Canada's Prime Minister Stephen Harper (L) talks with Minister of State of Foreign Affairs Peter Kent (C) and Foreign Minister Lawrence Cannon at the Summit of the Americas in April 2009.

By  Christopher Mason
GV Correspondent

OTTAWA – It is perhaps unexpected that a country as small and impoverished as Honduras—barely twice the size of Nova Scotia and the second poorest country in Central America—would find itself positioned as a crucial test of Canada's foreign aid policy.

But that is exactly the situation as western hemispheric leaders scramble to help broker a peaceful solution to the June 28 ousting of Honduran President Manuel Zelaya by the country's military.

Zelaya has spent the past month in exile, lobbying for diplomatic support to return to Honduras and resume his presidency, which was set to expire for elections in November.

The crisis comes at a crucial time for Canada, which is in the early stages of implementing a newly revamped foreign policy aimed at significantly bolstering, through aid and trade, Canada's influence in Latin America.

Efforts to reach a deal to settle the crisis play prominently to both prongs of Canada's new foreign policy.

Canada is the second largest foreign investor in Honduras and Canada is negotiating a free trade agreement with Honduras as part of a broader trade pact that would include Nicaragua, El Salvador and Guatemala. Bilateral trade between Canada and Honduras reached $238.3 million in 2008, up 35.4 percent from a year earlier.

Meanwhile, Honduras is the largest recipient of Canadian foreign aid in Central America. Additionally, Honduras was named one of 20 countries that will be targeted as priorities in Canada's newly reshaped international development efforts.

According to the most recent figures from the Canadian International Development Agency (CIDA), foreign aid to Honduras totaled a modest $16.4 million in 2006-2007. But that figure is likely to rise given the government's decision to list Honduras as a prioritized country.

In a region full of differing alliances, competing interests and regional rifts, how Canada comports itself during the Honduran crisis may well establish its footing and credibility throughout much of Latin America as it looks to implement its new aid policies.

"It is enormously fragile," said David Gillies, a principal researcher at the North-South Institute. "CIDA as an entity and across government will be considering the implications of the crisis on the aid program."

Honduras poses a significant test not just for Canada but also for the United States, European Union  and other international bodies such as the World Bank and Inter-American Development Bank (IADB).

The European Commission recently suspended all budgetary support payments to Honduras. The World Bank "paused" its Honduras programs, which may cost the country US$270 million. Loans from the IADB that have been held back could cost Honduras some US$200 million this year.

Canada and the U.S., perhaps mindful of efforts to repair their respective reputations in Latin America, have walked a more nuanced line.

The U.S., Honduras' top trading partner, has threatened to cut US$180 million in economic aid if the interim government cannot reach a deal with Zelaya to restore democratic rule. It has already cut US$16.5 million in military aid to Honduras.

Canada has made no such announcement on the status of its developmental assistance to Honduras, nor on the potential impact on free trade negotiations.

Already facing increasing isolation as one of the poorest countries in the hemisphere, wider aid cuts from the U.S. and Canada would have significant implications and may set a precedent for further sanctions from other countries.

That degree of influence reinforces the importance of Canada's handling of the situation in Honduras. Part of Prime Minister Stephen Harper's motive for shifting greater focus onto Latin America is the opportunity it provides for Canada to play a larger role in development and trading efforts, compared to some parts of Africa where it sometimes plays a secondary role to other donor countries.

Both Canada and the U.S. have strongly urged a return to democratic rule. Both countries are going to great effort to rebuild and expand their influence and reputation in Latin America. But the U.S. in particular is being watched closely.

"Their handling of the situation has been very good," said Kevin Casas-Zamora, senior fellow, foreign policy, Latin America Initiative at the Brookings Institution.

"Their first reaction was correct: They came out very strongly in favour of democracy and the rule of law," he added in an interview with the Council on Foreign Relations. "That's a very sensitive issue for Latin America given the history of U.S. meddling in Latin American politics and of the United States not always being on the side of democracy."

The Organization of American States (OAS) has taken a lead role in handling the crisis. Its members voted to suspend Honduras from the OAS, the first such move since Cuba was suspended in 1962.

"The UN system has been increasingly looking to regional organizations to play a bigger role in their own backyard to address illegal removals of democratically elected leaders and to promote and defend human rights," Gillies said.

Costa Rican president and Nobel Prize winner Óscar Arias has stepped in to mediate a solution to the crisis. Both Zelaya and Roberto Micheletti, head of the de facto government as elected by the Honduran congress, have agreed to meet with Arias.

But Micheletti seems unwilling to accept Zelaya's return as president, even on an interim or coalition basis. Prior to his ousting, the Honduran Supreme Court had issued an arrest warrant for Zelaya over his attempts to hold a referendum on easing presidential term limits.

Analysts say the best the international community can hope for is a tentative compromise that would allow Zelaya to return and lead a coalition government until elections planned for November, when he would step aside.

"Such a compromise would send the message to an increasingly politically unsettled Latin America that coups, however ambiguously defined, will not be allowed to stand," Michael Shifter, vice-president for policy at the Inter-American Dialogue, wrote in an analysis for Foreign Policy magazine. "It would keep the United States and much of the international community on the 'right side of history,' as Obama likes to say."