A false start

At the start of the 21st century, Honduras faced enormous development challenges. In 2000, per capita GDP (constant 2015 US$) was US$1,800, and Honduras had Central America’s highest rate of extreme poverty, with 27% of the population below the World Bank’s benchmark of US$3.00 per day (in 2021 purchasing power parity [PPP] dollars) compared to under 15% for other countries in the region. Honduras also had the region’s second worst income distribution, with a Gini coefficient of 0.55 compared to roughly 0.50 for El Salvador and Nicaragua and 0.47 for Costa Rica. Only Guatemala (0.60) was more unequal. Similarly, in the 1998 Competitiveness Index of the World Economic Forum (WEF), Honduras ranked 52nd of the 59 countries studied, lagging behind Nicaragua (48), El Salvador (47), Guatemala (43), and Costa Rica (29). These poor outcomes were rooted in the weak economic performance of the previous decades. In the 1980s, Honduran growth averaged only 2.5% a year, rising slightly to 3.0% in the 1990s—only marginally above the rate of population growth.

Nevertheless, there was growing optimism about the country’s potential. The “Agenda for Sustainable Development and Competitiveness in the 21st Century,” published in 2000 by the Central American Institute of Business Administration (INCAE) , the Latin American Center for Competitiveness and Sustainable Development (CLACDS) , and the Foundation for Investment and Development of Exports (FIDE) , envisioned ambitious transformations (Walker and Medina Oviedo 2000). It projected annual GDP growth of 5%, supported by an aggregate investment rate of 30% of GDP and an increased focus on less capital-intensive industries to generate more jobs. It also estimated that by 2020, sustained, inclusive growth could reduce the extreme poverty rate by 80% and greatly improve health and education indicators. This dynamism would be supported by a systematic process of state modernization that would eliminate administrative obstacles to investment; separate planning, regulation, and operations in state entities; de-politicize the judicial system; create transparent property registers based on real spatial coordinates; decentralize the public administration; and institutionalize participatory consultative processes.

This vision was by no means unreasonable. The reforms, introduced by the Callejas administration in the 1990s and kept in place during the Reina, Flores, and Maduro governments, were finally producing results. Those reforms followed the recommendations of the so-called “Washington Consensus.” By the mid-1990s, macroeconomic stability had been reestablished, and a raft of modernizing reforms had been introduced. They aimed to replace the exhausted “import substitution” strategy of the 1960s and 1970s with an export-oriented strategy, supported by the Central American Free Trade Agreement (CAFTA) with the United States. Tariff protection for industries focused on the domestic market was reduced, and a more competitive exchange rate increased the profitability of tradable goods production. That was reinforced by tax incentives and other privileges for “free zone” investments (such as the free use of foreign exchange by exporting companies).

By the early 2000s, export-oriented activities, such as the maquila sector in the Sula Valley, which includes apparel and electronics assembly, and non-traditional agriculture, accounted for a growing share of output and jobs. Export-led growth was also strengthening the balance of payments, helping to insulate against the periodic foreign exchange shortages that had characterized the pre-1990 economy and led to the 1988 debt crisis. In 2005, improved economic management was rewarded by the completion of the Highly Indebted Poor Countries (HIPC) process. HIPC eliminated US$1.5 billion of external public debt and cut the country’s debt overhang from around 100% of GDP to just over 20%, creating fiscal space for expanded infrastructure and social programs. New external assistance programs, such as the Millennium Challenge Corporation’s (MCC) US$225 million grant to support roads upgrading and commercial agriculture development, were also being approved.

However, in spite of that strong start, economic and social development in the 21st century has been disappointing. Honduras continues to lag behind regional competitors, both in economic growth and in social progress. GDP per capita remains among the lowest in the region, at just US$2,600 (constant 2015 US$). That, in turn, reflects a continuing challenge with the quality of the business environment. In the WEF’s 2019 Competitiveness Index¹, Honduras ranked 101 of 141 countries, trailing Guatemala (98) and Costa Rica (62). In 2023 it remained the lowest-ranked country in Central America on key governance indicators monitored by the World Bank, including control of corruption, rule of law, government effectiveness, and regulatory quality.

Indicators of poverty and social progress tell a similarly dismal story. Extreme poverty (on the World Bank’s standardized US$3.00 per day threshold) was halved between 1996 and 2008 but since then has flatlined at around 17% of the population. No other country in the region has extreme poverty above 10% (Figure 1). Income distribution also remains dire. The Gini coefficient stood at 0.47 in 2023, still among the worst in the region. Household survey data show the poorest two deciles get only 2% of total income while the richest decile receives 36% (Figure 2)². Honduras is also ranked poorly on the United Nations Development Programme’s (UNDP) Human Development Index, in 132nd place.

Economic growth: two disappointing decades

Without doubt, the disappointing development outcomes of the first quarter of the 21st century are rooted in a sluggish pattern of economic growth. On the plus side, between 2002 and 2023,³ the labor force grew rapidly, averaging 2.5% a year, due to steady population growth (2.1%) and a sharp fall in the dependency rate, as Honduras started to enjoy the benefits of the demographic transition (Table 1). Similarly, total employment (including self-employment) grew at an annual average of 2.4%. The strong growth of the labor force in 2002−19 happened despite the accelerating migratory outflow to the United States. However, after 2019, this positive demographic impulse was lost. The labor force began to shrink, due to continued migratory outflows and a rapidly falling labor force participation rate. Between 2019 and 2023, the economically active share of the working-age population (WAP) declined dramatically, from 66.2 to 59.3% (Table 1).

In spite of strong labor force growth for most of the period, per capita GDP growth between 2002 and 2023 averaged a paltry 1.61% per year. Underlying this disappointing picture are three distinct phases. Between 2002 and 2008, per capita GDP growth averaged an impressive 3.13% per year. Since the population was growing at close to 3% a year, total economic growth averaged close to 6% (not tabulated here). This positive outcome was driven mainly by labor productivity. Output per worker grew by 3.1% a year, which was the result of more workers getting relatively productive jobs in the formal sector of the economy (Table 2).

But between 2008 and 2023, a series of shocks and crises sapped the economy’s dynamism. Some were exogenous, such as the 2008 global financial crisis, the 2020 COVID pandemic, and the double hurricanes of Eta and Iota, which struck the north coast in 2020. Others were endogenous, such as a rolling political crisis dating back to 2009 and still unresolved. The annual growth rate of per capita GDP fell to 1.08% between 2008 and 2019, and in 2019−23, under the impact of the COVID shock and the two hurricanes, it fell even further to 0.81% (Table 2).

These shifting patterns of economic growth and its underlying drivers can be seen clearly in a “growth accounting” exercise undertaken for this study (Figure 3).⁴ The analysis separates the components of the growth of GDP into the contributions from increased labor supply (L), improvements in the quality of labor (human capital, H), physical capital accumulation (K), and the residual of total factor productivity (TFP). TFP estimates the difference between actual growth and projected growth, given the change in the other determinants. It is best understood as the change in output that cannot be directly explained by changes in the quantity of factor inputs and is thus attributable to changes (which can be both positive and negative) in the combined productivity of those inputs.⁵

The analysis shows that in the 1980s, Honduran growth averaged 2.6% a year. That was mainly attributable to labor force growth and human capital improvement (2.2 and 0.2%, respectively). The growth of the capital stock contributed only 0.6% a year. Investment in this period was depressed by the ongoing external debt crisis, exchange rate over-valuation, and the loss of impetus from the import substitution strategy, which remained in place. Even worse, the contribution of TFP in that decade was negative (-0.4% a year).

In the 1990s, as the reforms of the Callejas administration took effect, the pattern began to improve. The overall growth rate increased to roughly 2.8% a year, due to accelerated labor force growth (contributing 3.5% a year) and capital investment (1.4%). However, the contribution of TFP became even more negative (-2.1%), likely reflecting a mismatch between rapid labor force growth and the slower increase of the capital stock. Many of the workers who joined the labor force in this period (driven by demographics) were not able to find well-paid waged jobs because capital investment and firm growth were lagging behind. Thus, even though they were better educated than the previous generation, they ended up doing low-productivity, “own account” (self-employed) informal jobs, similar to those their parents did before them.

The pattern of growth improved much more between 2002 and 2008, when total output growth averaged an impressive 5.4%. Although the impetus from labor force growth slowed (contributing only 2.1% per year), investment increased and the contribution of capital stock growth rose to 1.8% per year. Most important, as the balance between the growth of factor inputs (capital and labor) improved, the contribution of TFP became strongly positive (1.2% a year).

Unfortunately, however, that uptick could not be sustained. In 2008−19, following the international financial crisis, the average growth rate slowed drastically to 3.2%. Labor force growth continued to contribute 2.1% a year, and the average quality of the labor force (H) improved strongly, due to enhanced education coverage combined with the retirement of older workers with little or no formal education (contributing a further 1.0% a year). But the contribution of increased capital investment dipped to 1.2%. Even worse, the contribution of TFP became negative once again (-1.1%), most likely due to the imbalance between the improved stock of human capital and the lagging stock of physical capital.

This poor performance continued in the period between 2019 and 2024, which was strongly affected by the Covid pandemic and its aftermath. The overall growth rate fell once more, to 3% a year. The contribution of capital growth dipped to 1.0%. Most strikingly, the contribution of labor force growth turned negative (-0.9%), due to the rapid withdrawal of workers from the labor force (linked partly to accelerated out-migration and partly to the reduced labor force participation rate among those who remained). At the same time, TFP registered a strongly positive contribution to GDP growth of 2.0% per year, which helped to offset the negative trends in physical capital and labor force growth. This suggests that the workers who dropped out of the labor force had relatively low productivity, so the average productivity of those remaining increased and output dropped less than might have been expected.

Honduras has also lagged behind the more dynamic economies of the region. Its tepid overall 1.6% per capita growth rate in 2002−23 was barely sufficient for it to graduate from low-income to lower-middle-income country status. By 2023, per capita income stood at just over US$3,000 a year (around $2,600 in constant 2015 US$). In the same period, per capita GDP grew at 2.8% in Costa Rica and 3.5% in the Dominican Republic. Each of those countries had less favorable demographics than Honduras but far stronger productivity growth (Figure 4). Honduras’ faltering economic dynamism is also reflected in the fact that real GDP fell more there than in other Central American countries during the Covid pandemic (2020) and has lagged behind in the subsequent recovery (Figure 5).

External imbalance and migrant remittances

Even more worrying is the fact that the export-oriented activities, whose expansion gave rise to optimism 20 years ago, have been declining in importance. Total exports have fallen as a share of GDP, from 46.5% in 2000 to 39.5% in 2010 and 33% in 2023 (Figure 6A). The composition of exports has also changed markedly. The contribution of the maquila sector to GDP has flatlined at around 4% of the economy’s value-added, accounting for some 35% of manufacturing jobs. As a result, the maquila (bienes para transformación, or goods for processing) sector’s average share of exports fell from 62% in 2000−2008 to 50% in 2009−2024, while the share of primary commodities (mercancias generales) rose from 36 to 49% (Figure 6B).

Honduran exports remain highly concentrated, in terms of both products and markets, making the country vulnerable to external shocks and geopolitical shifts. The drive to diversify into “non-traditional” agricultural exports, such as cultivated prawns, palm oil, pineapples, horticulture, mangos, and cacao, with generally higher productivities and complexity compared to the traditional exports, has petered out. Although the structure of the agricultural export basket has changed over the years, it remains highly concentrated, and traditional crops, such as coffee and bananas, remain preponderant. In 2024, four commodities accounted for 25% of total exports: coffee at 12%; bananas, 6%; palm oil, 4.5%, and cultivated prawns, 2%. In geographic terms, Honduran maquila exports go almost entirely to North America—either directly to the United States (71% of the total) or via complementary operations in Central America (23%).⁶ Commodity export markets are more geographically diversified, but North America is still the most important market, with 41% of the total, and the United States alone has a 35% share. Other important markets for Honduran commodities are Latin America and the Caribbean (LAC) (31%) and Europe (22%). Asia accounts for just 5% (Figure 7). Meanwhile, imports remain well above exports, with the negative trade balance running around 20% of GDP, and the structure of imports has remained fairly stable (Figure 8).

With export growth lagging behind the growth of imports, Honduras’ macroeconomic viability depends increasingly on migrant remittances. Due to the growing disparity between imports and exports, since 2000, the trade deficit has shot up tenfold, from US$644 million in 2000 to US$6,672 million in 2024 (Table 3). The services and income balances have also become strongly negative. The gap has been filled by a sizable upsurge in migrant remittances, from US$441 million (equal to 6% of GDP) in 2000 to US$9,510 million (26% of GDP) in 2024 (Figure 9). This has been critical to Honduras’ macroeconomic viability, but it also represents a strategic vulnerability. Changing policies toward illegal migrants in the United States will make further growth of remittances difficult and could undermine the existing flow. There are now well over 1 million Hondurans living in the United States, many of them with irregular migratory status. The recent cancelation of Temporary Protected Status (TPS) for over 50,000 Hondurans by the Trump administration, coupled with the imposition of a 1% tax on remittances, are both likely to undermine remittance flows.

Structural change without development

An important reason for poor GDP growth is that structural change has failed to boost labor productivity significantly. There was substantial structural change in the Honduran economy between 2002 and 2023. The share of jobs in agriculture fell from 39 to 23%, while jobs in services rose from 39 to 56% and the share of jobs in industry (manufacturing and construction) flatlined at around 21% (Table 4). The shift from agriculture to services accelerated markedly after 2019. The transition from agriculture is expected to drive development by boosting average labor productivity. Both in industry and services, average value added per worker is far higher (Figure 10). Thus, the shift of labor into either of those sectors makes an important one-off contribution to economic growth .

However, as can also be seen in Figure 10, productivity growth within the industry and service sectors was disappointing. As a result, there is little or no dynamic impulse to output growth from the changing structure of jobs in the Honduran economy. Agriculture’s share of value added fell from 15 to 11%, which is less than the fall in its share of employment. The sector’s productivity growth was well over 50% across this 21-year time horizon. But the productivity improvement in agriculture was largely due to the shedding of under-used labor on smallholder farms (through withdrawal from the labor force and internal and international migration), rather than to technological change. Meanwhile, the share of jobs in industry was stable, and after 2008, productivity in the sector fell, so its share of value added also fell , from 33 to 24%. That suggests that low-productivity artisan activities were increasing in relative importance. In the service sector, productivity also flatlined after 2008, because, similarly, many of the new service jobs were in low-productivity family businesses and own-account (self-employed) activities. Even so, by the end of the period, due to the large increase in its share of the labor force, the service sector accounted for 65% of total value added in the Honduran economy (Table 4 and Figure 10).

The continuing prevalence of small firms (those with five or fewer workers) is a striking feature of the Honduran economy. This categorization of establishment sizes corresponds to the “productive” definition of economic formality and informality .⁷ The prevalence of small units (which are likely to be informal) goes a long way to explain the disappointing productivity impact of the process of structural change described above. Classical theories of economic development, dating back to Arthur Lewis (1954), suppose that the shift from agriculture to industry and then to services would be accompanied by a shift from self-employment to waged employment, and would also be associated with the emergence of larger, more productive establishments. Higher productivity is not necessarily linked to having more skillful or better-capitalized workers; it also results from the efficiencies of specialization that accompany the division of labor (per Adam Smith’s example of a pin factory) (Smith 1776) and eventually from scale economies, as plant sizes expand.

These insights remain highly germane today. Work by the “Jobs of the World” project shows that the evolution of industrial organization remains central to economic development in the modern world. Bandiera et al. (2022) show that successful economic development entails three important transformations in the organization of work: (a) work becomes “marketized,” that is, there is a shift away from subsistence toward selling the products of work on a market; (b) firms emerge to pull workers out of self-employed work; and (c) specialization increases through the creation of new jobs and roles within firms. This sort of transformation was observable in Honduras in the 1990s, when many young women moved from low-paid jobs in agriculture and informal urban services (such as domestic services) into more productive, better paid jobs in the expanding maquila sector in the Sula Valley (Walker 1995).

Ideally, the movement of workers into the industrial and service sectors should also trigger ongoing technological change, increasing productivity continually across the economy. When investment per worker increases , the new investments also typically embody the most productive recent technologies. However, as we saw above (Figure 3), apart from the brief period in the 2000s when the contribution of TFP to economic growth became strongly positive, this pattern has been absent in Honduras in recent years. Workers have moved between sectors but have mainly remained in small, undercapitalized, and low-productivity activities, and the rate of technological change has been muted in all three sectors.⁸

Waged employment has grown steadily, but many of the new waged jobs are in small firms that cannot easily access capital or achieve efficiencies from the division of labor or scale economies. Figure 11 shows the trends in waged employment between 2006 and 2024, based on household survey data.⁹ In 2006, Honduras had 1.14 million waged jobs, of which 66% were in larger firms of six or more workers (likely to be formal jobs), while 34% were in small firms with five or fewer workers (likely to be informal), where productivity and earnings are normally lower. By 2024, there were 2.07 million waged jobs. But between 2006 and 2024, waged jobs in small firms grew faster than those in larger firms. As a result, by 2024, only 57% of waged jobs were in larger firms, and 43% were in small firms.¹⁰ The growth of jobs in larger firms slowed markedly after 2008, when the financial crisis began (Figure 11).

The concentration of jobs in small, informal firms is observable in all sectors. In 2024, agriculture accounted for 27% of all jobs, of which 21% were in small enterprises (with five or fewer workers) and 6% in larger firms (with six or more workers).¹¹ But industry and services also have more jobs in small firms than larger ones. Industry accounts for 22% of all jobs, split between 13% in small and 9% in larger firms. Services has 51% of all jobs (30% in small and 22% in larger firms) (Figure 12).

The negative impact of the atomization of employment across small enterprises on productivity and earnings is clearly observable across the economy. On average, in 2024 workers in small firms earned just half of what workers in larger firms earned (US$ 242 versus US$ 484) (Table 5). The table also shows important differences between average earnings between sectors. The highest earners are in financial intermediation (US$ 617 a month), and the lowest are in agriculture (US$ 198). Public sector workers (e.g., education, public administration, and defense) are also relatively well-paid. But in all sectors, there is a substantial difference between the average earnings of workers in larger and smaller enterprises, reflecting the lower productivity of the smaller, informal establishments.

The lack of better jobs has had a negative impact on female labor force participation (FLFP). The contrasting patterns of transition from school to adult life for men and women are illustrated in Figure 13. There is a significant gender difference, with only 50% of adult women studying or working compared to over 80% of men. This difference persists, even though girls’ education performance is now better than that of boys. It is partly linked to social norms related to women undertaking childcare and other unpaid household tasks, but it is also due to the shortage of better jobs.

The upshot is that a large majority of Honduran “NEETs,” that is, adults not in education, employment, or training, are women (Figure 14). Only 22% of all NEETs are men, while 78% are women. Of those, 19% are young women (aged 16−25) and 59% are older women. This is not unusual: female withdrawal from work outside the household is commonly observed in countries undergoing transformations from a rural, agrarian economy toward an urban, industrial, and service economy.

The development economics literature has documented a “U-shaped” pattern in FLFP. As per capita GDP rises, there is an initial fall in FLFP, followed by an increase at higher-income levels. This pattern results from an interaction between the shift toward marketized, off-farm production and gender norms that assign to women such roles as family care, cooking, firewood collection, and similar non-market activities. In some societies, it can also reflect a perceived trade-off between “honor” and income, that is, families are concerned not to expose women to the perceived risks of working outside the setting of the home.¹²

The result is that as off-farm activities grow in importance, they are at first mainly undertaken by men. However, as the economy continues to develop and earning opportunities in the cash economy rise, the “opportunity cost” of maintaining women in domestic tasks increases, and there is a gradual shift toward women working for money outside the home. Similarly, women who attain higher qualifications (such as tertiary degrees) and are able to access better quality formal jobs are more likely to participate in the labor force than lower-skilled women.

In Honduras, female withdrawal from the market economy is clearly evident. Young women, especially those who have succeeded in completing primary and some secondary education, seem more averse than young men to taking poor-quality jobs. This aversion likely reflects the relatively low incomes available from self-employment and from informal waged work (when set against the perceived value of non-market work within the household). A further consideration is the perception of precariousness in many poor-quality jobs: the risk of assault and exposure to criminality, both in travel to work on public transport and in many informal working environments. The pattern of violence against women in Honduras is well documented, and the country is currently ranked highest in Latin America for femicides, according to the Economic Commission for Latin America and the Caribbean (CEPAL) . Thus, women may prefer to wait for a better-paid and more secure formal job to become available and, in the meantime, undertake unpaid work in the household. Another possible consideration is discriminatory hiring practices by formal firms, some of which may prefer to hire men over women for specific roles. That can make it even harder for women to get a job that is sufficiently well-paid and secure to entice them out of the non-market, household economy.

The persistence of high female labor force withdrawal results in a significant loss of economic potential. It is likely to continue until more better-quality jobs, that better-educated women are willing to do, become available. That would be likely to entice a growing number of young women into the labor market. Examples might include jobs in labor-intensive industries, such as commercial distribution, tourism, financial services, health and education services, and light manufacturing.

Low investment and faltering productivity growth

Honduran investment over the past two decades has been too low to transform the economy. Most of the developing countries that have achieved transformational growth in recent decades (such as the “East Asian Tigers”) sustained high levels of aggregate investment during long periods, which permitted significant “capital deepening.” This means that the average amount of capital per worker (K/L) rose significantly, leading to a sharp increase in productivity. This pattern can be seen in Figure 15. Each dot in the scatter graph represents a data point for a specific country in a given year between 1990 and 2019. There is a clear correlation between capital intensity (K/L on the vertical axis) and per capita GDP (horizontal axis).

The evolution of an individual country can be traced in this scatter graph by highlighting the dots that correspond to it. The yellow dots trace the transformation of the Chinese economy between 1990 and 2019, showing a steep rise in the capital stock per worker, which correlates with a big hike in GDP per capita. To achieve that shift, China made a huge national savings and investment effort that was sustained for three decades, with gross capital formation (GCF) running consistently above 40% of GDP. India (the green dots) started in 1990 with a higher K/L ratio than China but invested at a slower rate. By the end of the period, China had overtaken it in both dimensions: it now has a higher K/L ratio and a higher per capita income.

The graph also shows how Honduras, Costa Rica, the Dominican Republic, and Mexico fared in the same interval. Honduras (the cluster of orange dots, bunched together in the center of the graph) achieved little in either capital deepening or per capita income growth. Mexico (pink dots) and South Africa (purple dots) show a similar pattern to Honduras, albeit at higher levels of K/L and income. These are all examples of countries that appear to be stuck in the “middle-income trap.” What is especially worrying for Honduras is that it has stagnated at such low levels of capital intensity and per capita income. In contrast, both Costa Rica (turquoise dots) and the Dominican Republic (blue dots) did much better, pulling away from Honduras in terms of capital depth and per capita income (notwithstanding an initial fall in K/L in the Dominican Republic in the early 1990s).¹³

Similarly, there is a clear correlation between the growth of per capita GDP and the share of waged jobs in an economy (Figure 16). In China, hundreds of millions of workers moved from self-employment in agriculture to waged jobs in firms (both private and public) in the modern sector of the economy. In the same interval, India did little to shift workers into waged jobs. Once again, the data for Honduras suggest a pattern of stagnation around a relatively low level of waged employment. In short, Honduras’ record on capital deepening and on the growth of waged employment over the past three decades compares poorly with countries that have achieved significant developmental transitions. While the Chinese data suggest a flying dragon, the Honduran data suggest a dormant snail. Honduras appears to have become stuck in the middle-income trap almost before it had reached middle-income status.

Honduran GDP data confirm the sluggishness of the investment effort of the past two decades. Table 6 shows the major components of aggregate demand in Honduras from 2000 to 2024. At the start of the period, investment (gross capital formation) was running at 28% of GDP (2000 and 2005). Exports were also strong (59% of GDP in 2005). However, both investment and exports have declined markedly since 2008. Investment slumped to 22% of GDP in 2024 and exports fell to 34% in the same year, whilst imports have fluctuated around 60% of GDP. Meanwhile, household consumption has risen steadily from 71 to 86% of GDP, while government consumption has risen from 13 to 16%. As a result, aggregate savings have plummeted from 16% of GDP in 2000 to minus 2% of GDP in 2024.

In recent years, Honduras has done badly on attracting foreign direct investment (FDI). Figure 17 shows the average level of FDI in the Central America and Dominican Republic region in 2021−23. In Honduras, FDI accounted for 2.8% of GDP, making it one of the four countries in the region with an FDI level below 3%, along with El Salvador (1.6%), Panama, and Guatemala (2.0% and 2.4%, respectively). This compares badly with Nicaragua (7.9%), Costa Rica (5.4%), and the Dominican Republic (3.7%). Almost all Honduran FDI was in services (including infrastructure services, financial services, and tourism, among other sectors) (panel A). But most important, 111% of FDI in Honduras was the re-investment of profits generated by foreign companies already operating in the country (panel B). This means that these are funds arising from existing foreign-owned investments, and there was no fresh money being brought into the country. New capital investments by foreign owners were actually negative, to the tune of 11% of total FDI. That reflects potential foreign investors’ dismal perception of Honduras’ prospects. In contrast, Nicaragua, Costa Rica, Guatemala, and the Dominican Republic all reported significant inflows of new capital contributions.

Public investment has also been low. Honduras’ recent fiscal management has been cautious. Apart from the pre-election years of 2013 and 2020, the consolidated deficit of the non-financial public sector has remained consistently below 4% of GDP (Table 7). As a result, Honduras has been able to maintain low, stable inflation rates and has had a positive relationship with the International Monetary Fund (IMF) through most of this period. Nevertheless, the stock of government debt has gradually climbed from just over 20% of GDP after the completion of the HIPC process (2005) to almost 50% of GDP today (Figure 18). According to the IMF’s analysis, this remains consistent with debt sustainability.¹⁴ As can also be seen in Table 7, this has been associated with a very modest public investment effort. Public sector capital expenditure has hovered around 5% of GDP per year.

Instead, public-private partnerships (PPPs) have been extensively used to address Honduras’ infrastructure needs in sectors, such as roads, ports, and electricity. Such publicly mandated and underwritten investments represent a significant share of private sector investment. This strategy had the potential to square the circle between the persistence of fiscal constraints and Honduras’ high infrastructure needs. It also had the potential to greatly improve “value for money” in infrastructure services (subject to establishing well-designed regulatory structures).¹⁵ Unfortunately, the management of Honduras’ PPPs (using flawed trust fund−based governance arrangements) has been highly unsatisfactory, and the cost and quality of the resulting infrastructure services leaves much to be desired.

Honduras’ low overall investment rate, coupled with the poor quality of many concession agreements with private investors, is an important cause of the country’s poor productivity performance. As was seen in Table 6, it is also associated with a very low level of aggregate savings. In 2024, household consumption was 86% of GDP and government consumption was 16%, so aggregate savings were negative at -2% of GDP. That is a reduction of 18 percentage points from the savings rate of 16% registered in 2000. It leaves little room for investment, given Honduras’ balance of payments constraints and limited borrowing capacity. An improved investment climate might go some way to facilitate increased private capital inflows, but it is difficult to imagine returning to investment rates of around 30% of GDP while domestic savings remain negative.

The competitiveness challenge

Honduras’ disappointing private sector investment performance is rooted, in turn, in the lack of competitiveness of the economy. The shortage of profitable investment opportunities is the result of a series of market and policy failures that make it hard to form and grow formal sector firms. The challenges include: the high costs of capital and formal sector labor; poor quality and expensive infrastructure services (especially electricity); and the dominance of strong incumbents with monopolistic or oligopolistic market positions in key sectors, which tends to make new entry difficult. Another big issue is the existence of legal and regulatory obstacles to the creation and growth of formal businesses, including (but not limited to) the fiscal administration and environmental licensing regimes and the inflexibility of the labor regulatory framework, which small firms often find difficult to negotiate. There are also significant challenges related to security, public sector corruption, and political instability. This litany of institutional failings adds up to a negative competitiveness climate that discourages investors and pushes them toward strategies to find protected spaces where they can negotiate rents with powerful actors.

Many of the most profitable investment opportunities are in “rent-seeking” activities ¹⁶, which often generate little employment. Investment often flows into monopolistic or oligopolistic markets, which are relatively profitable and low risk, due to constrained competition, but are also often capital intensive, with limited job creation potential. A key area of business activity is contracting with the state, where cronyism and corruption are often prevalent, including construction contracts, energy generation contracts, and concessions. Another profitable activity is investing in sectors that have negotiated fiscal privileges with the government. As a result, lobbying to secure and protect fiscal “exonerations” is an important activity for Honduran businesses.

The taxes not collected due to fiscal privileges are known as “tax expenditures.” They are estimated to cost around 6.4% of GDP (Table 8). That is the equivalent of roughly a third of the total taxes actually collected. Some of those exonerations/exemptions make sense, but others are harder to justify. For example, it arguably makes sense to waive taxation to help critical industries compete in price-sensitive global markets and protect jobs (for example, for the maquila sector and tourism). But exemptions from sales taxes, which are estimated to cost about 4.1% of GDP per year, seem too generalized. Many of the exempted goods are not consumed by low-income households. Poor households would arguably benefit more if fewer goods were exempt and tax collection were increased, allowing the public services they depend on to be improved. Another example is the exoneration of import duties for fuel for electricity generation (estimated to cost 0.3% of GDP). This opens up the risk that exonerated fuels might be channeled into other uses (such as fuel for vehicles). It might be better to charge duties on all imported fuels and increase the payment to electricity generators to offset the cost. Other examples include allowing medical expenses to be deductible for income tax purposes; allowing the statutory payment of 13th- and 14th-month salaries to be exempt from income taxes (when no one who pays income taxes is poor); and interpreting the constitutional clause specifying tax exemption for teachers to include university teachers, who are relatively well paid.

These types of challenges affect all sectors in the Honduran economy. “Second-best” policies , which aim to create offsetting incentives, can help to compensate for the high cost of doing business in specific sectors (say, export-oriented manufacturing, tourism, or non-traditional agriculture). But they are unlikely to succeed in transforming the economic performance of Honduras as a whole and are more likely to foment a culture of lobbying and rent-seeking, which ends up being a negative-sum game. Such offsetting policies are also hard to adjust effectively in real time, in the face of changing opportunities or threats.

Compensatory redistributive cash transfers are similarly unlikely to be transformative¹⁷. Well designed, they can help alleviate extreme poverty and reduce the sense of exclusion of poor rural communities entrenched in structural backwardness. But unless they are linked to other programs to support job creation in productive enterprises with adequate market linkages, they are unlikely to dynamize those local economies. They can easily become a fiscal dead-weight and – even worse - can become part of the framework of politicized rent redistribution which characterizes much of Honduran society, with recipients threatened with losing benefits if they don’t vote for the governing party. These risks are especially severe when such programs are transferred to urban settings.

Microenterprise promotion is another alternative policy that is unlikely to boost Honduras’ economic development. As extensively argued above, the prevalence of atomized economic activity is at the root of the productivity problem. Thus, increasing the relative importance of small-scale activities is not likely to be the solution. Microenterprise development programs can help to facilitate the emergence of marketized production at low levels of development, but most microenterprises employ few people from outside the family. They therefore lack the scale and capital resources needed to facilitate specialization and have limited potential for growth. As a result, they can contribute little to the type of transformation that Honduras now needs to achieve. The following sections discuss some of the major challenges facing Honduran investors.

Capital markets

Poor access to risk capital is an important constraint on investment in Honduras. Efforts to develop a capital market in the 1990s through the creation of a stock market (bolsa de valores) floundered as private, family-owned companies showed little appetite for the scrutiny associated with selling equity in public markets. Meanwhile, the banking system is managed conservatively and provides little long-term risk capital for new enterprises. It is less risky and more profitable for banks to focus on short-term working capital loans, on trade finance, and (especially) on consumer debt. The lion’s share of bank funding goes to commerce, construction and real estate, and consumer credit. A relatively small share of Honduran bank lending goes to agriculture (which in 2024 received 12% of total loans) or industry (5%) (Table 9). Regulators seem more concerned with reducing banks’ exposure to systemic risk than improving financial services to the economy at large. Banks’ balance sheet provisions¹⁸ were equal to 137% of non-performing loans in July 2023 (IMF 2023, 51).

Bank profits and lending rates are high. Honduran banks are among the most profitable in Central America, reporting a return on equity of 15% in 2022 (IMF 2023). This is attributable to a high “spread” between banks’ deposit and lending rates that seems to be linked to a lack of effective competition. Efforts in the 1990s to reduce the spread by opening the sector to foreign investors and promoting inter-bank competition were largely unsuccessful. The spread has persistently remained around 5 percentage points over the past two decades (Figure 19). In early 2025 there was a temporary dip to 3.5% due to a sharp uptick in deposit rates, which temporarily outstripped the increase in lending rates. But “business as usual” was quickly re-established, as lending rates were pushed up to over 15% (above 10% in real terms) and deposit rates slipped back to 10%. The banks’ spread in Honduras also remains one of the highest in the region—only Nicaragua has a significantly higher implicit one. Guatemala, El Salvador, and Costa Rica report much lower spreads (Figure 20).

High spreads also have the effect of shifting a significant part of value added from non-financial firms to the banks. In national accounts, the value added by financial intermediaries is computed as the difference between the cost of deposit funds to the banks and the income they derive from on-lending them. Correspondingly, the banks’ spread appears as a cost item in the accounts of the firms that pay interest to the banks.

Over the past two decades, the depth of financial intermediation has grown more strongly in Honduras than in the rest of Central America. Total credit has risen from around 35% of GDP in 2000 to 90% in 2024 (Figure 21). The combination of a relatively high bank spread and a high level of financial intermediation relative to GDP is seen only in Honduras. The other two countries with relatively high spreads (Nicaragua and the Dominican Republic) have relatively low depth of financial intermediation: Nicaragua with 36% of GDP and the Dominican Republic with 42%. That suggests that firms in those countries have addressed their capital needs through alternative strategies that avoid high bank margins. As a result, the share of financial intermediation in GDP in Honduras has risen from 5% in 2000 to 7% in 2024, one of the highest shares in the region (behind only El Salvador) (Figure 22).

Recent monetary and exchange rate policies have further increased bank lending rates. At the end of 2024, to ameliorate pressure on the exchange rate, the Central Bank of Honduras (Banco Central de Honduras [BCH]) acted to reduce liquidity through increases in the policy interest rate (tasa de política monetaria) and in the mandatory deposit ratio (encaje). The aim was to reduce the demand for dollars by curtailing the availability and increasing the cost of lempira funds in the banking system. The effect was to further increase lending rates. With annual inflation down to 4%, average real lending rates are presently (September 2025) well above 10%, which is bad news for investors.

Labor markets

Honduras’ labor regulatory policies are unfavorable to labor-intensive growth. The labor code is inflexible and imposes high costs on employers, both through the minimum wage and through the costs of severance pay (prestaciones) and other statutory benefits (such as the social security system). Figure 23 shows the trajectory of minimum wages in Central America over the past two decades. Honduras started in 2000 with a minimum wage similar to that in Mexico and Nicaragua and well below those of Costa Rica, Panama, and Guatemala. However, in 2008−09, in the context of the global financial crisis, the minimum wage was sharply increased and since then, it has remained similar to those of the region’s wealthier countries.

Most strikingly, relative to per capita GDP, Honduras has by far the highest minimum wage in the region (Table 10). The monthly minimum wage is 13.3% of the per capita annual GDP, double that of any other country. Since the law requires that workers be paid 14 months’ wages per year, the annual minimum wage in Honduras is the equivalent of 180% of per capita GDP. In an effort to keep dollar wages in the apparel assembly market competitive, the minimum wage in the maquila sector is set below that of other large firms. However, other firms and sectors are not so fortunate. The minimum wage is also calibrated to firm size, with larger firms paying much higher rates. This is a disincentive to jobs growth in medium-size firms that are near the threshold for a higher minimum wage.

Honduran employers also face important contingent liabilities linked to the uncertain cost of dismissals. Instead of having a fixed entitlement to severance pay, such as the Brazilian “compensation for time in service” scheme, in Honduras workers leaving a job need to show unfair dismissal in order to get significant compensation. This reduces labor market fluidity, as workers who want to leave will remain in a job trying to get themselves fired, and employers will delay layoffs, hoping for an opportunity to dismiss “with cause.” When dismissals result in a legal dispute, the employer can be liable to pay the full salary during the whole time of the legal process, which can take several years (this is called salarios caídos). The main beneficiaries are labor lawyers, who can collect 30% of the resulting settlement and who assemble portfolios of cases on a “no-win, no fee” basis. This all amounts to a significant contingent liability for employers, which is further compounded by the inefficiency and corruption of the labor courts. Large firms with professional human resource departments and well-connected lawyers can manage such risks, but for smaller employers, they constitute a significant deterrent to hiring anyone they do not know and trust personally.

Social protection

Honduras’ bifurcated social protection system disincentivizes the growth of formal employment. The system is divided into non-contributory and contributory parts. The non-contributory part includes targeted cash transfers for the extreme poor and universally available free health services from the Ministry of Health (SESAL) . The contributory element is based mainly on the Honduran Social Security Institute (IHSS) , which provides pensions, worker compensation, and health services to subscribed formal sector workers. The IHSS contribution costs about 11% on top of wages, divided between employer and employee. Employers must also make contributions to the training agency (INFOP) (1%), to the Social Housing Fund, and others. Such statutory contributions, collected through payroll taxes, are an important part of the cost of hiring labor in the formal sector, on top of the nominal monthly minimum wage (Michel and Walker 2019). As a result, there is a significant difference between the take-home wages received by formal sector employees and the cost to the employer of hiring those workers . This type of structure can constitute a disincentive to formal employment, especially if workers do not value the benefits from the contributory system by as much as is deducted from their wages to fund them.¹⁹

Unfortunately, the agencies financed through payroll taxes in Honduras rarely offer good value for money. For example, the IHSS has been wracked by corruption scandals. Most of its income is spent on a poor-quality health service, which duplicates the government-funded SESAL programs. The IHSS health system, which is directly operated by the insurer, also reports high salary costs (linked to generous collective agreements). The IHSS covers only about 15% of the population, while SESAL offers universal coverage and is the de facto provider for over 80% of the population. SESAL has gradually improved the quality and scope of its services, but it is also affected by serious labor management problems and frequent corruption scandals, especially related to medicine acquisitions. Nevertheless, there seems little rationale for continuing with two publicly mandated nationwide health programs.

At the same time, the pension program of the IHSS offers low retirement incomes. That is unsurprising, since pension funding, which is crowded out by the cost of the IHSS health program, amounts in practice to scarcely 3% of the payroll. The cost of an efficiently administered, sustainable pension program, with a “replacement rate” around 50% of earnings after 25 years of service, would normally require annual contributions of around 10% of earnings. Thus, if Honduran health insurance were universalized and covered through SESAL using fiscal funding, the current IHSS contributions (11% of the payroll) would be about sufficient to fund a proper pension program for the private sector. Strengthening the contributory pension system for private sector workers would, in turn, help to offset the growing threat of old-age poverty as the demographic transition advances. It would also generate a significant tranche of long-term savings, which could help leverage funding for long-term investments and spur growth and economic development.

Governance and security

Honduras has performed consistently badly on governance standards. Overall, on average through the past 20 years, Honduras has been firmly at the bottom of the regional rankings for control of corruption, rule of law, government effectiveness, and regulatory quality (Figure 24). Firms struggle with impunity and the lack of transparency in the judicial process, which makes contract enforcement insecure. The government has not delivered on campaign promises to re-establish an international agency to support judicial transparency (MACCIH) . Although there have been improvements linked to the establishment of the Property Institute (Instituto de Propiedad), there are still frequent disputes around land titles. The widespread incursion of narcotics money into the political process has further undermined the quality of governance.

Insecurity remains a huge challenge to households and businesses, alike. On the positive side of the balance, the murder rate has fallen considerably from the peak of 2011−13, when it was over 80 per 100,000 population (the world’s highest rate for a country not at war), to just 15 today. Nevertheless, Honduras faces a sustained crisis of citizen security. Extortion remains a cancer in the economy, causing many small businesses to close down and forcing larger firms to absorb the cost of paying “impuestos de guerra” (war taxes) to protection rackets and of reinforcing their security arrangements.

Energy

Honduras has one of the most expensive and least reliable power supplies in Central America. Improving electricity sector performance has been the goal of multiple multilateral agency assistance programs over the past 30 years (both investment loans and policy reform loans), but outcomes remain dismal. Although coverage is now close to 90%, the system has high generation costs that are linked to the uncompetitive procurement of power purchase agreements (PPAs). It also reports huge distribution losses, around 35% of generated power. Losses are mainly not technical but “economic,” which is a euphemism for the theft of energy from the system, undertaken by large commercial and industrial consumers as well as by households in informal settlements. The sector’s resulting financial losses are largely absorbed by the finance ministry, contributing around 1% of GDP to the public sector deficit (over a quarter of the total). The weak de facto regulatory framework and the political manipulation of power purchases in Honduras offer a stark contrast with the way power purchases are done in neighboring countries. In Guatemala, for example, transparent acquisition processes are producing generation prices as low as US$0.05 per kWh. Honduran PPA prices remain at far higher levels and seem likely to do so for many years. The current government has re-centralized control of the sector and negotiated modest reductions in the prices of expensive PPAs in return for long contract extensions.

Persistent social segmentation

As signaled at the start of this report, Honduras’ poor economic growth performance has prevented significant advances on poverty, inequality, and other social indicators. The socioeconomic progress envisioned at the turn of the 21st century has failed to materialize. Poverty and inequality in Honduras remain among the highest in Central America. The pattern of inequality is also closely linked to the distribution of formal and informal jobs across the population (Figure 25).

Rural-urban migration has helped to improve average living conditions, but urban society still reflects a deep division between the poor and the non-poor. The middle and upper class live mainly in formal neighborhoods and have relatively well-paid, formal jobs. But most of the population lives in informal settlements, which are often precarious and environmentally degraded, and little has been done to tackle the challenge of upgrading them. There is a strong correlation between housing informality and labor market informality. The quality of the public services used by low-income communities is often poor. Health and education systems are politicized and inefficient and face challenges of service quality and corrupt acquisition processes. The security and criminal justice services have failed to protect poor communities from extortion and drug-related criminality. Their lives are made miserable by gangs, who extract impuestos de guerra and threaten to draw their children into criminal activities. Worst of all, they have little optimism about the future the country offers them.

In the face of this stasis, hundreds of thousands of Hondurans, from both rural and urban areas, have voted with their feet, joining the migrant exodus toward the United States. According to the World Bank LAC region’s migration data portal, between 2016 and 2020, a cumulative total of 1 million Hondurans emigrated. But the re-election of Donald Trump has tightened the screw on the migration escape valve; as a result, the repatriation of illegal immigrants is likely to accelerate and remittances will come under pressure, with negative ramifications for the economy.

As well as driving the migratory outflow, the lack of good job opportunities also leads to labor force withdrawal by many who remain. As described above, this is especially true for young women who cannot find jobs that match their educational attainment and aspirations. Honduras is thus squandering the human capital that has been expensively accumulated by expanding educational and health service coverage. The result is a vicious circle, where poor job quality leads both to negative productivity growth and to slowing labor force growth. That is a poisonous cocktail for growth and development. Honduras needs a new way forward.

A changing world demands a new model

To generate lasting growth that lifts people out of poverty, Honduras must build a modern, productive economy where businesses can prosper and workers can access good jobs and earn living wages. This paper has shown that the growth of formal employment in larger firms would increase labor incomes, improve income distribution, and accelerate poverty reduction.²⁰

But the market opportunities that once powered Honduras’ growth model have shifted. Rising protectionism and rapid technological change (including the “fourth industrial revolution”²¹ and the emergence of artificial intelligence [AI]), coupled with the global transition toward a low-carbon economy, have altered where and how countries can compete.²² As a result, the model that drove Honduran growth in the early 2000s—based on labor-intensive manufacturing and non-traditional agricultural exports—has reached its limits. Accelerated productivity growth means that in the future, manufacturing will account for a shrinking proportion of global jobs. Meanwhile, services, which are more labor intensive and less prone to job-substituting technological change, will provide a bigger share of future jobs.²³

A new phase of transformative economic growth will happen only if the country grasps the opportunities that lie ahead. To re-energize its development process in this changing world, Honduras will need to compete on efficiency, quality, and innovation based on its resources, competencies, and competitive advantages.

Opportunities for growth in a shifting global economy

This report’s key message is that even in this changed world, Honduras still has important opportunities to expand its businesses and create more productive jobs. Strong possibilities exist in all the main economic sectors (agriculture, industry, and services) and in domestic as well as global markets. The following paragraphs flag some of the most promising areas. The aim of this section is not to lay out a full blueprint, but to identify strategic possibilities that can be explored in greater depth and to trigger discussion on alternative ways forward.

Expanding food production, manufacturing, and construction for local and regional markets can drive job creation as cities grow. Beyond traditional maquila activity, which still provides roughly 150,000 jobs across 350 factories, Honduras needs new sources of industrial growth, including domestic market sectors, such as construction materials, packaging, and processed foods. Agro-industrial processing in Honduras has already shown its capacity to create jobs, add value, and link small farmers to value chains. Examples of recent successes include vertically integrated coffee enterprises that span from primary production to retail coffee shops, and food processing firms that are developing local supply chains to reduce imports and serve domestic and regional markets. These experiences point to viable pathways for replication and scaling.²⁴

With the United States—Honduras’ most important trading partner—there may also be opportunities for “near-shoring.” U.S. firms will look increasingly for opportunities to relocate production from Asia to the Central American isthmus, for both logistical and geopolitical reasons. Honduras’ location and recent infrastructure investments, particularly the completion of the dry canal , position it well to benefit from these trends.

The global shift toward a greener economy offers further opportunities. The shift away from carbon-based energy systems is accelerating, reinforced by policy changes in major markets, such as Europe and East Asia. The so-called “green transition” creates space for investment in renewable energy. Honduras is well positioned to accelerate the greening of its energy system, provided it can address institutional and regulatory weaknesses in the electricity sector. Done right, this could mean cheaper, more reliable power and reduced dependence on imported fuels, strengthening the overall competitiveness of the economy.

Climate change adaptation is another key area for the future economy. Honduras is among the world’s most climate-vulnerable countries, with storms like Eta and Iota underscoring the growing risks from extreme weather. Nearly 40% of Hondurans live in rural areas, and agriculture remains the largest employer of the poor. Agricultural holdings continue to be highly atomized. Small farmers are undercapitalized and productivity is low. The growing risk of climate-related shocks are a further disincentive to investment. Building resilience will mean shifting from short-term crisis responses to long-term adaptation. Agriculture needs investment in product diversification and in appropriate technologies—such as drought-resistant crops and irrigation and flood control systems—to improve output (and value added) per hectare. The risks that cannot be mitigated through technological and organizational change will need to be pooled through effective insurance mechanisms.

There will also be a growing need to mitigate climate-related risks in infrastructure systems and in urban settlements. Housing finance reform could help to improve the quality of the housing stock by encouraging the construction of well-planned, programmed settlements. It could also help fund the retrofitting of the investments that are needed to protect informal settlements prone to flooding and landslides, while also creating jobs and training opportunities.

Service industries are another high-potential source of productivity growth and better jobs. As outlined above, services now account for almost two-thirds of jobs in Honduras, but many of them are very low quality, leaving enormous scope for improved organization and productivity growth. As connectivity expands, more services are becoming tradable. Business process outsourcing, tourism, and health services for foreign clients can all leverage Honduras’ location, bilingual workforce, and improving digital infrastructure. Non-tradable services are also evolving, with high potential for productivity growth. Rising demand (linked both to household preferences and to evolving demographics) means that education, health, and personal care services will play a growing role in the economy of the future. That underlines the importance of reforms to ensure service quality and cost effectiveness, especially where public resources are being used. Larger, more efficient wholesale and retail distribution systems are beginning to replace traditional markets. Public transport needs to transition away from the status quo, which generates comfortable rents for subsidized, unregulated private operators with local monopoly rights—but which delivers very poor services for the public. Instead, Honduras needs well-regulated transport systems that offer reliable, safe, and affordable services to users. Such improvements would enhance urban mobility, reduce congestion and air pollution, and expand labor market access by making travel to work less precarious for Honduran workers. A further bonus is that many formal service sector jobs are attractive to better-educated women, with the result that improving job quality in services will help to raise female labor force participation and allow Honduras to capitalize on recent gains in girls’ education.

Turning opportunity into sustained growth

These examples are possibilities, not prescriptions. They illustrate the wide diversity of opportunities for increasing productivity and improving jobs and earnings across the economy. Turning these opportunities into jobs-rich growth will demand coordinated investment, credible public policies and institutions, and sustained commitment from policy makers and private investors alike.

To make the right calls on priority areas for policy reform, Honduras will need a clear view of where its comparative advantages lie and what it would take to build on them. That requires rigorous analysis to identify high-potential sectors and an honest look at the barriers that block their development. Some barriers may be sector specific, but others are economy-wide. Policy makers concerned with regional backwardness will also need to assess subnational opportunities and support the improved connectivity of remote regions to larger economic centers. But whichever sectors and regions come to the fore, unlocking faster growth will require stronger public private partnerships, better regulation, and a broader, more efficient tax base to finance essential public investments.

Renewing collaboration and commitment

The challenge is difficult but not impossible. Honduras has done this before. A generation ago, the expansion of maquila exports, coffee production, and non-traditional exports, such as cultivated prawns and melons, all succeeded when private sector initiatives were aligned with supportive public policies. That same spirit of collaboration is needed now—to expand and modernize infrastructure, improve access to finance, improve regulation, and build the skills that the industries of the future demand. Honduras also needs to renew its commitment to institutions that can facilitate public-private collaboration, as FIDE did in the 1990s and 2000s. Honduras can also learn from other regional initiatives that have built broad coalitions to promote investment and competitiveness.

With clear priorities and shared effort, Honduras can build a more productive, sustainable economy that delivers better jobs and reduces poverty—transforming its social and economic future.

Footnotes

1. This is the last available global competitiveness ranking from the WEF.

2. These are likely to be lower-bound estimates of the extent of Honduras’ income inequality, since household survey data typically fail to fully identify many elements of the incomes of richer households. Analysis of microdata from tax registers (which consider shareholders’ incomes derived from firms’ undistributed profits) suggests that in 2019, the richest 10% of Honduran households received 57% of total income; the top 1% received 30%; and the top 0.1%, 20% (Del Carmen et al., 2025).

3. The analysis of long-term growth trends in this section covers the period 2002−23 to exclude the short-term disruptions linked to the recovery from Hurricane Mitch (2000−01).

4. The growth accounting exercise presented here is an update of earlier work on Honduras by Quijada and Sierra (2014), where a full description of the methodology can be found. The exercise uses Solow’s (1956) growth accounting method. The most important elements are as follows. A Cobb Douglas production function is assumed, with Hicksian technology and constant returns to scale. The methodology computes the share of growth that is not explained by variations in capital and labor inputs but is (rather) attributable to shifts in the production function. This residual element of growth is called total factor productivity (TFP) and is often referred to in the literature as the “Solow Residual.” The concept of TFP includes everything that affects production and that is not directly accounted for in the production function, including technology and the economic and institutional environment. Of the observable variables used to estimate productivity, the estimation of physical and human capital required special attention. The estimate of physical capital is based on the investment series from the national accounts (Gross Domestic Capital Formation), using the continuous inventory method with a depreciation rate of 4% (Schipke and Desruelle 2007). The series for the number of workers (L) and human capital (H) come from Penn World Tables 10.01 (Feenstra, Inklaar, and Timmer 2015). Using the series of L, H, and K, the residual contribution of TFP to growth can be estimated. This exercise is carried out for the period 1978−2024.

5. Fast growing low- and lower-middle-income countries tend to exhibit high contributions from the growth of labor and capital inputs. However, when there is an imbalance between the accumulation of labor and capital inputs, TFP can become negative, undermining the overall growth process. The contribution to growth of TFP tends to become more important as countries move into the upper-middle-income range, with their capital intensity closer to optimal levels. At this point, accelerated growth is more likely to be driven by technological change and human capital accumulation than by further physical capital deepening.

6. The vertically integrated Canadian giant, Gildan, has important plants in Honduras and Nicaragua that supply one another but whose final market is in North America.

7. As well as making economic sense, since it is based on household survey data, this indicator also has the advantage of being easily observable for the economy as a whole and internationally comparable. See Gasparini and Tornarolli (2009).

8. This pattern is also reflected in a relatively low aggregate investment rate, with gross fixed capital formation (GFCF) running slightly above 20% of GDP, and a relatively high incremental capital-output ratio (ICOR). See below for a further discussion of investment and capital accumulation.

9. It is difficult to find data on the number and size of firms in the Honduran economy, as the information used for GDP estimates comes from multiple statistical sources and is mostly confidential. However, the annual household survey generates data on the size and sector of the economic establishment where each person works, which can be used to analyze the distribution of the labor force across firm sizes.

10. These data are for waged jobs only. The waged jobs in small firms are highly likely to be informal. Total informality is much higher, as most self-employment jobs (not captured here) are also informal.

11. Alternative measures of labor informality, for instance, the proportion of workers who contribute to the social security system, yield even higher estimates: the Honduras government estimates it at over 80% (see Figure 2 in IMF (2023, 32). But on any measure, Honduras has one of the highest informality rates in LAC.

12. On the U-shaped relationship between economic development and FLFP, see Becker (1985). On the role of cultural norms in determining how households allocate men’s and women’s time to different tasks, see Boserup (1970); Alesina, Giuliano, and Nunn (2013, 2018); and Evans (2015). On the “honor-income trade off,” see Coen-Pirani, Léon, and Lugauer (2010); Bharati, Qian, and Yun (2021); and Tewari and Wang (2021).

13. The recent empirical literature confirms the insight that “capital deepening” (increased investment per worker) is a key driver of growth in low-income countries. For example, according to Inklaar and Timmer, who worked on the Penn World Tables, “…. the pace of global productivity growth has increased in recent decades and … faster accumulation of capital per worker in poor countries is the main driver of this development” (Inklaar y Timmer 2013, 3).

14. For a detailed analysis of Honduras’ debt sustainability see the Annex in IMF (2023).

15. For a detailed review of the potential that existed at the start of the 21st century to transform Honduras’ infrastructure services through well-designed PPPs, see World Bank (2003).

16. Economic rents are defined as incomes in excess of the economic opportunity cost of the relevant inputs. They often arise when there are protected spaces in the economy that limit competitive pressure. Examples include natural and legal/administrative monopolies or oligopolies. Rent seeking is a well-known pattern that can be observed in many developing economies. It is extensively discussed in North (1990).

17. Conditional Cash Transfers (CCTs) are a popular type of program, adopted by many governments in Latin America since 1990, often with support from development banks. The payments are financed from general fiscal resources and typically range in value between 5% and 15% of beneficiaries' household income. They have been widely studied using "randomized controlled trials"(RCTs), see Stampini et al. (2025).

18. The high level of provisioning may also be the result of banks’ fiscal management strategy, since it can reduce their taxable income.

19. For an in-depth discussion of the perverse labor market incentive effects of Latin America’s bifurcated social protection systems, see: H. Ribe, D. A. Robalino, and I. Walker, From Right to Reality: Incentives, Labor Markets and the Challenge of Universal Social Protection in Latin America and the Caribbean (Washington, DC: World Bank, 2012).

20. For a compelling account of the positive synergy between formal economic activity, productivity, and earnings growth, and the negative implications of institutionalizing informal economic atomization, see Levy (2008).

21. As defined by K. Schwab in “The Fourth Industrial Revolution: What It Means, and How to Respond” (Geneva: World Economic Forum, 2016), https://www.weforum.org/stories/2016/01/the-fourth-industrial-revolution-what-it-means-and-how-to-respond/.

22. For a recent overview of the changed opportunities for developing economies, see Rodrik and Stiglitz (2024).

23. AI may replace some jobs in services, but it could also enhance the effectiveness of low-skilled workers, opening new possibilities for the Honduran economy across multiple sectors. For a good discussion of the nuances of AI for labor demand in developing countries, see Rodrik and Stiglitz (2024) and Autor et al. (2022).

24. The World Bank’s “ComRural” project, which uses the “productive alliances” approach to capitalizing and creating market linkages for rural producers, is an important recent success story.