Economic Development in Honduras: A Banana War Legacy
An Analysis of Economic Development in Honduras from 1820 to Present
In many Latin American countries such as Honduras, the historical emphasis that has been placed on agriculture as a money industry for export purposes has resulted in the term, “banana republic” (Nash & Jeffrey 1994). Following their independence, most Latin American countries continued to depend on the export of raw materials for their revenue, rather than investing in an economic infrastructure that would provide value-added services, which only further contributed to this pattern of dependence on foreign states. This is largely what has taken place in the Republic of Honduras as well, and the country continues to suffer from sporadic and inequitable foreign investment, much of which has illegally diverted into private hands rather than infrastructure development. This paper provides an overview of the Republic of Honduras, an assessment of the contemporary constraints to its economic development, followed by an analysis of current economic indicators. A summary of the research will be provided in the conclusion.
Review and Discussion
Background and Overview. The formation of the modern state of Honduras began in the early 1820s; however, the process did not assume any degree of strength until well after the 1870s and has languished periodically ever since (Euraque 1996). At this time, Honduras — like other newly emerging independent former colonies — was faced with a wide range of problems following its independence in 1821. According to Euraque, most of these difficulties originated in the colonial period and only intensified between the 1820s and the 1870s. As a result, Honduras emerged from this period in its history with a specific economic structure whose connections to the world economy affected the country’s different geographic regions in distinctive ways. “The Honduran North Coast slowly accumulated a social and political prominence intimately associated with the peculiarities of the region’s geography and class structure” (Euraque 1). As a result, the vast majority of the Honduran population lives a generally isolated existence in the mountainous interior, a fact that may help to explain the country’s insular policy of the country in relation to Latin and Central American affairs (Euraque 1996).
During its colonial period, Honduras was a province of the Captaincy General of Guatemala, which itself was under the administration of Mexican authorities. Civil wars during the 1820s and 1830s aggravated the collapse, but these problems did not disappear when the country achieved its independence. In fact, “the new nation was born in debt” (Euraque 4). For example, in 1821, the Honduran treasury acknowledged outstanding debts totaling over four million pesos, an amount that subsequently increased to about five million after independence from Mexico. According to Euraque, more loans were quickly assumed by Honduras and in 1825, Central American federal governments contracted for additional loans in British financial markets. “By 1826 the first loan succumbed to a British stock market collapse, and the Central American government was saddled with debts largely for expenses, commissions, government salaries, and cash advances” (Euraque 4). The collapsing regional economies and civil wars did not help in obtaining resources to could pay off the debts that had accumulated during the 1860s, almost three decades after Honduras had separated from the Central American Federation (Euraque 1996).
Prior to the 1870s, the Honduran economy could not afford to support a strong, centralized federal state; during this period, three commodities took turns as Honduras’s most lucrative exports: 1) cattle, 2) hardwoods, and 3) mineral products (primarily silver and gold) (Euraque 1996). The exports of cattle, hardwoods, and mineral products to markets beyond Central America also helped to fuel commercial growth in certain areas of the territory and during given periods:
Cattle to the Caribbean, especially to Cuba (1850s-80s);
Hardwoods to the UK via Belize (1840s-70s); and Gold (1830s-40s) and particularly silver (1850s-70s) to the U.K. And the U.S. (Euraque 1996).
Nevertheless, the fiscal revenues realized from these exports never truly helped Honduras achieve the level of investment in its infrastructure to help avoid the economic stagnation that would continue to characterize the nation throughout the 20th century. Euraque, and others, point to rife corruption as being responsible for diverting much of the proceeds from foreign investments into private hands during these early years, a process that continues to constrain economic development today. “The fact is that economic relations connecting Honduras and world markets from the 1830s to the 1870s did not sustain a state capable of producing the ‘nation’ imagined by elite Hondurans” (Euraque 4).
Contemporary Constraints to Economic Development. The history of Honduras since the late 19th and 20th centuries has been characterized by economic turmoil and inordinate distributions of wealth. Since January 1984, the Caribbean Basin Initiative (CBI) has provided American businesses with an attractive investment option through trade and economic assistance in 27 countries in the Caribbean, including Honduras (Befus, Mescon, Mescon & Vozikis 1988). Governmental agencies that continue to be active in the initiative include the International Trade Administration, the Caribbean Agency for International Development, and the Commerce Department’s CBI Business Information Center (Befus et al. 1988).
Despite these and other such incentives for foreign investment, Honduras remains one of the poorest countries in the Western Hemisphere, characterized by an extraordinarily unequal distribution of income and massive unemployment (Honduras 2004). . “Honduras, like its neighbors in the region, is a developing nation whose citizens are presented with innumerable economic and social challenges, a situation that is complicated by rough topography and the occasional violence of tropical weather patterns, including the devastation wreaked by Hurricane Mitch in 1998” (Woodward 2004). According to Lewis (2002), prior to 1998, many countries in Central America were making some progress on social, economic, and political reforms. “Then Hurricane Georges hit the Dominican Republic in September 1998, and Hurricane Mitch devastated Nicaragua and Honduras in October 1998. Taken together, these disasters caused almost $10 billion in damage to infrastructure, agriculture, industry, and housing. “In Honduras alone, 35,000 homes were demolished and another 50,000 damaged” (Lewis 24).
To help overcome these constraints to development, the country continues to rely on expanded trade privileges under the Enhanced Caribbean Basin Initiative and on debt relief provided through the Heavily Indebted Poor Countries (HIPC) initiative (Honduras 2004). Although Honduras has achieved the majority of its macroeconomic targets, it has still failed to attain the IMF’s goals to liberalize its energy and telecommunications sectors. Further, domestic growth remains inordinately dependent on the economic health of its major trading partner, the U.S., concerning commodity prices, particularly coffee, and on reduction of the high crime rate (Honduras 2004). Other forces have been at play in the Honduran economy as well.
In the late 1990s, tens of thousands of jobs were being threatened by the escalating trade war between the United States and Europe, as the U.S. government attempted to impose sanctions that would have effectively doubled the price of a range of European Union (EU) produced luxury items (James 1999). The trade war’s immediate origins were traced to attempts by the giant U.S.-owned food company Chiquita to break into the European banana market, now the world’s largest.
In 1998, the United States pressured the World Trade Organization (WTO) to force the EU to dismantle favored trading terms provided by the EU to banana producers in former European colonies; Chiquita responded by claiming $5 billion in lost revenues from the EU (James 1999). In response, in January 1999, the EU eased its rules; however, the U.S. government regarded the effort as “too little, too late” and the U.S. warned that from March 3, 1999 (and maybe sooner), a wide range of luxury goods imported by the U.S. from Europe would be taxed at a full 100%, compared to then-existing rate of 6% (James 1999). The total value of the exports affected was estimated at around Â£500 million, or 700 million euros (James 1999). Former European colonies (mainly British and French) receive slightly preferential treatment over Central American producers exporting bananas to the EU. The banana is a crop which the U.S. does not export to Europe; however, many of the Latin American “bananas republics” products are grown on plantations that are owned by U.S. companies.
According to Stephen Bates, the banana crop only plays a very small part in annual trade between Europe and America; nevertheless, the battle over its export to the EU will cost jobs in British industries whose only connection with the fruit “is in the lunchboxes of its employees” (Bates 1999:23). The World Trade Organization has time and again ruled in favor of large machine- and chemical-intensive global industrial agricultural corporations over small-scale family farming and indigenous farmers, most notably in the Chiquita banana case. That case established the precedent that the European Union was not allowed to favor small indigenous, frequently organic farmers within former European colonies over the industrial bananas from plants operated by Chiquita (Mander 2001). According to Mander, the most traumatic social and environmental consequences of such economic globalization on the Honduran economy took place at the regional and local levels, particularly because of the shift from the previous economies based on small-scale, diverse models of agricultural production, to the industrial export model. “The results are grim” (Mander 2001:34). An unresolved dispute over bananas could also trigger a subsequent chain reaction of punitive sanctions in this area as well as another dispute over tax rules that could reach as high as $4 billion, according to international trade officials (Dougherty 2001). Chiquita subsequently filed for Chapter 11 bankruptcy protection and blamed European policies for its economic failures because the European banana system allocated import licenses through a complex formula that reduced Chiquita’s shipments. When Europe refused to change the system in 1998, the United States imposed $191 million in trade sanctions; however, the dispute assumed more ominous levels in 2001 as Europe completed a new system that Chiquita continued to oppose (Mander 2001).
Economic Indicators in Honduras Today. According to the World Bank’s basic economic scorecard, Honduras ranks below the Latin American average across the board as shown in the tables and figures below.
Econ. Incentive Regime
Average Annual GDP growth (%)
GDP per capita
Unemployment rate, % of total labor force
Gross Capital Formation
Soundness of banks
Adult literacy rate (% age 15 and above)
The research showed that the historic constraints to economic development that have plagued many Latin American countries are even more pronounced in the Republic of Honduras. The country continues to languish in many economic areas, even compared to its neighbors in Latin America, with only its average annual GDP growth and gross capital formation indicators slightly edging out its other Latin American counterparts. In the final analysis, it may well be several more decades before Honduras is able to shake off the lingering effects of its former status as a “banana republic” and the impact of natural disasters such as Hurricane Mitch to join the international community as a competitive trade partner.
Bates, Stephen. (January 8, 1999). Good friends slip on a banana skin. New Statesman,
Befus, David R., Debbie L. Mescon, Timothy S. Mescon and George S. Vozikis. (1988).
International Investment of Expatriate Entrepreneurs: The Case of Honduras. Journal of Small Business Management, 26(3):40.
Dougherty, Carter. (March 10, 2001). Zoellick, Lamy seek banana accord. The Washington
Euraque, Daraio A. Reinterpreting the Banana Republic: Region and State in Honduras, 1870-
1972. Chapel Hill, NC: University of North Carolina Press, 1996.
Honduras. (2004). U.S. Government: CIA World Factbook. Available: http://www.cia.
James, Steve. (January 20, 1999). Banana war threatens jobs and heralds wider trade conflicts.
World Socialist Web Site. Available: http://www.wsws.org/articles/1999/jan1999/ban-
Lewis, Megan. (April 2002). Challenge in the Tropics: Before 1998, Central America and the Caribbean Were Making Progress on Various Reforms. Then Hurricane Georges Hit the Dominican Republic, and Hurricane Mitch Devastated Nicaragua and Honduras.
Mander, Jerry. (September 2001). Globalization and the Environment. Tikkun, 16(5):33.
Nash, Gary B. And Julie Roy Jeffrey et al. The American People: Creating a Nation and a Society, 3rd ed. New York: HarperCollins College Pub., 1994.
Woodward, Ralph L., Jr. (2004). Honduras. In Encyclopedia Britannica.com [premium service].
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