BUSINESS & ECONOMICS

BUSINESS BRIEFS

The National Congress has passed a new law designed to prevent and penalize money laundering. The law defines "money laundering" as knowingly possessing, processing, or hiding money and/or property resulting from the traffic of illegal narcotics. According to a La Tribuna report, the law establishes penalties of 12 to 20 years in prison, with sentences being increased by one third for public employees, public officials, members of the military or elected officials. Also included in the new legislation are regulations which allow for the confiscation of money and property obtained from drug trafficking.

According to a report in El Heraldo, the National Congress will suspend for 8 months the issuance of leases and permits to shrimp producers in the Gulf of Fonseca. This action was taken in response to demands by local fisherman who claim that environmental damage done by large scale shrimp producers is seriously affecting their ability to support themselves and their families with subsistence fishing. During the suspension various government institutions will study the environmental impact that shrimp producers are having on this area.

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Negotiations continued this week between the Northern Central American Triangle nations (El Salvador, Honduras, and Guatemala) and Mexico in regard to the proposed Free Trade agreement between the countries. The issue is very controversial among Honduran government and business leaders, some of whom believe the agreement will bring better technologies and improve production and trade, and others who fear that many Honduran industries will be crushed by the competition of their powerful Mexican counterparts.

After operating for 21 years in Honduras as a credit card company, the Financial Group "Credomatic" has now expanded its operational status to form "Banco Credomatic." As the newest member of the Honduran banking community, Banco Credomatic will be able to offer complete services to its clients.

Restrictive trade policies, over-regulation thwart Honduran economic freedom

Growing in Greater Honduras

By MAS DINERO

A recently published study by the Heritage Foundation attempts to rank the economic freedom of 150 countries around the world. The best in the world was Hong Kong, ranking number 1 while repressive Cuba, Laos and North Korea brought up the rear at 148, 149 and 150, respectively. The Heritage research strongly suggests that economic freedom begets economic development leading to an improved standard of living for everyone.

All countries in Central America, with the exception of Nicaragua, rank free or mostly free. At the time the study was published in December 1996, Panama ranked along with El Salvador at 33 and 34 respectively, the freest in Central America. Earlier, El Salvador went on record to commit to reducing trade and tariff barriers with a view to duplicating the economic miracle of Hong Kong, where the world's most unregulated economy created unprecedented prosperity. All evidence suggests that the economy of El Salvador is on the move, and is recovering rapidly since the end of the civil war in 1991. Honduran businesses frequently seem to fear competition from the Salvadorans.

As was pointed out in last week (July 5), the Heritage Foundation ranked economic freedom by comparing countries on ten different, equally weighted indicatives of economic freedom. All of the ten factors are important to anyone living in or contemplating investment in a given economy. The abbreviated table 1 shows the Heritage rank of a few of the categories for the countries of Central America.

In table 1, a score of 1 is best and 5 is worst on each of the ten categories evaluated. For comparison Hong Kong, the freest, achieved a 1997 score of 1.25, while Cuba, North Korea and Laos all shared the worst score of 5.00.

If one accepts the thesis that economic freedom begets economic development, and there's overwhelming evidence that it does, then logically governments around the world should focus themselves on improving economic freedom, as El Salvador is in fact doing.

Honduras scored particularly badly in the categories of trade policy and regulation. Some improvement in each of these categories would make Honduras much more competitive with other Central American countries in attracting foreign investment and more rapid development.

Heritage posts a poor score of 4 - high level of protectionism to Honduras. To quote their study: "Honduras has tariffs ranging from 5 percent to 20 percent. It maintains non-tariff barriers through strict labeling requirements and has an effective ban on poultry and corn imports."

Regarding regulation, Heritage again posts a score of 4 - high level of regulation. "Honduras's bureaucracy suffers from corruption and cronyism. Regulations are posed unequally and often haphazardly. Regulations, therefore, remain a huge threat to business."

Chile has had a rocky political and economic history. After a brief period of Communist rule under Salvador Allende, a coup in 1973 brought 17 years of military rule. During this period, some free market consulting economists from Harvard University helped shape policy. Progress has continued very well under civilian rule. In 1995, Chile enjoyed a real growth in GDP of 8.5 percent, and per capita income was about US$8,000 per year. The corresponding figures for this period in Honduras during this period were a growth rate of 3.5 percent and a per capita income of about US$750. You could argue that Chile's copper production helped them a lot. But neither Hong Kong nor Taiwan have much in the way of natural resources and they have both prospered. It seems that the free economy has been the tool that unleashed the force of economic growth.

One of the trends that seems to promote economic growth is relatively low taxes and relatively low consumption of the government as a percentage of the gross national product of the country. Many of the world's developed nations have boxed themselves into high taxes and high government consumption, which will tend to thwart future prosperity for them, and therefore transfer their development opportunities to the more enlightened of the developing countries.

Note in table 2 that most Central American countries actually have relatively low rates of government consumption. This makes it cheaper to do business here, and gives all those living and doing business more control of their own money and destiny.

These figures do not show the cost of moneys taken for redistribution for social security, welfare, subsidies, etc., nor do they show the cost of complying with regulations good or bad, nor the cost to the citizens imposed by import tariffs and barriers. These are very significant costs, and a lot of them are not very productive.

Much of any government's consumption goes into the pockets of bureaucrats, and to fund their offices, cars, phones, other perks, etc. Needless to say, all of them have to justify their pay checks. If one can expand his or her job by showing the need for further regulation, enforcement, management, guidance, security, etc., then he or she will probably get a promotion. Governments do not generally like to point out that they do not make anything. They cost money, and thus reduce the GDP per capita left for the real producers or the economy, the farmers, miners, factory workers, engineers, artists, etc.

Government activities are only helpful if the long-term income of a nation is improved by the activity. There are justifiable examples of government consumption, but a review of world progress suggests that less is better than more. Governments simply cannot spend their country into prosperity, although many seem to have tried. The result of higher government spending is higher debt, higher taxes, bigger government, and slower economic growth.

Earlier studies reported by Mas Dinero in Honduras This Week showed that El Salvador and Guatemala are fortunate in having low government debt. Since they both have low government consumption, they are well poised for rapid economic development.

Nicaragua, on the other hand, is burdened by massive government debt, with an annual cost of interest nearly equal to its gross domestic product. This is an example of a country that pulled out all the stops to spend its way to prosperity. Not only did they fail, but they also crushed economic growth, and have a per capita income only a little over half that of Honduras.

For Honduras, the debt load is high, but not extreme. Government consumption is fairly low. Honduras can easily grow itself to better prosperity. A lot of the pieces are already in place; among them is the fact that foreign investment is strong and growing. Still it is a competitive world, and there is a lot of competition for investment dollars. El Salvador is on record as competing for investment dollars, as the Asian tiger economies have been doing. With a freer economy, Honduras can create an environment more conducive to internal re-investment, further supporting more rapid economic growth. This may be the best approach to greater Honduran prosperity.

Difficult or improbable as it may seem to be, the system must dispel the mistaken notion that somehow new government initiatives and programs will create new growth and prosperity. The real truth is that a reduction of non capital projects requiring new government spending will do more to further the quest for rapid economic development.

TABLE 1: Economic Freedom By Category per Heritage Foundation

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BUSINESS BRIEFS

The government approved an increase in gasoline prices, with regular gasoline climbing 12 cents to Lps. 23.98, and super climbing 17 cents to Lps. 24.79. According to the report in La Tribuna, the price of liquid propane gas increased one lempira to 84.45 for the 25 lb. tank, while kerosene and diesel rose only slightly, an increase of 9 cents to 13.73 for kerosene and 1 cent to 16.11 for diesel.

An article appearing in La Tribuna this week stated that property taxes will be due starting the first of August. Municipal workers are currently delivering tax statements to residences, but request that anyone not receiving a statement go to the Municipal Treasurer to verify the amount and due date of their property taxes.

Celtel, the Honduran company providing cellular phone service to 6,000 clients in Honduras and the multi-national Motorola, have announced a US$19 million investment plan aimed at expanding coverage. According to a La Prensa report, plans include coverage of the corridor from Tegucigalpa to Puerto Cortés this year, with coverage expanding to include the Bay Islands, Trujillo and Choluteca in 1998.

Effective July 3, GAS PRICES are DOWN AGAIN. In Tegucigalpa, Regular gasoline dropped 72 centavos to Lps. 23.86 per gallon; super gasoline is down 68 centavos to Lps. 24.62; diesel fell 28 centavos to Lps.16.10; and kerosene is down 06 centavos to Lps. 13.64. Prices are slightly lower in San Pedro Sula.

The Central American Bank of Economic Integration (CABEI) has APPROVED a 50 PERCENT REDUCTION in debt payments owed by Honduras. The agreement, signed by the CABEI and the Honduran government July 4, means Honduras will have to pay only $45 million -- not the originally planned $100 million -- to the CABEI this year. In all, Honduras owes more than $400 million to the lending organization.

The Honduran government will use a $50 MILLION LOAN FROM THE REPUBLIC OF CHINA TO FOMENT SMALL- AND MEDIUM-SCALE BUSINESS GROWTH here. Meanwhile, the R.O.C., which has long been active in promoting development in Central America, will use the interest earned on the loan to establish a special Central American Development Fund, scheduled to open in 1998.

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A new project signed by HONDURAS and NICARAGUA this week promises TO BUILD a DRY CHANNEL -- an overland version of the Panama Canal -- connecting Honduras' Caribbean coast with Nicaragua's Pacific coast. Among the benefits expected by the project are increased revenues for both countries, faster cargo transport, new jobs and access to new markets.

Freedom pays dividends: new economic freedom scale is good news

Growing in Greater Honduras
By MAS DINERO

The Heritage Foundation, an independent policy analysis organization, along with the Wall Street Journal recently released their third annual report on economic freedom, the

"1997 Index of Economic Freedom." Their analysis, covering 150 countries around the world shows that actions boosting a nation's score on the Index of Economic Freedom (Wall Street Journal, Dec. 16, 1996) "could well produce massive improvements in the living standards experienced by people in many of the world's poorest and unfree economies."

This is an exciting finding, because one of the easiest and most painless things any government can do is improve economic freedom.

So what is freedom? To some extent it is different things for different people. Certainly it is not the freedom to violate the rights and property of other people. In fact, violation of property rights, whether by government or by organized groups is one of the items measured by Heritage to determine lack of freedom.

Heritage tackles the freedom question with 10 equally weighted factors, including:

* Trade policy -- high tariffs, import/export restrictions, corrupt and arbitrary rulings for import or export permits get a low score here.

* Taxation -- High average tax rates at the personal or corporate levels get a low score in this category. (It is better that you control your own money).

* Government Intervention in the Economy -- Socialistic policies, government ownership of production, and high government consumption as a percentage of Gross Domestic Product get low scores.

* Monetary Policy -- High inflation rates as a result of poor central bank policy mean a low score.

* Capital Flows and Foreign Investment -- Policies that discourage foreign investment get a low score.

* Banking Policy -- Restrictions on banking policies such as not permitting foreign banks to operate on the same conditions as domestic banks, or not permitting banks to act as brokers or insurance agents bring lower scores.

* Wage and Price Controls -- Price controls of any type, rent, market prices, minimum wage, and even fixing bus fares detract from a good score.

* Property Rights -- Sanctity of private property is very important. Is it well protected by the courts? If the government wants property for whatever purpose, is the owner compensated at fair market value? Can land be invaded by squatters without fair compensation? Poor protection of property rights gets low score.

* Regulation -- A high level of regulation makes it difficult to start or continue operation a business. Over-regulation can kill the golden goose, and thwart competition, so it gets a low score.

* Black Market -- Pirated software on the market, failure to enforce copyrights, or markets that exist to circumvent excessive government regulation beget a low score.

As noted, each of these areas is weighted equally by the Heritage Foundation. Each individual may differ in his sense of importance of the 10 categories, but it is clear that if even one of the 10 categories is grossly out of line an economy will be stifled.

Now that we have gotten through the boring nitty-gritty, there are some interesting results, and they raise important questions.

Of the 150 countries analyzed, 72 were free or mostly free, up from 65 last year, while 78 were mostly unfree or repressed, up from 77 last year. Free and repressed countries are well distributed throughout the world.

HONG KONG FREEST

At the end of 1996, Hong Kong was classified as the freest in the world, and Singapore is ranked number two, very close behind. Although China has made strong economic gains in recent years, most production is still owned by the government, tariffs and taxes are high, and regulation oppressive. Given this situation, China ranks 126 out of 150 among the world's countries. Now that Hong Kong has been returned to the Chinese government, it is hard to imagine that the laissez faire policies of Hong Kong will continue unabated. China has already sent troops to Hong Kong and suspended the right of free assembly without permission. And China apparently intends to maintain a separate policy for Hong Kong, including a policy of keeping visiting and working in Hong Kong off limits to the majority of Chinese. Can this really fly?

CHILE FREEST IN LA!

Chile is a Latin American success story. The government consumes only 9 per cent of Gross Domestic Product, and has its social security and public education supplied by private enterprise. Tariff barriers are low, and there are few price controls. Minimum wage, hours worked and safety regulations are controlled by the government.

Economic freedom moves in both directions. New Zealand was quite socialistic a few years ago, but they have now deregulated, cut tariff barriers, and even privatized the postal service to rank the fourth freest country in the world! On the other hand, a lot of developed countries are losing ground due to increased post-industrial welfare and overzealous and relatively unproductive, costly environmental regulations. Holland, Canada, Belgium, Germany, and a number of others have lost ground in the past three years. High taxes and excessive regulation have become a hallmark for many of the developed nations.

Some of the Warsaw Pact countries have made tremendous progress. The Czech Republic ranks number 12 in freedom, putting it well ahead of most of Western Europe. Estonia, one of the Baltic States, recently being liberated from the former Soviet Union ranks an admirable number 25. Others are not faring so well. Corruption, government intervention and poor private property protection place Russia at a disappointing rank of 117, while Belarus and Georgia rank 128 and 129 respectively. The Ukraine ranks a repressive 135, and has been deteriorating.

POOREST, LEAST FREE

As an area, Sub-Saharan Africa is economically the poorest in the world. Of the 38 Sub-Saharan African countries graded, only 10 scored mostly free, while 22 were mostly unfree, and 6 rated repressed, like Zaire (number 139) and Angola (141), and Mozambique (133). A lot of aid of all types has been given to a multitude of African countries. Some like Tunisia (49) and Morocco (47) have done fairly well, but pervasive corruption, over-regulation and poor property rights have stifled the majority. It appears that bad government and lack of freedom, not lack of world economic assistance is at the root of the problem.

Heritage concludes that, "The people of Angola, Mozambique, Haiti, and the Ukraine are not poor because wealthy people on the West do not share their riches, rather they are poor because their governments pursue destructive economic policies that depress free enterprise." They further suggest that wise investors should choose to use this index to determine which governments are pursuing economic reform before making investment decisions. Investors and corporations around the world are making new foreign investments around the world at an unprecedented level. Clearly, regulations favorable to private enterprise will help attract these investment dollars and improve the economy.

Labor unions in the United States sometimes call the Honduran maquilas "sweatshops," but here those businesses are providing what for Hondurans today are good jobs that are helping make Honduras a better place to live. Honduras ranks number 84 in the Heritage study, not bad, but not very good either. There is room for improvement. Honduras and Latin American freedom will be discussed in more detail in the near future.

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Japanese geologists search for oil in Honduras

By SUYAPA CARIAS

TEGUCIGALPA -- Geologists from the JAPEX Geoscience Institute of Japan recently began investigating potential oil reserves in the Honduran Mosquitia. The exploration begins after JAPEX signed an agreement with the Natural Resources Ministry last year.

JAPEX has agreed to create a data base, as well as a regulatory master plan should oil be found. In the case that the investigation prove positive, the information will be sold to interested companies as a way to attract foreign investment to Honduras in the petroleum sector.

Seventy percent of the profits made on the sale of this information will go to JAPEX. The rest will go to the Honduran government. The institute will finance the majority of the exploration while the Honduran government provides logistic and technical support.

The Japanese geologists are currently looking at both La Mosquitia and the Atlantic seaboard. Their first mission includes field work on the Guare River and the organization of information collected by other scientists on previous explorations.

After spending two weeks in Honduras, the Asian experts returned to Japan to analyze samples and continue processing their data. Honduran authorities expect a preliminary report by September and a final document by March 1998.

Explorations for oil date back to the 1920s in Honduras, when a number of wells were dug in the Amatique and Ulua river basins. With 12 more wells in the Tela Basin and another 13 in La Mosquitia, there are currently 31 oil wells registered in Honduras. These were primarily dug by U.S. companies under concessions granted by the Honduran government. Eight of these firms still hold rights to the wells.

In 1994, the National Congress passed a Hydrocarbons Law to facilitate the development of a petroleum industry should these explorations prove fruitful. Although scientists have proven that oil definitely exists, they have yet to determine whether it will be found in amounts large enough to merit further drilling.

Last year, Honduras imported $213.5 million dollars in fuels.

BUSINESS BRIEFS

The MOTION PICTURE ASSOCIATION of the United States says it WILL TAKE LEGAL ACTION AGAINST several HONDURAN TELEVISIONS CHANNELS accused of broadcasting U.S. films without paying the proper royalties. MPA representatives spent the week in Honduras to investigate television stations here. They have yet to release the names of the stations that will be sued. It is estimated that U.S. filmmakers lose up to $2 million a year due to pirating.

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INFLATION DROPPED from 27 TO 23 PERCENT BETWEEN MAY 1996 AND MAY 1997, said Central Bank President Hugo Noe Pino in a La Tribuna report Tuesday (July 1). Pino expects the June-to-June rate to be one or two points lower and says if the trend continues Honduras will have no problem reaching its projected 16 percent inflation rate by December.

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INSURANCE COMPANIES PAID OUT LPS. 100 MILLION in 1996 TO REPLACE STOLEN VEHICLES, said Jose Luis Moncada, manager of the Honduran Chamber of Insurance Companies, in an El Tiempo report last Thursday (June 26). So far this year, they've lost Lps. 20 million to the car theft trade. Blaming law enforcement authorities for their losses, insurers say the Reina administration has not come down hard enough on vehicle thieves. Only 12 percent of Honduran vehicles are insured, Moncada added.

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The ANILLO PERIFERICO -- a new highway being built to link Tegucigalpa's four major access points -- will be ALMOST ENTIRELY COMPLETED BY the end of NEXT YEAR, said Carlos Zelaya, Minister of Pubic Works, Transportation and Housing, in an El Tiempo report last Thursday (June 26). Section 2, which links the Loarque neighborhood to the Danlí highway, will be completed by the end of August, he said. Zelaya added that Section 1, which will link Loarque to the Northern Highway, will be completed by March 1998 and Section 3, which will connect the Danlí highway to the road to Valle de Angeles, will be completed by November 1998. The new highway is expected to significantly lessen inner-city traffic.