The Cuban Economy Goes Into A Tailspin / Dimas Castellano

Raúl Castro and former Minister Marino Murillo. (INFOLATAM)
Raúl Castro and former Minister Marino Murillo. (INFOLATAM)

Dimas Castellanos, 1 August 2016 —  On 29 December, 2015 the Cuban president announced before the National Assembly of the People’s Power that “despite the impact of the international economic crisis, exacerbated in our case by the effects of the US blockade, maintained unchanged, and the external financial constraints, which have worsened during the second half of the year, the GDP grew 4% this year, which is undeniably a good result in the midst of these circumstances.”

Let’s take a look at this. The drop in GDP between 1989 and 1993 was 34%. Recovering from this decline requires sustained annual growth of 7%. The measures implemented for that purpose to date have failed. Between 2011 and 2014 the figure was 2.3%; in 2015, 4%; and during the first half of 2016 the GDP actually fell to 1%. According to these numbers, we are not looking at a “good result,” but rather the worsening of a prolonged crisis; something similar to the tailspin aircraft go into after they are hit.

Blaming the “blockade” and “external financial constraints,” after the measures taken by the US administration, is baseless for the following reasons:

  1. Family remittances, which in 2011 hit 2.294 billion dollars, exceeded 3.13 billion in 2014, and in 2015 were estimated at about 3.99 billion.
  2. In 2014 the export of technical services was worth over 8 billion dollars.
  3. In 2015 tourism surpassed the 3.5 billion dollar mark, and a new record was expected in 2016.
  4. The biopharmaceutical industry saved the country more than 1.9 billion dollars in imports.

As for traditional products, like nickel, Cuba’s leading export, it comes in at 1.1 billion dollars a year; while sugar in the 2014-2015 harvest weighed in at some 1.9 million tons and accounted for sales of 600 million dollars; and for the 2015-2016 harvest, which did not exceed 1.6 million tons, it will bring in about 150 million dollars more than the previous one. Other items are not sufficient to explain the fall in the GDP.

As for the “external financial constraints,” renegotiations of debt, including that owed to the Club de París – which forgave 8.5 billion of 11.1 billion dollars – have created a favorable environment with creditors for the reintegration of Cuba into international economic relations.

If family remittances and tourism have increased; if exported medical services have not dropped; if the reduction in revenue from nickel and sugar, either due to lower prices or productive inefficiency, cannot explain the sudden reversal, then an analysis must address petroleum among the possible causes. According to a Reuters cable on July 8, 2016, the delivery of crude to the island dropped from 100,000 to 53,000 barrels per day. If so, as occurred in Soviet times, Cuba may have been exporting a portion, which could explain the plummeting GDP.

Whatever the cause of the decline, what is the plan to deal with the crisis? On July 8 General Raúl Castro told the National Assembly: “We must reduce non-essential expenses of all kinds, foster a culture of saving and the efficient use of available resources, concentrate investments in activities that generate exports, replace imports, and support the strengthening of our infrastructure, thereby ensuring the sustainability of electricity generation and the improved use of energy carriers. We must, in short, strive not to hinder, in any way, the programs that ensure the nation’s development.”

Reducing costs, promoting a culture of saving, concentrating investments in activities that generate revenue, replacing imports, etc., are measures announced year after year, and which invariably fail. Thus, what is new about this plan, if all its objectives have been missed, over and over again?

Setting them again, while ignoring the root causes of the repeated failure to attain them, demonstrates a lack of political will in a scenario in which it is impossible to roll back the small reform measures introduced, sever relations with the US again, find a new sponsor, or erase Cubans’ knowledge of the true causes of their troubles.

The Minister of the Economy and Planning, Marino Murillo Jorge, proposed, inter alia, the following five measures:

  1. “If the problem we have is our liquidity capacity, the first thing we must do is restrict payments in currency in the country … administrate the taking out of loans very carefully, to render the country’s future borrowing manageable … and adjust our energy carriers’ consumption … “
  2. “As activity levels fall, wages in the business system will adjust to production levels … in the business system there is a lower average salary estimated than what we anticipated in the plan  … “
  3. “With the currency that we have, what we must do is support what is the raw material for the core business, or the spending entailed by the main activity in each place … because the amount of money that we are going to give the bodies is nothing like what was envisaged in the plan … “
  4. “We will have to work on looking for financing solutions in the medium and long term, to definitively abandon the principle of making short-term investments, because then the payment of debt is very fast, and the debt is not paid with the return on the investment. “
  5. “Now, if you lower prices, and wages have more purchasing power, that means that the physical quantities sold are greater, and to support these purchase capabilities it has been necessary to buy 25,000 tons of rice, 32,000 of peas, 82,000 of chicken, 36,000 of oil, and 3,800 of dehydrated milk. “

The decrease in imports in order to avoid generating new debt will be reflected in further production declines. The average salary, whose insufficiency relative to the cost of living is a pronounced anomaly of the Cuban model, will suffer a further decline, which will be reflected in lower production, more corruption and criminal activities. Reducing the amount of currency that the bodies will receive cannot be taken advantage of on the world market because productive inefficiency makes it necessary to use those savings to buy what we are unable to produce.

Although Raúl Castro stated that payment obligations are being met, Murillo’s words denote difficulties honoring commitments to creditors after the renegotiation. The slight reduction in prices, aimed at endowing the Cuban peso with greater purchasing power, without productive backing, makes it is necessary to import more, when one of the country’s problems is, precisely, a lack of solvency. In short, five insurmountable contradictions that augur the model’s final collapse.

As the causes are not external, or circumstantial, but internal and permanent, the analysis must take another course.

In July of 2007 General Raúl Castro acknowledged the shortcomings, mistakes and bureaucratic and indolent attitudes illustrated by Cuban fields infested with sicklebush, and argued that rising food prices on the international market made it necessary to produce them in Cuba. In 2008 he emphatically stated: “We must make commit to our land! We must make it produce! ” Castro stated that food production was “a matter of the utmost national security.” However, the reform measures were, from the very outset, subordinated to the dominance of State ownership, socialist planning, the granting of rights to foreign entrepreneurs who refuse to employ Cubans, and ideological orthodoxy: four of the culprits behind the failure.

In March of 2012 Marino Murillo Jorge said that the Ministry of Agriculture “has presented an unfavorable economic and financial status for several years, which negatively affects business management,” and demonstrated that the actions and measures taken to date to reverse this had been insufficient. In May of 2013 he stated: “The measures which for decades have been implemented in order to manage the land have not led to the necessary increase in production.”

Practical experience and the science of economics have demonstrated that people pursue certain goals, in accordance with their interests. The loss of autonomy – which is to the economy what oxygen is to organisms – together with statism, voluntarism, command and control methods, central planning, the ineptitude of leaders and administrators, and producers who lack incentives to produce, combine to spawn the inefficiency that characterizes the Cuban economy, and have driven it to what appears to be this, its final stage.

From 1% we are headed for 0%, and on to initiate a stage of negative growth, which they are bound to call “special growth.”

Note: Translation taken from Diario de Cuba English edition