eotN.312H odrsDrivers ofSustainableRural Growth Honduras Report No. 31192-HN Report No. 31192-HN Honduras Drivers of Sustainable Rural Growth and Poverty Reduction in Central America Public Disclosure Authorized Authorized Disclosure Disclosure Public Public Honduras Case Study (In Two Volumes) Volume I: Executive Summary and Main Text December 31, 2004

Environmentally and Socially Sustainable Development Latin America and the Caribbean Region Public Disclosure Authorized Authorized Disclosure Disclosure Public Public Public Disclosure Authorized Authorized Disclosure Disclosure Public Public and Poverty Reduction in Central

Document of the World Bank Public Disclosure Authorized Authorized Disclosure Disclosure Public Public

America Volume I

SINIT Sistema Nacional de Informacion Territorial UNDP United Nations Development Programme USAID US Agency for International Development WB World Bank WFP World Food Program

Vice President: Pamela Cox Country Director: Jane Armitage Sector Director John Redwood Sector Leader: Martin Raine Team Leader: Francisco Pichón

iii

Table of Contents

VOLUME I

Abbreviations and Acronyms ...... ii Acknowledgements...... viii Foreword...... ix

Executive Summary...... x

1. Introduction...... 1 2. Characterization of the Honduran Rural Economy and Policy Directions...... 8 3. Spatial Analysis of the Rural Sector in Honduras ...... 18 4. Analytical Results...... 41 5. Conclusions and Recommendations ...... 60

References...... 68

Boxes

2.1. Defining ‘Hillsides’, ‘Hillside Areas’ and ‘Valleys’...... 10 2.2. Land Issues in Honduras...... 12 2.3. Honduras Agricultural Rural Development Strategy 2004...... 16 3.1. Household Survey Data ...... 23 3.2. Livelihoods Studies...... 24 3.3. Remittances and Hillside Households ...... 27 4.1. Pitfalls with the Statistical Analyses of the IFPRI and Wisconsin Household Data41 4.2. Gender in the Hillside Areas...... 46 4.3. ESSD Projects Used for the Stocktacking Exercise ...... 55 4.4. Community-Led Asset Building: Nuestras Raíces Program ...... 59

Tables

2.1. Select Data for Central American Countries, 2000 ...... 8 2.2. GDP Shares and Growth Rates, 1981—2001...... 13 2.3. Agricultural Share of Exports and Agricultural Balance of Trade ...... 13 2.4. Select Indicators on the Coffee Sector in Central American Countries, 2000...... 14 3.1. Population Change and Density by Province, 1994--2002...... 19 3.2. Distribution of Households by Landholding Size and Income...... 24 3.3. Adoption of Conservation Practices ...... 25 3.4. Human Assets: Education Levels ...... 26 3.5. Financial Assets...... 28 3.6. Social Assets: Participation in Organizations...... 29 3.7. Access to Public Infrastructure and Services (based on University of Wisconsin survey data only)...... 30 3.8. Access to Public Infrastructure and Services (based on IFPRI survey data only)... 31

iv 3.9. Income-based Indicators of Rural Poverty in Honduras Based on Survey Data ..... 31 3.10. Household Typology according to Sources of Income...... 32 4.1. Livelihood Cluster Groups, IFPRI Household Survey ...... 42 4.2. Livelihood Cluster Groups, Wisconsin Household Survey ...... 43 4.3. Salient Household Characteristics, by Livelihood Strategy, IFPRI Households..... 44 4.4. Salient Household Characteristics, by Livelihood Strategy, Wisconsin Households...... 45 4.5. Asset Comparison between Poor Households and Non-Poor Households, Wisconsin Sample...... 52

Figures

1.1. The Asset-based Approach ...... 7 2.1. Change in Income Distribution in Rural Areas, 1993--2003...... 9 3.1. Honduras Provinces and Counties ...... 34 3.2. Honduras Topography...... 35 3.3. Transportation Infrastructure and Population Centers...... 36 3.4. Population Densities...... 37 3.5. Change in Population Densities, 1988--2001 ...... 38 3.6. Road Densities...... 39 3.7. Geographical Coverage of Combined IFPRI and Wisconsin Household Surveys.. 40 4.1. Annual Per Capita Income, by Livelihood Strategy, IFPRI Households ...... 48 4.2. Annual Per Capita Income, by Livelihood Strategy, Wisconsin Households ...... 48

v VOLUME II

Abbreviations and Acronyms ...... ii

Appendixes

1. Using an Asset-Based Approach to Identify Drivers of Sustainable Rural Growth and Poverty Reduction in Central America: Conceptual Framework ...... 1 2. Problems with Measuring Rural Poverty in Honduras ...... 24 3. Agricultural Sector Information...... 29 4. Spatial Analysis of Rural Economic Growth in Honduras ...... 32 5. Description of Data from IFPRI and University of Wisconsin Surveys...... 66 6. Conceptual Framework and Statistical Methods used for Clustering of Households According to Asset Use...... 73 7. Summary Report: Honduras Project Stocktaking Exercises...... 78 8. Description of the Livelihood Strategies of the Sample Households ...... 102 9. Results of the Multinomial Logit Models...... 106 10. Income Regression Results...... 119

Boxes

1.1. Sectoral and spatial linkages...... 4 1.2. The mystery of assets...... 7 1.3. Why the poor are poor: Lack of assets and low asset productivity ...... 9 1.4. Defining a livelihood ...... 9 4.1. Migration and population change ...... 35 4.2. Information on household level data sources...... 37 4.3. Topography, agricultural potential and market access ...... 38 7.1. Community-led asset building: Nuestras Raíces Program...... 87

Tables

1.1. Toward a New Rural Development Strategy for Central America...... 21 1.2. Household-Level Assets and Links to Other Levels...... 22 2.1. Comparison between income estimates...... 26 3.1. Shares (%) of Gross Value Added in the Agricultural Sector ...... 30 3.2. Change in Purchasing Power by Agricultural Sub-sector 1978 to 2000 ...... 30 4.1. Population change by Province, 1988-2001 ...... 46 4.2. Determinants of municipio-level population change, 1988-2001...... 46 4.3. Assets and changes in rural Honduras ...... 47 4.4. Assets and changes by year and Province, rural Honduras ...... 48 5.1. List of Provinces and Counties covered by the IFPRI and Wisconsin Household Surveys...... 70 7.1. Summary of results from regional workshops...... 91 9.1. Explanatory variables used in multinomial logit model, by livelihood strategy, IFPRI sample ...... 108

vi 9.2. Explanatory variables used in multinomial logit model, by livelihood strategy, Wisconsin sample ...... 111 9.3. Determinants of Livelihood Strategies (Full Multinomial Logit Model), IFPRI sample ...... 113 9.4. Reduced Form of the Multinomial Logit Model, IFPRI sample ...... 115 9.5. Determinants of Livelihood Strategies (Full Multinomial Logit Model), Wisconsin sample ...... 116 9.6. Reduced Form of the Multinomial Logit Model, Wisconsin sample ...... 118 10.1. Determinants of Household Income, IFPRI households...... 121 10.2. Determinants of Household Income, Wisconsin households ...... 122

Figures

1.1. Schematic presentation of the asset-based approach: Asset-context-behavior- outcomes ...... 23 4.1. Map of Honduras ...... 53 4.2. Provinces of Honduras...... 54 4.3. Transportation, infrastructure and population centers ...... 55 4.4. Population density...... 56 4.5. Percent rural by municipio 2001...... 57 4.6. Coffee-production areas of Honduras...... 58 4.7. Road density...... 59 4.8. Population change, 1988-2001...... 60 4.9 Changes in income distribution (1993 & 2003), all rural Honduras...... 61 4.10. Percentage of farmers using soil conservation measures...... 62 4.11. Percent households with potable water...... 63 4.12. Percent households with basic sanitation...... 64 4.13. Poverty in Honduras ...... 65 7.1. Schematic presentation of the Asset-based Approach and facilitation of the project stocktaking exercise...... 90

vii Acknowledgements

This study was prepared under the overall guidance of Martin Raine, Sector Leader for Central America in the Environmentally and Socially Sustainable Development (ESSD) Department at LCR. Francisco Pichon was the Task Team Leader for the study. Hans Jansen (IFPRI-RUTA) was the principal researcher and co-author of the Honduras case study. Other members of the study team included: Juan Manual Medina (Consultant, IFPRI-RUTA), Paul Siegel (Consultant, World Bank and FAO/CP), Jeffrey Alwang (Professor, Virgina Tech), David Woodall-Gainey (Consultant, Virginia Tech), Ricardo Arias (Consultant, World Bank), Jorge Caballero (FAO), Richard Anson (Consultant, World Bank), and Benjamin Bustamente (Consultant, World Bank). Diana Rebolledo provided administrative support.

The study team thanks Felipe Jaramillo, Robert Schneider, Jim Smyle and the entire Central America ESSD team for their intellectual guidance throughout the study. Many thanks are also due to Jane Armitage, Country Director for Central America, for her support to the ideas advanced by the study. Without support from FAO/CP and Selim Mohor, we could not have afforded the level of analytical effort demanded by the three country case studies. FAO facilitation remains key for dissemination and mainstreaming of the study's recommendations and subsequent technical assistance activities.

Many other people at the World Bank and in Honduras made substantial contributions to the study. We received valuable assistance from the staff of the Sistema Nacional de Información Territorial (SINIT) at the Honduras Rural Land Management Project and InfoAgro, the Geographic Information Systems Unit at the Secretaria de Agricultura y Ganadería (SAG). Carlos Zelaya (FAO-Honduras), Mariano Jiménez Talavera (Minister, SAG), Roberto Villeda Toledo (Coordinator, UPEG, SAG), Jorge Ramón Hernández (Minister, Secretaria de Gobernación y Justicia), Daniel Meza (RUTA-Honduras), Héctor Tablas (Director, Honduras Land Access Project, PACTA), Raúl Alemán (PACTA), and Henry Merriam (Coordinator, Unidad de Coordinación de Proyectos, UCP) all provided helpful comments throughout the study.

viii Foreword

In Central America, most of the poor are found in rural areas and much of the rural population is poor. Ongoing debate revolves around the underlying causes of persistent rural poverty and the most appropriate mix of interventions to promote broad- based, poverty-reducing growth. The World Bank’s recent Rural Development Strategy for the Latin America and Caribbean Region has underscored the fact that governments and donors need information about tradeoffs between growth and poverty reduction. Should public investments be targeted towards more favored areas in the hope that synergisms and economies of agglomeration create conditions for self-sustaining rural growth? Or, should less-favored regions receive a larger share of this investment to compensate for historical under-investment in these areas? Which regions and households are best able to take advantage of the emerging opportunities? What should be done to support those who cannot?

This Central American regional study is part of ongoing efforts by the Environmentally and Socially Sustainable Development Department and the Central American Department in the Latin America and Caribbean Region of the World Bank to address these fundamental questions and to strengthen analyses and strategies for rural development. This regional study encompasses three Central American countries: Nicaragua, Guatemala and Honduras. The focus of this report is Honduras. The study complements other World Bank-supported economic sector work currently being carried out by other sectors in Latin America and the Caribbean region.

The study is also motivated by several other factors: First is the recognition that sub- national regions are becoming increasingly heterogeneous and economically differentiated as part of ongoing processes of development and diversification, with some areas advancing and others being left behind. Second is the acceptance that one rural strategy does not fit all; creation of an appropriately tailored rural strategy requires understanding the assets, markets, and institutions that frame household opportunity sets and livelihood strategies. Third, rural heterogeneity requires identification of sufficiently homogeneous areas and household types to facilitate policy formulation, investment strategies, and project design. Fourth, there is a need to bridge the gap between conceptual strategies and their effective and timely implementation in order to obtain tangible and sustainable results. To this end, it is necessary to identify the appropriate sequencing and complementary of investments in assets needed to drive growth and reduce poverty.

ix DRIVERS OF SUSTAINABLE RURAL GROWTH AND POVERTY REDUCTION INCENTRAL AMERICA:

HONDURAS CASE STUDY

Executive Summary

Study Objectives

For millions of people in Central America, the question could not be more important: which priorities for public investments in rural development can best achieve sustainable growth and poverty reduction in the region? Should scarce public investments be targeted toward more favored areas that have better prospects for self-sustaining rural growth? Or should less-favored regions receive a larger share of this investment to compensate on equity grounds for historical under-investment in these areas? Which regions and households are best able to take advantage of the emerging opportunities? What should be done to support those who cannot?

This Central American regional study is part of ongoing efforts by the Environmentally and Socially Sustainable Development Department and the Central American Department of the World Bank to address these fundamental questions and to strengthen analyses and strategies for rural development. This regional study encompasses three Central American countries: Nicaragua, Guatemala, and Honduras. The focus of this report is Honduras. The study complements other World Bank-supported economic sector work currently being carried out by other sectors in the Latin American and Caribbean Region.

The objective of the study is to understand how broad-based economic growth can be stimulated and sustained in rural Central America. The study identifies “drivers” of sustainable rural growth and poverty reduction. Drivers are defined as the assets and combinations of assets needed by different types of households in different geographical areas to take advantage of economic opportunities and improve their well-being over time. The study examines the relative contributions of these assets, and seeks to identify the combinations of productive, social, and location-specific assets that matter most to raise incomes and take advantage of prospects for poverty-reducing growth. By examining the role of assets in achieving development objectives, it is hoped that subsequent policy and investments will have a sustainable impact on poverty reduction in rural areas.

Sub-objectives of the study include to:

• Examine recent changes in well-being for different areas of the country and different population sub-groups. • Describe the asset bases of rural households and understand how assets and combinations of assets contribute to well-being and rural growth potential. • Examine how the Bank’s current portfolio of Environmentally and Socially Sustainable Development and other sector projects can better contribute to improving the asset bases of rural households. • Provide guidance for strategies and investment priorities in Central America.

x Conceptual Approach

This study adopts an asset-based conceptual approach. Assets are defined to include natural, physical, financial, human, social, political, institutional, and location-specific assets. The study focuses on how households deploy their assets within the context of policies, institutions, and risks to generate a set of opportunities. Households respond to these opportunities by allocating their assets and selecting livelihood strategies that ultimately determine their well-being outcomes. Assets enable better risk management, empower people to participate in political and social life, and have impacts on levels of household well-being, incomes, and future growth potential. Through these outcomes and subsequent investment decisions, the household’s future asset base is determined.

The study is not trying to identify particular enterprises or sub-sectors that might stimulate growth and poverty reduction. Instead, it analyzes the quantity, quality, and productivity of assets needed by households in different geographical areas to exercise their potential for generating long-term growth and improving well-being. The asset-based approach is well-suited for understanding and analyzing the Honduran rural economy because of the unequal distribution of assets, high exposure to natural, economic, and social risks, and ongoing economic, political, and institutional reforms -- all of which influence prospects for rural growth and poverty reduction.

The study's focus on assets is appropriate given historically stark inequalities in the distribution of productive assets among households in the region. Such inequalities are likely to constrain how the poor share in the benefits of growth, even under appropriate policy regimes. Because of these inequalities, policy and market-based reforms alone cannot quickly level the playing field between the asset poor and those who possess the complementary assets necessary to exploit economic opportunity. Indeed, some growth-oriented investments can bypass poor households and deepen inequalities without targeted interventions to build the asset bases of the poor. The focus on assets also helps delineate public and private roles in building and strengthening asset bases.

Major Findings and Recommendations

The Honduras country study used complementary quantitative and qualitative methods of analysis, guided by an asset-based approach, to generate a number of key findings with important strategic implications. Since the study focused on hillside areas, the conclusions are specific to hillsides since the study cannot extrapolate to areas outside survey coverage. The survey data themselves may not be representative at any geographic scale.

There are well-defined areas of higher economic opportunity, given their underlying agricultural potential, relatively good access to infrastructure, and high population densities

As with other countries in Central America, economic potential has a strong spatial pattern in Honduras, with high potential areas close to the main cities and along the Northern Coast. Public investments in human and physical assets in Honduras have historically been skewed towards the 55 counties in the “T of Development.” Outside the T, public investments

xi (particularly road networks and other infrastructure) have been concentrated where agro- ecological conditions are favorable for export agriculture such as coffee (concentrated on small and medium-sized farms in the west) and bananas (mostly on large plantations in the northern valleys). Most other rural areas, the hillsides in particular, have only experienced limited public investments. This investment pattern has resulted in poverty being highest and deepest outside the T of development.

Poverty is widespread and deep in rural Honduras, particularly in hillside areas

Hillside areas account for the majority of land area and have agro-ecological constraints that make them less suitable for agriculture than the fertile valleys and coastal regions. Most poor households in hillside areas have only limited asset bases on which to base their livelihood strategies. The rural poor in hillside areas tend to have small and fragmented land plots. Production is often limited to a single rain-fed growing season. The poorest of the rural poor live in areas with high population densities and high population growth, further increasing pressure on the declining natural resource base in such areas. These factors constrain potential gains from adopting improved technologies and limit opportunities to diversify agricultural production. As a result, many are locked into strategies based on production of basic grains and small livestock for subsistence needs in areas that are not suited for such strategies. Under these circumstances, achieving sustainable increases in agricultural output and diversifying the agricultural base are major challenges.

Hillside areas should be a major target of national rural poverty reduction strategies

High numbers of poor people per area (poverty density) in hillside areas and the fact that some 80 percent of all rural poor are located in these areas should make these areas a focus of national rural poverty reduction strategies. Several public interventions, such as conditional cash transfer programs, have been shown to be effective tools for rural poverty reduction, but eventually the productivity of land and labor need to be raised. Asset bases of the poorest need strengthening, whether the poverty reduction strategy builds on agricultural or non-agricultural activities. The weak asset bases of the poor imply a need for funding from central government and public investments coordinated with local governments.

Overlap between high poverty rates and high poverty densities in some hillside areas means that investments there should reach significant proportions of the country’s rural poor

The western areas around Copán, the southern areas in Valle and Choluteca, and the Province of Comayagua have both high poverty rates and high poverty densities. By targeting these areas, significant proportions of the rural poor can be reached. The problem of leakages to the non-poor is minimized because poverty rates there are high. The geographic correspondence between high poverty rates and high poverty density means that there is limited tradeoff between poverty- and growth-oriented investments; the poor should benefit from both.

xii Agriculture should form an integral part of the rural growth strategy in hillside areas, but its potential is limited

Over the past 25 years, agriculture has not been a strong engine of growth in rural Honduras. High reliance of rural households on agricultural and related income, however, means that any strategy targeted to these areas should build upon the economic base created by agriculture. Broad-based agricultural growth in these areas is constrained by unequal access to land, degradation of natural resources and loss of soil fertility, absence of technologies for productivity enhancements in hillside areas, and weak institutions for technical assistance and dissemination of market information. The extent to which agricultural growth will lower rural poverty depends on how these critical shortcomings are addressed.

Agriculture alone cannot solve the rural poverty problem, but those remaining in the sector need to be more efficient, productive and competitive

Production of food grains on less than two hectares with rain fed agriculture is not a poverty exit strategy, unless significant productivity gains are found. Those pursuing livelihood strategies based primarily on basic grains on small parcels of land are caught in a cycle of poverty. While there are multiple interventions to address rural poverty, we focus below on strategic actions involving food security, security and access to land and forests, infrastructure provision, improved natural resource management, non-agricultural rural employment and migration as key areas to achieve broad-based growth and reduced rural poverty.

Food security: Food insecurity is caused by low land and labor productivity, low incomes, high exposure to environmental and other risks, and thin or missing markets for food in hillside areas. Low incomes and transportation problems related to infrastructure have inhibited the formation of markets. Food insecurity prevents households from maximizing returns from existing assets and adopting new technologies and higher value activities.

Food security is the prime objective of many poor rural households. It can be improved by investments in infrastructure, provision of market information, and new technologies for sustainable production. Increasing the contributions of economic activities linked to agriculture requires linking small farmers to market opportunities and providing the correct mix of assets to exploit the opportunities. Public investments are needed in infrastructure, communication, education, technical assistance, and credit facilities. These investments should be designed in such a way to create critical masses of complementary infrastructure and other household assets in targeted areas.

Security and access to land and forests: For families living in rural areas, absence of or limited security and access to basic resources are identified as the principal determinants of social inequality and poverty. In preparing an operational strategy to enhance land security and expand access to land, including the planned completion of a national land policy, the Government has key building blocks to its land-related foundation:

xiii • The Agrarian National Institute’s own experience in land reform and titling has provided important expertise on rural ownership and land-use and mechanisms of conflict resolution. • The recent land administration modernization programs (CMAT) and PATH (Land Administration Program) provide a secure basis for land titling and functioning of land markets, with complementary donor activities. • Honduras has a growing tradition of private farmer-to-farmer research and extension services geared to low-investment technologies proven in upland settings, supported through the availability of small-scale service providers. • Some private financial institutions have successfully experimented with land purchase schemes under the Access to Land Pilot Program, which are now being further expanded. • There are active area-based rural development initiatives being coordinated by NGOs or project units in regions where there is a clear demand for and availability of land for purchase. • There is considerable research data regarding subsistence, mixed and commercial land- based enterprises in lands of different aptitudes, from which to develop sound financial projections for credit operations.

Infrastructure: Infrastructure improvements are essential components of an asset-based growth and poverty reduction strategy. The study found clear evidence of positive effects of road and market access on livelihood decisions and household income. Historical under-investment in poor regions means that major investments are required to augment asset bases. Significant investments in rural infrastructure occurred during the 1990s, but many poor households and communities still lack access to basic infrastructure and services.

Sustainable management of land-water-forest resources: More holistic management of these key resources can contribute to a poverty-reducing agricultural growth strategy. The strategy should recognize the importance to long-term poverty reduction of maintaining environmental quality and mitigating disasters as the poor are more vulnerable to the consequences of environmental degradation and natural disasters. Addressing deforestation and encouraging sustainable development in the forestry sector should be priority responses to these issues.

The approach for achieving these interrelated land and forestry policy goals should be based on developing territorial-specific, and phased programs. Publicly supported programs in this context would be those oriented toward resolving land tenure conflicts; promoting conservation and rational use of water, soils, and forests; integrated watershed management; strengthening the national system of protected areas; and establishment of “zones of sustainable forest development” for commercial forestry purposes.

Generation of direct livelihood benefits for communities located in national forests and protected areas should be a fundamental goal of all these programs. Efforts should include developing and implementing the next generation of mechanisms and incentives (e.g., payment for environmental services and markets of environmental services) in order to create sustainable incentives for forest conservation and management and reforestation.

xiv Non-agricultural rural activities: Livelihood strategies based primarily on agriculture will not be adequate for many households in hillside areas. However, off-farm employment is limited because of the physical distances from urban centers and towns and the lack of good road infrastructure and transport services. Linkages to market-oriented agriculture are extremely weak. Households also lack complementary assets such as land, education, and finance, reducing self-employment options. Those with little or no land are pushed to look for off-farm work because they cannot produce enough basic grains to meet food security needs. Households with a certain minimum landholding tend to stay on their farms rather than seek off-farm employment.

Strong social and cultural bonds keep people tied to traditional farming systems and consumption patterns, but social capital assets, such as networks, organizations, and associations, and human assets can facilitate a process of change. Rural-based economic activities that generate value-added using primary agricultural products hold some promise, but need to be based upon increased agricultural output and higher incomes among agricultural producers. External markets also need to be identified. One example is to increase the locally produced supply of food to the growing tourism industry. This study suggests that better market access and higher road densities lead to higher household income, and improved market access can compensate for insufficient access to land and education.

Programs to assist individual and small group micro-enterprises might be considered as a contributor to rural growth. Such programs would need to evaluate the demand for enterprise output, but could focus on providing marketing skills and organization and, perhaps, credit facilities, based on a market analysis. This study shows the importance of credit and education for a self-employment-based livelihood strategy. Even though agribusiness development, education and training, rural finance and food safety are listed by the Government as urgent and critical for rural development, a large funding gap currently exists.

The role of migration: The primary causes of migration are poverty and land degradation. For example, people from hillside areas in the west and south – where soils have been exhausted and eroded – frequently migrate to the north and northeast regions. But migration is significantly less common among the poorest. While migration may increase incomes for those left behind, it carries at least two types of social costs. First, migration to the north and northeast has increased population density in receiving regions, increasing pressure on a fragile environment. Second, areas of origin lose productive laborers, but, given high population densities, agricultural production is not likely to suffer.

A major question is thus how to capitalize on the full potential of migration. Remittances serve as a source of finance for food and other goods. They can also be used to finance market- oriented activities, but lack of complementary assets often inhibits the ability to undertake market-oriented investments. To maximize returns from migration, government should consider providing information on labor markets and labor rights, providing basic training to assist prospective migrants, and improving financial systems to lower the transaction costs and risks associated with remittances. Technical assistance and asset strengthening, such as adult business education, in receiving regions could increase the economic contributions of remittances to these regions.

xv Move from geographically untargeted investments in single assets to a more integrated and geographically based approach of asset enhancement with proper complementarities

To achieve a level playing field and give the rural poor a chance to participate in the global economy, minimal levels of key assets are needed. Investments, notably health, education, and transport and communication infrastructure, are required to support agricultural and non- agricultural activities. Basic social and physical infrastructure is necessary for poverty-reducing growth. A multisectoral and spatially differentiated investment program is required to upgrade and improve access to household assets. The appropriate roles of the public and private sectors in providing access to assets need to be carefully considered. At a minimum market failures and information asymmetries should be addressed through public actions, and barriers to asset accumulation should be identified.

Land access and security are key contributors to livelihoods of the rural poor. Secure land rights can improve food security and enhance risk-bearing ability, both of which can contribute to agricultural growth. Complementary investments are also needed. For example, this study found evidence that credit and schooling complement land’s impact on income. This complementarity indicates high pay-offs to simultaneous efforts aimed at expanding these assets.

Technical assistance, training, capacity building, and inputs are needed for sustainable intensification of traditional agriculture and promote crop and livestock diversification, and improved forestry practices. Technical assistance should be coordinated with education and health programs to improve household nutrition.

Health and education services are critical for human capital assets. Provision of quality health and education to remote rural households is a challenge for developing as well as developed countries. Multi-community cooperation and coordination with infrastructure projects (such as roads and electricity) are essential to increase coverage and usage of health and education services. This study found evidence of the link between education and the likelihood that households have their own business.

Strong local level institutions are keys to managing community affairs such as provision of basic services, regulation of natural resources, mediation of conflicts, and coordination of community development. Water committees, school committees, credit associations, sharecropper associations, and churches are commonly found in communities. In the absence of formal institutions in isolated rural areas, these organizations fill a critical role and are an important factor in stimulating market-oriented production activities. Enhanced human and social capital can stimulate collective action, which is crucial for the process of change.

Financial services such as credit, savings, and insurance need to be better integrated. Examples of better integration are crop insurance linked to credit or credit linked to land access programs. Attempts to increase incomes through diversification strategies imply new risks, which may require new means of risk management.

xvi There are well-defined areas of high economic potential, relatively good access to infrastructure, and high population densities

Policymakers in Honduras also have the opportunity to target high poverty areas along the Guatemalan and Salvadoran borders in western and southwestern Honduras that have relatively high access to infrastructure and agricultural potential (e.g., in coffee producing areas), but also relatively high rates of poverty. In particular, the Copán area and parts of the Northern coast have substantial tourism potential based on important natural and cultural assets, but despite good location conditions, measures of well being are lagging far behind potential. Persistent high rates of poverty show that this potential is not being realized -- and to the extent that it is being realized, the poor are not participating. Therefore, asset bases of the poor in this region need to be strengthened before they can benefit from growth-related spillovers. Public investments are needed in infrastructure, communication, education, technical assistance, and credit facilities. These investments should be designed in such a way to create critical masses of complementary infrastructure in targeted areas.

Asset investment programs need to be adapted according to the specific needs of regions and households

Some household assets programs should be national in nature (such as education and health), while others (such as infrastructure, and productive and social capital assets) require more local adaptation. Household-level heterogeneity limits the appropriateness of “cookie- cutter approaches” to policies and programs designed to foster broad-based growth. Investment strategies should be formulated on broad regional bases, but options within regions should be tailored to local asset bases and other conditions. The challenge is to separate the public and private roles in providing productive assets; at a minimum, the public sector should take actions reduce inefficient barriers to productive asset accumulation. The report notes many such actions. Investments should support decentralized planning and implementation, but informed central analysis and central funding are still necessary for the poorest, most remote areas

Heterogeneity of areas and households also implies a greater role for local decision- making. Central government should provide guidance for investments and national priorities, but seek local input and analysis before deciding on the final form of such investments. Projects should contain a menu of alternatives whose ultimate choice depends on local assets and conditions. Local development investments should be community-driven, but informed analysis and central guidance and funding are still necessary, especially for poorest, most remote areas.

To capitalize assets, the policy and risk context must be addressed

Rural households are adversely affected by risks. These include weather- and market- related uncertainty and insufficient instruments for managing them are slowing economic growth. New instruments will better enable households to bear risks and help facilitate the process of structural change. The policy, legal, and institutional context are critical determinants of risk management ability:

xvii Secure property rights: Risks and uncertainty associated with property rights constrain efficient asset allocation and increase food-land-housing insecurity. Secure property rights with enforcement will facilitate land rentals and sales and build confidence in contracts and markets.

Risk and vulnerability: Rural Honduras is still trying to recover from damages related to recent shocks such as hurricanes, recurrent droughts, and the collapse in coffee and banana prices. Rural households also face health-related risks and a wide array of pests and diseases that plague agricultural production. The poor are most exposed to risk and unable to manage the risk. They often adopt coping strategies that degrade their asset base. Improved instruments to manage risk can be linked to financial services and provided by the private market. The public sector role also plays an important role. Public works and school feeding programs can facilitate risk management while strengthening household asset bases.

There is need for more strategic convergence in linking the investment and impacts of sectoral projects backed by the World Bank and other donors in the diverse geographical regions of the country

The Bank must improve the complementarity of Bank-supported investments and engage in cross-sectoral planning and cooperation. This is important for the Bank’s ability to prioritize new investments and increase its effectiveness in using the existing and proposed lending program to leverage more substantial gains in policy, regulatory, and institutional reforms that the Bank seeks in the country, as stated in the Country Assistance Strategy. A similar conclusion and overarching recommendation would apply to the investments carried out by the Government of Honduras and other collaborating partners.

The PRSC and Sector Wide Approach program (SWAp) for the rural sector are taking programmatic approaches including major institutional restructuring and consolidated national programs for agriculture, forestry and rural development, which lend themselves to applying the asset-based framework. While this operation is not being designed as a multisectoral operation, it can be an effective vehicle for carrying out many of the above recommendations, particularly if combined with other sectoral investment programs (land administration, human development, and infrastructure).

xviii

Chapter 1. Introduction

1.1. Context for the Study

Central American countries have been characterized by dualistic agricultural sectors and pervasive rural poverty throughout their history (Hereford and Echeverría 2003; de Ferranti and others 2004). Even though the Region has experienced a process of urbanization, most of the poor can be found in rural areas. Structural sources of rural poverty include unequal distribution of assets, inadequate investments in infrastructure and other public goods, ineffective delivery of public services such as health care and education, weak institutions, and policy biases against rural areas.

Since the early 1990s, many anti-rural policy biases in Central American countries have been reformed. During the 1990s, agricultural growth contributed to increased incomes and marginally lower rural poverty rates. This growth was largely driven by increasing prices of key agricultural commodity exports (notably coffee). Since the late 1990s agricultural prices have fallen dramatically. Lower agricultural prices have generated a sense of crisis in rural areas. The crisis is compounded by recurring natural disasters, which have negatively impacted rural populations and weakened their economic base. Potential policy changes, such as the Central American Free Trade Agreement (CAFTA), further contribute to the uncertainty, but also create opportunities for growth.

Traditional policy and market-based reforms cannot quickly resolve decades of structural constraints, including highly unequal access to productive and social infrastructure and skewed asset distributions. The human and economic cost of inequality and poverty is particularly stark among indigenous peoples, populations of African descent and women, many of who already belong to the poorest of the poor. Most of these social groups also have endured historical patterns of exclusion, which persist to this day. The violence and crime endemic to the Region compound the challenge. Although this violence is born of long-standing social, economic, and political inequalities, its influence has infiltrated the societies of almost every country in the region, retarding economic and social development, and undermining the confidence of citizens in government and public institutions.

Most vulnerable among the rural poor are those with small landholdings and landless farm workers who live in ecologically fragile areas, such as hillsides and sub-humid, drought- prone lands. Many of these areas lack basic transportation, communication, and social infrastructure. Households in such areas have limited assets and opportunities. They tend to have lower levels of education and larger families, yet have strong communal traditions and cultural values that are not always well understood in the context of the market economy. They are often net purchasers of food, producing primarily for subsistence or the local market. Their productivity has not kept pace with other sectors of the economy, and many see migration as their best opportunity to escape poverty.

1 Analysts acknowledge that new strategies are needed to promote sustainable poverty- reducing economic growth in rural Central America.1 A central theme is that agriculture cannot serve as the sole engine of poverty-reducing rural growth, and that a balanced and integrated multi-sectoral, spatial approach is needed. Such an approach will consider linkages between agricultural and non-agricultural activities, linkages across space, and relationships between household and community actions. Differences in environmental conditions and access to infrastructure and services dictates a differentiated rural strategy that considers differences in household and spatial assets, together with the spread and concentration of formal and informal institutions. The strategy should encourage asset accumulation and be responsive to local conditions.

1.2. Study Objective

The objective of the study is to understand how broad-based economic growth can be stimulated and sustained in rural Central America. The study identifies “drivers” of sustainable rural growth and poverty reduction. Drivers are defined as the assets and combinations of assets needed by different types of households in different geographical areas to take advantage of economic opportunities and improve their well-being over time. The study examines the relative contributions of these assets, and seeks to identify the combinations of productive, social, and location-specific assets that matter most to raise incomes and take advantage of prospects for poverty-reducing growth. By examining the role of assets in achieving development objectives, we can help ensure that policy has a sustainable impact on poverty reduction.

Sub-objectives of the study include to:

• Examine recent changes in well-being for different areas of the country and different population sub-groups. • Describe the asset bases of rural households and understand how assets and combinations of assets contribute to well-being and rural growth potential. • Examine how the Bank’s current portfolio of Environmentally and Socially Sustainable Development (ESSD) and other sector projects can better contribute to improving the asset bases of rural households. • Provide guidance for strategies and investment priorities in Central America.

This study adopts an asset-based conceptual approach. Assets are defined to include natural, physical, financial, human, social, political, institutional, and location-specific assets. The study focuses on how households deploy their assets within the context of policies, institutions, and risks to generate a set of opportunities. Households respond to these opportunities by allocating their assets and selecting livelihood strategies that ultimately determine their well-being outcomes. Assets help determine livelihood strategies, enable better risk management, empower people to participate in political and social life, and have impacts on levels of household well-being, incomes, and future growth potential. Through these outcomes and subsequent investment decisions, the future household asset base is determined.

1 See, for example, de Janvry and Sadoulet (2000); Echeverria (2001a); IFAD 2002; Valdes and Mistiaen (2001). The approach is reflected in the World Bank’s new rural strategy for Central America (World Bank 2002a).

2 The study is not trying to identify particular enterprises (such as cut flowers, broccoli, or snow peas) or sub-sectors (crop, livestock, forestry) that might stimulate growth and poverty reduction. Instead we analyze the quantity, quality, and productivity of assets needed by different household types in different geographical areas to exercise their potential for generating long-term growth and improving well-being. The asset-based approach is well-suited for understanding and analyzing the Honduran rural economy because of the unequal distribution of assets, high exposure to natural, economic and social risks, and ongoing economic, political, and institutional reforms -- all of which influence prospects for rural growth and poverty reduction.

The study's focus on assets is appropriate given historically stark inequalities in the distribution of productive assets among households and geographical areas in the Region. Such inequalities are likely to constrain how the poor share in the benefits of growth, even under appropriate policy regimes. Because of these inequalities, policy and market-based reforms alone cannot quickly level the playing field between the asset poor and those who possess the complementary assets necessary to exploit economic opportunity. The focus on assets also helps delineate public and private roles in building and strengthening asset bases.

Indeed, some growth-oriented investments can bypass poor households and deepen inequalities without targeted interventions to build and strengthen the asset bases of the poor. A critical case in point for the region is agriculture -- often the only livelihood strategy open to low-asset households. Land -- perhaps the most unequally distributed asset of all -- is a key asset for mobilizing other assets that help guarantee subsistence consumption and generate the basis for further income-generating activity. Land concentration limits these mobilization effects. Unless large-scale concentrated holdings are especially absorptive of labor, the allocation of resources will remain inefficient, with low productivity of both land and labor.

1.3. Study Audiences

The primary audience of the study includes: Central America World Bank operational staff and management (ESSD and other sector units); government officials (policymakers and strategy implementers) in national planning and sectoral ministries; management and technical officers from donor organizations working on the rural sector in the Central America countries; and officials from major nongovernmental organizations (NGOs) and farmer groups promoting rural sector growth and poverty reduction.

The secondary audience includes: World Bank staff from LAC and other regions, where the conceptual and analytical approaches may be of relevance; and academicians who are carrying out relevant rural sector analytical studies.

The chapter continues with a presentation of the asset-based conceptual framework employed in the subsequent analyses. The analytical framework used for applying the asset- based approach to Honduras is then presented, with a roadmap outlining major components of the study. These components include a geographical information systems (GIS)-based mapping exercise, an analysis of the determinants of household well-being using two large household surveys, and qualitative analyses of rural livelihoods and three World Bank projects.

3 1.4. The Asset-based Conceptual Framework

The conceptual framework used in this study is anchored to an asset-based approach. 2 The approach provides insights that are particularly appropriate for examining rural poverty and the potential drivers of growth. The framework includes the following components: assets (productive, social, location-specific), the context (policies, institutions and risks), household behavior (livelihood strategies), and outcomes (measures of household well-being). Household and community decisions determine outcomes such as household well-being, environmental preservation, and community prosperity. The welfare-generating potential of assets depends on the asset-context interface. Policy reforms and building of assets need to be considered in tandem (see figure 1.1).

A household’s assets consist of the stock of productive, social, and location-specific resources used to generate well-being3 (see Moser 1998; Siegel and Alwang 1999; Rakodi 1999). Household assets are drawn from individual, household, community, and national and global levels. Assets include human factors such as age, education and family structure; natural capital; physical capital such as land, equipment, and housing; financial assets; location-specific factors such as access to infrastructure and social services; and social, political, and institutional assets that include social and political networks and social inclusion. According to the asset-based framework, the poor are “asset-poor,” have limited assets, hold assets with low welfare- generating potential, or are unable to exploit their assets effectively.

Certain assets are effective only if combined with others; asset complementarity matters. For example, access to high-quality land has different implications for well-being depending on its location relative to markets and other infrastructure, on access to credit, and on high-quality inputs. Education may have markedly different implications for welfare generation depending on location and the functioning of labor markets and related institutions. Good transport and market infrastructure are essential for successful adoption of higher-productivity agricultural technology. Other important determinants of asset productivity include regulatory and legal systems, which determine the security and transferability of assets, and the existence of means of exclusion. These factors are part of the context.

The context in which households operate helps determine the welfare-generating potential of assets and prospects for improved well-being. The political, legal, and regulatory contexts affect how household assets are managed and the extent to which successful livelihood strategies can be undertaken (Zezza and Llambi 2002). Exposure to risk is also a part of the context. Risk has both an intrinsic and instrumental cost. Risk creates fluctuations in

2 See appendix 1 and Siegel (2005) for a more detailed presentation. 3 Natural assets include the quantity and quality of land, water and forest resources, agro-ecological conditions (elevation, slope, climatic factors), and soil conservation investments. Physical assets include durables such as livestock, machinery and equipment, the household’s dwelling and other buildings. Human assets include size and composition of the household, education levels, training and technical assistance received, and ethnicity. Financial assets include savings, credit, transfers (remittances and other cash transfers), and liquid stocks. Social and political assets include membership in various types of organizations, participation in collective action, social and political networks and social inclusion, voting rights, and participation in community, local and national elections. Finally, location-specific assets are related to the geographical location of the household and include access to population centers, markets, roads and public services, and population density.

4 consumption and lowers household well-being. The instrumental cost of risk is due to its impact on household responses. The costs of risk management include lower growth due to risk- avoidance behavior and risk-reducing activities, and costs associated with coping activities (Siegel and Alwang 1999). Domestic and international policies, institutions and markets, and forces of nature shape the context. In response, households allocate their assets and select livelihood strategies to manage risks associated with the prevailing context.

The opportunity set for households to achieve levels of well-being depends on the interface between assets and the prevailing context. Strategic management of household asset portfolios defines its behavior or livelihood strategy (Chambers and Conway 1992; Ellis 1998). Livelihood strategies refer to activities such as land and labor use decisions, investments in education, migration, participation in social capital building and other assets. Asset holdings determine the ability to undertake a given enterprise and the productivity of resources allocated to that enterprise; this ability and the potential returns of the strategy depend also on the context. Livelihood strategies include a range of on- and off-farm agricultural and non-agricultural activities (Berdegue, Reardon, Escobar 2001; Corral and Reardon 2001). In the asset-based approach, asset accumulation and changes in livelihood strategies are important drivers of sustained improvements in well-being.

Ultimately, we are concerned with outcomes that reflect household well-being and prospects for growth over time. The asset-based conceptual framework leads us to consider a variety of measures of household well-being and to use quantitative and qualitative analyses. In addition to income and consumption, poor rural households are concerned about food security, health status, vulnerability in general, empowerment and self-esteem, participation in community affairs, environmental quality, and hopefulness toward the future (Narayan and others 2000).

1.5. Study Analytical Components and Organization of the Report

The asset-based framework is amenable to a number of analytical techniques, but experience shows that simultaneous use of complementary methods deepens understanding of the relationship between assets, policy, and growth potential. This study combines graphical mapping techniques, quantitative household analysis, qualitative analyses of household assets and community livelihoods, and project stocktakings. The combination generates a description of rural space that recognizes the differential effect of policies in different households and regions.

The case study for Honduras has the following components:

Chapter 1: Introduction

Chapter 2: Characterization of the rural economy of Honduras, the policy context, and recent agricultural and rural strategies

Chapter 3: Spatial overview of rural Honduras, using geographical information systems (GIS) techniques and descriptive statistics about household assets and livelihood strategies

5 A number of maps and map overlays are presented; these maps illustrate the distribution of people, economic potential and activities, and well-being outcomes across the rural space. The spatial overview and descriptive statistics provide the foundation for subsequent analyses and interpretation of results.

Chapter 4: Analytical results

• Household-level Analyses: Descriptive statistics and econometric analyses were carried out using household-level data from two surveys to understand the determinants of household income and their linkages to asset endowments and livelihood strategies. Factor and cluster analysis techniques are used to identify and group households according to livelihood strategies. Econometric analysis is used to investigate the determinants of livelihood strategies and factors affecting income.

• Qualitative Analyses: Qualitative livelihoods information at the community level collected as a part of one of the household surveys and is used to complement the quantitative information at the household level. In addition, a series of rapid participatory assessments of a number of ESSD projects were conducted with project beneficiaries to identify assets that are constraining project impacts, and to examine how the context of policies, risks and institutions interact with assets to achieve sustainable poverty-reducing growth.

Chapter 5: Main conclusions and implications for priority setting of investments and other appropriate interventions.

6 Figure 1.1. The Asset-based Approach: Assets, Livelihood Strategies and Well-Being Outcomes

Assets… .….within a given context …determine the opportunity set Productive assets Social assets Location assets o Policies and institutions Risks o Natural o Social o Access to o Macroeconomic and trade o Price and market resources (private and networks infrastructure and f policies risk commons) o Political services o Sectoral policies and o Droughts and o Human capital networks (human o Distance to urban institutions floods (education, skills, rights, participation centers O o Political and market health status, in political o Agro-ecological liberalization, decentralization, o Natural disasters household decisions) zone (soil quality, P privatization Diseases and pests composition) climatic conditions) o Legal and regulatory o of animals and plants o Physical capital T systems, property rights and (equipment, housing, contracts o Human diseases transport) I o Human rights, labor laws Physical insecurity o Financial o National and local o capital (savings, O governments and institutions o Discrimination stocks of grains and o Private sector development livestock, access to ÏÏÏ N in factor and product markets credit) o Social protection and safety S nets Well-being outcomes …ÍÍÍ for Livelihood strategies (behavior) o Income and consumption o Self-esteem o On-farm activities agricultural activities o Savings o Leisure and recreation o Off-farm agricultural, non-agricultural activities o Food security o Empowerment o Commercial activities, microenterprise o Health and nutritional o Environmental quality o Migration, receipt of remittances status o Hopefulness about the future o Activities to strengthen social, environmental assets o Participation in social assistance and safety nets

7 Chapter 2. Characterization of the Honduran Rural Economy and Policy Directions

Chapter 2 presents a characterization of the rural economy of Honduras and the policy context. It includes a descriptive analysis of key sectoral issues and policies employed to combat rural poverty.

2.1. Overview of Socio-Economic Indicators for Honduras

Honduras has about 6.5 million people. Its population growth rate of 2.6 percent is relatively high (table 2.1). About half of the people reside in rural areas. It is a multi-cultural, multi-ethnic, and multi-lingual society. Nine recognized ethnic groups account for about 15 percent of the population (Traa-Valarezo and Rodríguez 2003). Honduras is one of the poorest and most unequal countries in the Latin America and Caribbean region. Per capita income is low and social indicators such as malnutrition rates, life expectancy, infant and maternal mortality rates, average education, and literacy are among the poorest in the Central American region. It is a Highly Indebted Poor Country and prepared a Poverty Reduction Strategy Paper (PRSP) in 2001. Poverty reduction and improvement of social indicators are the Government’s primary strategic objectives (GoH 2003).

Table 2.1. Select Data for Central American Countries, 2000 Population Population Rural Per capita Agriculture Life (million) growth (%) Population GNI share of expectancy (%0 (US$) GDP (%) (years) Costa Rica 3.8 1.6 42 3,820 11 77 El Salvador 6.3 2.0 40 2,000 10 70 Guatemala 11.4 2.6 60 1,700 23 65 Honduras 6.4 2.6 48 860 16 66 Nicaragua 5.1 2.6 45 370 32 69 Source: World Bank, World Development Indicators database. (www.worldbank.org/data/countrydata/aag/hnd_aag.pdf)

Poor growth performance is not a recent phenomenon, as the country has been lagging behind most of its Central American neighbors since the early 1960s. Honduras’ average annual rate of per capita economic growth was only 0.8 percent over the period 1960--2000. Over the same period, agricultural GDP has lagged population growth by 1 percent per year on average (World Bank 2000a; Government of Honduras 2004). During the same period, the distribution of income in rural areas has worsened (figure 2.1). Since 2000, the country has experienced a major economic crisis, as evidenced by relatively high inflation, declining agricultural incomes, falling real wages, and high unemployment.

Rural growth and poverty reduction have been constrained by a series of recent shocks. The decline in international commodity prices for major export crops such as coffee and bananas have severely impacted resource-poor farmers and agricultural laborers. The global economic slowdown has exacerbated problems of unemployment. Negative economic impacts have

8 resulted from natural shocks including Hurricane Mitch,4 destructive and erratic rainfall,5 and recurrent droughts.

Figure 2.1. Change in Income Distribution in Rural Areas, 1993--2003

Source: Encuesta Permanente de Hogares, 1988 & 2001

4 Hurricane Mitch hit the country from October 25 to November 1, 1998, causing 5,600 deaths and about $4 to $5 billion in damage. Impacts on infrastructure, the destruction of vast agricultural areas, and estimated crop losses of $1 billion affected as much as 35 percent of the rural population (Meltzer 2001). 5 For example, tropical storm Michelle affected Honduras in the fall of 2001.

9 2.2. Overview of Rural Conditions

In 2000, agriculture accounted for 16 percent of GDP (down from 24 percent in 1980), 40 percent of export earnings (75 percent in 1980), and 31 percent of the labor force (57 percent in 1980). About 80 percent of the rural population lives in areas classified as hillsides (see Díaz Arrivillaga 1996; UNDP 1998; and IICA 1999) (see also box 2.1). The majority of these people earn their living from agriculture sector, as laborers or from small landholdings.

Box 2.1. Defining ‘Hillsides’, ‘Hillside Areas’ and ‘Valleys’

‘Hillsides’ are areas with slopes of more than 12 percent. ‘Hillside areas’ also include flat- floored valleys, 300 to 900 meters in elevation that are scattered throughout the interior hillsides. ‘Valleys’ refer mainly to the lowland areas in the north and northwest of the country, which are generally considered as high-potential areas for agriculture. In Honduras, hillside areas account for roughly 80 percent of the total land area. Agricultural potential in hillside areas varies with agro-ecological factors such as elevation, rainfall, soil quality and fertility. However, compared to areas with lower slope and elevation, agricultural options in hillside areas are constrained. Hillside areas have less access to transport infrastructure and services.

Rural Honduras has relatively fewer non-agricultural activities compared to other Central American countries.6 Non-agricultural rural activities are most common in areas located near the industrial corridor in the north of the country and near the capital city of Tegucigalpa, all of which have relatively better infrastructure than other rural areas (Cuellar 2003).

Poverty estimates for Honduras (Munoz and Meza Palma 2000) are questionable because of the lack of an in-depth statistically representative national household survey (see also appendix 2). Official estimates place poverty at 66 percent at the national level and 75 percent in rural areas (SAG 2004). ECLAC (cited in Serna Hidalgo 2003) estimates the 1999 rural poverty rate to be 82 percent, with about three-quarters of rural households in extreme poverty. According to 2002 IFPRI survey data, over 90 percent of the hillside population live on less than $1 a day (Jansen, Damon, Pender, and Schipper 2003a). Estimates of rural poverty from the 2001 Population Census (INE 2002) are close to the ECLAC and IFPRI estimates. Food insecurity is also pervasive in rural areas (GoH/WFP 2003).

Strong evidence exists of high rural poverty rates and particularly high rates in hillside areas. In contrast to the concentration of poverty in hillside areas, most rural areas with lower poverty incidence are located in the so-called “T of Development.” This area comprises 55 counties (municipios) located along the fertile north coast and the central corridor, connecting the capital city of Tegucigalpa in the south and San Pedro Sula, the industrial center of the country in the north. The “T of Development” is the agricultural and industrial center of the country. The allocation of public investments has traditionally been highly skewed toward these areas (GoH 2004, p. 7).

6 Non-agricultural rural income in Honduras accounts for 22 percent of total rural income, compared to 60 percent in Costa Rica, 42 percent in Nicaragua, and 38 percent in El Salvador (Reardon, Berdegue, and Escobar 2001).

10

More than 80 percent of Honduras’ land area is legally classified as forestland, with the majority being public forest land. About 42 percent of the country’s forestlands have been deforested and forest degradation processes affect a significant percentage of the remaining forest areas.7 Forest resources are being lost at a rate estimated to be greater than 800 km2 per year. The bulk of the remaining forests are concentrated in the central and eastern regions where 44,750 km2 of forest, representing about 80 percent of the country’s existing forest resources are found. These two regions also contain 60 percent of the country’s deforested lands. Percentage- wise, the western and southern regions of the country are the most deforested (SAG 2004; GoH 2004). The population in forestlands is overwhelmingly poor. PRONADERS (2000) estimates that the poverty rate is 93 percent in forested areas. Between 250,000 and 350,000 households are estimated to live in forestlands, representing from one-third to one-half of the rural population.

Coverage of basic social and physical infrastructure in rural areas expanded significantly in the 1990s (World Bank 2000c). Major gaps in coverage persist, especially in hillside areas. Only 20 percent of the road network consists of paved roads, and many rural communities are isolated from major roads, especially during the rainy season when roads are impassable. About 70 percent of the rural population is covered by water and sanitation, but the quality and efficiency of these services are low. Electricity coverage in rural areas is 36 percent, compared to 95 percent in urban areas (INE 2003b). Honduras has about 100 telephone lines per 1,000 people, but since about half of these are mobile phones, which are mostly found in cities, coverage in rural areas is much less and largely stagnant. Honduras’ health infrastructure remains insufficient, as evidenced by relatively high rates of child malnutrition (17 percent), high child mortality (32 per 1000 births), and relatively low life expectancy at birth (66 years). Again these indicators are probably worse in rural than in urban areas.

2.3. Macro-Economic and Agricultural Sector Policies and Reforms

Like most other Central American countries, Honduras has adopted a range of structural adjustment and macroeconomic stabilization programs that continue today. Beginning in the early 1990s, Honduras gradually replaced its traditional economic import substitution model by an export growth-led model focused on market and trade liberalization. Major elements of the reform process included reduction of trade barriers and protection of domestic manufacturers, more flexible exchange rate arrangements, financial market liberalization, adjustments of public utility tariffs, and development of a legal framework to strengthen property rights.8

Agricultural sector policy reforms were implemented in the 1990s, notably a much- reduced public role, with reductions in public sector institutions such as agricultural extension.9

7 Among the principal causes of deforestation and forest degradation are: conversion for agriculture and livestock; unmanaged exploitation for domestic uses such as fuel wood; fire; and irrational and illegal logging. The problem is magnified by the limited effectiveness of the State Forest Administration (AFE-COHDEFOR), which currently is being restructured and reformed. 8 See Pino, Jimenez, and Thorpe 1994; World Bank 1994; Thorpe and others 1995; ASIES 1996; UNDP 1998; Walker and Oviedo 2000. 9 The Government extension system was privatized in 1992, when DICTA (Science and Technology Directorate for the Agricultural Sector) was created. Limited private services have emerged, but hillside areas are underserved. For

11 In addition, after more than three decades of heavy government intervention in support of land distribution and rural credit provision, a number of land market liberalization initiatives were introduced (see box 2.2). Meanwhile, rural interest rates were liberalized in an effort to stimulate commercial bank lending.10 Direct support measures such as consumer subsidies on staple foods (which had a regressive effect since they mostly benefited better-off urban dwellers) and guaranteed producer prices were gradually abolished, culminating in the elimination of the former Institute of Agricultural Marketing. Distortions in the markets of traditional export commodities (such as taxes on coffee and banana exports) were (partially) corrected.

Box 2.2. Land Issues in Honduras

For families living in rural areas, absence of or limited security and access to basic natural

resources, particularly land and forests, are widely regarded as critical constraints to improved well-being. Tenure insecurity is a major source of social instability (GoH 2001). A major structural cause of rural poverty is the lack of access to land by as many as 250,000 rural poor families. These families also lack technical services to make the land more productive.

Only about 30 percent of the estimated 2.6 million land parcels in the country are registered in the property registry. A recent study estimated the total value of these extra-legal assets amounts to be about US$12 billion. Failure to use even a fraction of these assets to mobilize credit is a key source of stagnation and inequality. The historical land claims of indigenous and Afro- Honduran communities further complicate the land rights issue, and are still to be adequately addressed.

Land reform and land titling have been major policy objectives in Honduras for the last several decades. Despite past attempts to transfer underutilized private and public land to minifundistas (households with less than 1 ha of land) and the landless, the country is characterized by highly skewed land distribution. About 70 percent of landowners hold 10 percent of land in farms, while a little over 1 percent of farmers hold as much as 25 percent. In addition, most land under 5 ha is not titled. Most smallholders are not eligible for titling because they work borrowed land under informal, short-term agreements, or because they occupy plots in public lands ineligible for titling. Tenure security is closely related to landholding size: whereas only 42 percent of all farms below 5 ha have secure tenure, about 75 percent of farms with greater than 50 ha are titled. IFPRI data suggest that only 25 percent of all parcels in hillside areas have secure tenure

(Jansen, Rodriquez, Damon, and Pender 2003a). The fact that the majority of Honduras’ land area is classified as public lands complicates the land access and tenure security situation. (Continuous in next page.)

example, the Fund for Technical Assistance to Hillside Farmers provides technical assistance, but coverage is limited to about 6,000 households in the provinces of Yoro, Olancho and Francisco Morazán (Hanson and others 2003). 10 These measures included strengthening individual property rights to land, extending titling efforts, including the privatization of cooperative lands, activating land rental markets and private credit markets, and removing government from all direct land redistribution efforts that did not involve market mechanisms. For details see Boucher, Barham, and Carter (2002).

12 In recent years, the Government has taken important steps to address many of the above mentioned issues. For example, the country has undertaken serious efforts to modernize the land administration system, target the land titling program to the large number of settlers in frontier areas, and title indigenous communities and recognize parts of ancestral domains. The recent land administration modernization programs (CMAT) and PATH (Land Administration Program) provide a secure basis for land titling and functioning of land markets, with

complementary donor activities. Some private financial institutions have successfully experimented with land purchase schemes under the Pilot Land Access Program; these are being expanded.

Along with macroeconomic and sectoral reforms, a process of decentralization began in the early 1990s. The decentralization process transferred budgetary authority to municipal governments and shifted responsibility for public forest management and protection of natural resources to municipalities. The government also gave up its monopoly in timber exports. Implementation of decentralization has been slow and forestry sector reforms are far from being completed.

2.4. Agricultural Sector Importance and Trends

Growth in the agricultural sector lagged behind other sectors in the 1990s (table 2.2). In terms of value added, crop production has dominated the agricultural sector since the 1980s, with about two-thirds of gross value added. Livestock, poultry and forestry each has about a one-tenth share, while maize has less than one-tenth (table 3.1 in appendix 3). Agricultural exports account for a major share of total exports, although this share declined from about 75 percent during the 1980s to about 50 percent since the mid-1990s (table 2.3). Coffee exports alone have historically accounted for more than 25 percent of total exports. Since the 1980s, the terms of trade for most agricultural products have declined (Walker and Pino 2002). New CAFTA agreements will undoubtedly have an impact on agricultural production patterns and trade.

Table 2.2. GDP Shares and Growth Rates, 1981—2001 GDP % shares GDP annual % growth rates 1981 1991 2001 1981--91 1991--2001 Agriculture 22.4 22.7 13.7 3.1 1.7 Manufacturing 22.9 27.3 31.6 3.4 3.5 Services 54.7 50.0 54.7 2.6 3.7 Source: World Bank (2003a).

Table 2.3. Agricultural Share of Exports and Agricultural Balance of Trade 1979--81 1989--91 1998 1999 2000 2001 Total exports (US$millions) 789 831 1533 1164 1370 1311 Agricultural exports (US$ 588 627 742 440 379 645 millions) % share agricultural exports 75% 75% 48% 38% 28% 49% Agricultural imports (US$ 146 111 314 431 400 413 millions) Balance of agricultural trade 442 516 428 9 -21 232 (US$ millions) Source: FAOSTATS.

13 In contrast to the slow growth of agriculture and its declining share of GDP and exports, major increases have taken place in the economic importance of maquilas and remittances. Remittances from abroad during 2002 to 2004 averaged about $800 million, or more than 10 percent of total GDP (Cáceres 2003; IDB 2003; World Bank 2003a). Remittances continue to show strong increases and are now the largest source of foreign exchange. Revenues generated by maquilas are about USD 600 million per year.

The importance of non-traditional agricultural exports also grew dramatically during the past decade. Despite their increase from $87 million in 1990 to $248 million in 2000, non- traditional export crops have not been able to compensate for large losses in revenues caused by the declines in traditional coffee and banana exports.11 The most important non-traditional exports are oil of palm, melon, pineapple, vegetables and fishery products. It is estimated that the non-traditional agricultural sector generates at least 100,000 jobs (RUTA 1998).

Coffee has been an extremely important product for rural areas, accounting for about one- quarter of the rural labor force, with 90,000 (mostly small sized) coffee producers and 300,000 laborers. Much of the expansion since the 1950s in coffee production was by small producers in hillside areas responding to a land titling program, favorable prices, and government support (Ruben and van den Berg 2001; Munroe, Southworth, and Tucker 2002). Because of coffee’s importance to the Honduran economy, the sharp decline in prices has had major impacts on rural employment and incomes and exports (table 2.4).12 Government revenues have also been negatively impacted. Honduras’ coffee revenues in 2003 were just over half of those in 1998.

Table 2.4. Select Indicators on the Coffee Sector in Central American Countries, 2000 Country % No. of No. of % rural Estimated reduction in labor Exports producers labor labor force income ($ millions) force Costa Rica 5% 73,000 200,000 28% 12.7 El Salvador 11% 24,000 160,000 17% 16.3 Guatemala 21% 63,000 700,000 31% 62.0 Honduras 26% 90,000 300,000 26% 36.7 Nicaragua 27% 30,000 280,000 42% 10.7 Source: Varangis and others (2003).

The profitability of agriculture has been negatively impacted by deteriorating terms of trade. The deterioration resulted from declining international commodity prices (particularly coffee, banana and shrimp), appreciation of the real exchange rate,13 and lowering of import duties. The negative pressure on the profitability of agriculture began in the early 1980s, but became particularly severe after 1995. Damages related to Hurricane Mitch, recurrent droughts and other climatic factors have exacerbated the situation. To date, agricultural diversification has

11 For example, in 2000--2001 Honduras earned $345 million from coffee, but this figure dropped to $167 million a year later. 12 Compared to the other Central American countries, Honduras has the highest proportion of coffee production by small producers, mostly with less than 2 ha (Varangis and others 2003). 13 Appreciation of the exchange rate (about 50 percent between 1990 and 2001) was mainly caused by the surge in maquila operations, increasing remittances from abroad, and large inflows of aid after Hurricane Mitch.

14 failed to counter the continuing decrease in its terms of trade. The latter and the loss in purchasing power by rural households (see table 3.2 in appendix 3) have had a negative impact on the well-being of the rural population. Low prices of basic grains and coffee have negatively affected the profitability of agriculture, with farmers losing about a third of their purchasing power over the past 20 years or so (Jansen and others 2002). It thus seems that: “… the liberalized agrarian economy of Honduras shows little sign of operating in the pro-poor fashion that some have hypothesized” (Barham, Carter, and Deininger 2002).

2.5. Pro-Poor Agricultural and Rural Strategies

The recent Poverty Reduction Strategy Paper (PRSP) and World Bank’s Country Assistance Strategy (CAS) recognize the importance of agricultural and rural growth to rural poverty reduction. The PRSP has six pillars, many of which address rural development issues: accelerating equitable and sustainable growth; reducing rural poverty; reducing urban poverty; enhancing investment in human capital; strengthening social protection for vulnerable groups; and ensuring sustainability through governance/institutional reforms and enhanced environmental sustainability.

The strategy for rural poverty reduction laid out in the PRSP includes three main components (GoH 2001):

• Improve access to land. Expand existing land regularization programs targeting small independent farmers, strengthen land rights of indigenous and Afro/Honduran groups, complete the nationwide agrarian and forest cadastre, implement a rural property registry, develop programs to provide poor rural landless with access to productive lands, and recognize traditional rights and usufruct on public lands. Special attention to ensure property rights of women is called for.

• Promote sustainable development in priority areas. Extend and broaden the National Program for Sustainable Rural Development (PRONADERS). PRONADERS is part of the Secretary of Agriculture and Livestock (SAG) and coordinates projects targeted at smallholders in hillside areas to increase productivity through improved natural resource management, crop diversification, quality improvements and production and marketing support services. In addition, PRONADERS promotes diversification of income sources: for example, through forestry schemes and tourism development in the coastal areas and the Copán Valley.

• Improve rural infrastructure. Further rebuild rural roads and bridges damaged by Hurricane Mitch, increase micro-irrigation schemes, and expand rural electrification, develop campesino enterprises through business and technical training for small rural entrepreneurs, provide private technical services (extension, training, research), and improve access to credit.

The Government of Honduras recently released an Agricultural and Rural Development Strategy (ARDS) for 2004--2021 (box 2.3). The result of a lengthy consultative process, the new ARDS focuses on achieving two overarching goals: poverty reduction and enhanced

15 competitiveness. The ARDS explicitly calls for developing smallholder agriculture; recognizes the heterogeneity of smallholder agriculture in the hillsides; emphasizes the urgency of improving the competitiveness of smallholders in view of the changing external environment; underlines the importance of improving agricultural product quality and market chains of smallholder production; and calls for increased public-private partnerships.

The government’s policy vision regarding rural development makes a clear difference between households located in the lowlands and households located in the hillsides. For the former, the focus is on development of their productive capacity, improving market links and competitiveness. For the latter, the focus is on diversification, household food security and community agro-forestry options.

Box 2.3. Honduras Agricultural Rural Development Strategy 2004

Key elements of the Honduras Agricultural and Rural Development Strategy (ARDS) are:

Improved Agricultural Production and Marketing • Develop markets and commercial capacities: (i) Strengthen competitiveness and competition in national markets (ii) Stimulate exports by improved market information and simplification of export

procedures

• Improve agricultural input (seed, agri-chemical) and output sanitation and safety standards • Develop and adopt new technologies and value-added activities • Provide agricultural education, capacity building, training including agro-enterprises • Improve access to rural finance, attraction of investments, and risk management • Invest in rural infrastructure and irrigation. • Improve natural resource management to enhance sustainability • Improve access to land, legal framework and processes, and social equality/inclusion.

Promote Campesino Agriculture and Gender Equality • Strengthen policies and programs aimed at campesino farmers • Integrate gender considerations in policies and programs.

Institutional Reform and Capacity Building • Reform the Secretariat for Agriculture and Livestock • Strengthen capacity within Secretariat, among stakeholders, and improve ability to conduct consultations and dialogue.

Source: SAG (2004).

Forestry in Honduras is considered a key subsector of agriculture. The ARDS contains provisions aimed at improving the forestry sector and a new Forestry Law was recently submitted to Congress. Policy goals for the forest sector that most directly support the PRSP include:

• Poverty reduction – through regularization of the traditional rights of populations in and near public forest lands, increasing employment and income of rural poor from

16 participation in public and private forestry activities, increasing productive opportunities and investments, and development of payment schemes of environmental services.

• Community participation – in decision making, in the process of regularization of the traditional rights of populations in forest lands, and through Community Forestry programs aimed at promoting and developing productive activities.

• Sustainable forest management – based on forest and environmental management planning and implementation and an ecosystems focus to guide investment such that benefits from productive activities can be sustained while protecting critical areas and ecosystem services. • Forest fire control – by mainstreaming forest fire prevention and control among the many local and regional actors and public agencies in order to more effectively tackle this large and complex problem.

• Development of local capacity – among municipal governments and communities to exercise their rights and meet their social responsibilities.

To date, most GOH efforts at poverty reduction in forestlands have shown little result. Among the principal reasons for this have been: (i) the uncertain and conflictive nature of land tenure in public forest lands preventing effective public and private investment and forest management; (ii) low priority given to the systematic provision of support for production systems, such as infrastructure, technical assistance, irrigation, training and access to markets, and credit; (iii) an overly rigid, top-down command and control forest regulatory framework that, while seeking to ensure appropriate management, has had the opposite effect by creating disincentives and encouraging illegal behavior; (iv) undue discretionality and lack of transparency in the management of public forest, leading to serious forest governance problems and limiting private investment; (v) a diffuse and confusing policy and legal framework, which is a major impediment to encouraging private investment and community-driven approaches to sharing the potential benefits of the forestry subsector; and (vi) public policies which have implicitly directed the State Forest Agency’s (AFE-COHDEFOR) attention toward generating income from timber extraction sales, rather than promoting needed forest and environmental management, regulation, and communal forestry-based poverty alleviation programs.

A mix of major legislative reforms have been sought by the current administration regarding national territorial planning (approved by the National Congress in 2003), a property rights law (approved by Congress in 2004), and a forestry law (currently being debated within Congress). Government has been in the process for some three years of attempting to reform the Forest Law and, since the last nine months, to restructure and reform the state forest agency.

17 Chapter 3. Spatial Analysis of the Rural Sector in Honduras

Chapter 3 presents a spatial overview of rural Honduras, using national GIS data and descriptive statistics from two recent household surveys. It also presents findings on household and community assets from livelihood studies carried out in communities where the household surveys were conducted. Maps and map overlays are presented; these maps illustrate the distribution of people, economic potential and activities, and well-being outcomes across the rural space (see appendix 4 for further details). Rural Honduras is characterized by substantial heterogeneity in economic potential and performance of sub-regions. Part of this heterogeneity is due to inherent differences in topography and agro-ecological conditions, and part is due to historical decisions to steer public investments toward more favored areas. The spatial overview and descriptive statistics provide the foundation for subsequent analyses and interpretation of results.

3.1. Spatial Overview

The spatial overview in this section sets the stage for the more in-depth household analysis in the subsequent chapter. The analysis begins by showing the spatial distribution of population compared to the distribution of transportation infrastructure. As expected, more densely populated areas are also those areas with better road infrastructure. We compare these distributions with the spatial distribution of agricultural potential and derive zones of economic growth potential. We examine the spatial distribution of outcomes in terms of poverty and food insecurity to understand the spatial relationship between population density, growth potential and these outcomes.14

Honduras is the second largest country in Central America, with a land area of about 112,000 km2 (figure 3.1). 15 Except for the eastern province of Gracias a Dios, the country is almost entirely mountainous. About 80 percent of the country’s western land area consists of interior highlands or hillside areas, with the remaining 20 percent classified as lowland valleys (figure 3.2). Within the interior highlands, numerous flat-floored valleys are mainly used for extensive livestock operations. Hillside areas are dominated by subsistence agriculture and staple food production and are characterized by small landholdings, low levels of technology, and low productivity.

Honduras has a relatively low population density of 58 people/km2, but given the mountainous nature of the country, the number of people per unit of arable land is much higher. About half the population is classified as urban. The capital city of Tegucigalpa, together with the industrial center of San Pedro Sula, account for nearly half of urban residents. The four other population centers with more than 100,000 inhabitants are distributed unevenly across the country (figure 3.3). As a result, access to urban markets and services is limited for most of the interior hillside areas, where an estimated 80 percent of the rural population lives. The most

14 Data for this section’s analysis come from a variety of sources, notably the Sistema Nacional de Información Territorial (SINIT) and InfoAgro, the SAG’s GIS unit. These data are supplemented with data from the 1988 and 2001 population censuses, and maps from the vulnerability assessment conducted by the World Food Program (WFP). See appendix 4 for more details. 15 This section benefited from a background paper prepared by Jeff Alwang and David Wooddall-Gainey (2004).

18 densely populated hillside areas include the Western border with Guatemala and the Southwestern border with El Salvador (figure 3.4), but rural population densities vary enormously across and within counties.

Population changes are largely driven by economic potential with movement towards urban area and the Northern Coastal area

Population change between the 1988 and 2001 censuses did not follow a uniform spatial pattern (table 3.1 and figure 3.5). Urban areas grew faster than rural areas, and growth was particularly high in areas near Tegucigalpa and San Pedro Sula. Eastern areas also grew at rates much faster than the national average, mostly due to their low base of population in 1988 and increasing in-migration from other areas. Population in most hillside areas also increased substantially between 1988 and 2001, but some areas experienced much lower growth or even population decline. For example, areas in the provinces of Choluteca and Lempira have lost people, mostly due to migration towards the industrial valley in Cortés and to the agricultural frontier in the northeast (Colón and Gracias a Dios). Coffee-producing areas near El Paraiso and Morazan and near the Guatemalan border grew more slowly than the national average, probably due to impacts of the coffee crisis.

Table 3.1. Population Change and Density by Province, 1994--2002 Population (‘000) Province 1988 2001 Annual growth, Population density 1988--2001 2001 (persons/km2) Atlántida 238.7 344.1 2.9 78.7 Colón 149.7 246.7 3.9 29.9 Comayagua 239.9 352.9 3.0 68.9 Copán 219.5 288.8 2.1 89.0 Cortés 662.8 1202.5 4.7 306.5 Choluteca 295.5 390.8 2.2 89.6 El Paraíso 254.3 350.1 2.5 46.7 Francisco Morazán 828.3 1180.7 2.8 137.0 Gracias a Dios 35.0 67.4 5.2 4.0 Intibucá 124.7 179.9 2.9 57.6 Islas de la Bahía 22.1 38.1 4.3 161.4 La Paz 105.9 156.6 3.1 62.0 Lempira 177.1 250.1 2.7 59.2 Ocotepeque 74.3 108.0 2.9 6.6 Olancho 283.9 419.6 3.1 17.6 Santa Bárbara 278.9 342.1 1.6 68.0 Valle 120.0 151.8 1.8 91.2 Yoro 333.5 465.4 2.6 59.8 Total Honduras 4443.7 6535.3 3.0 58.0 Source: Population Censuses 1988 and 2001; IGN (1996); and authors’ calculations.

19 Internal temporary migration has also historically been an important livelihood strategy in Honduras. Most migrants have left rural areas in the southwestern parts of the country, where land is of poor quality and the supply of basic services has been most limited (World Bank 1994).16

Most major roads follow the valleys between Tegucigalpa and San Pedro Sula (figure 3.3). Other major road networks head south out of Tegucigalpa to the Gulf of Fonseca near Choluteca, and eastward through the coffee-producing areas near El Paraíso. Areas of low population density in the east are, as expected, underserved by transportation infrastructure; Gracias a Dios has no major highways. The road network in hillside areas is generally much less well developed than in the valleys, but road densities throughout rural areas are variable. The eastern half of Honduras has very low road densities, while the western half has higher densities (figure 3.6). This result mirrors the distribution of population and shows a constraint to growth in the east due to lack of infrastructure.

Economic potential has a strong spatial pattern, with high potential areas close to the main cities and along the Northern Coast

Public investments in human and physical assets in Honduras have been skewed towards the 55 counties in the “T of Development.” These counties also have relatively good natural capital, so investments there are based on growth potential. Outside the T, public investments (particularly road networks and other infrastructure) have been concentrated where agro- ecological conditions are favorable for export agriculture such as coffee (concentrated on small and medium-sized farms in the west) and bananas (mostly on large plantations in northern valleys). Most other rural areas, the hillsides in particular, are excluded from the T of Development. While this policy may have been rational to the extent that investments in physical assets were needed to exploit comparative advantages in areas with favorable natural assets, it has also resulted in poverty being highest and deepest outside the T.

Rural poverty is deep and widespread throughout much of Honduras

Although Honduras does not have a detailed nationally representative household expenditure survey, which is the preferred means of measuring poverty, the Encuesta Permanente de Hogares has been used by the Honduran National Statistics Institute (INE) to create a poverty map (INE, 2003a and figure 3.4 but see appendix 2 for observations related to INE’s poverty calculations). Poverty rates are only weakly associated with lack of access to transport infrastructure. Highest poverty rates are found along the southwestern border with El Salvador, the far-western Copán area, along the southeastern border with Nicaragua, in the east, and in the north-central region. Many of these areas are relatively well served by transportation, especially Copan and Intibucá, which produce significant quantities of coffee. The east is clearly underserved by transport infrastructure, but while poverty rates are high there, the very low density of population ensures that poverty densities, or poor people per square kilometer, are low.

16 The World Bank (1994) estimates that about one-fifth of the labor force consisted of internal migrants, mostly from Copán, Lempira, La Paz, Ocotepeque, and Santa Barbara.

20 Despite good economic potential in parts of the country, measures of well-being in these areas are lagging far behind potential

High poverty areas along the Guatemalan and Salvadoran borders in western and southwestern Honduras represent somewhat of a conundrum. These areas have relatively high access to infrastructure and agricultural potential (e.g., in coffee producing areas), but also relatively high rates of poverty. In particular, the Copán area has substantial tourism potential, but despite good “locational” conditions, measures of well being are lagging far behind potential. Persistent high rates of poverty show that this potential is not being realized -- and the extent that it is being realized, the poor are not participating. Despite high population density and proximity to major road networks, lack of feeder roads within these mountainous counties increases transaction costs and makes it difficult for poor households to participate in the market economy, causing high poverty in the region.

Population densities tend to decline as one moves away from the major urban centers of Tegucigalpa and San Pedro Sula. Patterns in changes in poverty rates are not quite uniform. As noted in companion reports for Nicaragua and Guatemala, differences may exist between high poverty rate areas and high poverty density areas, which have implications for targeting of investments17. In Nicaragua, for example, areas with high poverty rates are distant from Managua, in areas where population densities are low. Targeting such areas, although minimizing leakages to the non-poor, would bypass most of the poor, since most of them live near Managua (poverty densities there are high). A different pattern exists in Guatemala, where poverty rates and population densities are highest in the Western Altiplano, leading to spatial coincidence between high poverty rate and high poverty densities.

Hillside areas have both high poverty rates and high poverty densities Most hillside areas in Honduras show both high rates of poverty and high population densities (leading to high poverty density). Most of the hillside areas are not suitable for intensive agriculture. Because of high population densities, however, these areas are used for staple food production leading to increasing degradation of natural resources, particularly soil, forests, and water (Kok 2001; Pender, Scherr, and Duron 2001; Jansen and others 2005). However, conditions are not uniform in all these areas. Their agricultural potential varies with agro-ecological factors such as elevation, rainfall, soil quality and fertility. However, compared to areas with lower slope and elevation, agricultural options in hillside areas are constrained. Hillside areas tend to have less access to transport infrastructure and services.

The World Food Program (WFP), together with the Government of Honduras, recently published a set of maps to reflect dimensions of food insecurity (GoH/WFP 2003). The maps show agro-ecological and socio-economic factors influencing food availability and affordability for households.18 Hillside areas in the western and central part of the country, and eastern areas

17 The poverty density is the number of poor per unit of land area. The poverty rate is the number of poor in an area divided by the area’s total population. 18 The factors and their weights are: per capita income (22 percent), education level (22 percent), household dependency ratio (22 percent), road density (16 percent), gender of household head (14 percent), and land area under permanent crops (3 percent). These factors were identified in previous studies and are key factors in our subsequent household data analyses.

21 are mostly classified as very highly or highly vulnerable to food insecurity. Most areas of Honduras face very high or high climatic risks.19 Hillside areas in the west and south, where poverty density is relatively high, contain most of the very high-risk areas.

The high degree of overlap between high poverty rates and high poverty densities in some areas means that investments there should reach significant proportions of the country’s rural poor

The western areas around Copán, the southern areas in Valle and Choluteca, and the Province of Comayagua have both high poverty rates and high poverty densities. By targeting these areas, significant proportions of the rural poor can be reached20. The problem of leakages to the non-poor is minimized because poverty rates there are high. The geographic correspondence between high poverty rates and high poverty density means that there is little tradeoff in targeting high poverty areas for poverty-reducing interventions. But several of these areas have good-quality infrastructure and access to markets. They would be good candidates for poverty-reducing investments.

Poverty rates are high, but densities much lower in eastern Honduras

Low population densities in the eastern part of the country lead to much lower poverty densities. Here we see a tradeoff between poverty rates and poverty densities. Because of the high poverty rates in some of these counties, investments do not need complicated targeting mechanisms; leakages to the non-poor are reduced in areas with higher rates of poverty. On the other hand, because population densities are low, investments should be spatially targeted to specific population clusters, or the types of investments should be selected based on low per unit costs of delivery over space. For example, investments like health-related services should obviously be targeted to population clusters. Others, such as education should be located to guarantee a reasonable degree of access, even in low population density areas.

In summary, rural poverty is deep and widespread throughout much of the rural space in Honduras. It is, however, possible to identify areas where poverty rates and densities are particularly high. These include the western and south-western areas in Copán, Intibucá, Lempira and La Paz; the southern areas in Valle and Choluteca, and the central province of Comayagua. Poverty rates are high, but densities are much lower in eastern Honduras (especially Gracias a Dios). By targeting areas with high poverty rates and density, it is possible that higher absolute numbers of poor can be assisted at a lower cost per household. This study does not advocate targeting high poverty rate and population density areas at the expense of areas with high poverty rate and low population density, or vice versa. But based on data availability, the study focuses on the most densely populated areas with very high rates of rural poverty. The final section in this chapter is devoted to a description of household asset bases in rural Honduras and rural income levels that result from the use of their asset portfolios.

19 The factors are: vegetative cover (16 percent), erosion potential (30 percent), desertification index (25 percent), population facing drought risk (3 percent), population facing flood risk (19 percent), and population using soil conservation practices (6 percent). 20 Because of the absence of high-quality representative consumption data, it is really impossible to provide accurate estimates of the number of poor people in any area.

22

3.2. Descriptive Analysis of Household Assets

The study uses data from two household-level surveys (box 3.1) to describe households’ assets and livelihood strategies, and examine how they differ between poor and less poor households. The descriptive statistics combine data from the two surveys, whereas the econometric analyses keep data from the two surveys separate.21

Box 3.1. Household Survey Data

In Honduras, a household-level data set does not exist that is representative for the entire country while also providing sufficient and reliable information that allows the kind of detailed income and asset-based analyses required for this study. For example, while INE’s 2003 permanent household survey covers 8,000 households and is statistically representative at the country level, it has far too little detail to apply to the asset-based approach. Other available household-level data sets, such as those at EAP Zamorano, have very limited geographical coverage and were never properly cleaned. Others, such as FAO’s farm-level data sets for Lempira, are of good quality but also short on required detail and especially geographical coverage.

Consequently, the household-level analyses in this study are based on data from two sub-national surveys, which collected similar information and are complementary in terms of their geographical coverage. The first survey was conducted in 2000--2001 for a land tenure and rural finance study of the University of Wisconsin at Madison. The second was carried out in 2001--2002 by the International Food Policy Research Institute (IFPRI) in cooperation with Wageningen University and Research Center and PRONADERS for the project “Rural Development Policies and Sustainable Land Use in the Hillsides of Honduras.” The IFPRI survey was carried out in hillside locations in hillside areas, while the University of Wisconsin survey was in hillsides and valleys located in hillside areas. Together the surveys cover parts of 12 (out of 18) provinces (departamentos), 42 (out of 298) counties (municipios), 206 villages (aldeas) and 400 hamlets (caserios).

The combined surveys contain observations from 1,225 households. From a purely statistical point of view the IFPRI survey is representative for the 19 counties where it was conducted. On the other hand, statistical representativity was never of much concern in the sampling of the University of Wisconsin survey households. As a result, only the part of the Wisconsin survey that corresponds to the targeted area of a European Union-funded project can be said to be representative at the level of the county. Both household surveys were supplemented by adding secondary, mostly geo-referenced information that included (but was not limited to) rainfall, altitude, population density, and road density from various sources. The combined surveys have virtually no coverage in the eastern part of Honduras, where poverty is deep but not dense. The surveys do cover the major populated rural areas (see figure 3.7). Appendix 5 contains more details on survey methods and coverage.

The descriptive statistics are complemented by information on household and community assets from the livelihood studies in IFPRI-surveyed communities (box 3.2).

21 Combining the data from the two surveys was done to simplify the presentation of results and provide some overall descriptive statistics. For the econometric analyses that have underlying statistical interpretation, the data for the two surveys are not combined (see box 4.1 in chapter 4).

23

Box 3.2. Livelihoods Studies

The IFPRI household survey was accompanied by qualitative diagnostic surveys at the community level in the same 95 communities. They were carried out with the help of local nongovernmental organizations with long-term experience in the area. The community-based livelihood studies

complement the household surveys and involved the characterization and diagnosis of problems, limitations, and opportunities resulting in community profiles. Although highly participatory and informal, structured methods were used in close cooperation with a representative group of community stakeholders of about 20 people in each community. Key elements in each diagnostic included the history of the community, the agricultural production systems, management of natural resources, access to infrastructure, public facilities and services. See appendix 5 for a brief summary.

Natural capital assets

Average landholding size in the study areas is about 14 ha, but the distribution of land is highly unequal (table 3.2). Nearly two-thirds of households work less than 7 ha. Poverty is closely associated with landholdings; on small farms, the vast majority of households are extremely poor.22 However, 20 percent of households with relatively large landholdings (greater than 14 ha) had high rates of extreme poverty. More land, by itself, is no guarantee of prosperity. Land security among hillside households is limited, since fewer than 15 percent of households report owning land with legal title.

Table 3.2. Distribution of Households by Landholding Size and Income Landholding size (Mz) Percentage of Percentage of sub- Percentage of sub- sample households sample households sample households that are poor that are extremely poor < 2 Mz 24.5 70.9 66.9 2--5 Mz 23.3 59.3 55.8 5--10 Mz 17.1 62.2 59.8 10--20 Mz 14.8 60.8 54.7 20---50 Mz 11.5 59.6 52.5 > 50 Mz 8.8 57.9 52.3 Source: Analysis of IFPRI and Wisconsin household survey data.

Agricultural potential depends on agro-ecological conditions such as elevation, slope, and climatic factors. Less-poor households tend to have better soils, are located at lower altitudes, and in areas with higher rainfall.23 Adoption of conservation practices among the survey households is limited (table 3.3). Even the most common conservation practice (live fences) is adopted on about 20 percent of farms. Other conservation practices are less common. The

22 Following the Honduran National Statistical Institute (INE), this study uses income-based definitions of poverty (<$1.50/day/person) and extreme poverty (< $1.00/day/person). 23 Regarding soil quality and rainfall data, there is detailed soil information for IFPRI households (the IFPRI survey included collection of soil samples from farmers’ fields), but not for University of Wisconsin households.

24 proportion of farmers using conservation practices is low, but higher in communities with agro- ecological conditions favoring horticulture and lower in communities with extensive livestock production (Jansen, Damon, Pender, and Schipper 2003). Little knowledge among farmers regarding the need and benefits of soil conservation is widely acknowledged as a major limitation to the adoption of such practices.

Table 3.3. Adoption of Conservation Practices Type of conservation Percentage of Wisconsin Percentage of parcels in IFPRI practice survey households that have survey on which practice is adopted adopted Stone walls 10.4 5.8 Terraces 2.8 n.a. Wind breaks/live fences 20.6 10.0 Contour planting 9.9 n.a. Dead fence construction n.a. 4.8 Fruit tree planting n.a. 3.4 Source: Analysis of IFPRI and Wisconsin household survey data.

Human capital assets

This study considers four types of human capital assets: education, household size and composition, ethnicity, and migration assets.

Average education levels are very low: a little over four years (see table 3.4). Low education levels are consistent with high dropout rates, despite continuing rises in school enrollment. The average level of education varies considerably among communities. Although the average literacy rate in the IFPRI communities is about 50 percent, literacy varies from less than 25 percent to almost 100 percent. With limited educational progress over time (younger household members tend to have a little more schooling than their parents), the human asset base in rural Honduras has stayed virtually stagnant between 1993 and 2003.

On average, households are large, with nearly eight members per household, with relatively high dependency ratio (74 percent). 24 One-sixth of households have at least one member living somewhere else, and on average, households have 1.4 members living outside the community for an average period of seven months per year.

The vast majority of survey households (95 percent) do not belong to a distinguishable ethnic minority, which makes it difficult to use the survey data to draw any conclusions regarding the influence of ethnicity on income and other indicators of well-being.25

24 This study defined the dependency ratios as the number of household members between the ages 12 to 70 divided by the total number of household members. 25 Nationally, defined ethnic minorities account for about 15 percent of the population, and are thus underrepresented in the IFPRI and Wisconsin surveys.

25

Table 3.4. Human Assets: Education Levels Household head Education level: Frequency (percentage of sample hh) < 4 years 62.2 Primary, 4-6 years 30.2 Secondary, 7-11 years 3.8 Post-secondary, > 11 years 3.8 % that can read & write 65.6 Average yrs of schooling 4.1

Household members older than 7 years Education level: Frequency (percentage of sample hh) < 4 years 47.3 Primary, 4-6 years 36.0 Secondary, 7-11 years 10.1 Post-secondary, > 11 years 1.9 Average years of schooling 4.4 Source: Analysis of IFPRI and Wisconsin household survey data.

Physical capital assets

Physical assets include fixed agricultural assets such as machinery and equipment, livestock, vehicles, and housing. On average, households own about $4,750 in physical assets. As in the case of land, the distribution of physical assets is highly skewed. Asset values are considerably higher for the Wisconsin survey households, indicating that the IFPRI survey covered the poorest of the poor in the hillside areas. Less than 20 percent of the IFPRI sample communities have electricity (against 36 percent national rural coverage), and only 13 percent have a public telephone. Less than one-third of the communities have a health clinic and about one-third have access to public transportation. Although 80 percent of the communities have a source of potable water, in general, this service is limited to main settlement centers of the community.

Financial assets

Financial assets include savings, credit, and transfers. Transfers mainly are in the form of remittances, but also include other cash transfers, such as pensions and conditional payments from the Programa de Asignación Familiar (PRAF, a social safety net program). The one- quarter of households from both surveys that receives remittances (mainly from abroad) receives about $600 per year per household, or less than $100 per person. Within the rural population, remittances are unevenly distributed: only 15 percent of all households in the IFPRI sample receive remittances and receive, on average only $200 per household per year (box 3.3).

26

Box 3.3. Remittances and Hillside Households

Even though remittances make only a relatively minor contribution to average household income in hillside areas, they are a significant source of income for those households that do receive them. In the IFPRI sample of hillside households, remittances account for only 5 percent of household

income, with an average household receiving 468 Lps (equivalent to about $30) per year1. But for the 15 percent of IFPRI households that actually receive remittances, this source of income accounts for one-third of their total income, and for households located around Tegucigalpa this share can be as high as 40 percent. Average annual remittances of IFPRI households that do receive them are $202. Poor basic grains farmers receive fewer remittances than livestock and coffee farmers.

A majority of households that receive remittances use these funds for food purchases. Remittances are also used to cover health care expenses and schooling costs, even though to a much lesser extent. Only 20 percent of households in the IFPRI survey reported wanting to spend this income on food, others would have liked to have invested this money in buying cattle, fixing up the house,

starting a business, buying clothing, or saving. However, many recipient households reported that funds were either insufficient or necessary to buy food, and that these investments could therefore not be realized.

Well over half of all surveyed households do not receive any form of credit, formal or informal (table 3.5). Even though just over 10 percent of households from the combined surveys report receiving credit from regulated institutions (mostly banks), such credit is almost non- existent in the hillsides. Just over 1 percent of the IFPRI households reported receiving credit from regulated institutions. Formal credit from non-regulated institutions (such as producers’ cooperatives and communal banks) is more widely accessible: about 12 percent of rural households reported receiving it, with little difference between the IFPRI and the Wisconsin survey households. Informal credit is by far the most popular form of credit used by rural households, with one-quarter of them reporting it. Nearly two-thirds of all households reported keeping some savings (table 3.5).

27

Table 3.5. Financial Assets Transfers Average amount (Lps) per year of Percentage of households that received households that received Remittances 9,100 44.8 Pension 30,586 2.9 School support 528 42.5 Child support 519 20.6 Old age support 519 8.5 Scholarships 997 7.8 Other transfers 2,460 6.3 Total transfers 5,710 57.6

Credit Average amount (Lps) borrowed by Percentage of households that received credit households that received credit Formal credit from regulated 59,272 11.8 institutions Formal credit from non-regulated 18,042 19.3 formal institutions Informal credit 12,034 25.7 Credits that already existed at the 51,148 27.1 beginning of 2000 (only Wisconsin survey) Total credit 50,738 44.6

Savings Average amount (Lps) of households Percentage of that reported savings (only Wisconsin households that survey) reported savings Formal savings 25,270 36.3 Informal savings 22,911 35.0 Total savings 32,681 61.5

Total financial assets 64,518 Source: Analysis of IFPRI and Wisconsin household survey data.

Social capital assets

In general, social capital (measured by the degree of participation in organizations) is limited. Whereas the most popular types of organizations include the church, followed by the ‘patronato’, parents’ organization, and water association, participation in other types of organizations is generally less than 1 in 20 households (table 3.6). Perhaps most importantly, the poor have significantly less social capital than the less poor. Chapter 4 investigates the reasons

28 for lower participation among the poor and how participation contributes to household well- being.

Table 3.6. Social Assets: Participation in Organizations Type of organization Percentage of all Percentage of Percentage of Mean households poor non-poor difference participating households households between non- participating participating poor and poor households Agricultural 2.7 3.0 2.3 -0.7 cooperative Producers’ association 5.6 5.5 5.9 0.4 Community 14.9 12.4 19.2 6.8 organization (patronato) Parents’ organization 14.4 10.2 21.7 11.5 Ethnic organization 1.4 0.4 3.2 2.8 Water association 11.6 10.1 14.2 4.1 Political organization 2.6 2.2 3.2 1.0 Church 30.3 20.1 47.9 27.8 Rural savings & loans 5.1 3.4 8.1 4.7 NGO or project 6.1 5.5 7.2 1.7 Women’s organization 5.1 4.1 7.2 3.1 Source: Analysis of IFPRI and Wisconsin household survey data.

Social capital varies greatly among IFPRI communities. The majority of community- based organizations deal with infrastructure, with relatively few focusing on agricultural production or environmental conservation, both of which are the focus of external organizations. The degree of collective action differs significantly across communities. Collective action focuses mainly on infrastructure works, particularly road maintenance through food-for-work programs and maintenance or construction of other public works such as waterways and school buildings.

Location-specific assets

The information regarding location-specific assets differs between the IFPRI and the Wisconsin surveys to such an extent that it warrants separate analyses. The Wisconsin data (table 3.7) suggest that poorer communities tend to be more isolated and have less access to electricity and drinking water. The Permanent Household Surveys (Encuesta Permanente de Hogares) carried out regularly by the National Statistical Institute, indicate that the proportion of rural residents with access to safe drinking water actually declined by 10 percent over the period 1993--2003. Access to other public services (health and schooling facilities) is universally difficult and not significantly different between poor and less-poor communities. The IFPRI data for hillside households also provide evidence of generally difficult access to markets and public services, but they do not show a clear-cut correlation with income level (table 3.8).

29 Table 3.7. Access to Public Infrastructure and Services (based on University of Wisconsin survey data only) Variable Poor Non-poor Mean Mean communities1) communities1) difference value between non-poor and poor communities Distance to county capital (km) 12.8 13.1 10.9 -2.2 Distance to the capital of another 12.4 12.3 9.3 -3.0 (closer) county (km) Primary access to the community is 7.2 % 5% 9% 4% a paved road (=1 if yes) Number of months per year the 8.0 8.4 8.9 0.5 access road can be used Percentage of communities with 28.2 25.7 31.9 6.2 electricity Percentage of communities in which 52.8 47.6 58.4 10.8 >50% of the households have drinking water Percentage of communities in which 2.7 1.7 3.5 1.8 >50% of the households have sanitary services Distance2) to daily market, in km 41.5 42.6 43.6 1.0 Distance* to health center, in km 5.4 5.6 4.2 -1.4 Percentage of communities with 38.8 37.4 44.0 6.6 secondary school Distance to secondary school, in km 6.5 6.6 5.4 -1.2 Travel time to secondary school 41.4 41.2 38.8 -2.4 (minutes) 1) Poor communities: average daily per capita income < US$1.50; non-poor community: average daily per capita income >= US$1.50. 2) If it exists in community, then distance = 0 Source: Analysis of Wisconsin household survey data.

30 Table 3.8. Access to Public Infrastructure and Services (based on IFPRI survey data only) Variables (all are Average value Average value for HH that Average value for HH Average value travel time in minutes) for all HH earn > US$ that earn between for HH that earn 1.00/person/day US$0.50 and < US$ 1.00/person/day 0.50/person/day Distance to paved road 74.2 68.7 92.8 72.2 Distance to fuel wood source 43.8 40.2 66.7 40.8 Distance to school 15.1 12.5 10.8 16.1 Distance to health center 66.5 72.3 74.7 64.6 Distance to Farmers’ market 73.1 72.1 93.00 70.2 Distance to Non-paved road 34.5 40.2 36.7 33.3 Source: Analysis of IFPRI household survey data.

The level of infrastructure development differs significantly across the IFPRI communities. For example, road density varies from less than 0.3 km/km2 to over 8 km/km2. Communities in coffee-growing areas tend to have a denser road network and better market access. Population density is also highest in coffee-growing areas.

3.3. Household Incomes

On average, rural households in Honduras are very poor in terms of income per household member (table 3.9). An average per capita daily income of $0.65 translates into a rural poverty rate of 90 percent and an extreme poverty rate of 85 percent. The IFPRI data confirm that poverty is deepest in the hillsides, where relatively few non-poor people are found (as indicated by a relatively low coefficient of variation). The Wisconsin data contain households located in better-endowed areas (including valleys in hillside areas) and therefore both the average income and the range of income are higher.

Table 3.9. Income-based Indicators of Rural Poverty in Honduras Based on Survey Data Poverty indicator All household survey University of IFPRI data data Wisconsin data Poverty rate (% people with < 90.0% 86.2% 94.6% US$1.50/person/day) Extreme poverty rate (% people with 84.6% 79.7% 92.2% < US$1.00/person/day) Average per capita daily income 0.65 0.77 0.39 (US$, std error followed by CV in (1.69, 2.57) (1.97, 2.56) (0.60, 1.52) brackets) Range in per capita daily income -3.57–31.89 -3.57–31.89 -2.06–4.37 (US$) Source: Analysis of IFPRI and Wisconsin household survey data.

31 Many participants in the community-based livelihood studies claimed that living conditions have worsened over time. There was a general perception by hillside residents that real wages and purchasing power have substantially decreased over the past decade, by as much as 30 to 50 percent.

Less than 15 percent of all households rely on their own farms as their only source of income, and only one-third rely on farming combined with transfers (table 3.10). About half the households derive their income from their own farming combined with off-farm work, with most of them receiving transfer payments as well. Less than 1.5 percent of all sample households do not engage in farming at all. Despite the low profitability of agriculture, many remain in farming for food security reasons (lowering food costs by avoiding market purchases as much as possible) and lack of alternative employment. Persistence in agriculture also reflects traditions and cultural ties of many hillside-area households, who view themselves as farmers first and foremost. Households with off-farm income, particularly those that manage their own business, are nearly invariably better off than households that stay on their own farm.

Table 3.10. Household Typology according to Sources of Income Types of households Percentage Average of households household in combined income (Lps. per sample year) Households that derive income only from farming 14.6 21,466 Households that derive income only from salaried work (off- 0.7 29,743 farm) Households that derive income only from own business 0.3 26,057 Households that derive income only from transfers 0.4 2,144 Households that derive income from farming and salaried 19.1 21,828 work (off-farm) Households that derive income from farming and own 3.8 10,9324 business Households that derive income from farming and transfers 19.1 24,493 Households that derive income from salaried work (off-farm) ------and own business Households that derive income from salaried work (off-farm) 0.7 17,463 and transfers Households that derive income from own business and - - transfers Households that derive income from farming, salaried work 3.6 83,783 (off-farm), own business Households that derive income from farming, salaried work 27.2 24,141 (off-farm), transfers Households that derive income from farming, own business, 4.2 65,113 transfers

Households that derive income from salaried work (off-farm), - - own business, transfers Households that derive income from all four sources 6.3 51,274

32 Types of households Percentage Average of households household in combined income (Lps. per sample year) (farming, salaried work, own business, transfers) Total 100 Source: Analysis of IFPRI and Wisconsin household survey data..

3.4. Summary and Conclusion

Rural Honduras is characterized by topographic complexity, agro-ecological diversity, and uneven distribution of infrastructure and public investments. Historical patterns of steering investments toward more favored agro-ecological areas have created strong inequality in access to markets and infrastructure. Outside of favored areas, natural and location assets are of lower quality and quantity and are unequally distributed, creating limited options for growth and poverty reduction. In the interior hillsides where most of the rural population resides, households also have very low levels of human and physical assets. As a result, poverty is high and living conditions are stark.

Hillside area households are isolated from markets, have only limited access to public services, and few options for improving their well-being. The critical question remains: how can investments be prioritized in these less-favored areas to promote broad-based sustainable growth? This question is explored in the following chapter, which examines livelihood strategies, their impacts on well-being, and policies to promote more successful strategies.

33 Figure 3.1. Honduras Provinces and Counties

Source: Unknown

34 Figure 3.2. Honduras Topography

Elevation (m) 1 - 300 301 - 600 601 - 900 901 - 1200 1201 - 1500 1501 - 1800 1801 - 2100 2101 - 2400 2401 - 2710 35 Figure 3.3. Transportation Infrastructure and Population Centers

Source: SINIT

36 Figure 3.4. Population Densities

Source: Census of Population and Housing 2001

37

Figure 3.5. Change in Population Densities, 1988--2001

Source: SINIT & Census of Population and Housing 2001

38 Figure 3.6. Road Densities

Source: SINIT & Census of Population and Housing, 2001

39

Figure 3.7. Geographical Coverage of Combined IFPRI and Wisconsin Household Surveys

40

Chapter 4. Analytical Results

This chapter contains results from the quantitative and qualitative analyses using household data from the IFPRI and Wisconsin surveys (see appendix 5) to understand the determinants of household income and their linkages to asset endowments and livelihood strategies. To identify household groups pursuing similar livelihood strategies, the study used factor and cluster analysis techniques (see appendix 6 for technical details). Clustering households into a limited number of categories with similar livelihood strategies provides information to better target interventions toward households with common characteristics. This information can increase the efficiency of targeted policy measures toward the intended beneficiaries (de Janvry and Sadoulet 2000b). The study then uses econometric techniques to isolate the main determinants of these livelihood strategies and of household income. Unlike the descriptive analysis in chapter 3, which combined the IFPRI and Wisconsin household data, in this chapter separate statistical analyses of the two data sets were conducted (box 4.1).

To complement the quantitative analysis, the study draws upon community livelihood studies collected as a part of one of the household surveys (appendix 5) and participatory assessments of several ESSD projects with project beneficiaries (appendix 7). This complementary qualitative analysis helped identify assets that are constraining project impacts and understand how the context of policies, risks and institutions interact with assets to achieve sustainable poverty-reducing growth.

Box 4.1. Pitfalls with the Statistical Analyses of the IFPRI and Wisconsin Household Data

The IFPRI survey is representative for the 19 counties where it was conducted from a purely statistical point of view. The sampling procedure (selection of villages, hamlets, and individual households) was done in a fully random manner.

The Wisconsin survey is not a statistically representative sample of households. It consists of two parts. The first is a parcel-based survey. Households (500) were selected based on their association with parcels that had been part of an earlier land-titling program. The second part contains 350 households located in nine counties that were non-randomly selected; they were those in which a land bank program of the European Community was beginning operation. Within these nine counties, villages, hamlets and individual households were selected based on a stratified random procedure, using agro-ecological conditions and farm size as strata for hamlets and households, respectively.

Because of their different sampling procedures, this study decided against pooling the IFPRI and Wisconsin samples and instead performed separate statistical analyses. However, the study tried to integrate and synthesize the results to the largest extent possible.

41

4.1. Identification of Key Livelihood Strategies

Livelihood strategies in hillside areas revolve around agricultural and small-livestock activities, with few households engaging in higher-return activities such as production of vegetables or non-farm activities

The IFPRI households were clustered into seven livelihood strategies (table 4.1). Over half pursue livelihoods that involve significant basic grains production (clusters 3, 4 and 5), although most households in other livelihoods groups also produce some basic grains (see appendix 8 for more details). Livestock is also an important component of the livelihood strategy of about half of the IFPRI households (clusters 1 and 5), and to a lesser degree coffee production (and as coffee laborers). Few IFPRI households engage in higher-return activities such as production of vegetables or non-farm activities.

Table 4.1. Livelihood Cluster Groups, IFPRI Household Survey Livelihoods Main livelihood strategy No. of Percentage of Percentage of Cluster Group households in sample clusters with cluster households in land title cluster Cluster 1 Livestock producers 59 15.6 46 Cluster 2 Coffee producers 28 7.4 65 Cluster 3 Basic grains farmers 68 18.1 21 Cluster 4 Basic grains farmers/farm 85 22.6 17 workers Cluster 5 Mixed basic grains/ 116 30.9 38 livestock/farm workers Cluster 6 Permanent crops producers (non- 12 3.2 67 coffee) Cluster 7 Vegetable producers 8 2.1 69 Total sample 375 100 36

Households in the valleys pursued more diversified livelihood strategies and are in general considerably less poor than households in the hillside areas

The Wisconsin households were clustered into six livelihood strategies (table 4.2). About one-quarter of households pursued a diversified livelihood strategy and nearly 30 percent are coffee producers. Basic grain production and livestock production are also important livelihood strategies. In contrast to the IFPRI household sample, the Wisconsin sample includes households whose livelihood strategies are dominated by a business or receipt of remittances.

42

Table 4.2. Livelihood Cluster Groups, Wisconsin Household Survey Livelihoods Main livelihood strategy No. of Percentage of Percentage of Cluster households in sample clusters with Group cluster households in land title cluster Cluster 1 Households that follow a 222 26.1 32.9 diversified livelihood strategy Cluster 2 Basic grains farmers/farm 115 13.5 7.8 workers Cluster 3 Livestock producers 98 11.5 48.0 Cluster 4 Coffee producers 242 28.4 31.0 Cluster 5 Own business 58 6.8 32.8 Cluster 6 Remittances 91 10.7 25.3 Total sample 850 100 29.8

Combining the results of the cluster analyses, eight livelihood strategies in rural Honduras were identified (see tables 4.3 and 4.4). The analysis clearly shows that household assets are important determinants of livelihoods and that certain strategies are associated with higher household well being (see appendix 8).

43

Table 4.3. Salient Household Characteristics, by Livelihood Strategy, IFPRI Households Cluster Group Î 1 2 3 4 5 6 7

Livelihood strategy

Mixed Basic basic Annual grains grains/ crops/ Basic farmers/ livestock/ Permanent intensive Total Livestock Coffee grains farm farm crops livestock sample producers producers farmers workers workers producers producers Number of households 376 59 28 68 85 116 12 8 Per capita income ($/day) 0.35 0.58 0.33 0.15 0.42 0.29 0.66 0.38 Farm size (ha) 10.0 32.0 3.5 2.4 1.9 10.7 2.4 4.4 % households with any titled land 36% 46% 65% 21% 17% 38% 67% 69% Importance of food security Medium Medium High High Medium Medium Medium Degree of market orientation Medium High Low Low Low High High Importance of off-farm agricultural labor Low Medium Low High Medium Medium Low Importance of off-farm non- agricultural labor Low Low Low Low Low Low Low Dependency ratio Low Low High High Medium Medium Low Population density Low Medium High High Medium High Low Access to markets and public services Low Medium Low Low Medium High High Education High Low Medium Low Medium Medium High Natural capital Medium Medium Low Medium Medium High High % poor households1) 94.6 77.8 100.0 100.0 98.8 97.9 95.2 86.2 % extremely poor households2) 92.2 76.2 100.0 100.0 91.8 96.6 77.0 85.8 1) Percentage of households with less than $1.50/capita/day. 2) Percentage of households with less than $1.00/capita/day.

44

Table 4.4. Salient Household Characteristics, by Livelihood Strategy, Wisconsin Households Cluster Group Î 1 2 3 4 5 6

Livelihood strategy

Basic grains farmers/ Diversified farm Livestock Coffee Own Total sample production workers producers producers business Remittances Number of households 826 222 115 98 242 58 91 Per capita income ($/day) 0.87 1.22 0.42 1.32 0.79 0.71 0.43 Farm size (ha) 15.5 30.0 1.3 17.2 8.1 26.6 8.4 Importance of food security Medium High Medium Medium Low High Degree of market orientation Medium Low Medium High High Low Importance of off-farm agricultural labor Medium High Low Medium Low Low Importance of off-farm non- agricultural labor Medium Low Low Low High Low Dependency ratio Low High Medium Medium Low Medium Access to markets and public services Medium Medium Medium Medium Medium Medium Education Medium Low Medium Low High Medium Natural capital Medium Medium Medium Medium Medium Medium % poor households1) 86.2 82.9 98.3 77.6 86.0 81.0 92.3 % extremely poor households2) 79.7 76.1 94.8 68.4 80.2 70.7 85.7 1) Percentage of households with less than $1.50/capita/day. 2) Percentage of households with less than $1.00/capita/day.

45

1. Pure basic grains farmers. These households, have small land holdings (usually less than 2 ha) and few other assets. They are found mostly in the IFPRI sample. They engage in minimal off-farm work and earn very low incomes (average of $0.15/person/day). A relatively large proportion of these households have a female head (see also box 4.2). This livelihood strategy is associated with deep and persistent poverty.

2. Basic grains and off-farm work. Households pursuing this strategy have even smaller land holdings than pure basic grains farmers and, like the latter, have very few other assets. However, they earn somewhat higher incomes by working a large proportion of their time off-farm (mostly in agriculture). But these households also belong to the poorest of the poor, earning less than $0.50/person/day.

3. Diversified households. These households represent a considerable proportion of both surveys. While the diversified households in the Wisconsin survey have relatively large farms, medium endowments of most assets, and few missing assets, the IFPRI diversifiers are more poorly endowed. As a result, diversified households in the Wisconsin survey are far more diversified than the IFPRI households. They earn much higher incomes as well.

4. Extensive livestock farmers. These households are present in both samples. They have relatively large farms and cattle holdings, but average levels of other assets. They tend to stay on their own farms. For many (but not all) of them, this livelihood is a poverty exit strategy.

5. Coffee farmers. These are mostly found in the Wisconsin sample, and coffee growers in the Wisconsin sample have considerably more land than those in the IFPRI sample. They also earn higher incomes. The collapse in coffee prices has pushed many coffee growers below the poverty line, even though they are relatively well-endowed with assets. Some have a financial buffer, which allows them to survive. Coffee prices were at all-time lows during the time when the surveys were executed and have recovered somewhat since.

6. Small-scale vegetable farmers, permanent crop producers, and intensive livestock farmers. These households are relatively few. They earn higher incomes than basic grains farmers, but many of them are still poor. Because of their small numbers, households pursuing these strategies are not included in the econometric analyses.

7. Households that have their own business. These households are relatively few and present only in the Wisconsin sample. They are generally better endowed in terms of land holdings, education, and financial capital. Most are non-poor.

8. Finally, a small group of households lives virtually exclusively off remittances. These households are found only in the Wisconsin sample (cluster 6). Most belong to the poorest of the poor.

46 Box 4.2. Gender in the Hillside Areas

Based on the IFPRI sample, female-headed households (FHH) differ from male-headed households (MHH) in five characteristics:

1) Household income: On average, FHH have about 30 percent lower income than MHH. 2) Importance of livestock: FHH earn 23 percent of their household income from producing and selling livestock and livestock products, as opposed to only 8 percent for MHH. 3) Proportion of rented land: While MHH rent in approximately 27 percent of their total farm area, the share is only 18 percent for FHH. 4) The amount of government transfers received: Even though FHH receive levels of remittances that are comparable to MHH, FHH receive less than half the level of government transfers (including pensions, school subsidies, pregnancy support, nutritional support, old age support and fellowships) of MHH. 5) Degree of diversification: Crop diversification is less common in FHH than in MHH. FHH do not grow annual crops other than basic grains. Very few FHH grow permanent crops. 6) Some of these differences between MHH and FHH can be explained by the many competing demands for female labor.

None of the livelihood strategies found in the IFPRI sample was able to generate an average annual income above the extreme poverty line of $365/person/year -- let alone above the poverty line of $550/person/year (figure 4.1). In general terms, the Wisconsin households are considerably less poor than the IFPRI households, mainly due to better asset endowments. However, in the Wisconsin sample there are also distinct differences according to livelihood strategies (figure 4.2). Less poor or non-poor households tend to have relatively large endowments of natural assets (mainly land) and usually follow one of the following four livelihood strategies: extensive livestock farming, permanent crop cultivation, economic diversification, or owner-operators of their own business.

Finally, it is worth drawing attention to the relationship between livelihood strategies and land titles, based on the IFPRI data. About one-third of the IFPRI households had title to at least some of their land.26 However, while almost 70 percent of households that focus on coffee, permanent crops, or vegetables have land title, the corresponding share for basic grains farmers is only 20 percent. Livestock producers are somewhere in-between. Thus lack of land title seems to be related to livelihood strategies based on annual low-value crops, whereas possession of a title seems to be related to crop/livestock strategies that require investments in land to pursue higher-value permanent crops or larger livestock operations.

26 The IFPRI survey asked if at least some of the household’s land is titled.

47 Figure 4.1. Annual Per Capita Income, by Livelihood Strategy, IFPRI Households

300 1 = large livestock producers 241 250 2 = coffee producers 3 = small basic grains 212 farmers 200 4 = very small basic grains farmers/farm 153 workers 139 150 5 = mixed basic 120 106 grains/livestock farm workers 100 6 = very small permanent 55 crop producers 50 7 = small vegetable producers

0 1234567

Figure 4.2. Annual Per Capita Income, by Livelihood Strategy, Wisconsin Households

700 1 = diversified strategy 2 = basic grains farmers/farm workers 600 3 = livestock producers 4 = coffee producers 482 500 445 5 = own business 6 = remittances 400 288 300 259

157 200 153

100

0 123456

4.2. Determinants of Livelihood Strategies: Multinomial Logit Models

The study used another technique to explain a household’s choice of livelihood strategy: multinomial logit models.27 These models were applied separately for the IFPRI and Wisconsin household samples. Detailed household-level econometric results can be found in appendix 9. A similar model was also applied to analyze primary data obtained from the more qualitative community-level livelihood studies.28 The following key findings can be highlighted:

27 A multinomial logit model (Greene 1990) is appropriate when the dependent variable consists of multiple categories (such as livelihood strategies). In this case, it relates the probability that a household (or community) will choose a given livelihood strategy to the household’s (or community’s) asset endowment. 28 At the household level, appendix 9 contains the results of both the full multinomial logit models and their reduced forms. The latter differ from the “full” models in that they exclude potentially endogenous explanatory variables.

48 Rural poverty

Basic grain farming is strongly associated with poverty and isolation

Relative to livestock producers and coffee growers, pure basic grains farmers are less likely to have titled land and have fewer migration assets and social capital. Relative to coffee growers and diversifiers, pure basic grains households live in isolated areas and are more likely to have a female household head.29 Relative to livestock producers and diversifiers, these households also have less access to formal credit, despite the fact that credit programs often focus on these households. Relative to coffee growers and large livestock farmers, they have a higher dependency ratio (“more mouths to feed”). These factors, in combination with little land and other complementary assets, strongly associate pure basic grains farming with poverty.

Food security

Hillside households with a certain minimum landholding stay on their farms to meet food security needs rather than seek scarce, more remunerative off-farm employment

Despite the fact that pure basic grains farmers have a little more land than households that combine basic grains growing with off-farm work, they are even poorer on average. But these households may have just enough land to be food secure. For food security reasons, they work more on their own farms and less off-farm. This reflects both the traditions and cultural ties of many rural households in hillside areas to farming, and a relatively high degree of risk aversion (attempting to avoid food purchases as much as possible). Many of these households seem to be locked into a vicious cycle of producing basic grains (mainly for self-consumption and using traditional production technologies), blocking the transition to other income-earning strategies that would possibly be more profitable.

Land tenure and credit

Tenure insecurity discourages more economically rewarding livelihood strategies Livelihood strategies focused on basic grains (with or without off-farm work) are associated with insecure land tenure. Secure land tenure increases the probability that a household will follow a livelihood strategy focused on diversification, livestock, or coffee. The availability of credit increases this probability even further. But a higher percentage of people in the community without their own land “push” households into livelihood strategies that focus on off-farm agricultural and non-agricultural work.

Landholding size

Households with larger land holdings are more likely to specialize in extensive livestock rearing

29 Households headed by single women are not the only ones included among the extremely poor, but they do have fewer options -- a factor that can perpetuate extreme poverty in the children raised in these families. See Colindres, Lopez, and Laforge (2004).

49 Even though livestock technologies are extensive (low returns to land) and often result in land degradation, this study did not find a significant effect of the soil fertility variable for the IFPRI households (no such variable was available for the Wisconsin households). However, other studies have pointed toward a serious land degradation problem caused by extensive livestock technologies (see Jansen and others 1997). There is thus a clear need for appropriate incentives and policies that stimulate the adoption of improved livestock technologies, in order to raise the profitability and sustainability of livestock-based livelihood strategies. Finally, a larger amount of owned land also increases the likelihood that a household has a business.

Market access and road density

Both market access and roads increase off-farm employment and other more remunerative livelihood strategies

Relative to pure basic grains farmers, households that combine the growing of basic grains with off-farm work have better market access. These households also tend to live in areas with higher road densities. Both market access and roads increase off-farm employment opportunities for these households, whose limited stock of land “pushes” them to look for off- farm work. Interestingly, off-farm work is often more remunerative than on-farm work, for these households that have little or no access to improved technologies as a means to increase income from on-farm work. Better market access also increases the probability that a community will specialize in coffee or vegetables.30

Agro-ecological conditions

Agro-ecological conditions and location affect livelihood strategies

Higher altitudes favor coffee-growing and vegetable cultivation, while a favorable rainfall regime encourages diversification. Even though the corresponding variable is not significant in the model, experience in the field and soil sample results indicate that coffee farms tend to have relatively fertile soils, whereas large extensive livestock operations tend to be on less fertile soil. Human capital

Higher education and lower dependency ratios are associated with more remunerative livelihood strategies

Education levels are generally low among rural households in Honduras. Nevertheless, households with higher average education are more likely to have their own business. Households with a lower dependency ratio are more likely to be coffee growers or large livestock farmers, which generally are more remunerative livelihoods than basic grains farming.

30 In the case of coffee, there may be some degree of reverse causality. That is, IHCAFE, the Honduras Coffee Institute, has a long history of investing in road construction in many coffee-growing areas.

50 Social capital

Social capital across communities is a driving force enabling small-scale producers to market their products and penetrate non-traditional exports and coffee markets

Market-oriented production seems to be stimulated by organizations external to the community that help identify new technologies, markets, or enterprises with comparative advantage.

Migration and remittances

Migration is less common among the poorest

Households that rely mainly on remittances tend to own their land and have land titles; have an older household head that is more often female; and have fewer household members living outside the household. Whereas the latter may sound contradictory, apparently the remittance payments on which these households subsist come from people who are no longer considered part of the household. Households that live exclusively off remittances, tend to be the poorest of the poor.

Ethnicity

Ethnic minorities are less likely to be livestock farmers or coffee growers

This result is derived from alternative specifications of the multinomial models, which are not reported here.

4.3. Determinants of Household Income: Least-squares Regression Models

Household income was hypothesized to depend on the household’s livelihood strategy and asset portfolio. On average, non-poor households have significantly better asset endowments than poor households, as illustrated for the Wisconsin sample in table 4.5. Note that this holds for all asset types. This suggests two conclusions: ownership of a certain minimum levels of all asset types is needed in order to be able to exit poverty; and asset complementarity matters.

51

Table 4.5. Asset Comparison between Poor Households and Non-Poor Households, Wisconsin Sample Type of asset (1) (2) Difference [(2) - Average poor Average non- (1)] households* poor households* Land holding (ha) 10.7 45.0 34.3 Years of schooling of the HH 3.6 7.1 3.5 head % of HH heads that can read & 64.3 88.6 24.3 write Years of schooling of HH 4.6 7.4 2.8 members older than 7 years Remittances received per year 6,773 42,789 36,016 (Lps) Credit (Lps) - Credit received in 2000 from formal institutions (regulated + non- 8,783 51,808 43,025 regulated) - Credit received in 2000 2,081 3,972 1,891 from informal sources - Credit that already 9,667 42,731 33,064 existed at the beginning of 2000 Savings (Lps) - Average amount of total savings (formal + 25,868 74,481 48,613 informal, only HHs that report savings) - % of HHs that report having savings 30.1 64.9 34.8 Participation in organizations (% of HHs that participate): - Agric. cooperative 3.3 6.1 2.8 - Producers’ assoc. 5.7 13.2 7.5 - Patronato 11.7 15.8 4.1 - Parents’ org. 9.8 13.2 3.4 - Ethnic org. 0.4 0.0 - 0.4 - Water association 9.0 7.9 - 1.1 - Political org. 2.3 6.1 3.8 - Church 18.6 21.9 3.3 - Credit org. (“savings & 3.5 6.1 2.6 loans”) 5.6 3.5 - 2.1 - NGO or external project 4.1 6.1 2.0 - Woman org. * Poor households = households with per capita daily income < $1.50. n = 712. Non-poor households = households with per capita daily income > = $1.50. n = 114.

52 Thus in addition to the effects on income of individual assets, the study investigated a number of interaction effects, in order to identify possible synergies between pairs of assets. These interaction effects included land ownership and credit, farm size and market access, farm size and education, market access and education, and land ownership and soil fertility. The detailed model results for both the IFPRI and Wisconsin samples31 are reported in appendix 10. The following main conclusions can be drawn:

Rural poverty

Consistent with the results from the multinomial logit models, the income regressions confirm that households whose livelihood strategy consists of pure basic grains production are the poorest, followed by households that combine basic grains production with off-farm agricultural work. All other livelihood strategies earn higher incomes. But the difference between the (low) incomes of the two poorest livelihood categories is still significant: that is, off- farm work is an integral part of the survival strategy of many poor rural households.

Land tenure and credit

Households with at least some titled land earn significantly higher incomes than households that have no titled land at all. The interaction between the amount of land owned by the household and access to credit exerts a positive effect on income. This implies the existence of a synergy effect between owned land and credit; that is, land ownership (natural capital) and credit (financial capital) are complementary assets.

Farm size

Even though the study did not include farm size as a separate explanatory variable in the income regressions (because of multicollinearity problems), both the interaction between farm size and market access and the interaction between farm size and average level of formal schooling of household members have a positive effect on income. Since the market access variable is essentially a measure of travel time (meaning that the larger the variable’s value, the poorer is market access), this result suggests that good market access can compensate for small farm size. The positive interaction effect between farm size and schooling suggests that education helps in translating the benefits of physical capital (in this case land) into higher income.

Market access and roads

Better market access alone has a significant positive effect on income. In addition, the positive interaction effect between education and market access suggests that, in terms of their effect on household income, good market access can compensate for less education, as it can compensate for small farm size (see previous point). Households that live in higher road density areas have higher incomes than households that live in areas with lower road densities.

31 The specifications of the income regression models differ somewhat between the IFPRI and the Wisconsin samples because of differences in data availability.

53 Human capital

Larger households have higher income (even though this may not translate into higher per capita income). Households with high dependency ratios have lower income. Households with older household heads have lower income. Households with more migration assets have higher income. Even though the study’s regression model fails to detect a statistically significant effect of formal education, households that have participated in training programs over the past 10 years have higher incomes. Other research suggests that in Honduras, every year of additional education increases income by about 10 percent, with upper secondary education having the highest returns.32 Acquiring professional skills (agriculture-related or not) allow people to sell their labor at a higher price.

Social capital

The reduced form of the income regression on the IFPRI sample (not reported) shows a positive impact on income of participation in external organizations, such as NGOs.

Ethnicity

The study was not able to detect a statistically significant effect of ethnicity on household income.

4.4. Participatory Stocktakings of Central American ESSD Projects

Stocktakings of four Central America environmentally and socially sustainable development (CA ESSD) projects in Honduras were undertaken in late 2003 and early 2004 to examine how these World Bank-supported projects contribute to sustainable rural growth and poverty reduction, and to help identify “missing assets” and “successful” livelihood strategies (see box 4.3). The project stocktakings applied rapid appraisal methods anchored in the asset- based approach to understand changes in household assets, the institutional and risk context, livelihood strategies, and well-being outcomes. 33

This section presents key findings from two of the project stocktaking exercises (PAAR-FPPL and PACTA) that particularly complement the household and community level quantitative and qualitative analyses based on the IFPRI and Wisconsin studies. Appendix 7 provides details on the overall project stocktaking exercise, findings from all four stocktakings and conclusions by participants and the stocktaking study team.

32 See presentation by Guillermo Perry and Felipe Jaramillo at the Third Regional Conference on Central America, "Economic Growth and Issues in Bank Resolution," sponsored by The Central American Monetary Council and the International Monetary Fund and hosted by the Central Bank of Honduras on July 8--9, 2004 in San Pedro Sula. 33 Participatory workshops were carried out with stakeholders, including project coordinators and staff, beneficiaries, and some local government officials. Visualization techniques, charts/boards, and other methods were used to enhance the possibility of eliciting views from the participants at the workshops. Two sets of workshops were held. Preparatory workshops were conducted in different locations for the respective projects during November and December, 2003. Regional workshops were held during the week of February 15-- 21, 2004 in Comayagua.

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Box 4.3. ESSD Projects Used for the Stocktacking Exercise

PAAR-CMAT: Objectives of the Modernization and Administration of Lands (CMAT) component of the PAAR project are to: modernize the land titling system; modernize the property registry and land cadastre; improve land tenure security; and, promote the sustainable use of land.

PAAR-FPPL: Objectives of the Fund for Producers in Mountain Slopes (FPPL) component of the PAAR project are to: improve the transfer of technology to improve agricultural, livestock, and forestry practices for farmers located in hillside areas; reduce deforestation, soil erosion, and depletion of soil fertility in hillside areas; improve the incomes and welfare of poor farmers and residents in hillside areas; and establish a financial mechanism whereby hillside farmers can access technical assistance and training over the long-term.

PACTA: Objectives of the Access to Land (PACTA) project are to: facilitate access to land for landless households through the land market; and, promote the development of sustainable rural enterprises. The target population consists of landless households.

PROBAP: Objectives of the Biodiversity and Priority Areas Project (PROBAP) are: capacity building at the institutional level to help better manage national parks; increase and improve involvement of adjacent communities in the protection and management of protected areas; improve management in buffer zones between communities and protected areas; and, build capacity for biological monitoring activities.

4.4.1. The Stocktaking of PAAR-FPPL: Key Findings

The target population of PAAR-FPPL is subsistence farmers with less than 5 ha of land in hillside areas, who grow maize, beans, coffee, raise small farm animals, and practice small- scale horticulture. Most landholdings are located within national lands and most farmers do not have land titles. PAAR-FPPL is involved in the following activities: improving research services to generate appropriate technologies for agriculture, cattle raising, and forest management in the project area; improving training and capacity building services to teach farmers sustainable technologies; improving technical and capacity building services for municipalities to manage watersheds; and training technical assistance providers to transfer technology for agriculture, livestock, and forestry.

Workshop participants included beneficiaries (men and women) from six community groups from the provinces of Yoro and Olancho. Before participating in the project, beneficiary farmers derived most of their income from on-farm production, notably maize and beans, and growing coffee, and from off-farm wage labor on coffee plantations. Participants now tend to devote more time to on-farm activities and less to off-farm wage labor activities.

Project beneficiaries have made the following progress: increased productivity of traditional subsistence crops (maize, beans) and coffee; increased surplus production to sell in markets and for household consumption; and adoption of new crops with higher returns such as

55 vegetables, fruits and forestry in fallow lands and through improved crop rotations. These changes in livelihood strategies are directly linked with project activities including technical assistance and capacity building; improved community organization; distribution of high yielding seed varieties and improved plant materials; distribution of agricultural inputs; and improved practices of soil conservation.

Regarding impacts on household well-being, beneficiaries consider that the increase in farm production has improved their food security. Nevertheless, their monetary income seems to have varied little, although the sources of income have changed. That is, although they have more surplus production, prices for agricultural products have fallen, whereas they are working less off the farm. Before the project, they derived about half their income from farm production; after the project, this proportion increased to 90 percent. Farmers believe the new agricultural practices they have adopted have increased their productivity, helped protect their soils and water sources, and have also improved the natural environment. In general, farmers feel the project helped develop a more positive attitude toward entrepreneurship and that now they are headed for improved well-being and quality of life. Thus they feel their asset bases and livelihood options have improved and are more optimistic about the future, but are concerned with the policy and institutional context (such as trade reforms) and increased exposure to market risks.

Farmers in the project have prioritized the need for strengthening of short-term credit and also are interested in investment capital. During the workshops they also mentioned the importance of skills and knowledge for farm productivity, as well as for group organization with productive and commercial objectives. To complement technical assistance (which respondents said needs improvement), farmers reported that they would like micro-irrigation systems, housing improvements, more education, and high-yielding varieties. In sum, farmers are demanding continuing help for financing, technical assistance, and capacity building. The second phase of the project (the recently approved Forests and Rural Productivity Project) includes credit provision as part of the assistance provided to farmers.

4.4.2. The Stocktaking of PACTA: Key Findings

The target population of PACTA is landless households. The project provides the following services: technical services to help beneficiaries develop business plans; technical assistance to help beneficiaries obtain long-term credit from commercial sources for purchasing land; non-reimbursable grant funds for productive investments; and technical services to help beneficiaries consolidate their enterprises during the initial phase.

Workshop participants included PACTA beneficiaries (both men and women) from six enterprises from the provinces of Yoro, Colón, Copán, and Comayagua. Before the project, they derived their incomes from salaried work and commerce (especially women), and a smaller proportion of income from growing maize, beans, rice, coffee, potatoes and raising small farm animals in rented or communal lands.

Livelihood strategies of these households have changed significantly since forming enterprises on their newly acquired lands. Labor on the farms is carried out collectively or individually, depending on the type of enterprise, group preferences, and the types of enterprises.

56 Enterprises include cattle raising and dairy products, oil palm, horticulture, coffee, and forestry, along with production of basic grains. Most beneficiaries are dedicated full-time to work on the newly acquired lands and/or associated enterprises, and have adopted an entrepreneurial perspective. Thus the need to work on other people’s farms has been reduced.

Although previous to PACTA, most of the households received some type of technical assistance or credit, their asset base was limited mostly to own (low education and skill) labor and some work tools. Now, their asset bases have expanded to include land, financial assets, livestock, equipment and machinery, and improved human and social capital (from training and technical assistance and group organization).

The combination (“package”) of land tenure security, physical assets, production credit, and technical assistance for enterprise development is perceived by households as an incentive to introduce new productive activities such as cattle raising, dairy production, and commerce, and also as a way to consolidate their livelihood strategies.

However, households face new risks inherent to a more complex portfolio of productive activities, including the uncertainty related to markets and prices, and the debt burden from purchasing land. Additionally, some conflicts could arise among members of the same enterprise, given new legal and judicial rights. This makes the new enterprises vulnerable to dissolution and to lost efforts. Nevertheless, the training and technical assistance they have received have helped them mange other risks like market access, price variation, pests and diseases.

Households report that their well-being has increased significantly along with food security, even though at such early stage they do not perceive an increase in monetary income. Self-esteem, motivation, willingness to work, and respect among neighbors has also increased notably. Family ties have been strengthened because more family members engage in the enterprise, including women, developing an entrepreneurial attitude in the household. Even though they are preoccupied with their debt obligations, they are hopeful they can repay by making the necessary sacrifices, so they can bequeath their investment to their children.

The most immediate additional demands that beneficiaries perceive need to be addressed are: housing, technical assistance and training (production and marketing), and infrastructure (roads, electricity, and irrigation).

4.4.3. Conclusions from Stocktakings of CA ESSD Projects

The following conclusions of the project stocktaking exercises (for all four CAESSD projects) are based on perceptions of workshop participants and reflections by the project stocktaking team.

Food, land, and housing security. There is a strong correlation between households’ demands for food security, land security, and housing security. Taken together, they are the basis for encouraging a more market-oriented perspective for their livelihood activities and asset accumulation strategies.

57

Land tenure security and housing security should be viewed as an integrated package. They add more economic value together than if they are accessed separately: that is, they should be considered as complementary assets. This is because they provide households with greater overall security and encourage savings for food security; facilitate the establishment of microenterprises in or outside the homestead; provide legal rights to demand water, electricity, and other public services; and facilitate access to credit.

PACTA promotes access to secure land through titles but does not provide funding for construction or improvements in housing. PAAR-CMAT creates the conditions necessary for land tenure security with some type of housing and in lands where beneficiaries are already settled. Land titles that legally recognize household land plots and residences are still lacking.

Improvements in combined food-land-housing security require actions to improve policies, laws, and institutions to augment and protect assets, including implementation and enforcement. These efforts are essential because they guarantee property rights and allow mortgaging or renting of lands. Appropriate policies and regulations also can help generate new business and employment opportunities, and they are critical to capitalizing land values.

PACTA provides alliances with the public sector and banks to access land and technical assistance services. PROBAP helps communities organize to access the institutional and legal frameworks, infrastructure, and alliances among public, private, and other organizations. PAAR- CMAT helps improve the legal and institutional context through the provision of land titles and the granting of legal rights that increase property values. These factors also have the capacity of generating increased income and welfare, even though this is not necessarily reflected in market value of land.

Physical infrastructure. Infrastructure such as transport and communications, marketing opportunities, electrification, and water for consumption and irrigation are important complements that add value to poor household’s assets. One case in point is PROBAP’s infrastructure projects for roads and eco-tourism. PACTA is also considering funding productive infrastructure projects.

Technical assistance and training. The rural poor without legal rights over land can still benefit from technical assistance and training to improve their production and ensure food security and introduce new crops.34 In recognition of this process of change, the PAAR-FPPL offers technical assistance, training, and inputs to improve traditional agriculture and promote crop diversification.

Financial services. Availability of financial services is one of the most underserved demands. None of the projects currently grants direct access to credit, but some credit institutions have already been identified in the region. See box 4.4 for an example of an attempt to use a community-based approach to address the lack of financial services in rural areas.

34 This conclusion concurs with findings from the FAO program Special Program for Food Security (PESA).

58

Box 4.4. Community-Led Asset Building: Nuestras Raíces Program

Although not covered by the project stocktakings, the Nuestras Raíces (NR) Program represents an interesting example of a community-driven development effort that attempts to apply a more integrated approach for asset building. The NR Program is specifically geared toward members of officially designated ethnic groups. The main objectives of the project are to build human capital, social and cultural assets, and promote gender equity. NR finances small-scale social and productive infrastructure projects that are identified, selected, and implemented by community groups. To deal with the lack of rural finance, NR provides community groups with knowledge and funds to create, manage, administer, and monitor their own community banks. This type of capacity building is also provided for small-scale infrastructure projects. Needs assessments carried out before the project indicated a high demand for small-scale projects such as bridges and paths, housing, health-related projects, water conservation, communal storage places, and more (see Traa-Valarezo and Rodríguez 2003).

59 Chapter 5. Conclusions and Recommendations

The overall study objective was to develop an appropriate conceptual and analytical framework to better understand how prospects for growth and poverty reduction can be stimulated in rural Central America. The Honduras country study used complementary quantitative and qualitative methods of analysis, driven by an asset-based approach, to generate a number of key findings with important strategic implications. These conclusions are focused on hillside areas since the study cannot extrapolate to areas outside the survey coverage and the surveys themselves may not be representative at any geographic scale.35

There are well-defined areas of higher economic opportunity, given their underlying agricultural potential, relatively good access to infrastructure, and high population densities

As with other countries in Central America, economic potential has a strong spatial pattern in Honduras, with high potential areas close to the main cities and along the Northern Coast. Public investments in human and physical assets in Honduras have historically been skewed towards the 55 counties in the “T of Development.” Outside the T, public investments (particularly road networks and other infrastructure) have been concentrated where agro- ecological conditions are favorable for export agriculture such as coffee (concentrated on small and medium-sized farms in the west) and bananas (mostly on large plantations in the northern valleys). Most other rural areas, the hillsides in particular, have only experienced limited public investments. This investment pattern has resulted in poverty being highest and deepest outside the T of development. Poverty is widespread and deep in rural Honduras, particularly in hillside areas

Hillside areas account for the majority of land area and have agro-ecological constraints that make them less suitable for agriculture than the fertile valleys and coastal regions. Most poor households in hillside areas have only limited asset bases on which to base their livelihood strategies. The rural poor in hillside areas tend to have small and fragmented land plots. Production is often limited to a single rain-fed growing season. The poorest of the rural poor live in areas with high population densities and high population growth, further increasing pressure on the declining natural resource base in such areas. These factors constrain potential gains from adopting improved technologies and limit opportunities to diversify agricultural production. As a result, many are locked into strategies based on production of basic grains and small livestock for subsistence needs in areas that are not suited for such strategies. Under these circumstances, achieving sustainable increases in agricultural output and diversifying the agricultural base are major challenges.

35 A nationally representative survey that covers the entire country would provide information on other parts of the country. Such a survey could provide important information for targeting of spatially differentiated interventions at the community and household levels in hillside areas and other parts of the country. It is therefore suggested that the upcoming LSMS to be undertaken in Honduras include geo-referencing of surveys to facilitate improved spatially and household differentiated analyses.

60 Hillside areas should be a major target of national rural poverty reduction strategies

High numbers of poor people per area (poverty density) in hillside areas and the fact that some 80 percent of all rural poor are located in these areas should make these areas a focus of national rural poverty reduction strategies. Several public interventions, such as conditional cash transfer programs, have been shown to be effective tools for rural poverty reduction, but eventually the productivity of land and labor need to be raised. Asset bases of the poorest need strengthening, whether the poverty reduction strategy builds on agricultural or non-agricultural activities. The weak asset bases of the poor imply a need for funding from central government and public investments coordinated with local governments.

Overlap between high poverty rates and high poverty densities in some hillside areas means that investments there should reach significant proportions of the country’s rural poor

The western areas around Copán, the southern areas in Valle and Choluteca, and the Province of Comayagua have both high poverty rates and high poverty densities. By targeting these areas, significant proportions of the rural poor can be reached. The problem of leakages to the non-poor is minimized because poverty rates there are high. The geographic correspondence between high poverty rates and high poverty density means that there is limited tradeoff between poverty- and growth-oriented investments; the poor should benefit from both.

Agriculture should form an integral part of the rural growth strategy in hillside areas, but its potential is limited

Over the past 25 years, agriculture has not been a strong engine of growth in rural Honduras. High reliance of rural households on agricultural and related income, however, means that any strategy targeted to these areas should build upon the economic base created by agriculture. Broad-based agricultural growth in these areas is constrained by unequal access to land, degradation of natural resources and loss of soil fertility, absence of technologies for productivity enhancements in hillside areas, and weak institutions for technical assistance and dissemination of market information. The extent to which agricultural growth will lower rural poverty depends on how these critical shortcomings are addressed.

Agriculture alone cannot solve the rural poverty problem, but those remaining in the sector need to be more efficient, productive and competitive

Production of food grains on less than two hectares with rainfed agriculture is not a poverty exit strategy, unless significant productivity gains are found. Those pursuing livelihood strategies based primarily on basic grains on small parcels of land are caught in a cycle of poverty. While there are multiple interventions to address rural poverty, we focus below on strategic actions involving food security, security and access to land and forests, infrastructure provision, improved natural resource management, non-agricultural rural employment and migration as key areas to achieve broad-based growth and reduced rural poverty.

Food security: Food insecurity is caused by low land and labor productivity, low incomes, high exposure to environmental and other risks, and thin or missing markets for food in

61 hillside areas. Low incomes and transportation problems related to infrastructure have inhibited the formation of markets. Food insecurity prevents households from maximizing returns from existing assets and adopting new technologies and higher value activities.

Food security is the prime objective of many poor rural households. It can be improved by investments in infrastructure, provision of market information, and new technologies for sustainable production. Increasing the contributions of economic activities linked to agriculture requires linking small farmers to market opportunities and providing the correct mix of assets to exploit the opportunities. Public investments are needed in infrastructure, communication, education, technical assistance, and credit facilities. These investments should be designed in such a way to create critical masses of complementary infrastructure and other household assets in targeted areas.

Security and access to land and forests: For families living in rural areas, absence of or limited security and access to basic resources are identified as the principal determinants of social inequality and poverty. In preparing an operational strategy to enhance land security and expand access to land, including the planned completion of a national land policy, the Government has key building blocks to its land-related foundation:

• The Agrarian National Institute’s own experience in land reform and titling has provided important expertise on rural ownership and land-use and mechanisms of conflict resolution. • The recent land administration modernization programs (CMAT) and PATH (Land Administration Program) provide a secure basis for land titling and functioning of land markets, with complementary donor activities. • Honduras has a growing tradition of private farmer-to-farmer research and extension services geared to low-investment technologies proven in upland settings, supported through the availability of small-scale service providers. • Some private financial institutions have successfully experimented with land purchase schemes under the Access to Land Pilot Program, which are now being further expanded. • There are active area-based rural development initiatives being coordinated by NGOs or project units in regions where there is a clear demand for and availability of land for purchase. • There is considerable research data regarding subsistence, mixed and commercial land- based enterprises in lands of different aptitudes, from which to develop sound financial projections for credit operations.

Infrastructure: Infrastructure improvements are essential components of an asset-based growth and poverty reduction strategy. The study found clear evidence of positive effects of road and market access on livelihood decisions and household income. Historical under-investment in poor regions means that major investments are required to augment asset bases. Significant investments in rural infrastructure occurred during the 1990s, but many poor households and communities still lack access to basic infrastructure and services.

Sustainable management of land-water-forest resources: More holistic management of these key resources can contribute to a poverty-reducing agricultural growth strategy. The

62 strategy should recognize the importance to long-term poverty reduction of maintaining environmental quality and mitigating disasters as the poor are more vulnerable to the consequences of environmental degradation and natural disasters. Addressing deforestation and encouraging sustainable development in the forestry sector should be priority responses to these issues.

The approach for achieving these interrelated land and forestry policy goals should be based on developing territorial-specific, and phased programs. Publicly supported programs in this context would be those oriented toward resolving land tenure conflicts; promoting conservation and rational use of water, soils, and forests; integrated watershed management; strengthening the national system of protected areas; and establishment of “zones of sustainable forest development” for commercial forestry purposes.

Generation of direct livelihood benefits for communities located in national forests and protected areas should be a fundamental goal of all these programs. Efforts should include developing and implementing the next generation of mechanisms and incentives (e.g., payment for environmental services and markets of environmental services) in order to create sustainable incentives for forest conservation and management and reforestation. 36

Non-agricultural rural activities: Livelihood strategies based primarily on agriculture will not be adequate for many households in hillside areas. However, off-farm employment is limited because of the physical distances from urban centers and towns and the lack of good road infrastructure and transport services. Linkages to market-oriented agriculture are extremely weak. Households also lack complementary assets such as land, education, and finance, reducing self-employment options. Those with little or no land are pushed to look for off-farm work because they cannot produce enough basic grains to meet food security needs. Households with a certain minimum landholding tend to stay on their farms rather than seek off-farm employment.

Strong social and cultural bonds keep people tied to traditional farming systems and consumption patterns, but social capital assets, such as networks, organizations, and associations, and human assets can facilitate a process of change. Rural-based economic activities that generate value-added using primary agricultural products hold some promise, but need to be based upon increased agricultural output and higher incomes among agricultural producers. External markets also need to be identified. One example is to increase the locally produced supply of food to the growing tourism industry. This study suggests that better market access and higher road densities lead to higher household income, and improved market access can compensate for insufficient access to land and education.

Programs to assist individual and small group micro-enterprises might be considered as a contributor to rural growth. Such programs would need to evaluate the demand for enterprise output, but could focus on providing marketing skills and organization and, perhaps, credit facilities, based on a market analysis. This study shows the importance of credit and education for a self-employment-based livelihood strategy. Even though agribusiness development,

36 See Jansen and others (2004) for a useful start of such analysis.

63 education and training, rural finance and food safety are listed by the Government as urgent and critical for rural development, a large funding gap currently exists. 37

The role of migration: The primary causes of migration are poverty and land degradation. For example, people from hillside areas in the west and south – where soils have been exhausted and eroded – frequently migrate to the north and northeast regions. But migration is significantly less common among the poorest. While migration may increase incomes for those left behind, it carries at least two types of social costs. First, migration to the north and northeast has increased population density in receiving regions, increasing pressure on a fragile environment. Second, areas of origin lose productive laborers, but, given high population densities, agricultural production is not likely to suffer.

A major question is thus how to capitalize on the full potential of migration. Remittances serve as a source of finance for food and other goods. They can also be used to finance market- oriented activities, but lack of complementary assets often inhibits the ability to undertake market-oriented investments. To maximize returns from migration, government should consider providing information on labor markets and labor rights, providing basic training to assist prospective migrants, and improving financial systems to lower the transaction costs and risks associated with remittances. Technical assistance and asset strengthening, such as adult business education, in receiving regions could increase the economic contributions of remittances to these regions.

Move from geographically untargeted investments in single assets to a more integrated and geographically based approach of asset enhancement with proper complementarities

To achieve a level playing field and give the rural poor a chance to participate in the global economy, minimal levels of key assets are needed. Investments, notably health, education, and transport and communication infrastructure, are required to support agricultural and non-agricultural activities. Basic social and physical infrastructure is necessary for poverty- reducing growth. A multisectoral and spatially differentiated investment program is required to upgrade and improve access to household assets. The appropriate roles of the public and private sectors in providing access to assets need to be carefully considered. At a minimum market failures and information asymmetries should be addressed through public actions, and barriers to asset accumulation should be identified.

Land access and security are key contributors to livelihoods of the rural poor. Secure land rights can improve food security and enhance risk-bearing ability, both of which can contribute to agricultural growth. Complementary investments are also needed. For example, this study found evidence that credit and schooling complement land’s impact on income. This complementarity indicates high pay-offs to simultaneous efforts aimed at expanding these assets.

37 In 2003 combined donor investment expenditures in rural development projects in hillside areas were less than $58 million, or about $29 per capita, on average, according to unpublished data from the National Program for Sustainable Rural Development (PRONADERS). Average per capita public expenditures in the rural areas between 1985 and 2001 have been estimated at $ 12 per year (Trochez 2003).

64 Technical assistance, training, capacity building, and inputs are needed for sustainable intensification of traditional agriculture and promote crop and livestock diversification, and improved forestry practices. Technical assistance should be coordinated with education and health programs to improve household nutrition.

Health and education services are critical for human capital assets. Provision of quality health and education to remote rural households is a challenge for developing as well as developed countries. Multi-community cooperation and coordination with infrastructure projects (such as roads and electricity) are essential to increase coverage and usage of health and education services. This study found evidence of the link between education and the likelihood that households have their own business.

Strong local level institutions are keys to managing community affairs such as provision of basic services, regulation of natural resources, mediation of conflicts, and coordination of community development. Water committees, school committees, credit associations, sharecropper associations, and churches are commonly found in communities. In the absence of formal institutions in isolated rural areas, these organizations fill a critical role and are an important factor in stimulating market-oriented production activities. Enhanced human and social capital can stimulate collective action, which is crucial for the process of change.

Financial services such as credit, savings, and insurance need to be better integrated. Examples of better integration are crop insurance linked to credit or credit linked to land access programs. Attempts to increase incomes through diversification strategies imply new risks, which may require new means of risk management.

There are well-defined areas of high economic potential, relatively good access to infrastructure, and high population densities

Policymakers in Honduras also have the opportunity to target high poverty areas along the Guatemalan and Salvadoran borders in western and southwestern Honduras that have relatively high access to infrastructure and agricultural potential (e.g., in coffee producing areas), but also relatively high rates of poverty. In particular, the Copán area and parts of the Northern coast have substantial tourism potential based on important natural and cultural assets, but despite good location conditions, measures of well being are lagging far behind potential. Persistent high rates of poverty show that this potential is not being realized -- and to the extent that it is being realized, the poor are not participating. Therefore, asset bases of the poor in this region need to be strengthened before they can benefit from growth-related spillovers. Public investments are needed in infrastructure, communication, education, technical assistance, and credit facilities. These investments should be designed in such a way to create critical masses of complementary infrastructure in targeted areas.

Asset investment programs need to be adapted according to the specific needs of regions and households

Some household assets programs should be national in nature (such as education and health), while others (such as infrastructure, and productive and social capital assets) require

65 more local adaptation. Household-level heterogeneity limits the appropriateness of “cookie- cutter approaches” to policies and programs designed to foster broad-based growth. Investment strategies should be formulated on broad regional bases, but options within regions should be tailored to local asset bases and other conditions. The challenge is to separate the public and private roles in providing productive assets; at a minimum, the public sector should take actions reduce inefficient barriers to productive asset accumulation. The report notes many such actions. Investments should support decentralized planning and implementation, but informed central analysis and central funding are still necessary for the poorest, most remote areas

Heterogeneity of areas and households also implies a greater role for local decision- making. Central government should provide guidance for investments and national priorities, but seek local input and analysis before deciding on the final form of such investments. Projects should contain a menu of alternatives whose ultimate choice depends on local assets and conditions. Local development investments should be community-driven, but informed analysis and central guidance and funding are still necessary, especially for poorest, most remote areas.

To capitalize assets, the policy and risk context must be addressed

Rural households are adversely affected by risks. These include weather- and market- related uncertainty and insufficient instruments for managing them are slowing economic growth. New instruments will better enable households to bear risks and help facilitate the process of structural change. The policy, legal, and institutional context are critical determinants of risk management ability:

Secure property rights: Risks and uncertainty associated with property rights constrain efficient asset allocation and increase food-land-housing insecurity. Secure property rights with enforcement will facilitate land rentals and sales and build confidence in contracts and markets.

Risk and vulnerability: Rural Honduras is still trying to recover from damages related to recent shocks such as hurricanes, recurrent droughts, and the collapse in coffee and banana prices. Rural households also face health-related risks and a wide array of pests and diseases that plague agricultural production. The poor are most exposed to risk and unable to manage the risk. They often adopt coping strategies that degrade their asset base. Improved instruments to manage risk can be linked to financial services and provided by the private market. The public sector role also plays an important role. Public works and school feeding programs can facilitate risk management while strengthening household asset bases.

There is need for more strategic convergence in linking the investment and impacts of sectoral projects backed by the World Bank and other donors in the diverse geographical regions of the country

The Bank must improve the complementarity of Bank-supported investments and engage in cross-sectoral planning and cooperation. This is important for the Bank’s ability to prioritize new investments and increase its effectiveness in using the existing and proposed lending program to leverage more substantial gains in policy, regulatory, and institutional reforms that the Bank seeks in the country, as stated in the Country Assistance Strategy. A similar conclusion

66 and overarching recommendation would apply to the investments carried out by the Government of Honduras and other collaborating partners.

The PRSC and Sector Wide Approach program (SWAp) for the rural sector are taking programmatic approaches including major institutional restructuring and consolidated national programs for agriculture, forestry and rural development, which lend themselves to applying the asset-based framework. While this operation is not being designed as a multisectoral operation, it can be an effective vehicle for carrying out many of the above recommendations, particularly if combined with other sectoral investment programs (land administration, human development, and infrastructure).

67 References

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