Thursday, July 25, 2019

Plenary Presentation: Carmelo Mesa-Lago, "The Cuban Economy After 60 Years of Revolution: Continuities and Changes"; Association for the Study of the Cuban Economy 2019 Annual Meeting

The 2019 annual conference of the Association for the Study of the Cuban Economy (ASCE) was held in Miami July 25-27, at the Miami Hilton Downtown Hotel. Details on registration, lodging at the hotel, and the Program are at: I have provided more information HERE: Association for the Study of the Cuban Ecoomy Annual Conference: "Cuba - Growth or Decline? Is the Revolution Dead?".
A highlight of the Annual Meeting was the Opening Plenary Presentation this year delivered by Carmelo Mesa-Lago, Distinguished Service Professor Emeritus, Economics and Latin American Studies, University of Pittsburgh.

A summary of his excellent presentation: "The Cuban Economy After 60 Years of Revolution: Continuities and Changes" follows. Mesa-Lago attempts ot make the case that Cuba's economic situation is the product of a confluence of historical patterns (the patron state syndrome), and an adherence to a strict model of central planning and state ownership of productive forces which has been rejected even by the great Asian Mraxist powerhouses--China and Vietnam.  He calls for a reconsideration of the "complementary" status of the private market within the Cuban economic model, and its liberation from the substantial state oversight to which it is now subject.

Mesa-Lago  began with a summary of the great economic changes and continuities between 1959 and 2017-18.

First the market system shifted to a centrally planned economy dominated by state enterprises and collectivized agriculture.

Second, Cuba has been able to break its very long dependency on sugar, which in 1959 constituted 75% of total exports and 22% of GDP, and now has been replaced by services which constitute 80% of exports and 12% of GDP.

Third, the shift from sugar reveals a new dependency: exporting professional services increased from zero to $7.6 billion and now stands as the primary source of had revenue.

Fourth, foreign remittances increased from virtually nothing to about $3.5 billion annually and now constitutes Cuba's second largest source of hard currency.  That aligns Cuba with many developing states in the region.

Fifth, tourism has become an important economic sector with the tourism numbers increasing 18 fold  and tourism revenue 53 times what it had been in 1959.  Thsi is Cuba's third largest source of hard currency.

Sixth, Cuba has also become less energy dependent; petroleum production increased 79 times and dependency on foreign oil fell form 99% to 50%.

Seventh, social services shifted form partly private and mostly limited to urban areas, to a state owned and operated system, with universal coverage and provided free.

Eighth, all these changes have to be financed somehow, and that somehow might well be external debt, which increased 190 times form 1959 levels before a recent successful coordination agreement by Cuba's creditors.

Ninth and last, Cuba''s population growth  fell from 2.1% to -0.2%, and the elderly population rose form 9% to 20% of the population.  This is good in a  away (people are living longer), but also augurs a long term trajectory of increased state spending on elder care.

Mesa-Lago suggested that the two constants among all of these key indicators  were (1) a sustained and unchanging economic  incapacity to generate appropriate, sustainable growth, and (2) an inability to finance imports with Cuba's own exports in the absence of foreign substantial state-aids.  These state aids includes paying above market for Cuban goods and services, and charging Cuba well below market for goods and services provided.

Another constant over the period after 1959 was the continued dependency f Cuba on a great donor/protector state.  Through the 1950s it was the United States (which captured 52% of exports); after that it was the Soviet Union (that captured 72% of exports), and since the 2000s it had been Venezuela  (with a peak of 44%). Between 1960 and 1990, the Soviet Union granted Cuba about $65 billion (about three times the entire U.S. aid to Latin America through the Alliance for Progreess program). It was, of course, the disappearance of the Soviet Union after 1990 that provoked the grave )Special Period) crisis in Cuba. At its peak in 2012, Venezuelan trade in goods and services constituted 22% of Cuba's GDP. Despite these almost constant flows of aid, and despite Raúl Castro's reforms after 2008 (which Mesa-Lago asserted did not produce effects), Cuba inefficient economic model has has a dismal performance (a performance that mimics that of other states that had tried similar economic models).

Mesa-Lago then illustrated the effects of Cuba's economic model on its economy through a series of graphs. In Figure 1 he showed Cuba's GDP growth between 2006 and 2017.  It cab ne summarized like this:

2006   12.1
2007     7.3
2008     4.1
2009     1.4
1020     2.1
2011     2.8
2012     [value]0
2013     2.7
2014     [value]0
2015     4.4
2016     0.5

2017     1.8
2019     1.2 [though the state may revise this upwards to 2.1]

In Figure 2, Mesa-Lago graphed Cuba's gross capital formation and fiscal deficits between 2007 and 2018

Capital Formation(%)                    Fiscal Deficit
2007   10.2                                      3.2
2008   14.8                                      6.9
2009   10.9                                      4.9
2010   10.1                                      3.6
2011     8.5                                      1.7
2012     8.6                                      3.7
2013     9.4                                      1.3
2014     7.6                                      2.2
2015     9.4                                      5.8
2016     9.6                                      6.7
2017   10.3                                      8.7

The lines here point to a downward trend in capital formation matched by an upward trend in fiscal debt which does not augur well for economic health absent subsidies from abroad.

In Figure 3 Mesa-Lago considered an inflation rate substitute--charting monetary liquidity in the hands of the population as a % of GDP between 1990 (the start of the economic crisis) and 2017 (perhaps the start of another).

Monetary liquidity in hands pf the population as a % of GDP 1990-2017 (the higher the percentage the more money in circulation chasing fewer goods)
1990     25.3
1992     56.1
1993     73.1
1994     51.7
1995     42.6
2000     42.6
2004     34.1
2010     40.6
2015     44.7
2016     52.7
2017     53.8
     Note here the numbers rising to levels just reaching thpse of the Special Period crisis--suggesting scarcity of goods.
Lastly, in Figure 4, Mesa-Lago plotted an Index of Physical Industrial Output between 1989 (equals 100) and 2017 (equals 67.6)--a substantial decrease in industrial output from the height of the pre-Special Period. On the other hand industrial output has been increasingly slowly but more or less steadily since the start of the Raul Castro era.

Index of Physical Industrial Output 1989-2017
1989     100.00
1992      [value] 0
1993        39.1
1997        48.2
2001        51.8
2003        39.5
2006        38.7
2008        46.1
2013        55.0
2015        62.1
2017        67.6

Mesa-Lago then pointed to other adverse effects. First, mining has declined in seven consecutive years (including oil and nickel). Second, sugar output in 201-2019 was 82% below 1989 levels. Third, among 13 key products--agriculture, cattle, and fishing--output in 2017was lower than the peak (in 2009-2017) and seven were below 1989 levels.

Mesa-Lago then suggested the cause of these weak numbers: the inefficient economic model. Central planning and state enterprises predominate over markets and private property in ways that continue to create administrative costs that decrease efficiency.  The Cubans also continue to refuse to adopt even parts of the Chinese or Vietnamese models of markets Marxism (for my take on that here).

Mesa-Lago then turned to the characteristics of Cuba's current dependency on Venezuela.To that end he offered Figure 5, an evaluation of the relationship Cuba-Venezuela 2007-2017 (in $ millions). The relationships proved quite interesting, though not in a positive way.

              Total Relationship  Exports Professional Services   Imports of fuels   Trade Volume (non-oil)
2007                6,832                               4,134                              2,243                    455
2012              16,107                               7,623                              6,079                 2,484 
2017                8,036                               5,822                              1,838                    376

More telling was Figure6, Impact of the Venezuela Crisis on Cuba's GDP.
FIGURE 6 (Impact of the Venezuela Crisis on Cuba's GDP (%)
YEAR                 GDP
2007                      9.9
2008                    15.4
2009                    11.7
2010                    17.9
2011                    21.0
2012                    21.9
2013                    19.0
2014                    18.5
2015                    12.0
2016                      8.8
2017                      8.2

The inherent cycle of growing dependency and the instability that comes after that dependency produces crisis when the rate of engagement ios reduced comes out clearly form the data.

That leaves Mesa-Lago with a set of conclusions.  First, the aggregation of Venezuela's economic-political crisis will have a severe impact on Cuba's economy although not as strong as that in the 1990s during the "Special Period". The reasons for the difference in impact include that Cuba in 2019 has a more diversified economy, especially with respect to trade partners and investment.  Cuba also has much higher hard currency revenue from  tourism and foreign remittances. Cuba is also less dependent on imported fuels.  Finally, the economic relationship with the Soviet Union was at its peak 28% of GDP, whereas under th Venezuelan dependency it is now 8%.

Conversely, Mesa-Lago argued,  Cuba in 1985-89 had its best economic and social performance whereas now the economy is much worse and suffers serious scarcity of consumer goods. The shock from a potential Maduro government collapse would cost Cuba about $8 billion. This would provoke a severe cut in GDP and investment. Yet this time neither Russia nor China is of a mind or capable of replacing Venezuela. Moreover President Trump's Cuba policies, particularly the application of Title III Helms Burton may generate a freeze in foreign investment, especially by risk averse Western enterprises. Mr. Trump's  measures against tourism (halting cruises and people to people travel) would cut the number of U.S.  tourists visiting the Island, and thus cutting into Cuba's third greatest source of revenue. Moreover, placing a cap on hard currency remittances (the second greatest source of hard currency for Cuba) would be difficult to enforce and thus more symbolic than functional.

If thsi is all the case, then what alternatives for Cuba? Raúl Castro's economic reforms of 2007-2017did not have appreciable tangible effects on the economy because they were quite slowly implemented, and were subject to too many restrictions, disincentives and taxes. On the aggregate these choices impeded  the proper advance of the private economy, conspiring against the attainment of needed growth.  Moreover, President Miguel Diaz-Canel is trapped by the program of the first secretary pf the Communist Party (Raúl Castro), as well as the PCC's guidance, memorialized in the documents of the 7th Party Congress.  But this is a trap he has himself helped construct; Diaz-Canel has  promised continuity. This, Mesa-Lago suggests, is absurd, in view of the collapsing Venezuelan economy, Mr. Trump's aggressive measures against he current government, and the lack of other states able and willing to fill the void left by Venezuela. Mesa-Lago noted that in his closing speech to the ANPP legislature (Asamblea nacional de poder popular) in April 2018, Raúl Castro stated:
We have to be alert and aware that we face additional difficulties and that the situation could worsen in the coming months [due to the crisis in Venezuela and President Trump's policies], even if it not returned to the stage of the special period in the 1990s, because today we have  another panorama in terms of the diversification of the economy. But we have to prepare ourselves for the worst scenario.

Disappointingly, Mesa.Lago noted,  the strategy adopted by the legislators is more long term (producing a 2030 economic plan, for example, rather than something for the short term shock).  ore importantly, such economic planning as has been attempted resorts to old and previously unsuccessful policies and vague goals. The emphasis continues to be on the central plan and state enterprises, as the key economic tools, with little mention of the necessary acceleration  and deepening (in Mesa-Lago's view) of necessary market's based reforms.

In support of this position, Mesa-Lago noted the emerging and quite puvblic views of prominent Cuban economists (within Cuba) who have criticized the current strategies.  He noted that they have pointed out the following:

--the huge problems Cuba faces:

--the lack of imagination and daring to attack such problems;

--the inadequacy of the plan in view in view of the enormous challenges that lie ahead;

--the absence in the discussion of the lobg standing broad consensus on economic reforms, which failed to receive the prominence they demand and that have been postponed or obstructed;

--the importance of applying to Cuba the successful policies of China  and Vite Nam;

--the silence on the development of policies on private property and micro-enterprises which should be given priority, and the widespread scarcity  of essential food items which predicts a second special period.
Mesa-Lago concluded by suggesting that in the 1990's, Fidel Castro, albeit reluctantly, introduced modest economic reforms that contained the worst conseqeunces of the crisis.  However, contemporary leadership has so far not followed his approach confronting another  though different devastating economic-social crisis in Cuba that is now making itself felt.

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