Honduras' IMF Agreement Includes Austerity Measures that May Make Conditions Worse, New CEPR Paper Finds

As the U.S. and Central American governments continue to discuss how to curb the number of people leaving Central American countries for the U.S. border, a new research paper from the Center for Economic and Policy Research (CEPR) finds that Honduras' agreement with the International Monetary Fund (IMF) may prolong Honduras' economic problems, which include high poverty, unemployment and high inequality. The paper, "Honduras: IMF Austerity, Macroeconomic Policy, and Foreign Investment," by CEPR Research Assistant Stephan Lefebvre, notes that the agreement, which provides Honduras with $189 million in financing over three years, includes many austerity measures, despite the weak labor market and growing poverty, and provides almost no protections for the most vulnerable sectors of society. As a condition of the deal, Honduran authorities agreed to implement fiscal consolidation amounting to 6.5 percent of GDP over four years, in addition to so-called "structural reforms" including privatizations, pension reforms and public sector layoffs.

"Thousands of people fled Honduras for the U.S. last year due to widespread crime, broken institutions, and a deteriorating economy," CEPR Co-Director Mark Weisbrot noted. "Yet the IMF's prescriptions are likely to weaken the economy further and worsen Honduras' problems.

"Honduran labor markets have yet to return to their pre-global-recession level and both poverty and inequality remain too high, with little sign of improvement," Weisbrot said. "Following a program of austerity--which the IMF itself seems to recognize will be highly unpopular--is likely to cause further deterioration."

The paper notes:

• The broadest measure of unemployment and underemployment increased from 35.5 percent of the labor force in 2008 to 56.4 percent in 2013. It is highly probable that pursuing austerity measures in this context will make the situation worse.
• The timing and composition of fiscal consolidation means that costs will likely fall disproportionately on the country's poor majority. Spending cuts target public sector workers, capital spending and local governments.
• A significant portion of the spending cuts target the government wage bill, expected to decrease by 1.7 percent of GDP by 2017. If fully implemented, the IMF plan will radically reshape the public sector in Honduras through austerity measures and a sweeping reform program that effectively privatizes important parts of the economy.
• Fiscal consolidation is frontloaded, with more than three-quarters of the four-year consolidation goal achieved by 2015. The agreement notes the possibility of "strong resistance" to these austerity measures and explicitly mentions making these policy changes well ahead of the 2017 general election.
• The plan contains only one provision designed to protect the impoverished majority in Honduras: a floor on social spending of 1.6 percent of GDP that is insufficient in both size and scope.
• The IMF plan for dealing with large and persistent current account deficits relies heavily on Honduras continuing to receive large net inflows of foreign direct investment (FDI).

"The foreign investment-dependent strategy that the IMF favors is fraught with risk, because FDI flows can be fickle and exhibit high volatility," Lefebvre said. "This macroeconomic plan is also an important driver of some dubious projects intended to attract foreign investment, such as so-called 'model,' or 'charter cities.'"