although these data are not part of the micro-SAM, they are essential for implementing the trade reform scenarios in the following sections. Tariff revenues were then aggregated at the commodity level of detail of the micro-SAM, and the economy-wide average tariff rate was not significantly different from the same rate calculated with balance of payments data. Due to data constraints, international capital flows are not distinguished by region of origin.

The public sector is a relatively small part of the economy of Honduras. Government current spending (including interest payments on outstanding debt) is 10 percent of domestic absorption, while the public investment-to-absorption ratio is 4.3 percent.<sup>9</sup> The public sector (excluding stateowned enterprises) employs just over 7 percent of the total workforce and 34 percent of the total stock of tertiary-skilled employees. We assume that in the final demand stage, the government consumes only its own commodity (public services). The government derives 29 percent of its revenues from direct taxes, 52 percent from activity and sales taxes, and 19 percent from taxes on international trade. The distribution of production (activity) and indirect (commodity) taxes is obtained from Cuesta (2004). However, the value of sales taxes collected in the coffee and banana sectors had to be adjusted to avoid having tax rates in excess of 100 percent. In these cases, sales tax rates were set to the economy-wide average for these sectors and the remainder allocated across all other commodities in accordance to the share of total taxes paid by each commodity.

Ideally, the final demand vector for households would be obtained from household survey data, but the EPHPM does not contain a consumption module and it was not possible to obtain a copy of the Encuesta Nacional de Ingresos y Gastos de los Hogares (ENIGH) which includes consumption data. Instead, we use the consumption vector of Cuesta (2004), which is based on the 1998–99 ENIGH. On the income side, the representative household is the sole recipient of all labor income, while capital income accrues to enterprises. 87 percent of these capital payments is remitted back to the households, while the rest is spent on government bonds (6 percent) and transferred to foreign owners of capital (7 percent). Households also receive transfers from abroad; these are mainly workers’ remittances, which amount to 78 percent of total current foreign private transfers.<sup>10</sup> The only available source of demand for investment goods by sector for Honduras is Cuesta (2004); however, the investment values reported in his SAM are not plausible since many sectors report negative investment even after accounting for drawing down of inventories. Instead, we use investment coefficients from a 2001 GTAP SAM for Central America to split aggregate investment according to the sectoral detail of the micro-SAM. Private investment is 84 percent financed by household saving, with the remainder coming from abroad. Foreign direct investment represents 83 percent of foreign capital inflows destined for the private sector and 51 percent of total capital from the rest of the world.

The data on intermediate consumption (input-output coefficients) is obtained from Cuesta (2004), who uses input-output coefficients compiled by the Central Bank of Honduras. The Cuesta (2004) coefficients are used as an initial estimate for intermediate consumption; however, these are adjusted at a later stage in order to satisfy the SAM balancing requirements. Because of wide variations in the data sources, the initial SAM described in the above paragraphs is quite unbalanced, although the imbalances are limited to the commodity rows and columns. In order to balance the SAM, a cross-entropy estimation method was applied to minimize the distance from

> 9Absorption is defined as the sum of private and public consumption and investment. Interest payment flows (on both domestic and foreign debt) are not shown directly, but instead are netted out of the other transfers (e.g., government transfers to enterprises and households are net of non-tax payments to the government and domestic interest payments).

> 10The importance of remittances from Hondurans working abroad has risen steadily over time, increasing to 10 percent of GNI in 2004 from a 4 percent average in the 1990s.

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