Saturday, April 17, 2021

"'What is to be Done?'". . . . 'Nothing'!; Cuba Standard: Economic Trend Report 4th Q 2020 and 1st Q 2021

Pouring a bucket of cold water on all state and private businesses living off tourism, the Cuban government realized it was not yet possible to reopen international travel. Just a few weeks after the re-opening of airports on Nov. 15, a third wave of contagion hit the island.

Selective and micro-focus quarantines, great agility and speed in applying tests, and contact follow-up and isolation continue to be key to Cuba’s successful COVID-19 response.

Although this differentiated approach is a more rational strategy in economic terms, because it avoids a total lockdown, it is not completely sustainable in the mid-term, due to the country’s need for income from tourism. One of the dilemmas is that the virus containment strategy applied in Cuba is feasible only as long as the number of cases remains low or moderate. 


So begins the Cuba Standard Economic Trend Report for Cuba's fourth Quarter 2020 and  first quarter 2021 just recently made available by Pavel Vidal (Chief Economist) and Johannes Werner (editor). The full report makes for very interesting reading.  The Executive Summary follows. 

The bottom line is quite straightforward and quite expected for a country in Cuba's position and coming out of its history at a moment of potential weakness and vulnerability as the last of the founding old guard retires (though by no means disappears): the Cuban authorities will do nothing for the moment.  The answer to Lenin's old question, "What is to be Done?" then is "Not a thing of significance"--an aggressive and quite deliberate "nothing" that itself will prove seek to project "something" into the calculus of transitions. 

 The current round of economic reforms will be  further implemented deliberately and cautiously, the state and party apparatus will be effectively on lockdown as the political transition formally moves forward; and in the meantime and at the margins, the Cuban state will continue to exploit those areas that appear most promising.  These include the continuing exploitation (in every sense of the word) of its growing medical and tech know how, the Belt & Road connection, and the connection with Iran.Internally the issue of the coherent and solidarity of the Cuban Communist Party will likely move to the center of concerns--though very far from public view. And in this time of transition it is unlikely that Cuban authorities will be in much of a mood to make concessions, even to as careless and ideologically sloppy (though undoubtedly well intentioned in their own way)  administration as the one whose disordered political party (though no less disordered than their opposition) currently in control of the executive and legislative branches of the federal government.  




• It seems possible that Cuba could become the first country in the region to achieve herd immunity. The coronavirus situation could be used by the Cuban government to revive the pharmaceutical and biotechnology industries.

• No significant redefinition of the concept of socialism is in sight for the Party congress. Support for small and medium-size private enterprise and the monetary reform seem to be the most advanced signals the 8th Congress could be sending.

• GDP figures for 2020, together with official updates for the 2019 GDP, translate to two consecutive years of economic recession (the new official quarterly GDP statistics show that the recession began in the second half of 2019).

• A 65% reduction in the average trade balance over the last five years serves to explain the incapacity of the government and state-owned companies to meet their financial commitments to foreign creditors and investors. Positive shocks are needed to break this stifling interdependence between balance of payments problems and economic stagnation.

• In terms of the average nominal exchange rate, the 2021 devaluation is almost twice as deep as the devaluation of the early 1990s. We expect a real currency devaluation (discounting domestic inflation) in 2021 of around 70%. This implies that we should expect much more favorable real effects on the economy as a result of the exchange-rate adjustment today than those in the 1990s.

• Multiple benefits motivated the implementation of monetary reform. These benefits are mainly associated with two types of impacts: A change in economic incentives and a transparency shock.

• A positive side effect of the exchange-rate unification is that state employment agencies can no longer use the exchange-rate differential to appropriate a significant portion of the wages paid in dollars by foreign investors.

• The banking system is currently operating with an extremely negative interest rate. This would result in a loss of about 80% in the purchasing power of household savings accounts. In fact, this loss can be read as an inflationary tax being paid by savers to finance part of the increase in public spending.

• The exposure of banks to the trajectory of the state’s accounts in the coming years is extremely high.

• The Finance Ministry is placing limits on pass-through from import prices to wholesale prices and to consumer prices. If these administrative measures can achieve something similar to what is achieved in market economies through competition, then the inflation rate would be close to 500% this year.

• In the medium and longer term, inflation, fiscal balance and the health of the banking system depend on the speed of the economy’s recovery, the implementation of reforms, confidence in policies, and the occurrence of possible positive shocks that could alleviate balance-of-payment tensions.

• The monetary reform is not reversible. After the devaluation, there are only two possible paths: Either progress in structural reforms and openness, or an unraveling with a runaway inflation process, followed by austerity measures at a social and political cost that would be difficult to assimilate.

No comments: