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Honduras: the devastating effects of the Coup

Honduras: the devastating effects of the June 28th coup on the Honduran economy are not likely to be undone by illegitimate elections

by COHA Research Associate Michaela D'Ambrosio

Whether one sides with the ousted President Manuel Zelaya or with the interim leader Roberto Micheletti, there is no denying the devastating impact of the June 28 anti-Zelaya coup d’etat on the Honduran economy. With the November 29 election of Porfirio ‘Pepe’ Lobo of the conservative Partido Nacional, backers of the status quo hope that Honduras can resolve its conflicts and begin a new path to economic recovery. However, even with Micheletti briefly stepping down during the election period to add much needed validity to the process, the legitimacy of the ballot and the integrity of Lobo are both ruinously compromised as the elections were held without Zelaya’s participation and thus carried out under an unlawful framework.

While Washington has troubled much of the world community by giving the de facto government the go ahead and recognizing the outcome of Sunday’s election, a majority of Latin American countries will not acknowledge Lobo as the legitimate winner of the presidential ballot. Hope for an economic recovery in the near future has been all but squandered unless Congress votes today to return Zelaya to office, which will allow him to hand over the Presidency to his successor in January.

Honduras, a country with a long history of extreme poverty and exploitation at the hands of a corrupt American-run banana industry, has developed a stable but patently unjust political environment, resulting in an attractive investment environment and a fairly prosperous tourism industry, but a shortage of social justices. The country still faces ominous development challenges, evidenced by a poverty rate of over 60%, an infant mortality level of 31 per 1,000 and chronic malnutrition cases of about one third of all children under five years of age. Traditional struggles over a fight for economic survival have been aggravated by the global economic downturn, as well as by Honduras’ ongoing political crisis. While, the country experienced a respectable economic growth rate of roughly 7% under Zelaya in the past two years, estimates project that it will shrink by 4.5% in 2009, most likely because of the worldwide suspension of aid and investment due to the coup. The ouster of President Zelaya plunged Honduras into a state of internal turmoil that has cost the country $50 million a day over the past five months, with a disproportionate burden falling on the country’s poor. If Lobo is successfully seated, he would need the backing of the international community to mend Honduras economy, support that he is currently lacking. It is easy to say that Honduras’ current economic strife is far from over.

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Zelaya’s Economic Success—Not Appreciated by All

Since Zelaya took office in January 2006, Honduras experienced a gradual improvement in its social and economic indicators, including poverty reduction, a decrease in inequality, and increased educational and development opportunities. The country’s gross domestic product (GDP) in recent years showed some promise, growing by 6.6% in 2006 and 6.3% in 2007; however it declined in 2008 as a result of the world economic crisis. President Zelaya’s social and economic policies gradually decreased the number of households living in poverty from 65.8% in 2005 to 60.2% in 2007. Under Zelaya, several social initiatives increased educational opportunities, such as the abolition of school fees which resulted in about 450,000 more children attending school, while 25% more students are receiving free school lunches.

Zelaya’s gradual success in targeting reforms for the poor was far from appreciated by all, and his mounting interest in catering to the poor was increasingly resented by the country’s wealthy elite. Honduras is a country ruled by a small group of privileged figures who, in the absence of a large middle class, control almost every aspect of the government, economy and society. Historically, the ruling oligarchy chose the president and legislators in a political process that was driven by class factors. According to Ramon Romero, professor of economics at the National Autonomous University, power in Honduras is concentrated in the hands of about 100 people from approximately 25 different families. These elites originally supported Zelaya because he was one of them and represented their interests; but when he became increasingly sensitive to the injustice that afflicted Honduran public life, his former boosters turned on him as it became clear that he was breaking with tradition by implementing socially-conscious policies. This constituted a transformative shift in his support, winning him support from the poor, but resentment from the rich.

Increasingly, the elites were estranged by some of Zelaya’s actions, including two measures in particular. The first was his endorsement of a deal with Hugo Chávez to join Petrocaribe, which allocated Honduras hundreds of millions of dollars in fuel at discounted prices, cutting into the profits of traditional oil importers in a major way. Secondly, he successfully instituted a 60% raise in the minimum wage, infuriating many business people. Ironically, the very same elites who originally backed him when he was perceived as a typical wealthy landowner were the very ones responsible for coordinating his removal by the military coup on June 28. The extent to which the coup centered on economic rather than political motives remains an important but largely unexamined question.

A History of Reliance on the United States

Honduras is the third poorest country in Latin America, with many formidable obstacles to achieving a successful, self-sustaining economy. For this reason, in recent years the U.S. has been a main provider of aid to the country. In 1998, Honduras was devastated by Hurricane Mitch, which left in its wake over 5,000 dead and billions of dollars in damage. Although parts of the country are still suffering from the hurricanes after effects, substantial foreign assistance, especially from the U.S., has enabled it to gradually recover its growth. Assistance from the U.S. amounted to $44 million in 2008 and would have increased to an estimated $47 million in 2009. However, these crucial funds for development and poverty abatement have been largely suspended as a result of the coup.

Washington is Honduras’ main trading partner, and Honduras is the largest Central American exporter to the U.S., with about 37% of its products going north, a majority of which includes knit and woven apparel, machinery, and petroleum. The current political crisis has further devastated the country’s already declining trade revenue caused by the global economic crisis. In 2008, Honduras exported $4,041.2 million worth of goods to the U.S., receiving imports totaling $4,846.2 million. Figures through September of 2009 show exports at around $2,427.5 million and imports of $2,440 million, evidence that trade revenue is rapidly declining and will fail to hit last year’s quota. It is projected that in 2009, exports will drop by $1 billion—a 15% plunge from 2008. In September, U.S. trade associations sent a letter to Secretary of State Hillary Clinton urging her to assist in bringing stability to Honduras, as the crisis is also greatly affecting businesses in the U.S. that carry out trade with the country.

Another source of revenue comes from the approximately one million Hondurans currently residing in the U.S. who sent back an estimated $2.8 billion in remittances in 2008, amounting to nearly one fourth of the country’s GDP. These remittances are now expected to decrease by $112 million in 2009, a 1% drop in the country’s GDP.

“Don’t Come to My Country”

The Honduran economy depends largely on its tourism industry, which has been all but devastated by the current political crisis. Last year, 1.5 million tourists stayed in lavish beachfront hotels and enjoyed the Caribbean’s famed scuba diving in destinations such as the Maya ruins near Copan Ruinas and hotspots off the Bay islands. According to Ricardo Martínez, the Minister of Tourism under Zelaya, who was ousted along with the President, the tourism industry has dropped by 70% this year, subsequently resulting in the loss of wages and jobs of the 155,000 Hondurans employed by the industry. While the Micheletti regime blames some news organizations for “over the top” exaggeration of the continuing bloodshed and violence, Martínez told colleagues at a tourism convention in El Salvador that Honduras is not a place to visit at this time. However, he pleaded with the world community not to forget his country after the situation has been resolved, as Honduras will be desperate for revenue from a revived tourism industry to jumpstart its prostrate economy.

Good-Bye to Foreign Assistance

As a result of the June 28 coup, the international community has withheld large amounts of loans and investment to Honduras in order to apply pressure on the Micheletti-led de facto government. The World Bank and Inter-American Development Bank are withholding $470 million in loans and transfers earmarked for Honduras. The EU has suspended about $93 million in aid, Venezuela (provider of at least 50% of Honduras’ petroleum) has ceased to supply the country with any fuel, and the U.S. has suspended $32.7 million in foreign assistance for 2009. Of the now suspended U.S. assistance package, $10.3 million was allocated to military assistance programs, $11.4 million for funds supporting development and child health and survival, and $11 million for two major transportation projects. An allocation of $215 million to improve infrastructure was frozen by the U.S. government agency, the Millennium Challenge Corporation, in reaction to the overthrow of Zelaya, but only after many weeks had passed. Additionally, it was unlikely that Honduras would receive any portion of the $105 million in U.S. funds from the Mérida initiative which is dedicated to assisting Central America in battling drugs.

Estimates indicate that overall, Honduran society has lost upwards of $200 million in prospective private investments since the coup. Experts have predicted that the Honduran government is facing a possible economic collapse, as almost 20% of the country’s projected budget for 2009 was scheduled to be financed by now unavailable foreign investments and loans.

In the event that Micheletti remains in power and Lobo is inaugurated in January without the participation of Zelaya, there will be restrictions on foreign assistance by at least some members of the international community. Honduras routinely depends on such aid to fill budget gaps, such as implementing the now severely limited programs for assisting the poor. The absence of such funding is crippling the capabilities of hospitals, schools, and basic poverty reduction programs, which in turn is painfully affecting those who most need the assistance. Micheletti has been unable to implement significant economic strategies to reverse the crumbling economy.

Lobo, for his part, has said that upon inauguration he will plead with foreign leaders to restore funding and seek a new agreement with the International Monetary Fund. However, there is a dismal prospect that Lobo’s intentions will be fulfilled without Zelaya’s immediate restitution. According to Brazil and much of Latin America and the EU, the only constitutional solution to the crisis would be the reinstatement of Zelaya to preside over the transfer of office in January.

Domestic Strife

Honduras is also facing destabilizing economic unrest within its borders. Zelaya supporters have undertaken a number of measures such as transportation blockades and strikes to protest against the actions of the de facto government, which have further crippled the national economy. Fruit seller Ana Julia Varela acknowledged “Sales have fallen something rotten since the coup. I’ve been in this market for 30 years and its never been like this. We just want peace so our sales pick up.”

Local Honduran businesses also are suffering because of curfews and restrictions imposed by the de facto regime, and because ordinary citizens have slashed their spending. The decrease in domestic demand and resultant loss in business revenue consequently has contributed to a dramatic rise in unemployment. From mid July through mid October, over 100,000 jobs were lost. Jose Enrique Nuñez, president of the Honduran National Association of small and medium sized businesses, stated, “since June 28 demand has declined dramatically. It has created chaos, and that chaos is causing us to collapse.” Thus the painful effects brought on by the coup are reverberating throughout the economy and among everyday Hondurans, with reports coming out of Tegucigalpa that the Honduran economy may have been set back by as much as ten years due to the five-month crisis.

The Role of the U.S. and International Community following the Election

The situation in Honduras represents one of the Obama administration’s first major tests in Latin America, a test that it ultimately failed. The White House appears to have ignored the principle that an election held by an illegal government is in fact illegal. Former Assistant Secretary of State and current Ambassador to Brazil, Thomas Shannon’s statement that the U.S. would recognize the outcome of the election with or without Zelaya’s reinstatement, showcases the intrinsic nature of U.S. policy towards Honduras, one that has been marked by mixed signals and differing objectives, but with a consistently inchoate style. Washington has turned its back on the principle of constitutional legitimacy in Honduras. Although the best time for action may have passed, the world community must exert pressure on Micheletti and the Honduran Congress to reinstate Zelaya in order for new and legitimate elections to occur.

Accounts of the November 29 election day process vary significantly. Mark Weisbrot, co-director of the Center for Economic and Policy Research stated, “Elections conducted in a climate of fear, human rights violations, and international non-recognition won’t resolve the political crisis in Honduras.” Countries including the U.S., Costa Rica, Panama, Colombia and Peru said they would recognize the results of the elections if voting was transparent and fair, yet many reports describe the opposite. Hugo Llorens, U.S. Ambassador to Honduras, praised Hondurans’ “civic spirit” and noted that the “well organized day” occurred “completely normal.” However, Zelaya’s supporters use the evidence of heavy military presence and the numerous incidents where authorities turned to violence to prove that the process was neither free nor fair. In San Pedro Sula, pro-Zelaya demonstrators were dispersed by security forces using water cannons and tear gas. The human rights organization Center for Justice and International Law (CEJIL) described election day as “a climate of harassment, violence, and violation of the rights to freedom of expression, association and assembly.” Allegations such as these demonstrate that the elections were not entirely legitimate. If Zelaya is not returned to power and important demands for a totally independent count of the votes (to clarify whether 42% or 65% of the voting population actually voted) are not met, then the Honduran government cannot be considered legitimate and the economy will continue to suffer as a result of isolation.

While Lobo has declared that the time for division is “over,” he will need the support of the international community to reverse the devastating effects of the coup. Brazilian President Luiz Inacio Lula da Silva has remained firm in his position of refusing to recognize the elections results, but is open to discussion. He stated, “If something new happens, we can discuss it. For now, the (Brazilian) position is not to accept the electoral process in Honduras. A new thing (we could discuss) is for Zelaya to take over for the inauguration of the new president.”

It will be impossible for Honduras to begin its economic recovery process unless the Honduran Congress votes today to return some degree of legitimacy to the government, by at least allowing Zelaya’s symbolic right to return to the presidency and hand over power to his successor in January.

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This analysis was prepared by COHA Research Associate Michaela D'Ambrosio
Posted 02 Dec 2009
Word Count: 2600


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