Katie Johnson


Quick facts about Honduras

  • Population- 8.1 million
  • GDP- $39.2 billion
  • GDP Growth %- 2.6%
  • GDP Per Capita- $4,839
  • Unemployment-4.2%
  • Inflation-5.2%
  • Foreign Direct Investment-$1.1 billion
  • 1. Legal System

    Economic progress is directly impacted by a countries “Rule of Law,” or a legal system that protects private property and enforces law/contracts fairly. The ability of an individual to accumulate private property, secured by clear laws that the state enforces, is known as “property rights”. Unfortunately, Honduras’s legal system is falling apart. The court system is weak, and there are extreme amounts of corruption within the legal system due to high crime rates and gangs. This corruption within the state results in property ownership not being protected by the government. It is no surprise that their economic progress is one of the lowest on the list. People can’t turn to the courts for help/protection because violence and corruption is hidden everywhere. Compared to America or Hong Kong, Honduras is a horrible place to live and do business, and there is no drive to create new innovated ideas, which also slows down economic progress.

    2. Competitive Markets

    In Honduras, there is a lack of a competitive market. In New Zealand for example, they have a great open market because their economy is the least corrupt in the world, they have an efficient labor market, appropriate government spending, and many other important characteristics that keep their economy on the top ten list. Sadly, none of these characteristics are present in Honduras’s economy. They do not have a successful market, let alone a competitive market that promotes innovative ideas, and the efficient use of resources (thus creating a healthy economy). It is easy for citizens to start a business but hard to obtain a license which is needed to obtain and increase wealth/production. Unfortunately, there is an absence of well-functioning labor markets. Due to corruption, especially within the government, there is just a lack of competition within the market.

    3. Limits on Government Regulation

    In Honduras, the government isn't too involved in important economic issues like trade regulation or de-regulation. Currently there is a lack of a market, and not many countries want to trade with Honduras. Honduras does most of its trading with America and Canada. In Hong Kong the government is needed to regulate trade and create policy to improve the economy because they are so successful and have such a well working open market with high economic freedom. Honduras, on the other hand, doesn't have as successful of a trade market, and the government only regulates key products such as oil. However, they do have a reasonably stable regulatory system and financial structure. Over the past decade, Honduras has been developing “character cities” with hope of attracting more trade and investment. However, because creating and enforcing regulation has been inconsistent, Honduras’s score has dropped 1.2 points in the past year.

    4. An Efficient Capital Market

    Honduras’s capital market is not very efficient. In order for their economy to grow it is important to save a little money and then make some good investments in the future. Due to extreme corruption within the state, saving money tends to be a difficult task for the government. Honduras only has minimal opportunity when it comes to saving money and putting money into wealth creating investments. Plus, it takes a really long time for people to get a business running in Honduras. It is especially hard to get all the permits needed in order to start building or renovating. Also, because Honduras is an agriculturally based society they have a small domestic market. These factors lead to an in-efficient capital market. In other countries, such as America, capital investment leads to wealth, and the ability to save a little today in order to invest a little tomorrow.

    5. Monetary Stability

    One Honduras lempira equals .047 U.S dollar; acting as a medium of exchange, the lempira is not very powerful. Is Honduras’s money stable? I say yes and no. Some agricultural based societies flourish and their economies continue to grow; Honduras doesn't have that luxury. Due to corruption and natural hardships Honduras’s business and revenue has proven to be un-stable. For example, in 1998 Honduras’s second largest export, the banana, was basically wiped out by Hurricane Mitch. This caused Honduras to face drastic economic poverty. Proof of Honduras’s un-stable dollar is seen in there poverty levels. They are the second poorest country in Central America, and they suffer from extraordinarily unequal distribution of income. The government also insufficiently controls the supply of money compared to other countries. Some positive aspects of Honduras’s money stability are their Central bank created on February 3, 1950, and an increase in monetary policy. Due to Honduras’s lack of a stable dollar, it is hard for borrowers and lenders during transactions because of uncertainty within the lempira.

    6. Low Tax Rates

    Even though Honduras is full of corruption, people are willing to work. Their unemployment rate is lower than New Zealand, Australia, Switzerland, and other countries that have some of the most economic freedom in the world. With a low 4.2% of unemployment, most citizens are working, and keeping most of their money. One of the ways to keep unemployment low, and keep an economy growing, is low tax rates. People will have a better incentive to work when they are taxed less and get to keep more of their wages. In Honduras, the average tariff rate is 6.5%. The overall taxation is equal to about 16.1% of domestic income. That means people are taking home over 80% of their pay check. Honduras’s low tax rates are one thing that helps the country rise on the Economic Freedom List. However, many people participate in an “informal economy." This means that they work independently, selling fruits, vegetables, clothes, and various other items in the streets. They do not pay taxes and the government can’t keep track of or force them to pay taxes because so many people do this. These low tax rates are an effective incentive, but they don’t have that large of an effect on Honduras’s economy because of its “informal economy.”

    7. Free Trade

    Free trade is based on the idea that a nation sells goods that it can produce at low costs and it buys goods that would be too expensive to acquire domestically. Nearly half of Honduras's economic trade is directly tied to the US. Exports to the US account for 30% of Honduras’s Gross Domestic Products. The US-Central America-Dominican Republic Free Trade Agreement (CAFTA-DR) came into force in 2006 and has helped create foreign investment/trade. Honduras has also recently entered into a trade agreement with Canada. However, physical and political hardship, as well as crime and corruption have deterred potential foreign investors. Also, they only have two major exports which are bananas and coffee. Additional natural barriers impede imports of agricultural goods. Furthermore, the average tariff rate for Honduras is 6.5 percent. Honduras doesn't participate in a lot of free trade.

    Honduras Economy Struggling to Stay Afloat

    Extra Credit

    Honduras has the world's highest murder rate.