Cuba’s formidable challenge

HAVANA – Statements issued recently by the Cuban authorities leave no doubt about the growing concern over the country’s worsening economic situation. The common belief is that external factors are mostly to blame for the process — especially the U.S. sanctions against Cuba. The actual history is a bit more complex.

Since 2007, almost 12 years ago, the Cuban government embarked on a transformation of its economic model. In 2008, promising changes were begun in the agricultural sector. In September 2010, private sector entrepreneurship became more flexible. And in 2011, an encompassing document was produced that served as a Guideline for the changes.

No less important were a series of other measures that expanded the individual rights of Cuban citizens. They included the right to buy and use mobile phones; the sale of computers and other audio and sound reproduction equipment; the right to purchase and sell homes and cars; the elimination of the exit permit to travel; and the right of Cuban residents to stay in tourist facilities previously reserved solely for international visitors. This review we undertake is pertinent, because it demonstrates the majority support this process had, even though it was not exempt from problems and not everyone had the same opportunity to take advantage of it.

Between 2009 and 2017, the private sector grew from 800,000 to 1.4 million workers, only an 11.5 percent difference from the number of persons employed by the state — and that’s despite all the restrictions placed on private entrepreneurs. 

The history of self-employment is even more extraordinary. The number of self-employed persons quadrupled (from 147,000 to 595,000). In 2010, this sector represented 4 percent of revenue created. By 2019, that number is expected to reach, at least, 13 percent. 

This phenomenon has meant a decrease of more than a quarter of all persons employed by the public sector in the period from 2010 to 2018, or the equivalent of 1.1 million jobs. And in the midst of very modest economic growth, this must have been a key factor in the increase of wages in the period of 78 percent. However, there is great worry with lower productivity. This factor, for people of working age with formal employment, dropped from 73 to 64 percent, an unsustainable trajectory for the budget and the viability of social policies, in addition to exacerbating inequality.

The main macroeconomic aggregates did not show a favorable evolution either. Real GDP (at 1997 prices) grew by 2.2 percent annually. Although they experienced an increase until 2013, both exports and imports in 2018 projected 2010 levels. And currently, the situation is even more precarious.

First, the restructuring of the external debt implies new payment commitments that did not exist at that time. Second, international visitors went from 2.5 to 4.7 million in 2018, which implies a significant additional demand. The volume of investments increased from 4.2 billion to 9.3 billion pesos in 2018, with a significant component of imported equipment and supplies. Although access to external credits has improved to some extent, remittances have grown, and foreign investment has timidly been invigorated, these sources have been insufficient to avoid a mismatch in foreign currency for the nation’s obligations. The growing demand for imported goods not offered in the markets of the country, together with the loss of convertibility of the CUC (Cuban convertible dollar) are creating a parallel circulation circuit of dollars.

External events have aggravated this situation. The first factor is the pronounced decline of Venezuela’s economy. According to data from the Economic Commission for Latin America (ECLAC), the Venezuelan economy has contracted more than 50 percent since 2014. Oil production went from 2.7 million barrels per day in that year to an average of only 966,000 in the first quarter of 2019, a contraction of 65 percent, according to the Organization of Petroleum Exporting Countries (OPEC).

Under these conditions, a similar proportional fall in its shipments to Cuba is expected — which at one time were estimated to be between 90,000 and 100,000 barrels a day. Since August 2017, the mixed company that operated the Cienfuegos oil refinery ceased to exist. Its refining commercialization represented a significant source of external revenues. The election of Jair Bolsonaro in Brazil also led to the Cuban decision to terminate its participation in the Mais Médicos program, which represented an entry to the country of between $250 million and $300 million.

As of September 2017, a series of events hit the tourism industry, the only large export sector that had shown a favorable trajectory in the period analyzed, particularly after 2014. Hurricane Irma, travel alerts issued by the State Department, and the new regulations for travel of Americans to Cuba published in November of that year, unleashed the perfect storm that has stalled the increase of visitors, while revenues were reduced in 2018. Activation of Title III of the Helms-Burton Act, and the recent additional restrictions for travel and remittances, will increase financing costs, and will further diminish an already insufficient earning in foreign exchange.

The results are known. A bulging list of non-payments to suppliers and foreign investors that undermines the possibility of maintaining adequate supplies and the strategy of attracting foreign capital. These are estimated by several sources in figures close to $1.5 billion. The shortages of products of different types are not new in the Cuban context, but they have worsened appreciably in the last four months. 

And a short-term improvement is not expected.

Despite all of this, Cuba could have found itself under better circumstances at this point. The opening to the private and cooperative sectors was incomplete and contradictory, and even a partial reversal was attempted. Worse yet, it was made within the framework of a slow reform that did not transform the slowest aspects of the Cuban system, such as the planning model, for example.

The changes to the structure of state enterprises were schematic, reproducing formulas of the past, and creating new structures that continue to drain the scarce resources of the public sector. The calls to increase exports have been precisely that, just words. Foreign investment has perhaps been the most consistent gamble, but it’s been entangled in bureaucracy and ignorance of the most elementary standards of the contemporary business world. Social policies were not transformed enough to meet the new challenges of a more unequal society.

For all the above, a thousand reasons have been given: we’ve only started; without hurry, but without paused; it is still too early for a complete evaluation; we’re going to experiment; conditions are not right; we have to step back because results are not what were expected; we made a mistake and we must rectify… and a very long etcetera. It is painful to say, but in vast sectors of the Cuban public sector there is a disconcerting ignorance of the basic principles that govern the functioning of an economy.

The Cuban government faces a formidable challenge. The tangle that prevents any effort for change is the result of vested interests over many years, which include trying to replace monetary-mercantile relations with administrative orders, voluntarily, and not realistically, to an archaic mentality that assumes that Cuba has to be compensated for daring to stand up to the United States, which seeks to exploit agreements over and over avoiding their own problems at home, and whose solutions are postponed indefinitely. It is an interpretation of the world disconnected dangerously from reality, with very little sophistication to overcome the complex geopolitics of this Caribbean island. And there is still hope of returning to that social and economic bubble where Cuba lived in the 1980s.

The growing economic difficulties will disproportionately affect the most vulnerable. This is a unique opportunity for the authorities to find the definitive impulse to undo the knots that bind the development of this country. But it will be much more difficult now. The Cuba that faces this abyss is very different from the one of the nineties. The citizens do not arrive in the same conditions. Its government does not have the legitimacy of the previous leadership. The public sector faces growing difficulties in retaining its best talents, at a point when they are more necessary than ever.

What can be done?

To be continued…

Dr. Ricardo Torres is a professor of economics at the University of Havana.