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Honduras' Coup: The Last Thing a Poor Nation Needs

Editor's Note: An earlier version of this story had an incorrect amount for how much Millennium Challenge money Honduras is to receive in 2009 Long before a military coup ousted Honduran President Manuel Zelaya, the country was in a financial pinch. One of Latin America's smallest and poorest nations, with per capita income of just $1,717 annually, Honduras saw its economy shrink 2.2% in the first four months of 2009. Exports fell 15% in the first quarter as international demand withered under recession. Now, with world leaders and organizations such as the United Nations and the Organization of American States protesting Zelaya's ouster, Honduras runs the risk of losing hundreds of millions of dollars in trade, international aid, and loans. That would be a serious blow to the country, whose annual federal budget is just over $3 billion. On June 29, leaders from Nicaragua, Venezuela, and seven other countries that belong to a five-year-old regional alliance called ALBA met in Managua along with the exiled Zelaya and his foreign minister and demanded he be returned to office. In Tegucigalpa, thousands of Hondurans clashed with riot police in front of the presidential palace, where the president of Congress had been sworn in as Zelaya's replacement a day earlier. American Aid Could Be SuspendedThe Organization of American States (OAS) called an emergency meeting in Washington for June 30 to discuss the possibility of expelling Honduras for violating a ban on coups included in the Democratic Charter OAS member states agreed on in 2001. For decades, Latin America was plagued by a series of military dictatorships, but Zelaya's June 28 ouster was the first military move against a sitting President since a brief, failed coup against Venezuelan President Hugo Chavez in 2002. Although the Obama Administration was quick to condemn Zelaya's removal from office, Secretary of State Hillary Clinton refrained from calling it a "coup," because under U.S. law that could require suspension of foreign aid upon which Honduras relies heavily for poverty alleviation and development programs. The law states that no U.S. aid may go to a country whose duly elected head of state is toppled "by military coup or decree." "The United States should wait and see what ends up happening politically in Honduras before it thinks about cutting aid," says Peter Hakim, president of the InterAmerican Dialogue, a Washington think tank that focuses on the region. "Placing sanctions on a poor country ends up hurting people and it doesn't do much to help democracy." American economic and social aid to Honduras this fiscal year is set to reach $43.2 million, including funds from the Millennium Challenge, an ambitious anti-poverty program that requires countries to combat corruption and foster the rule of law and democratic institutions. The $215 million in Millennium Challenge funds granted to Honduras for a five-year period ending in 2010 are aimed at increasing farm productivity and improving transportation infrastructure to reduce the cost of getting agricultural goods to market. One third of Honduras' population works in agriculture. Most of those funds already have been disbursed. In the first half of the year, Honduras received $28.2 million in Millenium funds. In addition to the economic and social aid, Washington is providing some $7.8 million in military and police aid to Honduras this year. Venezuela is another big source of aid to Honduras and has sent some $105 million in energy cooperation funds via Petrocaribe in the past year, according to the Honduran Central Bank. Chavez created Petrocaribe four years ago to provide 14 poor Caribbean and Central American countries with subsidized oil; his largesse has won him political allies throughout the region, including Zelaya. Exports Are ExpandingAlong with Haiti, Nicaragua, and Guyana, Honduras is one of the poorest countries in the Western Hemisphere. Two-thirds of its 7.8 million citizens live below the poverty line, and unemployment is estimated at 28%. The country has one of Latin America's most unequal distributions of wealth: The poorest 10% of the population receives just 1.2% of the country's wealth, while the richest 10% collect 42%. The economy is small—worth just $13 billion—and relies largely on coffee and banana exports, although in recent years Honduras has diversified its export base slightly to include textiles, garments, some automotive components, and shrimp. One in every eight Hondurans lives and works abroad, and the country relies heavily on the money they send their families. In 2008, expat workers sent home $2.7 billion, which accounted for more than 20% of Honduras' GDP. Even the 2006 Central American Free Trade Agreement with the U.S.—which was expected to boost trade and draw millions in foreign investment to Honduras and five other countries in the region—has yet to bear fruit. Honduras is the largest Central American supplier of textiles and garments to the U.S. and sends more than half of its exports there, but sales have dropped because of slowing international demand. Honduras' low-cost export manufacturers, or maquiladoras, which produce mostly garments and simple automotive components and had export sales of $3 billion last year, have shed 26,000 jobs over the past ten months, or around one-fifth of the maquiladora workforce. Maquiladora exports are expected to drop by 10% this year, according to the Honduran Maquiladora Assn. Whether Zelaya is reinstated to the Presidency or not, his ouster could well diminish investor enthusiasm for the country. After all, investors can place factories in any of the other CAFTA countries: Costa Rica, El Salvador, Nicaragua, Guatemala, or the Dominican Republic. "Honduras is one of the poorest countries in the hemisphere and it has some of the weakest institutions, and the events we're seeing will probably hurt the investment climate," says Hakim.
Smith is Bloomberg BusinessWeek's Latin American correspondent, in Mexico City.

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