Distortions that persist both in the public and private sectors

HAVANA – The serious economic problems that Cuba is going through have deep structural roots whose fundamental causes have not been adequately addressed in the economy’s ‘updating’ process. Getting out of this marasmus requires transformations in the government-run businesses, and in the private and cooperative sector. It makes little sense to consider one disconnected from the other, as some recent statements seem to suggest.

Cuba has a small and necessarily open economy, with few truly competitive sectors worldwide, generally located in the less lucrative parts of the value chain. Think of sun and beach tourism dominated by all-inclusive resorts; or the fact that the nickel produced must be refined outside our borders; or that the worldwide distribution of tobacco and rum is in the hands of large transnationals. Historically, external shocks have had a great impact on economic activity together with the tendency to concentrate economic relations on an external partner that offers advantageous conditions for the country.

This economic structure determines a low economic growth rate, with great volatility that produces several disproportions. Three of them are particularly important today. Despite the enormous investment in education and public health, the productive profile shows an excessive mastery of activities that hardly require a workforce with those qualification levels. A good part of that human potential is wasted, so to speak. The production of external surplus (key in a country like Cuba) is concentrated in a few activities, many of them subject to special agreements (medical services), which are vulnerable to economic or political events in those states. Examples are the cases of Brazil, Ecuador or Bolivia. Finally, the enormous social commitments assumed, in this productive context, involve the systematic extraction of income from the few surplus sectors at levels that compromise their long-term viability.

What characteristics does this model of production have after the 1990s?

The decline of the sugar industry added other complications. In the first place, the volume of foreign exchange that it generated could not be quickly compensated by other sectors, which was only achieved after 2004 with medical services. Likewise, the activities that replaced it did not generate the same amount of direct jobs. This created the need to redistribute resources from the new surplus sectors. Thirdly, neither tourism, medical services nor the biopharmaceutical industry have succeeded in generating networks which the sugar sector provided, accentuating the previous process. These transfers not only finance social services (from education and health care, to sports, culture, and others), but sustain that part of the productive apparatus that is unrepeatable but that generates jobs, delivers products considered high priority or are simply socially unfeasible in its restructuring.

Once the (unsustainable) protection offered by the scheme of relations with the Soviet Union and the Council of Mutual Economic Aid (CAME) disappeared, the huge gap in external competitiveness suffered by the Island became evident. That is, we failed to sell enough to the rest of the world to pay for the imports the country required, the commitments derived from foreign companies operating around us, or the external debt. That affects domestic economics in many ways, but consumers immediately felt it through several intertwined phenomena.

Scarce goods become too costly for the average citizen. In addition, imported consumer items, which are the majority, are offered at prices charged on the international market and with a high tax rate for the purpose of raising capital. In both cases, these prices do not have much to do with domestic wages. It is a huge difference, which has to do with the external productivity and competitiveness gap, but also as part of a mechanism to capture resources in freely convertible currency that now reach homes directly. There are remittances, unseen money made from tourism and foreign companies operating on the Island, and income from private businesses that sell directly to visitors.

The use of this surplus should fall equally under an economic and social criteria. Economic development requires the investment of a significant proportion of productive resources. However, there is a harmful and unsustainable trend that holds the State responsible for the provision of all kinds of goods and services designated for the ‘social’ or ‘public’ interest. But rarely do you hear of the sources to finance these responsibilities.

The ‘social’ or ‘public’ has become so large that it has overwhelmed the real economic possibilities or administrative capacity of the public entity. For example, should the Cuban State finance all high performance sports? Since income inequality is a reality that derives directly from the economic structure, it is time to rethink the subsidies offered without distinguishing between citizens. The hypertrophy of the administrative apparatus that overwhelms both the central government and the companies is another problem. Finally, how much more should companies and entire sectors be sustained that are clearly unfeasible?

However, an increase in investments would not be enough if they are not properly utilized. Decision-making mechanisms to set prices faced by Cuban companies determine a very inefficient allocation and use of these resources. The numerous stories of investments that do not yield what was expected due to countless reasons are well known.

The distortions are so varied and of such magnitude that they could not be corrected quickly, at least not without causing a social and political schism. Mass unemployment and impoverishment of broad layers of the population is not in anyone’s interest, but the correction of these imbalances has to accelerate. That path has already been taken. The social expenditures of the central budget went from 27 to 21 percent of GDP. In an opposite trend, investments more than doubled since 2014, a welcome trend since investments used to be an adjustment variable.

The correction of these distortions necessarily passes through the public sector in general. Therefore, it makes little sense to disconnect the transformation of State-run businesses, from the dynamics of the private sector. They are two parts of a whole, although one of them has been declared a subsidiary of the other. The restructuring (preferable to energize) of State businesses will inevitably lead (if done seriously) to the elimination of some, while others will have to adjust their functions. In any case, one of the foreseeable results is the loss of thousands of jobs. Where else will those jobs come from? Consider that capital scarcity necessarily conditions its creation in activities where capital requirements per worker are relatively low. Undoubtedly, foreign investment (which also faces obstacles of all kinds) will make a contribution — but most likely not enough. The obvious answer is that most of these jobs must be created in the private and cooperative sectors.

The serious contradictions of economic policy have resulted in the fact that a large part of the workers who left the public sector (since 2009) have landed in the informal sector, emigrated to other countries, or are carrying out activities where they do not take full advantage of their qualifications. And yes, the non-state sector created the most jobs in the last decade, despite all its limitations. Since 2009, the self-employed sector, for example, has created more than 470,000 jobs.

A country where the number of persons of working age has been decreasing since 2015 cannot allow these disproportions to exist. It is why the authorities should demand that any economic and socially successful restructuring of the state-run companies include the extension of the nomenclature of activities that can be carried out in the private and cooperative sector, improve the legal status of these businesses, favor their integration with companies of any denomination, and expand their access to foreign trade and formal financing. The latter issue should also consider instruments that allow mobilizing domestic savings more effectively.

All this would allow the authorities to correct existing distortions, and preserve social consensus around unavoidable changes while ensuring a smoother tack towards a new economic model. A manageable change does not mean that it will be free of frictions or contradictions. A comprehensive and coherent strategy is what is missing.

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