The Cuban economy in 2018

HAVANA – 2018 was another exercise in complexity for the Cuban economy. Cuban authorities have estimated an economic growth of around 1.2 percent. According to reports, this discrete performance is supported by the performance of sectors such as communications, commerce, the manufacturing industry and public health. In turn, decreases were reported in tourism, the sugar industry, agriculture and construction. And although 85 percent of the investment plan was met, according to the projected figures, this still represents an almost 4 percent increase over 2017. 

The figures’ overall analysis reveals several interesting elements. First, the dynamics have been based on sectors essentially oriented to the domestic market, which is consistent with the continued deterioration of the external financial situation. Second, at least two of the decisive export sectors exhibited a negative performance: tourism and the sugar industry. Thirdly, the sales of medical services can expect an uncertain route with a not so encouraging forecast after the departure of Cuban doctors from Brazil. Finally, revenues from nickel shipments could be higher based on the price of the product in international markets during most of the year.

The evolution of international tourism deserves a separate reflection. This sector, the most dynamic in the last five years, has gone through a complex juncture since September 2017. A combination of natural events, travel warnings from the U.S. State Department and the new regulations issued by the U.S. in November 2017 for visitors to Cuba have influenced a change in the rhythm of arrivals and in their structure.

In 2018, arrivals by air fell by 6 percent, with reductions not only from the United States, but also from other major countries such as Canada, Germany, France, the United Kingdom, Italy and Spain. This has been partially offset by the increase in cruise ship arrivals. However, although the final figures are not known, it was estimated that 4.7 million foreign tourists would arrive in 2018, which would represent a slight increase of 1 percent compared to the previous year. If we add to this a change in the composition of travelers in favor of cruise passengers, whose total expenditures on land is lower, then one can expect lower gross revenues.

The Cuban economy has been losing momentum since 2016 and another period of low growth is expected in 2019. Reasons for this slowdown include external and domestic aspects. The external economic context has been changing negatively for Cuba. First, we have Venezuela’s economic crisis, whose effects are felt strongly in foreign trade. Venezuela is Cuba’s number one market for medical services, in addition to pharmaceuticals; and the Island’s main supplier of oil and derivatives. 

Thus taking into account that Venezuela crude production dropped from 2.2 million barrels per day in 2016 to only 1.15 million in November 2018, then we can deduce that the drop in shipments to the Island must be substantial. Also the association that PDVSA (Venezuela’s state-owned oil and natural gas company) maintained with CUPET (Cuba’s largest oil company) in Cienfuegos that allowed the export of refined products has ended.

Another element has to do with the erratic performance of two of the main export industries: nickel and sugar, which have been adversely affected by setbacks in production and a decline in their prices.

And still another aspect comes from the effect of the new U.S. policies. This effect has been particularly bad for travel and its related sectors. Add to that the dissuasive effect that this more hostile bilateral climate has on potential investors from other countries, and on U.S. companies themselves.

Likewise, aspects of a domestic nature have also not helped. Since mid-2015 hardly any new measures have been adopted as part of the “update.” Modifications that have entered into force may be considered restrictive or of little practical value. The rules related to the state-run companies or foreign investment are easy to find, highlighting that the latter is probably the area with the most coherent trajectory within the reform. In the first group would be all the norms adopted in relation to the private and cooperative sectors.

Surely part of the rules related to self-employment were modified in December 2018, but not those that had to do specifically with transportation in Havana. Results of the “experiment” on the system of transport speak for themselves. A sector that already suffered from a deficit in supply has seen a significant reduction in the fleet of cars that provide the service. The majority of those who do now operate are private taxis that charge higher prices, which affects negatively many who cannot afford the costlier tariffs. Finally, prices have risen even more (as one would expect). For example, in areas where the cost of travel was 5 CUP (Cuban pesos) is now up to 25 CUP in some places, and at times of the day. A lack of service also has to do with the lower availability of fuel.

The Cuban government has faced a slowdown in the economy through a combination of austerity measures, fiscal stimulus, and investment priority. Since July 2016, strong measures have been adopted to save resources in the public sector, particularly in relation to energy, reducing physical allocations to State entities. Likewise, import controls have been used to maintain a positive external balance, which has been significantly reduced however.

As an example, between 2013 and 2017 current imports fell by 27 percent, a reduction that could not be attributed solely to price moderation. Taking into account the high proportion of intermediate goods in Cuban foreign purchases, the reduction has a negative effect that is felt in domestic production, particularly in the manufacturing sector. Other effects can be seen in retail markets which suffer from recurrent shortages of high demand products. A similar situation has been occurring with medical supplies.

The stimulus has come through public spending, which has grown faster than GDP since 2015. The fiscal deficit went from 2.2 percent (of current GDP) in 2014, to 9 percent in 2018. However, the pressure over those prices is lower given that this imbalance is now mostly financed by the issuance of public debt. A positive element of this strategy is that it has continued to prioritize investment, which has maintained an upward trajectory, although still far from the necessary amounts.

For the coming year there is no foreseeable improvement in the external financial situation, which will continue to negatively affect growth possibilities. Even if relations with the European Union continue to improve, relations with Russia and China remain stable, and better results are achieved in attracting external capital, the scarcity of foreign currency will be a serious obstacle. Several of the main export goods, although in demand, face restrictions that do not allow for an increase in their production, while the service industry must develop new markets.

The government itself has already planned for a GDP growth of around 1.5 percent, more modest than in all the previous years. However, the picture does not have to be hopeless. The Cuban government needs to reconsider all its options and professionalize the design and implementation of economic policy. The ability to retain competent staff depends on whether they can link their work with a reasonable probability of improving their living standards. Low pay, along with the rigidity and the hypertrophy of the public sector prevent this.

Although they can be improved, norms already adopted provide an opportunity to begin. The “actualization” itself suffers from serious internal contradictions. It requires significant changes in its approach in how it addresses problems and in the philosophy that guides the possible solutions. The economic growth that is sought in public discourse is incompatible with the restrictions that weigh on the non-state sector, with the enormous state bureaucracy, the excess of unnecessary control, or the ignorance of basic elements of the functioning of an economic system. Conceiving a dynamic economy where all sectors advance at the same time is an illusion. Which does not mean there is not a need for a social pact that guarantees some ‘minimums’ to all citizens.

Cuba needs to develop its productive forces and will not achieve it under its archaic system of central planning. This model, by its very nature, feeds three types of distortions that prevent progress in the direction toward which the Cuban government has indicated that it wants to take the country. Since this model supplants (which does not exceed) the monetary-mercantile relationships by administrative ones, it requires a huge bureaucracy to manage the decisions that would otherwise occur in a decentralized manner. In this sense, price formation suffers from serious deficiencies, so that they do not transmit the type of information necessary for an adequate decision making. It is common that prices do not reflect the real conditions of the various markets. Poor information results in incorrect decisions.

Ours is by its very nature a vertical system, which tends to rigidity, and looks up, and less to the side. It is not strange to find unused capacities that coexist alongside scarcity or unnecessary imports. For example, the large dependency on food imports that occurs in the context where a high percentage of idle or underexploited land is available. Likewise, high inventories (read immobilized resources) coexist with a high unsatisfied demand; sometimes due to the impossibility of managing its sale (price rigidities or marketing channels), other times because it has been bought without consideration for the real market demand. These structural failures can not be resolved by the party cadres, or by calls to reduce the bureaucracy.

Cuba also will not develop its economy while its policies outweigh external factors (foreign investment and advantageous agreements) to the detriment of its own resources and talents. It is necessary to reconsider the role of the state enterprise in the economic system, and to change the rules of the game to promote competition, a credible threat of bankruptcy and reward linked to performance. The nation’s private and cooperative sectors must play a more prominent role in the economy. Its current size is due more to administrative limits than to the exhaustion of its potential. It is not serious to pretend that you are free of the same vices that are common in the public sector.

None of this will be possible with our backs turned to the rest of the world. More saving, adjustment, and payment of debts will not make the economy grow. The Cuban government should seriously consider a strategy of reducing the cost of external financing and increase the flow of fresh resources, which would include sensitive issues such as remittances and the approach to international financial institutions. Although Cuba faces exceptional circumstances derived from the prolonged sanctions imposed by the United States, the high risk associated with operations with the Island is not due solely to external factors. There is little point in increasing the attraction of external resources if they are then invested inefficiently.

The reduction of social services, so highly valued by Cuban citizens, is not a requirement due to this. On the contrary, a dynamic economy would support higher tax revenues with which the salaries of these employees could then be increased. That same scenario would make it possible to achieve more rapid progress on the issue of housing, whose solution requires large amounts of resources that are not available in a stagnant economy.

The first quarter of 2019 will be marked by the referendum on the project of a new Constitution. Sixty years after the triumph of the Cuban Revolution, it seems clear that aspiring for a better country is not enough. Old approaches and already tried formulas that bear no results should not be imposed on the legitimate aspirations of progress of the Cuban people.

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