Roatan: 16º20'N 86º28'W
Las Islas de la Bahia
Roatan is the largest of eight islands that are collectively known as Las Islas de la Bahia, or The Bay Islands. These islands rest upon the Bonacca Ridge, the result of an enormous crack which runs long the ocean floor, about 40 miles northeast of the north coast of Honduras. Lava from the earth's mantle welled up through this crack and formed the Caribbean plate, which buckled and created the Bonacca Ridge. Roatan is 40 miles long and less than 4 miles wide at its widest point, or about 49 square miles. The population is approximately 30,000.
A Short History of the Bay Islands
Located about 65 kilometers off the Northern Coast of Honduras, the Bay Islands group consists of 3 main Islands (Roatán, Guanaja, and Utila), 3 smaller islands (Barbareta, Morat, and Helene), and 65 smaller cays. Between these islands and the mainland are the Cayos Cocinos (Hog Islands).
During the Maya reign in Central America (between the 4th and 10th centuries), the Paya Indians populated the Bay Islands. The Payas were a smaller and less advanced group then the Mayans. Their civilization was characterized by simpler housing and tools. Payan artifacts (pottery, jade, and shells) are often found in Island burial and ceremonial sites and are referred to by the locals as "yaba ding dings."
The island Indians mined jade which they took in small boats to the mainland to trade for tools, and other items. The islands provided an abundant variety of foodstuffs such as manioc, fish, corn, turtles, iguanas, agouti (island "rabbits"), native fruits, land crabs, and deer.
During the 13th and 14th centuries, Europeans discovered these islands.
For almost 200 years Spanish conquistadores and British pirates battled for control of these islands, ignoring the Indians for the most part. During this period, the Islands were used for food and wood supplies, safe harbor, and slave trading. Remains of old British forts and towns named after famous pirates remain as their legacy. One group of slaves was "parked" here during this time during the heat of a battle. When the winners came to collect them, the slaves refused to go. These are the Garifunas who populate much of the Bay Islands to this date, still maintaining their own cultural identity and language. Punta Gorda on Roatán is one of many villages where they still make their homes.
The British eventually established control of the Bay Islands, until the early 1960's when control of the Islands was officially returned to Honduras.
The Islands have evolved into a microcosm of many cultures that is not easy to describe. In recent years, the number of expatriate North Americans and Europeans living in the Bay Islands, especially on Roatán, has grown dramatically. They have brought many changes, some good and some not so good. Once pristine beaches and verdant hillsides are now sites for homes, restaurants, resorts, and larger developments. As this new development occurs, fresh water supplies are being strained, and the need for a modern infrastructure is apparent. RECO (Roatán Electric Cooperative) provides adequate electricity, but no sewage or water treatment plants exist. Telephones are difficult or impossible to get in most places. Ironically, cable television is widely available.
Some Interesting Facts
and Figures about Honduras
Honduras’ Population:
5,861,955 (July 1998 est.)
National capital:
Tegucigalpa
Independence:
15 September 1821 (from Spain)
GDP—per capita:
$2,200 (1997 est.)
GDP:
$12.7 billion (1997 est.)
GDP—composition by sector:
agriculture: 20%
industry: 19%
services: 61% (1997)
Labor force:
total: 1.3 million (1997 est.)
agriculture 62%,
services 20%,
manufacturing 9%,
construction 3%,
other 6% (1985)
Inflation rate—consumer price index: 15% (1997 est.)
Unemployment rate: 6.3% (1997); underemployed 30% (1997 est.)
Exports:
total value: $1.3 billion (f.o.b., 1996)
commodities: bananas, coffee, shrimp, lobster, minerals,
meat, lumber
partners: US 54%, Germany 7%, Belgium 5%, Japan 4%, Spain
3% (1995)
Imports:
total value: $1.8 billion (c.i.f. 1996)
commodities: machinery and transport equipment, industrial
raw materials, chemical products, manufactured goods, fuel and
oil, foodstuffs
partners: US 43%, Guatemala 5%, Japan 5%, Germany 4%,
Mexico 3%, El Salvador 3% (1995)
Highways: 
total: 15,400 km
paved: 3,126 km
unpaved: 12,274 km (1996 est.)
Area:
total: 112,090 sq km
land: 111,890 sq km
water: 200 sq km
Area—comparative: slightly larger than Tennessee
Flag description: three equal horizontal bands of blue (top), white, and blue with five blue five-pointed stars arranged in an X pattern centered in the white band; the stars represent the members of the former Federal Republic of Central America—Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua; the two blue stripes represent the Atlantic and Pacific Ocean for Honduras has two coasts.
To read a detailed history of Honduras click here: 
Following is some environmental and economic background on Honduras.
The 1980s saw a heightened awareness and concern over ecological issues. Even though Honduras is not overpopulated, its land resources have been overexploited, and there are numerous reasons for concern regarding deforestation and the prevalence of unsustainable agricultural practices. Enforcement of the few regulations already in effect is uneven.
Honduras has two major national parks. One is the Tigra Cloud Forest Park near Tegucigalpa. The other is the Copán National Park near the border with Guatemala, which houses the Mayan ruins. Honduras also has established the Río Plátano Reserve. Furthermore, the government has attempted to encourage ecotourism in the Islas de la Bahía, where biologically rich coral reefs are located.
As a consequence of the expansion of environmental consciousness, the Honduran Association of Ecology (Asociación Hondureña de la Ecología--AHE) was founded in the 1980s. Following the example set in the foundation of the AHE, many other groups formed with the stated purpose of promoting ecologically sound policies. Unfortunately, in 1993 many sources of international funding dried up following the discovery of corruption in a number of Honduran ecological groups. Despite the continued presence of many environmental problems, ecologists are encouraged by the increasing environmental consciousness among all sectors of the population. The fact that environmental concerns are part of the policies advocated by peasant organizations, labor unions, and other interest groups is a sign that the ecological movement has come to maturity.
Honduran society provides examples of the most severe problems faced by developing nations. Yet within that same society, the unique relationship between social and political forces provides potential for progress in alleviating the country's problems.
After Honduras achieved independence from Spain in the early nineteenth century, its economic growth became closely related to its ability to develop attractive export products. During much of the nineteenth century, the Honduran economy languished; traditional cattle raising and subsistence agriculture produced no suitable major export. In the latter part of the century, economic activity quickened with the development of large-scale, preciousmetal mining. The most important mines were located in the mountains near the capital of Tegucigalpa and were owned by the New York and Honduras Rosario Mining Company (NYHRMC). Silver was the principal metal extracted, accounting for about 55 percent of exports in the 1880s. Mining income stimulated commercial and ancillary enterprises, built some infrastructure, and reduced monetary restraints on trade. Other beneficial economic effects were few, however, because the mining industry was never well integrated into the rest of the Honduran economy. The foreign mining companies employed a small work force, provided little or no government revenue, and relied mostly on imported mining equipment.
Honduras's international economic activity surged in the early twentieth century. Between 1913 and 1929, its agricultural exports rose from US$3 million (US$2 million from bananas) to US$25 million (US$21 million from bananas). These "golden" exports were supported by more than US$40 million of specialized banana company investment in the Honduran infrastructure and were safeguarded by United States pressure on the national government when the companies felt threatened.
The overall performance of the Honduran economy remained closely tied to banana prices and production from the 1920s until after the mid-century because other forms of commercial export agriculture were slow to emerge. In addition, until drastically reduced in the mid-1950s, the work force associated with banana cultivation represented a significant proportion of the wage earners in the country. Just before the banana industry's largest strike in 1954, approximately 35,000 workers held jobs on the banana plantations of the United Fruit Company (later United Brands Company, then Chiquita Brands International) or the Standard Fruit Company (later brought by Castle and Cook, then Dole Food Company).
After 1950 Honduran governments encouraged agricultural modernization and export diversification by spending heavily on transportation and communications infrastructure, agricultural credit, and technical assistance. During the 1950s--as a result of these improvements and the strong international export prices-- beef, cotton, and coffee became significant export products for the first time. Honduran sugar, timber, and tobacco also were exported, and by 1960 bananas had declined to a more modest share (45 percent) of total exports. During the 1960s, industrial growth was stimulated by the establishment of the Central American Common Market (CACM--see Appendix B). As a result of the reduction of regional trade barriers and the construction of a high common external tariff, some Honduran manufactured products, such as soaps, sold successfully in other Central American countries. Because of the greater size and relative efficiency of the Salvadoran and Guatemalan industrial sectors, however, Honduras bought far more manufactured products from its neighbors than it sold to them. After the 1969 Soccer War with El Salvador, Honduras effectively withdrew from the CACM. Favorable bilateral trade arrangements between Honduras and the other former CACM partners were subsequently negotiated, however.
A political shift in the 1980s had strong and unexpected repercussions on the country's economic condition. Beginning in late 1979, as insurgency spread in neighboring countries, Honduran military leaders enthusiastically came to support United States policies in the region. This alignment resulted in financial support that benefited the civilian as well as the military ministries and agencies of Honduras. Honduran defense spending rose throughout the 1980s until it consumed 20 to 30 percent of the national budget. Before the military buildup began in fiscal year 1980, United States military assistance to Honduras was less than US$4 million. Military aid more than doubled to reach just under US$9 million by FY 1981, surged to more than US$31 million by FY 1982, and stood at US$48.3 million in FY 1983. Tiny Honduras soon became the tenth largest recipient of United States assistance aid; total economic and military aid rose to more than US$200 million in 1985 and remained at more than US$100 million for the rest of the 1980s.
The increasing dependence of the Honduran economy on foreign aid was aggravated by a severe, regionwide economic decline during the 1980s. Private investment plummeted in 1980, and capital flight for that year was US$500 million. To make matters worse, coffee prices plunged on the international market in the mid-1980s and remained low throughout the decade. In 1993 average annual per capita income remained depressingly low at about US$580, and 75 percent of the population was poor by internationally defined standards.
Traditionally, Honduran economic hopes have been pinned on land and agricultural commodities. Despite those hopes, however, usable land has always been severely limited. Honduras's mostly mountainous terrain confines agriculturally exploitable land to narrow bands along the coasts and to some previously fertile but now largely depleted valleys. The country's once abundant forest resources have also been dramatically reduced, and Honduras has not derived economically significant income from mineral resources since the nineteenth century. Similarly, Honduras's industrial sector never was fully developed. The heady days of the CACM (midto -late 1960s), which produced an industrial boom for El Salvador and Guatemala, barely touched the Honduran economy except to increase its imports because of the comparative advantages enjoyed by the Salvadoran and Guatemalan economies and Honduras's inability to compete.
Bananas and coffee have also proven unreliable sources of income. Although bananas are less subject to the vagaries of international markets than coffee, natural disasters such as Hurricane Fifi in 1974, drought, and disease have appeared with a regular, albeit random, frequency to take their economic toll through severely diminished harvests. Moreover, bananas are grown and marketed mostly by international corporations, which keep the bulk of wealth generated. Coffee exports, equally unreliable as a major source of economic support, surpassed bananas in the mid1970s as Honduras's leading export income earner, but international price declines coupled with huge fiscal deficits underlined the vulnerability of coffee as an economic base.
As Honduras entered the 1990s, it did have some factors working in its favor--relative peace and a stronger civilian government with less military interference in the politics and economy of the country than in past years. The country was hobbled, however, by horrendous foreign debt, could claim only diminished natural resources, and had one of the fastest growing and urbanizing populations in the world. The government's daunting task then became how to create an economic base able to compensate for the withdrawal of much United States assistance without becoming solely dependent on traditional agricultural exports.
In the 1990s, bananas were booming again, particularly as new European trade agreements increased market size. Small bananaproducing cooperatives lined up in the 1990s to sell their land to the commercial giants, and the last banana-producing lands held by the government were privatized. Like most of Central America, Honduras in the 1990s began to woo foreign investors, mostly Asian clothing assembly firms, and it held high hopes for revenue to be generated by privatizing national industries. With one of the most strikeprone labor forces in Central America, debt-burdened and aging industrial assets, and a dramatically underdeveloped infrastructure, Honduras, however, has distinct economic disadvantages relative to its Central American and Caribbean neighbors, who compete with Honduras in the same export markets.
Honduran president Rafael Leonardo Callejas Romero, elected in November 1989, enjoyed little success in the early part of his administration as he attempted to adhere to a standard economic austerity package prescribed by the International Monetary Fund (IMF--see Glossary) and the World Bank (see Glossary). As the November 1993 presidential elections drew closer, the political fallout of austere economic measures made their implementation even less likely. Any hope for his party's winning the 1993 election was predicated on improving social programs, addressing employment needs, and appeasing a disgruntled, vocal public sector. However, reaching those goals required policies that moved away from balancing the budget, lowering inflation, and reducing the deficit and external debt to attract investment and stimulate economic growth.
Callejas inherited an economic mess. The economy had deteriorated rapidly, starting in 1989, as the United States Agency for International Development (AID) pointedly interrupted disbursements of its grants to Honduras to signal displeasure with the economic policies of the old government and to push the new government to make economic reforms. Nondisbursal of those funds greatly exacerbated the country's economic problems. Funds from the multilateral lending institutions, which eventually would help fill the gap left by the reduction of United States aid, were still under negotiation in 1989 and would be conditioned first on payment of arrears on the country's enormous external debt.
Between 1983 and 1985, the government of Honduras--pumped up by massive infusions of external borrowing--had introduced expensive, high-tech infrastructure projects. The construction of roads and dams, financed mostly by multilateral loans and grants, was intended to generate employment to compensate for the impact of the regionwide recession. In reality, the development projects served to swell the ranks of public-sector employment and line the pockets of a small elite. The projects never sparked private-sector investment or created substantial private employment. Instead, per capita income continued to fall as Honduras's external debt doubled. Even greater injections of foreign assistance between 1985 and 1988 kept the economy afloat, but it soon became clear that the successive governments had been borrowing time as well as money.
Foreign aid between 1985 and 1989 represented about 4.6 percent of the gross domestic product (GDP--see Glossary). About 44 percent of the government's fiscal shortfall was financed through cash from foreign sources. Side effects of the cash infusion were that the national currency, the lempira (L; for value of the lempira--see Glossary), became overvalued and the amount of exports dropped. A booming public sector, with its enhanced ability to import, was enough to keep the economy showing growth, based on private consumption and government spending. But the government did little to address the historical, underlying structural problems of the economy--its overdependence on too few traditional commodities and lack of investment. Unemployment mushroomed, and private investment withered.
By 1989 President Callejas's broad economic goal became to return Honduran economic growth to 1960-80 levels. During the decades of the 1960s and 1970s, the country's economy, spurred mostly by erratically fluctuating traditional agricultural commodities, nevertheless averaged real annual growth of between 4 and 5 percent. At the end of the 1980s, however, Callejas had few remaining vehicles with which to pull the country out of the deep regionwide recession of the 1980s. Real growth between 1989 and 1993 translated to mostly negative or small positive per capita changes in the GDP for a population that was growing at close to 4 percent annually.
President Callejas attempted to adhere to conditions of desperately needed new loans. Cutting the size of the public sector work force, lowering the deficit, and enhancing revenues from taxes--as mandated by the multilateral lending institutions--were consistently his biggest stumbling blocks. Despite his all-out effort to reduce the public-sector deficit, the overall ratio of fiscal deficit to the GDP in 1990 showed little change from that in 1989. The total public-sector deficit actually grew to 8.6 percent of the GDP, or nearly L1 billion, in 1991. The 1993 deficit expanded to 10.6 percent of the GDP. The Honduran government's medium-term economic objectives, as dictated by the IMF, were to have generated real GDP growth of 3.5 percent by 1992 and 4 percent by 1993. In fact, GDP growth was 3.3 percent in 1991, 5.6 percent in 1992, and an estimated 3.7 percent in 1993. The economy had operated so long on an ad hoc basis that it lacked the tools to implement coherent economic objectives. Solving the most immediate crisis frequently took precedence over long-term goals.
By 1991 President Callejas had achieved modest success in controlling inflation. Overall inflation for 1990 had reached 36.4 percent--not the hyperinflation experienced by some Latin American counties--but still the highest annual rate for Honduras in forty years. The Honduran government and the IMF had set an inflation target of 12 percent for 1992 and 8 percent for 1993. The actual figures were 8.8 percent in 1992 and an estimated 10.7 percent for 1993. Hondurans had been accustomed to low inflation (3.4 percent in 1985, rising to 4.5 percent by the end of 1986), partly because pegging the lempira to the dollar linked Honduras's inflation rate to inflation rates in developed countries. But the expectation for low inflation made the reality of high inflation that much worse and created additional pressures on the government for action when inflation soared in 1990.
Between 1980 and 1983, 20 percent of the work force was unemployed--double the percentage of the late 1970s. Job creation remained substantially behind the growth of the labor force throughout the 1980s. Unemployment grew to 25 percent by 1985, and combined unemployment and underemployment jumped to 40 percent in 1989. By 1993, 50 to 60 percent of the Honduran labor force was estimated to be either underemployed or unemployed.
The government's acceptance of foreign aid during the 1980s, in lieu of economic growth sparked by private investment, allowed it to ignore the necessity of creating new jobs. Honduras's GDP showed reasonable growth throughout most of the 1980s, especially when compared to the rest of Latin America, but it was artificially buoyed by private consumption and public-sector spending.
Mainstay agricultural jobs became scarcer in the late 1970s. Coffee harvests and plantings in border area decreased because fighting in neighboring Nicaragua and El Salvador spilled over into Honduran. Other factors contributing to the job scarcity were limited land, a reluctance on the part of coffee growers to invest while wars destabilized the region, and a lack of credit. Small farmers became increasingly unable to support themselves as their parcels of land diminished in size and productivity.
Problems in the agricultural sector have fueled urbanization. The Honduran population was 77 percent rural in 1960. By 1992 only 55 percent of the Honduran population continued to live in rural areas. Campesinos have flocked to the cities in search of work but found little there. Overall unemployment has been exacerbated by an influx of refugees from the wars in neighboring countries, attracted to Honduras, ironically, by its relatively low population density and relative peace. In the agricultural sector (which in 1993 still accounted for approximately 60 percent of the labor force), unemployment has been estimated to be far worse than the figures for the total labor force.
Honduran urban employment in the early 1990s has been characterized by underemployment and marginal informal-sector jobs, as thousands of former agricultural workers and refugees have moved to the cities seeking better lives. Few new jobs have been generated in the formal sector, however, because domestic private sector and foreign investment has dropped and coveted public-sector jobs have been reserved mostly for the small Honduran middle-class with political or military connections. Only one of ten Honduran workers was securely employed in the formal sector in 1991.
In the mid-1980s, the World Bank reported that only 10,000 new jobs were created annually; the low rate of job creation resulted in 20,000 people being added to the ranks of the unemployed every year. The actual disparity between jobs needed for full employment and new jobs created exceeded that projection, however. For those with jobs, the buying power of their wages tumbled throughout the 1980s while the cost of basic goods, especially food, climbed precipitously.
Mining, the mainstay of the Honduran economy in the late 1800s, declined dramatically in importance in the 1900s. The New York and Honduras Rosario Mining Company (NYHRMC) produced US$60 million worth of gold and silver between 1882 and 1954 before discontinuing most of its operations. Mining's contribution to the GDP steadily declined during the 1980s, to account for only a 2 percent contribution in 1992. El Mochito mine in western Honduras, the largest mine in Central America, accounted for most mineral production. Ores containing gold, silver, lead, zinc, and cadmium were mined and exported to the United States and Europe for refining.
In the early 1990s, the United States was by far Honduras's leading trading partner, with Japan a distant second. United States exports to Honduras in 1992 were valued at US$533 million, about 54 percent of the country's total imports of US$983 million. Most of the rest of Honduras's imports come from its Central American neighbors. Despite its status as beneficiary of both the Caribbean Basin Initiative (CBI) and the Generalized System of Preferences (GSP)--both of which confer dutyfree status on Honduran imports to the United States--Honduras has run a long-standing trade deficit with the United States. Total exports of goods and services by Honduras in 1992 were US$843 million, of which about 52 percent went to the United States. The current account deficit, however, continues to rise, from US$264 million in 1992 to an estimated US$370 million deficit in 1993.
THE CENTRAL AMERICAN COMMON MARKET (CACM) was one of four regional economic integration organizations created during the Latin American export boom of the 1960s. The CACM was established by Guatemala, Honduras, El Salvador, and Nicaragua (and later joined by Costa Rica) with the signing of the General Treaty of Central American Economic Integration (Tratado General de Integración Económica Centroamericana) in Managua on December 15, 1960. The CACM and the three other Latin American trading blocs-- the Latin American Free Trade Area, the Caribbean Free Trade Association (Carifta), and the Andean Group--were generally alike in their initial endorsement of regional integration behind temporary protectionist barriers as a way to continue import- substitution industrialization (ISI--see Glossary).
The basic strategy for development in Latin America was pioneered in the 1950s by Raúl Prebisch and the Economic Commission for Latin America and the Caribbean (ECLAC). The "ECLAC approach" applied a structuralist model of development that emphasized increasing private and public investment in manufacturing and infrastructure in order to overcome dependence on exports of primary commodities. Prebisch argued that continued overreliance on primary commodity exports as a source of foreign exchange would eventually lead to economic stagnation and even economic contraction because as population growth and falling commodity prices would exert downward pressure on per capita gross domestic product (GDP--see Glossary). Concurrently, Prebisch and ECLAC recognized the inherent limitations for single-country domestic markets of ISI based solely on manufacturing. Particularly for the smaller countries of the Western Hemisphere, strictly domestic production of manufactured goods would quickly saturate local demand and would prematurely reduce returns on capital investment.
In order to overcome the limitations of single-country ISI, ECLAC proposed to expand the "local" market by means of common markets among like groups of countries. A common external tariff (CET) would allow nascent industries to develop by protecting local manufacturers from extraregional competition.
The ECLAC approach was advanced and widely accepted throughout the Western Hemisphere as an alternative to both the liberal export-led growth model and the previous single-country ISI approach. In practice, however, elements of all three models coexisted uneasily in most Latin American economies until the mid- 1980s.
Despite their common adherence to the ECLAC model of intraregional free trade within a protectionist framework, the various Latin American trading blocs differed from each other in the size and economic structure of their member states, their intermediate goals, their institutions, their cohesiveness, and their relationships to the global economy. In the case of the CACM, economic disequilibria among member states, incomplete and unbalanced implementation of the ECLAC-inspired integration scheme, and the inherent limitations of a development model based on protection from global competition eventually undermined the CACM as originally conceived by ECLAC. The CACM's effectiveness waned following Honduras's withdrawal in the wake of the 1969 Soccer War with El Salvador. The CACM stagnated throughout the 1970s and virtually collapsed during the prolonged Central American (see Glossary) political and debt crises of the 1980s, revitalizing only after its overhaul and the partial inclusion of Panama in the early 1990s.
The post-World War II movement toward Central American economic integration began with a wave of bilateral free trade treaties signed among Guatemala, Honduras, El Salvador, Nicaragua, and Costa Rica between 1950 and 1956. By the end of this period of bilateral negotiations, each country had become party to at least one of the treaties, which involved free trade in a limited range of products. The trend toward economic integration was further bolstered by the formation of the Organization of Central American States (Organización de Estados Centroamericanos--Odeca) in 1951. Although primarily a political entity, Odeca represented a significant step toward the creation of other regional multilateral organizations.
Economic cooperation at the multilateral level began to take shape under the auspices of ECLAC, which in August 1952 began sponsoring regular meetings of the Committee of Economic Cooperation, comprising the ministers of economy and commerce of the five Central American republics. It was through the committee that ECLAC advanced the Prebisch model of coordinated industrialization within regional trading blocs. ECLAC's active consultancy efforts facilitated the signing in 1958-59 of three important integration agreements: the Multilateral Treaty on Free Trade and Central American Economic Integration (Tratado Multilateral de Libre Comercio e Integración Económica Centroamericana), the Integration Industries Convention (Régimen de Industrias de Integración--RII), and the Central American Tariff Equalization Convention (Convenio Centroamericano sobre Equiparación de Gravámenes a la Importación).
The Multilateral Treaty on Free Trade and Central American Economic Integration provided for intraregional free trade in 239 groups of Central American products and a ten-year phase-in of intraregional free trade in all Central American goods. The Central American Tariff Equalization Convention was a complementary agreement to the multilateral treaty, establishing a CET on 270 products, including all those listed under the treaty, and proposing a harmonization of tariffs on an additional 200 products within five years. The tariff equalization convention would thereby provide the common barrier to extraregional imports under which Central American producers would conduct a liberalized trade.
The RII was the most controversial component of the ECLAC program and would be the most difficult to implement. As originally conceived, the RII was to direct the flow of capital investment into the region by granting special incentives and privileges to firms given "integration industries" status. In order to prevent costly duplication of capital investment, firms whose products had small consumer markets in the region would be given a virtual monopoly within the CACM. The Central American countries were supposed to distribute integration industry plants among themselves in an equitable and efficient manner.
The integration regime envisioned by the ECLAC-sponsored agreements never entered fully into force, but was instead superseded by the General Treaty of Central American Economic Integration, which became the basis for the CACM. The general treaty represented a compromise between the ECLAC-inspired approach and the policy preferences of the United States. The latter proposed several significant changes to the ECLAC integration scheme, the main difference being the establishment from the outset of intraregional free trade as the norm, rather than as the exception, as provided for in the multilateral treaty. Under the United States plan, all products would be subject to intraregional free trade unless exempted. The United States was also opposed to the granting of monopoly status to integration industries within the region. In exchange for adoption of its plan, the United States would provide funding for the various institutions of the CACM and increase its economic aid to Central America.
In February 1960, Guatemala, El Salvador, and Honduras accepted the United States-sponsored integration scheme and signed the Tripartite Treaty (Tratado Tripartito) in Esquipulas, Guatemala, establishing intraregional free trade as the norm and excluding an RII mechanism. The Tripartite Treaty evoked strong objections from ECLAC, which saw its guiding role in Central American integration undermined by United States involvement in the process. In response to protests from ECLAC and the government of Nicaragua, the United States and the parties to the Tripartite Treaty agreed to negotiate a compromise integration treaty to supersede all prior free-trade agreements. The General Treaty of Central American Economic Integration was signed in Managua, Nicaragua by four of the five republics (Costa Rica delayed signing by two years) on December 13, 1960, with ECLAC conceding on the free trade issue and the United States conceding on the inclusion of the RII. The general treaty went into effect for Guatemala, El Salvador, and Nicaragua in June 1961 and for Honduras and Costa Rica in April and July 1962, respectively.
In addition to the RII, the general treaty established a permanent Secretariat, the Secretariat of the General Treaty on Central American Economic Integration (Secretaría Permanente del Tratado General de Integración Económica Centroamericana--SIECA), and a development bank, the Central American Bank for Economic Integration (Banco Centroamericano de Integración Económica--BCIE). A Central American Clearing House (Cámara Centroamericana de Compensación de Monedas) was established in 1963 to promote the use of local currencies in the settlement of short-term trade deficits between pairs of CACM member states. A Central American Monetary Council (Consejo Monetario Centroamericano) was set up the following year to promote monetary union.
During the 1960s and 1970s, the CACM had a significant positive impact on trade flows in Central America. Intraregional exports as a percentage of total exports grew dramatically--from 7 percent of total exports in 1960 to 26 percent in 1970--before declining to 23.4 percent in 1975 and to 14.7 percent in 1985. The total value of trade within the region grew from US$33 million in 1960 to US$1.1 billion in 1980, dropping to US$421 million in 1986. Of all goods traded within the region, 95 percent had attained duty-free status by 1967, and 90 percent of traded goods were covered by the CET. The goods exempted from intraregional free trade were mainly traditional agricultural exports destined for global markets.
Most of the new intraregional trade was in consumer goods, a large share of which consisted of processed foods. By 1970 food processing was the single most prominent industrial activity within the CACM, accounting for approximately 50 percent of gross industrial output. The preference for consumer goods production was built into the CACM tariff structure, which imposed a high CET on extraregional consumer goods but did not impede the import of intermediate or capital goods.
In addition to the protection afforded to consumer goods production by the CET on consumer imports, CACM member states also promoted investment in industry by introducing generous tax incentives and exemptions for new and existing industrial firms. To help promote balanced development, the Convention of Fiscal Incentives for Industrial Development (Convenio Centroamericano de Incentivos Fiscales al Desarollo Industrial) was signed among the then four CACM member states in 1962 to equalize the granting of tax incentives to industrial firms. The convention allowed Honduras and Nicaragua to offer temporarily broader tax breaks to industrial firms than the other two more industrialized republics. Honduras became the main beneficiary of this differentiated treatment, gaining in 1969 an extension of its preferential taxation status.
Another important incentive to industrial development within the CACM was the implementation of regional infrastructure development projects. Several infrastructure development organizations were established during the 1960s to improve intraregional transport and communications: the Technical Commission of Central American Telecommunications (Comisión Técnica de las Telecomunicaciones de Centroamérica--Comtelca), the Central American Corporation of Air Navigation Services (Corporación Centroamericana de Servicios de Navegación Aérea--Cocesna), the Central American Maritime Commission (Comisión Centroamericana de Transporte Marítimo--Cocatram), and the Central American Railways Commission (Comisión Centroamericana de Ferrocarriles--Cocafer). These organizations were financed mainly by the Regional Office for Central America and Panama (ROCAP) of the United States Agency for International Development (AID) as part of the Alliance for Progress initiative. AID/ROCAP also financed a Regional Highway Program to improve highway routes considered vital to intraregional trade.
Despite the considerable expansion of intraregional trade and investment in Central America during the 1960s, by the end of the decade, the region had not yet achieved the balanced industrial growth nor the diversification of extraregional exports that was needed to maintain the momentum of the CACM. This failure resulted in part from the inability of Central American governments to implement fiscal modernization or to overcome persistent structural trade deficits by the less developed economies of the region. Moreover, the gradual abandonment by regional economic planners of key components of the ECLAC model, particularly the goal of monetary union and the Integration Industries Convention, reduced the potential for joint action on a broad range of common challenges. Lack of progress on structural reforms of the Central American economies meant that the CACM would exist primarily as a customs union, rather than become an economic community. By the early 1980s, Central America's profound economic problems and political upheavals had undermined most CACM activities and institutions.
During the 1960s, Central American policymakers charged with implementing the ECLAC model were faced with a series of deeply ingrained social and political obstacles to economic modernization. Foremost among these were the structural biases in favor of traditional export agriculture that diverted capital from industrial investment and discouraged export diversification. Among the most pervasive structural biases were the antiquated tax systems that relied primarily on import tariffs as a source of revenue while undertaxing property and personal income. As free trade entered into force within the CACM, governments found themselves forfeiting a large share of their traditional revenues. In all of the republics except Costa Rica, political opposition to fiscal reform from the powerful landowning sector prevented governments from recovering the lost funds through property and income taxes. Pressure for fiscal reform was offset by a surplus of commercial bank credit during the 1970s, which allowed Central American governments to run consecutive fiscal deficits. When the flow of lending to Latin America ended abruptly in 1982, the burden of servicing Central American public and private debts caused a severe regional economic depression. The "lost decade" of the 1980s was characterized by macroeconomic instability, massive capital flight, and severe cutbacks in public services.
Monetary and credit policies were also strongly biased in favor of the traditional export sector, which enjoyed a sharp increase in commercial bank lending throughout the 1960s. In 1970 a large share of domestic credit was still being channeled to traditional export agriculture, which received three times as much credit as did industry. Moreover, interest rates for traditional agriculture were in some cases kept artificially much lower than the rates paid by industry and by nontraditional agriculture.
Despite these inconsistencies in public policy toward industrialization, manufacturing's contribution to GDP grew modestly in all of the region except Honduras during the 1960s. Industrial growth associated with the CACM was generally more capital intensive than manufacturing for domestic markets, where small, labor-intensive firms employing ten to twenty workers were the norm. Rather than producing the desired diversification of extraregional exports, however, Central America's industrial development stagnated at the stage of consumer goods production and became heavily dependent on capital-goods imports paid for with foreign exchange from traditional agricultural exports. The foreign exchange constraint that had existed before formation of the CACM remained essentially unchanged, as competitive export industries oriented toward global markets failed to develop under the CACM's protective CET.
Another major drawback of the CACM was its inability to compensate for disequilibria in capital endowments, in net export volume, and in productivity among more- and less-developed member states. As a result, intraregional trade imbalances became pronounced, and the CACM became polarized between the net creditors, Guatemala and El Salvador, and the net debtors, Honduras and Nicaragua. Costa Rica evolved from a net debtor to a net creditor.
The institutions created by the general treaty to alleviate structural imbalances among member states failed to operate as planned. One of the first CACM institutions to be deactivated was the Integration Industries Convention, which had been negotiated to help allocate capital investment rationally and fairly among member states. The convention had been a source of controversy from the beginning, having been opposed by the United States and excluded from the earlier Tripartite Treaty. When rivalries arose over the proposed location of plants, CACM institutions were unable to mediate the conflicts or to impose solutions. As a result, only two firms ever attained integration industries status, and the convention was effectively scrapped in the mid-1960s when a tire plant was established in Costa Rica to compete with an integration industries plant in Guatemala.
Another CACM institution that abandoned its original purpose was the Central American Clearing House. The clearing house had originally been designed to promote the use of local currencies in the settlement of intraregional trade deficits. The clearing house and the Central American Monetary Council were supposed to represent initial steps toward monetary union. By 1963, however, the CACM member states had allowed the monetary cooperation effort to lapse and were settling their trade deficits in United States dollars twice yearly. Little impetus remained to maintain exchange rate stability or currency convertibility within the CACM.
As the 1960s progressed, unbalanced growth and development among CACM member states began to take a serious toll on cooperative efforts in trade, monetary policy, and investment promotion. By the end of the decade, the CACM had reverted to an amorphous grouping of economies at different stages of development pursuing uncoordinated and sometimes antagonistic macroeconomic policies. The most acute conflict arose between Honduras and El Salvador over the issues of unbalanced trade, investment, and migration.
By the mid-1960s, chronic Honduran trade deficits with El Salvador and highly visible Salvadoran investment in Honduras had led to widespread Honduran indignation and a virtual Honduran boycott of Salvadoran products. Meanwhile, 300,000 Salvadoran migrants displaced by the expansion of export agriculture in their country had settled across the border in Honduras. Capitalizing on the widespread sentiment against Salvadoran "encirclement," the government of Honduran President Oswaldo López Arellano (1963-71) attempted to expel Salvadoran squatters under the pretext of land reform. Increasing tensions throughout the summer of 1969 erupted into hostilities on July 14, when Salvadoran air and land units made an incursion into Honduran territory. The ensuing four-day war claimed 2,000 lives and led to the forced repatriation of about 150,000 Salvadorans.
Diplomatic and commercial relations between El Salvador and Honduras were suspended for a decade thereafter, as was air transport between the two countries. In December 1970, Honduras withdrew from the CACM after it failed to persuade the other member states to enact further reforms in its favor. Honduras subsequently conducted trade with CACM countries on a bilateral basis until 1986. Honduras's withdrawal from the CACM, although not significant in terms of lost trade volume, represented a symbolic collapse of the organization as a vehicle for promoting coordinated regional growth. The prospects for integration had already dimmed considerably prior to the Soccer War, as evidenced by the piecemeal abandonment of major components of the original ECLAC integration plan.
Despite Honduras's withdrawal from the CACM and its suspension of commercial relations with El Salvador, Central American intraregional trade rose steadily throughout the 1970s, exceeding US$1 billion by 1980, before halving in the mid-1980s as a result of accumulated intraregional debts, the overall debt crisis, and the disruption caused by civil wars in El Salvador and Nicaragua. Most efforts to coordinate industrial and macroeconomic policies had been abandoned, however, well before the general treaty expired in 1982.
A reactivation of Central American economic integration was made possible with the signing of the Central American Peace Agreement (Esquipulas II) in August 1987. Esquipulas II laid the political groundwork for concerted action to renew the integration system following restoration of peace and democracy in the region. Formal action to restart the integration process was taken at the eighth summit of Central American presidents, held in Antigua, Guatemala, in June 1990. The participants at the Antigua summit approved the Economic Action Plan for Central America (Plan de Acción Económico de Centroamérica--Paeca), which foresaw a new conceptual and legal basis for a Central American economic community.
The new integration initiative emphasized insertion of the region's economy into the global economy based on export-led growth. The industrial base established under the CACM was to be retrofitted and modernized to compete in the international marketplace, and nontraditional exports were to be be promoted more vigorously. Concurrently, the maximum CET for the region was to be reduced from 40 percent to 20 percent and was expected to average between 10 percent and 15 percent for most products. With assistance from the European Economic Community (EEC), a new Central American Payments System was established to settle intraregional debts. The main components of this new payments system were a revised Central American Clearing House and a Special Foreign Currencies Fund. The new payments system, backed by an initial 120 million European Currency Unit (ECU--see Glossary) support fund, was designed to manage intraregional creditor-debtor relations multilaterally, rather than bilaterally as under the previous regime, so that trade deficits would be incurred against the system rather than against individual countries. In addition, the Special Foreign Currencies Fund, which was backed by an initial EEC support fund of 30 million ECUs, was to help the less developed countries in the region finance the building and improvement of export-related infrastructure.
Further progress toward integration was made at the tenth Central American presidential summit, held in San Salvador, El Salvador, in July 1991, when the five original participants agreed to include Panama in certain aspects of the new economic community. The eleventh summit, held in Tegucigalpa, Honduras, modified several CACM institutions and incorporated them into the System of Central American Integration (Sistema de Integración Centroamericana--SICA), an umbrella organization encompassing both political and economic integration efforts. Honduras fully rejoined the integration process in February 1992, upon the signing of the Transitional Multilateral Free Trade Agreement with the other Central American republics.
Central American integration was given a further boost with the signing of the North American Free Trade Agreement (NAFTA) among Canada, Mexico, and the United States. In August 1992, a Framework Free Trade Agreement was signed among the five Central American republics and Mexico, establishing the procedures for the formation of a free-trade area projected to enter into force in December 1996. Inclusion of Central America in a free-trade area with Colombia and Venezuela was also foreseen in the Caracas Commitment adopted at a regional summit in February 1993. Guatemala's recognition of Belize in September 1991 made it possible to begin free-trade agreement talks with the Caribbean Community (Caricom), the successor to Carifta. In late 1993, the Central American countries were actively lobbying for incorporation into NAFTA and were expanding ties with the G-3 (Mexico, Colombia, and Venezuela) and Caricom.