&RXQWU\ VWUDWHJ\ SDSHU

&RXQWU\VWUDWHJ\SDSHU

2

2%-(&7,9(62)&20081,7<&223(5$7,21 *HQHUDO2EMHFWLYHV 6SHFLILF2EMHFWLYHVWR/DWLQ$PHULFDDQG&HQWUDO$PHULFD 7KHELODWHUDOIUDPHZRUN +21'85$6±1$7,21$/$*(1'$ 7KH0DVWHU3ODQRI1DWLRQDO5HFRQVWUXFWLRQDQG7UDQVIRUPDWLRQ03157 7KH3RYHUW\5HGXFWLRQ6WUDWHJ\356 $1$/<6,62)7+(&28175< 3ROLWLFDO&RQWH[W 'RPHVWLF3ROLF\±LQQHHGRIVXVWDLQHGSURJUHVV 9 )RUHLJQSROLF\±DUHJLRQDODJHQGD 11 (FRQRPLFDQGVRFLDO&RQWH[W (FRQRPLF6LWXDWLRQ 12 7UDGHUHODWLRQV 14 6RFLDO&RQWH[W 6XVWDLQDELOLW\RIWKHGHYHORSPHQWSROLFLHV $QDO\VLVRISRYHUW\ 16 *HQGHULVVXHV 17 (QYLURQPHQW 17 &RQFOXVLRQVDQGPHGLXPWHUPFKDOOHQJHV,17(51$7,21$/&223(5$7,21±3$67$1'35(6(17 *HQHUDORXWORRN,QVWLWXWLRQDOIUDPHZRUN6WRFNKROPDGYLVRU\JURXS 19,QWHUYHQWLRQ3ULRULWLHV 20 &RPPXQLW\&RRSHUDWLRQ (80HPEHU6WDWHVDQGRWKHUGRQRUV &RRUGLQDWLRQPHFKDQLVPV 22 (80HPEHU6WDWHV 23 2WKHUGRQRUV 24 675$7(*<2)&20081,7<&223(5$7,21 0DLQRULHQWDWLRQVRIWKHVWUDWHJ\ 1RQIRFDOVHFWRUV 2SHUDWLRQDO&ULWHULD 3

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

(;(&87,9(6800$5< This Country Strategy Paper forms part of a continuous process of management of European Commission cooperation with Honduras. It is a key element in the improved programming process introduced in the reform of the management of external assistance, which is expected to lead to greater coherence between the EU s strategic priorities and to the appropriate policy mix for each partner country. The strategy is based on Honduras own development agenda as well as on the Commission s cooperation principles and the Memorandum of Understanding signed with Honduras in March 2001. In addition, it builds on the prior country strategy covering the period from 1998 2000. For the period 2002 2006, the Commission s cooperation programmes with Honduras will focus primarily on the three priorities of (a) support to local development and decentralisation; (b) support to education, (c) sustainable management of natural resources. An indicative amount of ¼PLOOLRQKDVEHHQDOORFDWHGWRWKHVHSULRULW\VHFWRUVXQGHUWKH0HPRUDQGXP of Understanding. These resources will be complemented by projects funded from specific budget lines as well as programmes financed under the Central American and Latin American regional programmes. 2%-(&7,9(62)&20081,7<&223(5$7,21 *HQHUDO2EMHFWLYHV Article 177 of the EU Treaty sets out the three broad objectives for Community development co-operation. These are: fostering of sustainable economic and social development; the smooth and gradual integration of the developing countries into the world economy; the fight against poverty. Furthermore, Community policy should also contribute to the general objective of developing and consolidating democracy and the rule of law and encouraging the respect of human rights and fundamental freedoms. The Joint Declaration of the Council of Ministers and the European Commission on the Community Development Policy (November 2000) establishes as the principal aim of the EU cooperation the reduction in the poverty and ultimately its elimination. The Declaration uses a wide interpretation of the concept of the poverty: "the poverty is not defined only by the lack of income and economic resources, but also includes the concept of vulnerability and the impossibility to have access to adequate education, food, health, natural resources, drinking water, land, work, credit, information and political participation, services and infrastructure." (Article 8). To achieve this aim, the Declaration sets out six priority areas of action for the cooperation of the European Union, namely: the link between trade and development; support for regional integration and cooperation; support for the macro-economic policies and promotion of fair access to social services; 5

transport; food security and sustainable rural development strategies; strengthening of the institutional capacity, above all concerning the good governance and the rule of law. 6SHFLILF2EMHFWLYHVWR/DWLQ$PHULFDDQG&HQWUDO$PHULFD The directives for cooperation with Honduras are defined since 1984 in the framework of the meetings of San Jose among the EU and the Central American countries (Honduras, Costa Rica, El Salvador, Nicaragua and Panama). The San Jose process, renewed in Florence in 1996, has established the following general objectives for future cooperation with the countries and the region: - strengthen the peace process and the democratisation of the region; - promote viable and equitable economic and social development; - strengthen the fight against delinquency; - support consolidation and modernisation of the rule of Law; - strengthen the social policies. At the same time, in the framework of the follow-up of the Summit between the EU and Latin- America and the Caribbean (Rio de Janeiro, 1999), the Commission 1 confirmed that the current priorities for the Central American sub-region are the rule of law and human rights, the support to social policies and the integration into the international economy. Likewise, the EC emphasised that prevention/handling of the natural disasters and the environment, as well as the consolidation of the process of regional integration should take a special importance in Community cooperation. At a regional level, the 5HJLRQDO $GYLVRU\ *URXS with the Central American countries affected by hurricane 0LWFKand the donor countries and organisations, held in Stockholm in 1999, established a series of guidelines and objectives for the reconstruction of the region: 5HGXFH WKH HFRORJLFDO DQG VRFLDO YXOQHUDELOLW\ of the region, as a principal objective; 6XSSRUW WKH UHFRQVWUXFWLRQ DQG WKH WUDQVIRUPDWLRQ of Central America on the basis of transparency, JRRG JRYHUQDQFH DQG democracy and by strengthening the decentralisation of duties and competences, with the active participation of civil society; 3URPRWHWKHUHVSHFWRIKXPDQULJKWV as a permanent objective. The promotion of equal opportunities, the rights of the childhood, the ethnic groups and other minorities deserve special efforts; &RRUGLQDWHWKHHIIRUWVRIWKHGRQRUV, guided by the priorities established by the recipient countries; Intensify the efforts to UHGXFHWKHORDGRIWKHH[WHUQDOGHEW of the countries of the region. In parallel, cooperation with Honduras is based on the cooperation agreement of 1993 among the EC and the six Central American countries, covering a vast array of sectors of cooperation, as for example development aid, economic cooperation and the promotion of regional integration. This agreement is not preferential and includes the typical clauses of the "third generation" agreements, among which the respect for human rights, the evolutionary clause, the fight against drugs. The financing of several areas of cooperation of this agreement is carried out on a yearly basis on the 1 COM/2000/0670 6

basis of a series of Regulations, among which Reg. 443/92, that defines and articulates the largest part of assistance to Latin America and Asia. Likewise, it is necessary to emphasise that economic and trade relations with Honduras are covered by the System of Generalised Preferences (SPG) applicable at a regional level to all countries of Central America. The new SPG was adopted on 10 December 2001 and has entered into force in January 2002. Under the special regime "drugs", tariff preferences granted for certain agricultural products were renewed and extended to industrial products. 7KHELODWHUDOIUDPHZRUN On March 26, 2001 a Memorandum of Understanding was signed between the EC and Honduras with a financial enveloppe of USD 147 mln for the period 2000-2006. This strategy is fully consistent with the MoU and the national reference papers for economic and social development described below. In order to increase the efficiency of EU assistance, it has been agreed to limit the areas of concentration. The projects will be carried out on the basis of financing memoranda but the possibility of budgetary transfers is not excluded. The final selection of projects and their corresponding financial allocations will be carried out on the basis of the outcome of project identification and preparation work of the Commission. The attached indicative work programme is conditional upon available annual budgetary allocations. In addition to this, Honduras can also benefit from a series of regional sector-specific initiatives made available for Latin America (ALFA, URB-AL, AL- INVEST, @LIS). +21'85$6±1$7,21$/$*(1'$ The reconstruction and transformation of the country following hurricane Mitch, and the fight against the poverty are the principal aims of the Master Plan of National Reconstruction and Transformation (MPNRT), presented in the Stockholm Meeting of the Advisory Group (May 1999), and the Poverty Reduction Strategy (ERP) presented in 2001. According to the Government of Honduras, these two documents are complementary and jointly WKH\ DUH WKH IXQGDPHQWDO EDVLV IRU WKH GHILQLWLRQRIWKHORQJWHUPFRXQWU\VWUDWHJ\ 2. The successful implementation of both programmes would allow at a later stage to introduce development components. 7KH 0DVWHU 3ODQ RI 1DWLRQDO 5HFRQVWUXFWLRQ DQG 7UDQVIRUPDWLRQ 03157 The main objective of MPNRT is WR UHFRYHU DQG LPSURYH WKH VRFLDO HFRQRPLF DQGHQYLURQPHQWDOFRQGLWLRQV that prevailed before hurricane Mitch and create the appropriate framework "to establish the foundations for a process of national transformation, with a view to constructing a better country prepared to face future challenges." 3 The Honduran government considers the MPNRT like a PHGLXPWHUPLQVWUXPHQW (up to 2005). Four thematic areas of action were defined: 2 PRS, April 2001 3 MPNRT introduction, p. 9, May 1999. 7

the UHFRYHU\ DQG LQYLJRUDWLRQ RI WKH SURGXFWLYH VHFWRUV DQG VHUYLFHV through direct actions closely related to the reconstruction of infrastructure and the consolidation of healthy macro-economic policies and structural reforms; the ILJKWDJDLQVWSRYHUW\, through short-term actions and medium and long term strategies, as well as the promotion of integrated human development with emphasis in the sectors of health, nutrition, education and housing; the SURWHFWLRQ DQG LPSURYHPHQW RI HQYLURQPHQW, risk management and mitigation of disasters; the GHPRFUDWLF SDUWLFLSDWLRQ LQ WKH 03157 through, among others, the improvement of the democratic political system, the strengthening of the judiciary, the decentralisation of the executive, the support to organised civil society and its incorporation in the consultation process in particular through representatives of women and ethnic groups. 7KH3RYHUW\5HGXFWLRQ6WUDWHJ\356 This is an ambitious ORQJWHUPSURJUDPPH (up to 2015), parallel but complementary to the aims of MPNRT. Furthermore, the implementation of the PRS is one of the elements necessary to reach the decision point of the HIPC allowing external debt relief. The PRS is based on five wide strategic guidelines: 7RJLYHKLJKHUSULRULW\WRWKHVXVWDLQDEOHUHGXFWLRQRISRYHUW\ 7RJLYHKLJKHUSULRULW\WRDFWLRQVWRVXSSRUWOHDVWGHYHORSHGJURXSVDQGDUHDVRI WKHFRXQWU\ 7RVWUHQJWKHQFLYLOVRFLHW\SDUWLFLSDWLRQDQGGHFHQWUDOLVDWLRQ 7RVWUHQJWKHQJRYHUQDQFHDQGSDUWLFLSDWRU\GHPRFUDF\ 7RUHGXFHHQYLURQPHQWDOYXOQHUDELOLW\DQGLWVLPSDFWRQSRYHUW\ On the basis of these guidelines, the PRS will develop actions on VL[ DUHDV of intervention: acceleration of IDLUDQGVXVWDLQDEOHHFRQRPLFJURZWK; SRYHUW\ UHGXFWLRQ LQ UXUDO DUHDV through the improvement of fair and sustainable access to natural resources, the improvement of rural income and access to basic services. SRYHUW\ UHGXFWLRQ LQ XUEDQ DUHDV, through the increase in employment, the promotion of micro business and SME s, the support to intermediate-sized cities and best access to housing and basic services. LQYHVWPHQWLQKXPDQUHVRXUFHV through the improvement of access to and the increase in the quality of basic services of health and education. VRFLDO SURWHFWLRQ IRU WDUJHW JURXSV and especially the population in extreme poverty. To guarantee the VXVWDLQDELOLW\RIWKHVWUDWHJ\ through actions to strengthen the good governance, accountability, transparency and the decrease in the ecological vulnerability through an increasingly active participation of local government and civil society. 8

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±LQQHHGRIVXVWDLQHGSURJUHVV After a long period of military rule, Honduras managed to restore IRUPDOGHPRFUDF\ in November 1981. The Liberal Party (PL) and the National Party (PN) have monopolised the political power in the country during the last thirty years. The PL has been in power since 1982, with the exception of the period from 1990 to 1994. The November 2001 general elections led to a change of guard, as the PN leader Maduro on a reform and anti-criminality platform won the elections. In general, differences between the PL and the PN are not related to ideological questions but rather to the agenda of political families affiliated to each one of them. The last elections also a brought a new increased role for the traditionally weak parliament: in the absence of an absolute majority, the new government will have to seek alliances in the parliament. This could lead to increased GLDORJXH and FRQVHQVXV EXLOGLQJ EHWZHHQ GLIIHUHQW SDUWLHV which could ERRVW UHIRUP. A first indication of this happened in January 2002 when the two major parties agreed on a joint statement confirming their intention to support a package of constitutional reform bringing more transparency in the functioning of the Electoral Court and supporting the continuation of the reform of the judiciary. The 90 s witnessed obvious progress in the country s GHPRFUDWLVDWLRQ. Important achievements were noted in key issues such as the subordination of the army to the civil power, the legal framework allowing a progressive decentralisation of the state, and the awareness that the fight against corruption and the protection of human rights must be one of the priorities of Honduran society. Specific measures have been taken in order to deepen the democratic process in the country in the last years, such as the creation of a National Commissioner for Human Rights, acting as ombudsman but suffering from scarce budget financing. Furthermore, in November 2000 a compensation was granted to a number of families of victims of human rights abuses in the 80 s following cases introduced to the Central American Court of Human Rights. Steps have also been taken as far as the reform and independence of the judiciary are concerned, namely the reform of the Supreme Court, the 9

approval of a new Procedural Penal Code and the presentation of a modernisation plan of justice (endorsed by an ambitious financing plan). However further steps need to be taken in number of areas. The process of increased SDUWLFLSDWLRQ RI WKH FLYLO VRFLHW\ in policy formulation have been boosted by Hurricane Mitch but remains fragile. Despite the huge economic and social impact Hurricane Mitch has left on Honduran society, it has been instrumental in proving the physical vulnerability of the country and has shed doubts on the very foundations of the Honduran model of development. It meant a massive awareness on the urgent need to come with a new vision of the country and its political and social instruments in order to face the challenges of the future. In this framework, the organised civil society has found new spaces of communication to put forward its demands, vision and proposals. An example of this evolution was the preparation of the MPNRT and in particular of the PRS, which resulted, under the support from the international Community, in a full participatory process of Honduran society. This process seems now to be irreversible and Honduran authorities seem committed to consult on a regular and institutional basis representatives of the civil society, something that is strongly encouraged by the international community. The process of GHFHQWUDOLVDWLRQ has acquired new impetus. The traditional existence of an over-sized State, with low efficiency and effectiveness and limited citizen participation in decision-making has long been regarded as an important obstacle to modernisation. The municipalities as well as different actors in society have become aware of the important role of decentralisation in the development of the country. The law of municipalities approved in 1990 foresees greater participation of the local government. Despite of this, delays in budgetary transfers to the regions combined with weak technical and administrative capacity of the local authorities have created a vicious circle that continues to slow down the decentralisation process. According to a recent study commissioned by the World Bankonly a rough 10% of Honduras municipalities are in a position to assume more responsibilities as opposed to the 50% of them being totally unable to take over new competences in the framework of devolution of power from central government. Furthermore, the strengthening of JRRGJRYHUQDQFH is still an actual high priority for Honduras. The political control of key State institutions and the exacerbated clientorientation of the "political families" within the two major parties, have not promoted good governance and accountability. Unfortunately, there are still numerous examples of non application of legally established procedures and non respect of the prisoners rights. A vast array of State activity is not subject to administrative and judicial control making any dividing line between different branches of power unclear. &ULPLQDOLW\DQGYLROHQFH are becoming increasingly worrying. Reports of attacks by armed groups are rapidly spreading around the country with serious impact for security and economic activity in large (tourism, foreign investment). Armed conflicts in neighbouring countries have resulted in huge number of weapons spreading around the country. There are different forms of violence ranging from organised crime in the North of the country to groups of armed youngsters ( PDUDV mostly involved in armed robbery. Although some positive results exist in the fight against organised crime, there is neither a clearly defined strategy nor the necessary State resources to curb the growth in violence and criminality. The new elected president Maduro has made the fight against criminality the main objective of its government. He is supporting the adoption of a new legislative framework and very strict implementation of law ( tolerancia cero ). 10

On the other hand, concerns for FRUUXSWLRQ DQG KXPDQ ULJKWV DEXVHV are still actual. Scarcity of information does not allow a real assessment of the extent of the issue. This could be achieved with the elaboration of a National Strategy against corruption in the framework of IMF s Poverty Reduction and Growth Facility (PRGF). The government recognises the gravity of the problem. In March 2001 a National Anti-corruption Council was set up with wide participation of civil society representatives to monitor both the elaboration of the strategy and later on its implementation. Nevertheless, information released by international press agencies present in Honduras state that the police are thought to be involved in the murder by "death squads" of more than one thousand young people in 2000. Similar reports exist on threats and intimidation to members of the indigenous groups. The Government seems committed to initiate a reform of the police having taken concrete steps such as the recent expulsion of dozens of agents. On the other hand, ODFNRIOHJDOVWDELOLW\DQGVHFXULW\ remain high on the country s agenda. In April 2000, the Commissioner of human rights noted in a special report that DW SUHVHQW WKH LQGHSHQGHQFH RI WKH MXGLFLDO LV EHLQJ DIIHFWHG E\ H[WHUQDO LQIOXHQFHV«widely identified as the submission of judges to the will of political and economic power, the impunity of high-level politicians and economic operators, the lack of credibility of the judicial system by the public opinion, the legal and economic insecurity of contracting parties, the political appointment of the members of the judiciary, and the impunity of judges involved in corruption scandals. )RUHLJQSROLF\±DUHJLRQDODJHQGD Taking into account its geo-strategic position, its immediate neighbourhood and its external trade, it is not surprising to note that Honduras has a highly focused regional focus on its foreign policy agenda. Honduras is indeed involved and actively participates in UHJLRQDO DQG VXEUHJLRQDO LQWHJUDWLRQ efforts. In the framework of Central American integration, a common market was created and a series of institutions inspired by the EU model were established, some of them playing an important role, such as the Central American Court of Human Rights. The new administration seems committed to pursue a policy supporting Central American integration and closer economic ties with Mexico and NAFTA. Much as its Central American neighbours, Honduras has a VSHFLDO UHODWLRQVKLS ZLWK WKH 86. Apart from the traditional close links of Washington with the political establishment, relations between the two countries are multi-faceted covering trade (US being the first trade partner), education, culture and last but not least, the presence of a large Honduran community in the US. This presence of Hondurans in the US has gained political nature following Hurricane Mitch, when the US on a temporary basis legalised the presence of Honduran immigrants in the US. This scheme has encompassed more than 100.000 Hondurans and has resulted in very substantial transfers of hard currency to Honduras exceeding USD 400 mln in 2000. Therefore, Tegucigalpa has made the extension of this status beyond June 2002 a main objective of its relationship with the US. It is clear that the recent developments in the international scene will put increased pressure in favour of putting an end to the scheme, in which case Honduras is likely to suffer both from the elimination of remittances but also from the integration of the returnees. This is an example of the close links between internal and external policies traditionally existing in the region. This close link between domestic and foreign policies is particularly obvious in matters related to regional integration. 11

However integration efforts have not prevented WHQVLRQ ZLWK QHLJKERXULQJ FRXQWULHV that from time to time increases. The ratification of the Lopez-Ramirez Treaty by the Honduran Parliament settling the maritime boundary between Colombia and Honduras has provoked a reaction by the Nicaraguan authorities, who have imposed a 35% import duty on Honduran imports (practically stopping traditionally abundant Honduran exports) and have asked the Central American Court of Justice to stop the ratification process. The two sides have finally agreed to defer their case to the International Court of Justice in the Hague. The change of governments in both countries could contribute to decreasing tension and bringing more stability in the region. This follows a similar case in 1992, where the ICJ defined the border between El Salvador and Honduras. Unfortunately even in this case, the border between the two countries has not been marked yet. On the other hand, Honduras expressed its support to the Puebla-Panama programme which covers comprehensive and ambitious infrastructure projects across its territory and highlights the position of the country as a transit corridor in the area. (FRQRPLFDQGVRFLDO&RQWH[W (FRQRPLF6LWXDWLRQ 0DFURHFRQRPLFHQYLURQPHQW Honduras ranks in the ORZ DYHUDJH LQFRPH JURXS of countries according to the World Bank with a nominal Gross national product per capita of 650 USD in 2000. The main historical characteristic of the Honduran economy has been its ZHDN JURZWKUDWHDQGLWVGLIILFXOW\WRWUDQVODWHJURZWKLQSRYHUW\UHGXFWLRQ. Between 1920 and 1995 the average per capita GDP growth was 0.5%. In 1991-98 GDP grew to an annual average rate of 3.4%, below that of the rest of the Latin American countries, except Nicaragua and Haiti. In 1999, and in the context of hurricane Mitch, the GDP decreased by 1.9%, but recovered in 2000 with a rate of 4.8% 4. As a result, per capita GDP (calculated in PPP) in 1999 reached 2.340 USD, similar to that of Nicaragua (2.279 USS) but clearly below the rest of the Latin American countries 5. Estimates for 2001 continue to be optimistic despite the economic slowdown in the US with a GDP growth of 4%, according to BID, slightly lower than the 5% target included in the PRSP. Honduran economy has also been characterised from FKURQLF PDFURHFRQRPLF DQG LQ SDUWLFXODU ILVFDO LPEDODQFHV. This situation has prevented reduction of poverty in a substantial and sustainable way. In the early 90 s, soaring fiscal and trade deficits resulted in the need for a comprehensive stabilisation programme backed by loans from multilateral financial institutions. It was only in the second half of the 90 s that some achievements towards fiscal discipline and some steady progress in reducing poverty have been made. Measures liberalising the exchange rate, the banking system, internal and external trade and a serious tax reform have largely contributed to the success of the programme. Hurricane Mitch has proved a serious test to the commitment and resolve of the government to stick to its fiscal and 4 Source: Cepal, on the basis of official figures. 5 Data for 1999; GDP per capita in PPP (in USD): El Salvador 4.344; Guatemala 3.674; Costa Rica 8.860; Panama 5.875. 12

monetary stability. Important external aid flows have prevented the return to imbalances and have blocked inflationnary pressures. Signs of recovery already abound. The basic orientations of the country s economic policy have not been revised after Mitch. The need for a VWDEOHPDFURHFRQRPLFVLWXDWLRQ, the support to economic recovery and the elaboration and implementation of the PRS have been the key priorities. During the period 2000-01 positive results have been posted as far as inflation rate is concerned, which dropped to 10.1%, the lowest in the last seven years. However, the imbalance of the current account 6 was only partially compensated for from various sources and essentially from family remittances 7 and direct foreign investment (with an amount of 262 million dollars, highest in the last six years). International reserves of the Central Bank exceeded 1 billion USD in 2000 covering 3.7 months of imports of goods and services (BID). 3URGXFWLYHVHFWRUV Honduran economy has been heavily dependent on DJULFXOWXUH (22-23% of the country s domestic product). As agriculture has been seriously hit by Mitch, its contribution to the economy has dropped to 15% but has an upward trend although traditional agricultural exports remain below pre-mitch levels and are still vulnerable to external factors. As an example, in the first half of 2001, coffee exports have been reduced by half due to lower international prices and of comparatively lower productivity of Honduran producers. 0DQXIDFWXULQJ traditionally accounts for 35-40% of GDP with a steady increase boosted by heavy growth of the textile sector. ([WHUQDO'HEW High budget and current account deficits (usually over 10% of GDP) in the 80 s led to KHDY\ LQGHEWHGQHVV. In 1990, external debt amounted to 122% of GDP with the debt service payments reaching 35% of exports income. The stabilisation programme endorsed and implemented by the government reduced the debt ratios but in 1999 external debt was still close to 5 billion USD, some 90% of GDP. The need to ensure reconstruction following Hurricane Mitch without bringing extra burden to the country s fiscal situation led to efforts of the donor community to reduce the total volume of external debt. This initiative available to a number of countries meeting a series of specific criteria, among which the implementation of a poverty reduction strategy, is known as HIPC. In June 2000, the IMF and the World Bank announced that the country reached the decision point under +,3&LQLWLDWLYH. Under the agreement and with the participation of a series of bilateral donors, it was decided that the volume of Honduras debt will be reduced by 900 million USD in the next 15 years. On October 11, the PRS was formally approved opening the way for support under HIPC. A three-year (1999-2002) 3RYHUW\ 5HGXFWLRQ DQG *URZWK )DFLOLW\ (PRGF) arrangement for Honduras was approved on 26 March 1999 for an amount of USD USD 202 mln. In early October 2001, IMF praised progress on macro-economic stability achieved in Honduras expressing the wish that the current economic programme would not be affected by the result of the November 2001 elections. 6 deficit of 530 million USD or 8.8% of GDP in 2000 (World Bank) 7 with financial flows of more than 400 million dollars (almost 7% of GDP) 13

7UDGHUHODWLRQV There are three main trends in Honduras trade pattern : (a) Exports concern a OLPLWHG QXPEHU RI SURGXFWV, mainly agricultural, such as banana, coffee or crustaceans such as shrimps and lobsters making the country fragile on international prices (overall dependency from traditional exports is nevertheless slightly falling over the years: bananas and coffee exports reached more than 50% of total exports in 1990 but less than 25% in 2000), (b) Honduras main trade partners are the 86 (35% of exports and 47% of imports) and the Central American neighbours and (c) Honduras has traditionally a WUDGH GHILFLW that has reached 11.3% of GDP in 2000 and seems to be growing in 2001. Trade with the EU is limited: the EU accounts for 6% of Honduras total trade. Total turnover between the EU and Honduras in 2000 was below 600 mio EUR with a positive trade balance for Honduras of 180 mio EUR. Honduras exports agricultural, fish products (85%) and textiles, while it imports manufactured goods. 9DOXHPOQ(85 Total Trade All countries (Imports and Exports) 10.085 Trade Balance -916 Trade with EU (Imports and Exports) 590 Trade Balance +184 From the above, it is FOHDUWKDWWKHUHLVDQHHGWRGLYHUVLI\SURGXFWLRQDQGERRVW QRQ WUDGLWLRQDO H[SRUWV. In this sense, Honduras has also benefited from a US special trade scheme for textile producers in the Carribean area allowing duty free and quota free imports in case the raw material used is of US origin. An exportoriented textile industry locally known as PDTXLOD has thus been developed in the Northern part of the country around the city of San Pedro Sula, making Honduras the second largest Latin American supplier of textile in the US market after Mexico: in 2000, some 6.8% of US textile imports are from Honduras. The rapid development of maquila has consequences for the labour market and internal migration flows. The recent economic slowdown in the US could affect this dynamic industry that has grown by 88% in the last five years and accounts already for 6% of GDP. The big challenge for the sector would be the increase of added value for local manufacturers and the diversification of its export markets. On the other hand, given the relatively large inflow of foreign exchange, WKHQDWLRQDO FXUUHQF\ VUDWH has been maintained at high levels. With an inflation of 10.1%, the currency depreciated against the USD by only 4.4% 8, undermining the competitiveness of Honduran exports. 6RFLDO&RQWH[W Honduras is undergoing the first stages of a GHPRJUDSKLFWUDQVLWLRQ process whose characteristics are decreases in mortality rates thanks to improvements in health care, decreases in birth rates and a slight reduction of population growth, although they still remain high compared to other Latin American countries 10. Urban 8 The depreciation by 4.4% of the national currency is similar to that of 1998 and 99, but with an inflation rate of 15.7 and 11% respectively. Source: CEPAL. 9 Most data of this section come from UNDP Human Development report on Honduras, 2000. 10 In 1998, 2.8% in Honduras, compared with Dominican Republic 1.7%, Jamaica 0.9%, Argentina 1.3%, Uruguay 0.6%. 14

population remains comparatively low, but is on the rise especially in the industrial capital, San Pedro Sula, as a result of the development of maquila. With respect to its age structure, the Honduran SRSXODWLRQ is YHU\ \RXQJ. The population under 15 represents 42% of the population, whereas that between 15 and 24 means reaches approximately 21%. The economically active population (EAP) is evaluated, for 1998, in more than 2.2 million people, with an average annual growth in the 90 s of 4.4%. This means an annual increase of the active population by 70.000 people, far more than the absorption capacity of the economy and the capacity of the State to provide adequate education and labour qualifications. According to a study by the Confederation of,qgljhqrxv *URXSV of Honduras in April 1999, there are nine ethnic groups in the country, the largest of which are the Lencas and Garifunas representing some 60% of the total indigenous population of 500.000. Several studies indicate that the indigenous population is among the most vulnerable groups (cultural identity, uncontrolled Forest activities, HIV/AIDS). In HGXFDWLRQdespite substantial progress over the past 25 years, Honduras still lags behind for quality standards, enrollment, infrastructure, textbooks. In fact State spending in education has decreased from 4.8% of the GDP in 1985 to 3.8% in 1995-1997. The education system is in need of complete overhaul to adapt it to the market conditions and requirements; nowadays some 85% of the curricula concern traditional (often theoretic) matters and only 15% are linked to the productive sector. Attendance remains low, despite the decision to extend compulsory schooling to 9 years. The transition from primary to secondary education seems particularly difficult: from 95% primary school enrollment, only 35% continue in secondary education. Furthermore repetition levels are alarming exceeding 10% in State secondary schools. Among the reasons for poor attendance and absenteism, one can blame low nutrition rates, lack of support from the family and FKLOGODERXU. The latter is a common phenomenon in Honduras, where according to World Bank data, more than 400.000 children and adolescents are working nowadays. Improvement of human resources is key to the successful and sustainable implementation of the poverty reduction strategy. This is recognised by national leaders and the donor community present in Honduras. The recent (Dec 2001) proposals from Costa Rica relaunching the debate on the foundations of regional integration, consider the very aspect of education as an important contribution to regional integration. Considerable increases in the VRFLDO VSHQGLQJ in the 1990 s have not been sufficient for Honduras to reach the so-called 20/20 goal stipulated in the Copenhagen Social Summit in 1995 11. Social indicators rate below most of Latin American countries, including Nicaragua or Bolivia. Following Mitch and in the framework of the PRS and HIPC, the government of Honduras has expressed its commitment to closely link its development strategy with a determined boost to education and health. One of the most important social characteristics in Honduras is WKH XQIDLU GLVWULEXWLRQRILQFRPH which is a structural obstacle to poverty reduction. The Gini coefficient 12 (see below) was above what was expected of a country of a similar per 11 Goal that implied that the governments of the recipient countries committed themselves to earmark 20% of their budgets to basic social health expenditure and education, meanwhile, the donors adopt the commitment to assign 20% of their aid for those expenditures. 12 The coefficient of Gini measures the distribution of income. A value zero indicates equal distribution, a value one indicates unequal. 15

capita income, taking into account that an international comparison shows that the greater the per capita income, the least is the inequality. 8QIDLUGLVWULEXWLRQRILQFRPHLQ/DWLQ$PHULFDLQ*LQLFRHIILFLHQW Honduras 0.590 Costa Rica 0.459 Ecuador 0.437 Nicaragua 0.603 Bolivia 0.589 Panama 0.485 Guatemala 0.558 Peru 0.462 El Salvador 0.508 6RXUFH81'3+XPDQ'HYHORSPHQW5HSRUW The XQHTXDOODQG RZQHUVKLS and DFFHVV WR ODQG prevent the development of a prosperous agricultural population. There is a high concentration of land in hands of relatively few actors. Almost 75% of land plots only represent 12% of the land used for farming purposes and they are usually located in mountain areas of low productivity 13. On the other hand, 2% of plots occupy some 40% of total agricultural surface, which also happens to be flat and most fertile. The issue of SXEOLFKHDOWK remains of concern. In the 1990 s steady progress has been made in almost all sectors, except for malnutrition, where the situation actually worsened. The public health and social security systems need comprehensive overhaul aiming at better targetting and increased efficiency. $,'6represents a serious threat being the first cause of hospitalisation and death in Honduran public hospitals. It is considered that at least the 1.8 % of population between 15 and 50 are HIV positive. In some target groups (sex workers, homosexuals, prisoners, street children and in the garífuna ethnic group) the epidemic is generalised with rates ranging between 7 and 15%. In period 1985-2000 it is calculated that a total of 16.227 cases appeared, although it is considered that this figure represents less than 50% of the real cases in the country. $1DWLRQDO 6WUDWHJ\DJDLQVW$,'6 has been adopted by the government. Throughout 2000-01 with the support of international cooperation, including a project financed by the Commission, there have been efforts to intensify communication and education for the prevention, the protection of human rights, the promotion of equal access to social and health services, in particular for target groups. 6XVWDLQDELOLW\RIWKHGHYHORSPHQWSROLFLHV $QDO\VLVRISRYHUW\ The Human Development Index of Honduras was 0.653 for 1998 14, similar to that of neighbouring countries (Nicaragua 0.631, El Salvador 0.696, Guatemala 0.619). Although this means an improvement compared to previous decades, this progress has been insufficient to alleviate the state of poverty in which most of the Honduran society is found. 15 It is calculated that in 1999, RI WKH SRSXODWLRQ OLYHG LQ SRYHUW\ and RI KRXVHKROGVZHUHIDFLQJH[WUHPHSRYHUW\. On this topic, the Human Development Report Honduras 2000 indicates that "there have been improvements, but that have favoured principally urban areas, worsening the situation in rural areas and widening the income gap with the poorest and especially women. 13 The implications that this situation entails for the environment and the sustainability of the natural resources are detailed in section 3.4.3. 14 UNDP, Human Development Report 2000. Honduras is in 113 th position for a total of 174, in the classification of the human development index (HDI) 15 In 1990 the index was of 0.614, and 1980 were 0.565 16

*HQGHULVVXHV Gender development index is below the average of Latin America and the Caribbean (0.748) but similar to that of Central American countries (except Costa Rica and Panama). Furthermore, the Index of Gender Promotion (IGP) 16 has shown a positive development since the 90 s (from 0.384 in 1990 to 0.460 in 1998). The main issue here is SDUWLFLSDWLRQ LQ LQFRPH, where the relation men/women is more than 4/1. This is due to various socio-cultural beliefs and traditions preventing women from entering active labour market. However WKHUHVHHPVWRH[LVWDVPDOO JURXSZLWKLQWKH IHPDOH SRSXODWLRQ ZLWK D KLJK OHYHO RITXDOLILFDWLRQ DQG HFRQRPLF LQVHUWLRQ LQ FRQWUDVW WR D ODUJH PDMRULW\ RI YHU\ ORZ LQFRPH 7KLV LV FRPPRQ SKHQRPHQRQ WR DOO /DWLQ $PHULFD EXW LV HVSHFLDOO\ VR LQ WKH FDVH RI +RQGXUDV (UNDP, 1998). Another worrying issue is the GRPHVWLFYLROHQFHDJDLQVWZRPHQ. It is reported that every month three women are murdered by male family members and at least five are assaulted by family members. It is believed that the phenomenon is more serious than it seems as many cases remain unreported. This gender issue is considered as a transversal issue in the development of activities in the framework of this strategy. (QYLURQPHQW From the decade of the 70 s a process RI V\VWHPDWLF GHVWUXFWLRQ RI IRUHVW UHVRXUFHV begun and is still in process at an accelerated speed, bringing about, in only 30 years, the loss of almost a third of the forest resources of the country 17. The causes have been a forest policy that has privileged extraction more than conservation, an economic and social policy that has progressively relegated the population to live under conditions of subsistence in the forest areas and a generalised disregard of the public opinion towards the problem of the environment. In addition to this, the existence of a high number of actors (central and local level) with overlapping competences creates conflicts leaving a vacuum of power, thus benefiting private interests leading to deforestation. Measures to prevent further deforestation are urgently needed in particular by setting up a clear institutional and legislative framework (a series of laws are already on the pipeline at the Parliament) with clear roles for the institutions involved and incentives for reforestation. As a result, the FRXQWU\ V ORZHU KXPDQ GHYHORSPHQW LQGLFHV DUH IRXQG LQ WKH EDVLQV RI JUHDWHU HQYLURQPHQWDO GHFOLQH. The tragedy of Mitch woke up the national conscience regarding environmental problems. The PRS picks up part of this preoccupation. However, until now, interventions have not attacked the real causes (of a socio-economic nature) of the environmental destruction. The PRS and the environmental strategy must be complementary and not subordinate one to the other. The fundamental aim has to be the striking of a balance between the use and the sustainability of the resources. 16 GDI measures the same variables as HDI, but taking into account the inequality of between men and women, the IGP measures the position of women in terms of access to decision-making and the degree of participation in economic and political life. Both values move between 0 (inequality) and 1 (equality). 17 Instead of decreasing, the annual rate of deforestation actually increases over the years: in 1964 the rate was 80.000 ha/year ; in 1990, 87.596 ha/year and in 1996, 108.000 ha/year (SERNA, State Environment report, Honduras 2000). The forest surface has been reduced from 70% to 50% of national territory between 1965 and 1990 (CODHEFOR, Analysis of forest subsector 1996). 17

For this reason, the immediate necessity is to launch D ZLGH GLDORJXH with all involved parties in order to reach consensus on a environmental agenda vital for the country s environmental protection. Stricter environmental monitoring and more rigorous planning are also needed. It is important to bear in mind that in Honduras, more than in other countries, WKHOLQN EHWZHHQ HQYLURQPHQW DQG SRYHUW\ UHGXFWLRQ LV REYLRXV. A sustainable management of natural resources can lead to improved water supply and increased economic activities. Therefore any action in this area has multiplier effects. &RQFOXVLRQVDQGPHGLXPWHUPFKDOOHQJHV Honduras has been relatively preserved from the plague of civil war its neighbours have experienced. The democratic transition therefore has been relatively smooth in the 80 s and definitely in the early 90 s with an urgent call for deepening democracy in the late 90 s. Progress in most socio-economic indicators has been steady but slow. Hurricane Mitch has temporarily suspended this process and created new foundations and methods for development. The mobilisation of the international community and the unprecedented cooperation between state structures and the civil society has brought forward new methods of consultation on the future national development policies. A new deal seems to be in its birth as regards the future priorities of the country. These can be summarised in three blocks: *RRGJRYHUQDQFHDQGVWDWHRIODZ 3RYHUW\UHGXFWLRQ 5HGXFWLRQRIWKHYXOQHUDELOLW\WRQDWXUDOGLVDVWHUV As regards the first area of JRRGJRYHUQDQFH, the challenges comprise: - the completion of the implementation of the reform of the judiciary allowing legal stability, predictability and equity; - the adoption and the implementation of measures to fight widespread corruption; - the deepening of the process of decentralisation and devolution of power to local and regional authorities with an increase in their funding; - the introduction of more transparency in the political life, more democratic control and further institutionalisation of the role of civil society; - the further democratisation of the police; - the fight against organised crime, which is increasingly becoming a threat to society. As regards SRYHUW\UHGXFWLRQ, the main challenges are: - the reduction in income inequity, which is one of the main characteristics of the country s situation; - the more effective use of economic growth as a tool to reduce poverty and exclusion; this has been a structural problem for the country in the last years and it needs to be addressed if the poverty strategy is to be successful; - the intensification of the reconstruction work after Mitch in particular as regards social infrastructure; 18

- the fight against the causes of structural poverty, and in particular the overhaul of the education system and the increase of state funds to the education sector to improve both infrastucture and quality standards; - the intensification of efforts to support private sector development in particular SMEs in non traditional sectors; - the need to boost product diversification in particular in market segments with important potential and investment stock; - the need to promote a predictable investment environment to attract foreign investment; - the transformation of the role of the State as a facilitator of the economic process providing equal opportunities to economic operators; - the support to efforts of regional cooperation in Central America but also NAFTA and other areas in order to provide better market access for Honduran exports. As far the UHGXFWLRQRIWKHYXOQHUDELOLW\WRQDWXUDOGLVDVWHUV, the challenges are: - the introduction of a component of vulnerability assessment in all economic and social planning; - the integration of disaster preparedness measures in development and environmental programmes; - the awareness raising of the population on the need for sustainable development and the risks associated with uncontrolled use of natural resources; - the adoption of a comprehensive legislative framework to fight deforestation and degradation of environment; - to involve local authorities and communities in the environmental protection; - to address issues of food security in medium/long term with relevant policies of incentives to local communities; - to increase cooperation between disaster relief organisations in neighbouring countries.,17(51$7,21$/&223(5$7,21±3$67$1'35(6(17 *HQHUDORXWORRN,QVWLWXWLRQDOIUDPHZRUN6WRFNKROPDGYLVRU\JURXS The weight of international cooperation is VXEVWDQWLDO for Honduras. In the framework of the Honduran PMRTN, the donor community will support Honduras with 3 billion USD assistance for the period 1999-2005. Almost half of the assistance will come from bilateral donors and the other half from multilateral sources. The biggest priority of the aid package will be on social and economic development with some 39% of funds followed by institutional support and public administration reform, telecommunications and health with some 43%. In the framework of the Advisory group meeting in Stockholm, in May 1999, D )ROORZXS*URXS was established to support Honduras (and other countries of the region) in the process of post-mitch reconstruction. In Honduras the group has gradually been extended over its two years of existence. Initially formed by Germany, Canada, Spain, the United States, and Sweden (G-5) and almost immediately 19

Japan. In October 2001 there were fifteen members 18 (G-15 ) with the participation of the European Commission. It is clear that the adoption of the Poverty Reduction Strategy will have an impact on donor coordination as projects will increasingly move to specific areas identified in the Strategy. The G-15 is coordinated by a rotating SURWpPSRUHVHFUHWDULDWand has three levels of action: Groups of Ambassadors and Resident Representatives, Technical Group of Follow-up and Sectoral Boards. At the end of 2001 the rotating presidency is assumed by Germany. The *URXS RI $PEDVVDGRUV, meeting monthly, analyzes the situation of the international cooperation of the country and the recent activities of the donor countries. The Group also gives guidelines to the other two levels on the presence of donor community and monitors progress in reconstruction and national transformation in cooperation with the Government s Cabinet of Reconstruction. The 7HFKQLFDO)ROORZXS*URXS is formed by the G-15 Directors of the Cooperation Agencies. This group, partly operating as Technical Secretariat, provides the group of Ambassadors with information and advice and maintains permanent relations with the Technical Support Unit of the Government and representatives of civil society. The 6HFWRUDO %RDUGV make a more targetted follow-up per sector with the participation of representatives of relevant Governmental agencies, civil society, sectorial programme managers and project directors. The Follow-up Group has helped generating an open and permanent dialogue with the Government and civil society and to serve as a tool for the implementation of the government policies linked to the reconstruction and processing of the country. In other countries of the region affected by Mitch there are similar groups of follow-up, EXWFHUWDLQO\LWLVLQ+RQGXUDVZKHUHWKHDFWLYLWLHVRIFRRUGLQDWLRQDQGFRQVXOWDWLRQ KDYH UHDFKHG WKH PRVW VDWLVIDFWRU\ UHVXOWV. The achievements in the educational sector have been particularly satisfactory.,qwhuyhqwlrq3ulrulwlhv The following table presents the overall volume and the main areas of donor cooperation either VSHQWSODQQHGDQGRUFRPPLWWHG for the period of 1994 to 2005. 6HFWRU $PRXQWPLR86' RIWRWDO DLG HIPC 98,7 3.3 Infrastructure and telecoms 400,8 13.2 Socio-economic development 1.173,7 38.8 Instit. Development / pub. Administration 491,2 16.2 Health and nutrition 416,7 13.8 Education and training 132,8 4.4 Environment and natural resources 165.3 5.5 Other 17.5 0.6 Hurricane Mitch 126.8 4.2 7RWDO 6RXUFH81'3UHSRUW 18 The remaining eight members are, in order of incorporation: BID and PNUD, World Bank and International Monetary Fund, the United Kingdom, the Netherlands, BCIE and Italy. 20

From the above-mentioned information, one can notice the clear concentration of the activities of the donor community in a number of sectors such as socio-economic development, infrastructure, institutional support and health. However, DUHDV VXFK DVHGXFDWLRQDQGHQYLURQPHQWVHHPVRPHKRZWRDWWUDFWOHVVDWWHQWLRQGHVSLWH WKHJUDYLW\RISUREOHPVDFFXPXODWHG. &RPPXQLW\&RRSHUDWLRQ For the period of 1998-2000 programmes and projects for a total of ¼ PLOOLRQ have been approved. In the last few years financial and technical cooperation, and economic cooperation with Honduras have been guided by the three priorities identified in the &RXQWU\ 6WUDWHJ\3DSHU, namely (a) consolidation of the democratic process, (b) investment in the human resources and (c) sustainable economic development. In practice this has been translated into a series of individual projects, a summary of which is given below: 3URMHFW %XGJHWPLR¼ Support Programme for the small and medium-sized farmers of 9.86 Olancho (PROLANCHO) Agricultural business Development and conservation of soil and 6.9 water in the basin of the river Jicatuyo Support to preventive health in Honduras (SPAH), 5.9 Development of education in marginal urban communities 6.3 (DECUMH) Support for vocational training in Honduras (AFOPH) 5.3 Institutional Strengthening of the Contraloría 0.99 Independent power Generation and saving 5.0 Information market centre and support for the exports of Honduras 0.78 Additionally in response to the reconstruction needs following Hurricane Mitch, the EC adopted an extraordinary financial package for the region of an amount of ¼PLOOLRQRIZKLFKIRUSURMHFWVLQ+RQGXUDV7KHUHVXOWLQJ programme 355$& includes activities in a number of sectors such as water and sewage (60% of total interventions), education, health and institutional capacity. Furthermore, it is necessary to emphasise the )RRG 6HFXULW\ line which has supported several NGO projects and three larger programmes: Rural Credit programme in support of Food Security (¼PLOOLRQDQGD/DQG Programme in Support for Food Security (¼ PLOOLRQ DQG D 6XSSRUW Programme for the Marketing of Farming Products for Small Producers of Honduras (¼ PLOOLRQ $V +RQGXUDV LV H[WUHPHO\ YXOQHUDEOH WR QDWXUDO disasters, it has been one of the focus countries of (& HPHUJHQF\ DVVLVWDQFH, in particular under the framework of ECHO. In several occasions, the most recent being the summer 2001 drought and Hurricane Michelle, ECHO provided very timely and targeted assistance (750.000 and 500.000 EUR respectively) in close cooperation with the Honduran relief agencies and the government. In addition, ECHO has been financing Disaster Preparedness projects through its ',3(&+2 programme since 1998. These projects aim at reducing the vulnerability of its local communities to disasters. A specific programme for +,9 SUHYHQWLRQ$,'6 (drawing from the specific horizontal budget line) has also been launched with a budget of ¼PLOOLRQ 21

Other budgetary lines of relevance for Honduras are the Tropical Forests and Environment, NGO Co-financing and Uprooted Populations. Under the latter an integrated rural development project has been financed in Bolsones area bordering El Salvador. No comprehensive evaluation has taken place on past activities in Honduras. However on the basis of projects reports and on the ground experience of the programme managers in the Headquarters and the delegation, the most important lessons learned in the last few years are: the general impact of Community cooperation in Honduras is affected negatively by its GLVSHUVLRQin several different sectors and a series of individual projects among ¼PLOOLRQ specific projects (for example in education or health) that have been formulated and implemented ZLWKRXW DZLGHU YLVLRQ RIWKH VHFWRU and national policy run the risk to obtain unsustainable results; acting at ORFDOOHYHO, there are opportunities to finance actions of large impact, whenever the project is well prepared and counterparts develop a great sense of ownership. The projects PROLANCHO, JICATUYO and DECUMH have managed in particular to act as catalysts of development attracting the attention of the government and other donors; success in the projects is often a matter of SHUVRQDOFRQWDFWV and of the right choices as regards the IRFXV of the action, the links with authorities and the civil society and the right balance between concrete, specific topics and systemic change. The above considerations lead to D QHHG IRU ODUJHU LQWHUYHQWLRQV LQ D UHGXFHG QXPEHU RI ZHOO WDUJHWHG VHFWRUV ZLWK SUHYLRXV SROLF\ GLDORJXH ZLWK WKH JRYHUQPHQW WKH UHSUHVHQWDWLYHV RI FLYLO VRFLHW\ DQG LQ FRQVXOWDWLRQ ZLWK WKH GRQRUFRPPXQLW\. It is clear that the previous experience of individual projects with limited policy dialogue has reached its limits. Furthermore to maximise the impact of the programmes in the framework of the priorities set in the PRS, the SRVVLELOLW\WR XVH EXGJHWDU\ VXSSRUW and contribute to VHFWRUDO SROLFLHV should be properly investigated. In order to achieve positive results in this respect, a policy dialogue needs to be established with the new government on all related topics. In any case, the visibility of the Community action has to be preserved and promoted. It is proposed that the first area, where the possibility of sectoral policy has to be analysed is HGXFDWLRQ. (80HPEHU6WDWHVDQGRWKHUGRQRUV &RRUGLQDWLRQPHFKDQLVPV Apart from the coordination taking place in the framework of the G-15 group, there are at least µmonthly meetings of the EU MS Ambassadors and the Head of the EC delegation for Central America under the initiative of the EU MS assuming the rotating presidency. These meetings allow an exchange of views on the country s economic and social situation as well as priorities in cooperation including in the G- 15 framework. In parallel and in order to facilitate the exchange of information and experiences, the EC Delegation calls ad hoc meetings (at the most appropriate level) every time officials from Brussels visit the country. 22

(80HPEHU6WDWHV The following table presents key figures of the EU Member States bilateral cooperation, as included in the relevant report of UNDP for Honduras. These figures have been updated according to comments made by the Member States missions in Tegucigalpa. &RXQWU\ <HDUVRI UHIHUHQFH 7RWDODPRXQW RIFRRSHUDWLRQ PLOOLRQ86' 3ULRULW\DUHDV Germany 1999-2004 77.6 Mainly carried out by GTZ and KfW 70% goes to social/economic development and environment other priorities include public admin. and decentralisation Belgium 1998-2000 0.9 mainly through NGOs 86% to social, economic development Spain 1998-2000 346.3 geographical areas covered: Ceiba-Trujillo, Yojoa-Presa del Cajon, Choluteca-Nacaome, Valle de Sula, capital areas: good governance, municipal development, health and social services, education, housing Finland 1999-2004 3.5 democracy, environment, equal opportunities, poverty reduction France 2001 0.4 1.8 Humanitarian assitance Projects carried out by NGOs through the Fondation de France Netherlands 1994-2002 31.2 Good governance, decentralisation, participation of civil society Italy 1998-2002 6.3 Infrastructure, mainly water and energy UK 1998-2000 )RUWKHZKROH &HQWUDO $PHULFD DFID has recently opened an office in Tegucigalpa Priorities are prevention and reduction of violence, pro-poor growth, good governance, HIV/AIDS prevention/reduction. Sweden 1999-2002 135.0 Health, decentralisation, social infrastructure, institutional reform, human rights, fight against corruption, participation of civil society, quality aspects of education (forecast), strengthening of dialogue/coordination with government and other donors 6RXUFH81'3UHSRUWDQGGDWDIURPWKH0HPEHU6WDWHV 23

2WKHUGRQRUV The bulk of the 86 DVVLVWDQFH is carried out through USAID and covers economic development, civil society participation, environment, decentralisation, reform of the judiciary, health and education. US has provided and is expected to provide a total assistance of USD 749 mln from 1986 to 2004. A special package of 252 mln USD was specific to Hurricane Mitch. For the fiscal year 2001, Honduras financial enveloppe will reach USD 24.6 mln. -DSDQ is also providing substantial assistance mainly in the area of infrastructure, reaching USD 54 mln out of a total 130.5 mln for 1998-2000. &DQDGD 7DLZDQ and 6ZLW]HUODQG also run cooperation projects in the country. Furthermore, technical assistance is also provided by a number of Latin American countries, such as Argentina, Brazil, Colombia, Chile and Mexico in particular in the framework of education exchanges and emergency assistance. Among the multilateral donors, apart from the,0) with its PRGF programme analyzed above, the key players are the,qwhudphulfdq %DQN RI 'HYHORSPHQW providing loans for key sectors (agriculture, health, public administration, preinvestment support) for an amount of USD 250 mln earmarked for 1999-2001, the :RUOG %DQN with a wide portfolio of projects worth USD 561 mln (mostly loans in concessionary terms carried out by International Development Association), WKH :RUOG )RRG 3URJUDPPH with a large contribution to address Mitch food security problems and the &HQWUDO$PHULFDQ%DQNRI(FRQRPLF,QWHJUDWLRQ. 675$7(*<2)&20081,7<&223(5$7,21 The strategy of the European Commission has been elaborated taking into account a series of factors and notably: - the aims of the cooperation policy of the European Union - the previous experiences of the European Commission in Honduras - the aims and priorities of the country, as they are expressed in the PMRTN and the PRS - the priorities and areas of intervention of other donors and in particular the EU Member States 0DLQRULHQWDWLRQVRIWKHVWUDWHJ\ The strategy of the EC corresponds in general terms to the broad guidelines of the Memorandum of Understanding signed with the Government of Honduras in March 2001, which determines the priorities of financial and technical cooperation, and economic cooperation, for the years 2000-2006 and is accompanied with an indicative budgetary package of 147 mln EURO. The need for FRQFHQWUDWLRQ RI HIIRUWV in order to maximise the impact of the Community action in view of a substantial and visible contribution to the country s poverty reduction strategy have led to a further targetting in a OLPLWHG QXPEHU RI VHFWRUV(compared to the five sectors included in the MoU), which are expected to have VSLOORYHU LPSDFW in other areas, mainly in rural development, social and economic development and equal opportunities. Taking into account the high number 24

of sectors requiring support and the strong presence of other donors, an analysis has taken place in order to select the areas where the Community could have a comparative advantage in providing assistance and where possibilities for a policy dialogue with the authorities are high. Activities will be complemented by reconstruction projects in the framework of PRRAC in Honduras. The following matrix allows to assess the response strategy of the on-going and future programmes in conjunction to the challenges. &KDOOHQJHV (&3DVW2QJRLQJUHVSRQVH (&6WUDWHJ\ *RRG*RYHUQDQFH State of Law Decentralisation Civil society participation Corruption Criminality 3RYHUW\5HGXFWLRQ Income equity Reconstruction Education Private sector development Public health Regional integration Equal opportunities 5HGXFWLRQ RI YXOQHUDELOLW\ WRQDWXUDOGLVDVWHUV Eco.-social planning Awareness raising Legal framework Involvement of local communities Increase of regional cooperation Development of local communities Food security Disaster preparedness Public Administration reform project Institutional support to Contraloria Programme on young lawbreakers; NGO support projects Democracy and Human Rights projects Support to education in marginal urban areas Support to vocational training; Preventive health for adolsecents; HIV/AIDS prevention; Independent Power generation and saving; Binational project of socioeconomic development of Bolsones area; PRRAC projects: water treatment, housing, haelth and education, vocational and business training; Information market centre and export promotion Rain forests protection; Food security projecs; Support to small farmers in Olancho district; Food business and soil/ water conservation in Jicatuyo; Support to small farmers in food processing and commercialisation; Reduction of local vulnerability to disasters. 6XSSRUW WR ORFDO GHYHORSPHQW DQG GHFHQWUDOLVDWLRQ Horizontal projects (NGO support, Democracy and Human Rights) 6XSSRUW WR VHFRQGDU\ HGXFDWLRQVHFWRU PRRAC projects; Non focal: support to the productive sector Horizontal programmes: @LIS, ALFA. 6XVWDLQDEOH PDQDJHPHQW RI QDWXUDO UHVRXUFHV Food security; PRRAC interventions; Horizontal programmes: URB-AL, Tropical forests; Emergency assistance ECHO, Disaster preparedness DIPECHO; Regional Programme for Central America. Results of this analysis were shared and confirmed with the Member States missions in Tegucigalpa as well as other donors present on the ground. 25

The three areas are as follows: VXVWDLQDEOHPDQDJHPHQWRIWKHQDWXUDOUHVRXUFHVLQGLFDOORFDWLRQRI IXQGV The aim is to promote the rational and sustainable use of the natural resources and in particular water and land. A particular attention will be paid to the interaction between local actors and the relevant central authorities. It is widely acknowledged in Honduras that the management of water resources is vital for safeguarding environmental balance. On the other hand, the lack of access to running water is a serious public health problem, especially in rural and marginal urban areas. Therefore the contribution of the programme could be valuable in reducing vulnerability to natural disasters but also by increasing the access to running water to disadvantaged groups of population thus contributing to the wider objective of improving living conditions. 6XSSRUWWRORFDOGHYHORSPHQWDQGGHFHQWUDOLVDWLRQ Under this heading funds will be earmarked for actions at local level to strengthen the capacity of municipal authorities in the provision and improvement of municipal/communal services. Where deemed necessary and at limited extent, actions will also be carried out at central level to enhance the objectives pursued at local level. Activities will include exchange of experience among municipalities and support to partnerships with local operators and NGOs in increasing the quality and efficiency of services. The aim of this programme is to contribute in a concrete way to the smooth process of decentralisation by supporting successful examples of devolution of competences, by accompanying this process and by disseminating the results. Furthermore by strengthening the management capacity of the local government, it is believed that a further delegation of competences from central authorities will follow, while a substantial contribution to the improvement of living conditions of local population and an efficient and sustainable management of natural resources will be achieved. 6XSSRUWWRWKHHGXFDWLRQVHFWRU The current low levels of education of large parts of Honduran population are considered serious obstacles to poverty reduction. Unless education infrastructure and quality standards are dramatically improved, the education system will be likely to reproduce poverty and to increase inequalities, including between men and women. On the other hand, as education and the fight against criminality have been set as top priorities by the new government, it is clear that ownership of the proposed activities in education is likely to be important. Previous work experience in education has been considered positive. However a more specific targetting is needed. As explained above, education has not received adequate attention from donors and among those active and in particular the World Bank the emphasis is put on quality standards and primary education. Therefore, it is proposed that this programme concentrates on secondary education, pending final confirmation at a later stage following an analysis of the priorities of the government and the possibility to support a sectoral policy. Activities in the framework of the programme should cover both attendance levels and quality standards. Activities will be carried out both at central level for the systemic components and at local levels favouring a participatory approach with local communities, NGOs and other relevant bodies. A wider analysis of the reasons for the low attendance in secondary level and for possible particular problems of access for females will be carried out and wider suggestions will be 26

presented and solutions will be sought. Provision could also be made for technical assistance to the government in the definition of a sectoral policy in education, if necessary. A total reserve of 10 mln EURO or 8% of available funds under the MoU will be set aside for use according to the needs assessed during the annual reviews. 1RQIRFDOVHFWRUV In addition to the orientations of the strategy, two more areas have been identified for possible support as second priority, in case there is need on the basis of the annual review. The VXSSRUWWR WKH SURGXFWLYH VHFWRU and the full use of existing possibilities for increasing exports and attracting investments remain important objectives. Possible activities in this area comprise the strengthening of the legislative framework, the support to associative structures, the assistance to Honduras participation in the WTO negotiations and the creation of a stable, foreseeable and reliable environment for the attraction of foreign investment. The UHJLRQDO FRRSHUDWLRQ of the European Union with Central America is a fundamental complement to the above mentioned pillars. The aim of regional cooperation is to promote the economic, political and social integration of Central America through three main activities: support for economic integration and the definition of common policies; consolidation of the Central American institutional framework and its performance; and strengthening of the role of civil society in the process of integration. It is widely believed that Honduras will hardly manage to reduce its current levels of poverty if it isn t embarked in a stable regional process of economic integration and development. 2SHUDWLRQDO&ULWHULD A series of operational criteria will guide the work of the Commission in all the phases of identification, formulation and implementation of programmes: HPSKDVLV LQ WKH JRRG TXDOLW\ RI LGHQWLILFDWLRQ DQG HODERUDWLRQ RI SURJUDPPHV ; with better co-ordination with the Member States and other donors (including, if possible, joint missions, joint programmes, interaction with other donors during sector-specific assessment and formulation of new programmes), with greater participation of the Delegation thanks to the process of deconcentration applicable from 2002 to the Delegation of Managua; emphasis in VHFWRUVSHFLILF SURJUDPPHVratherthan in individual projects and elaboration of strategic focus where possible on the basis of sectoral studies showing the added value of EC assistance; (PSKDVLVWRFRPSOHPHQWDULW\ to PRRAC-MOU; where assessed feasible and where the amount of EC financing justifies it, look for FRILQDQFLQJ eventually through budgetary support and/or joint financing mechanisms with other donors; Ensure the IXOOFRPSDWLELOLW\andLQWHJUDWLRQRI&RPPXQLW\FRRSHUDWLRQLQWR WKH IUDPHZRUN RI WKH 356 including on the basis of a UHJXODU PRQLWRULQJ E\ WKH&RPPLVVLRQ'HOHJDWLRQandSDUWLFLSDWLRQLQWKH* 27

Involve FLYLOVRFLHW\. 2WKHUEXGJHWDU\OLQHV Complementary to the strategy, the 5HJLRQDO 5HFRQVWUXFWLRQ 3URJUDPPH IRU &HQWUDO $PHULFD (PRRAC) contributes to the post-mitch reconstruction effort, and uses the opportunity presented by Mitch in order to bring forward a sustainable development model for the country in full consultation with civil society. In this context, the strategy of the EC is centered around the support for the social policies and more specifically for public health, water treatment and sewage, social housing, education and training. The actions of the PRRAC are directed essentially to the less-favoured sectors of society and the most vulnerable population. In this framework and in full coordination with other donors the Commission is involved in the discussions on +,3& and analyses all options for its contribution. A decision to commit 12 mln USD was taken in April 2001 and thanks to a reallocation of funds from the FEPEX project another 25 mln EURO will be channelled to the Special Fund for Social Transformation (FETS). In addition to this, a series of RWKHULQVWUXPHQWV available in the Commission could be applicable to Honduras and namely: Activities in the area of HIV-AIDS; Activities in the area of conflict prevention; Activities to support food security and humanitarian assistance; Activities in the area of R&D; Activities of destruction of anti-personnel mines; Activities on Justice and Home Affairs. Honduras is also eligible in horizontal programmes such as ALFA, @LIS, URB-AL, ALINVEST. Although each one of these horizontal programmes follows different procedures for preparation, identification, implementation and follow up, the present strategy will guide the setting up of their priorities. &RKHUHQFHZLWKRWKHU(&SROLFLHV An analysis of the EC policies and their possible impact on Honduras shows that the most relevant policies and in particular trade, agricultural, health and consumer protection, internal market, competition (see annex 3) are FRQVLVWHQW and FRKHUHQW with the present Strategy. However, it is important to underline some issues relative to certain implementation aspects, for which concerns have been voiced by Honduran officials: &$3 DQG LQ SDUWLFXODU WKH ³EDQDQD FRPPHUFLDOLVDWLRQ FRPSRQHQW, where Honduras and the EU have been in the past on opposite sides in the WTO panels; 63* 'UXJV FRPSRQHQW, which due to its limited duration prevents long term investment in the areas concerned; 6DQLWDU\DQGSK\WRVDQLWDU\FRQWUROV (issue seems to be close to a solution). 28

&RPSOHPHQWDULW\ZLWKRWKHUGRQRUV This Strategy is fully consistent with the two national development documents adopted by the Honduran government. Activities under many headings are indeed supporting implementation of the Poverty Reduction Strategy and the Master Plan, which serve as guideline for all donors cooperation activities. Increased cooperation both on the ground and between headquarters have allowed to increase complementarity in the programming exercise. The growing role of the delegation in project identification and management will contribute to this direction. In this context, the possibility of having joint or coordinated projects with other donors will be assessed subject to the timing and the relevance. 1$7,21$/:25.352*5$00( The Indicative Programme is based on the principles highlighted in the Strategy and the Memorandum of Understanding signed in March 2001. It comprises a list of sectoral objectives, proposed activities, indicators of achievement and policy conditions valid throughout the programming period. While maintaining its independent nature, the Indicative Programme intends to contribute to the implementation of the Poverty Reduction Strategy. Therefore activities, objectives, indicators and conditionality clauses of both Strategies are similar or converging. The choice of areas of concentration has been the fruit of consultation with local, national bodies as well as with other donors. The choice of management structure will be made on a case by case basis, not excluding the use of budgetary support through sectoral Funds or indeed the Reduction Poverty Fund. The funds mobilised to reach the objectives of this Strategy derive mainly from the Memorandum of Understanding but other budget lines could be used according to the current established procedures. The final selection of projects and their corresponding financial allocations will be carried out on the basis of the outcome of project identification and preparation work of the Commission. The attached indicative work programme is conditional upon available annual budgetary allocations. The indicative programme is subject to annual revision and adaptation. Any revision will be made in consultation with the Honduran authorities and the Member States. Due attention will be taken to include in the projects lessons from previous projects in order to disseminate good examples and avoid mistakes. It has to be noted that the budget allocations per project are indicative and could be subject to revision. )RFDOVHFWRU 6XVWDLQDEOHPDQDJHPHQWRIQDWXUDOUHVRXUFHV The global objective is to support LQWHJUDWHG PDQDJHPHQW RI ZDWHU UHVRXUFHV in determined key areas. This would be achieved in concrete terms through: An HIILFLHQW DQG VXVWDLQDEOH XVH RI QDWXUDO UHVRXUFHV, including land. The issue of provision of water to urban and rural population will be given first priority. Support to the SURWHFWLRQRIZDWHUUHVRXUFHV in key areas. 29

6WUHQJWKHQLQJ WKH LQVWLWXWLRQDO FDSDFLW\ RI PXQLFLSDOLWLHV in dealing with environmental issues 5DLVLQJ DZDUHQHVV RIORFDO FRPPXQLWLHV and increasing their participation in the protection mechanisms ForeseenLQWHUYHQWLRQV are based on a series of studies and assessment currently in progress. The studies will allow a more accurate identification of the needs, the desired sustainability and the institutional capacity of the municipalities to carry out the projects. In preliminary terms, activities will be concentrating in selected areas, with an initial pilot activity. The indicative overall budget will be POQ(852. Work has already started in this sector with the elaboration of studies and proposals for the regions to be covered. It is essential that cooperation with relevant projects in neighbouring countries facing similar problems continues to be strong even at the level of project preparation. In this sense, frequent exchange of experience between different projects within Honduras but also in neighbouring countries should be an important part of the project. The elaboration of joint projects covering Honduras and neighbouring countries should not be excluded. For the successful implementation of the projects, the Honduran Government needs to adopt a UHOHYDQW OHJLVODWLYH HQYLURQPHQW, incl. specific laws on land planning, water resources, forestry law. These laws have to be compatible and promote a sustainable management of natural resources. Furthermore, strategies for the PDQDJHPHQW RI ZDWHU EDVLQV and the elaboration of an HIILFLHQW FRVWHIIHFWLYH HQYLURQPHQWDOLPSDFWDVVHVVPHQWSURFHGXUH will be welcome. In the same line, an increased participation of civil society and municipalities will contribute to the programme s sustainability. Relevant indicators allowing to monitor achievements in the sector LQFOXGH WKH SHUFHQWDJHRIIRUHVWVFRYHUHGE\LQWHJUDWHGPDQDJHPHQWSODQV, the percentage of SRSXODWLRQ ZLWK DFFHVV WR SRWDEOH ZDWHU DQG VHZDJH, the UHGXFWLRQ RI PRUWDOLW\GXHWRLQIHFWLRXVGLVHDVHV. )RFDOVHFWRU 6XSSRUWWRORFDOGHYHORSPHQWDQGGHFHQWUDOLVDWLRQ The overall objective is to VXSSRUW WKH SURFHVV RI GHFHQWUDOLVDWLRQ DQGWUDQVIHU RIFRPSHWHQFHVWRORFDOJRYHUQPHQW. This will be achieved namely by: Supporting the elaboration of the LQVWLWXWLRQDO OHJLVODWLYH IUDPHZRUN allowing the devolution of powers to the municipalities and accompanying the implementation process by troubleshooting any possible practical obstacles; Supporting the PRGHUQLVDWLRQ RI SXEOLF DGPLQLVWUDWLRQ by streamlining administrative procedures and routines between central and local government; Supporting the LQVWLWXWLRQDO FDSDFLW\ RI PXQLFLSDOLWLHV in ensuring quality municipal services and in particular water and waste management, public transport; health and protection of marginal groups with the possibility of cofinancing pilot actions at municipal level; Encouraging the SDUWLFLSDWLRQRIPXQLFLSDOLWLHV in the decision making process of the central government in issues of concern to local communities; 30

Facilitating H[FKDQJH RI H[SHULHQFH and the creation of information networks between the municipalities. In this sector, the following programme will be supported: Support to GHFHQWUDOLVHG PDQDJHPHQW RI XUEDQ VHUYLFHV with an indicative budget of POQ(852. The goals of this programme can only be achieved if the Honduran government pursues a SROLF\RIGHFHQWUDOLVDWLRQ on the basis of current legislation, notably the Law on Municipalities. This means improving coordination between central and regional/municipal level, strengthening the institutions responsible for decentralisation and supporting devolution to municipal level. On the other hand, municipalities will also need to show commitment in assuming responsibilities for the provision of quality municipal services and to this goal work with local representatives of civil society and private operators. Relevant indicators allowing a monitoring of the achievements in the sector include the part of EXGJHW H[SHQGLWXUH WUDQVIHUUHG WR ORFDO JRYHUQPHQW, the number of PXQLFLSDOLWLHVDEOHWRPDQDJHGXWLHVGHYROYHG by the State. )RFDOVHFWRU 6XSSRUWWRHGXFDWLRQVHFWRU The key objectives are: To support the LQWURGXFWLRQRITXDOLW\VWDQGDUGV in secondary education; To assist in a comprehensive UHYLHZ RI H[LVWLQJ FXUULFXOD and help in their UHYLVLRQ, where deemed necessary, taking into account the current real needs of the society and labour market; in this process, civil society, the business community and teachers will be closely involved; To assist in the elaboration of SRVLWLYHPHDVXUHV allowing KLJKHUDWWHQGDQFH in secondary school; To implement a WUDLQLQJSURJUDPPH for teachers as a result of the reform. The project will have an indicative budget of POQ(852. Actions will take place at central and local levels. A number of schools can be selected as pilot with an additional assistance in the framework of the project. Furthermore, the Government should move ahead with the DSSURYDO DQG LPSOHPHQWDWLRQRID)UDPHZRUN/DZRQ(GXFDWLRQ contemplating the elaboration of updated national curricula in line with current requirements, the approval of incentives allowing the smooth transition from primary to secondary education and offer a wider role to local communities. Progress in this area will be measured against indicators such as the DWWHQGDQFH UDWH LQ VHFRQGDU\ HGXFDWLRQ, the EXGJHW VSHQGLQJ LQ HGXFDWLRQ, the level of UHSHWLWLRQ and DEVHQWHHLVP, the number of H[LVWLQJ FXUULFXOD UHYLHZHG and the number of QHZFXUULFXODHODERUDWHGDQGDGRSWHG. 31

&URVVFXWWLQJLVVXHV The following issues will be taken into account in all projects and during the whole project cycle, ie. design, preparation and implementation and will also be considered as desired outcome of the specific projects. Gender Regional integration is the main priority for the regional strategy for Central America and should be a permanent concern at all levels of the national strategy, in which all actions and activities should be coherent with the regional strategy. Environment Decentralisation Promotion of information and communication technologies Participation of civil society Disaster preparedness 32

$11(;,QGLFDWLYHSURJUDPPLQJERDUG 6HFWRU3URMHFW&RPPLWPHQW%XGJHW0(852 Indicative amounts 7RWDO0R8 3URMHFWVDOUHDG\FRPPLWWHG 7RWDOEXGJHWDYDLODEOH )2&$/6(&7256BBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBB. 6XVWDLQDEOHPDQDJHPHQWRIQDWXUDOUHVRXUFHV (45%) Integrated management of water resources 2002 33.0 2006 26.0 6XSSRUWWRORF'HYHORSPHQWDQGGHFHQWUDOLVDWLRQ(26%) Decentralised management of urban services 2004 34.0 (GXFDWLRQ (21%) Secondary education* 2003 28.0 7RWDO 5HVHUYH (8%) ÃLQÃFDVHÃEXGJHWDU\ÃVXSSRUWÃLVÃILQDOO\ÃFRQILUPHG ÃIXQGVÃWRÃEHÃFRPPLWWHGÃDQGÃSODQQHGÃGXULQJÃDQQXDOÃUHYLHZV 2WKHUEXGJHWDU\OLQHV +,3& 86' (***) 355$&,QGLFDWLYHDOORFDWLRQIRU+RQGXUDV Ã$QÃDGGLWLRQDOÃÃPLRÃ(85ÃKDVÃEHHQÃUHDOORFDWHGÃWRÃ+,3&ÃIURPÃ)(3(;ÃSURMHFW 33

$11(;6KRUWVXPPDU\RI355$&LQWHUYHQWLRQVLQ+RQGXUDV The sector of ZDWHUDQGVHZDJHrepresents almost 60% of the whole intervention of the PRRAC in Honduras. In this field efforts will concentrate on three types of actions: the construction and rehabilitation of wells and aqueducts in rural areas, the rehabilitation and extension of the liquid and solid waste treatment in intermediate cities and the rehabilitation of the aqueduct and sewage system in marginal neighbourhoods of Tegucigalpa. The programme s main aims in HGXFDWLRQ DQG KHDOWK are to rehabilitate and improve infrastructure services in selected communities, as well as to improve the quality and access to public services. 6WUHQJWKHQLQJ WKH LQVWLWXWLRQDO FDSDFLW\ RI WKH PXQLFLSDOLWLHV to deal with sustainable development, environmental management and housing reduction are also important aims of the programme. In JHRJUDSKLF terms, the PRRAC will concentrate on the departments of Francisco Morazán, Colon, Olancho, El Paraíso, Valle and Gracias a Dios. This concentration has been decided taking into account the needs expressed by Honduran authorities and the activities of other donors. 34

$QQH[3ROLF\0L[ 1. Trade Policy: Article 133 of the EU Treaty constitutes the legal basis for the EU s trade policy. It states that the objective of the Union s commercial policy is «to contribute, in the common interest, to the harmonious development of world trade, the progressive abolition of restrictions on international trade and the lowering of customs barriers». It covers all the main aspects of trade in agricultural and non-agricultural goods and services as well as key related issues of intellectual property, investment and competition. The main instruments of the Union s trade policy towards Central America include : - Strengthening and expansion of bilateral trade relations with Central American countries on the basis of transparent and non-discriminatory rules - Supporting regional trade and economic integration processes in the Central American sub-region - Supporting Central America in its fight against drugs through autonomously granting duty free market access to the EU for all industrial products (excluding arms and ammunition) and a range of agricultural products under the special arrangements to combat drug production and trafficking (drug regime) of the Generalised System of Preferences (GSP). - To support the integration of Central American countries into the world economy by assisting them to implement existing WTO commitments as well as new commitments that will result from the Doha Development Agenda. The strategy set in this document, in particular with regard to the economic co-operation section, is fully in line with the achievement of these objectives. However, for the drug regime of the GSP, there is some concern among Central American countries that the short period of renewal of the GSP regulation may act as a disincentive to longer-term investment in the region. 2. Common Agriculture Policy (CAP) The 1957 Treaty of Rome contained provision for a Common Agricultural Policy (CAP). This policy sought to increase the productivity of European agriculture, ensure reasonable living standards for farmers, stabilise farm produce markets and guarantee a stable food supply at fair prices for consumers. Many changes to the CAP were made, modifying price policy, restricting market intervention, regulating output and introducing a system to control spending on agriculture. Measures were added to stimulate development in rural areas. By 1992, an important overhaul of the CAP took place which involved: reduction of support prices, adjustment of market management to restore market balance, and more assistance was provided for social and environmental measures. Concerning its external dimension, those changes focussed on the next enlargement of the Union, the global economy and the need to implement WTO commitments. Few agricultural commodities covered by the CAP enter into competition with Central American products. A notable exception is bananas and since the EU is an important destination for Central American products, Central American banana producers have voiced significant grievance concerning the impact Community policy in this field has had on their market access. In addition, the CAP has also influenced meat and sugar markets. 3. Sanitary and Phytosanitary Control Policy Consumer Protection In its external dimension, the Community policy in this sector aims to assure a high level of protection of health, safety and economic interests of the consumers, as well as the protection of public health in the EU. The implementation of this principle is perceived, by some third 35

countries, or economic sectors, as a measure of non-tariff trade protection, that prevents the access of some products mainly agricultural - to the European markets. At the same time, some Central American countries have raised concerns about nonreciprocal treatment by the EC in the implementation of certain Community principles of health inspection, such as that of regionalisation but also agreement of control institutions. 4. Internal Market The principal aim of this policy is to strengthen the process of economic integration for a liberalisation of the markets, as well as the development of a legislative framework compatible with that of the EC in order to: - assure a suitable level of protection of industrial and intellectual property, - prevent money laundering, - protect personal data - guarantee minimum standards for public calls for tender, avoiding any kinds of restrictive measure of the markets. Regulatory convergence leads to mutual benefits, supporting trade and investment and favouring investment abroad of EU companies. This policy is compatible with the present strategy both in the bilateral and the regional context. 5. Competition Policy The interest in applying competition policy in the EU s relations with third countries, mainly in the negotiation of trade agreements, is based on the establishment of a stable and clear legal framework for relations among economic operators that may prevent commercial conflicts. At the same time, the discriminatory treatment between companies of both parties is avoided with respect to direct investments or access to the services market. Likewise, the EU takes part in multilateral co-operation in this sector in the framework of the World Trade Organisation (WTO). The WTO working group on "trade and competition" examines the possibility of strengthening the convergence of policies for which a multilateral horizontal action might be explored by the EC. This policy is compatible with the present strategy since interventions promoting its aims and policies are included, in particular in the regional context. 6. Research and Development Policy In the EC, international co-operation in this area is covered by the Fifth Framework Programme (FP5) through two principal axes: - An international co-operation dimension for each research programme, included in the FP5, that contributes to the solution of common or general problems. - a specific international programme third countries and regions, including Central America. The training and mobility programmes for researchers included in the EC Framework Programme are also compatible with the aims of the present strategy. 7. Environmental Policy The priorities of the environmental policy for Central America are defined at two levels: 36

- Objectives and principles included in the 6 th Community Environment Action Programme (6EAP, 2002-2011): climate change, depletion of natural resources and the loss of biodiversity, participation in the discussions and negotiations on forest related issues 19. - To encourage Central America to implement its international commitments under the different multilateral environmental agreements, notably: Πthe Biodiversity Convention, Cartagena Protocol of Biosafety, ΠClimate Change Convention, Πthe Kyoto Protocol, ΠStockholm Convention of Persistent Organic Pollutants Πthe Rotterdam Convention on the Prior Informed Consent Procedure for certain hazardous chemicals and pesticides in international trade. These objectives are compatible with the present strategy in particular in view of the fact that environment as one of the main crosscutting issues for sustainable development has been mainstreamed into the co-operation strategy. 8. Conflict Prevention In its communication on conflict prevention (April 2001), the Commission announced its intention to focus its co-operation programmes more clearly on addressing root causes of conflict in an integrated manner. In this context, the Commission will seek to incorporate specific conflict prevention (or resolution) measures into its various sectoral programmes. 9. Justice and Home Affairs: The instruments put into place by the EC in its relations with Central America in the fight against drugs are coherent with the objectives of the present strategy. The current policy concerning immigration could have a impact on the development of Honduras that depends heavily on remittances from emigrants. 10. Information Society The main objectives pursued by co-operation with Latin America in the Information Society field are the following: 1. Promoting the development of an inclusive Information Society in those countries and fighting the digital divide within and between countries and regions and, as such, contributing to the economic and social development of Latin American countries; 2. Fostering the integration of Latin American countries in the global Information Society; 3. Promoting European industrial interests in Latin America by creating a favourable environment for the EU Information Society stakeholders in the region, notably by promoting efficient regulatory and policy frameworks, as well as open and global standards in the region; 4. Reinforcing technological co-operation in the field of Information Society, in particular through the European Union Framework Programme for RTD; Those objectives are compatible with both the national and regional strategies. 19 In line with the EC communication on Forests and Development: the EC approach (COM1999 (554)). 37