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THE ROLE OF FOREIGN AID IN DEVELOPMENT: COSTA RICA AND HONDURAS
 
 
December 1997
 
 
NOTES

All years referred to in this memorandum are fiscal years unless otherwise noted. All dollar amounts are expressed in 1997 dollars unless otherwise noted. Numbers in text and tables may not add to totals because of rounding.
 
 
PREFACE

What role does foreign aid play in promoting the economic development and improving the social welfare of countries in Africa, Asia, and Latin America? That question is difficult to answer and has been the subject of much debate among development specialists as well as Members of Congress and the American public.

Drawing on the works of other scholars, this memorandum analyzes the role of foreign aid in the development of Costa Rica and Honduras between 1953 and 1993. It is one of three that are being published as background papers for The Role of Foreign Aid in Development, a Congressional Budget Office (CBO) study published in May 1997. These memorandums are intended to illustrate more fully the themes identified in the main study.

Eric J. Labs of CBO's National Security Division prepared the memorandum under the general supervision of Cindy Williams and R. William Thomas. Richard Fernandez and Julia Matson of CBO provided valuable assistance. Many officials of the Agency for International Development, the Inter-American Development Bank, and the Organization for Economic Cooperation and Development also provided information. In particular, the author would like to thank James Fox, Ellen Peterson, and Cheryl Warner. The author would also like to thank Nicholas Eberstadt of the American Enterprise Institute and Harvard University, for reviewing an earlier draft of the manuscript. The author and CBO, however, bear full responsibility for the final product.

Sherry Snyder edited the manuscript, and Melissa Burman proofread it. Judith Cromwell prepared it for publication.

Questions about the analysis may be addressed to Eric Labs.
 
 

CONTENTS
 

SUMMARY

INTRODUCTION

INFLUENCE OF GOVERNANCE ON COSTA RICA'S DEVELOPMENT

INFLUENCE OF DOMESTIC ECONOMIC POLICY ON COSTA RICA'S DEVELOPMENT

ROLE OF FOREIGN ASSISTANCE IN COSTA RICA'S DEVELOPMENT

INFLUENCE OF GOVERNANCE ON HONDURAS'S DEVELOPMENT

INFLUENCE OF DOMESTIC ECONOMIC POLICY ON HONDURAS'S DEVELOPMENT

ROLE OF FOREIGN ASSISTANCE IN HONDURAS'S DEVELOPMENT

CONCLUSION

BIBLIOGRAPHY
 
TABLES
 
1.  Social Indicators for Costa Rica and Honduras, 1967 and 1992
2.  Presidential Administrations of Costa Rica, 1948-1994
3.  Composition of Costa Rica's Gross Domestic Product by Sector, 1950-1980
4.  Composition of Costa Rica's Exports, 1980-1994
5.  Administrations of Honduras, 1948-1994
6.  Composition of Honduras's Gross Domestic Product by Sector, 1950-1980
7.  Composition of Honduras's Exports, 1980-1994
 
FIGURES
 
1.  Gross National Product per Capita for Costa Rica and Honduras, 1960-1994
2.  Foreign Direct Investment in Costa Rica, 1965-1993
3.  Foreign Assistance to Costa Rica, 1953-1993
4.  Foreign Aid and Foreign Investment as a Percentage of Costa Rica's Gross National Product, 1965-1993
5.  External Debt as a Percentage of Costa Rica's Gross National Product, 1971-1993
6.  External Debt as a Percentage of Honduras's Gross National Product, 1971-1993
7.  Foreign Assistance to Honduras, 1953-1993
8.  Foreign Aid and Foreign Investment as a Percentage of Honduras' s Gross National Product, 1965-1993
9.  Foreign Assistance to Costa Rica and Honduras as a Percentage of Gross National Product, 1965-1993


 

 

SUMMARY

This memorandum is one of several to be published by CBO on various developing countries and the role that foreign aid has played in their development. CBO has published a study titled The Role of Foreign Aid in Development. Through a broad review of the academic and policy literature on development, that study attempts to identify the important conditions for development and the role that foreign aid plays in that process. It also highlights the general themes gleaned from the literature with illustrations from eight developing countries: South Korea and the Philippines, Costa Rica and Honduras, Botswana and Zambia, and Tunisia and Egypt. This memorandum examines the development history of Costa Rica and Honduras. Although both countries have received substantial amounts of foreign assistance, Costa Rica has been relatively more successful in achieving long-term economic and social development than Honduras.

The government of Costa Rica has run the country well. Politically, Costa Rica is the oldest democracy in Latin America. In 1948, the government abolished the army. The electorate has generally alternated the presidency between the two major political parties. The government has also invested heavily in education, health, and human welfare.

Costa Rica's economic policies between 1950 and 1980 led the country gradually toward increasingly higher degrees of trade protectionism, state-centered industrialization, and deficit spending. That strategy worked initially in promoting economic growth--in part because of the government's huge investment in human capital. But by the late 1970s, those economic policies contributed to a major economic crisis and dramatic declines in economic growth. Nonetheless, the willingness of the government to make reforms--reduce spending, lower tariff and nontariff barriers to trade, and liberalize the exchange rate--has returned Costa Rica to a strong growth track.

Foreign assistance, particularly U.S. assistance, has made a positive contribution in promoting education, health, and agriculture. The record is more mixed with respect to promoting economic growth. On the one hand, foreign aid tended to reinforce Costa Rica's economic mismanagement in the 1960s and 1970s. On the other hand, it assisted Costa Rica in making various reforms that returned the country to prosperity.

Honduras, however, is one of the poorest countries in Latin America. The government has been less stable and more corrupt. Between 1950 and 1980, the military took control of the government five times. Moreover, the Honduran government has invested less in human capital than has the Costa Rican government.

The economic policies of Honduras paralleled those of Costa Rica up through the economic crisis of the early 1980s. But unlike its neighbor, the Honduran government was far less willing to make necessary reforms to promote economic growth, partly because the United States continued to give it foreign aid, regardless of its economic policies, in return for support of U.S. foreign policy objectives in the region. The Honduran economy managed only lackluster growth through the 1980s.

By the 1990s and the end of the Cold War, however, the United States was no longer willing to provide unconditional assistance and began cutting funding levels. The inability of the economy to generate sustained economic growth prompted the Honduran government to make some reforms such as liberalizing trade and devaluing the currency. As a result, the economy has achieved more vigorous growth in recent years. Those accomplishments look promising, but their sustainability remains uncertain.

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