Download The Cuban Economy

NS4540
Winter Term 2017
The Cuban Economy
Overview I
• Structure of the Cuban economy very unusual
• State owning most enterprises
• A dual exchange rate system
• Many prices set by the state and
• Public services (particularly health and education) account for an
exceptionally large proportion of national income and
employment
• These characteristics make it difficult to determine the
equivalent value of Cuban production and therefore size
of the economy
• Middle range of estimates puts Cuban national income at
$90,000m. With a population of 11.2 m suggest income
per capita around $8,000 slightly below average for Latin
America and the Caribbean region
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Overview II
• Also uncertainty over estimates of annual growth rates
• Base year 1997, and with shifts in the structure of the economy
hard to get an idea of growth rates
• Consensus is that real GDP growth is roughly in line with the
average for the region over the past decade.
• However growth has not been sufficient to restore Cuba’s
income and production to its 1990 level
• Legacy of the economic recession of the 1990s remains
with
• Continued hardship for many Cubans
• Far greater inequality than before, and
• Severely decapitalized infrastructure and productive capacity
• To understand recent performance and current
challenges necessary to trace evolution of Cuba’s
economic structure and performance since it lost support3
of the Soviet bloc.
Economic Crisis in the 1990s I
• Cuba’s integration into the Soviet economic bloc had
created a economic structure that was
• Highly dependent on exports of sugar at very favorable prices in
exchange for petroleum and other imports and
• Propped up with generous grants or concessional loans to cover
any trade deficits.
• Direct result of the loss of those favorable prices and
financing when the Soviet bloc collapsed in 1989-91 was
a 70% decline in foreign exchange inflows
• Resulted in a 35% decrease in national income between
1990 and 1994
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Economic Crisis in the 1990s II
• Cuba’s recovery has been hampered by restricted access
to international markets and finance
• US sanctions were tightened during the worst years of
hardship
• Torricelli Act, 1992 and Helms-Burton Act in 1996
• U.S. policy not only blocked trade with U.S. but also with
subsidiaries of U.S. companies
• Included restrictions on Cuban access to US technology and
additional provisions designed to deter third country
businessmen from involvement in Cuban trade of investments
• US measures meant Cuba had
• no access to support from official multilateral financial institutions
and
• exceptionally limited access to international financial markets
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Economic Crisis in the 1990s III
• Cuba now has an unusual and unbalanced economic
structure due largely to.
• US restrictions on Cuban trade and financing, and an
• Unorthodox approach to economic adjustment
• With import deliveries interrupted, the central planning
system which was similar to the Soviet model stalled in
1990-91
• Cuban government refused to follow the “transition”
model of other former Soviet bloc partners
• Instead responded by appealing for mass mobilization as if the
country were under war conditions
• Wanted to pre-empt unrest and preserve social safety net and
universal health and education services
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Economic Crisis in the 1990s IV
• Planning authorities still had a monopoly on international
transactions
• Sought to prioritize essential food imports
• Despite reducing oil imports by 70% and other products by more
than 80% they still only had enough foreign exchange to
purchase half as much food as before.
• A “food program” sought to encourage self-provision
and innovative methods while
• Government attempted to minimize economic and social
disruption by maintaining fixed salaries and prices for basic
goods and
• Keeping state employees (90% of total labor force) employe
work
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Economic Crisis in the 1990s V
• Inevitably as output declined, productivity per worker
decreased sharply
• Cost of subsidies rose and
• The fiscal deficit increased dramatically
• Deficit was monetized with the result that the black
market value of the Cuban peso collapsed from around
seven pesos per dollar in 1990 to more than 100 pesos in
1993
• For Cuban state employees decline in living standards
felt in acute shortages of all but the most essential goods
• Because of the decline in the black market value of the
peso imported goods were priced beyond their means
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Economic Crisis in the 1990s VI
• However most jobs secure
• All Cubans had access to a basic food ration, utilities and
public services
• Legalization of the US dollar and establishment of an
official exchange market for personal transactions
together with stabilization program halted the Cuban
peso’s decline
• Domestic currency had strengthened to 25 pesos per
dollar by end of 1995 – remained there for two decades
• Exchange rate for official transactions remained at one
peso per dollar
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Economic Crisis in the 1990s VII
• Policy achieved main objectives
• Social protection broadly achieved – health statistics stable
• “Transition recession” saw economic decline, but not as severe
in some of the former areas of the Soviet Union
• Economy began to recover from 1994 on.
• Legacy of crisis years remains
• Economic structure that has remained overspecialized and
distorted
• Deep monetary imbalances
• Growing income inequality, and
• Flourishing black markets which have hampered economic
efficiency and dynamism.
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Unbalanced Growth I
• Cuban recovery efforts focused on seeking new sources
of international earnings
• Constitutional reform 1992 and foreign investment law of
1995 opened the economy to new sources of financing,
management skills in sectors with most potential for
foreign exchange earnings
• Policy of channeling resources into a few areas resulted
in a recovery built around a small number of industries:
• Tourism
• Nickel
• Professional services, and
• Petroleum processing – joint venture with Venezuela
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Unbalanced Growth II
• Tourism provided a high return for relatively little
investment
• Tourist arrivals grew by 18% in the 1990s, rising from
340,000 arrivals in 1990 to 1.7m by 2000
• Tourism receipts overtook sugar earnings in 1994
• by 2000 were more than four times as large totaling US$1,900m
• Since 2000 industry has matured
• average annual growth has been 4%
•
with 3m arrivals in 2014
• bringing in $2,700m gross revenue
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Unbalanced Growth III
• Cuba’s external accounts reveal extent of specialization.
• By 202 the five categories listed above accounted for 90% of the
country’s US $16,000m foreign exchange earnings
• Economy’s vulnerability to external shocks resulting from such export
product concentration compounded by a high dependence on a single
trade partner – Venezuela.
• For past decade all of Cuba’s oil imports (one half of all import
spending) came from Venezuela
• These are paid for by Cuban earnings from the sale of
professional services to Venezuela
• Leaves Cuba very exposed to political changes in that country
• Since death of Hugo Chavez in early 2013 Cuba has been
seeking new markets for its medical services
• South Africa an Brazil have emerged as important customers
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Unbalanced Growth IV
• Current Challenges
• Beyond a handful of export industries, few other areas of
economic activity that have recovered to their 1990 levels
• Task of reversing the severe decapitalization that occurred
during the economic recession of the 1990s is incomplete
• Process has been hampered by chronic shortage of investment
finance and very restricted access to foreign exchange.
• Favorable trade agreement with Venezuela produced a
brief surge of activity in 2005-07 with annual GDP growth
rising above 10% -- soon petered out
• Annual growth in 2009-14 moderated to 2.3%, and
• The aggregate level of investment remains around 10% of GDP
– less than one half average for LAC and too low to prevent
further erosion of the national capital base
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Unbalanced Growth V
• Dual currency system
• obstructs the integration of the external and internal economies,
and
• Contributes to increasing income inequality
• For Cubans who receive incomes in convertible currencies and
some who are self-employed living standards have improved
substantially since the 1990s crisis
• For the rest whose incomes are in the undervalued
Cuban peso living standards are still worse than in 1990
• Prices of the many goods and services that are
denominated in convertible currency or sold at market
prices completely out of reach
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Unbalanced Growth VI
• Low productivity remains a burden for the state budget
which continues to subsidize production and prices
• While wide income inequality with chronic hardships and
shortages
• provides poor incentives for work,
• fertile ground for corruption, and
• fuels a desire for changes in the economic system
• There is a guideline document initiated by Raul Castro to
cover a five year process of updating the economy
• Liberalization in some markets with
• State still owning most of the production
• Aim has been to introduce a new dynamism into parts of
the economy that have been languishing
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Unbalanced Growth VII
• Prospects for Cuban economic growth and development
have been transformed by the breakthrough with the US
following December 17, 2014 statement that diplomatic
relations to be normalized
• Has led to speculation about the possibility of the removal of
economic sanctions
• As yet impact on economy has been modest with an increase in
US visitors to Cuba being the main effect
• However expectations have been transformed – likely to
stimulate investment while further easing of sanctions
will create new economy opportunities
• However until further major changes in US sanctions are
introduced Cuba will continue with its gradual process of
economic recovery and restructuring.
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Summing-up: The Future I
• Results of Raul Castro’s economic reforms have been
modest in terms of economic performance
• Annual GDP growth just 2.6% from 2008-14.
• Living standards for most Cubans remain low and
income inequality has been increasing
• Structural changes are taking place.
• Since 2008 the non-state sector has been expanding and the
state sector contracting.
• Half a million people (10% of the workforce) are now officially
registered in the non-state sector – up from less than 150,000 in
2008
• Government spending which peaked at 78% of GDP in 2008,
declined to 59% in 2014
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Summing-up: The Future II
• These trends are expected to continue, despite a shift in
the Government’s fiscal stance in 2015
• from a conservative one (with the deficit restrained to an average
of just 3% of GDP for the previous 20 years)
• to an expansionary one with the target for the budget deficit in
2015 was set at over 6% of GDP
• By April 2016 when the 7th Congress of the Cuban
Communist Part is due to approve guidelines for the next
five years economic system will be very different from the
one that existed in 2011
• Prices and markets will be playing a greater role in the allocation
of resources,
• with more non-state enterprises, and
• the government’s management will be more focused on indirect
than on direct control,
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Summing-up: The Future III
• Other changes to expect
• The government’s economic management will be more focused
on indirect than on direct control,
• Government emphasis will be on monitoring, providing key
public services and welfare, strategic planning and regulation.
• External debts will have been cleared through agreements at the
Paris Club, and the opening to foreign investment will be wider.
• In addition to this structural transformation within Cuba,
any further relaxation of US sanctions will contribute to
the reintegration of the economy into the international
market.
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