The Cuban economy in 2019

HAVANA – According to press reports, the growth of the Gross Domestic Product (at constant prices) will be around 0.5 percent over the previous period. This would be in line with the estimate made by the United Nations Economic Commission for Latin America (ECLAC). However, at the end of the year no precise estimates were offered, even if they were subject to revision. The Cuban government itself had set a goal of 1.5 percent, but since the beginning of the year the economy has been affected by numerous negative domestic and external shocks, which have weighed heavily on the performance of the period.

Last year began with the impact of a powerful and unexpected tornado that severely affected the infrastructure in three Havana municipalities. This occurred while in the midst of preparations for the celebration of Havana’s 500th anniversary. The response by citizens and the authorities was quick and effective, but costly.

The news was not good from elsewhere. Based on the 2019 international economic environment, Cuba faced adversity because of the negative trends experienced by the world economy and specific aspects of its own situation at home.

Rounding out the scenario was a general slowdown in all regions, including China; the weakening of trade due to trade wars and other tensions; greater volatility in the financial markets; and the negative effect of shocks such as Brexit and geopolitical tensions in the Middle East. We can add to this factors that are specific to the Cuban context — such as the economic sanctions imposed by the U.S.

‘Updating’ in 2019

The year 2019 was marked by an economic policy that trended towards the management of acute economic problems in the short term, while what was labeled an economic ‘update’ only received incremental movement, lacking the strength to start transforming the productive landscape into the meaningful change the country requires. Some may commend the process: a gradualness that guarantees order and control. The problem with this reasoning is the incorrect identification of the nature of the problems. These are, in the Cuban case, structural and systemic, hardly surmountable in the framework of the current economic model. The general economic stagnation not attributable to the U.S. sanctions (which in part is indigenous and the external can be debated), seemed an acceptable cost in exchange for stability. However, some of us believe that it weakens the country dangerously on all fronts.

Therefore, if the transformation truly seeks to overcome these failures it cannot be cosmetic or superficial, but profound. In that case, what is needed is not an ‘update’, but a reform that among other things radically modifies how we define property and the State’s relationship with businesses — no matter the type of property.

Modifications were introduced to government enterprises, the self-employed sector and the non-agricultural cooperatives, but these changes were not all made in the same way: some were positive, while others introduced additional restrictions. Ambivalence is what distinguishes the approach to the non-state sector. The ‘perfecting’ of some of these activities has been marked by a highly restrictive initial plan, which they had to ease up on because they were politically and socially unfeasible during a time of clear economic slowdown.

The timing of its implementation could not have been worse (late 2018), with an economy in crisis and a de facto paralysis of the changes in the key areas that were being ‘updated’ which are now almost 4 years old (started in 2016). This in spite of the fact that these transformations had been endorsed in the 2016 Congress of the Communist Party (although it did take a year to have the final versions of the documents), and incorporated into the new Constitution.

The net effect of these advances and setbacks only helps to fuel the perception among the citizenship of the little practical use of these documents that take years to write and approve, and which later contribute little to decisions made. Add to this the lengthy process to implement agreed upon policies, decisions usually taken with little or no discussion with the interested parties. The results are visible in the long list of experiments that never end or that yield few lessons to learn from.

Regarding state-run businesses, achievements have been slight, some with short-term positive effects such as the increase in workers’ salaries. 

During the recent meeting of the National Assembly it was announced that in 2019, 28 new measures were approved to help boost these businesses. Two problems arise from the adopted approach: On the one hand, none of the measures addresses the contradictions that emanate from the differing incentives that are established from divergent interests of the owner (the people), the administration of the units, and the government. We can add to that that the control exercised by the people over its workers has been weakened, among other things, for its lack of transparency and the lack of information on the management of the units addressed.

Additionally, management and regulatory functions appear dispersed among the company, the OSDE (Ministry of Agriculture), other respective ministries and the government. All are decisive in the process. Another problem is that we are moving into a system of maximum dispersion of businesses where each has a practically unique combination of attributes: some operate under a closed system while others do not. The closed system of financing can be amplified towards other ends in certain case (micro investments), those that carry out mercantile operations with the Mariel Zone which retain 50 percent of the currencies, and other that will have powers to import certain products while other will not, and so on.

The consequences of what is described above are many. First, it is not uncommon to verify problems in order to increase productivity. And it can be clearly understood why regulators have so much difficulty controlling thousands of businesses and units. In practice, what we have is a regulatory framework for each business that exists in the country. The attempt to maximize results in the narrow universe of the business leads to enormous social inefficiency. The economic system must ensure (among other functions) the greatest efficiency in the WHOLE of the economy, which implies a perpetual transfer of factors (labor, capital, land, knowledge) between businesses and sectors. This process is doubly weakened in the Cuban case by the monetary-exchange system used.

The root of all these failures lies in the inability to bravely accept the serious failures that have afflicted central planning economies. What’s really frustrating is that these problems are not new. For more than five decades we’ve had a large body of information, and deep analysis, of what the problems are, including their causes.

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