Honduras Paths Toward Building a Resilient Society Systematic Country Diagnostic Update Honduras Paths Toward Building a Resilient Society Systematic Country Diagnostic Update February 2022 © 2022 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org 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, completeness, or currency of the data in- cluded in this work and does not assume responsibility for any errors, omissions, or discrepan- cies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. 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Cover photos: Manos sosteniendo café recién preparado en campo de cultivo (Hands holding freshly picked coffee beans in farm field). © iStock.com/helovi. Colorido mantas (Colorful blankets). © iStock.com/pxhidalgo. Contents Acknowledgments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viii Abbreviations and Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix 1. Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Priorities Ahead. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.3 Process and Structure of the SCD Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2. Poverty and Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.1 Trends in Poverty Reduction and Shared Prosperity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.2 Causes of Poverty and Drivers of Poverty Reduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.3 Limited and Unequal Access to Basic Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.4 Lack of Opportunities in the Labor Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3. Economic Growth in Honduras: Challenges and Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.1 Macroeconomic and Sectoral Drivers of Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.2 Challenges to Competi­ tiveness in Honduras . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4. Sustainability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.1 Macroeconomic and Fiscal Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.2 Social Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 4.3 Environmental Sustainability Notably in the Face of Climate Change . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 5. Taking Stock and Priorities Ahead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 5.1 Challenges Facing Poverty Reduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 5.2 Deep Roots of the Challenges Faced. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 5.3 Priorities Ahead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Honduras: Paths Toward Building a Resilient Society    v Appendixes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Appendix A: Institutional Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Appendix B: Knowledge Gaps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Appendix C: International Benchmarking: Poverty and Inequality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Appendix D: Definition of Peer Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Appendix E: Update of the Official Poverty Measurement Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Appendix F: Trends in Poverty Reduction, Shared Prosperity, and Inequality. . . . . . . . . . . . . . . . . . . . . . . 51 Appendix G: Drivers of Poverty Reduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Appendix H: Profile of the Poor and Nonpoor Populations in Honduras, 2014-2019. . . . . . . . . . . . . . . . 54 Appendix I: Unequal Access to the Internet and School Enrollment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Appendix J: Lack of Opportunities in the Labor Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Appendix K: Selected Industries and Their Growth Challenges and Opportunities . . . . . . . . . . . . . . . . . 59 Appendix L: Disparities in Energy Access. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Appendix M: Corruption Constraints on Business Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Appendix N: Reducing the Fiscal Deficit and Maintaining Fiscal Sustainability. . . . . . . . . . . . . . . . . . . . . 65 Appendix O: Reforms in Infrastructure Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Appendix P: Additional Measures Needed: Competitiveness and Job Creation, Inclusion, and Resilience. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Appendix Q: Data and Knowledge Honduras 2015–21 and Planned 2022. . . . . . . . . . . . . . . . . . . . . . . . . . 72 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Boxes Box 1.1. Migration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Box 3.1. Can Honduras Benefit from Migration? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Box 3.2. Impasse in the Energy Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Box 4.1. The Knowledge Gap—Beyond Repression: What Policies Can Have Short- to Medium-Term Impacts on Crime and Violence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Box 4.2. Honduras’ Commitment to Addressing Climate Change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Box 4.3. Knowledge Gap—Linking Climate Change and Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Box 5.1. Challenges of State Capture and Growing Influence of Criminal Elements in Public Spheres. 34 Box 5.2. Reforms to Further Strengthen Macroeconomic and Fiscal Stability. . . . . . . . . . . . . . . . . . . . . . . 36 Box 5.3. Additional Measures to Boost Inclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Box 5.4. Additional Measures to Boost Competitiveness and Job Creation. . . . . . . . . . . . . . . . . . . . . . . . . 39 Figures Figure 1.1. Moderate Poverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 2.2. Food Insecurity in Honduras Was Highest in Latin America and the Caribbean, 2020. . . . . 12 Figure 3.1. Honduras’s Growth Driven by Factors of Production. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Figure 3.2. Honduras’s Growth Driven by Private Consumption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Figure 3.3. Decelerating Investment and Diversification of the Exports Index . . . . . . . . . . . . . . . . . . . . . . 16 Figure 3.4. Prudent Macroeconomic Management Supported Macrostability in the Run-Up to the COVID-19 Crisis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Figure 3.5. Prudent Macroeconomic Management Safeguarded Debt Sustainability with Strong Debt- Carrying Capacity and Low Risk of Debt Distress. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Figure 5.1. Institutional Benchmark Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 vi    Honduras: Paths Toward Building a Resilient Society Figure A.1. Institutional quality between 2016 and 2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Figure A.2. Homicide Rate: Honduras, World, and Selected Countries, 2008–19 . . . . . . . . . . . . . . . . . . . 45 Figure C.1. Honduras’s Poverty Is Higher than in Central America and the Latin America and Caribbean Region. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Figure C.2. Honduras Has the Second-Highest Poverty Rate in the Latin America and Caribbean Region, circa 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Figure C.3. Honduras’ Structural and Aspirational Peers Have Experienced Stronger Poverty Reduction since 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Figure C.4. Honduras Shows Consistently Higher Inequality Levels Than Its Structural and Aspirational Peers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Figure E.1. New Official Poverty Estimates, National (2014–19). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Figure E.2. New Official Gini, National (2014–19). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Figure F.1. Extreme Poverty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Figure F.2. Departments with Higher Indigenous Population Shares Are Correlated with Higher Poverty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Figure F.3. Shared Prosperity (2014–19). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Figure F.4. Gini Coefficient . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Figure G.1. Income Growth and Its Distribution Drove Changes in Poverty between 2014 and 2019. . 52 Figure G.2. The Demographic Dividend Compensated for Declines in Labor and Nonlabor Income. . 53 Poverty change by income source, 2014–19. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Figure G.3. Stock of Emigrants to the US as a Share of the Overall Honduran Population (1960–2019). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Figure G.4. Per Capita Remittances in Current US$, 2001–20. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Figure I.1. Internet Cost as a Share of Per Capita Household Income across Countries . . . . . . . . . . . . . . 56 Figure I.2. Secondary Gross Enrollment by Quintile, 2011 and 2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Figure I.3. Honduras Urban-Rural Enrollment, Ages 5–20 (2019). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Figure J.1. Labor Force Participation, by Country and Bottom 40, Circa 2019. . . . . . . . . . . . . . . . . . . . . . . 57 Figure J.2. Unemployment Rate for Select Groups, 2014 and 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Figure J.3. Public Sector Wage Premium, by Type of Private Sector Firm, 2014–19. . . . . . . . . . . . . . . . . . 57 Figure J.4. Gender Wage Gap by Sector, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Figure J.5. Working from Home, by Country. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Figure J.6. Households Reporting Income Loss in May and August 2020 (percent). . . . . . . . . . . . . . . . . . 58 Figure M.1. Perceptions of Corruption among Public Sector Officials and Politicians . . . . . . . . . . . . . . . 63 Figure M.2. Favoritism, Influence, and Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Figure M.3. Checks and Balances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Figure M.4. Corruption Constraints on Business Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Tables Table 1.1. Policy Levers and Entry Points to Address the Vicious Cycles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Table 4.1. Comparative Data on Impact on Lives Following Hurricanes Mitch and Eta-Iota. . . . . . . . . . 26 Table B.1. Knowledge Gaps, 2015 and 2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Table H.1. Profile of the Poor and Nonpoor Populations, 2014 and 2019. . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Table N.1. Main Macroeconomic Indicators and Projections in Honduras, 2015–23. . . . . . . . . . . . . . . . 67 Table Q.1. Studies, 2015–21 and Planned. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Honduras: Paths Toward Building a Resilient Society    vii Acknowledgments We would like to thank the members of the World Maria Concepcion Steta Gandara, Nicolas Collin Dit Bank Group’s Honduras Country Team from all De Montesson, Julie Ruel Bergeron, Tomas Plaza Re- Global Practices and the International Finance neses, Carolyn J. Shelton, Edouard Ereno Blanchet, Corporation (IFC) as well as all the Honduran au- Peter Johansen, Mariano Gonzalez Serrano, Magda- thorities, partners, and stakeholders, who contrib- lena Bendini, Maria Elena Garcia Mora, Ana I. Agu- uted to the preparation of this Systematic Country ilera, Christopher Mays Johnson, Ricardo Martén, Diagnostic (SCD) Update. We are grateful for Manuel Contreras Urbina, Graciela Sanchez Mar- their inputs, knowledge, reviews, and advice. tinez, Carlos Xavier Munoz Burgos, Paola Guerra Guevara, Miguel Pereira Mendes, Denny Mahalia The team was led by Eric R. Lancelot (Program Lewis-Bynoe, David Bassini Ortiz, Katharina Sieg- Leader, Infrastructure/Social Development), Car- mann, Ana Karla Perea Blazquez, Brendan John olina Diaz-Bonilla (Senior Economist), and Elena Meighan, Marie Caroline Paviot, Barbara Cunha, Bondarenko (Economist) under the leadership and Marie-Laure Lajaunie, Jose Antonio Silva Gomez, guidance of Carlos Felipe Jaramillo (Regional Vice Abel Lopez Dodero, Rocio Sanchez Vigueras, Daniel President), Seynabou Sakho (Director, Strategy Alberto Benitez, Julian Najles, Martin H. Ochoa, Au- and Operations), and Michel Kerf (Country Di- gusto Garcia, Manjula M. Luthria, Olanrewaju Malik rector). The following people provided additional Kassim, Mary Lisbeth Gonzalez, Ivonne Astrid guidance: Sanaa Abouzaid (Country Manager, Moreno Horta, Alejandra Mia Garcia-Meza, Erika IFC), Boris Weber (Resident Representative), Do- Padron, Vanessa Cheng-Matsuno, Midori Makino, erte Doemeland (Practice Manager), Ximena Del Maria Del Carmen Minoso, and Martin Albrecht. Carpio (Practice Manager), Andrea Guedes (for- mer Country Operations Manager), Pedro Rodri- The team would like to thank the peer reviewers guez (Program Leader, Equitable Growth, Finance Liliana D. Sousa (Senior Economist), Tito Cordella and Institutions), Rita Almeida (Program Leader, (Adviser), and Kristina Svensson (Country Man- Human Development), Bill Maloney (Chief Econo- ager) for their comments and suggestions. Finally, mist), and Martin Rama (former Chief Economist). the team is grateful to Patricia Dacarett (Operations Officer), Carlos Roberto Aguirre Larios (Opera- The SCD Update team is thankful for the deep en- tions Analyst), Noris Salinas (Program Assistant), gagement of the following team members who Belkis Delcid (Team Assistant), Elizabeth Sanchez contributed to preparing this report and for their (Program Assistant), Pamela Gunio (Program As- guidance: Francesca Recanatini, Marcela Rozo, Eze- sistant), and the Honduras country office Admin- quiel Miranda, Luis Alvaro Sanchez, James Sampi, istrative and Client Support team who made all the Natalia Campora, and Giselle Del Carmen. The team necessary arrangements for the extensive series of is grateful for the sector-specific knowledge, inputs, virtual mission meetings and provided critical ad- and guidance from Julieta Trias, Miriam Montenegro, ministrative support. viii    Honduras: Paths Toward Building a Resilient Society Abbreviations and Acronyms AD Afro-descendant IDB Inter-American Development BCH Central Bank of Honduras Bank BPO business process outsourcing IFC International Finance Corporation BTI Bertelsmann Transformation Index INE Instituto Nacional de Estadística CCDR Country Climate and IPAH Indigenous Peoples and Afro- Development Report Hondurans CCT conditional cash transfer LFP labor force participation COMRURAL Rural Competitiveness Project LOP Organic Budget Law (Ley Orgánica de Presupuesto) CONASA Drinking Water Supply and National Council LULUCF Land use, land-use change, and forestry DFS digital financial services MACCIH Mission to Support the Fight DGPMF Dirección General de Política Against Corruption and Macro Fiscal Impunity in Honduras ENEE Empresa Nacional de Energía MSME micro, small, and medium Eléctrica enterprise ENIGH National Income and MTFF medium-term fiscal framework Expenditure Survey NDC Nationally Determined EPHPM Encuesta Permanente de Hogares Contribution de Propósitos Múltiples NEET not in the employment, FDI foreign direct investment education, or training FPIC Free, Prior, and Informed NFPS nonfinancial public sector Consent PEFA Public Expenditure and Financial FRL Fiscal Responsibility Law Accountability FRS Fiscal Risk Statement PER Public Expenditure Review FTZ free trade zone PPP public-private partnerships GCI Global Competitiveness Index PROSASUR Promoting Food Security in the GDP gross domestic product South GVC global value chain SANAA Servicio Autonomo Nacional de ID identification Acueductos y Honduras: Paths Toward Building a Resilient Society    ix SCD Systematic Country Diagnostic SEZ special economic zone SCGG Secretaría de Coordinación SOB state-owned banks General de Gobierno SOE state-owned enterprise SEDLAC Socio-Economic Database WJP World Justice Project for Latin America and the WSS water supply and sanitation Caribbean All dollar amounts are in US dollars unless otherwise indicated. x    Honduras: Paths Toward Building a Resilient Society 1. Executive Summary The challenges and opportunities currently poverty line was relatively stagnant between 2014 faced by Honduras remain broadly in line with and 2019. In 2019, 25.2 percent of the Honduran those identified in the country’s Systematic population lived in extreme poverty and almost Country Diagnostic (SCD), prepared in 2015. half (48.0 percent or 4.4 million people) lived in Since 2015, substantive analytic work has deep- poverty, based on the official poverty lines.1 Rural ened the understanding of challenges and oppor- poverty is concentrated in the Dry Corridor area tunities but not materially modified the SCD’s and in departments with high shares of ethnic findings. The COVID-19 pandemic, coupled with minorities. Inequality continues to be among the two Category 4 hurricanes—Eta and Iota—in fall highest in the Western Hemisphere. 2020, further exposed and compounded the coun- try’s fragilities. This SCD Update highlights recent The crises in 2020 exacerbated the country’s developments in macroeconomic, sectoral, and existing economic and social challenges. Real poverty-reduction performance and the status of gross domestic product (GDP) declined by 9.0 Honduras’s reform efforts. It is best read in con- percent year-on-year in 2020, down from the junction with the 2015 SCD. 2015–19 average of 3.8 percent growth. Employ- ment and income sank,2 resulting in the highest levels of food insecurity in the Latin America 1.1 Recent Developments and the Caribbean region. In addition, inequal- Honduras remains one of the poorest and most ity rose and human capital deteriorated as fewer unequal countries in the Western Hemisphere children have been attending school because of and faces increasing levels of extreme poverty the COVID-19 pandemic. While data are not yet in both urban and rural areas (see appendix available, the impacts on poverty and human cap- C). Poverty reduction under the country’s official ital are expected to be sobering. Honduras: Paths Toward Building a Resilient Society    1 Some of the positive economic trends that had institutional weaknesses in the country and stalled been achieved since the 2015 SCD eroded with progress in key reforms, including at the sectoral the effect of the pandemic and hurricanes amid level. a more challenging political and governance context. Honduras implemented prudent mac- 1.2 Priorities Ahead roeconomic policies between 2015 and 2020, an- The 2015 SCD identified three policy levers chored in the Fiscal Responsibility Law, a crawling and three complementarity measures (see table peg with ample foreign exchange, and a sound fi- 1.1) to address Honduras’s challenges. The track nancial sector, which led to an upgrade of its sov- record of reforms since 2015 is mixed at best, with ereign credit rating.3 Real GDP growth averaged progress made in a few areas, partial progress in 3.1 percent over the past decade, mainly driven others, and limited progress in many sectors. All by remittance-fueled private consumption. The priorities identified in the 2015 SCD remain valid. twin shocks of 2020, however, led to a significant Recent developments suggest additional empha- increase in public debt and fiscal risks, including sis in a few areas: establishing comprehensive those related to the electrical company, Empresa migratory policy (to enhance possible benefits of Nacional de Energía Eléctrica (ENEE). GDP con- migration), boosting society/community engage- tracted sharply in 2020, though some economic ment (to increase the demand for good gover- sectors, such as maquila4 and telecommunica- nance), enhancing support to the private sector tions, proved resilient. (to boost growth), and fostering sectoral actions/ reforms (to promote resilience). The SCD Update Governance and the quality of institutions introduces two new filters: the feasibility of the deteriorated further since 2015. The political measures and the relative urgency to act. These fil- polarization rooted in the unresolved issues of ters do not reduce the number of areas that need the 2009 political crisis was compounded by the attention, but they promote a focus on specific contested presidential reelection in 2017 and alle- entry points in each area that can inform policy gations of high-level public corruption combined in the short to medium term and open the door to with strong, underlying vested interests from a engage on broader reforms in the long run. (The variety of groups. Recent developments show a new elements appear in italics in table 1.1). decline in the quality of governance and institu- tions5 (see appendix A, figure A.1) under the per- The overall vulnerability of the economy and sistent influence of patronage and state capture,6 society stands out as Honduras’s overriding undermining citizens’ trust,7 affecting the capac- challenge. Returning to the prepandemic socio- ity for service delivery, fostering inequality and economic growth patterns would result in an in- exclusion, and hampering private sector develop- sufficient generation of quality jobs to satisfy the ment. Inadequate institutions and policy-making rapid growth of the labor force. In this scenario, processes were further weakened by elite capture, the pressure to migrate will remain, and crime preventing the implementation of institutional and violence will persist, particularly if impunity reforms focused on accountability and inclusion, remains widespread. Conversely, a build-back- creating a vicious cycle. Combined with continu- better-and-greener agenda aimed at yielding more ing challenges of violence and impunity, a picture and better-quality jobs could contribute to break- emerges of rising fragility and growing inequality ing the vicious cycles identified in the SCD and in Honduras, resulting in a deteriorating social addressing vulnerability through a resilient recov- contract. The shocks in 2020 further intensified ery. While the broad reform agenda has stalled, 2    Honduras: Paths Toward Building a Resilient Society Table 1.1. Policy Levers and Entry Points to Address the Vicious Cycles Policy Levers Entry Points* Crime and „ Strengthen violence prevention „ Create opportunities for youth in urban areas, building growth and law enforcement. community infrastructures and public spaces „ Customize soft accompaniment policies to be determined Migration and „ Improve education and skills „ Mitigate the negative effects of migration (focusing on growth to compete and establish drivers of migration, conditions of living of migrants, a comprehensive policy on and so on) while optimizing the benefits (for example, migration. leverage remittances, link with diaspora, and so on). Poor „ Strengthen the quality of „ Strengthen access to justice in the lower courts; bolster governance institutions by supporting a the capacities of anti-corruption units. and growth separation between the public „ Mandate the publication of asset declarations of public domain and private interests servants, establish clearer rules and accountability on through conflicts of interest, and improve access to information. — strengthening the rule of „ Reinforce transparency and openness in the use of law and the judiciary public resources and policy making; build monitoring — building capacity and evaluation systems and statistical capacity. — improving the „ Foster accountability through capacity building accountability framework of civil society and support enhanced community engagement approaches in local development. Complementary Measures Entry Points* Boosting „ Promote and sustain „ Improve the efficiency of public expenditures. growth macroeconomic stability, „ Manage and mitigate fiscal risks from SOEs, notably including fiscal sustainability. ENEE. „ Improve infrastructure „ Strengthen infrastructure resilience and improve rural „ Support the private sector access and connectivity. through trade and regulatory „ Leverage successful maquila experiences to inspire reform. relevant targeted reforms. „ Strengthen links between the maquila sector and the rest of the economy. Fostering „ Strengthen the targeting and „ Expand the coverage of CCTs, while strengthening inclusion coverage of conditional cash payment mechanisms. transfers. „ Safely reopen schools and adjust instruction to „ Improve access to basic learning levels. services, in particular, health and „ Improve preparedness to health emergencies and education. access to high-quality primary care services. „ Promote active labor market „ Launch labor-intensive works programs, beginning policies to improve job matching, with areas most affected by hurricanes, and scale up particularly for low-skilled and broaden agriculture-linked activities in rural areas workers, while fostering economic building on the COMRURAL model opportunities, particularly in poor and remote areas. Promoting „ Strengthen prevention and „ Strengthen risk assessment and consolidate institutions resilience disaster risk management, in charge of risk management for strengthened service notably in the face of climate resilience. change. *Some entry points remain to be determined—that is, they are identified as knowledge gaps. Note: CCT = conditional cash transfer; COMRURAL = Honduras Rural Competitiveness Project; ENEE = Empresa Nacional de Energía Eléctrica; SOE = state-owned enterprise Honduras: Paths Toward Building a Resilient Society    3 successes in specific areas (fiscal and disaster risk short-term measures to maximize the economic management, for example) show that progress is impact of remittances and knowledge spillovers to possible. the private sector from US migrants. Improving governance and the quality of insti- Boosting growth that creates jobs rests on but- tutions remains at the core of the development tressing the capacity of the private sector and challenge for Honduras and will require ad- enabling the movement of labor from lower dressing issues of state capture and impunity. to higher productivity activities. The past suc- Clear leadership is required to strengthen the rule cess of maquilas is an example on which to build. of law, tackle its uneven and discretionary appli- Strengthening capacity to generate employment cation, bolster accountability mechanisms, and can be centered around three initiatives. create a clear separation between public and pri- vate interests, as the country faces increasing risks „ First, reversing the recent weak trends in trade of fragility. This would require progress in the fol- and foreign direct investment (FDI). The ex- lowing areas: strengthening the independence of perience in the maquila sector can be lever- the judiciary and regulatory agencies; bolstering aged through further improvements in trade capacities of prosecutorial units; improving trans- facilitation (logistics, customs, taxes, and so parency of the legislative and policy-making pro- on) and connectivity to external markets to cesses; further investing in anti-corruption units; foster aggregate economic activity. Given the introducing measures to enhance the capacity for national savings shortage and the low level of citizens to hold public and elected officials ac- technology in the country, the contribution of countable; and strengthening capacities for digital FDI will be critical. Progress in trade and FDI and open government. facilitation will support the diversification and sophistication of the economy, generat- Reducing levels of crime and violence remains ing quality employment. FDI and trade would critical. Although the homicide rate has declined, be aided by reducing institutional uncertainty, it remains among the highest globally (see ap- thus, supporting the need to improve gover- pendix A, figure A.2). Greater attention must be nance and the rule of law. placed on the drivers of crime and violence, in- „ Second, reducing the costs of operation in the cluding efforts to promote social cohesion, trust, formal economy and fostering competition. and social capital within vulnerable communities, Further leveraging of the maquila experience in addition to strengthening institutions. can be achieved by strengthening the links with the domestic economy. Onerous labor The increasing migration flows and incoming legislation that hinders private sector expan- remittances are closely linked to worsening sion, serves as entry barriers for the less skilled, opportunities at home (box 1.1). The SCD em- and boosts informality should be revised. En- phasis on education and skills to contain migra- hancing the use of digital technology would tion, although well placed, failed to gain traction; help with greater productivity in the public and improvement in education outcomes has been private sectors, including through innovations negligible while the labor market has been in- that facilitate access to credit for micro, small, creasingly challenged to absorb a rapidly growing and medium enterprises (MSMEs). labor force. Rather than focusing only on reducing „ Third, maximizing the economic impact of migration flows, it will be important to identify remittances. Given their significant size, 4    Honduras: Paths Toward Building a Resilient Society Box 1.1. Migration Emigration has accelerated in recent years. Since 1990, the number of Honduran immi- grants in the United States (the main destination country) has grown almost sixfold, from 115,000 in 1990 to 630,000 in 2015, and over 700,000 in 2020. The number of Honduran refugees has increased almost 20-fold in the past decade (from 1,166 in 2009 to 26,351 in 2019), while the number of asylum seekers has tripled every two years (from 997 in 2009 to 123,011 in 2019). Among the drivers of this process are crime and gang violence, gender-based violence, family reunification, and higher incomes in destination countries. Climate change—compounded by natural resource degradation—and limited access to basic services and job opportunities are expected to continue fostering migration from rural areas, to both urban centers within Honduras and other countries. The demo- graphic profile of migrants has changed, with most people traveling in family units and a growing number of unaccompanied children. Source: Q. Wodon, et al., eds., Climate Change and Migration: Evidence from the Middle East and North Africa (Washington, DC: World Bank, 2014); IOM, “Niñez y Adolescencia Migrante No Acompañada Retornada en el Trián- gulo Norte de Centroamérica” (Northern Triangle Migration Management Information Initiative,San Salvado, El Salvador, International Organization for Migration, 2016), https://mic.iom.int/webntmi/descargas/descargasoim/NT- MI-EHMH-ES-Vol2-NNAMIGRANTENOACOMPA percentC3 percent91ADA.pdf; Barbora Šedová, Lucia Čizmaziová, Athene Cook, “A Meta-Analysis of Climate Migration Literature.” CEPA Discussion Papers; 29, 2021. https://doi. org/10.25932/PUBLISHUP-49982 remittances can be a powerful driving force external financing, and improvements in fiscal for development and poverty reduction. Pol- risk management. icies incentivizing more productive use of remittances—such as investment, recon- At the same time, infrastructure improve- struction, and so on—could be beneficial to ments remain pertinent. The implementation the country in the short term. However, if of the 2014 reform and the improvement of structural constraints to private sector devel- the financial situation of ENEE are urgent, in- opment are not addressed, migration could be cluding through renegotiation of contracts with further fueled in the future. producers and revision of the tariff structure to improve quality and affordability. Major gains Maintaining macroeconomic stability and are feasible in water delivery, including in the managing and mitigating fiscal risks will be quality of the relevant institutions. Enhancing important for recovery and reconstruction. the role and capacity of the information econ- Continued implementation of prudent macroeco- omy will contribute to improved public sector nomic policies, including through the approval of delivery, better governance, increased finance the Fiscal Responsibility Law (FRL) and structural for firms and households, and wider adoption of reforms, is warranted and will require continuous new technologies. Finally, improving rural roads adherence to the FRL, improvements in public and building resilient infrastructure will con- expenditure efficiency, renewed revenue mobili- tribute to opening up rural areas and fostering zation efforts, continued reliance on concessional opportunities. These improvements should be Honduras: Paths Toward Building a Resilient Society    5 financed with support from private investment 1.3 Process and Structure as much as possible. of the SCD Update To foster inclusion, continuing economic as- This SCD Update draws on existing and new sistance to the poor and ensuring the right analysis, publications, extensive consultations, targeting remain a necessity. Progress has been and ongoing dialogue with public and private achieved in targeting assistance, but the insti- sector stakeholders in Honduras. Throughout tutions that provide economic assistance need the discussions, there was broad consensus on the to be protected and strengthened to minimize diagnosis of challenges, in particular the country’s errors of inclusion and exclusion and to foster weak governance as well as the priorities ahead. employment. Immediate efforts are needed for The SCD Update identifies that pertinent knowl- education to resume fully after the COVID-19 edge gaps remain and that new ones are emerg- crisis, while greater health resilience can build ing, such as information on the impacts of climate on the efforts to manage the pandemic. Both change and migration, on which policies are most have the potential to increase human capital effective to reduce crime and violence, and on over the long term. Expanding opportunities what institutional determinants support state for low-skilled labor and those at the bottom of capture (see appendix B). the income distribution calls for attention to the generation of nonfarm jobs in rural areas and in Notes areas of the country with high rates of absolute 1. Honduras has updated its official poverty measure- poverty—which disproportionately means In- ment methodology using international best practice digenous Peoples and Afro-Hondurans. (see appendix E). The previous methodology, used in the 2015 SCD, would suggest 64.7 percent of the popu- The SCD’s call for “strengthening prevention lation lived in poverty in 2019 instead of the new, more and disaster risks management” is even more precise estimate of 48.0 percent in 2019. Note that the timely today. This effort should build on the new methodology (and corresponding updated poverty lines) coincidentally results in a 2019 poverty rate that is consistent work undertaken for more than two similar to the 49.0 percent estimated under the interna- decades to strengthen prevention, which most tional poverty line of $5.50 per day. probably contributed to mitigating the human cost of the 2020 hurricanes. Natural disasters are 2. The data are not available to measure the specific impacts on vulnerable populations that were likely also recurrent, and their frequency is likely to increase harmed by the pandemic and the hurricanes: Indigenous in the context of climate change. In the short Peoples, Afro-Hondurans, and persons with disabilities. term, managing the impact of the two hurricanes will require attention to the physical reconstruc- 3. Honduras’s sovereign credit rating was upgraded by Standard & Poor’s to BB from B+ in July 2017 and by tion of more resilient assets and to building the Moody’s to B1 from B2 in September 2017. The agen- institutional framework to manage future natural cies maintained the ratings with a stable outlook in 2019, shocks. These activities provide an opportunity to 2020, and 2021. generate employment and to deliver training. At- 4. Maquilas are businesses that are allowed to assemble, tention to the population at the lower end of the manufacture, or process raw materials and export the distribution of income should be a priority. finished product largely free of duty and tariffs. They are 6    Honduras: Paths Toward Building a Resilient Society present throughout Latin America and have been partic- The report can be found at https://www3.weforum ularly successful in Honduras in generating growth and .org/docs/GCR2018/05FullReport/TheGlobal creating employment. The manufactured goods are ex- CompetitivenessReport2018.pdf. ported to other countries, mainly the United States and Canada. 7. Two sources: (1) Latin American Public Opinion Project (LAPOP) “Barometro de las Americas” (Vanderbilt Uni- 5. Bertelsmann Transformation Index (BTI), 2016–20. The versity, Nashville, TN, 2019); and (2) WEF, Global Com- BTI is a measure of the development status and gov- petitiveness Report. ernance of political and economic transformation pro- cesses in developing and transition countries around the world. A description of each index and its construction can be found at https://bti-project.org/en/methodology. 6. See the Global Competitiveness Report pub- lished by the World Economic Forum (WEF), 2018. Honduras: Paths Toward Building a Resilient Society    7 2. Poverty and Equity 2.1 Trends in Poverty figure 2.1, appendix E, figure E.1, and appendix F, figure F.1). Poverty has shown little decline Reduction and Shared since 2014, while extreme poverty has increased Prosperity slightly, from 24.8 percent in 2013. Extreme pov- Honduras continues to be one of the poorest erty has been increasing in rural areas since 2014 and most unequal countries in Latin America and in urban areas since 2017. Most poor Hon- and the Caribbean; its middle class remains durans continue to live in rural areas (with rural one of the smallest in the LAC region, and pov- poverty heavily concentrated in the Dry Corri- erty reduction lags other Central American dor and in departments with a higher share of countries (see appendixes C and D). Honduras ethnic minorities)1 and still overwhelmingly rely faces low levels of economic and social inclusion, on agriculture as their principal livelihood (see and lower-income households continue to be appendix F, figure F.2). vulnerable to shocks. The latest available interna- tional headcount estimates show that in 2019, 49 Income growth between 2014 and 2019 was low percent of the population was living on less than in Honduras for both the bottom 40 percent of $5.50 per day (the upper middle-income global the income distribution and the population as poverty line) before the double impact of the a whole, while income inequality has been rela- COVID-19 pandemic and hurricanes. tively stable since 2013 (see appendix F, figures F.3 and F.4). The income growth of the bottom Poverty reduction has been limited in re- 40 percent between 2014 and 2019 is less than cent years. In 2019, 48.0 percent of Hondurans half of what it had been in the mid-2000s. At the lived below the country’s official poverty line, subnational level, urban inequality has been gen- with 25.2 percent living in extreme poverty (see erally declining since 2014, while rural inequality 8    Honduras: Paths Toward Building a Resilient Society Figure 1.1. Moderate Poverty per capita income, was the strongest factor in the reduction of poverty in 2014–19. Overall, N tion l Urb n Rur l 80 the demographic dividend attenuated the labor 70 and nonlabor income declines in rural areas and p rc nt of individu ls 60 helped reduce moderate poverty. The demo- 50 graphic dividend also had beneficial impacts for the extreme poor, along with increased employ- 40 ment and higher remittances, but these were not 30 2011 2012 2013 2014 2015 2016 2017 2018 2019 enough to compensate for the negative poverty impact of declining labor and nonlabor (excluding Source: World Bank estimates using the Encuesta Permanente de Hogares de Propósitos Múltiples (EPHPM). remittances) income (see appendix figure G.2). Note: Poverty: share of the population whose household per Honduras’s demographic transition, however, can capita income is below the poverty line. also be a risk, since the relatively faster growth of the labor force could put stress on job generation has risen sharply, from a Gini coefficient of 43.1 in if not enough jobs are available. 2014 to 48.6 in 2019. Remittances and migration play an increas- ingly important and complex role in the Hon- 2.2 Causes of Poverty duran economy. Remittances had a positive but and Drivers of Poverty small impact on poverty in 2019, as most remit- tances went to nonpoor households for their con- Reduction sumption. Migration trends to the United States The small decline in moderate poverty was continued, reaching 8.3 percent of the Honduran driven by growth in household per capita in- 2019 population, while per capita remittances come, while the slight increase in extreme continued to skyrocket into 2019 and decelerated poverty was primarily the result of an increas- (although still increasing) during the 2020 pan- ingly unequal distribution of income within demic (see appendix G, figures G.3 and G.4). the extreme poor population (see appendix figure  G.1). Urban households were helped by higher income growth, a better distribution of in- 2.3 Limited and Unequal come, and beneficial price changes, with employ- Access to Basic Services ment and income increases in construction and High malnutrition and unequal access to basic manufacturing. However, the recent deceleration services remain key barriers for human capital in manufacturing has hurt extreme poor urban formation and inclusive growth, starting with households. Meanwhile, rural households faced health. Honduras was assessed as the least-pre- a worsening distribution of income and declining pared country in the Latin America and the Carib- real incomes that increased both rural poverty bean region to cope with the pandemic, ranking and rural extreme poverty, which were adversely 156th out of 195 on the 2019 Global Health Se- affected by the deceleration in the agricultural curity Index.2 The quality in the provision of and sector, including coffee production. access to care is remarkably lower among the low- est income quintiles, although coverage of certain The declining dependency rate (the demo- primary care services is relatively high. Declines in graphic dividend), a component of household vaccination coverage3 and disruptions in essential Honduras: Paths Toward Building a Resilient Society    9 maternal and child health services could lead to a persons without disabilities (50 versus 79 percent 37 percent increase in child mortality and an 80 in rural areas).12 Challenges in the sector have percent increase in maternal mortality.4 been recently compounded by school closures in response to the pandemic and the hurricanes, Unequal access to infrastructure services has with potential long-term consequences that could inhibited inclusive growth in Honduras, which result in learning-adjusted years of schooling fall- has been exacerbated with the 2020 lockdown ing from 6.4 pre-pandemic to 4.7 years.13 measures. Access to adequate water and sanita- tion services remains highly unequal, and service The enactment of policies and strategies for quality is poor, a situation likely to deteriorate the social inclusion of Indigenous Peoples and with the impact of climate change if nothing is Afro-Hondurans remains limited. The National done.5 A wide disparity of coverage between the Policy Against Racism and Racial Discrimination poor and nonpoor and the urban and rural popu- and for Integrated Development of Indigenous lations remains (see appendix H). Quality sanita- Peoples and Afro-Hondurans, adopted in 2016, tion is insufficient, with only 13.7 percent of sewer has yet to materialize in reforms within national connections treated.6 This situation stems from a institutions to ensure that these objectives are lack of investments7 and insufficient progress in met. the implementation of the 2003 and 2009 reforms. Government measures to mitigate the effects of the COVID-19 pandemic8 have resulted in falling 2.4 Lack of Opportunities revenues for service providers and added larger in the Labor Market financial requirements.9 As of 2019, 14 percent of Honduras’ labor force participation rate, par- rural households did not have access to electricity, ticularly for women, remains among the lowest affecting particularly the poorest (see appendix in the Latin America and the Caribbean region H). Similarly, one-quarter of the rural populace10 while workers are concentrated in low-pro- lacks access to an all-year transitable road. Finally, ductivity jobs. Honduras has the fourth-lowest internet access and usage are low while costs are labor force participation (LFP) rate among 15- to high (see appendix H and appendix figure I.1). 64-year-olds in the region, at 66 percent in 2019 Similarly, broadband connectivity is limited, with (see appendix J, figure J.1), with less than 60 per- an average of 73 mobile cellular subscriptions per cent participation among the bottom 40 percent 100 people compared to more than 100 subscrip- of the income distribution. It also has the sec- tions per 100 people in the Latin America and the ond-highest LFP gender gap in the region behind Caribbean region.11 Guatemala.14 Workers with primary education or less are concentrated in agriculture, while workers Despite high spending on education, Hondu- with tertiary education are in the service sector.15 rans continue to face deep and persistent dis- Approximately half of Honduran workers are ei- parities in access to and quality of education. ther in “elementary” occupations16 or in services Access to primary education has increased, but and market sales, while only a third are in skilled, low enrollment for children under 5 years of age high-paying jobs in agriculture, industry, or ser- and between 12 and 17 years remains strongly vices.17 As of 2019, services and retail continued associated with family income and location (see to be the leading sectors for female employment. appendix I, figures I.2 and I.3). Only 61 percent of persons with disabilities have attended primary Unemployment has increased, particularly for education or higher compared to 85 percent for women and youth, and informal employment 10    Honduras: Paths Toward Building a Resilient Society continues to dominate across all sectors. Un- appendix J, figure J.3). In 2020, the government employment is particularly high among the poor approved a centralized mechanism for salary ne- (7.5 percent), women (8.7 percent), and workers gotiations to guide decisions on nominal wage ages 15–24 (11.3 percent), but it has increased for increases in line with the FRL, which could help all groups when comparing 2014 to 2019 (see ap- contain the wage bill and support the planned re- pendix J, figure J.2). Less than a fifth of workers turn to the FRL target in 2023; however, practical are employed in the formal sector, essentially in measures have yet to be taken.23 The gender wage large firms, while the informality rate reaches 96 gap has modestly declined since 2013; however, and 99 percent among poor and extremely poor the average wage for male workers is approxi- individuals, respectively (see appendix H). Hon- mately 9 percent higher than that of female work- duras’s labor force is particularly vulnerable to ers, with important differences across sectors (see the COVID-19 crisis because most workers lack appendix J, figure J.4). access to unemployment insurance or labor con- tracts and often rely on day-to-day work that can- Although there has been a shift toward jobs in not be performed at home. services and industry between 2014 and 2019, employment in agriculture increased among Ethnicity and race, and likely disability,18 also the rural poor amid a decline in overall agricul- affect employment outcomes in Honduras. Af- tural incomes. Self-employment in agriculture is ro-descendants (ADs) in Honduras have lower the least-remunerated job, followed by informal salaries19 and primarily work in the agriculture, wage work, nonagricultural self-employment, and tourism, or service sectors with limited social formal wage work.24 Approximately 30 percent of safety nets. Unlike in other countries, educational households combine multiple job types,25 and 41 inequality is not the main factor explaining differ- percent of wage jobs in both urban and rural areas entiated outcomes (ADs in Honduras have on aver- are informal.26 age more years of formal education than non-ADs). With the economic lockdown in March 2020, The public sector wage premium and the gen- businesses across Honduras without access der wage gap both remain high, although they to electricity or the internet were not able to are declining. During 2014–17, the government switch to remote work or education.27 Although achieved a significant retrenchment of the wage the share of work from home-amenable jobs in- bill20 (about 3 percentage points of GDP) and in creased by 20 percent in Honduras from 2014 to 2019, the authorities established a ceiling on the 2019, it remains among the lowest in the Latin budgetary central government wage bill, in line America and the Caribbean region (see appendix J, with the FRL. Despite these efforts, public ex- figure J.5). The most vulnerable groups (rural, poor, penditure on remuneration remained the high- unskilled, or informal workers) are least likely to be est among structural and aspirational peers,21 able to work remotely and thus face higher risks of accounting for around 11.3 percent of GDP in job loss as a result of the COVID-19 lockdowns. In 2019 or 35.2 percent of total spending, absorb- addition, the COVID-19 pandemic disproportion- ing about 43.7 percent of tax revenues in 2019.22 ately affected women as school closures increased In 2019, public sector workers earned 23 percent the need to provide childcare at home.28 Around more than formal workers in private firms (versus 27.6 percent of women lost their job either perma- 32 percent in 2014) and 49 percent more than in- nently or temporarily four months after the onset formal workers (versus 56 percent in 2014) (see of the crisis versus 11.1 percent of men.29 Honduras: Paths Toward Building a Resilient Society    11 Figure 2.2. Food Insecurity in Honduras payment system through the Honduran Bank for Was Highest in Latin America and the Production and Housing (Banco Hondureño para Caribbean, 2020 la Producción y la Vivienda; BANHPROVI), dis- bursing to 192,000 extremely poor households 50 Round 1 (l st 30 d s) Round 3 (l st 7 d s) in early 2021, with an emergency top-up transfer 40 to 115,000 households in areas affected by Hur- ricanes Eta and Iota. However, wage bills remain sh r of hous holds 30 high, and the COVID-19 crisis revealed the deep 20 weaknesses of the health sector. Some challenges 10 remain also for the poorest households, linked to 0 limited access to telecommunications (telecom) HND ECU COL PER DOM GTM SLV BOL PRY MEX CRI ARG CHL and access to payments for remote populations, Source: World Bank High-Frequency Surveys. notably Indigenous and Afro-Honduran peoples Note: Share of households where adults had to skip a meal as well as persons with disabilities. Finally, perva- because there was not enough money or other resources sive governance weaknesses and corruption affect government capacity to deliver public services effectively. The pandemic and two hurricanes have further increased already high levels of vulnerability, as the country faced income and job losses, Notes primarily among women and low-skilled work- 1. A lack of data disaggregated by ethnicity, race, and ers, and the highest food insecurity in Latin disability status does not allow a more nuanced analysis America and the Caribbean (see figure 2.2 and of the challenges faced by these vulnerable groups. appendix J, figure J.6). As of September 2021, 2. For more information on the Global Health Index for the pandemic had led to serious illness for some Honduras, see https://www.ghsindex 305,000 Hondurans and to 9,260 deaths. The .org/country/honduras/. hurricanes caused significant destruction across 3. Taken from the Extended Immunization Program/ nearly all of Honduras’s 18 departments, affecting SIVAC, Ministry of Health (2020). almost 4 million people, including departments 4. Global Financing Facility, “Country Brief on Main- with high shares of Indigenous and Afro-Hondu- taining Essential Health Services during the COVID-19 ran communities. Poverty is expected to increase Pandemic” (World Bank, Washington, DC, 2020), https:// sharply in 2020, and school closures affect the www.globalfinancingfacility.org/sites/gff_new/files human capital formation of children, especially /documents/Honduras-Covid-Brief_GFF-ES.pdf. among the poorest households. 5. GEO Honduras, “Environmental Assessment Report,” 2014, 64. Inefficient public spending continues to ham- per better labor market outcomes. The target- 6. Water Partnership Program Country Report 2017, Characterization of WSS Services in Mid-sized Cities and ing of the skilling system and social protection Small Towns. has improved thanks to the establishment of both the National Center for Information on the Social 7. More than $300 million annually is required, half of Sector (CENISS) and the social registry since 2014 which is needed to rehabilitate or build new water sup- ply infrastructure; 2016 Water Supply and Sanitation to identify all potential social program beneficia- Monitoring Country Report (MAPAS II). ries. During the pandemic, the conditional cash transfer (CCT) program introduced a digitalized 12    Honduras: Paths Toward Building a Resilient Society 8. ERSAPS Resolution no. 05-2020, issued March 13, /bitstream/handle/10986/33304/Jobs-Diagnostic 2020, Government of Honduras, https://drive.google. -Honduras.pdf?sequence=7. com/file/d/1nwN0N27heFFWfJBE35GiinvXljKc6lJ3/view. 17. Michel and Walker, Jobs Diagnostic Honduras. 9. Comisión Nacional de Banca y Seguros (CNBS), Circu- lar CNBS No. 006/2020, 2020, https://www.cnbs.gob.hn 18. Maria Elena Garcia Mora, Steven Schwartz Orellana, /blog/circulares/circular-cnbs-oo62020/. and German Freire, Disability Inclusion in Latin America and the Caribbean: A Path to Sustainable Development 10. Research for Community Access Partnership, Rural (Washington, DC: World Bank, 2021). Accessibility Index 2019. 19. World Bank, “Afro-descendants and Labor Inclusion 11. World Development Indicators (2019). Learn more in Honduras (Unpublished background study). about the World Bank’s World Development Indicators 20. The wage bill is defined as all wages and salaries at https://datatopics.worldbank.org/world-development measured on an accrual basis, including all cash and in- -indicators/. kind wage and salaries and severance payments, plus 12. World Bank, Disability Inclusion in Latin America employers’ social benefits. and the Caribbean: A Path to Sustainable Development 21. For global comparisons, two sets of countries have (Washington, DC: World Bank, 2021). been identified. See appendix D for how the peers were 13. Before the pandemic, children in Honduras could identified. Structural peer countries: El Salvador, Lao expect to complete 10 years of schooling by age 18, People’s Democratic Republic, Nicaragua, and Senegal. which is equivalent to 6.4 years when adjusted for Aspirational peer countries: Benin, Cambodia, the Do- quality of learning. World Bank, Acting Now to Pro- minican Republic, and the Philippines. tect the Human Capital of Children: The Costs of and 22. Secretaría de Finanzas, Gobierno de la República Response to COVID-19 Pandemic’s Impact on the Ed- de Honduras, “Memoria Institucional 2019,” (Honduras ucation Sector in Latin America and the Caribbean government, Tegucigalpa, 2020). Retrieved from https:// (Washington, DC: World Bank, 2021), http://hdl.handle www.sefin.gob.hn/documentos-e-informes/. .net/10986/35276. 23. The mechanism covers all employees from the cen- 14. See the LAC Equity Lab, https://www.worldbank.org tral administration and decentralized entities, including /en/topic/poverty/lac-equity-lab1/labor-markets/labor those under special regimes such as teachers and health -force. In addition, Muller and Sousa show that this low care workers. The decree that establishes the mecha- female participation rate may be explained by women in nism has been approved by the Council of Ministers but rural Honduras underreporting their engagement in eco- has not yet been published in the Official Gazette, and nomic activities (that is, production for own consumption hence its implementation is planned for 2022. and of market goods, and remunerated services and commerce), possibly undercounted by 6–23 percent- 24. Michel and Walker, Jobs Diagnostic: Honduras. age points. M. Muller and L. D. Sousa, “‘She Helps Me 25. Michel and Walker, Jobs Diagnostic: Honduras, clas- All the Time’: Underestimating Women’s Economic En- sifies formal jobs as those in firms with more than five gagement in Rural Honduras” (Policy Research Working employees or self-employment among individuals who Paper 9217, World Bank, Washington, DC, 2020). have completed at least secondary education. 15. World Bank estimates using INE EPHPM 2019. 26. Michel and Walker, Jobs Diagnostic: Honduras. 16. V. Michel and I Walker, Jobs Diagnostic: Honduras 27. R. Llovet Montanes et al., “Working from Home in (Washington, DC: World Bank, 2019). Services: street LAC: Enabling Factors and Inequality Implications” vendors, domestic helpers, shoe cleaners, building (World Bank, Washington, DC, forthcoming). caretakers, messengers, garbage collectors, and vehi- cle cleaners; Agriculture: farm laborers; and in Indus- 28. Two sources: (1) Data for Good at Meta, Survey on try: maintenance, basic laborers, and handlers. The Gender Equality at Home, 2021, https://www.equali- report found at https://openknowledge.worldbank.org tyathome.org/. (2) World Bank, “Mapping of Childcare Honduras: Paths Toward Building a Resilient Society    13 Programs and Provision Gaps in Areas with Higher Em- 29. World Bank, “The Gendered Impacts of COVID-19 ployment Opportunities for Women in Honduras” (Gen- on Labor Markets in Latin America and the Caribbean” der Innovation Lab for Latin America and the Caribbean; (Policy Brief, World Bank, Washington, DC, January 2021). LACGIL, forthcoming). World Bank High Frequency Phone Surveys for 2020. 14    Honduras: Paths Toward Building a Resilient Society 3. Economic Growth in Honduras: Challenges and Opportunities 3.1 Macroeconomic and and exacerbated by the adverse business climate, FDI has been concentrated in just a few, primarily Sectoral Drivers of Growth tradable sectors. Such absence of investment spill- Growth during the 2014–19 period was driven overs erodes the potential growth impact of for- largely by factor accumulation, as productivity eign investment and constrains the development declined (see figure 3.1). The country’s real GDP of new economic opportunities. Fragmentation growth averaged 3.7 percent over the 2014–19 pe- between the tradable and non-tradable sectors, as riod, lower than the growth rates of its structural well as inefficiencies in sectoral allocation of in- peers (4.3 percent) and aspirational peers (6.2 per- vestment and human capital, further exacerbate cent). Growth has been lower than during the boom the limited gains in productivity.1 Unlocking fu- in the early 2000s, primarily because of lower cap- ture economic growth will depend on attracting ital accumulation and a significant decline in total more FDI, maximizing investment spillovers by factor productivity. Increasing remittance inflows improving the allocation of resources, and better have been used primarily for consumption, a key integrating economic sectors. contributor to growth (see figure 3.2). Limited investment in manufacturing implies The recent deceleration in investment inflows that low-productivity services remain the key en- and trade combined with limited cross-sector gine of job creation. Labor remains concentrated in spillovers adversely affect growth (see figure less technologically sophisticated activities, such as 3.3). The maquila industry is not well integrated commerce (a sector with high rates of self-employ- with the domestic economy because of its prefer- ment), hotels, and restaurants. These labor market ential tax treatment and regulatory incentives, thus inefficiencies caused a deceleration in labor produc- it reinforces economic fragmentation. As a result, tivity growth, exacerbated by the growing unskilled Honduras: Paths Toward Building a Resilient Society    15 Figure 3.1. Honduras’s Growth Driven by labor supply. The government needs to foster export Factors of Production diversification and integrate activities in nonspecial TFP Hum n c pit l L bor C pit l GDP rowth economic zone areas with the industrial sector and 6 5.1% global value chains, expand employment in high 4 3.7% 3.1% value-added sectors, and boost productivity. 2 2.4% p rc nt 0 The recent Country Private Sector Diagnostic conducted by the World Bank Group identified –2 agriculture and agribusiness, manufacturing, –4 1990s 2000–08 2009–13 2014–19 business process outsourcing (BPO), and digital Source: World Development Indicators, Penn World Table 10, financial services as sectors where more private World Bank staff calculations. sector participation could have a significant de- Note: GDP = gross domestic product; TFP = total factor productivity. velopment impact. Specifically, more quality jobs could be created in agriculture by diversifying the production and developing agribusiness to boost Figure 3.2. Honduras’s Growth Driven by exports and enhance resilience. Manufacturing has Private Consumption Gov rnm nt consumption Priv t consumption a strong competitive advantage based on its estab- R l GDP rowth 8 N t xports Ch n in inv ntori s Gross fix d c pit l lished industrial base and has the potential to pro- 6 duce more complex, higher-value-added products. 4 2 In BPO, there is potential to contribute to export 0 diversification by transitioning to higher-value p rc nt -2 -4 outsourcing services. Digital technologies could -6 -8 be transformational across the whole economy, in -10 -12 both the public and private sectors. Their use could 2000–08 2009–13 2014–19 2020 foster access to financial services for MSMEs and Source: Central Bank of Honduras, World Bank staff calculations. would enable those businesses to invest in them- Note: GDP = gross domestic product. selves and create jobs; increasing their access to digital financial services would reduce their busi- ness costs and widen their reach (see appendix K). Figure 3.3. Decelerating Investment and Diversification of the Exports Index Honduras’s growth plummeted in 2020 as a FDI % GDP (LHS) FDI, M quil % GDP Div rsific tion ind x HND result of the COVID-19 pandemic and Hurri- 8 0.80 canes Eta and Iota, exacerbating the country’s 7 intrinsic vulnerabilities. Real GDP contracted div rsific tion ind x of xports 0.75 6 by a record 9 percent in 2020. Output contracted FDI, p rc nt of GDP 5 0.70 4 3 0.65 across nearly all sectors as a result of a sharp fall in 2 0.60 trade, investment, and consumption, particularly 1 0 0.55 in export-oriented sectors, owing to the pandemic –1 0.50 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 (agriculture, textile) and in transportation, local infrastructure, agriculture, and housing owing to Source: World Bank staff estimates based on data from Cen- tral Bank of Honduras and TCdata360. the hurricanes. Lockdowns impair employment Note: The diversification index of exports measures the and incomes, leading to a steep drop in consump- degree of concentration of exported goods. Higher index readings reflect higher product export concentration. LHS = tion, as emergency social assistance was limited. By left-hand side. 16    Honduras: Paths Toward Building a Resilient Society December 2020, 10.2 percent of firms had closed deficit by 6.6 percentage points of GDP in three permanently, and only 16.2 percent had been able years and stabilized the public debt-to-GDP ratio to return to their prepandemic level of operations at around 43 percent. This was instrumental in re- as of early 2021.2 As a result, about 400,000 people storing credit ratings, reducing Honduras’s credit lost their jobs in 2020, with the majority being in spreads, and improving financing terms for in- manufacturing and services. Agricultural produc- vestment. The current account deficit narrowed tion declined because of extensive flooding of key to an average of 3.6 percent of GDP between 2015 plantations that damaged crops and delayed the and 2019 (from an average of 8.2 percent during next cultivation cycle.3 Remittance inflows stayed 2011–14), primarily financed by strong FDI (see somewhat resilient amid an unemployment spike figures 3.4 and 3.5). Yet the impacts of the 2020 in the United States, growing by 3.8 percent year- on-year in 2020 (down from 13.0 percent growth Figure 3.4. Prudent Macroeconomic year-on-year in 2019), partially compensating for Management Supported Macrostability in income losses. the Run-Up to the COVID-19 Crisis Fisc l b l nc CAB Infl tion R l GDP rowth The 2020 crises led to significant pressure on 12 the fiscal account. In response to the crises, the 8 4 government focused on the emergency response p rc nt of GDP 0 in the health sector while also assisting vulnerable –4 households and affected firms by providing liquid- –8 ity support, transfers, forbearances, and credit re- –12 lief as well as post-hurricane reconstruction. To –16 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 finance those expenditures, the government was Source: World Bank staff estimates using data from Banco able to authorize up to $2.5 billion (10 percent of Central de Honduras GDP) in new borrowing for 2020–21 after activat- Note: CAB = current account balance; GDP = gross domestic ing the FRL’s escape clause. As a result, the non- product. financial public sector (NFPS) deficit increased to 5.5 percent of GDP in 2020 (from 0.9 percent in Figure 3.5. Prudent Macroeconomic 2019). Meanwhile, the NFPS debt-to-GDP ratio Management Safeguarded Debt increased to 53.6 percent in 2020 (from 43.1 per- Sustainability with Strong Debt-Carrying cent in 2019) on the back of the lower nominal Capacity and Low Risk of Debt Distress GDP (accounting for about 80 percent of the in- Dom stic d bt Ext rn l d bt D bt s rvic (RHS) crease in debt) and higher external borrowing.4 70 20 18 60 16 50 14 3.2 Challenges to Competi­ p rc nt of r v nu p rc nt of GDP 12 40 10 tiveness in Honduras 30 8 6 20 4 Since 2014, the implementation of fiscal and 10 2 structural reforms has substantially improved 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 0 Honduras’s macroeconomic performance. The Source: World Bank staff estimates using data from Banco government pursued prudent macroeconomic Central de Honduras management anchored in the FRL, a crawling peg Note: As of 2020, 65.5 percent of public and publicly guar- exchange with ample foreign reserves, and sus- anteed debt ($5,960 million) was contracted by multilaterals, 21.5 percent ($1,952 million) by commercial institutions, and tained fiscal consolidation. It reduced the fiscal 13 percent ($1,177.3 million) by bilateral entities. Honduras: Paths Toward Building a Resilient Society    17 crises exposed Honduras’s longstanding macro- While the true impact of migration remains economic vulnerabilities. Persistently low domes- to be clarified (see box 3.1), progress on other tic investment rates and the overall procyclical fronts to boost competitiveness remain insuf- fiscal policy5 consequent upon budget rigidities ficient. Although the homicide rate has declined constrained the country’s ability to respond to since 2011 (see section 5.3), the prevalence of shocks. The government consistently relied on crime and violence remains a key concern for cuts to public investment to meet FRL targets, re- businesses and citizens.7 The economic cost of ducing long-term growth. Transitioning to a more crime and violence in Honduras is estimated to countercyclical fiscal policy would dampen busi- be close to 14 percent of GDP.8 High levels of vi- ness cycles, protect public investment, and better olence in Honduras are associated with systemic support long-term growth.6 social, economic, and political exclusion and are Box 3.1. Can Honduras Benefit from Migration? While migration is often associated with the depletion of human capital and other negative effects, such as those described in the 2015 Systematic Country Diagnostic (SCD) and while the impact of migration in Honduras is yet to be determined (a knowl- edge gap), recent analysis demonstrates potential medium- and long-term benefits of migration:a „ Honduran migrants could gain more than the rest of the country’s population in terms of increases in income and better access to education and health services.b „ Honduras can benefit through increased remittances, investments, trade, and trans- fers of skill and technology. In 2021, remittance flows to Honduras were estimated to be more than 20 times higher than the total amount of development aid received by the country over the past 10 years.c But to harness these benefits, a set of comprehensive policies that facilitate the integra- tion of migrants into the host economy and society need to be in place. Honduras lacks a comprehensive migratory policy that could help optimize the benefits of migration and reduce the injuries and losses of life sometimes suffered on the migrant trail. a. According to World Bank estimates, the net official development assistance received by Honduras, Guatemala, and El Salvador in 2019 totaled US$1.15 billion. World Development Indicators (WDI 2019); World Bank Migration and Development Brief No. 32 (April 2020), https://www.knomad.org/publication/migration-and-development-brief-32-covid- 19-crisis-through-migration-lens; World Bank Migration and Development Brief No. 33 (October 2020), https://www. worldbank.org/en/topic/socialprotectionandjobs/publication/migration-and-development-brief-33; World Bank Migration and Development Brief No. 34 (May 2021), https://www.knomad.org/publication/migration-and-development-brief-34; and Clemens, Michael. “Does Development Reduce Migration?” Center For Global Development, Working Paper, 359 (March 2014). https://www.cgdev.org/publication/does-development-reduce-migration-working-paper-359. b. Globally, migration empowers women and reduces child mortality. In Canada, for example, access to better jobs explains a citizenship premium of 11 percent in higher wages among naturalized migrants, while delaying the citizenship eligibility of migrants by one year adversely affected Canadian residents’ wages. Wladimir Zanonia and Ailin He, “Citizen- ship and the Economic Assimilation of Canadian Immigrants” (Inter-American Development Bank, Working Paper Series IDP-WP-01127, March 2021), https://publications.iadb.org/publications/english/document/Citizenship-and-the-Econom- ic-Assimilation-of-Canadian-Immigrants.pdf. c. According to World Bank estimates, the net official development assistance received by Honduras, Gua- temala, and El Salvador in 2019 totaled $1.15 billion. Michael Clemens, “Does Development Reduce Migra- tion?” (Center for Global Development Working Paper 359, March 2014), https://www.cgdev.org/publication/ does-development-reduce-migration-working-paper-359. 18    Honduras: Paths Toward Building a Resilient Society rooted in weak governance and institutions. The the skills that are in demand in the labor market. civil and criminal justice systems are not free from About 40 percent of Honduran workers lack basic improper government influence and are not im- problem-solving skills in technology-rich envi- partial, leading to the growing public perception ronments, suggesting that the education system of impunity.9 Limited access to justice, weak pro- needs to provide significant additional training to tection of rights and the rule of law, and a climate enable businesses to capitalize on the opportuni- of impunity further reinforce the drivers of vio- ties offered by the digital economy.11 lence and fragility, which, exacerbated by extreme weather events, contribute to the strong intention Adequate infrastructure remains limited. The among Hondurans ages 18 to 39 to migrate, as energy sector remains a major hindrance to the shown by surveys from January 2021.10 country’s development because of its high costs, limited access, and low reliability12 (see appen- Low quality and deep and persistent disparities dix L). The sector’s abysmal $3.4 billion debt stock in access to education prevent many Hondu- (about 15  percent of GDP) and an additional rans from acquiring the knowledge and skills $1.1 billion in contingent liabilities stemming from required by the private sector. Section 2.3 de- persistent mismanagement (see box 3.2)13 are a tails the weaknesses of the general education sys- systemic risk to macrofiscal stability. Investments tem. The technical and vocational education and in the transport sector have largely funded core training systems in Honduras require a better cur- infrastructure14 in pursuit of the government’s am- riculum to provide young workers with training in bition to turn Honduras into a regional logistics Box 3.2. Impasse in the Energy Sector Empresa Nacional de Energía Eléctrica’s (ENEE’s) persistent deficit stems from a com- bination of high losses (35 percent in 2018) in the distribution system, expensive and limited generation capacity, and misaligned tariffs as well as a weak institutional and governance framework. Inadequate public investment in infrastructure is increasing the fragility of the electricity system. Attempts to resolve these issues had limited progress. Despite various legal and regulatory reforms enacted over the past decade, the gov- ernment is struggling to implement the Electricity Sector Law of 2014 and subsequent regulations. The last initiative involved the creation, in January 2020, of the Intervenor Commission of ENEE with a mandate to (1) develop a sustainability plan for the sector; (2) improve the financial situation of ENEE; and (3) support the implementation of the Electricity Sector Law of 2014. The Strategic Plan prepared by the Intervenor Commis- sion includes measures to reduce ENEE’s debt, mitigate associated fiscal risks, and provide short-term fiscal relief by increasing electricity tariffs, reducing technical and nontechnical losses, and renegotiating existing contracts with providers of generators and with Empresa Energía Honduras, the company subcontracted to manage the distri- bution network and reduce loses. The implementation has been slow and has not pro- duced the expected results. Source: World Bank staff assessment in the context of the World Bank Programmatic Advisory Services and Analytics “Supporting a Sound Energy Transition for an Efficient Central America (2018-2022), forthcoming. Honduras: Paths Toward Building a Resilient Society    19 hub, but the investments have failed to improve Competition is constrained by entrenched state accessibility in rural areas.15 In urban areas, most capture and incumbents, which is exacerbated by public transport is provided by unregulated and weak checks and balances. Favoritism in govern- informal operators and tends to be unsafe and ex- ment decisions is increasing, and there are growing pensive. The sector is vulnerable to shocks, with indications of patronage and undue influence in re- 60 percent of the country’s transport network lationships between politicians and businesses. The being at risk from natural disasters. Digital con- capacity of the system to curtail these practices is nectivity is limited and constrained by inadequate limited, as checks and balances are weak in Hondu- regulation to promote competition. Honduras’ fi- ras, even compared to neighboring countries (see ber-optic network is underdeveloped, and mobile appendix M, figure M.3). and internet access is limited and expensive. Digi- tal payments are largely underexploited. Finally, business and trade regulations are also key constraints. The regulations seem largely Limited access to finance remains one of the market driven;20 however, de facto, the legal frame- key constraints to private sector development. work, price controls, and state capture dampen While the financial infrastructure in Honduras competition.21 The 2019 Global Competitiveness has improved recently, many MSMEs reported Index (GCI), produced by the World Bank, ranked that the lack of access to credit is the main ob- Honduras 118th out of 141 economies on indi- stacle to doing business. Honduras ranks the cators of the burden of government regulation, highest among Latin America and the Caribbean 93rd on domestic competition, 92nd on market countries in the percentage of firms whose re- dominance, and 86th on competition in services. cent loan application was rejected. Coupled with Significant barriers to entry, including time22 and higher interest rates than elsewhere in region, this cost, inhibit competition in domestic markets and hinders MSMEs’ development and employment encourage informality. High trade costs are an im- growth, undermines competitiveness, and limits plicit barrier to doing business in Honduras, in- options for financing the expansion of business cluding through nontariff measures imposed on operations. 896 export products—nearly half of all exports identified in the Harmonized System23—such as Weak institutions and governance continue ex- export registration requirements and inspection acerbating the difficulty of doing business. In requirements. The 2019 GCI ranked Honduras 2020, Honduras scored poorly on all six dimensions 119th out of 141 countries on indicators related to of the World Bank’s Worldwide Governance Indica- the efficiency of border clearance. tors. Administrative corruption particularly affects small and medium-sized firms,16 with bribery inci- dences higher than 30 percent, triple the regional Notes 1. M. A. Hernandez Ore, L. D. Sousa, and J. Humberto average. A sense of impunity is disproportionally Lopez, Honduras: Unlocking Economic Potential for perceived by medium-sized firms, and more than Greater Opportunities (Systematic Country Diagnostic; 50 percent of firms identify the judicial system as SCD, Washington, DC: World Bank, October 2015).The their major constraint.17 Corruption has long been reasons for the low impact of investment on growth rate perceived as one of the top challenges in Hondu- are not yet fully understood and remain a knowledge ras, but it noticeably became the primary concern gap in the SCD Update. among Hondurans with the onset of the pandem- 2. These figures are from survey data reported by the ic.18 Medium-sized firms are particularly affected.19 Honduran Council of Private Enterprise (COHEP) for 2020. 20    Honduras: Paths Toward Building a Resilient Society 3. In response to the crisis, the government has imple- the Survey of Adult Skills” (OECD Skills Studies, OECD mented a Containment and Response Plan, provided Publishing, Paris, 2016), http://dx.doi.org/10.1787 targeted support to MSMEs, and adopted a long-term /9789264258051-en. Plan for Reconstruction and Sustainable Development, 12. In the 2019 GCI, Honduras ranked 110th out of 141 aimed at rebuilding productive assets and infrastructure, countries in electricity access and 103rd in electricity ser- strengthening the economy’s sustainability and resil- vice quality. ience to natural disasters, and expanding social protec- tion programs. 13. ENEE’s liabilities includes two contingent risks: (1) an increase in receivables of about 43 percent in 2020 and 4. External public debt increased by 5.5 percentage (2) the government’s ongoing conflict with Empresa En- points of GDP in 2020 (from 30.7 percent at the end of ergía Honduras, the company subcontracted to manage 2019), including a sovereign bond placement ($600 mil- the distribution network and to reduce loses. lion) and multilateral loans ($1,552.7 million). 14. Honduras’s total investments in transport infrastruc- 5. World Bank Semiannual Report and World Bank staff ture averaged just under 2 percent of GDP between calculations based on data from Banco Central de Hon- 2010 and 2018, a higher percentage than those of its re- duras, SEFIN. gional peers (El Salvador and Guatemala) but less than 6. Namely, during a boom: (1) government spending as half that of Panama, the regional reference. a share of GDP should go down because of automatic 15. Honduras has the lowest road density in Central stabilizers; (2) with constant tax rates and some de- America. Only 51 percent of the population has access gree of progressivity, government revenues as a share to a city of 50,000 people within one hour of travel time of GDP should go up, and (3)  the budget surplus as by a motor vehicle. Its rural access is 30.3 percent, mea- a share of GDP should increase. The opposite should sured as the share of rural population less than 2 kilome- occur in recessions. ters from an all-weather road. 7. The World Economic Forum’s Executive Opinion Sur- 16. More than 60 percent of the firms in the 2016 Enter- vey ranked crime and theft as the second most prob- prise Survey identified corruption as a major constraint lematic factor for doing business in Honduras in 2017. on their development, which is twice the average per- Some 64.1 percent of firms reported paying for security, centage in the Latin American and the Caribbean region 27.7 percent reported experiencing losses due to theft and the world. and vandalism, and 29.7 percent identified crime, theft, and disorder as major constraints to doing business. 17. See Enterprise Survey, 2016. 8. Information comes from the Global Peace Index 2021, 18. “A hondureños les preocupa más el desempleo https://www.visionofhumanity.org/wp-content/uploads que el coronavirus: CID Gallup,” La Prensa, February 3, /2021/06/GPI-2021-web-1.pdf . 2021, https://www.laprensa.hn/honduras/1440085-410 / h o n d u re % C 3 % B 1 o s -preocupa-mas-desempleo 9. The World Justice Project Rule of Law Index -coronavirus-cid-gallup. 2021 (Washington, DC: World Justice Project, 2021), https://worldjusticeproject.org/sites/default 19. See Enterprise Survey, 2016, https://www /files/documents/WJP-INDEX-21.pdf; Bertelsmann .enterprisesurveys.org/en/data/exploreeconomies/2016 Transformation Index, 2020, https://bti-project.org/en /honduras. /reports/country-dashboard/HND. 20. Defense and Promotion of Competition Law (2006), 10. CID-Gallup poll, January 2021, as reported in “A hon- participation of Honduras to CAFTA-DR, customs union dureños les preocupa más el desempleo que el coronavi- with Guatemala. rus: CID Gallup,” La Prensa, February 3, 2021, https://www .laprensa.hn/honduras/1440085-410/hondure%C3%B1os 21. OECD-World Bank Product Market Regulation In- -preocupa-mas-desempleo-coronavirus-cid-gallup. dicator (2013–2016), https://www.oecd.org/economy/ reform/indicators-of-product-market-regulation/. 11. OECD (Organisation for Economic Co-operation and Development), “Skills Matter: Further Results from Honduras: Paths Toward Building a Resilient Society    21 22. Starting a business in Honduras involves 11 proce- dures that take an average of 42 days to complete. 23. The Harmonized System is a global product classification system. Learn more at https://www .trade.gov. 22    Honduras: Paths Toward Building a Resilient Society 4. Sustainability 4.1 Macroeconomic and analysis, the public and publicly guaranteed debt- to-GDP ratio is expected to peak at 59.7 percent Fiscal Sustainability of GDP in 2022 and then decline gradually to 40.1 The 2015 Systematic Country Diagnostic percent of GDP by 2041, supported by stable pri- (SCD) projected that Honduras’ macroeco- mary surpluses and declining interest payments. nomic profile could be expected to improve The ratios of the present value of public debt and in the medium term if a number of conditions public debt service to GDP are expected to remain were met. Unfortunately, the 2015 SCD scenario well below their indicative thresholds. While no did not fully materialize despite sustained fiscal indicators exceed their benchmarks under any consolidation, prudent macroeconomic man- scenario, public debt remains vulnerable to con- agement, and a well-capitalized financial mar- tingent liability risks and exogenous shocks, es- ket (see appendix N, table N.1), as key structural pecially natural disasters. This highlights the constraints to growth, including those related to importance of detecting and addressing existing private sector investment and the provision of debt vulnerabilities and rebuilding buffers to ad- infrastructure, remain unaddressed. In addition, dress shocks. the twin shocks of 2020 led to a steep increase in public debt. Improvements in Honduras’s macroeconomic outlook will depend on the implementation of Nevertheless, public sector debt remains stable, important structural reforms. Appendix N.1 the risk of debt distress for both public exter- presents Honduras’s medium-term macroeco- nal and overall debt is low, and the country has nomic outlook. Real GDP is expected to reach its strong debt-carrying capacity. According to the prepandemic level by 2023 supported by recon- most recent World Bank/IMF debt sustainability struction and recovery efforts and if vaccines are Honduras: Paths Toward Building a Resilient Society    23 widely available to the population. Projections also a crucial challenge, with a growing mistrust assume that structural reforms are accelerated, es- by civil society with respect to governance, pecially in the financial management of the elec- corruption, and mismanagement, undermin- tricity sector, governance, and transparency. With ing quality in the provision of public services. respect to fiscal management, the country will need A mechanism for public monitoring of prices to (1) maintain prudent fiscal management and re- (Observatorio de Precios) has been launched turn to the FRL target by 2023; (2) strengthen tax and a new e-procurement platform (Hondu- policy and tax administration, including revenue compras2) has been put online. However, it is management; (3) strengthen fiscal risk manage- still limited by underlying data structures that ment and reduce the growing vulnerability from preclude an integrated analysis of the entire pro- contingent liabilities, especially those stemming curement cycle. from SOEs (for example, ENEE), state-owned banks (SOBs), and natural disasters; (4) increase 4.2 Social Sustainability spending efficiency, including in the procurement Although the homicide rate has declined of goods and services and on the wage bill; and, since 20111 on the back of more stringent specifically on the wage bill, (5) control the growth repression, the prevalence of crime and vio- of the wage bill by implementing the centralized lence remains a key concern (see appendix wage bargaining mechanism and pursuing civil A, figure A.2; box 4.1). The underlying drivers service reform. These reforms would need to be and triggers of crime and violence remain. Cor- complemented with key structural reforms in sup- ruption and weak capacity in the police and ju- port of growth and poverty reduction. dicial systems add to a climate of impunity that provides fertile ground for crime, triggering a While notable progress has been observed in lack of confidence in the police.2 Beyond repres- specific areas, accountability continues to be sion and efforts to expand inclusion of youth in Box 4.1. The Knowledge Gap—Beyond Repression: What Policies Can Have Short- to Medium-Term Impacts on Crime and Violence Gangs, a primary driver of crime and violence, also adversely affect the provision of pub- lic services. In Honduras, crime and violence have an additional layer of complexity with the existence of drug cartels, professional crime entities of sophisticated organization, and high-powered weaponry that do not rely on gangs for their activities but that are sporadically involved with the gangs, thereby strengthening both parties. Relevant eval- uations to design appropriate policies could include the following: (1) the true impacts of the reform (or “purging”) of the police that took place starting in 2013; (2) a mapping of services (such as education, health) against the borders of gangs; (3) the mechanisms and impact on crime and violence of returned migrants who have spent time in US jails; and (4) a better understanding the cost of extortion, a primary source of income for gangs. Source: The Geography of Crime and Violence in Latin America and the Caribbean: Revisiting the Role of Development Policy (2023). 24    Honduras: Paths Toward Building a Resilient Society productive activities—which have achieved lim- health, education, and water and sanitation. The ited progress over the past five years—a broader impacts of these events disproportionately affect vision needs to be grounded on a better under- the poorest and marginalized segments of the standing of what could concretely work. Signifi- Honduran population.7 cant resources have been spent to address crime and violence. For example, the US government Climate change is expected to increase mean has spent more than $2 billion to fight crime and temperatures; intensify floods, heatwaves, and violence in Central America, mainly in primary drought; and raise sea levels, with significant and secondary interventions related to preven- consequences for the whole Honduran society. tion, such as a crime and violence observatory Honduras is one of the Central American coun- lab and police training. However, impact evalua- tries most affected by drought affecting agricul- tions have not been conducted of these interven- ture,8 while flooding destroys crops, homes, and tions and there is little information on what has infrastructure. Temperature and precipitation worked to address key drivers of the problem. changes resulting from climate change will affect the already stressed power sector, reducing hy- Honduras has one of the highest rates of youth dropower generation and increasing dependence who are neither in school nor employed, fur- on polluting thermal plants; threaten land, forest, ther fueling crime and violence. Recent demo- and marine ecosystems that are crucial to liveli- graphic shifts in Honduras,3 with an increase in hoods; and reduce water quality and availabil- the working-age population, present risks given ity, enhancing conditions for the proliferation of the size of the population that is not in the em- vector-borne and waterborne diseases.9 Climate ployment, education, or training (NEET) cohort,4 change impacts, compounded by natural resource and prevalent crime and violence. As of 2019, degradation and limited access to basic services, 28 percent of individuals aged 15–24 neither at- are expected to continue fostering migration tended school nor were employed. This share is from rural areas to urban centers and outside particularly high among women (43 percent)—in Honduras.10 fact, the highest in the Latin America and the Ca- ribbean region, followed by El Salvador at 38 per- Hurricanes Eta and Iota struck Central Amer- cent. As highlighted in the 2015 SCD, this group ica in 2020, each with an impact magnitude is particularly vulnerable to crime, both as perpe- comparable to that of Hurricane Mitch in 1998. trators and victims. They resulted in severe displacement and loss of life (evacuation of more than a million citizens and 4.3 Environmental over 100 deaths).11 The government’s damage and loss assessment suggested an impact of about 52 Sustainability Notably in billion lempiras ($2.15 billion), and the full dam- the Face of Climate Change age and loss assessment equated to about 7.5 per- Honduras’ exposure to natural hazards re- cent of 2019 GDP. The magnitude of both 2020 mains a key challenge to the country’s devel- events, their intensity, and the patterns of dam- opment.5 From 1996 to 2015 Honduras has been age were reminiscent of Hurricane Mitch, though the country most severely affected by extreme their human and economic impacts were far less weather events,6 with annual average losses equiv- significant (see table 4.1). Although these dispari- alent to 2.1 percent of GDP, affecting critical sec- ties are partly a consequence of the specificities of tors such as transportation, telecommunications, the storms, the substantive efforts of Honduras in Honduras: Paths Toward Building a Resilient Society    25 Table 4.1. Comparative Data on Impact on Lives Following Hurricanes Mitch and Eta-Iota Mitch (1998) Eta-Iota (2020) Country Dead Directly affected Dead Disappeared Directly affected Costa Rica 4 16,500 2 — 325,000 El Salvador 240 83,316 2 — 2,000 Guatemala 268 105,000 60 100 311,245 Honduras 5,657 617,831 95 10 437,212 Nicaragua 3,045 368,261 21 2 2 million Panamá N/A N/A 21 12 — México N/A N/A 27 — 184,000 Belize N/A N/A — — 30,000 Sources: World Bank staff elaborations based on Hurricane Mitch information: Elizabeth Mansilla, “Centroamérica a 10 años de Mitch. Reflexiones en trono a la reducción del riesgo” (2008). Hurricanes Eta-Iota information: World Bank, “Advisory 11: Hurricane Eta Central America—Belize- Mexico” (World Bank internal document). Note: — = not applicable; N/A = not available. investing in disaster risk reduction and prepared- Law (Decree 297-2013) and the Agroforestry Law ness in recent years also seem to have played a for Rural Development articulate the national pol- part. Confirming this by identifying the results icy aimed at strengthening adaptation to climate achieved under the government policies on disas- change and generating co-benefits for the popu- ter risk management and by determining how to lace (box 4.2). build on those is a knowledge gap. Honduras has built on years of efforts to incorporate disaster risk The shocks induced by the 2020 crises have management and climate change in its strategies, underscored the urgent need to strengthen the rather than simply focusing on enhancing disaster resilience of the economy. In response to the responses. crisis, the government has implemented a Con- tainment and Response Plan, is providing targeted The government of Honduras has put in place support to MSMEs, and has adopted a long-term a regulatory and policy framework to support Plan for Reconstruction and Sustainable Devel- low-carbon and climate-resilient development opment, aimed at rebuilding productive assets that, if effectively implemented, could help ad- and infrastructure, strengthening the economy’s dress land degradation. Forest cover in Hondu- sustainability and resilience to natural disasters, ras still represents 56 percent of the territory,12 but and expanding social protection programs. The land use, land-use change, and forestry (LULUCF) challenges and opportunities that climate change removals remain a major challenge for green- may create on the country’s development pat- house gas emissions. Driven by the exploitation of terns remain, however broadly to be determined, forest and agriculture alone,13 LULUCF represents an endeavor the upcoming Country Climate and around 42 percent of Honduras’s total emissions14 Development Report (CCDR) will try to address and, as mentioned in the SCD, intensifies the im- (box 4.3). pacts of droughts and floods. The Climate Change 26    Honduras: Paths Toward Building a Resilient Society Box 4.2. Honduras’ Commitment to Addressing Climate Change In its Nationally Determined Contribution (NDC) to the United Nations Framework Convention on Climate Change, Honduras has committed to a 15 percent emission reduction relative to business-as-usual levels by 2030 for energy, industrial processes, agriculture, and waste, conditional on international support. In addition, Honduras has included as sectoral targets, the afforestation/reforestation of 1 million hectares by 2030 and a 39 percent reduction in family firewood consumption through the use of efficient stoves to reduce deforestation by 2039. Finally, Honduras aims to formulate a Green Growth Policy that will regulate and promote the protection and restoration of ecosys- tems and include incentives to enhance the agriculture sector through green technol- ogies. Three main programs are envisaged: National Program for the Restoration and Valuation of Ecosystem Goods and Services; Program for the Recuperation of Degraded Ecosystems; and National Program of Coastal and Marine Ecosystems.a Turning those policies into actions will be a major challenge given weak institutional capacity and gov- ernance shortcomings; however, on a more positive note, the rhythm of deforestation has slightly declined in recent years.b Sources: The Climate Change Law (Decree 297-2013) available at https://observatoriop10.cepal.org/sites/default/files /documents/hn_-_ley_del_cambio_climatico_y_otros_decretos.pdf; Executive Decree PCM-126-2020, available at https:// www.tsc.gob.hn/web/leyes/PCM-126-2020.pdf; and Updated NDC, available at https://www4.unfccc.int/sites/ndcstaging /PublishedDocuments/Honduras%20First/NDC%20de%20Honduras_%20Primera%20Actualizaci%C3%B3n.pdf. a. Executive Decree PCM-126-2020. b. Deforestation declined from 22,700 Ha/y between 2012 and 2016, to 18,400 Ha/y between 2016 and 2018. Box 4.3. Knowledge Gap—Linking Climate Change and Development The objective of the Country Climate and Development Report (CCDR) will be to cap- ture the interplay between Honduras’ development goals and climate change. The CCDR will analyze how the country’s development goals can be achieved in the context of adapting to and mitigating climate change. The CCDR will also take into account and reflect the country’s commitments as embedded in its Nationally Determined Contri- butions (NDC) and will identify ways to support implementation. The CCDR will deploy a people-centered approach and focus on four key aspects as they relate to climate change and development: (1) water resources management; (2) transport; (3) agriculture, forestry, and land use; and (4) the social dimensions of climate change. Source: World Bank, “Country Climate and Development Report (2022),” forthcoming. Honduras: Paths Toward Building a Resilient Society    27 Notes 6. See Sönke Kreft, David Eckstein, and Inga Melchior, “Global Climate Risk Index 2017” (Germanwatch, Berlin, 1. The measured declines may be partially skewed 2016). by a change in the methodology of evaluating homi- cides. Sources: United Nations Office on Druge and 7. Indigenous peoples and Afro-descendants are the Crime, “Victims of Intentional Homicide: 2018,” https:// groups most severely affected by poverty and social ex- dataunodc.un.org/content/homicide-rate-option-2 , clusion in Honduras. While these groups account for an based on data from the United Nations Crime Trends estimated 8.6 percent of the national population, rough Survey (UN-CTS); UNAH/IUDPAS—Honduras Violence estimates from indigenous organizations indicate that Observatory. more than 70 percent live in poverty and over half are unemployed. A lack of household surveys has translated 2. Sourced from the 2019 AmericasBarometer by the into a lack of official estimates of poverty rates among Latin American Public Opinion Project (LAPOP), www these groups. .LapopSurveys.org. 8. Ravelo, A., A. Planchuelo, R.A. Ramírez, et al. 2016. 3. The dependency ratio dropped from 61.4 percent Monitoreo y Evaluación de las Sequías en América Cen- in 2015 to 56.2 percent in 2019; World Development tral. Editores: Hugo Carrão y Paulo Barbosa; EUR 27974 Indicators. ES; doi:10.2788/65166. 4. Data from the Honduran Household Survey (2018). 9. Government of Honduras (2018). National Climate Informality refers to workers aged between 15 and Change Adaptation Plan. 64 who do not receive a pension. According to Inter- national Labour Organization data, the share of the 10. Two sources: (1) Q. Wodon, et al., eds., Climate population not in education, employment, or training Change and Migration: Evidence from the Middle East stands at 26.7 percent of the labor force, 78 percent and North Africa Region (World Bank Studies, Washing- of whom are women, including a growing share of ed- ton, DC: World Bank, 2014); (2) B. Šedová, L. Čizmaziová, ucated women. The share of youth in the NEET popu- and A. Cook, A Meta-Analysis of Climate Migration Lit- lation in Honduras is the highest in the Latin American erature (No. 29). New York: Center for Economic Policy and the Caribbean region. Youth are defined as people Analysis, 2021). between the ages of 15 and 24. Youth not in education are those who were neither enrolled in school nor in 11. IFRC, “Hurricane Eta and Iota—Emergency Ap- a formal training program (such as vocational training) peal no. MDR43007 Operation Update no. 2” (Situ- during a specified reference period (for example, one ation Report, International Federation of Red Cross week). and Red Crescent Societies, Paris, January 21, 2021), https://reliefweb.int/report/honduras/honduras 5. Natural hazards also include geological events. Al- -hurricane-eta-and-iota-emergency-appeal-n-mdr43007 though Honduras has remained largely unaffected by the -operation-update-no-2#:~:text=According%20to%20 frequent earthquakes and volcanic activity that charac- official%20figures%2C%20approximately,floods%20 terize other Central American countries, in 2009 a mag- accumulated%20from%20the%20storms. nitude 7.1 earthquake killed seven people and caused estimated losses of $100 million, including $35 million 12. Anuario estadístico Forestal de Honduras 2019, in damage to infrastructure. “Disaster Risk Manage- http://sigmof.icf.gob.hn/downloads/Anuario-Forestal ment in Central America: GFDRR Country Notes, Hon- -2019.pdf. duras” (World Bank, Washington, DC, 2010), http://web 13. Annual average forest loss is estimated to be 23,303 .worldbank.org/archive/website01539/WEB/IMAGES hectares per year, with the 2006–12 period registering /GFDRR_HO.PDF. the highest deforestation, according to Anuario es- tadístico Forestal de Honduras 2019. 28    Honduras: Paths Toward Building a Resilient Society 14. According to its Biennial Update Report (2020), the country’s total emissions were 23,293 tonnes of carbon di- oxide equivalent (t CO2e), of which forest removals were 14,657 gigagram carbon dioxide equivalent (GgCO2e). Honduras: Paths Toward Building a Resilient Society    29 5. Taking Stock and Priorities Ahead 5.1 Challenges Facing of these achievements and the risks that they might be reversed. While this risk is not unique Poverty Reduction to Honduras, the country’s intrinsic vulnerabili- Although the country’s fundamental chal- ties make it particularly important to consolidate lenges have not radically changed since the 2015 the gains previously acquired. For example, while SCD—and thus its recommendations are still the flexibility of the fiscal discipline was warranted relevant—Honduras has made progress in some in 2020 in the face of the crises, it is important for areas identified in the SCD. Significant strides the country to quickly resume fiscal discipline to have been made in improving fiscal sustainability further strengthen macro stability and for it to im- and debt stabilization on the back of stringent fiscal plement a more countercyclical policy to respond discipline before the 2020 crises. Together with an better to shocks. Moreover, a planned return to improved framework for disaster risk management FRL targets should safeguard public investment. and a stronger social protection targeting system, Improvements in assessing, monitoring, and mit- these efforts have probably helped cushion the im- igating fiscal risks will be critical. The example of pact of the exceptional crises of 2020. There seems the improved management of the emergencies to be a conjunction of factors that led to progress in resulting from climate disasters for more than 20 those areas: first, a consensus across society of the years shows that sustained achievements are possi- urgent need to act and second, a sustained accom- ble beyond economic and political cycles. Looking paniment of international stakeholders customizing ahead, significant improvement in the efficiency world-class, cutting-edge practices in the country. of public investment spending combined with a long-term program of investment is needed to Repeating patterns observed in previous cy- adapt infrastructure to the new climate patterns, cles, the 2020 crises underscored the fragility from transport to water, from energy to digital. 30    Honduras: Paths Toward Building a Resilient Society Improving the management of these infrastructure example, through early warning and crisis man- services will also be essential for sustainability. agement systems), underlying issues have yet to be addressed: resilience of infrastructures and sys- Progress on other structural challenges has tems remains weak, as demonstrated by the num- been more mixed, and key constraints remain ber of infrastructures (road, bridges, houses, and to accelerated growth. The shortage of skills is so on) destroyed by Hurricanes Eta and Iota and still prevalent, hampering the articulation of a the impacts on some productive sectors such as more complex, integrated, and high-productivity textiles. As mentioned previously, fiscal vulnera- economy. Education outcomes are poor, despite bilities have increased in the post-2020 crises con- the high level of spending in the sector. Further, text, and improving the quality of expenditures while investments have been made on trunk in- will be essential to maintain fiscal equilibrium at a frastructure, accessibility and cost remain key moment of dire need for investment to boost the challenges to competitiveness, particularly for economic rebound, provide basic services, and rural populations. Access to credit also remains a foster inclusion of the poorest people. challenge, and little to no progress has been made in reforming the regulatory framework affecting the labor market and certain product markets 5.2 Deep Roots of the subject to special regimes. Challenges Faced The SCD identified the low quality of insti- Despite improvement in the social protection tutions susceptible to corruption and various targeting system, inequality and social exclu- forms of elite capture as the root cause un- sion remain high. The pandemic underscored the derlying Honduras’s development challenges. deep weaknesses of the health sector. Moreover, The SCD stressed how a low development equi- while progress has been observed in some of the librium did not allow for the emergence of bar- areas flagged in the SCD, such as social protection gaining powers among groups that could demand and access to water, the quality of the services de- the improvement of state institutions. The situa- livered in some areas has remained mediocre, at tion has not improved since the SCD: governance best: education outcomes are poor; the quality and and institutions have continued to deteriorate affordability of services such as water, electricity, under state capture, clientelism, and patronage. and internet are bad; and the divide between the This has undermined citizens’ trust, adversely af- formal and informal sectors has grown. As a result, fected service delivery, limited space for reform, the country’s Human Capital Index has degraded and restricted opportunities for private sector in recent years, except for slight improvements development, ultimately fostering inequality and since 2015 in primary education. The 2020 crises exclusion. compounded the low quality and access difficulties across a range of these services, with near-certain An institutional benchmark1 assessment with adverse human capital outcomes in the long term, two sets of country comparators (structural and especially for poor and vulnerable people, includ- aspirational) shows that Honduras ranks poorly ing Indigenous Peoples, Afro-Hondurans, mi- across the board, but particularly on public sec- grants, and persons with disabilities. tor performance, service delivery institutions, and accountability and corruption. The institu- Resilience remains broadly low. While progress tional assessment compares Honduras with struc- has been achieved in disaster management (for tural and aspirational comparators on the basis of Honduras: Paths Toward Building a Resilient Society    31 Figure 5.1. Institutional Benchmark Analysis a. Honduras and Structural Peers b. Honduras and Aspirational Peers Top 50 25–50 qu ntil Bottom 25 Top 50 25–50 qu ntil Bottom 25 Public s ctor Public s ctor p rform nc p rform nc S rvic d liv r S rvic d liv r institutions institutions Account bilit Account bilit nd corruption nd corruption L l L l institutions institutions Politic l Politic l institutions institutions Busin ss nd Busin ss nd tr d nvironm nt tr d nvironm nt L bor L bor institutions institutions Soci l Soci l institutions institutions Fin nci l Fin nci l institutions institutions 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 dist nc to fronti r dist nc to fronti r Source: World Bank staff estimates based on a suite of governance indicators. a suite of 88 indicators and shows considerable quality of rule of law and stability of democratic room for improvement in most of the nine institu- institutions. This trend is supported by findings tional clusters assessed (see figure 5.1). The analy- from other sources, such as the World Justice sis highlights that regulation and enforcement are Project (WJP),4 which signals that the country especially weak when it comes to managing public performs worse than most Latin American coun- resources, and the government lacks the capacity to tries when it comes to the rule of law (2021 Rule spend efficiently. Significant corruption and the ab- of Law Index). Honduras also ranks at the bottom sence of control and accountability are perceived as of the Latin America and the Caribbean regional more severely rooted in Honduras than in all com- distribution with regard to the public integrity parator countries. In terms of political institutions, of its institutions, according to the 2019 Index of Honduras ranks in the bottom third relative to all Public Integrity, which shows that corruption and its comparators, with fundamental rights neither lack of protection of fundamental rights are per- guaranteed nor properly defended together with a vasive. As an expression of the low levels of trust, declining capacity to apply constraints to govern- 48 percent of citizens do not believe Honduras is ment powers, signaling state capture. In effect, civil a democracy; satisfaction with democracy shows society displays widespread distrust in politicians a sharp decline from 65.6 percent in 2010 to 35.9 and a lack of engagement to a worse extent than in percent in 2018.5 In 2020, Honduras reached its most of Honduras’s comparators. worst rating on Transparency International’s Corruption Perceptions Index6 since its first rat- Honduras struggles in terms of integrity, rule of ings in 2012. The country also ranked next to last law, and corruption; although there have been in the 2020 Latin American Index of Legislative some steps taken toward addressing adminis- Transparency, showing an increase in favoritism trative corruption, the challenge of capture by and undue influence that is leading to a decline in vested interests remains unaddressed. Between public trust in the past five years. Among Hondu- 2015 and 2020 Honduras declined in four of the rans surveyed in early 2021, corruption was iden- six Worldwide Governance Indicators,2 and the tified as the main problem in the country.7 quality of governance and institutions has de- clined across most dimensions of the Bertelsmann The opportunities for effective citizen en- Transformation Index (BTI),3 particularly in the gagement in policy making and civil society 32    Honduras: Paths Toward Building a Resilient Society oversight of the public sphere are limited. Hon- of powers between the branches of government, duras is rated Partly Free in Freedom in the World, as is evident through the way magistrates are ap- Freedom House’s 2020 study of political rights pointed to the Supreme Court, Superior Tribu- and civil liberties worldwide. Although during nal of Accounts, and other control institutions; 2014–19 there were some specific actions linked although this has improved recently with the to social accountability and open government, inclusion of civil society groups in the selection overall civil society faces serious challenges. Civil process, these processes are still highly political society organizations and citizen champions, es- and wrought with conflicts of interest. Addition- pecially in the human rights and environmental ally, influential special interest groups within sec- fields, report significant threats, surveillance, and tors can have a direct influence on policy design violence aimed at limiting their participation in and implementation; in energy, water, education, public policy decisions and actions. In 2016, in- health, and other sectors, vested interests have digenous and environmental activist leader Berta had a role in blocking reforms that would improve Cáceres was assassinated in her home; former efficiency and accountability in service delivery. military personnel and an executive of the dam Broadly, the institutional determinants that sup- project she had been speaking out against have port state capture continue to be a knowledge gap, been convicted for that crime. International civil despite some initial analytical work implemented society organizations have identified Honduras as by the team for this Update. one of the most dangerous countries in the world for environmental activism. A picture emerges of rising fragility and grow- ing inequality in Honduras, driven by impunity, The low capacity of institutions is also related elite capture, violence, and social exclusion, to the weakness of the human resource man- and resulting in the deterioration of the so- agement system, which is highly politicized and cial contract, growing frustration among the fragmented. As mentioned earlier, the lack of a populace, and increased outward migration. coherent legal framework for public employment, Reversing these trends will be the fundamental with multiple special regimes for occupational challenge of the country if it is to escape from the groups, and the lack of clear remuneration policy low growth equilibrium into which it has for so have been the driving forces of the unsustainable long been locked. public wage bill. The weak institutional arrange- ments include the lack of a high-level public admin- 5.3 Priorities Ahead istration authority responsible for human resource policies across the public sector. Limitations in 5.3.1 Approach to Prioritization human resource management allow for the prom- This Update follows the 2015 SCD priorities, inence of patronage dynamics, which ultimately adding two additional prioritization criteria, help fund political parties and campaigns and give the feasibility of the reforms and the relative greater discretion to benefit particular interests. urgency to act. The 2015 SCD prioritization fil- Honduras has long been in urgent need of a mod- ters included the impact of the policies, their time ern civil service based on merit and performance. horizon, the complementarity of those measures, and evidence to support prioritization. The limited The broader dynamics of state capture are track record of successful reforms over the past structural and not new (box 5.1). Part of the five years warrants a realistic perspective on what underlying problem lies in the weak separation can be achieved and in what timeframe. Successful Honduras: Paths Toward Building a Resilient Society    33 Box 5.1. Challenges of State Capture and Growing Influence of Criminal Elements in Public Spheres A series of high-profile corruption cases have affected the credibility of the government, undermining public trust and social cohesion. In response to massive protests against one of the biggest corruption scandals in the history of the country (the embezzlement of close to $330 million from the Social Security Institute, a portion of which financed the National Party campaign in 2013), in 2016 Honduran authorities requested support from the Organization of American States to establish the “Mission to Support the Fight Against Corruption and Impunity in Honduras” (MACCIH). As MACCIH, in coordination with the Office of the Public Prosecutor, began unraveling corruption cases and reveal- ing corrupt networks, some linked to high-level public officials and a group of legislators that allegedly funneled social investment funds for other ends, Honduran authorities took steps to undermine MACCIH’s work, attempting to shield themselves from inves- tigation and prosecution. MACCIH publicly identified this dynamic as an “impunity pact” among the political elite. In that context, authorities were unwilling to extend the mission’s mandate, leading to its closure in January 2020. Additionally, since 2014, court cases in the United States have revealed the deep influence of narcotrafficking and or- ganized crime among high-level politicians across political parties, local elected officials, businesspersons, police, and military in Honduras—most recently, with the sentencing in the United States of the brother of the President of Honduras (as well as a member of the National Congress) to life in prison on charges related to drug trafficking. The United States has publicly called out a series of “corrupt and undemocratic actors,” particularly in the Honduran National Congress and public sector staff. The Global Organized Crime Index 2021a identifies the prominence of state-embedded criminal actors in Honduras; and conversely, low levels of resilience to address these problems. Source: World Bank, “Honduras Risk and Resilience Assessment (2022).” a. Global Initiative Against Transnational Organized Crime, Global Organized Crime Index 2021, https://ocindex.net /assets/downloads/global-ocindex-report.pdf. past reforms exist but extending them into the fu- Thus, in all cases, promoting the reforms ture will require continuous attention. With ad- through strategically selected windows, or justments, other programs implemented by the entry points, whose breadth and depth will government could potentially have wider impacts be highly dependent on the feasibility and on poverty and growth. For some of the relevant urgency filters, seems warranted for success. reforms that stalled for years, realistic entry points Continuous accompaniment from international might be a solution to advance in the right direc- stakeholders in the reform process will also be tion. In some cases, the recent context may have needed. Overall, the reconstruction needs due to triggered a broader conscientization from the soci- the 2020 crises slightly expand the set of critical ety on the urgency to act that could allow the con- priorities even with the application of two addi- sensus needed to finally advance the reforms. tional filters. 34    Honduras: Paths Toward Building a Resilient Society 5.3.2 Building on Recent Success Further improving the effectiveness of the social to Solidify Achievements protection system to build the resilience of the Substantial progress has been achieved with most vulnerable people is warranted. Various respect to three Complementary Measures areas need to be considered, particularly to make identified in the 2015 SCD: prudent macroeco- social protection more adaptive to climate change nomic management, targeting and coverage of and to promote and protect human capital, includ- social protection, and improvement in the pre- ing expanding the coverage of the social registry vention and management of disaster risks. considering elements of adaptive social protection and expanding the coverage of the CCT to reach Maintaining and further strengthening macro- all the poor and vulnerable population. It is partic- economic and fiscal stability and accelerating ularly urgent to provide support to the increased the implementation of structural reforms will be number of poor households resulting from the crucial to support strong, consistent growth and 2020 twin shocks. In addition, strengthening pay- enduring poverty reduction. The government ment mechanisms through an expansion of digital will have to balance support for the recovery with payments would ensure predictable and frequent a convergence to the FRL targets building on and payments with wide coverage and would promote further advancing the structural reforms started in the financial inclusion of the poorest and most vul- 2014 (see appendix N, table N.1). Further strength- nerable people; building skills from the early years ening fiscal stability will require managing two key until adulthood would promote employability and entry points: improving the efficiency of public social inclusion. Additional measures to further expenditures and managing and mitigating fiscal boost inclusion are warranted (see box 5.3). risks stemming from SOEs, in particular ENEE (see box 5.2). Building on past reforms, targeted mea- Finally, while Honduras has made steady prog- sures, such as implementing a centralized wage ress in disaster risk prevention, the country bargaining scheme, could contribute effectively in needs to build resilience to natural shocks, the short term to the first entry point. Progressing which are expected to intensify with climate on the loss-reduction strategy and containing the change. As mentioned, Honduras was rated the recurrence of arrears of ENEE are imperative and, world’s most severely affected country by extreme given the size of the company’s debts, urgent. As a weather events. Climate change is already affect- result, a broad program involving at least adjust- ing crop yields, causing food insecurity in affected ment to the tariff policies—with a close eye on the areas along the Dry Corridor.8 Climate change potential impacts on the poorest customers—re- impacts in the Dry Corridor, compounded by the duction of costs and losses (technical and thefts), lack of basic needs coverage, are expected to con- and improvement of energy efficiency of key public tinue to stimulate migration from rural areas to sectors (hospital, army, and so on) are warranted. urban centers, outside Honduras, or both. Prog- Other reforms for macroeconomic and fiscal sta- ress has been achieved on the early management bility could target increasing domestic private and of crisis but strengthening the resilience of in- public savings and investment through further frastructure and services seems a relevant entry development of the domestic financial market point, in particular through programs aimed at that would help reduce Honduras’s dependency improving risk assessments of public assets and on external factors of growth, improve economic services, enhancing the resilience standards and resilience to external and domestic shocks, and norms for public assets (both green and gray in- strengthen long-term economic growth. frastructure), and improving their enforcement Honduras: Paths Toward Building a Resilient Society    35 Box 5.2. Reforms to Further Strengthen Macroeconomic and Fiscal Stability Rationalizing public sector spending will entail (1) strengthening transparency and ac- countability of the public sector by enhancing the comprehensiveness of fiscal reports, their monitoring, and their publication; (2) rationalizing and increasing the efficacy of social public spending by enhancing the pro-poor features of targeting mechanisms; (3) significantly redressing the imbalance between recurrent spending, especially the wage bill, and capital expenditure; and (4) strengthening digital government tools, leg- islation, and institutions in an effort to improve public sector efficiency and consolidate programs into fewer and higher-impact interventions. Moreover, reducing inefficiencies in public spending, especially in procurement, the wage bill, and targeted transfers will be essential to gaining spending efficiency and support planned convergence to the Fiscal Responsibility Law (FRL) targets. Amending the legal framework and strengthening institutions responsible for the civil service are critical. Managing and mitigating fiscal risks, including those related to two state-owned banks that require recapitalization (Banco Nacional de Desarrollo Agrícola; BANADESA, and Banco Hondureño para la Producción y la Vivienda; BANHPROVI) and Empresa Nacional de Energìa Eléctrica (ENEE). Given BANADESA’s financing insolvency, a proper resolution should be implemented, limiting the contingent liabilities to the state. While the private financial sector is liquid and solvent, the impacts of the twin shocks should be closely monitored and banks audited to address losses and to manage the fiscal consequences of potential problems. On the energy sector, efforts are needed to im- prove governance in ENEE and resolve its financial situation, including the restructuring (implementation of the electricity law approved in 2014), keeping electricity tariffs in line with costs, and medium- and long-term structural measures, such as reduction of tech- nical and nontechnical losses and renegotiation of existing contracts with suppliers of generators. Source: World Bank assessment based on World Bank, “Honduras Social Expenditures and Institutional Review” (World Bank, Washington, DC, 2014); data on debt-related fiscal risks and contingent liabilities from the Honduras Ministry of Finance and from World Bank, “Public Expenditure Review” (World Bank, Washington, DC, forthcoming). and building/consolidating institutions in charge country is critical. Targeted programs focusing of risk management. on high labor–intensity works,9 starting with the areas most affected by the hurricanes, can accel- erate the transformation of the rural economy by 5.3.3 Reorienting and/or helping poor and unskilled people transition out Accelerating Reforms Where of the rural poverty trap. Approaches based on There Has Been Commitment strong citizen engagement should be preferred as but Limited Results the way to build citizen trust and circumvent risks Expanding rural access and enhanced quality of fraud and corruption. Further improving access of infrastructure service delivery across the to water, energy, and telecom in rural areas should 36    Honduras: Paths Toward Building a Resilient Society Box 5.3. Additional Measures to Boost Inclusion Social inclusion in Honduras remains weak, particularly for Indigenous Peoples and Afro-Hondurans (IPAH). These cohorts remain largely unseen in policy making and programming because of statistical invisibility (a knowledge gap), structural discrimina- tion, and their weak voice and agency to d1emand change. First and foremost, targeted policies and actions need to be based on data. It is important to set norms that allow for the identification of IPAH. Policies and measures that could help overcome some of the barriers then could include (1) promoting a comprehensive framework to ensures that free, prior, and informed consent (FPIC) is defined and instituted in agreement with IPAH, (2) supporting complementary actions to national laws and regulations that are culturally adapted and framed as part of a national response to sustainability and climate change, and (3) focusing on implementing the National Policy Against Racism and Racial Discrimination for an Integrated Development of Indigenous Peoples and Afro-Hondu- rans (P-PIAH), adopted in 2016. Source: World Bank assessment, based on two regional reports: Germain Freire et al., Afro-descendants in Latin Amer- ica: Toward a Framework of Inclusion (Washington, DC: World Bank, 2018) and German Freire et al., Indigenous Latin America in the Twenty-First Century: The First Decade (Washington, DC: World Bank, 2015), and the assessments and feedback from consultations with Indigenous Peoples and Afro-descendants organizations. accompany the effort because they have both an The promotion of active labor market policies inclusion and economic role that can help address should first rely on existing successful pilots. the endemic poverty of rural areas. Such measures The Rural Competitiveness Project (COMRU- are urgent for distinct reasons: the reconstruction RAL) and its complement Corredor Seco Food and improvement of rural access is essential for Security Project (PROSASUR) have shown un- the poor; the electricity sector represents a huge deniable success in professionalizing small sub- liability to public finances that needs to be ad- sistence agriculture. This approach needs to be dressed urgently; implementing water and energy widely scaled up to match the rest of the territory. sector reforms is a priority in the face of climate It also needs to identify paths of transition for the change as restrictions to both human consump- 30+ percent of the population working in agricul- tion and agriculture have already started to ma- ture toward new jobs. Works in rural roads can terialize; finally, reforms in the digital sector are offer a temporary solution. Beyond that, new jobs also urgent if the country is not to lag behind in a are needed and can rely, for example, on the so- rapidly changing world. Priority reforms in infra- phistication of the value chains, with more inte- structure are listed in appendix O. A natural entry gration of agribusiness services to raw agriculture. point is to focus public investment programs on This could entail a wide array of services, from in- labor-intensive works, beginning with areas most dustrial processing close to the site of production affected by hurricanes, while fostering private to specialized services to agriculture (equipment sector involvement whenever possible. For that renting, for example) (see box 5.3). Promoting job latter measure to materialize, strengthening the creation in labor-intensive sectors (agriculture PPP framework and implementation capacity is and construction, for example), especially those warranted. with the potential for transformation to boost Honduras: Paths Toward Building a Resilient Society    37 external competitiveness (such as agribusiness, learning competencies of local workers and firms manufacturing, business process outsourcing, in non–special economic zone areas to be able to and information and communication technology) meet their clients’ needs. These and other detailed and those concentrated in rural areas would help policy recommendations are outlined in the Hon- break the cycle of poverty. Building on past suc- duras CPSD (see also box 5.4). cesses, scaling up COMRURAL and PROSASUR is warranted, and the sophistication of the pro- grams to incorporate more value seems feasible. 5.3.4 Putting Renewed Emphasis Finally, the modernization of agriculture depends on Areas Where Progress Was on an acceleration of the land tenure reform, no- Insufficient tably through strengthening the capacity of the Improving access to basic services is essential National Registry of Land Management Regula- and urgent and should entail a strong focus on tions, modernizing land and property cadasters, education and health. Implementation of key re- streamlining business licensing, and strengthen- forms in those sectors has been stalled for years, ing the land tenure security of the communal lands leading to inefficiencies and poor outcomes. The of the Indigenous Peoples and Afro-descendants. crises in 2020 were a cruel demonstration of the urgent need to strengthen those systems. The re- While systemically improving business regula- cent national elections provide an opportunity tion would be warranted to support the private to prioritize these sectors and accelerate the im- sector, a step-by-step approach testing actions plementation of reforms; international financial toward more integrated value chains through institutions could assist by piloting and incentiv- pilots based on the success of the maquila seems izing relevant efforts. feasible. Building on the potentials of the country, strengthening the industrial sector will be essen- The COVID-19 pandemic dealt unprecedented tial to boost growth and absorb low-skilled rural blows to Honduras’s growth and equity goals individuals while providing them with new skills, by shutting down an education system that was allowing a smooth transformation of the rural already underperforming. The present situation economy. The success and resilience of maquilas offers an opportunity to rethink both how educa- provide a formidable terrain of experimentation tional resources are spent and how the quality of for measures that could contribute to boosting the outcome can be improved. Improving learning the industry. Leveraging successful maquila expe- competencies and technical capacities is essential rience to profit from nearshoring, fostering trade, to build a reservoir of workers able to support the attracting foreign investment, and better linking development and complex articulation of firms the maquila sector and the rest of the economy to enable them to compete in global markets and seem relevant entry points to boost the industry. support the transition toward higher-value-added Short-term measures could, for example, consist of production. In the short to medium term, the safe (1) promoting a vertically integrated value chain reopening of schools, including a campaign to mo- and forward and backward links within Hondu- tivate and encourage enrollment and school pre- ras to increase the competitiveness of the maquila paredness, is a priority and a basic entry point industry and strengthen linkages with domestic to reactivate the educational system. In addi- MSMEs, thus expanding the economic impact of tion, efforts should be made to assess all children the maquila sector beyond export-oriented firms; upon their return to school so that instruction and (2) increasing the absorptive capacity and can be adjusted to learning levels, ensuring the 38    Honduras: Paths Toward Building a Resilient Society Box 5.4. Additional Measures to Boost Competitiveness and Job Creation For stronger, more resilient, and more inclusive growth, the country needs to strengthen competitiveness, promote job creation, and build domestic savings and investment (see appendix P). The labor participation rate has increased considerably, but employment creation has been insufficient to absorb the increasing labor supply. Employment cre- ation has primarily concentrated in low-productive services activities. Premature dein- dustrialization has prevented the incoming labor force from benefitting from knowledge dissemination associated with industrial activities, thus reducing the opportunities for prospective workers to gain access to more high-tech job options. Moreover, the ed- ucation system offers limited specialized technical training. In addition, job creation in micro, small, and medium enterprises (MSMEs), which account for nearly 70 percent of Honduras’s workforce, has decelerated considerably. Honduras should create more qual- ity, formal, and high-paying jobs for the emerging workforce and improve the quality and market relevance of education programs. The most attractive opportunities to increase export competitiveness involve prod- ucts in which Honduras already has a comparative advantage and a sizeable market share, but exploiting the full potential of existing exports will require the following: (1) strategic repositioning within current and new value chains, (2) deeper regional inte- gration, (3) transformation and modernization of the domestic market through product diversification and sophistication, (4) improvement of the regulatory framework and business environment, (5) strengthened linkages between export- and foreign domestic investment (FDI)-oriented sectors and the rest of the economy, and (6) a strengthened domestic financial market. Relevant entry points could include reform in the labor mar- ket regulations to allow free mobility of the workforce between special economic zone (SEZ) and non-SEZ areas, reforms of intellectual property rights to ease the resolution of patent conflicts, and the reduction of regulatory burden in non-SEZ areas to promote the development of competitive markets. Sources: World Bank staff elaborations based on Veronica Michel and Ian Walker, Honduras Jobs Diagnostic (Jobs Series 17, Washington, DC: World Bank, 2019); International Finance Corporation, Honduras Country Private Sector Diagnostic (Washington, DC: World Bank Group, forthcoming). availability of extra support for those who have education for all students. This would require the fallen further behind. These actions, along with careful integration of these efforts into the educa- current efforts by the government to build remote tion system as well as a considerable investment learning platforms for students, to provide remote in expanding access to digital devices and to con- professional development for educators, and to nectivity, which currently is very limited and un- deliver printed educational materials packages for equally distributed. children who are not able to participate in remote learning otherwise, could be leveraged and built Honduras will need to spend more and better upon to expand access to quality and accessible on health to effectively address major health Honduras: Paths Toward Building a Resilient Society    39 emergencies such as COVID-19. In light of and violence need to be complemented with “soft” the existing challenges facing the sector that approaches to reduce the likelihood that children have been further compounded by the COVID- and youth will drift into criminal activities and 19 pandemic, the health sector must act using a gang membership. Investments in family mental multipronged approach that prioritizes (1) pre- health services as well as creating opportunities paredness and response to health emergencies, for youth that compete with gangs seem feasible including pandemics and natural disasters, partic- to disrupt the recruitment pipeline and develop ularly through the urgent upgrading of equipment, strong, cohesive communities. Addressing urban infrastructure, and governance of the nationwide decay and building community infrastructure and surveillance and laboratory network; and (2) eq- public spaces can also contribute to this agenda. uitable access to high-quality primary care ser- Reforms to incentivize the middle class—the peo- vices. This would entail ambitious policy changes ple with enough voice and power to change the involving, for example, increasing immunization system—to participate in efforts to reduce crime coverage to reach the growing number of children is also key.10 Interventions aimed at reducing with no access to vaccines (“zero dose children”), gender-based violence offer promise in reducing leveraging community-based nutrition programs overall levels of crime and violence. Available evi- to address the ever-growing overweight epidemic, dence suggests that reforming gender-biased leg- and establishing a quality referral network across islation can increase women’s engagement in the the country to ensure the continuity of quality care private sector workforce,11 which combined with for pregnant women and mothers. Underpinning enhancing security from violence and harassment all policy recommendations is a need to enhance of women in workplaces can, in turn, foster eco- the Ministry of Health’s governance of the health nomic growth. International organizations need sector so that it can more effectively address sys- to coordinate their efforts to support dedicated temic deficiencies that hamper service delivery programs by government but also to support civil at the central and subnational levels. COVID-19 society efforts to demand action to address the showed the deliquescence of the health system problem. The entry point would thus lie in soft and the urgency to improve it. policy to be defined once the knowledge gap iden- tified is closed. 5.3.5 Policy Levers to Address Better understanding the key drivers of mi- the Vicious Cycles Identified in gration and identifying measures that could the 2015 SCD optimize its benefits for the country seems Effectively implementing the policy levers warranted. Supported by the International Orga- identified in the SCD will require time, con- nization for Migration, the United Nations High sistency, and a careful evaluation of the risks Commissioner for Refugees, the United States and potential unintended consequences of the Agency for International Development, and other proposed interventions given the complex en- development partners, Honduras has made prog- vironment. The SCD recommendations on the ress in recent years in managing its emigration policy levers to break the cycle between crime with the creation of the National Migration Insti- and violence and low growth broadly remain per- tute and the National Council for the Protection tinent as it remains a key roadblock to growth of Honduran Migrants as well as the strength- and poverty reduction. International experience ening sectoral agencies providing services to suggests that “hard” approaches to fighting crime Honduran emigrants and migrants in transit. 40    Honduras: Paths Toward Building a Resilient Society However, the country still lacks an integrated mi- fragility risks, may help tailor country engage- gratory policy that aligns various sectoral com- ment programs in a timely manner. While, in petencies into a comprehensive framework. Key a context of capture, it is not clear how readily elements to consider could include (1) investing elites will help embark on (or allow for) a path in employable skills, (2) fostering resilient infra- toward sustainable reform,12 smaller steps in structure and services in communities where this direction over the short term, considered projected climate-change impacts are expected entry points, could include strengthening ac- to trigger emigration, (3) implementing a policy cess to justice in lower courts, addressing loop- framework and guidelines to manage vulnerable holes in the legal-administrative framework populations in sending communities and for mi- that allow for discretion (starting with man- grant populations in transit, and (4) strengthening dating the publication of asset declarations of links to the diaspora (the cost of sending remit- public servants, establishing clearer rules and tances is already among the lowest in the region) accountability on conflicts of interest, and and facilitating the migrants’ return. The benefits improving access to information), bolstering and drawbacks of migration is a new knowledge capacities of the Special Prosecutorial Unit gap that will be addressed with analytical work Against Corruption Networks, and moderniz- in 2022, and specific entry point(s) will be identi- ing accountability institutions to improve the fied when supporting analytical work to close the effectiveness of their oversight role. knowledge gap is concluded (2022). „ Moving forward, there is a need to rein- force the supply and demand for good Finally, at the heart of Honduras’s challenges governance. On the supply side, much more for development, improving the low quality of needs to be done to reinforce transparency institutions and limiting capture by elites re- and openness to prevent mismanagement of main of utmost priority. A nuanced analysis of public resources and to build citizens’ trust the context of state capture and economic inter- in the capacity of government to allocate and ests is critical for the design and implementation invest taxpayers’ money with efficiency and of effective and sustainable interventions. integrity. Building on progress, such as that achieved by initiatives like the Open Gov- „ The focus areas identified in the 2015 ernment Partnership and the Infrastructure SCD—strengthening the rule of law and Transparency Initiative, Honduras could re- the judiciary, building capacity, and en- inforce transparency and openness in the use hancing the accountability framework— of public resources and policy making while remain relevant. However, they need to be building monitoring and evaluation systems complemented by additional measures stem- and statistical capacity. On the demand side, ming from an understanding of the implica- an entry point could be strengthening the ca- tions of capture by elites and interest groups. pacity of civil society to play a much more While priority action areas may seem clear, it active role in demanding accountability from will be important for reformers, stakeholders, government. A focus on renewing the social and development partners to carefully and contract from the local level, starting in se- periodically consider the most appropriate lect municipalities, is another possible entry courses of action. Communication and co- point, fostering enhanced community engage- ordination in this regard, coupled with sober ment approaches to local development from assessments of the trends in governance and which lessons can be drawn. Additionally, it Honduras: Paths Toward Building a Resilient Society    41 is critical for Honduras to build trust with government could take advantage of the growth local communities and ensure that public in- perspectives offered by the rebound of the inter- stitutions dedicated to the defense of human national economy and the prospect of the United rights, particularly the rights of Indigenous States prioritizing shorter value chains and near- Peoples and Afro-descendants, are appropri- shoring. The nature of international markets, par- ately staffed, well equipped, and sufficiently ticularly the demand for greener products, may independent to ensure the protection of provide opportunities for the agriculture and the rights and the appropriate and just handling manufacturing sectors, provided these sectors of grievances, which, if left unattended or can adapt to this new demand. The country’s ac- mismanaged, can fuel conflict. cess to submarine cables provides potential op- portunities to develop the digital economy. The The 2015 SCD priorities—reflecting the crite- demographic dividend is yet another important ria of impact, time horizon, complementarity, opportunity, provided the job market is reformed and evidence base—remain largely relevant to enable greater flexibility and formalization. Fi- today. The SCD Update introduces two new fil- nally, while much has already been done, further ters, the feasibility of the measures and the rela- strengthening the regional market and deepening tive urgency to act. The resulting priorities appear the integration of the economies of Central Amer- in table 1.1. They are the same as the 2015 SCD ica will offer development opportunities. priorities but with complements and nuances in- corporated in italics in the table. In addition, the table highlights a few entry points that are prom- Notes ising first steps to initiate or further pursue re- 1. The institutional benchmark analysis consists of iden- tifying institutional gaps by comparing Honduras with forms in the priority areas. a set of country comparators through a benchmarking exercise that measures the distance to the frontier of aggregated indicators grouped according to nine insti- 5.3.6 A Positive Context for tutional families. Reform 2. Honduras declined in four of the six Worldwide Gov- While these are far-reaching goals, elements of ernance Indicators, specifically voice and accountability, context may provide opportunities to improve political stability and absence of violence, government governance. First, the government alternation effectiveness, regulatory quality, control of corruption, after the November 2021 elections is an opportu- and rule of law. nity to reverse the negative trends observed in the 3. The BTI measures changes in three main dimensions: past five years, notably on governance, and to ac- political transformation, governance index, and eco- celerate reforms. A new government will have the nomic transformation. opportunity and responsibility to chart a course 4. World Justice Project (WJP) indicators signal that ex- consistent with the recovery and reconstruction ecutive and legislative officials have institutionalized the needs of the country and to address the critical use of public office for private gain and offer a series constraints to growth. On the international scene, of supporting conclusions. This malpractice has been the United States has placed renewed focus on ranked as one of the most severe in the world; effective corruption and weak institutions as one of the key constraints and oversight on government powers are weakening, undermining accountability; the capacity to drivers of migration from northern Central Amer- enforce regulations lags behind other countries in Latin ica and has announced that this will be a major America and the Caribbean, and it has stalled over the focus of its development assistance. The incoming past five years. Improper influence and lack of respect 42    Honduras: Paths Toward Building a Resilient Society for due process in administrative proceedings are the 10. See Rachel Kleinfeld, A Savage Order: How the main explanations for the weak regulatory enforcement. World’s Deadliest Countries Can Forge a Path to Secu- rity (New York: Pantheon Books, 2018). 5. See Latin American Public Opinion Project (LAPOP), “Barometro de las Americas.” 11. See Asif Islam, Silvia Muzi, and Mohammad Amin, “Unequal Laws and the Disempowerment of Women in 6. Corruption Perception Index 2020, “Honduras Sum- the Labor Market: Evidence from Firm-Level Data” (Pol- mary Report” (Transparency International and Aso- icy Research Working Paper 8202, World Bank, Washing- ciación para una Sociedad más Justa, 2021). http:// ton, DC. 2017). biblioteca.asjhonduras.com/wp-content/uploads/2021 /01/IPC2020-resumen.pdf. 12. Several of the recommendations for addressing gaps in the accountability framework build on the World 7. See CID Gallup poll from January 2021, as reported in Bank’s 2009 Honduras Institutional and Governance Re- “A hondureños les preocupa más el desempleo que el view (IGR), which underlined the need for (a) improving coronavirus: CID Gallup.” In addition, half of Hondurans transparency in key policy-making and decision-making surveyed think the government did a poor job of manag- processes; (b) strengthening mechanisms to hold pol- ing the hurricane disasters in late 2020; only 19 percent icy makers and decision-makers to account, especially think it did a good or excellent job. in cases of poor performance; and c) supporting citizen groups that represent the broader public interest to par- 8. World Bank Group. Disaster Risk Management Series ticipate in policy discussions. No. 5, Natural Disasters Hotspots: A Global Risk Analy- sis. 2005. Washington, DC, The World Bank. 9. Road works alone could create close to 50,000 jobs for each billion dollars invested. See Jobs and Distributive Effects of Infrastructure Investment: The Case of Argen- tina (Washington, DC: World Bank, June 2021). Honduras: Paths Toward Building a Resilient Society    43 Appendixes Appendix A: Institutional Quality A.1 Developments over the 2016–20 Period Show a Decline in the Quality of Institutions Figure A.1. Institutional quality between 2016 and 2020 Source: Bertelsmann Transformation Index, 2016–20 44    Honduras: Paths Toward Building a Resilient Society A.2 Homicide rate, Honduras and World, 2008–19 Figure A.2. Homicide Rate: Honduras, World, and Selected Countries, 2008–19 World C ntr l Am ric nd M xico El S lv dor Gu t m l Hondur s 120 100 sh r of hous holds 80 60 40 20 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Honduras: Paths Toward Building a Resilient Society    45 Appendix B: Knowledge Gaps Table B.1. Knowledge Gaps, 2015 and 2022 Knowledge Gaps Identified in the 2015 Systematic Country Diagnosis Update available? What are the determinants of low returns to investment in No Honduras? What is the full cost of crime to the Honduran economy? Partially. Global Peace Index 2021. What is the effect of labor market regulations on job creation, Partially. Honduras Jobs Diagnostics, 2020a informal employment, and unemployment in Honduras? What is the impact of the country’s high minimum wages on Yes. Honduras Jobs Diagnostics, 2020 job creation, particularly for unskilled workers? What are the challenges facing increased female inclusion Partially. Muller and Sousa 2020b into the labor force? How does crime affect the welfare of the bottom 40 percent No in Honduras? What is the relationship between vulnerability, extreme No. Country Climate and Development Report weather events, and poverty? (2022) Knowledge Gaps identified in the Systematic Country Diagnosis Update Planned Analysis to address them? What is the interplay between Honduras’ development goals Country Climate and Development Report (2022) and climate change? and Climate Change Institutional Assessment (2022). Unpacking the government policies on disaster risk Partially. Post-disaster Public Financial management: what results have been achieved and how to Management Assessment (2020, internal World build on them? Bank document). The real impacts of migration: how does migration affect Partially. World Bank 2019 and Clemens 2014. countries’ development patterns and what policies can NCA Migration (2022). optimize such contributions? What are the institutional determinants that support state/ No institutional capture? What are the institutional obstacles and weaknesses that No undermine the fair and even application of justice? What is the welfare situation and what are the challenges World Bank study on Afro-descendants and labor facing the historically most excluded and vulnerable groups? inclusion in Honduras (2022) and future work based on the 2023 Population Census and 2022–23 National Income and Expenditure Household Survey, which will include ethnicity variables. Beyond repression, what policies can have short- to medium- No term impacts on crime and violence? a. Veronica Michel and Ian Walker, Jobs Diagnostic: Honduras (Washington, DC: World Bank Group, 2020). b. Miriam Muller and Liliana D. Sousa, “‘She Helps Me All the Time.’ Underestimating Women’s Economic Engagement in Rural Honduras” (Policy Research Working Paper 9217, World Bank, Washington, DC, 2020). 46    Honduras: Paths Toward Building a Resilient Society Appendix C: International Benchmarking: Poverty and Inequality Figure C.1. Honduras’s Poverty Is Higher Figure C.2. Honduras Has the Second- than in Central America and the Latin Highest Poverty Rate in the Latin America America and Caribbean Region and Caribbean Region, circa 2019 Poverty headcount ratio at $5.50 a day Poverty headcount ratio at $5.50 a day (2011 purchasing power parity) (2011 purchasing power parity) 100 L tin Am ric nd th C ribb n C ntr l Am ric Hondur s 80 80 70 pov rt r t (%) 60 60 pov rt r t (%) 40 50 40 20 30 0 M r rib dor iti s n co ru il P lic do il i l u Ec i in m c liv b b Ch ur xi Ri u u m m nt P H Br pu b Bo nd n lv C u u r lo 20 t r Ur st Co Ho R c S Ar Ni Co P Gu n El 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 ic th in nd m Do ric Am tin L Figure C.3. Honduras’ Structural and Figure C.4. Honduras Shows Consistently Aspirational Peers Have Experienced Higher Inequality Levels Than Its Stronger Poverty Reduction since 2014 Structural and Aspirational Peers Poverty headcount ratio at $1.90 a day Gini coefficient, peers (2000–19) (2011 purchasing power parity), peers (2000–19) Structur l p rs Aspir tion l p rs C ntr l Am ric Hondur s 60 55 Structur l p rs Aspir tion l p rs C ntr l Am ric Hondur s 35 50 30 45 Gini 25 40 pov rt r t (%) 20 35 15 30 10 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 5 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Source: PovcalNet and the LAC Equity Lab (using SEDLAC; Socio-Economic Database for Latin America and the Caribbean). Note: Appendix D describes how the aspirational and structural peers were identified. The structural peers are El Salvador, Lao People’s Democratic Republic, Nicaragua, and Senegal. The aspirational peers are Benin, Cambodia, the Dominican Republic, and the Philippines. The average Gini coefficient was calculated for structural and aspirational peers. Care should be taken in interpreting the Gini coefficient across regions, as many countries outside the Latin America and the Caribbean region rely on welfare aggregates based on consumption, while in Latin America and the Caribbean, the welfare aggregate is based on income. Income-based inequality measures tend to be higher than consumption-based measures. Honduras: Paths Toward Building a Resilient Society    47 Appendix D: Definition of Peer Countries The Systematic Country Diagnosis Update uses 5. Human Capital Index: To consider the quality the same definition of peer countries as in the on- of the labor force in terms of education and going Honduras Public Expenditure Review (PER) health attainment.1 in order to compare Honduras’s performance 6. GDP per capita (purchasing power par- from different perspectives. For the international ity, constant 2017 international $): To benchmarking exercise of Honduras, three groups limit the selection to countries that are of countries are considered: regional peers repre- lower-middle-income. sented by the Central American average (includ- ing the Dominican Republic), structural peers, 7. Global Climate Risk index 2000–19: To and aspirational peers. The criteria below were account for the level of exposure and vulnera- used to select the set of structural and aspirational bility to extreme climate-related events.2 peers using the Country Economic Memorandum (CEM) 2.0 Tool. In addition, countries that are net hydrocar- bon exporters were excluded. All indicators are weighted equally. Structural Peers Under this classification, the tool identifies coun- The analysis suggests the following structural peer tries with similar economic/social or demo- countries: El Salvador, Lao People’s Democratic graphic performance as Honduras. The analysis Republic, Nicaragua, and Senegal. relies on a proximity statistical method by using a predefined set of variables. The variables selected for the period 2010–19 are the following: Aspirational Peers This classification presents countries that possess 1. Total population: To consider the size of the similar structural conditions but have evolved country as a constraint and thus include small and overperformed when compared to Hondu- countries in terms of population. ras. Specifically, based on the set of variables, the tool identifies the countries that have achieved 2. Percent of population ages 15–64, % total: remarkable progress in a specific target variable. To include countries where the population is For the period 2010–19, the target variables are young, given the relevance of this as a labor annual GDP per capita growth and government factor endowment and to the growth model. effectiveness to capture countries that are struc- 3. Tax revenues as % of gross domestic product turally similar. For measuring government effec- (GDP): To include countries with a high level tiveness in countries that have achieved high rates of tax revenues and little space to increase of productivity, the set of variables used are (in them. this order): government effectiveness, rule of law, and voice and accountability. 4. Valued added manufacturing: To include economies where manufacturing is the rele- The analysis suggests the following aspirational vant sector. peer countries: Benin, Cambodia, the Dominican Republic, and the Philippines. 48    Honduras: Paths Toward Building a Resilient Society Appendix E: Update of the Official Poverty Measurement Methodology In October 2018, the government of Honduras literature. The old poverty lines were based on decreed the creation of a High-Level Poverty an outdated basket of basic products from the Commission to lead the political dialogue in 1978 ENIGH. The main adjustments include (1) relation to the measurement of monetary and adopting new caloric requirements and (2) calcu- multidimensional poverty. The government also lating household food and nonfood consumption created a Technical Poverty Commission respon- using the latest 1998 ENIGH instead of the 1978 sible for the review of the poverty measurement ENIGH, among others. The new poverty lines are methodology. The technical commission contin- between 20 and 25 percent lower than previous ues to be coordinated by the Secretaría de Coor- ones. Moreover, when converted to purchasing dinación General de Gobierno (SCGG) and the power parity prices, they are more in line with Instituto Nacional de Estadística (INE) and in- what would be expected for a lower-middle-in- cludes the Ministry of Finance, Ministry of Labor, come country. A more recent ENIGH will be in Secretary of the Presidency, and Central Bank of the field throughout 2022 and will be the most Honduras (BCH). The Technical Commission up-to-date source of consumption patterns of also includes several organizations, including the Honduran population. With this new survey, the World Bank, as collaborators in an advisory official poverty lines are expected to be updated capacity.3 The World Bank was asked to lead the again.4 core technical team. The work was undertaken throughout 2019, and the new official poverty New official poverty estimates indicate that numbers were released in January 2020. poverty levels are lower than previously thought but confirm that poverty reduction Three main adjustments were done to the offi- has been weak in recent years. The increase cial income aggregate: (1) recalculation of in- in income and the decrease in the poverty lines come aggregates by applying best practices to have compounding effects that lead to a strong the treatment of extreme values, missing val- decrease in poverty rates. The new figures show ues, and others; (2) inclusion of income corre- that 48 percent of Hondurans lived below the sponding to the 13th and 14th monthly salary poverty line in 2019, while 25.2 percent were (commonly known as aguinaldo and catorceavo living in extreme poverty. Poverty and extreme in Honduras); and (3) inclusion of an estimate poverty have shown little decline since 2014, of income corresponding to imputed rent for with extreme poverty instead increasing slightly homeowners. On average, these changes in- from 24.9 percent in 2014 (figure E.1). The per- creased official household income by 16 percent centage of people who were living in poverty in for 2014–18. rural areas (57.7 percent, using official poverty lines) was higher than those living in poverty in Official poverty lines were updated using the urban areas (39.9 percent). Inequality continues latest National Income and Expenditure Sur- to be among the highest in the region with a Gini vey (ENIGH, in Spanish) and methodolog- coefficient of 49.9 in 2019, relatively stagnant for ical advances in the poverty measurement the past five years (figure E.2).5 Honduras: Paths Toward Building a Resilient Society    49 Figure E.1. New Official Poverty Estimates, National (2014–19) a. Moderate Poverty b. Extreme Poverty Old N w Old N w 80 80 70 70 60 60 p rc nt of th popul tion p rc nt of th popul tion 50 50 40 40 30 30 20 20 10 10 0 0 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 The new harmonized microdata in the So- Figure E.2. New Official Gini, cio-Economic Database for Latin America National (2014–19) and the Caribbean (SEDLAC) uses the revised Old N w raw data from the Honduran National Statis- 0.53 tics Institute for 2014–19. The SEDLAC series 0.52 is affected by more thorough data cleaning and 0.51 Gini co ffici nt inclusion of the 13th and 14th-month salaries. 0.50 These two components changed the harmonized 0.49 income aggregate for 2014–19 and resulted in a 0.48 break in the series. 0.47 2014 2015 2016 2017 2018 2019 50    Honduras: Paths Toward Building a Resilient Society Appendix F: Trends in Poverty Reduction, Shared Prosperity, and Inequality Figure F.1. Extreme Poverty Figure F.2. Departments with Higher Extreme Poverty (% individuals) Indigenous Population Shares Are N tion l Rur l Urb n Correlated with Higher Poverty 40 Moderate Poverty and Indigenous 35 Population p rc nt of th popul tion 30 80 25 70 mod r t pov rt , p rc nt L mpir 20 L P El P r iso Intibuc 60 Ol ncho 15 S nt B rb r Cop n Cholut c Yoro Com u Ocot p qu 10 50 Colon 2011 2012 2013 2014 2015 2016 2017 2018 2019 V l Atl ntid 40 Fr ncisco Mor n Cort s Source: Instituto Nacional de Estadística, EPHPM 2014 and 30 0 10 20 30 40 50 2013 Census. sh r of IP popul tion Source: World Bank estimates using INE’s 2013 Population Census projections and EPHPM 2019. Figure F.3. Shared Prosperity (2014–19) Figure F.4. Gini Coefficient Annualized growth rate of income for the N tion l Rur l Urb n poorest 40% and the overall population 0.54 0.52 Growth bottom 40 Growth tot l 6 0.50 Gini co ffici nt 5 0.48 nnu li d rowth r t , p rc nt 4 0.46 3 0.44 2 0.42 1 0.40 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 -1 -2 Source: World Bank estimates using the EPHPM. r r co ic ru s n il do do il i m bi c in bl liv Ch xi ur Ri u u m nt P Br pu b Bo nd n lv u rib u lo M Ec r Ur st Co Ho P R S Ar Co P C n El ic th in nd m Do ric Am tin L Note: Data covers 2014–19, except Chile (2013–17), the Do- minican Republic (2017–19), Mexico (2016–18), and the Latin America and the Caribbean (LAC) aggregate (2015–19). The regional aggregate is based on 18 countries in the region for which microdata are available at the national level. Source: LAC Equity Lab tabulations of SEDLAC (CEDLAS and the World Bank). Honduras: Paths Toward Building a Resilient Society    51 Appendix G: Drivers of Poverty Reduction Figure G.1. Income Growth and Its Distribution Drove Changes in Poverty between 2014 and 2019 Contribution of income growth, income distribution, and prices to poverty changes by area (percentage points) a. National b. Rural Pric s Distribution Growth Pric s Distribution Growth 8 8 6 6 4 4 points points 2 2 p rc nt p rc nt 0 0 –2 -2 –4 -4 –6 -6 c. Urban Pric s Distribution Growth 8 6 4 points 2 p rc nt 0 -2 -4 -6 52    Honduras: Paths Toward Building a Resilient Society Figure G.2. The Demographic Dividend Figure G.3. Stock of Emigrants to the Compensated for Declines in Labor and US as a Share of the Overall Honduran Nonlabor Income Population (1960–2019) Poverty change by income source, 2014–19 9 8 Sh r individu ls, d 15–64 Sh r mplo d R mitt nc s Nonl bor incom L bor incom 7 5.0 6 5 p rc nt 2.5 4 3 pov rt ch n 0.0 2 1 –2.5 0 1960 1970 1980 1990 2000 2013 2019 –5.0 Source: World Bank estimates based on American Commu- Source: World Bank estimates using the EPHPM. nity Surveys and US Census (for emigrants) and based on the Note: Shapley decomposition was developed by Joao Pedro Honduran Central Bank (for remittances). Azevedo, Minh Cong Nguyen, and Viviane Sanfelice, “ADE- COMP: Stata Module to Estimate Shapley Decomposition by Components of a Welfare Measure” (Statistical Software Com- ponents S457562, Boston College Department of Economics, 2012, revised January 12, 2019), based on Ricardo Paes de Barros et al., “Uma Análise das Principais Causas da Queda Recente na Desigualdade de Renda Brasileira,” Revista Econômica 8, no. 1 (2006): 117–47. Figure G.4. Per Capita Remittances in Current US$, 2001–20 600 500 p r c pit r mitt nc s, US$ 400 300 200 100 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Source: World Bank estimates based on American Commu- nity Surveys and US Census (for emigrants) and based on the Honduran Central Bank (for remittances). Honduras: Paths Toward Building a Resilient Society    53 Appendix H: Profile of the Poor and Nonpoor Populations in Honduras, 2014-2019 Table H.1. Profile of the Poor and Nonpoor Populations, 2014 and 2019 2014 2019 Extreme Extreme poor Poor Nonpoor All poor Poor Nonpoor All Household Percentage in each 24.9 49.7 50.3 100.0 25.2 48.0 52.0 100.0 category Daily per capita 1.7 2.8 12.8 7.8 1.6 2.8 12.8 8.0 income 2011 USD PPP Average 6.1 5.8 4.8 5.3 5.9 5.7 4.6 5.1 household size Average age of 45.5 45.6 47.6 46.7 49.1 49.2 50.5 50.0 household head Households with 30.9 32.4 34.9 33.8 29.8 33.1 33.8 33.5 female head (%) Living in urban 41.1 48.5 57.6 53.1 34.5 45.6 63.2 54.8 area (%) Average years 3.7 4.1 7.0 5.7 4.0 4.4 7.4 6.1 of education of household head School enrollment 92.7 94.1 93.7 93.9 90.8 92.2 96.4 93.8 (% ages 6–12) School enrollment 44.8 51.4 61.4 56.0 47.8 51.3 68.8 59.3 (% ages 12–18) Proportion of 36.7 34.3 22.5 28.4 34.6 31.9 19.9 25.6 members 0-12 years old (%) Proportion of 16.6 16.3 14.0 15.1 14.5 14.5 11.6 13.0 members 13–18 years old (%) Proportion of 43.7 46.4 59.6 53.1 46.6 49.4 63.6 56.8 members 19–70 years old (%) Proportion of 2.9 3.0 3.9 3.4 4.3 4.3 5.0 4.6 members 70+ years old (%) 54    Honduras: Paths Toward Building a Resilient Society 2014 2019 Extreme Extreme poor Poor Nonpoor All poor Poor Nonpoor All Access to Services Internet at home 2.7 4.7 23.3 15.2 8.4 11.5 38.0 26.6 (%) Internet use (%) 17.7 23.7 50.3 38.6 37.1 45.8 76.2 63.1 HH with access to 72.8 79.5 92.3 86.7 84.5 88.5 97.1 93.4 electricity (%) HH without access 17.0 13.7 6.6 10.1 14.4 10.5 2.7 6.5 to water (%) HH without access 20.8 16.0 6.5 11.2 11.5 9.0 3.7 6.2 to sanitation (%) Labor force (ages 15–65) Labor force 59.8 60.9 69.1 65.4 57.7 59.8 71.1 66.2 participation (%) Female labor force 35.6 38.5 54.1 47.0 32.1 36.7 57.3 48.3 participation (%) Male labor force 88.2 87.0 85.8 86.3 87.0 86.9 86.5 86.7 participation (%) Unemployment 7.5 6.6 4.4 5.3 7.0 7.5 5.3 6.2 rate (%) Female 3.6 3.3 2.1 2.6 4.1 4.3 2.8 3.4 unemployment rate (%) Male 3.9 3.4 2.2 2.7 2.9 3.3 2.5 2.8 unemployment rate (%) Informality (%) 98.3 94.6 69.3 79.8 99.2 96.0 72.8 81.7 Source: World Bank estimates using the Encuesta Permanente de Hogares (EPHPM) 2014 and 2019. Note: HH = household. Honduras: Paths Toward Building a Resilient Society    55 Appendix I: Unequal Access to the Internet and School Enrollment Figure I.1. Internet Cost as a Share of Per Capita Household Income across Countries a. Income groups (circa 2019) b. Geographic areas (circa 2019) Top 60 Bottom 40 Urb n Rur l 100 100 90 80 80 70 60 60 p rc nt p rc nt 50 40 40 30 20 20 10 0 0 BOL BRA COL DOM ECU HND MEX PAN PER SLV URV BOL BRA COL DOM ECU HND MEX PAN PER SLV URV Note: Workers are classified into income deciles based on their per capita household income using country distributions. Relative internet cost is calculated as the ratio of the monthly price for a fixed broadband 5-gigabyte plan over the average monthly income per capita (both variables expressed in purchasing power parity, 2011 international dollars). Internet price data are at the country level. Data refer to the most recent year of data available in SEDLAC. Source: R. Llovet Montanese et al., Working from Home in LAC: Enabling Factors and Inequality Implications (Washington, DC: World Bank, forthcoming). Figure I.2. Secondary Gross Enrollment by Figure I.3. Honduras Urban-Rural Quintile, 2011 and 2019 Enrollment, Ages 5–20 (2019) N tion l Rur l Urb n Q1 Q2 Q3 Q4 Q5 100 100 90 80 80 70 60 p rc nt 60 50 p rc nt 40 40 30 20 20 10 0 0 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 2011 2019 Source: World Bank estimates using the EPHPM 2011 and Source: World Bank estimates using the EPHPM 2019. 2019. 56    Honduras: Paths Toward Building a Resilient Society Appendix J: Lack of Opportunities in the Labor Market Figure J.1. Labor Force Participation, by Figure J.2. Unemployment Rate for Select Country and Bottom 40, Circa 2019 Groups, 2014 and 2019 Ov r ll Bottom 40 2019 2014 90 12 80 10 70 un mplo m nt r t , p rc nt 60 8 50 6 p rc nt 40 30 4 20 2 10 0 0 r r s co ru il p. ) All Rur l Urb n Youth F m l M l Poor Non-poor rb do do Ho il i bi m u l c liv Ch xi ur Ri u u (u R m m P Br Bo (15-24) nd n lv u u n r lo M Ec t r Ur st in Co P c ic S nt Ni Co P Gu in El m Ar Do Note: Labor force participation reported for individuals ages Note: Unemployment and sector of employment reported for 15–64. individuals ages 15–65. Source: Socio-Economic Database for Latin America and the Source: World Bank estimates using the EPHPM 2019. Caribbean, SEDLAC (CEDLAS and World Bank). Figure J.3. Public Sector Wage Premium, Figure J.4. Gender Wage Gap by Sector, by Type of Private Sector Firm, 2014–19 2019 Priv t -inform l Priv t -form l 50 40 60 s pr mium ov r priv t s ctor, p rc nt 30 p, p rc nt 50 20 10 40 0 nd r hourl w –10 30 –20 20 –30 –40 10 –50 Industr S rvic s R t il Prim r Tr nsport, w 0 Construction 2014 2019 & Utiliti s Note: Formality is defined as contributing to the social secu- Note: Estimates limited to working individuals ages 15–65. rity system. The analysis is limited to wage-earning individuals Source: World Bank estimates using the EPHPM 2019. ages 18–65. Public sector wage premiums are estimated using decompositions from A. S. Blinder, “Wage Discrimination: Re- duced Form and Structural Estimates,” Journal of Human Re- sources 8, no. 4 (1973): 436–55 and R. Oaxaca, “Male-Female Wage Differentials in Urban Labor Markets,” International Economic Review 14, no. 3 (1973): 693–709, and controlling for years of education, years of education squared, experi- ence, experience squared, gender, urban status, and part-time status (working less than 30 hours per week). The premium is calculated relative to the formal/informal private sector. Source: World Bank estimates using the EPHPM 2014–19. Honduras: Paths Toward Building a Resilient Society    57 Figure J.5. Working from Home, Figure J.6. Households Reporting Income by Country Loss in May and August 2020 (percent) Ov r ll Bottom 40 2019 2014 90 12 80 10 70 un mplo m nt r t , p rc nt 60 8 50 6 p rc nt 40 30 4 20 2 10 0 0 r r s co ru il p. ) All Rur l Urb n Youth F m l M l Poor Non-poor rb do do Ho il i bi m u l c liv Ch xi ur Ri u u (u R m m P Br Bo (15-24) nd n lv u u n r lo M Ec t r Ur st in Co P c ic S nt Ni Co P Gu in El m Ar Do Note: First and last year for Honduras are 2015 and 2019. Source: World Bank High Frequency Surveys. Source: R. Llovet Montanese et al., Working from Home in LAC: Enabling Factors and Inequality Implications (Washing- ton, DC: World Bank, forthcoming). 58    Honduras: Paths Toward Building a Resilient Society Appendix K: Selected Industries and Their Growth Challenges and Opportunities Modernizing the agricultural sector is essential will be essential. The sector would benefit from an to transform the rural economy, boost growth, institutionalized long-term vision and closer co- and reduce poverty. The sector’s contribution to operation among public sector stakeholders and the GDP remained around 14 percent in 2019, ac- between the government and producers. counted for 34.4 percent of total exports in 2019, and has played an important role in ensuring the Honduras’s light manufacturing is largely built country’s food security and employment (30.2 on the maquila model that shows a strong com- percent of the national workforce when count- petitive advantage in several products. The sec- ing the agro-industry). While a limited number tor has been able to thrive despite the country’s of producers have developed modern and highly weak business environment, increasing global productive agribusinesses that supply large super- competition, high energy costs and wages, high market chains, the sector is dominated by small- export taxes, lack of skilled labor, and the lim- scale farmers (72 percent of rural families engage ited local sourcing of raw materials. These, to- only in subsistence farming) and producers who gether with poor security and inadequate local have limited technical knowledge, market infor- transportation infrastructure and logistics ser- mation, and financial resources. The sector is vices, slow down the expansion for export-ori- characterized by a high degree of informality, with ented manufacturers and development of more low-quality jobs, low productivity, and wages that complex products with greater value added. The are only about one-fourth of the formal minimal factors providing investors with long-term finan- wage. Around 58 percent of the rural population, cial security include the country’s increased trade including workers dependent on farm wages, live openness and the location of these firms in spe- in poverty. The government has been facilitating cial economic zones (SEZs) with efficient access the engagement of small-scale producer organi- to the deepwater Port Cortes on the north coast, zations in productive alliances that link them to preferential tax treatment, and a relatively low domestic and international markets while pro- minimum wage. Building on a strong base created moting their financial inclusion and mobilizing by the knitwear industry focused on exporting to private capital for development.6 Honduras also the US market, Honduras is repositioning itself made significant progress increasing social in- to produce and export more diverse and complex clusion and, for the first time, has developed an products. This includes technical textiles, sustain- approach to ensure disability inclusion.7 Those able fibers, and automotive parts and components experiences need to be scaled up and completed that compete in higher-value segments of the pro- by actions aiming at attracting new local players duction chain, producing woven fabric and man- to foster more integrated agrifood systems and made fibers (such as polyesters, synthetics, and increase value added, thus helping to transform synthetic blends). To advance the development of rural areas. Increasing access to high-quality in- light manufacturing, Honduran producers have puts, financing, infrastructure, logistics services, the potential to leverage their established busi- knowledge systems, food quality and safety veri- ness relationships with large brands and retailers. fication, and climate change resilience assistance In addition, closer collaboration in the auto parts Honduras: Paths Toward Building a Resilient Society    59 subsector between Honduran producers and their to finance, improving public sector gover- equivalents in other Central American countries nance, facilitating service delivery, and creat- could enable them to collectively engage in more ing jobs. With COVID-19 causing widespread sophisticated forms of production. shutdowns, school and business closures, and job losses, information and communication tech- One of the fastest-growing sectors in Hon- nologies (ICT) have become a critical lifeline for duras is business process outsourcing (BPO), the country coping with social distancing and re- which can create high-quality jobs while in- mote work. However, access to quality broadband creasing domestic value added. Honduras offers in Honduras is low, unaffordable, and unequal. international companies an attractive setting to Connectivity is mostly limited to major cities, outsource their business processes, and the coun- which hinders economic equity, rural develop- try has well-established call centers for customer ment, and access to basic services such as health service, sales and technical support, logistics and and education, especially for Indigenous Peoples freight management capabilities, and other BPO and Afro-descendants living in remote rural com- services. Honduras is in the central time zones munities. Moreover, limited digital services are of the United States and Canada, with access to available to citizens, and despite recent efforts, a young, low-cost, English-speaking labor force improvements need to be made to the existing that can swiftly develop new technology skills. e-government system.8 The government has re- Increased corporate telecommuting as a result of cently modernized its national identification (ID) the COVID-19 pandemic could intensify the de- system with state-of-the-art technology and has mand for BPO services. To take full advantage of issued new ID cards to all of its adult population, this opportunity, the Honduran BPO subsector though the modernization of the civil service reg- will need to develop a wider range of higher-value istry is still pending. The government still needs to functions and digital services, such as software strengthen its core management systems (public development, information security, business ana- financial management, procurement, public in- lytics, and social media production and manage- vestment, and customs systems, among others) to ment. To achieve this, firms require a tech-savvy fully develop authentication services for citizens workforce to fill highly skilled jobs, and Hondu- and put in place an interoperability platform to ran workers have little access to training in digital share data across government systems to improve literacy. Moreover, the BPO industry requires a efficiency in service delivery. high-performance bandwidth, but currently, the quality of internet services in Honduras is poor by A key aspect of the provision of digital services regional standards, which constrains the growth is the need to expand access to digital financial of BPO. The complex, inconsistent, and slow reg- services (DFS) to micro, small, and medium istration process for start-up BPO companies is size enterprises (MSMEs) to spur growth and an additional challenge. Finally, as in other sec- diversification. The Honduran financial sector tors, corruption and crime increase operating offers a variety of DFS solutions for MSMEs, in- costs and create a negative reputation for Hondu- cluding noncash merchant payments, advanced ras that discourages international investment in data analytics, underwriting process automatiza- its BPO sector. tion, value-chain and supply-chain financing, and nonfinancial services (such as business manage- Digital services have enormous potential to ment tools). Nevertheless, as of 2017, just 45 per- transform the economy by widening access cent of the total adult population held an account 60    Honduras: Paths Toward Building a Resilient Society at a formal financial institution, which was lower e-wallets, credit and debit cards, and electronic than the regional average of 54 percent. Despite payments through point-of-sale devices, ATMs, the importance of remittances in the Honduran agent networks, or real-time transfers unless they economy, only 11 percent of Hondurans reported partner with a large bank. Also, the financial reg- using formal financial accounts to receive their re- ulatory framework in Honduras is not conducive mittances. The smaller financial institutions that to the creation of financial technology (fintech) are often best placed to serve MSMEs typically firms and is among the most restrictive in Latin lack sufficient financial and human capital to de- America. Because many MSMEs require a greater velop digital products. These savings and credit level of financial intermediation than bigger firms, unions and cooperatives, smaller banks, and mi- DFS has the potential to offer them cost-effective crofinance institutions have limited access to the solutions tailored to their unique circumstances. crucial mobile infrastructure required to offer Honduras: Paths Toward Building a Resilient Society    61 Appendix L: Disparities in Energy Access While the national electrification rate in Honduras terms of energy access for cooking, the majority of was 9.9 percent in 2017, it masks the significant households in Honduras (55.6 percent) are concen- gaps in access between urban and rural areas. While trated in the lowest Tier 1 (no access), as a conse- most urban households (97.3 percent) in 2017 had quence of the high share of traditional or improved electricity access through the national grid, only stoves that use biomass, and very limited access to 69.3 percent had access to the grid in rural areas, modern liquefied petroleum gas or electric stoves. and 22.5 percent of rural households had no access The significant use of inferior stoves in Honduras, to any kind of electricity source. This improved in especially in rural areas, exposes households to 2019, which showed 13 percent of rural households indoor air pollution and adverse health impacts. did not have access to electricity. In addition, elec- These significant disparities in energy access impair tricity quality and reliability remain an issue, pre- the social resilience and well-being of the poorest venting both grid-connected households (about 50 people and undermine prospects for more inclu- percent) and households with off-grid electrifica- sive economic recovery and shared prosperity.9 tion solutions from reaching full-access levels. In 62    Honduras: Paths Toward Building a Resilient Society Appendix M: Corruption Constraints on Business Development Figure M.1. Perceptions of Corruption among Public Sector Officials and Politicians a. Perception of corruption among public b. Perception of corruption among sector officials politicians All Mor th n h lf H lf of th m L ss th n h lf Non 18.1% Not wid spr d 50 27.2% Sli htl wid spr d 40 30 p rc nt 20 10 14.6% Som wh t wid spr d 40.1% 0 V r wid spr d 2016 2018 Source: Barómetro de las Américas por LAPOP, 2018 Figure M.2. Favoritism, Influence, and Figure M.3. Checks and Balances Trust S n l Nic r u Hondur s El S lv dor 2017–18 2016–17 2015–16 Fund m nt l Ri hts Hirin nd firin pr ctic s Op n Gov rnm nt Undu influ nc Abs nc of Corruption F voritism in d cisions of ov rnm nt Constr ints offici ls on Gov rnm nt Pow rs Public trust in politici ns 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0 1 2 3 4 5 Source: World Justice Project Index (2020). Source: World Economic Forum, Global Competitiveness Index. Honduras: Paths Toward Building a Resilient Society    63 Figure M.4. Corruption Constraints on Business Development a. Bribery Incidence b. Firms expected to give gifts to secure government contract All countri s L tin Am ric nd th C ribb n Hondur s All countri s L tin Am ric nd th C ribb n Hondur s 30 35 30 25 25 20 p rc nt 20 15 p rc nt 15 10 10 5 5 0 0 Sm ll (5–19) M dium (20–99) L r (100+) Sm ll (5–19) M dium (20–99) L r (100+) c. Value of gift expected to secure d. Firms expected to give gifts to get a government contract construction permit % of contract value All countri s L tin Am ric nd th C ribb n Hondur s All countri s L tin Am ric nd th C ribb n Hondur s 3.5 40 3.0 35 30 2.5 25 2.0 p rc nt p rc nt 20 1.5 15 1.0 10 0.5 5 0.0 0 Sm ll (5–19) M dium (20–99) L r (100+) Sm ll (5–19) M dium (20–99) L r (100+) e. Firms identifying corruption as a major f. Fims identifying the courts system as a constraint major constraint All countri s L tin Am ric nd th C ribb n Hondur s All countri s L tin Am ric nd th C ribb n Hondur s 60 80 70 50 60 40 50 p rc nt 30 p rc nt 40 30 20 20 10 10 0 0 Sm ll (5–19) M dium (20–99) L r (100+) Sm ll (5–19) M dium (20–99) L r (100+) Source: 2016 World Bank Enterprise Survey. 64    Honduras: Paths Toward Building a Resilient Society Appendix N: Reducing the Fiscal Deficit and Maintaining Fiscal Sustainability Fiscal management: In 2016, the government Tax administration. The tax administration enacted the Fiscal Responsibility Law (FRL) to has modernized, based on a sound governance strengthen public finances, setting a 1 percentage framework, the professionalization of the public point of gross domestic product (GDP) ceiling for service, and robust integrity assurance mecha- the nonfinancial public sector (NFPS) deficit in nisms. Significant progress was achieved on the 2019 and forward (deficit targets for the 2016–18 registered taxpayer base, voluntary compliance, transition period were separately specified) and the filing and payment of declarations, and ac- limiting the nominal growth of current spending curate reporting in tax declarations.10 Further to average GDP growth over the previous 10 years progress is needed on revenue management, ac- plus the projected inflation in the year ahead. The countability and transparency, risk management, FRL formalized the medium-term fiscal framework the administrative review process, and dispute (MTFF) as a critical part of the budget cycle and re- resolution to more fully conform to international quired a formal assessment by the Central Bank of good practices. Honduras (BCH) on the consistency of the MTFF with monetary and exchange rate policies. In addi- Managing debt-related fiscal risk. The coun- tion, a new budget monitoring office, the Dirección try’s 2021 fiscal risk statement is well developed, General de Política Macro Fiscal (DGPMF), was comprehensive, and complies with the legislation created to scrutinize fiscal indicators. except in the case of risks from natural disasters.11 Further progress, however, is needed to manage Tax policy: The government has made revenue the country’s exposure within a more compre- mobilization efforts over the last five years with- hensive perspective (for example, management of out having to change statutory tax rates. It incor- global risks, fiscal rules implementation), as well porated a tax code in 2017 aimed at simplifying as the contingent liabilities linked to public-pri- tax collection, broadened the tax base by stream- vate partnerships (PPPs), the debt portfolio of lining exemptions, made customs reforms (in- NFPS entities, loan guarantees, municipalities, cluding a new operating manual to enhance the state-owned enterprises (SOEs)—in particular collection of import duties in gasoline and bulk the energy sector—as well as natural disasters. freight), introduced electronic notifications of suspicious activity to taxpayers, and upgraded Public debt management: The government to a modern system based on timely tax refunds. made progress on debt transparency. The Medi- The tax reform included a 3-percentage point in- um-Term Debt Strategy and Financing Plans are crease in the value added tax rate (from 12 to 15 updated annually. The authorities have nearly percent), higher fuel taxes, the establishment of completed drafting the content of the Debt Law a minimum income tax to strengthen tax com- (LOP) in accordance with the recent Debt Man- pliance, and the elimination of some exemptions agement Performance Assessment.12 Moreover, helped to strengthen the revenue side. Congress debt recording and payment processes are well also eliminated the “most privileged regime” con- defined and cover both the subnational level and cession to special economic zones. SOEs. According to the Debt Reporting Heat Map Honduras: Paths Toward Building a Resilient Society    65 (2021), instrument, sectoral, and annual borrow- published on the public purchases and contract- ing plan reporting remains partial. The govern- ing platform, Honducompras. ment is working to further develop the domestic debt market, with longer maturities to be increas- Power sector: Since the 2015 Systematic Country ingly held by pension funds and other institutional Diagnostic was done, the government has taken investors and aiming to have a larger proportion steps toward resolving Empresa Nacional de En- of debt denominated in lempiras. ergía Eléctrica (ENEE’s) financial position, includ- ing reducing its nontechnical losses, introducing Public financial management: Progress in con- a rightsizing program that reduced the workforce trolling public wage growth has been limited and by 60 percent, adjusting quarterly tariffs based on is constrained by structural challenges, such as a cost-recovery formula, and creating a new post lack of a coherent legal framework for public em- of Secretary of Energy to support the implemen- ployment, multiple special regimes, and a lack of a tation of the electricity sector’s reform. The gov- clear remuneration policy. Insufficient skills, poor ernment is continuing to take steps to implement information systems, and a lack of resources are the approved electricity sector law and to reassess compounding factors that provide room for fraud, generation contracts that have not yet come into leakages, and inefficient staffing, which adversely effect. Its reform agenda is focusing on strength- affect the ability to plan effectively and control ex- ening supervision of ENEE, reducing its losses, penditures. The statute of the Honduran civil ser- strengthening its governance and audits, and di- vice is not unified nor does it reach all institutions, viding up the company into three departments so efforts are needed to implement a common dealing with the generation, transmission, and dis- salary policy, to streamline differences among re- tribution of electricity. Despite this, ENEE’s finan- gimes, improve the criteria for hiring staff, and cial situation represents a key fiscal vulnerability consolidate the different contracting modalities in Honduras. Government subsidies further com- that are currently being used. The government pound the impact of the sector on public finance. has taken some first steps in this direction. In The financial eases that were designed to face the 2019, it approved a salary adjustment for public crisis (for example, a $600 million sovereign bond employees in the civil service regime, and in June in June 2020) are merely bandages that will not 2020, it established a centralized mechanism for cure the hemorrhage: an urgent implementation negotiating salaries to guide decisions on nominal of the reform is needed. wage increases in line with the FRL. In addition, to improve the framework and decision-making Monetary, exchange rate, and financial sector for PPPs, the government created a new unit in policies: The government has taken steps toward the Treasury supported by an inter-institutional modernizing its monetary policy framework with council to improve the management of PPPs, to the aim of facilitating a transition toward inflation assess the convenience of procuring PPPs rather targeting. It has also adopted measures to make the than traditional public investments, and to con- financial system more resilient including a new se- duct technical feasibility and cost-benefit studies. curities market law, as well as introducing interna- The government has also submitted to Congress tional financial reporting standards and enhancing a new public procurement law that will modern- forecasting capacities at the BCH. The new regula- ize and strengthen the compliance process, which tions for the interbank money market and foreign will increase transparency as public procurement exchange market, approved in 2017, have con- contracts only have legal validity once they are tributed to bolstering the monetary transmission 66    Honduras: Paths Toward Building a Resilient Society mechanism and supporting the de-dollarization policy rate by 250 basis points from 5.50 percent of the economy (the crawling-band exchange rate in January 2020 to 3.00 percent in November 2020, regime continued to anchor monetary policy and suspended liquidity absorption operations, and re- enabled a steady depreciation of the lempira). In duced reserve requirements from 12 to 9 percent, response to the pandemic, the BCH has cut the among other measures. Table N.1. Main Macroeconomic Indicators and Projections in Honduras, 2015–23   2015 2016 2017 2018 2019 2020 2021 e 2022 f 2023 f Real GDP growth (%), at constant 3.4 3.9 5.0 3.8 2.7 −9.0 4.7 4.4 3.8 market prices Agriculture 2.6 4.8 10.3 2.6 −1.0 −6.3 2.0 3.7 3.1 Industry 4.2 3.7 4.5 4.1 1.8 −14.3 4.5 4.9 4.7 Services 3.3 3.7 3.8 4.1 4.1 −7.1 5.5 4.4 3.5 Share of GDP (%) Private 74.0 74.1 74.3 Consumption 75.5 77.0 79.3 78.5 77.6 77.0 Government 13.4 13.4 13.0 Consumption 12.6 12.5 14.2 14.3 13.7 13.0 Gross Fixed Capital 22.1 19.7 20.9 21.6 20.0 16.7 18.6 19.8 20.1 Investment Exports, Goods, and 57.3 55.7 55.7 54.4 54.2 47.4 50.7 51.9 52.6 Services Imports, Goods, and 68.6 65.0 66.5 66.9 63.6 57.0 61.8 62.7 62.4 Services Current Account 4.7 −2.6 −1.3 −6.6 −2.4 2.9 −3.2 −3.4 −3.6 Balance (% of GDP) Net Foreign Direct Investment (% of 4.6 4.2 4.5 3.7 2.0 1.5 2.2 2.6 2.8 GDP) Trade Balance −3394.1 −3062.2 −3528.3 −4900.2 −4609.1 −3689.4 −4485.0 −4382.0 −4372.2 (Billions of US$) Trade Balance −16.3 −14.2 −15.4 −20.5 −18.5 −15.6 −16.7 −16.3 −15.4 (Percent of GDP) Fiscal Balance (% −1.1 −0.5 −0.8 −0.9 −0.9 −5.5 −5.4 −2.2 −1.0 of GDP)a Debt (% of GDP)a 39.0 40.1 40.1 42.1 43.1 53.6 57.0 57.5 57.1 Primary Balance (% 0.1 0.3 0.1 0.0 −0.2 −4.2 −4.2 −0.9 0.5 of GDP)a Source: World Bank Staff estimations based on data from the Central Bank of Honduras and Ministry of Finance as of September 2021. Note: e = estimate; f = forecast. Honduras: Paths Toward Building a Resilient Society    67 Appendix O: Reforms in Infrastructure Services Water „ Scale-up integrated water security programs Honduras’s efforts to increase resilience to cli- (water infrastructure and governance), in- mate change are highly dependent on sound creasing and optimizing multipurpose water management of water resources. Balancing storage in key basins and aquifers based on variability in the spatial and temporal availabil- their socioeconomic relevance and degree of ity of water resources, and managing the risks of water insecurity. scarcity, inundations, pollution, and the distri- „ Strengthen water resources management bution of water among different users are key in at the national and basin levels, particularly adapting to the projected consequences of climate linked to information management systems, change. At a governance level, responsibility for planning, and decision-making under deep water policy, financing, regulation, and moni- uncertainty; improve groundwater man- toring is dispersed across various ministries and agement and strengthen water basin-level agencies, with no established central body to co- institutions. ordinate efforts. Although access to basic water „ Broaden programs aimed at enhancing the and sanitation services has improved in the past quality and efficiency of water supply and san- decades, Honduras continues to face significant itation services delivered by decentralized and challenges in ensuring quality and reliability of ring-fenced Urban Water and Sanitation Pro- services. Some policies and measures that could viders as contemplated in the Drinking Water help overcome some of the constraints in the sec- and Sanitation Sector Framework Law. tor include „ Strengthen national institutions to provide adequate regulation, policy, and technical as- „ Operationalize the National Water Author- sistance functions, especially by consolidating ity and support institutional transformation the water utility SANAA (Servicio Autonomo from the national to the decentralized/basin Nacional de Acueductos y Alcantarillados) as levels to provide the enabling framework for a technical entity of CONASA to serve as a water security. water supply and sanitation sector coordina- „ Design a national program to increase water tor at the central level. supply and sanitation coverage in rural areas. „ Design and implement a comprehensive na- „ Update the National Water Supply Quality tional sanitation plan to increase sewerage Program to provide an integrated approach coverage and wastewater treatment capacity. to stimulate and improve water quality throughout municipalities, with a joint ef- fort between the Drinking Water Supply and Digital Sanitation National Council (CONASA), Honduras needs to improve access and qual- National Regulator (ERSAPS), and the Min- ity of broadband services and strengthen dig- istry of Health. ital government services. The country’s low broadband penetration derives from several fac- Looking ahead, bolder—and possibly longer-term— tors, including lack of backbone infrastructure, measures in the water sector would include weak regulatory environment and competition, 68    Honduras: Paths Toward Building a Resilient Society and high prices for services and broadband-en- method to enable the public to access govern- abled devices. Digital is an essential piece of the ment services with a high level of assurance, country’s competitiveness and inclusion. There and (3) robust core government systems to is a need to improve industrial, residential, and ensure efficient, cost-effective, and trans- international telecommunication infrastructure, parent public financial management, public including digital solutions, to connect and pro- procurement, public investment, and human tect producers, consumers, and markets. Policy resources management to support service actions that could help Honduras overcome these delivery. constraints include „ Manage the risk of cybersecurity by enact- ing a law on data protection or a cybersecu- „ Increase access to quality broadband ser- rity law and increase capacity to respond to vice by promoting competition and extend- cyberattacks.13 ing broadband infrastructure to rural areas, „ Increase access and uptake of digital finan- through (1) active and passive infrastructure cial services to improve financial inclusion for sharing; (2) simplification of the licensing households and access to finance for MSMEs. regime; (3) more efficient use of the univer- Regulations for e-money were published in sal service fund; and (4) establishment of 2016, but the fintech sector remains under- quality obligations for broadband operators developed. Solutions tested in more advanced (coverage, internet speed). In addition, the countries of the Latin American and Carib- government could develop projects aimed at bean region, such as the establishment of connecting publicly funded entities to be used marketplace lenders, need to be tested. to provide broadband coverage to unserved „ Further nurture innovation through incen- and remote communities. tives to expand incubators in line with the „ Enable government to provide digital services, initiatives in San Pedro Sula, expand usage to by the development of (1) an interoperability boost productivity in key sectors such as ag- framework and platform through which pub- riculture and the public administration, and lic agencies can exchange data securely; (2) a invest in human capital and promotion of secure one-stop-shop with an authentication technology transfer. Honduras: Paths Toward Building a Resilient Society    69 Appendix P: Additional Measures Needed: Competitiveness and Job Creation, Inclusion, and Resilience For stronger, more resilient, and more inclu- of the policy actions that could help Honduras sive growth, the country needs to strengthen achieve this include: competitiveness, promote job creation, and build domestic savings and investment. The „ Diversification. Diversify toward a more most attractive opportunities to increase export wide-ranging productive structure to ex- competitiveness involve products in which Hon- pand employment and boost productivity to duras already has a comparative advantage and enable Honduras to reduce its reliance on a a sizeable market share, but exploiting the full narrow range of sectors and export destina- potential of existing exports will require strate- tions—thereby limiting its exposure to exter- gic repositioning within current and new value nal shocks and commodity cycles. chains, transformation and modernization of the „ Technical Capacity. Upgrade production, domestic market through product diversification processing, and handling standards to meet and sophistication, improvement of the regula- international safety and quality standards. tory framework and business environment, and Upgrading the quality of existing exports strengthened linkages between export- and for- while also developing new products and ser- eign domestic Investment (FDI)-oriented sectors vices could boost productivity and support an and the rest of the economy. In addition, Hondu- export-oriented growth strategy. Moreover, ras could ‘cash in’ the demographic dividend if it scaling up access to technology (for example, can create enough good quality, formal jobs for the internet, digital services, etc.) could boost the emerging workforce, and improve the quality and performance of the service subsectors inten- market relevance of education programs. Promot- sive in the use of low-skilled labor. ing jobs creation in labor-intensive sectors (for ex- „ Vertical Value Chains. Support the develop- ample, agriculture, construction), especially those ment of vertical value chains and vertical inte- with the potential for transformation to boost gration to increase competitiveness and create external competitiveness (such as agribusiness, a more conducive business environment with manufacturing, business processing outsourc- investment policies that enable the formation ing [BPO], and information and communication of backward linkages and foster the growth of technologies [ICT]) and those concentrated in domestic micro, small, and medium size en- rural areas would help break the cycles of poverty. terprises (MSMEs). Promote the forward and Finally, increasing domestic private and public backward linkages; a more robust, vertically savings and investment through further devel- integrated value chain within Honduras could opment of the domestic financial market would strengthen linkages with MSMEs and expand help reduce Honduras’s dependency on external the economic impact of the sector beyond ex- factors of growth, improve economic resilience to port-oriented firms. external and domestic shocks, make households „ Linkages between Free Trade Zones (FTZs) and firms more secure and climate-resilient, and and non-FTZs. Facilitate private investment strengthen long-term economic growth. Some beyond the current FDI-oriented sectors. 70    Honduras: Paths Toward Building a Resilient Society Accelerate harmonization of national legisla- improve access to appropriate financial and tion with regional regulations, to facilitate the insurance instruments for MSMEs and house- interaction between FTZs and nonFTZs and holds, including through digital means; (2) knowledge and productivity spillovers. Adopt incentivize domestic saving and investment; select FTZ’s regulations and successful prac- and (3) promote the use of remittances in- tices in the domestic market. flows into capital investment. This could also „ Regional Integration. Promote greater inte- include supporting climate risk management gration into global value chains (GVCs) to bet- and climate financing for banks, insurance ter capitalize on proximity to the US market companies, and other financial institutions; through harmonized customs administration promoting fintech to boost technological in- within the Northern Triangle (Guatemala, novation; strengthening rural savings funds; Honduras, and El Salvador). This could also and incentivizing private sector insurance to support Honduran firms to diversify produc- foster productivity growth. Expanded and in- tion and adopt new technology. clusive access to financial services could lower „ Demographic Dividend. Promote jobs cre- costs and facilitate the growth of smaller firms ation in labor-intensive sectors, especially in in supply chains and clusters. rural areas, to break the cycles of poverty. „ Domestic Financial Market. Continue de- veloping domestic financial market to (1) Honduras: Paths Toward Building a Resilient Society    71 Appendix Q: Data and Knowledge in Honduras 2015–21 and Planned 2022 Table Q.1. Studies, 2015–21 and Planned Independent Honduras Case Study— Evaluation Group (IEG) Early Evaluation of the World Bank’s COVID-19 Response, 2021 Honduras Economic DNA: maintaining commitment with a special focus on poverty and shared prosperity, 2015 World Bank Group. 2015. Honduras Economic DNA: Maintaining Commitment—With a Special Focus on Poverty and Shared Prosperity. World Bank, Washington, DC. https://openknowledge.worldbank.org/handle/10986/22028. Expenditures on Public Sector Wage Bill —Reform Options, 2018 [CONFIDENTIAL Internal WB document] Background Paper: Expenditures on Public Sector Wage Bill in Education (2018), [CONFIDENTIAL Internal WB document] Background Paper: Civil Service in Honduras (2018), [CONFIDENTIAL Internal WB document] Honduras: Joint Bank-IMF Debt Sustainability Analysis, 2021: https://www.imf.org/en Macro /Publications/CR/Issues/2021/09/14/Honduras-Fourth-Reviews-Under-the-Stand-by -Arrangement-and-the-Arrangement-Under-the-465812 Debt Management Performance Assessment (DeMPA), 2022 (forthcoming) Assessment of Debt-Related Fiscal Risks in Honduras, 2021 [CONFIDENTIAL Internal WB document] The Impact of COVID-19 on Formal Firms in Honduras: Evidence from Monthly Tax Returns, 2021 Bachas, Pierre, Anne Brockmeyer, and Camille Semelet. 2021. The Impact of COVID-19 on Formal Firms in Honduras: Evidence from Monthly Tax Returns. MTI Practice Notes. World Bank, Washington, DC. https://openknowledge.worldbank.org/ handle/10986/35093. Honduras Public Expenditure Review, 2022 (forthcoming) Honduras: Poverty Diagnostic, 2001 “World Bank. 2001. Honduras: Poverty Diagnostic Poverty 2000. Washington, DC. https://openknowledge.worldbank.org/handle/10986/15508. Honduras Poverty Assessment, 2022 (forthcoming) Technical and Economic Analysis of Maximum Penetration of Wind and Solar Energy in the Electric System of Honduras, 2016 World Bank. 2019. Análisis Técnico y Económico de Máxima Penetración de Energía Eólica y Solar en la Red Eléctrica de Honduras. Washington, DC: World Bank Group. https://imagebank2.worldbank.org/search/30894509 CONFIDENTIAL: Assessment of the Governance, Fiscal Costs and Risks of the Energy Electricity SOE in Honduras, ENEE, 2019 (pending QER) Assessment on Energy Efficiency Potential and Demand-Side Management Opportunities in Honduras, 2019 World Bank. 2021. Evaluacion de Oportunidades de Mejora de la Eficiencia Energetica y la Gestion de la Demanda en Honduras. Washington, DC: World Bank Group. https://imagebank2.worldbank.org/search/33282671 72    Honduras: Paths Toward Building a Resilient Society Independent Honduras Case Study— Evaluation Group (IEG) Early Evaluation of the World Bank’s COVID-19 Response, 2021 Infrastructure Honduras Transport Infrastructure Sector Assessment 2.0 (forthcoming, 2022) Agriculture Enabling the Business of Agriculture Report, 2019. https://eba.worldbank.org/en/reports Central America Social Expenditures and Institutional Review: Honduras, 2015 World Bank. 2015. Central America Social Expenditures and Institutional Review: Honduras. Washington, DC. https://openknowledge.worldbank.org/ handle/10986/22672 Study financed by the Inter-American Development Bank (IDB): Impact Evaluation of the Cash Transfer Program “Bono Vida Mejor,” 2017 https://sgpr.gob.hn//Content/Uploads/Evaluaciones/636663868289323218- Producto%2015%20versio%CC%81n%20definitiva.docx.pdf Remittances and Labor Supply in the Northern Triangle, 2018 Sousa, Liliana D., and Andres Garcia-Suaza. 2018. Remittances and Labor Supply in the Northern Triangle. Policy Research Working Paper No. 8597. World Bank, Washington, DC. https://openknowledge.worldbank.org/handle/10986/30446 Toward Equal? Women in Central America, 2018 World Bank Group. 2018. Towards Equal? Women in Central America. World Bank, Washington, DC. https://openknowledge.worldbank.org/handle/10986/30398 Human Capital Outflows: Selection into Migration from the Northern Triangle, 2018 Social Protection Del Carmen, Giselle, and Liliana D. Sousa. 2018. Human Capital Outflows: Selection and Jobs into Migration from the Northern Triangle. Policy Research Working Paper No. 8334. World Bank, Washington, DC. https://openknowledge.worldbank.org/ handle/10986/29368 Toward More Efficient and Effective Public Social Spending in Central America, 2018 Acosta, Pablo A., Rita Almeida, Thomas Gindling, and Christine Lao Pena. 2017. Toward More Efficient and Effective Public Social Spending in Central America. Directions in Development—Human Development. World Bank, Washington, DC. https://openknowledge.worldbank.org/handle/10986/26659 Honduras Jobs Diagnostic, 2019 Michel, Veronica, and Ian Walker. 2020. Honduras Jobs Diagnostic. Job Series No. 17. World Bank, Washington, DC. https://openknowledge.worldbank.org/handle/10986 /33304 She Helps Me All the Time: Underestimating Women’s Economic Engagement in Rural Honduras, 2020 Muller, Miriam, and Liliana D. Sousa. 2020. ‘She Helps Me All the Time’: Underestimating Women’s Economic Engagement in Rural Honduras. Policy Research Working Paper No. 9217. World Bank, Washington, DC. https://openknowledge .worldbank.org/handle/10986/33638 Honduras: Paths Toward Building a Resilient Society    73 Independent Honduras Case Study— Evaluation Group (IEG) Early Evaluation of the World Bank’s COVID-19 Response, 2021 Strategy and Action Program for WSS in Small Towns in Honduras https://documents1.worldbank.org/curated/pt/883341496228017268/pdf/ACS10444- WP-P132283-PUBLIC-Post-DM-DS-MA-AR-GP-20160616-CLEAN.pdf Monitoring of Country Progress in Drinking Water and Sanitation, MAPAS (Spanish) https://www.wsp.org/sites/wsp/files/publications/WSP-MAPAS-Honduras.pdf Monitoring of Country Progress in Drinking Water and Sanitation, MAPAS II (Spanish) Public Expenditure Review Decentralization of Water and Sanitation Services https://www.wsp.org/sites/wsp/files/publications/PER-Honduras-Decentralization- Water-Sanitation-Services.pdf Improving Access to Finance of the Tegucigalpa Municipality Water Utility, Overview https://ppiaf.org/activity/honduras-improving-access-finance-tegucigalpa-municipality- Water Supply and water-utility-0 Sanitation (WSS) Diagnostic of the WSS context in Tegucigalpa (Spanish) Municipal WSS Unit 10-year Business Plan (Spanish) National Water and Sanitation Plan, PLANASA (Spanish) Link: http://conasa.hn/wp-content/uploads/2017/07/PLANASA_AMPLIADO_ IMPRENTA.pdf Water and Sanitation Financial Policy (Spanish) Water Security Strategy in the Dry Corridor (Spanish) Honduras— Modernizing the Water and Sanitation Sector Builds Resilience, 2019 https://documents1.worldbank.org/curated/en/465661553067283591/pdf/135433- BRI-P118090-19-3-2019-12-40-25-WeBook.pdf Improving Transparency and Accountability in Public-Private Partnerships— Disclosure Diagnostic Report: Honduras, 2018 Public-Private World Bank. 2018. Improving Transparency and Accountability in Public-Private Partnerships (PPPs) Partnerships: Disclosure Diagnostic Report—Honduras. World Bank, Washington, DC. https://openknowledge.worldbank.org/handle/10986/29786 Predicting School Dropout with Administrative Data: New Evidence from Guatemala and Honduras, 2017 https://openknowledge.worldbank.org/handle/10986/30146 Education Education Sector Plan, 2018. https://cne.presidencia.gob.hn/sites/default/files/PESE_2018_2030_OFICIAL_ VERSION_COMPLETA.pdf Open Data Readiness Assessment, 2017 Governance http://opendatatoolkit.worldbank.org/docs/odra/odra_honduras-es.pdf Co-financed with United States Agency for International Development: Public Financial Management Expenditure and Financial Accountability (PEFA) Assessment Strengthening Hydromet Services, Disaster Preparedness and Urban Resilience in Disaster Risk Honduras (Honduras Hydromet Modernization Plan), 2020 Management— https://www.preventionweb.net/publication/strengthening-hydromet-services-disaster- Hydromet preparedness-and-urban-resilience-honduras 74    Honduras: Paths Toward Building a Resilient Society Independent Honduras Case Study— Evaluation Group (IEG) Early Evaluation of the World Bank’s COVID-19 Response, 2021 Doing Business Report, 2020 (global report, with analysis on Honduras) https://www.doingbusiness.org/content/dam/doingBusiness/country/h/honduras/ Commerce/ Business HND.pdf Country Private Sector Diagnostic: Creating New Markets in Honduras (2021, forthcoming) Extractives Building Regulatory Capacity for Improved Governance of Extractive Industries, 2016 Climate Change Honduras Country Climate and Development Report (2022, forthcoming) Crime, Violence, and Community-Based Prevention in Honduras, 2015 Citizen Security/ Berg, Louis-Alexandre, and Marlon Carranza. 2015. Crime, Violence, and Community- Prevention/ Fragility, Based Prevention in Honduras. Justice, Security, and Development Series. World Bank, Conflict & Violence (FCV) Washington, DC. https://openknowledge.worldbank.org/handle/10986/22378 CONFIDENTIAL: Honduras Risk and Resilience Assessment (2022, forthcoming) Note: Titles in italics are forthcoming. Honduras: Paths Toward Building a Resilient Society    75 Notes 1. For more information, see https://www.worldbank.org/en/publication/human-capital/brief/the-human-capital -project-frequently-asked-questions#5 2. The Global Climate Risk Index 2021 can be found at https://reliefweb.int/sites/reliefweb.int/files/resources /Global%20Climate%20Risk%20Index%202021_1_0.pdf. 3. Collaborators include the Inter-American Development Bank; World Bank; Central American Bank for Economic Integration; Economic Commission for Latin America and the Caribbean; Institute of Nutrition of Central America and Panama; World Health Organization; Foro Social de la Deuda externa y Desarrollo de Honduras (FOSDEH); represen- tatives of civil society and academia. 4. For more details on the new official poverty measurement methodology, see https://www.ine.gob.hn/V3 /pobrezamonetaria/. 5. These numbers differ slightly from those published by the Instituto Nacional de Estadística (INE) in January 2020. The Technical Poverty Commission met in March 2021 to review some issues with the underlying microdata and ac- cepted the revisions. This was not a change to the poverty measurement methodology itself, but rather a correction of the microdata. 6. Through COMRURAL. 7. Through the Corredor Seco Food Security Project (PROSASUR). 8. Despite the government’s efforts, Honduras still ranked 138th out of 193 countries in the UN’s 2020 e-Government Survey with a score of 0.45 (not significantly different from 0.41, its score in 2014). This was below the regional average of 0.63 and the Central American average of 0.58. 9. “Beyond Connections: Energy Access Diagnostic Report Based on Multi-Tier Framework,” World Bank, June 2019. Also see ESMAP/World Bank Group, https://microdata.worldbank.org/index.php/catalog/3753. 10. From the tax administration diagnostics assessment tool (TADAT), the International Monetary Fund, and the World Bank Group, 2020. 11. WBG staff assessment based on data from the Ministry of Finance. 12. WBG staff assessment based on data provided by the Ministry of Finance in Honduras on reforms in debt management and related areas, using revised DeMPA methodology (https://www.worldbank.org/en/programs /debt-toolkit/dempa). 13. Honduras is only of only two countries in the Latin America and the Caribbean Region that does not have a law on cyber-criminality. The other country is El Salvador. 76    Honduras: Paths Toward Building a Resilient Society