de Honduras, 1985-2000.

3.3 Macroeconomic variables affecting agricultural trade

The impact of trade liberalization on agriculture cannot be analysed without considering other important components of the economic adjustment programme. The characteristics of programme design and the timing of its implementation are crucial to obtain the expected results. In the case of Honduras, uneven import tariff reductions and elimination of trade restrictions were to be compensated by the real depreciation of the exchange rate, so as to produce a more uniform protective system for import-competing and export products. Under this less discriminatory environment, resources were to move to more profitable activities with higher social value. To facilitate this relocation, existing constraints in factor and product markets had to be removed to promote competition (see Table 10).

Table 10. Nominal and real effective exchange rate (REER)

Note: An increase in the REER index means an appreciation of the domestic currency, a decrease in the REER, a depreciation.

Source: Elaborated by author with data from Banco Central de Honduras, Departamento Regulador de Financiamiento Externo (DERFE).

The persistent appreciation of the Honduran currency (Lempiras) since the mid-1990s has amplified the transmission of low international prices for agricultural products to domestic markets.^[47] The agricultural terms of trade which had improved steadily between 1987 and 1997 by 15 percent deteriorated by more than 30 percent from 1997 to 2000. This appreciation was motivated mainly by the increase in capital inflows because of remittances and donations. Migrants’ remittances grew, especially during the second half of the decade, up to US$450 million, equivalent to almost 10 percent of GDP annually.^[48] International donors contributed with US$310 million per year during 1998-2000, equivalent to 6.6 percent of GDP. An additional source of foreign exchange were short-term capital inflows motivated by the high real interest rates, at a time when US interest rates were relatively low.^[49] The price of the dollar was kept down relative to other prices in the economy, owing to its relatively abundant supply. However, this meant that agricultural exporters received less real income for each unit they sold and that importers had to pay less for their agricultural imports. It is estimated that, from 1995 to 2000, the Lempira appreciated by about 23 percent with respect to the US dollar. However, at the same time, the US dollar was itself appreciating with respect to European currencies and other currencies from nondollar areas. The result of this combined effect is that Honduran producers, through relative variations in the exchange rate, lost competitiveness by more than 23 percent with respect to producers in other continents (see Table 11).

Table 11. Honduras: Real interest rates for loans (percentages)

Note: Rates correspond to last quarter of each year and are weighted averages of all banking systems.

Source: Instituto Nacional de Estadística (INE).

As happened in other Latin American countries, success in inflation control resulted in increased real interest rates. Nominal interest rates, set by the commercial banks, did not fall at the same pace as inflation. Nominal rates were also kept high in the financial market because of the handling of capital inflows by the Central Bank. In order to sterilize increases in money supply, derived from the forced increase in international reserves, the Central Bank issued certificates of deposit, denominated in Lempiras, bearing a market competitive interest rate. The Central Bank action increased the competition to capture deposits in domestic currency, increasing the interest rate. The combination of Hurricane Mitch, high real interest rates and low agricultural prices has produced a considerable financial crisis in the agricultural sector in Honduras. This is one of the main current issues in Honduran agriculture and in the whole economy.

4 Food security impacts

Most food security indicators have improved during the last decade in Honduras. In general, per capita food availability has increased, but its composition has changed away from the traditional products of the Honduran diet (Table 12). Apparent consumption of cereals registered a moderate reduction from the late 1980s to the late 1990s, motivated mainly by a significant reduction in maize supply. However, this reflects only a change in consumption habits during the adjustment decade. The Hondurans have moved from making their own flour and “tortillas” using their domestic production of white maize, to importing a substantial amount of breakfast cereals and processed cereals (6.5 percent of agricultural imports in 1997-99). On the other side, part of the domestic supply of white maize and the increasing imports of yellow maize are feeding the growing chicken industry, whose meat is also having an increasing presence on Honduran household tables. Rice and wheat per capita availabilities have increased, but almost exclusively as a result of imports.

Meat supply per capita grew by more than 55 percent during the decade, sustained almost entirely by domestic production. The increasing acceptance of chicken in families’ daily diet was due to its reduced price. Chicken prices fell by more than 25 percent in real terms during the decade. Per capita availability of milk also expanded significantly by about 30 percent. The Honduran livestock subsector reallocated its resources to increase milk production, given the low world prices for beef. In this case, there was some substitution of imported milk by domestic production, with improved quality and marketing.

The apparent per capita intake of nutrients (energy [kcal]/proteins/fat) has also increased. In terms of energy, food intake has increased by close to 5 percent and, in terms of proteins, by around 9 percent. These improvements have happened despite the severe impact of Hurricane Mitch on domestic food production.

Increased food imports, financed by the rise in foreign transfers, compensated for the reduction in domestic production.

Table 12. Honduras: Food supply per capita (kilograms per capita per year)

Source: Food Balance Sheets, FAOSTAT (2001).

FAO estimates of the prevalence of undernourishment in Honduras show an increase in the absolute number of people undernourished but a decrease with respect to the total population. These numbers, which are less optimistic than the average availability of food and nutrients, are clearly affected by the skewed income distribution in Honduras (Table 13).

Table 13. Honduras: Population and prevalence of undernourishment

Source: FAO, The State of Food Insecurity in the World 2001 (2001).

Data from the World Bank registered Honduras as one of the high-inequality economies in the world, where the lowest 20 percent of the population receives only 1.6 percent of total income, and 61.8 percent of the country’s income is concentrated in the hands of the 20 percent of the population with the highest incomes.^[50]

In terms of access to food, Honduras still has the capacity to finance its food imports requirements. However, the agricultural import bill has increased substantially and now takes around one-third of foreign exchange earnings from merchandise exports (Table 14). Back in the mid-1980s, it was equivalent to around 10-12 percent of export earnings. Another important source of foreign exchange earnings are exports of services, like tourism and “maquila”. These have become increasingly important for Honduras, where the growth of those two activities has been tremendous. Most transactions out of the ZIPs and free zones are service “outsourcing”, where the local factory is selling processing services to foreign firms and not goods. The value added by the “maquila” was estimated at around US$540 million in 1999. Including export of services in the analysis adds force to the argument that Honduras has the capacity to meet its increasing food import requirements.

Table 14. Agricultural import bill respect to export earnings (percentage)

Source: Honduras en Cifras, Central Bank of Honduras.

A note of caution surrounds the huge level of remittances by the thousands of Honduran immigrants, especially those located in the USA, who are currently supporting numerous families in their home country and whose “legal residence status” is dependent on year-to-year political decisions in the host country. A strong enforcement of migration policies causing a partial reversal of this immigrant flow, by deportation, could cause a severe drop in household incomes, especially in the poor population stratum.

Poverty indicators have also shown improvements after trade liberalization and economic reforms. During the first half of the decade, the positive impact was greater in rural than in urban areas. This is consistent with the idea of the reforms correcting the “anti-agriculture” and “anti-rural” bias implicit in the old macroeconomic and sectoral policies. It is also consistent with the results estimated by Ferro (1995). Later in the decade, poverty in urban areas continued to be reduced, but in rural areas there was no progress and the proportion of the ultra-poor (indigents) increased. Again, this seems to be due to the impact of Hurricane Mitch in the rural sector.

Finally, the indicator of unfulfilled basic needs (UBN) showed that during the 1990s the proportion of families with some UBN was substantially reduced from 67 percent to 48 percent. The reduction was relatively higher in the rural area.

5 Interests in the current negotiating round

Honduras is currently involved in three key negotiations: (1) the current round of agricultural negotiations within the WTO framework, (2) the hemispheric integration efforts to create a continental free trade area (FTAA) and (3) the newly begun negotiation for the formation of a free trade area between Central American countries and the United States. These concurrent negotiations represent a huge challenge for the limited institutional capacity that currently exists in Honduras to deal effectively with the multiple issues and compromises that arise from those processes. Honduras lacks the technical and financial resources to undertake a negotiation in all these forums by itself.

In the agricultural negotiations at the WTO, Honduras has joined the so-called “Like Minded Group” (also known as G11), which includes some of its Central American partners (El Salvador and Nicaragua) and other more distant countries like Cuba, Dominican Republic, Haiti, Pakistan, India, Kenya, Nigeria, Uganda, Zimbabwe and Sri Lanka. They advocate the interests of “net food importers” and emphasize the need to make special and differentiated treatment more effective for developing and less advanced countries. Even though the Central American countries have participated jointly in a Common Market for the last 40 years, they still have not managed to reconcile their interests sufficiently to carry out a joint participation in negotiations with third countries.^[51]

The positions held by Honduras in relation to the topics of the agricultural negotiations are reflected in the proposals presented by the G11 Group to the Agriculture Committee.^[52]

5.1 Market access

Honduras focuses its strategy on achieving substantial reductions of tariffs in developed countries and obtaining access advantages for products of interest to it in OECD markets. There is no clear formula or offer made with respect to tariff reductions in developing countries. Its interest in this WTO negotiation is in developed country markets, and there seems to be no interest to use this round to enhance trade opportunities between developing countries by reciprocal tariff reductions.

There is a great emphasis in the G11 Group proposal on the creation of eventual tariff protection mechanisms exclusive to the developing countries. This group proposes the institution of three “contingent” mechanisms: (1) the permission to raise consolidated tariffs when cheap imports destroy or threaten to destroy the “key” productions of a country (very similar to the safeguard in Article XIX of the General Agreement); (2) the possibility of applying variable tariffs, as part of the special and differentiated treatment, made exclusive to developing countries; and (3) the possibility of using the special agricultural safeguard. However, the special agricultural safeguard would have to be revised from its original conception, because it has serious design problems that make it less applicable in countries with a history of high inflation or exchange rate overvaluation.

A third point on this subject is the need for rules to make tariff systems simpler and more transparent, expressing duties in ad valorem terms and avoiding the application of minimum import prices.

In general, the Honduran stand is relatively comfortable because their bound tariffs are much higher than their applied tariffs. Any tariff reduction that might be approved within the WTO, no matter how drastic, would not significantly affect their current tariff situation. However, this situation would change if the United States proposal to negotiate from applied tariffs, and not from the bound tariffs, were to be accepted.

5.2 Domestic support

On this subject, the G11 Group proposes joining all the Boxes into one box of General Subsidies, and then to check which criteria would make these programmes legal. The most important point in the proposal is the definition of the criteria that will differentiate between distorting and non-distorting programmes.

The G11 also proposes the establishment of a common minimum support level (for example, 10 percent of the value of production) for all countries, which will not be subject to countervailing actions by any other member country. Subsidies up to 5 percent over the minimum would be open to countervailing action for developed countries, but anything over this last level (10 percent minimum support + 5 percent additional) would be prohibited. The G11, consistent with its purpose to broaden the management flexibility of agricultural policies in developing countries, also proposes to double the de minimis level for developing countries (from 10 percent to 20 percent of their production).^[53]

In this field also, Honduras will hardly be restricted by its current domestic support level, which is very low in comparison to the actual de minimis level. However, it could be adversely affected by higher subsidies in the developing countries it competes and trades with in the international market if current disciplines were relaxed.

5.3 Export subsidies

The G11 Group considers that dumping practices should be prohibited, including those promoted by export subsidies. They should disappear in all their forms. Honduras does not have a more elaborated position than a general statement.

5.4 Other subjects

As part of the Development Box, Honduras through the G11 proposes that developing countries should define which products or agricultural sectors would be under the discipline of the Agreement on Agriculture. This proposal attempts to limit the field where agricultural disciplines would apply to a list of products that will be defined by the developing countries themselves. The acceptance of this principle could mean opening the possibility of returning to intervention policies rejected in the past.

6 Conclusions

Honduras has maintained and deepened macroeconomic and sectoral reforms which began in 1990 and were consolidated through the signing of the URA. The results in terms of GDP and income growth and poverty reduction appear to be positive but have been obscured in the recent past by the impact of climatic and external factors.

Despite clear advantages in natural resources, geographical location and transport facilities, the agricultural sector in Honduras lacks the necessary incentive framework to generate a high and sustained growth in rural areas. In general, the domestic support instruments for agriculture dismantled during the sectoral reform have not been replaced by effective support mechanisms, compatible with the WTO commitments. Honduras has reasonably complied with the agreed reforms in its sectoral adjustment programmes and, later on, in the WTO Agreement on Agriculture.

The macroeconomic policy framework has not been propitious for the sector’s development: the exchange rate appreciation and high real interest rates have discouraged investment and agricultural production. The fall in international prices for its main export products and for those competitive with imports added to these problems. All the previous problems were worsened with unfavourable climatic developments like Hurricane Mitch.

The subjects that have more relevance for Honduras agriculture in the current negotiation refer to the opening of markets in developed countries as well as in developing countries, through a significant reduction in tariffs, internal aids and export subsidies. An improved special safeguard is required as a defence instrument, to protect farmers with respect to sudden price changes or short-term volume fluctuations. This is especially important in view of the lack of government programmes on income compensation to injured farmers, as in many developed economies. Finally, the strengthening and reorientation of international technical and financial aid for the sector must be accomplished in such a way that the establishment of basic agricultural services in developing countries becomes possible.

References

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