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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 2 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 4 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 5 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 6 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 7 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 8 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 9 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. 10 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 11 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 12 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 13 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 14 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 15 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 16 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. 17 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 18 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, 19 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. 20