Copyright ©2023 Fundación Eléutera for The Fraser Institute. All rights reserved.

The authors
have worked independently and their views are therefore theirs alone and do not necessarily
reflect those of the Fraser Institute's patrons, trustees and employees. This publication in no way
implies that the Fraser Institute and its trustees and employees endorse or oppose the passage
of any law or any particular political party or candidate. Edited in collaboration with the Economic
Freedom Network

Data for researchers

All the data, including those presented in this report and those omitted due to space limitations, may be freely
downloaded at www.eleutera.org. This file contains the most up-to-date and accurate data on the Index of
Economic Freedom in Honduras. The names of some variables and some data sources have changed since the
first publication in 1996; users can find information regarding the sources and descriptions of these years in
previous editions of Economic Freedom of the World. All editions of the report are available in PDF and can be
downloaded free of charge at www.freetheword.com. However, it is strongly recommended to use the data
from this most recent file to take advantage of its updates and corrections, even with respect to the data of
the first few years. To carry out longitudinal or long-term studies, it is recommended to use the chained index,
since it is the most homogeneous in time. If you have any problems downloading the data, please contact Fred
McMahon by email at freetheworld@fraserinstitute.org. For technical questions regarding the data itself,
contact Carlos G. Cálix or Jairo Nuñez by email at direccion@macrodato.com.

Publication citation Authors:

Carlos G. Calix and Jairo Nunez
Title: Economic Freedom in Honduras: Annual Report 2023
Publisher: Fundación Eléutera
Publication date: 2023
Content
SUMMARY 4
Economic Freedom in the World 4
What is economic freedom? 4
Why measure economic freedom? 5
Economic Freedom in Honduras 5
The decline of Economic Freedom in Honduras 7
RESULTS 9
Area 1. Size of the State: spending, taxes and companies 9
1A. Public spending 9
1B. Transfers and subsidies 9
1C. Companies and public investments 9
1Di. Top marginal income tax rate 9
1Dii Top marginal tax rates for taxes on income and wages 9
1E. State ownership of assets 9
Area 2. Legal structure and guarantee of property rights 10
2A. Judicial independence 10
2B. Fairness in the courts 10
2C. Protection of property rights 10
2D. Military interference in the rule of law and politics 10
2E. Integrity of the legal system 10
2F. Legal compliance of contracts 10
2G. Regulatory restrictions on the sale of real estate 11
2H. Police reliability 11
2I. Business costs of crime 11
Area 3. Access to a sound currency 11
3A. money growth 12
3B. Standard deviation of inflation 12
3C. Inflation: last year 12
3D. Freedom to have foreign currency bank accounts 12
Area 4. Freedom of international trade 12
4A. Taxes on international trade 13
4Ai. International trade tax revenue (% of trade sector) 13
4Aii. average tariff rate 13
4Aiii. Standard deviation of tariff rates 13
4Bi. Non-tariff trade barriers 13
4Bii. Cost of import and export procedures 13
4C. Exchange rates on the black market 13
4D. Controls on the movement of capital and people 13
Area 5. Regulations 14
5Ai. Bank ownership 14
5Aii. Credit to the private sector 14
5Aiii. Interest rate controls / negative real interest rates 14
5Bi. Hiring regulation and minimum wage 14
5Bii. Regulation of hiring and firing 15
5Biii. Centralized collective bargaining 15
5Biv. Regulation of the working day 15
5Bv. Mandatory cost of dismissal 15
5Bvi. Compulsory military service 15
5C. Regulation of business activity 15
DISCUSSION 16
Final reflection on the Honduras Index of Economic Freedom 16
Homework for Government: Property Rights and Inflation 17
METHODOLOGY 17
THE AUTHORS 24
SUMMARY

Economic Freedom in the World

The Economic Freedom of the World index measures the degree of support for economic free-
dom in the policies and institutions of each country. The cornerstones of economic freedom are
personal choice, voluntary exchange, free competition, and the guarantee of private property.

42 parameters are used to create a global index that measures the degree of economic freedom
in five large areas:

1.State size: spending, taxes and companies;

2.Legal structure and guarantee of property rights;
3.Access to a sound currency;
4.Freedom of international trade and
5.Credit, labor and company regulation

Since the first publication in 1996, numerous studies have used Economic Freedom of the World
data to study the effects of economic freedom on investment, economic growth, income levels,
and poverty rates.

Virtually without exception, these studies have found that countries with institutions and policies
more consistent with economic freedom have higher investment rates, economic growth rates,
income levels, and poverty reduction rates.

The Fraser Institute produces the annual Economic Freedom of the World report in cooperation
with the Economic Freedom Network, a group of independent research and education institutes in
nearly 100 countries and territories, in the case of Honduras through the Eléutera Foundation.

What is economic freedom?

The essential elements of economic freedom are: 1) personal choice, 2) voluntary exchange coor-
dinated by markets, 3) freedom of entry and competition in markets, and 4) protection of people
and their assets against third party attacks. These four pillars imply that there is economic free-
dom when people can choose for themselves and carry out voluntary exchanges as long as they
do not harm the people or property of others. People have a right to their own time, talent, and
resources, but they do not have the right to deprive others of their property or demand that
others provide it to them.

In an economically free society there is no room for the use of violence, theft, fraud or trespassing,
but rather freedom of choice, trade, cooperation and competition in accordance with the convic-
tions of each one. In an economically free society, the main function of the State is to protect
people and their property against attacks by third parties.

The Economic Freedom of the World (EFW) index measures the degree of compliance of each
country's institutions and policies with this protective function. In other words, the Economic
Freedom of the World index assesses to what extent a country's institutions and policies conform
to the ideal of the limited state, one that protects property rights and organizes the provision of a
limited set of “ public goods”, such as national defense and access to sound currency, without
extending much beyond these basic functions. To score high on the index, the country must
effectively protect private property, ensure fair enforcement of contracts, provide a stable mone-
tary framework, as well as keep taxes low, refrain from setting up barriers to domestic and interna-
tional trade, and rely more fully on markets than on public spending and state regulation to alloca-
te goods and resources.
In many ways, a country's global index of Economic Freedom of the World is a measure of the
degree of fit of its institutions and policies to the ideal framework that is derived from the basic
analysis of microeconomics textbooks. What kind of political structure is most favorable to
economic freedom? The answer is a limited state designed to protect minority rights and
promote consensus-based political action. Elections and majority democracy are not enough;
they must be backed by restrictions on the power of the executive and by the constitutional
protection of individual rights, the decentralization of political action and the rule of law.
Otherwise, the result is political instability and the trampling of economic freedom. This is an
essential point largely ignored by political leaders, the media, and modern intellectuals, and
unawareness of which is likely to lead to disappointment regarding the results of majoritarian
democracy and loss of political and economic freedom.

Why measure economic freedom?

Milton Friedman believed that a more precise measurement of economic freedom would allow
researchers to more clearly identify the key factors in the behavior of economies. Accordingly,
the Economic Freedom of the World project has always had as its sole objective the accurate
measurement of economic freedom. In recent years, social scientists have focused on identif-
ying and measuring the impact of economic, political, legal, and cultural factors on the growth
and development of economies.

The Economic Freedom of the World index data set is the most comprehensive measure of the
degree to which countries rely on voluntary exchange and market institutions to allocate resour-
ces. A reliable measure of differences in economic freedom across countries and over time is
essential for current scholarship in this important area.

The Index of Economic Freedom currently includes more than 160 countries and provides data
that can go back as far as 1980 for about 100 of them.

Economic Freedom in Honduras

The Economic Freedom Index in Honduras has

decreased from 7.04 in 2020 to 6.74 in 2023.
 Below is the performance obtained by Honduras in each of the measurement areas between
2020 and 2023, which reflected setbacks in economic freedom in four of the five measurement
factors.

HONDURAS WORSE IN 4 OF 5 ASPECTS MEASURED BY THE RANKING

OF ECONOMIC FREEDOM
Table N° 1: Score by indicator between 2020 and 2023

Source: Fundación Eléutera based on information from the Fraser Institute

Based on the previous data for each indicator, it can be concluded that the setbacks were
largely conditioned by:

• Government size: The growth in the size of the government that was undoubtedly conditio-
ned by the increase in fiscal spending, as a result of the measures adopted by the post-pande-
mic government, the creation of new secretariats and an increase in the general budget.

• Legal Structure and Security of Private Property: It is urgent to provide greater legal
certainty regarding the processing of the permits required for the development of projects
that, as has been seen,have been weakened by administrative decisions taken by local and
national authorities, which has generated growing concern. In addition to land invasions and the
repeal of laws that do not guarantee the conditions of legal stability.

• Currency Stability: In this indicator, Honduras is also going backwards.Tax aid, withdrawals
from pension funds and greater issuance of the money supply generated a substantial increase
in the amount of money, which has translated into a significant increase in inflation.

• Freedom for International Trade: Honduran foreign policy has generated uncertainty in
international markets, but even so, the levels of freedom for international trade are maintained
in 2023.

• Credit, Labor and Business Regulation: In this indicator, Honduras regresses significantly. The
increasing difficulty in obtaining the necessary permits to promote new investments and
businesses, especially in the environmental area, as the operating permits of some companies
are not renewed, has generated a more adverse climate for the development of the private
sector.
The decline of Economic Freedom in Honduras

In 2020, according to the Economic Freedom Report provided by the Fraser Institute, the Legal
System and Property Rights area had stabilized, obtaining a score of 4.23, after having consecuti-
vely received 4.15 in 2018 and 2019. However, in 2023 the instability caused by legal uncertainty
generated by land invasions and repeals of laws that contravene the Constitution of the Republic
and various trade agreements, creates a significant deterioration in the case of Honduras.
Honduras has not fared well in terms of the rule of law. In 2020 an improvement was reported,
however it was ranked 128 out of 162 jurisdictions in the world. It is a fact that an efficient market
economy is not possible without a solid and predictable legal structure that protects property
and contract rights for all, equally and fairly. Improving in this area is the country's greatest
challenge and opportunity.
In this same sense, the lack of judicial independence, impartiality and integrity politicizes the legal
system and grants special privileges that violate the law, weakening the economic freedom of
other members of society. Military interference through states of emergency undermines the
rule of law. Contract enforcement is crucial. Weak contract enforcement discourages individuals
and businesses from entering into freely agreed contracts, as it leaves parties uncertain whether
contracts will be fairly enforced and disputes handled properly in the system. law creating more
uncertainty. Lack of police reliability and the high cost of crime add huge expenses to business,
increase risk and, in the worst cases, expose business owners to violence and destruction.
Honduras achieved its highest Rule of Law score in 2014 and it was not very high, just 4.46. In 1985,
Honduras fell to its lowest level in the Rule of Law, 2.88. It's improved a bit since then, but it was
still just 4.23 in 2020. The nation seems stuck in a dangerously low balance on the rule of law.Ac-
cording to data from the Honduran Council for Private Enterprise (COHEP), it is estimated that 2.4
billion dollars have been stopped from investing in the country due to the invasions. Mainly affec-
ting the agribusiness sector, such as African palm, sugar cane, melon, okra, shrimp and livestock.
Adding losses above $120 million for extortion.
In the same way, in a publication entitled “Illegal security puts the generation of employment,
investment attraction, reputation and public finances of Honduras at risk”, released in 2022,
warned that “Actions that do not respect the applicable legal provisions, including international
treaties, can generate damages for over $1.3 billion dollars to the State of Honduras, cause an
international controversy, harm thousands of Honduran families, and scare away essential invest-
ments for a prosperous future in Honduras.” In addition to another lawsuit in early 2023 “against
the Honduran government before the International Center for Settlement of Investment Dispu-
tes (ICSID), for the confiscation of control of the company in violation of a court order. The
claimant's claim is for US$330 million and was registered by the ICSID Secretariat."
The protection of people and their legitimately acquired assets is a basic element of economic
freedom and civil society. In fact, it is the most important function of the state. The basic
elements of a legal system compatible with economic freedom are the rule of law, the guarantee
of property rights, judicial independence and impartiality, and the effective and impartial applica-
tion of the law. Being indicators of the degree of effectiveness in the protective functions of the
State: judicial independence, the impartiality of the courts, the protection of property rights,
military interference in the Rule of Law and politics, the integrity of the legal system, the legal
enforcement of contracts, regulatory restrictions on real estate sales, police reliability, and busi-
ness costs of crime. For this reason, in Honduras it is necessary to strengthen the legal system and
property rights
It is urgent to provide greater legal certainty due to land invasions and the repeal of laws that do
not guarantee the conditions of legal stability; in specific cases equivalent to indirect and illegal
expropriations, which has generated growing concern, uncertainty and risk for owners and
potential investors.
What is the cause of the decline in economic freedom in Honduras?Although Honduras' scores
and rankings have fallen in four out of five areas of the Index of Economic Freedom, the decli-
nes have been greatest in the areas of Size of government (area 1), Legal system, and protec-
tion of property rights (area 2). , sound currency (area 3) and Regulation (area 5).The drop
registered in area 1 has been shocking, the score obtained in Honduras in 2020 was 8.87 while in
2023 a score of 8.10 is reported.
As for area 2, the registered drop has been enormous: in 2023, the score of 4.23 obtained by
Honduras has gone to 3.88. It is not difficult to identify the specific reasons for the fall of area 2,
the increase in land invasions, the ramifications of the wars against drugs and corruption, and
the violation of property rights has weakened the rule of law and, in our opinion, they have
contributed to the sharp drop in the score in the legal system area. Increased regulations have
also been a major factor in lowering the country's scores. During the last decade, non-tariff
barriers, restrictions on foreign investment and business regulation, particularly focused on the
Special Development Zones and the uncertainty caused by the Tax Justice Law, have increased
a lot. It is not surprising, therefore, that the increase in regulations has been accompanied in
Honduras by a sharp reduction in scores on elements such as judicial independence, court
impartiality, and regulatory favoritism. To a large extent, the country has experienced a signifi-
cant shift away from the rule of law towards a heavily regulated politicized state.
The reduction in the overall score between 2020 and 2023 on the ten-point scale may not
seem very large, but academic studies on this question indicate that a one-point decrease is
associated with reduced GDP growth in the long run. This assumes that unless policies that
undermine economic freedom are reversed, future annual growth of the Honduran economy
will remain below 4%.
It is worth mentioning that the index is now more exhaustive and the available data is more
complete, so the number and composition of the elements of many countries vary at different
moments in time. It is a problem similar to that of comparing GDP or the price index of different
years, whose underlying basket of goods and services changes each year. To correct this
problem and ensure temporal comparability, we have done the same as the statistics that
analyze national income, for this purpose the following table is presented:

Table N° 1: Global index from 1980 to 2023

1980 1985 1990 1995 2000 2005 2010 2015 2020 2023
Honduras 5.42 5.58 5.71 6.21 6.73 7.16 7.26 7.29 7.04 6.74

Source: Fundación Eléutera based on information from the Fraser Institute

 RESULTS

Area 1. Size of the State: spending, taxes and companies: The size of the State has been
negatively affected against the last edition of the Index of Economic Freedom presented in
2020:
Variation
from
Score 2020

1. Size of the
8.10 -8.7%
state

1A. Public spending

The country's public spending has presented a relative variation of +2.35% from 2019 to 2021
(136,243 million lempiras in 2021 against 133,103.5 million lempiras in 2019). . When making the
relationship of the 136,243 million lempiras of public spending with the total consumption of
the country in 2021, which was 672,775 million lempiras, it generates 20.25%, which impacts
this indicator of public spending.

1B. Transfers and subsidies

Transfers and subsidies in the country have remained constant in the last 20 years , causing
this indicator to obtain its maximum result of 10.0 in the economic freedom index.

1C. Companies and public investments

According to data from the World Bank, public investment in the country was 23.9% in 202 .
This percentage of public investment gives a rating of 7.46 / 10.0 on this indicator of the index.

1Di. Top marginal income tax rate

The maximum marginal tax rate of the income tax has remained stable during the last nine
years at 27%, assigning a score of 9.0 / 10.0 in this indicator.

1Dii Top marginal tax rates for taxes on income and wages
The maximum marginal tax rates of income and wage taxes, like the previous indicator, have
remained stable at 27%, assigning a rating of 9.0 / 10.0 to this indicator.

1E. State ownership of assets

This component is based on scores from the Varieties of Democracy (V-Dem) data on state
ownership of the economy. According to data from the V-Dem, the State of Honduras has
increased the amount of state assets to the point of reducing this indicator from 8.48/10.0 in
2020 to 8.22/10.0 in 2023.
Area 2. Legal structure and guarantee of property rights
The legal structure and the guarantee of property rights has been negatively affected against
the latest edition of the Index of Economic Freedom presented in 2020:

Variation
from
Score 2020 2020

2. Legal structure and

guarantee of property
rights
3.88 4.23 -8.4%

2A. Judicial independence

This element is taken from the question in the World Competitiveness Report: “Is the judiciary in
your country independent of the political influence of rulers, individuals and companies? The
result of this element is 4.67 / 10.00.

2B. Fairness in the courts

This element is taken from the question in the Global Competitiveness Report: “Your country's
legal framework for resolving disputes and challenging the legality of government acts and regu-
lations by private companies is inefficient and susceptible to manipulation ( = 1) or is efficient and
follows a clear and neutral process (= 7)”. The wording of the question has changed slightly over
the years. The result of this element is 3.48 / 10.00.

2C. Protection of property rights

This element is taken from the World Competitiveness Report question: “Property rights, inclu-
ding that of financial assets. The result of this element is 4.43 / 10.00.

2D. Military interference in the rule of law and politics

This element is based on Political Risk Element G of the International Country Risk Guide. “Measu-
re of military intervention in politics. Since the army is not the object of election, its intervention,
even of a peripheral nature, reduces democratic accountability. Military intervention can stem
from an external or internal threat, be a symptom of underlying problems, or constitute a com-
plete takeover of power. In the long term, a system of military rule will almost certainly diminish
the effectiveness of the functioning of the State, lead to corruption and create a difficult environ-
ment for foreign companies. The result of this item is 4.17 / 10.00.

2E. Integrity of the legal system

This element is based on Element I of Political Risk, Law and Order, of the International Country
Risk Guide: “Two measures of one element of risk. Each sub-item equals half of the total. The
sub-element "law" evaluates the strength and impartiality of the legal system and the sub-ele-
ment "order", popular compliance with the law. The result of this element is 3.50 / 10.00.
2F. Legal compliance of contracts
This element is based on estimates from the World Bank's Doing Business report on the time and
money required to collect a debt. A debt equivalent to 200% of the country's per capita income
is assumed, in which the plaintiff has fulfilled the contract and the court has ruled in his favor.
Scores of zero to 10 are assigned for (1) the cost in time (measured by the number of calendar
days required from the filing of the claim to payment) and (2) the monetary cost of the case (me-
asured as a percentage of the debt The result of this element is 2.46 / 10.00.

2G. Regulatory restrictions on the sale of real estate

This sub-element is based on data from the World Bank's Doing Business report on the time,
measured in days, and monetary costs required to transfer ownership of land and a warehouse.
Scores from zero to 10 are assigned for (1) the time cost (measured by the number of calendar
days required to convey the property) and (2) the monetary cost of the conveyance (measured
as a percentage of the asset's value). The result of this element is 7.74 / 10.00.

2H. Police reliability

This element is taken from the Global Competitiveness Report question: “To what extent can
police services be trusted for law enforcement and order maintenance in your country? The
result of this element is 3.5 / 10.00.

2I. Business costs of crime

This element is taken from the Global Competitiveness Report question: “To what extent do
crime and violence impose costs on companies in your country? The result of this element is 4.67.
The result of this element is 4.67 / 10.00.

Area 3. Access to a sound currency

The area of access to sound currency has been negatively affected against the last edition of the
Index of Economic Freedom presented in 2020:

Variation
from
Score 2020 2020

3. Access to
9.21 9.31 -1.1%
sound currency
3A. Money growth
This item measures the average annual growth of the money supply over the past five years
minus the average annual growth of real GDP over the past ten years. Countries whose money
supply growth greatly exceeds real output growth receive lower scores. Money supply figures
from the M1 aggregate (basically defined as demand deposits plus currency in circulation) have
been used to measure the growth rate of the money supply. The result of this item is 8.58 / 10.00.

3B. Standard deviation of inflation

This item measures the standard deviation of the inflation rate over the past five years. Normally
the GDP deflator is used as a measure of inflation in this element or, if these data are not available,
the Consumer Price Index. The result of this element is 8.79 / 10.00.

3C. Inflation: last year

The CPI is normally used as a measure of inflation in this element, since it is usually available before
the GDP deflator. When this data is not available, the inflation rate of the GDP deflator is used.
The result of this element is 9.47 / 10.00.

3D. Freedom to have foreign currency bank accounts

The score is 10 if having foreign currency bank accounts at home and abroad is allowed without
restrictions. The result of this element is 10.0 / 10.00.

Area 4.international trade freedom

In 2020, international trade freedom had a score of 6.07 / 10.0, the same as that obtained in
2023:

Variation
from
Score 2020 2020

4. Freedom of interna-
tional trade 6.07 6.07 -0.0%
4A. Taxes on international trade
4Ai. ITax revenues on international trade (% of commercial sector)
There have been no significant variations in income from taxes on international trade. Honduras'
trade balance continues to be negative. At this point the valuation is 9.53 / 10.00 similar to the
previous ten years in this sub-element.

4Aii. Debt. average tariff rate

According to data from the World Trade Organization in its report Tariff Profiles in the World
published in 2022, Honduras has a tariff rate of 5.8%. which has remained stable for the last 10
years. This value gives you a value of 8.84 / 10.00 in this indicator of the index.

4Aiii. Standard deviation of tariff rates

The values obtained from the World Trade Organization in its report tariff profiles in the world
published in 2022 of 9.2 generates, through the formula, a score of 6.32 / 10.00 in this indicator
against a 6.66 / 10.00 obtained in 2020.

4Bi. Non-tariff trade barriers

This sub-item is based on the Global Competitiveness Report survey question: “Does your coun-
try's tariff and non-tariff barriers significantly reduce the ability of imported products to compete
in the domestic market”. According to the report of the World Trade Organization, Honduras has
remained similar to the values of 2020.

4Bii. Cost of import and export procedures

It is based on data from the World Bank's Doing Business report on the time costs (non-mone-
tary) of the procedures necessary to export or import a full 20-foot container of dry goods
without dangerous or military elements. According to the data obtained, it generates a rating of
4.25 / 10.00, very similar and stable to the last ten years.

4C. Exchange rates on the black market

This element is based on the percentage difference between the official exchange rate and the
parallel (black) market rate. A score of 10 is assigned as the country does not have a black market
exchange rate, i.e. the currency is fully convertible without restrictions. This assigned value has
not changed in the last nine years due to the relative stability of the currency and the fact that,
on the black market, the currency has no restrictions on its conversion.

4D. Controls on the movement of capital and people

This element is made up of restrictions on foreign property and investment, capital controls, and
freedom of visit for foreigners. Overall, a score of 1.32 / 10.00 was obtained mainly due to the 0.00
obtained in the freedom to visit for foreigners, which was the same as in 2020 because foreign
visitors present many complaints to obtain entry permits and they are normally of short duration.
compared to other nearby countries.
Area 5.regulations
In 2020 the regulations obtained a score of 6.74 / 10.0 slightly above what was obtained in 2023:

Variation
from
Score 2020 2020

5. Regulations 6.45 6.74 -4.3%

5Ai. Bank ownership

Data on the percentage of bank deposits in private banks have been used to construct the
score intervals. The countries with the highest percentage receive higher scores. In Honduras,
between 95% and 100% of bank deposits are in private banks, therefore, as in previous years,
the score for this sub-indicator is 10.00/10.00.

5Aii. Credit to the private sector

This sub-indicator reflects to what extent public indebtedness displaces private indebted-
ness. Depending on the availability of data, it is calculated as the proportion of the public fiscal
deficit over private savings. The government fiscal deficit is estimated to have been 4.9% for
fiscal year 2021 . According to the methodological parameters, a score of 6.22 / 10.00 is obtai-
ned in this sub-indicator.

5Aiii. Interest rate controls / negative real interest rates

If interest rates are mainly set by the market and real rates are positive, the country receives a
score of 10. If rates are mainly set by the market, but real rates are sometimes slightly negative
(less than 5%) or the differential between deposit and credit rates is large (8% or more), the
country receives an 8. According to World Bank data, Honduras is at a real interest rate of 11.7%
in 2021, for which it is qualified with a score of 8.00 / 10.00.

5Bi. Hiring regulation and minimum wage

It is based on the World Bank's Doing Business Report Recruitment Difficulty Index, described
as follows: “The hiring difficulty index measures (i) whether fixed-term contracts are prohibi-
ted for permanent assignments; (ii) the maximum cumulative duration of fixed-term con-
tracts; and (iii) the ratio of the minimum wage for an apprentice or first-year employee to the
average value added per worker. An economy is assigned a score of 1 if the use of fixed-term
contracts for permanent tasks is prohibited, and a score of 0 if they can be used for any task.
Likewise, a score of 1 is assigned if the maximum cumulative duration of the fixed-term con-
tracts is less than three years, 0.5 if it is three or more but less than 5 years, and 0 if the
fixed-term contracts can last five years. or more years. Finally, a score of 1 is assigned if the
relationship between the minimum wage and the average value added per worker is equal to
or greater than 0.75; a score of 0.67 for a ratio equal to or greater than 0.50 but less than 0.75;
a score of 0.33 for a ratio equal to or greater than 0.25 but less than 0.50; and 0 for a ratio less
than 0.25”. An economy is assigned a score of 1 if the use of fixed-term contracts for perma-
nent tasks is prohibited, and a score of 0 if they can. In the case of Honduras, as in previous
years, a value of 0.00 was assigned.
5Bii. Regulation of hiring and firing
This sub-element is based on the Global Competitiveness Report question: “The hiring and
firing of workers is hampered by regulation (=1) or is flexibly decided by employers (=7)”. The
wording of the question has changed slightly over the years. For this indicator, it was not possi-
ble to find data, so the average value of the maximum and minimum values was assigned,
assigning a value of 3.5 close to the value determined for 2020.

5Biii. Centralized collective bargaining

This sub-element is based on the Global Competitiveness Report question: “Wages in your
country are set through a centralized bargaining process (= 1) or in each private company (=
7)”. The wording of the question has changed slightly over the years. No data could be found
for this indicator, so the average value of the country's index for the last five years was assig-
ned.

5Biv. Regulation of the working day

This sub-element is based on the Rigid Hours Index from the World Bank's Doing Business
report, described as follows: “The rigid hour index has 5 components: (i) if there are restric-
tions on night work; (ii) if there are restrictions on work during the weekly rest; (iii) if the weekly
working day can consist of 5.5 days; (iv) if said work week can be extended to 50 hours or more
(including overtime) for 2 months of the year, in response to a seasonal increase in production;
and (v) if the paid annual vacation is 21 working days or less. A value of 8.00 / 10.00 was assig-
ned under the methodological criteria.

5Bv. Mandatory cost of dismissal

Considering that in Honduras the cost of dismissal is required, a score of 2.52 / 10.00 was
assigned according to the formula proposed in this sub-indicator.

5Bvi. Compulsory military service

Scoring intervals have been drawn from data on the existence and duration of compulsory
military service. Countries with longer periods receive lower scores. A score out of 10 is assig-
ned to countries without conscription. If its duration is equal to or less than 6 months, the
score is 5; between more than 6 and 12 months, 3; between more than 12 and 18, 1; and from
18 months, zero. In the case of Honduras, military service was abolished in 1994, so a value of
10.00 / 10.00 is assigned.

5C. Regulation of business activity

In this indicator, an average value of 6.31 / 10.00 was obtained, mainly due to the high bureau-
cratic costs that govern the system of business creation processes in the country.
DISCUSSION

Final reflection on the Honduras Index of Economic Freedom

Greater economic freedom is associated with better economic and social indicators, such as
gross domestic product (GDP), poverty level, and life expectancy at birth. In line with the above,
the Economic Freedom report published in 2022 highlighted that the countries that are located
in the top quartile in the economic freedom ranking had an average GDP per capita of US$ 48,251
in 2020, while the countries in the quartile lower had an average GDP per capita of US$ 6,542. A
similar issue occurs with poverty, where in the top quartile of the ranking, 2% of the population
experiences extreme poverty (income below US$1.90 per day) compared to 31.5% shown by the
countries that are in the lowest quartile. of economic freedom. Finally, with respect to life expec-
tancy, in the case of the countries with greater freedom it is on average 80.4 years, while for the
less free countries it is 66 years. In the case of Honduras for 2023 it is 75.4 as shown in the
following illustration:

Illustration No. 1: Evolution of life expectancy at birth

48.3 75.4

1963
2023
Source: Fundación Eléutera based on information from the World Bank

Illustration No. 2 shows the relationship between economic freedom and poverty in the
case of Honduras, showing an increase in poverty due to the decrease in economic free-
dom, which is consistent with the idea that less freedom generates less prosperity and
wealth and that also translates into an increase in poverty in the country (r=0.56).

Illustration No. 2: Economic Freedom and Poverty

Source: Fundación Eléutera based on information from the International Monetary Fund and the World Bank
On the other hand, in illustration No. 3, there is evidence of a positive correlation between
the variables Index of Economic Freedom and life expectancy at birth (r=0.53).

Illustration N°3: Score in the Index of Economic Freedom and Life

Expectancy at Birth

Source: Fundación Eléutera based on information from the International Monetary Fund and the World Bank

Homework for Government: Property Rights and Inflation

Honduras fell back in four of the five attributes measured by the index. To reverse this trend, it is
essential that the Government coordinate and lead an agenda that makes it possible to face the
signs shown by the Fraser Institute index (need to reduce bureaucracy, provide legal certainty,
reduce inflation and regulations) and move forward towards greater economic freedom. This is
the only way to improve people's quality of life and get out of the looming recession as quickly as
possible. The experience and reality of the countries of the world cannot be ignored, particularly
the situation in Honduras.

METHODOLOGY
The methodology for calculating the Economic Freedom index for Honduras is based on the
obtaining mechanisms for each indicator of the 5 areas that comprise it.

Area 1: Size of the State: spending, taxes and companies

1A General public consumption expenditure
This element is measured as general public consumption expenditure as a percentage of total
consumption, the score being calculated as follows: (Vmax - Vi) / (Vmax - Vmin) multiplied by 10.
Vi is the actual public consumption of the country in proportion to the total consumption, setting
Vmax and Vmin at 40 and 6, respectively. Data from 1990 have been used to determine the maxi-
mum and minimum values for this element. Countries with a higher share of public spending recei-
ve lower scores. On the contrary, as they approach the maximum value, the proportion tends to
zero. Sources: World Bank, World Development Indicators (various issues); International Monetary
Fund, International Financial Statistics (various issues). United Nations National Accounts.
1B Transfers and subsidies as a percentage of GDP

This element is measured as public transfers and subsidies as a proportion of GDP, calculating the
score as follows: (Vmax - Vi) / (Vmax - Vmin) multiplied by 10. Vi is the proportion of the country's
transfers and subsidies over GDP and the values of Vmax and Vmin are set to 37.2 and 0.5, respec-
tively. Data from 1990 have been used to determine the maximum and minimum values for this
element. The formula assigns lower scores to countries with larger transfer sectors. If the size of a
country's remittance sector is close to that of the country with the largest sector in the reference
year 1990, the country's score will tend to zero. Sources: International Monetary Fund, Govern-
ment Finance Statistics Yearbook (various years); World Bank, World Development Indicators
(various issues); International Monetary Fund, International Financial Statistics (various issues);
United Nations National Accounts.

1C Companies and public investments

Data on the number, composition, and share of output of public enterprises and public invest-
ment as a proportion of total investment have been used to construct scores from zero to 10, so
that countries with the most enterprises and public investment receive lower scores. Countries
score out of 10 if there are few public companies and public investment is generally less than 15%
of total investment. If there are few public companies apart from those in sectors where econo-
mies of scale reduce the effectiveness of competition (for example, electricity generation) and
public investment is between 15% and 20% of the total, the country receives a score of 8.

In the same assumption as above, if public investment is between 20% and 25%, it receives a 7. If
there are public companies in the energy, transport and communications sectors and public
investment is between 25% and 30% of the total, a 6 is assigned. If there are enough public compa-
nies in many sectors, including manufacturing, and public investment is generally between 30%
and 40%, the score is 4. If there are many public companies in many sectors, including retail, and
public investment is generally between 40% and 50% of the total, the score is 2. A score of zero is
assigned when the economy is dominated by public enterprises and investment in the public
sector exceeds 50% of the total investment. In some cases, the score has been estimated from
the questions in the Global Competitiveness Report: “In your country, public enterprises: (1 = play
a dominant role in the economy; 7 = play little or no role in the economy)” and “In your country,
public companies: (1 = are strongly favored over their private sector competitors; 7 = compete on
equal terms with the private sector)”. Sources: International Monetary Fund, Government Finance
Statistics Yearbook (various issues); World Bank, World Development Indicators (various issues);
International Monetary Fund, International Financial Statistics (various issues); World Economic
Forum, Global Competitiveness Report (various issues); United Nations National Accounts. Euro-
pean Bank for Reconstruction and Development, Transition Indicators.

D Maximum marginal tax rate

i Maximum marginal tax rate of income tax
Countries with higher marginal rates applied to lower income thresholds receive lower scores,
according to the matrix set out below. Income threshold data have been converted from local
currency to 1982-1984 US dollars (applying early-year exchange rates and the US Consumer Price
Index). Figures include rates below national scope, where applicable.

ii Top marginal tax rates of taxes on income and wages

Countries with higher marginal income tax rates and wages at lower income thresholds score
lower, according to the following matrix. Income threshold data have been converted from local
currency to 1982-1984 US dollars (applying early-year exchange rates and the US Consumer Price
Index). Figures include rates below national scope, where applicable.
 Income thresholds for the application of the maximum marginal rate (1982-1984 US$)

1E State ownership of assets

This component is based on scores from the Varieties of Democracy (V-Dem) data on state
ownership of the economy, which “measures the degree to which the state owns and controls
capital (including land) in the industrial, agricultural, and service sectors. It does not measure the
extent of government revenue and spending as a percentage of total output; in fact, it is quite
common for states with expansionary fiscal policies to exert little direct control (and virtually no
ownership) over the economy. The rating for this component is designed to reflect the true distri-
bution of the raw data, but on a scale of zero to 10.

Area 4: Freedom of international trade

A Taxes on international trade

i International trade tax revenue (% of trade sector)

This sub-element measures the amount of international trade tax payment in proportion to
exports and imports. The formula used to calculate the scores is: (Vmax - Vi ) / (Vmax - Vmin)
multiplied by 10. Vi represents the revenue from taxes on international trade in proportion to the
commercial sector. The values of Vmin and Vmax are fixed at zero and 15%, respectively. This
formula assigns lower scores as the average tax rate on international trade increases. Countries
with no specific taxes on international trade score a 10. As revenue from these taxes increases
toward 15% of international trade, the score falls toward zero. Note: except for two or three extre-
me observations, revenue from taxes on international trade as a proportion of the commercial
sector ranges between 0 and 15%. Sources: International Monetary Fund, Government Finance
Statistics Yearbook (various issues); International Monetary Fund, International Financial Statistics
(various issues).

ii Average tariff rate

This sub-element is based on the unweighted average of the tariff rates. The formula used to
calculate the score from zero to 10 for each country is: (Vmax - Vi ) / (Vmax - Vmin) multiplied by
10. Vi represents the country's average tariff rate. The values of Vmin and Vmax are fixed at 0%
and 50%, respectively. This formula assigns a score out of 10 to countries that do not impose
tariffs. As the tariff rate increases towards 50%, the score is reduced towards zero. Note: except
for two or three extreme cases, all countries have average rates within the range of 0% to 50%.
Sources: World Trade Organization, World Tariff Profiles (various issues).
iii Standard deviation of tariff rates
A large variation in tariff rates has a more restrictive impact on trade and, therefore, on economic
freedom than a flat tariff, so countries with larger variations should receive lower scores. The
formula used to calculate scores from zero to 10 for this item is: (Vmax - Vi) / (Vmax - Vmin) multi-
plied by 10. Vi represents the standard deviation of the country's tariff rates. The Vmin and Vmax
values are fixed at 0% and 25%, respectively. This formula assigns a score of 10 to countries that
set a flat tariff, which decreases towards zero as the standard deviation of the rates increases
towards 25%. Note: Except for some very extreme cases, the study countries have standard
deviations of tariff rates in the range of 0% to 25%. Sources: World Trade Organization, World
Tariff Profiles (various issues).

4B Regulatory barriers to trade

4Bi Non-tariff trade barriers

This sub-item is based on the Global Competitiveness Report survey question: “Does your coun-
try's tariff and non-tariff barriers significantly reduce the ability of imported products to compe-
te in the domestic market”. The wording of the question has changed slightly over the years.
Source: World Economic Forum, Global Competitiveness Report (various issues).

4B ii Cost of import and export procedures

This sub-element is based on data from the World Bank's Doing Business report on the time
(non-monetary) costs of the paperwork required to export or import a full 20-foot container of
dry goods without hazardous or military elements. Countries that take longer to import or export
receive lower scores. Scores from zero to 10 are assigned for (1) the time cost of exporting a good
(measured by the number of calendar days required) and (2) the time cost of importing (measu-
red by the number of calendar days required). . The two scores are averaged to obtain the ultima-
te for the sub-element. The formula used to calculate the scores from zero to 10 is: (Vmax - Vi ) /
(Vmax - Vmin) multiplied by 10. Vi represents the time cost value. The values of Vmax and Vmin
are fixed at 62 days (export) and 80 days (import) (1.5 standard deviation above the mean) and at
2 days (export) (1.5 standard deviation below the mean) and 0 days (import). Countries with
values outside the range of Vmax and Vmin receive scores of zero or ten, in each case. Source:
World Bank, Doing Business (various issues).

4C Black Market Exchange Rates

This element is based on the percentage difference between the official exchange rate and the
parallel (black) market rate. The formula used to calculate the scores from zero to 10 is: (Vmax - Vi
) / (Vmax - Vmin) multiplied by 10. Vi is the country's black market exchange rate premium. The
values of Vmin and Vmax are fixed at 0% and 50%, respectively. The formula assigns a score of 10
to countries without a black market exchange rate, that is, those whose currency is fully converti-
ble without restrictions. If there are exchange rate controls and a black market, the score decrea-
ses towards zero as the premium increases towards 50%. The score is zero if the premium is equal
to or greater than 50%. Source: MRI Bankers' Guide to Foreign Currency (various issues)
4D International Capital Market Controls

4Di Restrictions on foreign ownership and investment

This sub-element is based on the following two questions from the Global Competitiveness
Report: “What is the frequency of foreign ownership of companies in your country? 1 = very infre-
quent, 7 = very frequent”; and “How restrictive are your country's regulations on international
capital flows? 1 = very restrictive, 7 = not restrictive at all”. Source: World Economic Forum, Global
Competitiveness Report (various issues).

4D ii Capital Controls
The International Monetary Fund reports on up to 13 types of international capital controls. A
score of zero to 10 is assigned for the percentage of capital controls not imposed in proportion
to the total number of capital controls in place, multiplied by 10. Source: International Monetary
Fund, Annual Report on Exchange Arrangements and Exchange Restrictions (various issues) .

Area 5: Credit, labor and commercial regulation

A Regulation of the credit market

5Ai Ownership of banks

Data on the percentage of bank deposits in private banks have been used to construct the score
intervals. The countries with the highest percentage receive higher scores. If they reach between
95% and 100%, the score is 10; between 75% and 95%, 8; between 40% and 75%, 5; between 10%
and 40%, 2; and with 10% or less, the score is zero. • Sources: James R. Barth, Gerard Caprio, Jr.,
and Ross Levine, Bank Regulation and Supervision (various years); James R. Barth, Gerard Caprio,
and Ross Levine, Rethinking Bank Regulation: Till Angels Govern (2006).

5A ii Credit to the private sector

This sub-element reflects to what extent public indebtedness displaces private indebtedness.
Depending on the availability of data, it is calculated as the proportion of the public fiscal deficit
over private savings. Since the deficit is expressed as a negative number, a higher numerical value
will result in higher scores. The formula used to calculate country scores is (-Vmax - Vi ) / (Vmax +
Vmin) multiplied by 10. Vi is the ratio of deficit to gross investment, and the values of Vmax and
Vmin are set to 0 and -100.0%, respectively. The formula assigns a higher score as the deficit is
reduced (that is, it approaches zero) with respect to gross savings. If deficit data are not available,
this sub-item is calculated as the ratio of private credit to total banking sector credit. A higher
value indicates more economic freedom. The formula used to calculate country scores is (Vi -
Vmin) / (Vmax - Vmin) multiplied by 10. Vi is the proportion of the country's total domestic credit
allocated to the private sector and the values of Vmax and Vmin are set to 99.9% and 10.0%,
respectively. Data from 1990 have been used to determine the maximum and minimum values for
this element. The formula assigns a higher score as the share of credit to the private sector
increases. Note: in previous editions, this element was calculated only as the proportion of private
credit over total banking sector credit. The database has been retrospectively updated to 1990
using the new methodology. Sources: World Bank, World Development Indicators (various
issues); International Monetary Fund, International Financial Statistics (various issues).

5A iii Interest rate controls / negative real interest rates

Data from credit market controls and regulations have been used to construct the scoring
ranges, assigning higher scores to countries with market-determined interest rates, stable
monetary policy, and positive real deposit and credit rates. If interest rates are mainly set by the
market and real rates are positive, the country receives a score of 10. If rates are mainly set by the
market, but real rates are sometimes slightly negative (less than 5%) or the spread between the
deposit and credit rates is large (8% or more), the country receives an 8. If the real deposit or
credit rate is persistent.
5B Regulation of the labor market
5Bi Regulation of hiring and minimum wage
This sub-element is based on the World Bank's Doing Business Report Recruitment Difficulty
Index, described as follows: “The recruitment difficulty index measures (i) whether fixed-term
contracts are prohibited for permanent assignments; (ii) the maximum cumulative duration of
fixed-term contracts; and (iii) the ratio of the minimum wage for an apprentice or first-year
employee to the average value added per worker. An economy is assigned a score of 1 if the use
of fixed-term contracts for permanent tasks is prohibited, and a score of 0 if they can be used for
any task. Likewise, a score of 1 is assigned if the maximum cumulative duration of the fixed-term
contracts is less than three years, 0.5 if it is three or more but less than 5 years, and 0 if the
fixed-term contracts can last five years. or more years. Finally, a score of 1 is assigned if the
relationship between the minimum wage and the average value added per worker is equal to or
greater than 0.75; a score of 0.67 for a ratio equal to or greater than 0.50 but less than 0.75; a
score of 0.33 for a ratio equal to or greater than 0.25 but less than 0.50; and 0 for a ratio less than
0.25”. The countries with the greatest difficulty in recruiting receive the lowest score. Source:
World Bank, Doing Business (various issues).

5Bii Regulation of hiring and firing

This sub-element is based on the Global Competitiveness Report question: “The hiring and firing
of workers is hampered by regulation (=1) or is flexibly decided by employers (=7)”. The wording
of the question has changed slightly over the years. Source: World Economic Forum, Global Com-
petitiveness Report (various issues).

5Biii Centralized collective bargaining

This sub-element is based on the Global Competitiveness Report question: “Wages in your coun-
try are set through a centralized bargaining process (= 1) or in each private company (= 7)”. The
wording of the question has changed slightly over the years. Source: World Economic Forum,
Global Competitiveness Report (various issues).

5Biv Regulation of the working day

This sub-element is based on the Rigid Hours Index from the World Bank's Doing Business report,
described as follows: “The rigid hour index has 5 components: (i) if there are restrictions on night
work; (ii) if there are restrictions on work during the weekly rest; (iii) if the weekly working day can
consist of 5.5 days; (iv) if said work week can be extended to 50 hours or more (including overti-
me) for 2 months of the year, in response to a seasonal increase in production; and (v) if the paid
annual vacation is 21 working days or less.
5Bv Mandatory cost of dismissal
This sub-element is based on data from the World Bank's Doing Business report on the cost of
notice requirements, severance pay and redundancy penalties. The formula used to calculate the
scores from zero to 10 is: (Vmax - Vi) / (Vmax - Vmin) multiplied by 10. Vi represents the cost of
dismissal (measured in weeks of salary). The Vmax and Vmin values are fixed at 108 weeks (1.5
standard deviations above the mean) and 0 weeks, respectively. Countries with values outside
the interval delimited by Vmax and Vmin receive scores of zero or ten, in each case. Source: World
Bank, Doing Business (various issues). A value of 2.52 was obtained for this sub-indicator.

5Bvi Compulsory military service

Scoring intervals have been drawn from data on the existence and duration of compulsory
military service. Countries with longer periods receive lower scores. A score out of 10 is assigned
to countries without conscription. If its duration is equal to or less than 6 months, the score is 5;
between more than 6 and 12 months, 3; between more than 12 and 18, 1; and from 18 months,
zero. If there is conscription but it does not appear to be strictly enforced or its duration cannot
be determined, the country is given a score of 3. If it is clearly not enforced, even though it may
be possible, the country is given a score of 10. If compulsory state service includes non-military
alternatives, the country is given a score of 5. Sources: International Institute for Strategic
Studies, The Military Balance (various issues); War Resisters International, World Survey of Cons-
cription and Conscientious Objection to Military Service.
THE AUTHORS

Carlos G. Cálix, CEO of MacroDato and co-founder of Grupo Lix. Post-doctorate from the Natio-
nal Council for Scientific and Technical Research (Argentina). Director of the Academic Council
of the Fundación Eléutera and Director of the Community of Entrepreneurs of Honduras. He has
been awarded as an entrepreneur with growth potential by COHEP and as one of the ten most
outstanding young people in Honduras through the TOYP Awards. Professor of the Doctorate in
Business Management at Universidad Nacional Autonoma de Honduras and visiting professor at
the Provincial University of the Southwest (UPSO-Argentina).

Jairo Núñez, executive director of MacroDato and general manager of E&J Capital. He is an
industrial engineer with a Master of Business Administration, MBA, with a specialty in quality
management. He also has a master's degree in Industrial Engineering. He also has a master's
degree in Political Science and Communication. Certificate in teaching-learning processes from
the Harvard School of Education and certificate in Design and Development of Educational
Technology from the Massachusetts Institute of Technology MIT. Postgraduate professor at the
National Autonomous University of Honduras and the Catholic University of Honduras.