In Honduras slum, acid test for new leader's drug gang battle TEGUCIGALPA (Reuters) - A sprawling, well-kept cemetery buttresses the entrance to Nueva Capital, a sketchy Honduran slum with panoramic views over Tegucigalpa, the capital city of this violent country with the world's highest murder rate. A colorful smattering of fresh-cut flowers hints at a steady stream of visitors to the bulging burial ground in one of the city's most feared neighborhoods, where kids sniff paint thinner and murder is rife. Like many of the drug-scarred shanties that creep up the hills surrounding Tegucigalpa, Nueva Capital is a testing ground for the militarized gang-fighting policies of Juan Hernandez, Honduras' president-elect. Gang culture is rife in the main cities of Honduras. First formed in the 1980s in the United States by Central American immigrants, the "Calle 18" and "Mara Salvatrucha" gangs, or "maras," later blossomed into international franchises as members were deported back to their home countries. The maras have run wild in Honduras for years and the violence has escalated as Mexican drug cartels invaded the country, whose Caribbean coastline makes a perfect pit stop for South American cocaine bound for the United States. Vowing to do "whatever it takes" to end the violence, the ruling National Party's Hernandez drew support from voters tired of the 20 murders a day in a country of just 8.5 million people. But critics worry that tough tactics could lead to a repeat of the bloodletting seen in Mexico, where 80,000 people have been killed since a military offensive was launched against the warring drug cartels in late 2006. Others fear Hernandez's approach also risks ignoring Honduras' root problems: drug abuse, weak institutions, widespread corruption and rampant unemployment. "There are two choices here: Join the army or join a gang," said Nueva Capital resident Pablo Lainez, a former "Calle 18" member who used to ferry bags of marijuana for the gang, as he gazed over the city below. Lainez says he quit gang life because he was worried he'd wind up dead, and is now one of the legions of young people without work in this failing country, where nearly half the population is under 18 and emigration is common. Lainez' father, like those of two friends sitting with him, was gunned down while the 18-year-old was still a young child. There are now an estimated 1 million civilian-held guns in the country, with belt-slung revolvers an everyday sight. A graduate of Honduras' military academy, Hernandez says he wants a "soldier on every corner," working alongside a brand new military police force to wipe out endemic police corruption, gang warfare and foreign drug cartels. Honduras was a key U.S. ally in Central America when civil wars raged in Nicaragua, El Salvador and Guatemala. But despite being the region's No. 1 coffee exporter, its economy has been undermined by widespread violence, a feeble tax take, poor wealth distribution and deep corruption. Hernandez made job creation a cornerstone of his campaign, vowing to generate 250,000 new jobs a year with proposals for new roads, power stations, autonomous free-trade cities and an extra 200,000 hectares of palm oil plantations. "With work, you live better," he declared at his ticker-tape victory speech. Honduras' electoral authority declared Hernandez the winner of the November 24 presidential election with 36.8 percent support. Leftist runner-up Xiomara Castro, the wife of ousted former leader Manuel Zelaya, has refused to acknowledge a result she calls fraudulent although it is almost certain to stand. Honduras remains a deeply unequal country where just under half the population earns less than a dollar a day. The chronic lack of opportunities pushes some into gangs, and others to risk their lives reaching the United States. Remittances now make up nearly a fifth of Honduras' gross domestic product, or GDP. With many Hondurans in the United States illegally, deportation can lead to an abrupt end to much-needed funds for countless families. Last year, the United States deported a record 32,464 Hondurans, U.S. Immigration and Customs Enforcement data show, up nearly 40 percent from the year before. Nearly 15,000 were convicted criminals, more than double the number in 2009. According to 2011 Department of Homeland Security data, "the manufacturing, distribution, sale and possession of illegal drugs" was the main crime leading to deportation of foreign nationals. However it gives no country by country breakdown. Critics say the mass deportation of Hondurans, criminal or otherwise, many of whom return to dangerous neighborhoods, chips away at Honduras' shaky foundations and undermines the United States' anti-drug efforts in the country. "It's a contradiction," said Michael Shifter, head of the Inter-American Dialogue think-tank. You're sending money to strengthen the security situation and then you're sending ... people back with criminal records. Most days, one or two U.S. planes, each carrying about 150 deported Hondurans, land in the northern city of San Pedro Sula. Charity workers say many disperse back to their villages to plot their return to the United States. "It's the American Dream," said Jose Reyes, 18, a Nueva Capital resident who nearly left earlier this year to follow his uncle. Just to have a better life. While some leave to find work, just as many are looking for a way out of the clutches of gangs and their "war tax," which even those selling chewing gum in traffic must pay. But taming the gangs will require reforming the police. Juan Carlos "El Tigre" Bonilla, a giant, rock-faced man who was accused by the Honduran police's internal affairs department of murdering civilians, leads a police force regularly accused of running death squads and which experts believe is behind 40 percent of extortions across the country. Although he denies the charges and was acquitted of the only case that came to trial, the United States has withheld funds from him and his force. A purge of the police force that began during Hernandez's time as head of Congress has been criticized for not going far enough in rooting out corrupt cops, and it remains to be seen how vigorously he will pursue the purge once in office "The temptation is heavy and it's everywhere," one officer told Reuters when asked about graft within the force's ranks. A recent census of the police, the first of its kind, identified hundreds of "ghost" officers on the payroll even though they don't exist. The dysfunction breeds impunity, with 83 percent of serious crimes in Honduras never investigated. A report in May from the non-partisan Alliance for Peace and Justice found there were up to 120,000 armed private security guards in Honduras, well outnumbering the roughly 7,000 active police officers it identified. Of those 120,000, only a fraction worked for the 709 security companies registered with the government, it found. Mark Ungar, one of the report's authors and a former adviser to the Honduran police, said private security guards play an integral role in smuggling drugs and weapons. "It's this huge gray world of organized crime and it dwarfs public security," he said. The hollowing out of public institutions, many of which experts say have been infiltrated by drug gangs, has left the residents of Nueva Capital with little hope for change with Hernandez. "The violence is going to get worse because the soldiers are coming to take the streets," said Ever Aguilar, 18, an aspiring youth worker. There's going to be a war. Additional reporting by Gustavo Palencia; Editing by Simon Gardner, Kieran Murray and Doina Chiacu