Encourage Honduras in its Bold Economic Reforms
AROUND the world, emergent governments agonize over decisions of how far and how fast to move in unshackling economies from deadening statist control. Newly elected Honduran President Rafael Leonardo Callejas, who visited the US recently, has launched a daring program of reform. Last Thanksgiving weekend, Mr. Callejas and his National Party won a decisive, top-to-bottom victory over the ruling Liberals. This marked the culmination of a five-year drive by Callejas and the idealists of his ``Monarca'' movement first to reform their own party, and then to capture power on a platform of anticorruption, demilitarization of Central America, and economic reform.
The Nationalists won despite being outspent at least 3-to-1 by the combined resources of the Liberals and the government itself, which freely used public funds for advertising and logistical support of its ticket. The election brought Honduras's first ballot-box transfer of power to an out-party in 57 years.
The real story came after Callejas's inauguration. It took only 33 days for the new administration to strike at the economic and social crisis it had inherited. On the evening of Friday, March 3, the 46-year-old president, backed by his new legislative majority, passed a sweeping reform of Honduras's economic order.
Protective tariffs will be slashed from a top rate of 135 percent to 20 percent within two years; income and corporate tax rates come down to levels at which more people might actually pay them, while certain excise taxes will rise and a value added tax will be imposed.
Hundreds of special subsidies, tax exemptions, and privileges for well-connected businesses were annihilated. State-owned industries will be sold, public services contracted out where possible, and land reform begun in earnest. Some will think the program unwise in its austerity, but no one can dispute its courage.
If that Friday night was historic, Saturday morning was equally so. Following the passage of the Callejas reforms, the new president of the Central Bank convened his board and ended a 60-year-old exchange rate regime that had provided cut-rate hard currency to the privileged while distorting the economy and stifling competition.
The program assaults the interests of virtually all powerful sectors of society. The combined effect of budget cuts and the withdrawn access to phony exchange rates translates to more than a one-third cut in military spending in one year.
To hesitant governments elsewhere in Latin America and beyond, Honduras presents a case study in the bold approach. But the picture could darken in a hurry. With big business, the unions, and the military all chafing under the reforms, the Honduran experiment hangs by a thread. With a rare opportunity to recognize courage and reinforce sound policy, the international community, infatuated with Eastern Europe, is taking a business-as-usual attitude toward Honduras's pleas for cooperation.
The US Treasury and State Departments have attempted to organize a quick restructuring of the country's foreign debt problem, but the ``Iffys'' (international financial institutions) are living up to their nickname. Congress seems unwilling even to maintain foreign aid at last year's level. The Commerce Department, OPIC, and other agencies, frenetically active in Poland and Hungary, have yet to organize their first trade mission to Honduras, historically Latin America's poorest country.
If Honduras succeeds, with our help, other countries will be encouraged to emulate its courage. Conversely, if Callejas wins no tangible reinforcement from the nations that have preached reform, the go-slow lobby in the new democracies will be vindicated. Honduras may lack the glamor of Panama, Nicaragua, or Eastern Europe, but a little extra attention would go a long way.