The Twenty Seventh Annual Meeting of the Association for the Study of the Cuban Economy (ASCE) was held, as usual, in late July in Miami. But it was a bit different this year; most participants--paper presenters, discussants, and audience members--seemed to agree that significant "reforms" of the Cuban economy would not only be limited in the next few years, but because of the slow and partial implementation of those that have occurred, inequality was increasing. But even more conclusive was the general belief that not only could no major changes be expected until the dictatorial regime was changed, although as forces beyond the dictatorship's control, now unleashed, continue steadily there may be some hope in the further future for a more open and prosperous Cuba. I'm not betting on that yet.
It is the gravity of Cuba's present economic/social situation that leads to this conclusion; the situation is so bad, so extreme, that it is difficult to believe the present regime could--let alone want to--ameliorate this mess. In spite of a boom in US visitors (both Cuban-Americans and other Americans) as well as a clear expansion of private restaurants, B&B's, and other services stemming from President Obama's 2014 opening measures, Cuba's GDP fell last year and may continue to fall this year. Export and import of goods has fallen. Liberalizing reforms in agriculture have been reversed. No action has been taken to unify the perverse dual exchange rate. Petroleum imports from Venezuela have almost been halved; Cuba had to buy some oil from Russia recently but paid cash for the purchase. Housing construction has faltered; emphasis is now placed on upgrading some of Old Havana's deteriorated buildings to please tourists. The medical system used by most Cubans is in a state of chaos; hospitals are being closed and consolidated. Equally discouraging, the quality and resources dedicated to education have greatly deteriorated.
The external factors that Cuba confronts also lead to pessimism, at least in the short term. Venezuela's political turmoil means its highly subsidized oil deliveries to Cuba will not increase; they will likely continue to decline. President Trump's minor adjustments to the Obama actions will not lead to a continued boom of US tourists; at worst it may well lead to a decline in non-Cuban-American tourists as the 12 reasons to justify visiting the island are more carefully monitored and payment to military-owned hotels and services is restricted. Russia, now under EU and US sanctions and with a declining economy, is in no position to bail out Cuba, and China seems more interested in commercial activities than grant assistance.
Then there is the demographic problem. Cuba now has the highest proportion of elderly residents in the hemisphere. And the open travel policies Raul Castro put in place a few years ago seem to be accentuating the issue as all those youths who can flee the country. Finally, last year Cuba negotiated (another!) US$11 billion debt extension/forgiveness deal with the Paris Club but recently Raul Castro announced it would be difficult for Cuba to pay its reduced debt service.
Finally, there is the intransigence of the Government. Raul Castro had said he would step down as President in 2018; he left his possible continuation as Communist Party Chairman in doubt. He has now emphasized that all senior Party and Government members must join him in stepping down as well. But in 2019. Who knows what will happen then if Raul stays in good health. The Obama moves were based on a hope that the Cuban Government, if reciprocity were not mandatory, would relax some of its strong political/economic controls and move towards a mixed economy model. This proved optimistic. While the Government did free some dissidents, soon thereafter many were detained again or encouraged to leave the country.
But this is only a summary. Given the focus of the US press on the growing American tourist boom and the new Trump policies, as well as anecdotal trivia, background may be most useful.
First, demography, both macro and micro. Demographers have long known that Cuba's population was aging fast, but in 2016--a few years earlier than expected--it passed Uruguay as the hemispheric country with relatively the largest elderly population. Not only has the birth rate fallen to 1.04 per woman (replacement is about 2.1), but net immigration exacerbates the situation. With the exception of 2013/14, when the statistical office--mysteriously--claims there was a slight net surplus in migration flows, the recent net outflow has been over 50,000/yr. Cuba's population decline may accelerate in the future. The economically active population is falling faster, of course, as youths abandon the country; it fell from 5.17 million in 2011 to about 4.87 in 2016. This, however, has not led to increased employment ratios. Open and "hidden" unemployment is now estimated at about 28 percent. While the state enterprises and governments down-size, the expansion of the private sector has been less buoyant. Then there is the effect of age on the Nomenklatura. Weekly, the newspapers print obituaries of "heroes of the Revolution." Most such heroes are in their late 80's or 90's, so it is reasonable to expect that by 2020 virtually few of the original Revolutionaries will be in Government. Their departure, accompanied by Fidel's death, reduces the legitimacy of the Government, since given the disastrous economic/social/political situation after 58 years of Revolution, this legitimacy is based almost solely on historic memories. And, of course, on force.
Cuba's economic situation is dire. And although the support from President Obama's late 2014 decisions has borne fruit, even that has not stopped the slide. Cuban GDP data are chronically untrustworthy, so the minus 0.9 percent real decline published for 2016 is surprising. Usually the Cuban statistical office favors upticks. One careful analyst suggested the decline was likely closer to 2.5 percent and--given the news we have received so far--a similar decline is likely this year. Carmelo Mesa-Lago, known for his neutrality and care with data, points out that real wages are about one third what they were in 1989, before the implosion of the Soviet Union. This is after a recovery from the "Special Period" that followed that implosion. The drop in Venezuelan oil has likely been accompanied by its payments to Cuba for security troops and "mission" doctors and teachers, but data is unavailable. Goods exports in 2016 were down 12 percent in dollars. To understand how bad the economy is, all one needs to know is that merchandise exports in 1958, the last year before Fidel's advent, were higher in nominal dollars than those of last year. Housing construction continues to decline; annual construction during 2010-15 (28,500/yr) averaged half the 1984-90 level, but 2017 may see only 6,000 completions. The estimated housing deficit has risen from 550,000 in 2006 to 888,000 last year. The fiscal deficit has risen from 2.9 percent of GDP in 2007 to an estimated 15 percent of GDP this year as the economy contracts. Public services--particularly health and education--have dropped apace; education outlays, for example, have dropped by 4 percent of GDP in the last ten years. The minimum wage (about US$25/month) remains so low that no-one on it can afford even a basic basket of food. While a new foreign investment law was passed three years ago, the response has been limited. About 395 projects were proposed in the past two years, but only 83 were approved and far less are underway. One hope, a major port and free zone at Mariel, is stalled. After three years only 8 firms are now operating in it, and some are simply plants that transferred operations within Cuba.
One sector of the economy is, however, expanding rapidly--tourism. Visitor arrivals have risen from 2.0 million to at least 2.6 million between 2010 and 2016. (One Cuban economist put the number at almost 4 million in 2016!). The Central Bank reports tourism expenditures; they were over US$2.7 billion in 2016. About 350,000-370,000 Cuban Americans visit Cuba yearly and can now bring more money for their family and friends. But other American visitors have risen from 160,000 in 2015 to over 300,000 in 2016, and arrivals from the US during the first half of 2017 have risen even faster, almost 50 percent. A Caribbean-wide gravity model predicts that without any US governmental constraints, US tourists to Cuba would eventually reach between 3 and 5 million yearly. Canadians have long been the most important tourists to Cuba by market nation, but their numbers dropped slightly in 2016 when the Government began to quote packages in US$ instead of the depreciating Canadian dollar.
Trump's recent moves--to prohibit Americans from purchasing services from military-owned places (most hotels and some clubs) as well as dropping Obama's "honor-system" for reasons to visit Cuba--could dampen the non-Cuban-American travel growth but Cuba's economy, like much of the Caribbean, has become vitally dependent on tourism and immigrant remittances. Some examples: The attractive colonial town of Trinidad now receives over half its (admittedly low) municipal taxes from what the authorities call the "non-state sector." Raul Castro's decision over five years ago to allow private sales/purchases of housing has led to a growing market. Foreigners are excluded from the market, but many Europeans and Americans use Cuban "presta-nombres" (borrowed names) to buy property, fix it up, and then rent it out to tourists. One researcher noted there are about 20 multi-staffed real estate agencies in Havana (some transactions occur in Miami); there house prices range from US$5,000 to US$1.5 million. Most agencies average only two or three sales a month; they make their money on rentals of the newly purchased and rehabilitated property to tourists. While the use of presta-nombres is known to the authorities, they so far have turned a blind eye to the process, but any dispute will leave the foreign investor without any claim on his/her property. The tourism boom has led the Government to emphasize rehabilitation of Havana's main tourist areas; so much so that one researcher severely lamented the deviation of resources from housing for the common Cuban to aesthetic renewal. The tourists' desire to use the internet and cell phones in Cuba, combined with the regime's allowance of cell phone usage by Cubans has led to a major increase in cell phone usage. The Cuban diaspora either sends the phones to friends and family members or the funds to buy such (their cost, of course, is well above that payable by a Cuban state worker). Blogs by Cubans have sprung up, and internet journalists now compete openly with governmental media. Warnings, discriminatory regulations, and even occasional jailings have so far not deterred this growth.
The tourism has also led to a boom in private restaurants, tours, B&Bs (AirB&B is very present in Cuba), mini-hotels, taxis, beauty salons, etc., all directed towards foreign tourists. While remittances are not reported specifically, Obama's removal of a cap, the closer relationship between Cuban-Americans and their families on the island, and the great increase in small private activities (and investment) means they are likely in the range of US$3.5 billion. But many European and American family members send equipment to their Cuban small entrepreneurs. If you add in-kind transfers--everything from small generators, commercial water filters, kitchen appliances, etc. directed to the private "Paladares" (small private restaurants), B&Bs, and other private activities, remittances could equal US$ 6 billion. One researcher calculated that Paladares pay about 280 percent the minimum wage (often close to the average in the state sector). Teachers, doctors, and other professionals have often fled their professional activities to work in the private sector.
What is impressive, however, is that the tourist expansion--accompanied by an equally strong expansion of private activities linked to it--has not led to overall GDP growth. Part of the explanation is the strong comparative advantage Cuba has in sandy beaches, agreeable climate, and affable citizens. But much of it stems from poor economic policies. As mentioned the timid liberalization of some agricultural production and marketing has been reversed. Far more important has been the delay in addressing the dual foreign exchange rate. The Cuban Peso is about 24/US$1. The CUC, another currency, is supposed to be equal to the US dollar, but the authorities charge an exchange tax of 10 percent. Tourists are charged in CUCs, Cubans are also charged in CUCs for specific, mostly imported, items. The disparity in exchange rates, of course, has led to massive corruption, economic "rents," and economic perversions. (Remember that the Cuban military control virtually all foreign-exchange earning activities! Also remember the average monthly state wage is less than CUC 30!) For years, the Government has claimed it would unify the currency, but so far all it has done recently is to transfer some more minor transactions into CUCs. This has led to the boom in employment in tourism-related private services, where the authorities--much as they would love to--cannot totally control the abundance of dollars and Euros, let alone CUCs spent by foreign tourists. It has also led to an obvious and growing income disparity between Cubans. The political leaders have always fared well, and so have those with family members in the US or Europe, who have sent them dollars or Euros. But now entrepreneurial taxi-drivers, barbers, restaurant or mini-hotel owners, B&B operators and other so linked to direct payments of foreign currency are also thriving. And the elderly (the average pension is about US$10/month), rural farmers, urban poor with no employment linked to foreign currency, and government workers remain abjectly poor. I suspect, given that the most emigres were white, there is also a racial disparity underway as well.
The arrival of some Cubans to ASCE meetings has made its member fully aware that Cubans know exactly what is wrong with their economy and what to do about it. Indeed, one Cuban participant will be going on to Harvard as a visiting professor. This knowledge has made most ASCE members increasingly reluctant to prescribe actions as they conclude their analyses; the necessary actions are obvious so there is no need to lecture. But the corollary of this understanding is that the lack of action stems solely from political reasons. I have already mentioned the military gain immensely from the dual exchange rate. Party leaders, and their families, would obviously lose from a regime change. And both groups have learned strong lessons from the demise of the Soviet Union and Kadaffi in Libya; they have also learned much from the impotence shown by the US, EU, and "international community" when faced with strong, unyielding governments. North Korea, Iran, even little Honduras, have ignored international resolutions, diplomatic demarches, and sanctions successfully, while Cuba is confronting an environment where such actions against it are being reduced. There seems little reason for the regime to relax its political controls, and the Government has so responded. But the rapid growth of the private "cuenta-propistas" (own-account workers) is creating a dual economy more closely linked to foreign suppliers and finance. The poverty of governmental resources and its loss of respect among many mean the authorities are increasingly irrelevant to more and more Cubans. Some ASCE participants expressed the hope that the increased tourism, increased international exchanges, unabated economic depression, and continued growth of the private sector would force change, particularly as the "old Guard" died off and a newer generation of leaders have to confront the economic disaster caused by the Revolution.
This may happen. And it may not. Political repression remains strong. Soon after Obama's visit, the Seventh Communist Party Congress was convened; its importance underlined by the fact there have been only seven such meetings in the 58 years of the Castro Regime. The Congress firmly repeated that state ownership and management would remain paramount. Private ownership or management of fundamental means of production would be "temporary." Foreign investment (easily controlled) would be the incremental stimulus to economic growth, not private enterprise. In short, the Chinese model was firmly rejected. Cuba' poverty restricts aggregate private savings, and the country's lack of creditworthiness, bizarre exchange rate policy greatly restricts fiscal borrowing abroad. This has consequences, since the transport, electricity, sewerage, water, and other systems have declined so greatly they will be a major restraint on future tourism and private activities. One study noted that over 40 percent of Cuban Americans returning from visiting Cuba had heard of someone close becoming sick because of poor water. It is hard to see how Cuba could marshal a quarter of its GDP in savings to finance the necessary investment to attain, say, a 5 percent GDP growth target. As one participant noted, small scale private businesses, often family run and staffed, cannot liberate Cuba from the disaster caused by dual exchange rates, governmental control of all foreign exchange, transport, construction, most housing and commerce, a stubborn bureaucracy, and a fear and rejection of market forces. Moreover, the authorities remain ambivalent even about the country's major growth sector. The Government has continued to delegitimatize the growing squadron of private sector NGOs that have arisen. It continues to jail dissidents who challenge it, often about perverse private incentives. And, strongly united, it continues to underline the importance of the Revolutionary myths and the socialist command of the economy. While major reforms and change are thus unlikely in the next five years, all will depend after that on the determination of the Nomenklatura, military, and Socialist leaders of Cuba. So far, bets against them have been losing propositions.