The Cuban Economy Does Not Grow or Crash

The private sector still has obstacles preventing it from adequately thriving. (14ymedio)

14ymedio bigger14ymedio, Madrid | December 18, 2018 — The Cuban economic machine has made no progress in 30 years but it does not “totally crash,” according to expert Pavel Vidal, in an analysis published this week on the Web page of Cuba Posible titled “The Cuban Economy in 2018: Another Year without Crashing and with no Progress”

The Cuban economist, who works at Pontifical Xavierian University in Cali (Colombia), stated that, according to information provided by the Minister of Economy and Planning, Alejandro Gil, the gross domestic product (GDP) has recorded a growth of 1% in 2018, well below the officially forecasted figure of 2%.

While the Government attributes the poor results to the shortfall in export earnings, the high level of indebtedness, the international context and weather factors, Vidal showed that the issues are deeper still.

“It must be acknowledged that the [Cuban] system has proven to be effective in managing the crisis and in avoiding financial collapse, and has as well been ’effective’ in limiting private initiative, innovation and a boom in productivity. It is a system which holds the record of keeping the country at the lowest rates of investment in Latin America. The Cuban productive machine has been kept this way for nearly 30 years: it does not completely crash, nor does it show economic progress,” is how Vidal summarized the domestic economy’s state of stagnation.

The information relating to “discreet” growth, as labeled by President Miguel Díaz-Canel, results in something closer to recession. As indicated by the economist, “the dearth of basic commodities and the price dynamics of the consumer goods match up less and less with the official statistics regarding the GDP and the Consumer Price Index.”

Pavel Vidal finds it astonishing that the Government has managed to keep the accounts under control in the context of the spectacular crash of its main trading (and political) partner on which it largely depends. While Venezuela has lost half of its GDP over the last five years, Cuba has grown at an average rate of 1.7%.

In his opinion, the protracted experience of State centralization, control of resources and financial and exchange regulations have managed to maintain an allocation of resources which has dampened what he calls the “Venezuelan shock.”

But the main control pathways used by the Government to achieve this throughout this period of time have been tourism and expansionist tax policies, both of which are at a delicate juncture.

Tourism, which skyrocketed with the U.S. thaw in relations, has registered an average growth of 16% over a three-year period, which has been sufficient to obtain foreign earnings and to influence foreign investment and the private sector.

“Between 2015 and 2017, the arrival of U.S. visitors (including Cuban-Americans) had been growing at an average yearly rate of 44% and had doubled the participation of the total number of visitors to the Island,” according to Vidal.

But 2018 has turned out to be more adverse, despite the improvement of the last months. Tourism global figures, approx. 2.5 million visitors, dropped by more than 5% between January and June, 2018. Taking into account U.S. tourists alone, the drop throughout the six-month period amounted to 24%. The Trump Administration’s restrictions, added to the the issues stemming from the so-called “sonic attacks,” which caused problems to the health of several U.S. diplomats on the Island, accounted for the slowdown in that key sector to the Cuban GDP.

According to the Cuba Standard Economic Trend Report, the impact amounts to 557 million dollars in income not yet received, almost double the estimate, which is the figure mentioned by Vidal that the Island will fail to receive for the cancellation of Cuba’s participation in the Mais Medicos (More Doctors) program in Brazil (U.S. $300 million).

Vidal also quoted the implementation of an expansionist tax policy as a dampener on the effects of the Venezuelan crisis. As pointed out by the economist, after several years’ austerity, [the Administration] has resorted to tax expenditures since 2015 and, to reduce the potential inflationary impact of this expansionist tax policy, the Ministry of Finances and Prices has resorted to government bonds rather than the creation of new money. The issue is that the tax deficit grows and has created a hole of 12 billion pesos (12% of GDP) in 2018. Even though this will contribute to short-term growth, it is based on a financial bubble by way of government bonds.

The fact remains that despite the Government’s trying to keep its composure, thanks to its iron grip on the State’s economy, the biggest issue is that it is unable to generate structural changes allowing to create new expectations. The dual currency system, the inefficiencies of the state’s business sector, the restrictions to farming and the private sector prevent, in his opinion, building up more physical capital and making intensive use of technology and human capital.

According to Vidal, both the President and the Party refuse to undertake deep reforms and merely undertake cursory ones. Thus, they minimize the ideological and political issues which a great transformation entails and they can launch a message that something is changing. It could seem like a method in which there is every advantage, but the fact remains, Vidal points out, that it is the perfect recipe for failure.

“If ten things need changing in order for a productive sector, market or economic mechanism to efficiently work, the Cuban government will only change two things, and those two things will never be the most important ones (…). They spend time and energy in bringing about changes which do not have the chance of offering significant results, since the eight other things preventing an efficient operation have not been changed,” indicated Vidal, while providing some illlustrative examples.

Despite this picture of stagnation,  Vidal believes that the arrival of 3G internet connectivity may entail a significant change and have an impact on the private sector, even though — and he warns — “a requirement in order to do so is for public policy to think outside the box and to create an adequate regulatory framework to promote, rather than restrain, expansion in one of the areas of the so-called orange economy having a greater global dynamism.”


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