# I. Introduction

Honduras made progress toward reducing poverty between 1991 and 2006, with the proportion of the population living in extreme poverty falling from 61.5 percent to 47.5 percent. This large decrease in extreme poverty was almost entirely explained by progress in urban areas, where the headcount ratio fell from 52.2 percent in 1991 to 27.9 percent in 2006.<sup>1</sup> Between 1991 and 2006, 6 percent of the population in Honduras left rural areas in search of a better life in the cities; by 2006, 54 percent of the population lived in rural areas, down from 60 percent in 1991. Despite this decline, the fortunes of those left behind did not change much, with the incidence of extreme poverty in rural areas remaining at a high level of 65 percent throughout the period.

Poverty reduction had been taking place in a period of unstable and relatively low economic growth, with per capita income growing at an average annual rate of just 0.9 percent between 1990 and 2005. During this period Honduras’ external sector experienced major shocks, the most important being the preferential trade agreement with the United States. Preferential access to the U.S. market translated into annual rates of export growth of 2.7 percent. Export growth was led mainly by the manufacturing _maquila_ sector, whose value added (in U.S. dollars) grew at an average rate of 33 percent a year between 1990 and 2006.<sup>2</sup> A special feature of the _maquila_ sector in Honduras is the gender-biased nature of its employment mix: during the 1991–2006 period, close to 7 out of 10 _maquila_ employees were women. Given the close relation between the performance of the sector and women’s income, this study explores how gender shapes the relationship between trade expansion and poverty. It tests the hypothesis that the reductions in poverty attributed to the _maquila_ expansion are, to a certain extent, explained by gender effects.

The paper is organized as follows. The next section presents an overview of the Honduran economy between 1991 and 2006. It describes the country’s macroeconomic performance, poverty and inequality indicators, and trends in international trade in general and the _maquila_ sector in particular. The following section describes the methodology used to identify the poverty impact of an expansion in the _maquila_ sector as well as the gender effects embedded in this relation. The third section presents the results. The last section summarizes the paper’s main findings.

# II. Trade Expansion and Poverty Alleviation in Honduras, 1990–2006

This section includes a brief description of international trade and its composition, the importance of the _maquila_ industry, and poverty trends in Honduras since 1990. The data suggest that the increasing integration with international markets, and its potential poverty-alleviating effect, is associated with Honduras’ trade-liberalizing policies.

> 1. Authors’ computations based on data from INE (2006).

> 2. A manufacturing firm is defined as a _maquila_ when it operates within a fiscal regime that allows it to import intermediate goods on a duty-free or tariff-free basis, process or assemble them (labor valueadded), and then reexport the final good, usually to the originating country.

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