37045 INTERNATIONALBANK FOR WORLD BANK R E T C N O E N STRUCTION PM AND DEVELO February 2006 No. 87 A regular series of notes highlighting recent lessons emerging from the operational and analytical program of the World Bank's Latin America and Caribbean Region UNDERSTANDING THE DRIVERS OF SUSTAINABLE RURAL GROWTH AND POVERTY REDUCTION IN HONDURAS Hans G.P. Jansen, Paul B. Siegel, Jeff Alwang and Francisco Pichón Background by public programs have left many inhabitants of rural With a population of seven million, Honduras is the areas without access to key markets and assets, such as second most populous country in Central America. It is land, financial services, support services, basic infrastruc- also the second poorest country in the region with an ture and social services. Economic growth in Honduras annual per capita income of less than US$ 1,000. Two out historically has been very volatile and continues to suffer of every three people in Honduras are poor (per capita from natural shocks, including Hurricane Mitch, destruc- income less than US$ 1.50/day); and three out of every tive and erratic rainfall, and recurrent droughts. Mean- four poor people are extremely poor (per capita income while, over the past decade, income distribution in rural less than US$ 1.00/day). Social indicators such as child areas has grown more unequal. malnutrition rate (17 percent), life expectancy at birth (66 years), child mortality rate (32 per 1000 births), and Methodology literacy rate (less than three-quarters of the population) are among the poorest in Latin America and the Caribbean Using an asset-base conceptual approach (Figure 1), the (LAC) region. regional study "Drivers of Sustainable Rural Growth and Poverty Reduction in Central America", carried out by the About one-half of all residents in Honduras are classified as rural, and 80 percent of these live in areas classified as hillside areas (Box 1). The Box 1: Defining "hillsides", "hillside areas", and majority of these people earn their living from "valleys" the agricultural sector, as laborers and/or from small landholdings. Poverty is particularly stark `Hillsides' are areas with slopes of more than 12 percent. `Hillside areas' in rural areas where the number of poor also include flat-floored valleys, 300 to 900 meters in elevation, which are scattered throughout the interior hillsides. `Valleys' refer mainly to the continues to increase. Rural poverty is primarily lowland areas in the north and northwest of the country, which are the result of a combination of unequal distribu- generally considered as high-potential areas for agriculture. In Hondu- tion of assets, low factor productivity, inad- ras, hillside areas account for roughly 80 percent of the total land area, equate public policies, and vulnerability to natu- where the major economic activity consists of smallholder farming ral and economic shocks. 70 percent of land- focusing on production of basic grains, coffee and livestock. Agricul- holdings account for 10 percent of land in tural potential in hillside areas varies with agro-ecological factors, such farms, and 1 percent of farmers own 25 as elevation, rainfall, and soil characteristics. However, compared to percent of the land. Land and labor productivity areas with lower slope and elevation, agricultural options in hillside are kept low by the low adoption of improved areas are constrained. Rather than profit maximization, food security is production technologies, unsustainable land use the most important objective of most smallholder households living in practices, high importance of extensive cattle hillsides areas. Many hillside areas also have less access to transport production, and a still-expanding agricultural infrastructure and services. frontier. Poor policies and insufficient attention 1 Environmentally and Socially Sustainable Development choice of livelihood strategies? How do livelihood strate- Unit and the Central American Department in the Latin gies and asset endowment influence household well- America and Caribbean Region, investigates how broad- being? How do some current projects fit into the coun- based economic growth can be stimulated in rural Hondu- tries' rural development strategies and contribute to ras in general hillside areas in particular. "Drivers" are improving the asset bases of rural households? On what defined as the assets and combinations of assets needed by types of assets or combinations of assets should public different types of households located in different geo- investments concentrate in order to have maximum impact graphical areas and following different livelihood strate- on income and poverty reduction, and what is an gies, to take advantage of economic opportunities and appropriate sequencing of such investments? raise incomes. The asset-base approach is well-suited for understanding and analyzing the Honduran rural economy To address these questions, the authors combine spatial because of the highly unequal distribution of assets, analysis, quantitative household analysis, community live- substantial exposure to natural and economic risks, and lihood studies and project stocktaking exercises. Rural ongoing economic, political, and institutional reforms, all Honduras is characterized by substantial heterogeneity in of which influence prospects for rural growth and poverty economic potential and performance of sub-regions. The reduction. The historically stark inequalities in the distribu- spatial analysis uses national Geographic Information tion of productive assets among households and geo- Systems (GIS) data to illustrate the distribution of people, graphical areas in rural Honduras are likely to constrain economic potential and activities, and well-being out- how the poor share in the benefits of growth, even under comes across the rural space. The quantitative analysis appropriate policy regimes. draws highly from household surveys carried out by the International Food Policy Research Institute (IFPRI) and the University of Wisconsin (Figure 2) and complemented by secondary data regarding rainfall, altitude, population and road densities, and market access. Factor and cluster analysis tech- niques are used to identify and group different livelihood strategies at the household level; and econometric analysis is used to investigate the determinants of livelihood strategies and the major factors that impact on income. The community studies, also carried out by IFPRI, focused on the diagnosis of problems, limitations and opportunities, resulting in community profiles. Project stocktakings were carried out to link the results of the study to actual project experience in the field and to identify priority investments and actions to enhance households' asset portfolios. The main conclusions and operational implications of the Honduras study, while pointing towards historical imbalances in public and private investments that Rather than identifying particular enterprises or sub- have favored high potential areas, strongly support the sectors that might stimulate growth and poverty reduc- need for increased focus on the hillside areas in the tion, the Honduras study analyzes the types and combina- development of rural strategies. They also draw attention tions of assets needed by households to improve their to the importance of asset complementarity and invest- well-being. It looks at households' asset endowments and ments with increased cross-sectoral cooperation. These their livelihood strategies, defined as the ways in which are all necessary to realize project impacts and bridge the households deploy their assets, including natural, physical, gap between conceptual strategies and their timely imple- financial, human, social, and location assets, within the mentation, to obtain tangible results in terms of a sustain- context of policies, institutions and risks. Households able reduction in rural poverty. respond to opportunities, and their asset allocation and resulting livelihood strategies ultimately determine well- Findings being outcomes. The main questions asked are the following: What are the asset bases and livelihood strate- There exist a limited number of well-defined areas of gies of rural households in Honduras and how do higher economic opportunity, given their underlying agri- individual assets and combinations of assets influence the cultural potential, relatively good access to infrastructure, 2 and high population densities. Economic potential has a circumstances, achieving sustainable agricultural growth strong spatial pattern in Honduras. Historically, public is challenging. The hillside regions are also characterized investments in human and physical assets have been by a shortage of population centers (cities or towns) that skewed towards areas close to the main cities and along could be poles for economic activities and social services. the Northern Coast, the so-called "T of Development." The physical distance from urban centers and towns, Outside the "T", public investments have been concen- together with the lack of road infrastructure and transport trated where agro-ecological conditions are favorable for services, and households' lack of other assets such as export agriculture. Most other rural areas, the hillsides in land, education and skills, and access to credit, limits more particular, have been excluded from public investments. remunerative off-farm employment opportunities. This has resulted in poverty being highest and deepest outside the "T". Overlap between high poverty rates and high poverty densities in some hillside areas means that investments there should reach significant proportions of the country's Figure 2: Geographical Coverage of Household rural poor. Many hillside areas in Honduras show both Surveys high rates of poverty and high population densities (leading to high poverty density). For example, the western areas around Copán, the southern areas in Valle and Choluteca, and the province of Comayagua have both high poverty rates and high poverty densities. By explicitly targeting these areas in rural investment programs, significant proportions of the rural poor can be reached while minimizing the problem of leakages to the non-poor. Agriculture alone cannot solve the rural poverty problem, but those remaining in the sector need to be more efficient, productive and competitive. Many hillside households have strong social and cultural bonds to traditional farming production systems and consumption patterns (food security), but most of these people are locked into strategies based on the production of basic grains and small livestock for subsistence needs in areas that are not suited for such strategies. Households pursuing livelihood strategies based primarily on basic grains on small parcels of land are caught in a cycle of poverty. Strategic actions involving food security, security and access to land and forests, infrastructure provision, improved natural re- Economic potential does not automatically translate into source management, non-agricultural rural employment improved well-being for all households. Poverty rates in and migration are needed to increase land and labor the hillsides are high even in areas with relatively good productivity, achieve broad-based and sustainable agricul- access to infrastructure and high agricultural potential (for tural growth and reduce rural poverty. example, along the Guatemalan and Salvadoran borders in western and southwestern Honduras), showing that this Infrastructure improvements are essential components of potential is not being realized -- and to the extent to which an asset-base growth and poverty reduction strategy. The it is being realized, the poor are not participating, mainly study found clear evidence of positive effects of road and because of missing assets, in addition to poorly function- market access on livelihood decisions and household ing institutions and policy shortcomings. income. Better market access and higher road densities lead to higher household income, and improved market Poverty is widespread and deep in rural Honduras, access can to some extent compensate for insufficient particularly in hillside areas. Hillside areas account for access to land and education. Historical under-investment the majority of land area, and often have agro-ecological in poor households' assets and inadequate provision of constraints that make them less suitable for agriculture. public infrastructure and services in hillside areas mean Most poor households in hillside areas have limited assets that major investments are required to augment asset on which to base their livelihood choices. They are often bases. Significant investments in rural infrastructure locked into livelihood strategies based on production of occurred during the 1990s, but many poor households and basic grains and small livestock for subsistence needs in communities still lack access to basic infrastructure and areas that are not suited for such strategies. Under these services. 3 Recommendations The transition should be made from geographically Hillside areas should be a major target of national rural untargeted investments in single assets to a more integrated poverty reduction strategies. Despite the challenges, high and geographically-based approach of asset enhancement poverty density in hillside areas, and the fact that some 80 with proper complementarities. To achieve a level playing percent of all rural poor are located in these areas, should field and give the rural poor a chance to participate in the make these areas a target of national rural poverty global economy, minimal levels of key assets are needed. reduction strategies. Even though conditional cash trans- But household-level heterogeneity limits the appropriate- fer programs have been shown to be effective tools for ness of "cookie-cutter approaches" to policies and pro- poverty reduction, their impact is necessarily limited and grams designed to foster broad-based growth. Investment eventually the productivity of land and labor need to be strategies should be formulated on broad regional bases, raised. Asset bases of the poor need to be strengthened but options within regions should be tailored to local asset before they can benefit from growth-related spillovers, bases and other conditions. An important issue for targeting and this implies a need for funding from the central public investments is to identify the combinations of assets government and public investments, which should be that best enable households to take advantage of an area's coordinated with local governments. growth potential and contribute to improvements in their well-being. Therefore, a multisectoral and spatially differ- Agriculture should form an integral part of the rural entiated investment program is required to upgrade and growth strategy in hillside areas. Over the past 25 years, improve access to household assets. Land access and agriculture has not been a strong engine of growth in rural security are key contributors to livelihoods of the rural Honduras. However, high reliance of rural households on poor. Secure land rights can improve food security and agricultural and related income means that any strategy enhance risk-bearing ability, both of which can contribute targeted to these areas will have to build upon the to agricultural growth. Technical assistance, training, economic base created by agriculture. But broad-based capacity building, and inputs are needed for sustainable agricultural growth is constrained by unequal access to intensification of traditional agriculture and promote crop land, degradation of natural resources, absence of tech- and livestock diversification, and improved forestry prac- nologies for productivity enhancements, and weak insti- tices. tutions for technical assistance and dissemination of market information. The extent to which agricultural Notes growth will be able to lower rural poverty depends on how these critical shortcomings are addressed. The Siegel, P.B. (2005). Using an Asset Base Approach to Government of Honduras should give priority to the Identify Drivers of Rural Growth and Poverty Reduction in implementation of an operational strategy to enhance land Central America: Conceptual Framework. Policy Research security and expand access to land, including the planned Working Paper Series No. WPS 3474, The World Bank. completion of a national land policy. Food security can be www.worldbank.org/research or econ.worldbank.org improved by investments in infrastructure, provision of market information, and new technologies for sustainable World Bank (2004). Drivers of Sustainable Rural Growth production. and Poverty Reduction in Central America: Honduras Country Case Study. Gray Cover Report No. 31192-HN The participation of poor hillside households in the (Volumes I & II), The World Bank: Washington, D.C. market economy can be facilitated by increasing market access and reducing transaction costs. Linkages to market-oriented agriculture are extremely weak in the hillsides. Off-farm employment is limited because of the physical distances from urban centers and towns and the lack of good road infrastructure and transport services. About the authors There therefore is a need to consider the strengthening of satellite urban centers and towns outside of the "T of Hans G.P. Jansen is a Research Fellow and Coordinator for development". This would provide better access to Mesoamerica at the International Food Policy Research product and factor markets, help lower transactions costs Institute (IFPRI) based at the Regional Unit for Technical associated with distance, and increase opportunities for Assistance (RUTA) in San José, Costa Rica. Paul Siegel is off-farm employment. Based on the econometric results a consultant with the Environmentally and Socially Sustain- of the study that show the importance of credit and able Development Unit (LCSES) of the Latin America and education for a self-employment-based livelihood strat- Caribbean Region of the World Bank. Jeff Alwang is a egy, programs to assist individual and small group micro- Professor in the Department of Agricultural and Applied enterprises might have a positive influence on rural Economics at Virginia Tech. Francisco Pichón is a Senior growth. Natural Resources Management Specialist with LCSES. 4