By Ricardo Torres (Progreso Weekly)
HAVANA TIMES– The country’s economy continues to set the pace for some of the most intense debates currently taking place on the Island. Since 2016, economic growth has slowed significantly: The GDP increased 2.7 percent per year from 2010-2015, and since has slowed to a 1.5 percent increase from 2016 and 2018. In 2019, it is not expected to exceed 1 percent. The Economic Commission for Latin America and the Caribbean (ECLAC) estimates the increase at 0.5 percent.
The immediate causes can be attributed to the economic collapse of Venezuela, the new sanctions imposed by the United States, the economic break with Brazil, and low prices for some export products. But we must add to these the little success achieved by the ‘updated’ economy.
The first half of 2019 began with the worst shortage of basic goods since the end of the most acute stage of the crisis of the early 1990s. Even the government itself warned that the situation could get worse in the following months. The low availability of fuel has affected public transport in several provinces.
Slow growth is not new in the Cuban landscape. The truth is that Cuba does not grow what it owes in the best of times, and now does it with greater inequality. The short periods of bonanza have been, as a rule, associated with external support of doubtful sustainability. One of the latent problems is the chronic shortage of foreign exchange, which results in default cycles of international commitments. This means that the Island systematically transfers to its foreign partners the consequences of its limited economic success.
Cuba is not financed in the international markets like other similar countries, partly because of the U.S. sanctions, but also because of its peculiar economic system. Although the Island has managed to obtain disproportionate attention from countries such as Venezuela, China, Russia and the European Union, this has more to do with geopolitics or strategic positioning than with its economic dimension. The problem with this is that these arrangements are almost always vulnerable to the political cycle, and unsustainable over time. A very good example is the low profile of Chinese investment on the Island amid excellent commercial and political ties.
The truth is that Cuba’s response has always been below expectations. Although foreign debt was recognized as a priority since 2010 as part of a broader strategy to return to foreign markets, a similar episode has been repeated less than seven years later. Few question the interest of the Cuban authorities to fulfill their obligations, the doubts fall on their strategy to achieve a viable project.
According to the authorities themselves, since 2010 only the simplest changes contained in the Guidelines were finalized. The restructuring of employment is perhaps the most important transformation. The government reduced its workforce starting in 2010. During this period, 1.2 million workers ceased to be public employees. At the same time, the working-age population increased by about 300,000 people. The 1.2 million then found employment in the non-state sector, or the informal trade, or emigrated. It is a common narrative to hear about growing inequality, economic crime, or new jobs such as the smuggling of products or imports.
In spite of the ‘demographic crisis’ that is constantly cited, the truth is that Cuba has the largest working-age population it has ever had in its history. The problem lies in the use of this workforce. The proportion of people of working age with formal employment has been systematically reduced since 2011, from 76 to 64 percent. There are multiple explanatory factors, but a very important one is investment. Although investment volumes have grown, they remain very depressed.
At the same time, little has been done to improve the allocation of the scarce existing resources from the rigid central planning system to the price and exchange rate distortion. The real estate boom shows that once rules and incentives are put in order, significant amounts of resources are mobilized. The banking system is lagging behind in channeling temporarily free resources to expanding sectors. It would be necessary to look for the causes by which the individuals keep enormous amounts of money out of the domestic banks, and the lack of support these offer to the emergence and expansion of small businesses, just to mention one example.
The government is committed to foreign investment, but leaves behind the use of internal resources. Foreign capital, without a strategic approach within the development model, will only produce an even greater currency mismatch in the future. Changes in state enterprises have been minimal, and have not resulted in a framework that allows them to be managed commercially, or brought fresh resources.
Restructuring of the economy done timidly, such as we have taking place, has already been tested in other countries with similar models (central planning systems such as the USSR of perestroika). The prospects are not promising, and Cuba is proof of it. Productivity has not increased and dangerous macroeconomic imbalances accumulate. Public debt has grown in the shadow of cheap loans from state banks to the State, in part to cover the enormous inefficiency of the state business apparatus. And to the chronic shortage of products, one must add the visible deterioration of the price of the convertible peso in the informal market.
Faced with this situation, the latest economic policy decisions are, at the very least, late and of little impact. The successful transfer of factors to viable sectors requires at least three conditions.
First, the system must detect activities and sectors that don’t function. In that sense, a deep monetary-exchange reform is essential. Secondly, mechanisms have to be created to make it possible for mobile factors (labor and a part of capital) to move towards new sectors. This process is not free from friction, since it takes time and resources to liquidate unviable companies and create new jobs. Along these lines, the limitations imposed on the expansion of the non-state sector act as retardants. The self-employed sector has already fulfilled that function for the public sector, although unfortunately only in areas with little prospects for improvement.
Finally, the restructuring needs investment resources to make possible the emergence of new sectors. These resources must be procured not only in foreign investment or external credit, but in domestic savings. A part would come from a lighter public sector, and from the productivity gains of companies run by independent government boards. In any case, a modern financial sector is part of the solution.
That is a possible path for Cuba which would allow the country’s endogenous capabilities to be used more fully, making it less dependent on the stormy global geopolitics. But it would only come through a paradigm shift. Recent measures taken do not point in that direction.
Where do we go from here? Not very far.
Ricardo Torres is a professor of economics at the University of Havana.