Thursday, July 27, 2017

Cuban Economic Developments: Insights from the 27th Annual Meeting of the Association for the Study of the Cuban Economy

The 27th Annual Meeting of the Association for the Study of the Cuban Economy will take place in Miami, Florida 27-29 July 2017. The three-day conference, around the theme Cuba: Navigating a Turbulent World, will focus on evaluating the state of the Cuban economy taking into consideration the impending changes in Cuba’s relations with the United States. Those of you in Miami at the end of July might consider participating. The Conference Concept Note and Progam may be accessed HERE.

This post includes summaries of the plenary presentations of the opening of the conference, with presentations by Carmelo Mesa-Lago (Pittsburgh); Omar Everleny (Havana) and Jorge Pérez-López (US Labor Dept. Retired).

Cuban Economic Developments
Chair: Helena Solo-Gabriele, University of Miami and ASCE President
Carmelo Mesa-Lago, Professor Emeritus, University of Pittsburgh, ""Fidel Castro's Legacy on Cuba's Social Policy and the Current Situation"
Omar Everleny Pérez Villanueva, Revista Temas, "La economía cubana: Por dónde anda y que se debería esperar"
Jorge Pérez-López, U.S. Department of Labor (retired), "Cuba's Never Ending External Sector Crisis"

"Fidel Castro's Legacy on Cuba's Social Policy and the Current Situation"
Carmelo Mesa-Lago
Emeritus Professor University of Pittsburgh

Carmelo spoke to the issue of social conditions in Cuba. Two important factors: population aging and the structural reforms undertaken since 2017.

Cuba has the oldest population in Latin America overtaking Uruguay20% of the population is over 60 going to over 30% in 2030. Problem is the birth rate declining to 1.04 and population growth is now .002. Economically active population has plunged to 4.868 million and the employed is 4.591 million. Main factor is the population aging.

Hidden unemployment is the most important aspect of labor figures,which runs about 30% down from 35% in 2011. The hope was for migration to private sector. But the rate of private sector growth has not increased enough causing the state to fudge its numbers. Official number is 2.4 in 2015. Hidden is 26.1. This hidden unemployment is labor surplus.

From a 100 base in 1989 state median wage adjusted for inflation is now 39% of the base with real growth only since Raul Castro's tenure.

Increased inequality has also been increasing. The big break is between those getting remittances versus those getting state wages. Private sector employment is also earnming substantially more than those earning median state wage. On the other hand social expenditure (education, health care, housing, etc.) between 20006 and 2015 remains the highest in Latin America but down form 36.6 to 28.2 as a % of GDP; 47.3 as a % of GDP.

Social security pension showing some rebound form reforms of 2008 when retirement age was increased as was the employer contribution rate and small employee contribution rate. But still shows a deficit of 23.3 as a percent of total cost. Mesa Lago thinks that the deficit will decrease modestly for some more years before rebounding because of structural issues (payouts will start increasing over contributions as population ages and workforce shrinks or remains stable). Another reform--freeze in median pensions will also have positive budgetary effects but of curse will affect the amounts available to pensioners many of whom (unless supported by families abroad) have little else to rely on. Median pension is now $11 U.S. month.

Health care has seen changes. Decline in facilities. Hospitals declined 32%, rural hospitals were especial targets. Medical personal decreased 22% 2008-2016 except for doctors who increased 21% but many now working abroad. But infant mortality continued to decline even as family doctors declined by 40%. Severe scarcity of medicines and access to and quality of care has declined. Infant mortality has declined however.

Housing deficit continued strong, with a deficit of over 80,000 units. Dwellings constructed per year has continued to decline form 111.4 thousand to 22.1 thousand. But the ratio of housing per 100 inhabitants is now 1.9.

Social assistance has decreased even as poverty has increased, especially in the countryside. Going back to pre Revolutionary patterns? There are no statistics so calculation with precision is difficult. But it is clear that with salaries insufficient to meet needs either needs are not met or are met in the unofficial economy. Education enrollment has also declined 72% between 2001-2015.

Conclusion: Cuba is undergoing a slow economic rectification under conditions of shrinking population and declining services. Most of this is a function of lack of funds, either self generated or received from foreign sources. Living standards have worsened and will continue so unless the reforms of 2008 on are deepened.


La Economía cubana: Dónde está? Que debería hacerse?
Omar Everleny Pérez Villanueva

What is to be done? That is the fundamental question, especially where no sector of the Cuban institutions--government, academics, etc. fail to undertake them. Overshadowing the discussion is the aging population plus the realization that population is shrinking, especially laboring population.

What is the actual situation? An economy that grows very slowly, about 1-2% a year, which might even be understood as standing still depending on how you read the numbers. That slow growth masks uneven growth and shrinlage within important sectors. Worse, actual exports (and imports) decreased. Fatal is the need to divert national resources to social welfare programs. The result in the actual case are growing deficits (the way in which social programs are subsidized int he absence of income form trade). The teade deficit continues to grow especially as import decreases are tied to export decrease. Venezuelan trade drives asome of this. The situation there is unlikely to improve.

The only bright spot is the tourist sector. Tourism is growing, even and especially from the U.S. This represents the only possible reliable source of foreign currency and income. That growth is not driven by the Cuban diaspora but by non Cuban Americans. This despite the fact of fear of a clamp down from the regulations that will be issued in September 2017 from the U.S.

Tourism is benefiting not just generally, but especially outside of Havana for tourist centered communities. Viñales and Trinidad are good examples of small communities that are benefiting from tourism. Yet ironically the bad state of transport impedes further development beyond targeted tourist zones. And, indeed, the possibility of transport between Havana and targeted tourist sectors (like Viñales and Trinidad) remains a challenge [a theme on which I have written earlier this year].

The private sector continues to grow--again driven by tourism related demand. These are the sources of income inequality but also of fresh sources of tax revenues for the state.

Problem of course is that the state regulation of the private sector continues to inhibit robust private sector growth. Most people have to get licenses in areas that may have little to do with their education (e.g., the engineer opening a restaurant). The licensing and approval process works against the state's interest in growing the private sector.

Labor cooperatives has grown slowly. 498 have been approved. Still considered an experiment though one that is 4 years ongoing. The administrative process and the difficulties of tax administration also dog the efficient growth and utility of this sector.

Monetary unification remains an aspiration but is also a real drag on the economy. Both in terms of its lack of coherence and the differences between them inhibits trade and the development of the economy.

Special economic zones were viewed as the answer to Cuba's problems--large increases in trade and little contact. Especially Mariel was viewed as the crown jewel of this effort. But again the hyper bureaucratic process has produced few approvals and little income. 24 companies have been approved ot date, 8 in operation from 11 countries. This has generated a possibility of $1360 million in investment b but not clear what the breakdown of these investments are. What makes this even more exasperating is that the bureaucratic morass involves non U.S. companies form state with which Cuba has undertaken years of business. This administrative overlay, risk averse and slow, substantially impedes the operationalization of even the best plans. 
This administrative overlay that impedes development is especially evident in the agricultural sector.  The combination of risk averse administrators, and a misreading of regulations, plus the reworking of others has effectively impeded food security.  He gave the example of mangoes in Cuba where farmers are effectively impeded form selling their excess in the face of the interpretation of regulations for mandatory contributions to state food distributors. .  


Cuba's Never Ending External Sector Crisis
Jorge Pérez López
U.S. Dept. Labor (retired) /Fair Labor Association

He looked at recent external sector performance (main components of balance of payments), and then key sources of external shocks: Venezuela, Brazil, and the U.S. The focus is on insights drawn from recent data, to the extent they are available or may be discerned. The fundamental insight is that Cuba appears to be unable to extricate itself from a  pattern of constant but changing external shocks as it extracts itself from one crisis by creating conditions for the next crisis.

The fundamental problem is on information.  No real data on Cuban balance of payments since 2001.  Only BOP statistics in AEC are for current accounts and most recently for 2013.  Nothing on capital and financial accounts.  Latest external sector data fr trade is 2015. Sparse and out of date information on debt, and no systematic data on investment.

Cuban balance of payments appear positive and Cuba has had a positive current account for some time.  Merchandise trade and services trade are the principal drivers  Merchandise trade shows that Cuba has had a huge deficit in merchandise trade account. Last time there was a surplus was 1960. This negative balance of trade was overcome by a huge amount recouped through trade in services--service exports (doctors, etc.) has been the savior fo the Cuban economy for a number of years.

Strategies for balancing BOT components are difficult.  Trade deficit in merchandise represent critical imports for food, fuel and the like.  Reduction could impede ability to export merchandise.  Food imports are substantial, yet a lot of this is made of food that could be grown domestically.  But the centralization of agricultural sectors and its hyper regulation has contributed to Cuban food insecurity and thus of its needs to import basic food stocks. Oil imports are essential and not made up by local production. Statics for fuel, however, are not current and are difficult to interpret. A bit of feul imported are really for re-export.

Cuba has a concentration on a few trading partners--Venezuela, China (exports), Canada, Netherlands (Rotterdam metals markets).  What is new is that 14-15 on commodity tables for Cuba but only one for services. in the Handbook. 

Some oddities: The first touches on the accounting for remittances--which are not shown on Cuban BOP statistics. There are no statistics on the capital and financial accounts--the shows flows of income to Cuba.  The main factors are debt incurred by Cuba and also investment.  Important accomplishment: in 2015 negotiations with Paris Club re Cuban debt (a significant accomplishment) which fixed the amount of Russian debt and renegotiated $11 billion of non performing debt with significant forgiveness and an 18 year repayment plan.  But also creditors  will be more demanding on the renegotiated terms.

This has created incentives to draw foreign investment into Cuba  What is needed is $2 to 2.5 billion a year. Last one shoes 395 projects available for investment.  What actually happens is harder to know.  Little data.  ZED Mariel has been invested in Mariel around 25 enterprises. Most are still in gestation.  Little present activities.  BrasCuba (relocating factory to Mariel) and Unilever as the most important. Since Ley 118 passe din 2014, 83 projects worth $700 million a year--far short of the amount needed.

So where are things now and where are things going?  2016 crisis over Venezuelan subsidies.  Three areas of concerns.  Vulnerability to Cuban development; impact on non subsidized petroleum purchases and negative impact Cuba services sales to Venezuela.  The crisis with Brazil may jeopardize the completion of the Mariel ZED (as a consequence of the Brazilian corruption scandals Oderbrecht).  With the U.S: the crisis turns of the changes in U.S: policy that will be announced in September. Immediate impact, however, on tourism. Also the transactions prohibition with entities controlled by Cuban military may chill overall investment.

Conclusion, Cuba's problems exacerbated by its isolation from globalized trade and financial flows. Dark clouds looming.  But the Cubans have seen this before and it will be interesting to see how they will survive the current cluster of crisis. China may play a role in this, but the relations between China and Cuba do not mirror those of Cuba and the USSR. China a key importer of Cuban sugar.

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