Economic transformations in Cuba: a review

Abstract

After Raul Castro’s accession to the presidency of Cuba, the country has witnessed the most far-reaching process of economic reforms for more than five decades. The government has expanded the private and cooperative sectors, has passed a new foreign investment law, restructured most of its old debt and has sought to end the long-standing dispute with the USA. Yet economic performance has been poor and the country faces significant challenges and contradictions arising from the reforms. This paper analyses the macroeconomic environment and the changes introduced by the Cuban government over the period 2007–15. While successful at restoring macroeconomic equilibria, restrictive macroeconomic policies have hurt economic growth, whereas growth- and efficiency-enhancing measures are yet to produce results. Moreover, transformation of the economic model is slow because of its many internal contradictions. The paper also discusses some of the main impediments to future change.

Keywords:

• Reforms
• Cuban economy
• macroeconomic environment
• growth
• contradictions

Notes

1. González, “The Sharp Edge.”

2. By the late 1980s a housing deficit of around half a million units had been calculated. Rodríguez, La estrategia de desarrollo.

3. Ferriol, “Política social y desarrollo”; and Espina, “La política social en Cuba,” 135–136.

4. Triana, 1999; and Figueras, Aspectos estructurales.

5. Torres, “Transformations.”

6. It should be noted that GDP measurements changed from 2003 on, essentially giving greater weight to social services. The growth in exports of these services was therefore well represented in the GDP series, contributing to the attainment of high growth rates.

7. Mesa-Lago and Vidal, “The Impact of the Global Crisis.”

8. It is worth recalling that at the end of 2014 the real wage was equivalent to 35% of the 1988 level (author’s calculations). However, it must also be recalled that wages were the main source (and often the only source) of income for the vast majority of families in 1989. At present this has changed significantly. This complicates measurement of the purchasing power of Cuban consumers.

9. The degree of quasi-taxation is high in Cuba, which hides the government’s true fiscal position. Hidalgo and Barceló, “Cuasifiscalidad.”

10. In March 2014 Cuba’s National Assembly passed – in a special session – Law 118 on Foreign Investment, which includes all areas within the potential destinations for foreign investors, except education, public health and defence. However, the national private sector is limited to a short list of activities, mostly simple services and light manufacturing. Nevertheless, theoretically cooperatives can participate in all areas, although, in practice, up to 2015 the sectoral profile has been very similar to that of self-employment. This topic is more thoroughly discussed in other sections of this paper.

11. Piñero, “Nuevas cooperativas cubanas.”

12. Mesa, “Cooperativas no agropecuarias.”

13. An important difference, in addition to long-term transformation goals, has to do with the role granted to cooperatives, as a form of ownership that is more collective than private, although in principle it is useful to address many of the weaknesses of the traditional state company.

14. León and Pajón, “Política crediticia en Cuba.”

15. This type of scheme is ultimately a response to a major problem associated with the chronic shortage in the supply of hard currency, which in turn is derived from an imbalance in the balance of payments. The scheme allows one to assign currencies centrally for a period, depending on the ‘systemic’ importance of the applicant, for example, import of food, energy, commodities, etc. These arrangements have been tested in other contexts in the past. Even in 2014 there were two other countries in Latin America (Argentina and Venezuela) using dual currency and exchange controls. Empirical evidence suggests that these are very expensive and inefficient methods and should be disregarded as soon as possible. De la Torre and Ize 2013. The difficulty in the Cuban case lies in the fact that the use of these controls has been delayed considerably over time and it is part of a wider set of central mechanisms for allocating resources. This implies that the economy has been subject to deep distortions for an extended period, with disastrous effects not only in static but also dynamic terms (behaviours, preferences, informality).

16. An assessment of the importance of the return of Cuba to institutions like the World Bank and the IMF, and some mechanisms to make this possible in the medium term, are found in Feinberg 2011.

17. On 10 December 2015 Moody’s reaffirmed the Caa2 rating, but changed its outlook from stable to positive, citing lessened dependence on Venezuela, and continued reform and rapprochement with the USA. More importantly the new outlook opens the door to an upgrade over the coming months.

18. Pérez, “Foreign Direct Investment.”

19. This calculation is based on the recommendations in Guilarte 2014, taking into account several sources that estimate transfers to Cuba, which vary significantly according to the methodology used.

20. A more detailed discussion of estimates of remittances and their role in Cuba’s economy can be found at Spadoni, “El descongelamiento.”

21. Morales, “Balance del Trabajo.”

22. Barceló, “Institucionalización del mercado.”

23. Profits came indirectly through its trade partners, especially Venezuela.

24. Although this is more a result of the exceptionally poor performance of goods-producing sectors, especially agriculture, including the sugar industry and other simple manufactures.

25. CEEC, La inversión extranjera.

26. Vidal, “La apertura.”