One year after three hurricanes ravaged the island in 2008 and the impact of the global financial and economic crisis, the Cuban economy has continued to deteriorate further due to the lack of significant reforms. The overall economic situation on the island has not only worsened the terms of trade facing Cuba because of the rise in the prices of food imports and the decline in the price of nickel exports, but has further reduced the limited access that Cuba had to international credits. As a result, the Cuban government the government lowered the official growth projections of Cuba’s national product for 2009 from 6% to 2.5%, although some of the Cuban economists in the island think that there will be no positive growth all in 2009 and that the economy could even shrink somewhat.
After half a century of relying on external subsidies, first from the Soviet Union and then from Venezuela, and on not paying back the credits contracted abroad, the authorities have finally admitted the gravity of the economic panorama facing the Cuban economy. However, as in the past, government officials refuse to take responsibility for the economic performance debacle and instead blame the U.S. embargo, the destruction caused by the hurricanes, and the impact of the international depression for the dismal economic conditions.
The government has implemented energy savings measures, cut social spending, and adopted other measures in 2009 to cope with the growing liquidity crunch. At the same time, creditors have been asked to restructure debts, and the bank accounts of hundreds of suppliers and other foreign companies in state-run banks have been blocked since January. The symptoms of the ongoing economic crisis, aggravated by the international depression, can be seen in factories operating at half time or completely paralyzed, reduction of the number and quantity of goods available under the rationing cards (including such basic products as rice, beans, salt, etc.), the renewal of cuts in electricity distribution (“apagones”), and the inability to make payments on foreign credits.
As it currently stands there are three sources of uncertainty for the immediate future that the Cuban government will have to deal with in respect to their economic policies: (1) internal economic developments and political reforms; (2) the impact of the global financial and economic crisis, and (3) U.S. policy toward Cuba and several areas of concern.
Very low productivity in practically all economic activities continues to be an endemic problem in Cuba. Between 2000 and 2007, according to the Anuario Estadístico de Cuba, average nominal salaries increased by almost twice as much as productivity, but real salaries declined. So far, none of the measures that have been implemented seem to have had much impact on increasing productivity.
A major reform of salaries, including the elimination of ceilings on salaries and the establishment of new forms of payments depending on the characteristics of the state enterprises, the type of work, and the quantity and quality of the output, had been announced. The new practices were supposed to be implemented starting in January 2009, but the reform has gotten bogged down by bureaucratic considerations and administrative resistance. Furthermore, the implementation of the salary reform has also been complicated by the existence of a dual monetary system that makes it very difficult to measure the real costs of production, establish the prices to charge for products and compare salaries actually paid to various workers. Elimination of the dual currency system would almost be a prerequisite to be able to improve accountability and to raise productivity in many activities.
In a further attempt to get workers to work and to improve production and productivity, on June 26, 2009, the government issued Decree No 268 authorizing Cubans to hold more than one job. The Government calls this concept “pluri-employment,” explaining that “workers, after fulfilling the duties of the post they normally hold, may enter into more than one work contract and receive the corresponding salary.” According to the authorities, “pluri-employment” is intended “to attenuate the effects of an aging population, stimulate work and provide opportunities for workers to increase their income.”
The average monthly salary in Cuba is 415 pesos, about US$19. While the Cuban government subsidizes some food products and provides education and health care at no cost, the salary is not sufficient for most wage earners to meet their daily needs and many young people refuse to take government jobs because they consider the pay insufficient to sustain living standards and find the working conditions inadequate. As a consequence they prefer to try to earn a living by engaging in private activities that are considered illegal by the government or try to leave the country. Workers that do accept government jobs many times use their positions to steal goods and materials from the state enterprises that they can then sell in the black market.
Insufficient Food Production
Despite having a large endowment of agricultural land, Cuba continues to import more than 80% of its food needs, spending about US$2,800 million for this purpose. Commodity exports totaled $4 billion in 2008, while imports increased 41% to $15.4 billion, leaving a deficit in external commodity trade of $11.4 billion, according to the National Statistics Office. This situation has worsened significantly in the first months of 2009 as the price of imports rose while domestic agricultural production continued to decline. It will take much more than the modest steps taken by the authorities so far to be able to increase food production. Especially when one takes into consideration that domestic food production has been declining for the past three years, even before the hurricanes hit Cuba. These declining trends have continued in the first few months of 2009 despite the actions taken by the authorities described below to increase food production.
Some experts fear that the current global economic crisis will hamper the implementation of the reforms, such as decree 259 enacted in 2008 that gave individual farmers the possibility of leasing parcels of up to 26.8 hectares of fallow land, that were announced as part of the new emphasis on energy savings and the lack of availability of needed inputs. These reforms were expected to encompass an administrative decentralization, the delegation of the planning and implementation of many decisions to the municipal level, the distribution of idle land to individual farmers, the availability of inputs and other equipment needed by these farmers, and an improvement in the prices paid to farmers for some of their products. Yet, according to Vice Minister of Agriculture Alcides López, about 100,000 requests for use of idle lands have been recorded, but so far only 36% of the requests have resulted in land being turned over and only with respect to 20% of the requests is the land being exploited. The question remains whether there will be sufficient agricultural inputs available for farmers to be able to produce in these lands.
The results of the first few months of 2009 have not been very reassuring, as agricultural production remained very unstable and there were shortages across a wide range of agricultural products. Agricultural production fell 7.3% in the first half of the year with respect to 2008; output of bananas dropped 61%; citrus, 45%; pork meat, 33%; poultry, 28%. While there were some reported increases of tomatoes and potatoes, the availability of eggs and meat, particularly pork, items of great weight in the diet of ordinary Cubans, was down.
Poor and insufficient housing is still one of the major problems affecting the Cuban population. In the 1990s, construction was practically stopped, except for special programs like building hotels and condominiums for foreigners that would bring some desperately needed dollars into the country. Even before the destruction from the hurricanes that hit the island in 2008, the housing deficit was estimated at 600,000, a deficit that grew every year as the government was not capable of meeting its target for new housing construction. It is estimated that the hurricanes damaged or destroyed some one million residences and the efforts to repair and replace them have fallen below targets. There are growing complaints about the lack of progress in the repair of houses damaged by the hurricanes and on the persecution by the authorities of individuals that try to obtain construction materials in the black market to undertake their own repairs.
The authorities continue to forbid Cuban citizens from owning and freely disposing (rent, sell, exchange and/or mortgage) the houses that they occupy without prior government authorization. Thus there is little incentive by residents to repair and improve these facilities. Moreover, the availability of paint and other maintenance materials is quite limited and expensive and mostly has to be obtained through the black market. Thus, the housing problem is likely to continue to grow unless there is a fundamental change in the legal system that gives appropriate incentives to the dwellers and a substantial increase in the availability of construction materials that allows for the needed repairs to be undertaken.
INADEQUATE INFRASTRUCTURE INVESTMENTS
The industrial policy followed by the Cuban authorities over the last 50 years has resulted in a large dependence on imports of commodity as well as of intermediate inputs. Moreover, the technologies that Cuba adopted, many originating from the former socialist camp, are very inefficient as they tend to consume large volumes of raw materials and of energy in their operations.
The level of capital formation in recent years has not been sufficient to bring about a sustainable rate of growth of the economy. The level of investment in relation to the gross domestic product (GDP) has dropped from 13.19% in 2006 to 8.6% 2008. This compares to average rates in Latin America of 21.8% over the past fifteen years. As a result, Cuban infrastructure(factories, roads, railroads, sewerage systems, etc) are in very poor condition and need very badly to be repaired and replaced.
According to a November 2007 EFECOM report, nearly 3,000 kms of major roadways in Cuba are in poor or substandard condition. Current planned repairs would not even amount to 400 kms. per year. Over 75% of paved roadways in the Havana area alone are in poor conditions and need of big and complex repairs. The cost of performing the needed repairs and improvements on the major highway system in Cuba has been estimated at US$1 billion. Another US$500 million would be needed to perform repairs and improvements in the railway system.
The fall in export revenue (especially from nickel exports and tourism) has now made it necessary for the government to reconsider planned investments and to seek a cut in the imports of energy and other inputs. The government has announced a reduction of 6% across the board to the budgets of all regional organisms, including the most important sectors of the economy, and in 26th of July 2009 speech, Raúl Castro warned that even more drastic cuts may be needed.
I do not see the possibility for the Cuban economy to undertake the needed increases in capital formation and investments needed to ensure sustainable economic growth in the immediate future in the absence of considerable investments from abroad, something that does not seem plausible under current political conditions.
BALANCE OF PAYMENTS AND INTERNATIONAL CREDIT PROBLEMS
Cuba’s external merchandise trade deficit skyrocketed by 65% in 2008, driven by a doubling in the value of oil imports, higher costs of food imports, and a decline in nickel exports. As a result of the global crisis, the world price of nickel fell some 80%, reaching a level close to or even below the cost of production. As a result the government debated whether to temporarily shut down production and ran into difficulties with its major producer and exporter, Sherrit International, which demanded compensation for costs of production that exceeded the value of the export earnings.
Venezuelan exports to Cuba (mostly oil) soared to $5.3 billion in 2008 from $2.9 billion in 2007, making that country Cuba’s most important commercial partner. China remained Cuba’s second most important, with trade valued at over $2 billion, followed by Spain and Canada, as in recent years. The U.S. remains the island’s fifth-largest trading partner. Imports from the United States rose in 2008, as U.S. food exports hit a record $860 million, compared with $608 million in 2007. Meanwhile, the official newspaper Granma has reported that demand for imports from China and Russia has declined in 2009, and so has foreign investments.
Tourism, which is the second largest source of foreign exchange, stagnated in terms of number of tourists in the early months of 2009 and experienced a decline of some 14% in value. The National Bureau of Statistics (ONE) reports that Cuba received 1.2 million tourists in the first five months of 2009. The main origin of tourists that travel to Cuba at the present time, in order of importance, are Canada, Germany, United Kingdom, Italy, Spain, France and Mexico.
Receipts from remittances have increased because of the lifting of restrictions by the United States, but their volume has been below expectations because of the impact of the economic global crisis on the financial situation of the exile community.
The Minister of Economy and Planning, Marino Murillo, has recently publicly admitted that the international crisis has affected Cuba’s ability to obtain international credits and this has made inevitable the need for reductions in domestic consumption. According to official sources, the contraction of available credit throughout the world as a consequence of the credit crisis increases the difficulties Cuba already had to obtain international loans and finance imports.
In his speech of July 26, 2009, Raúl Castro said that the global economic crisis means tougher times ahead for Cuba, but he admitted that the country has no one to blame but itself for the poor farm production that leads to frequent shortages of fruits, vegetables and other basics. He implored Cubans to take fuller advantage of a government program begun last year to turn unused state land over to private farmers. “The land is there, here are the Cuban people,” he said, pounding the podium, “let’s see if we get to work or not, if we produce or not, if we keep our word.” Castro stated that since state officials began doling out unused state land to private farmers and cooperatives, 82,000 applicants have received more than 1.7 million acres — nearly 40% of fallow state land. The program is betting that private interests can revive an agricultural sector crippled by decades of government mismanagement.
Raúl Castro also informed that government leaders will be meeting to assess the effect of the global crisis on Cuba’s economy, “particularly the significant reduction of income from exports,” and that “more belt-tightening may lie head for Cuba” as the government looks at making its second “adjustment to expenditures” in 2009 due to the effects of the global financial crisis. He said Cuba needs to press ahead with its program for getting more land into the hands of private farmers, calling the lone major economic reform of his administration a top national priority.
Cuba seems to be at a crossroads. The cumulative negative effect of many years of poor economic policies has been further amplified by the damage inflicted by the hurricanes that hit the island in 2008 and the impact of the global economic crisis. Meanwhile, the new administration of Raúl Castro has turned to the old men of the revolution in order to assure political support, casting aside the younger generation. These old revolutionaries continue to rely on their old tactics of economic controls and refuse to implement the more radical economic reforms that would be needed in order to turn the economy around. As a consequence, the social situation is becoming tense and the risks of a social upheaval increasing. The questions that arise are how much longer will these old men continue to run things, what would those that follow them do, and will the social situation in Cuba hold out without a major breakdown in the face of a continued deterioration of economic performance.
Meanwhile, the political changes in the United States have made it possible for the new administration to consider an easing of its policies towards the island. We must be conscious that the U.S. has always had as one of its main concerns the possibility of social unrest in Cuba that would bring about a major migratory movement of Cubans to the United States. To help prevent this, the U.S. administration seems to be willing to make some concessions that would ease the economic conditions in the island, but it would need to be able to show that there have been some policy movements on the Cuban side to be able to justify changes in policy with its own constituency. So far the Cuban authorities have refused to make any concessions.
Joaquín P. Pujol worked for many years at the International Monetary Fund and has served as an officer and an executive board member of the Association for the Study of the Cuban Economy since 1990. This is an abridged version of a longer article