CUBA: The gathering storm

21/03/2010 | Andrea Armeni

Caught between poor economic policies and the US embargo, Cuba lacks access to the multilateral lenders, who could best help it

Statistical information on Cuba may be hard to come by – and harder still to take at face value – but even with no numbers, there is little doubt that the country is in a parlous state. Conversations on the economy in Havana consistently feature comparisons with the so called período especial that followed the fall of the USSR and the end of Soviet subsidies – and any comparison with those dark days for Cuba bodes ill.

The consensus view from Cuba experts interviewed by Emerging Markets, both on the island and abroad, is that the country is languishing perilously close to economic and social ruin, with no solution in sight.

The change of leadership in 2006, when Raúl Castro took over from his brother Fidel as head of the government, raised hopes that the country’s apparently inevitable collapse would be halted. “Expectations rose quickly,” says Eusebio Mujal-León, professor of government and director of the Cuba XXI Project at Georgetown University. But hopes outpaced the reality of change.

Raúl recognized that the 50-year embargo by the US, both blocking trade with the country and isolating it, was crippling Cuba. But he also acknowledged for the first time that part of the problem was of Cuba’s own making. In a public appeal to realism last July, he said: “It is not a matter of shouting ‘Fatherland or Death; down with Imperialism!’ The embargo is hurting us, yet the land just lies there, waiting for our efforts.”

There is talk of change and economic reforms. But real change will require structural, rather than palliative economic reforms – most of which have been half-heartedly proposed and implemented – and certainly more than the mild shift in posture that Raúl introduced.

Structural reforms must be matched by a rethinking of the political economy and a serious injection of financing and investment, says Omar Everleny, a senior economist at the Center for the Study of the Cuban Economy in Havana. “The old model is done for; it can’t be fixed,” he adds. “We can’t move forward with the same old measures.”

Raúl’s suggested reforms are shy of the urgent overhaul needed. In part this is because Raúl’s leadership has had to remain close to Fidel’s legacy, for political as well as psychological reasons. But most importantly this is due to the entrenched position that the socialist structure of the political economy is non-negotiable. The leadership “wants to make some changes, but without shaking things up too much”, says Mujal León. Concern within the government over retaining its slipping hold on power still trumps the concern for economic improvement.

DROWNING BY NUMBERS

According to the Economic Commission for Latin America and the Caribbean (ECLAC), the Cuban economy had a bad 2008, with a slump in growth, an increase in the overall government deficit to 6.7% of GDP, an increase of $1 billion in external debt, and losses topping 20% of GDP from a string of hurricanes. This was followed by a dismal 2009, when the government’s GDP growth estimate of 6% was revised downwards twice to an official – if hard to believe – 1.4% by the end of the year.

The balance of payments worsened again, as Cuba faced an increase in the price of food imports and a decrease in the value of its exports. This gave rise to a liquidity crisis that translated into reduced access to credit and a severe tightening of imports.

Capital spending decreased by 25% (on top of a drop of 40% in 2008). Osvaldo Martínez, president of the Commission for Economic Affairs of the National Assembly, says that investment in enterprises will be reduced in 2010, too, as a contribution to the planned reduction in the budgetary deficit. This lack of investment leaves the country in worse shape by the month.

The country also experienced difficulties in servicing its debt and delayed payments due. The situation improved marginally only towards the end of the year, when the central bank authorized some overdue payments, on the condition that the suppliers continued to do business with the country.

Meanwhile a dual currency system continues to create inequality and aggravates the plight of those who only derive a salary in national currency from the state.

On the street there is general agreement that things have deteriorated over the last two years. Óscar Espinosa Chepe, a prominent independent economist, says: “There is now less food in the supermarkets. And just look at all the people milling in the streets all day long. Where is the 1.6% unemployment?”

FINDING THE FUNDS

The critical question is where Cuba will find the money to survive the next couple of years.

There’s no help visible from abroad. Foreign direct investment is said to be stable – frozen is a better word. Foreign companies working in Cuba instead report missed payments due from the government and enormous difficulties in repatriating profit, with bank accounts continuing to be blocked in an attempt to stem the drainage of cash reserves.

Cuba is also running out of partners who can help. Venezuela, Havana’s biggest sponsor, is suffering from its own economic crisis, which will limit president Hugo Chávez’s largesse.

China is a commercial and political partner, second only to Venezuela, but is not seen as likely to do Cuba too many more favours after extending $600 million in grants and loans in 2009.

Brazil is open to doing business, and the Brazilian Investment Agency in Cuba was brimming with excitement during the recent visit of its president Luiz Inácio Lula da Silva. But concrete results, such as Brazil’s investment in the port at Mariel, may not happen quickly enough.

Recent cooperation agreements with Libya and Singapore, North Korea and Azerbaijan are also unlikely to provide Cuba with the economic support it needs.

The most promising option for Cuba, says Everleny, would be to access desperately needed funds and the expertise of the multilateral development banks. He believes that such assistance in principle could be forthcoming, although for now remains elusive.

Partly because of the country’s policies and partly because of the US embargo, Cuba has no access to the very institutions that could help it back on its feet.

LEGACY ISSUES

Cuba’s predicament harks back to long-standing issues.

“The fundamental problem,” says Jorge Máttar, director of CEPAL for Cuba, “is that the levels of productivity and efficiency have not corresponded with Cuba’s need to move forward.” Put simply: Cuba does not invest enough, nor produce enough, and consumes too much.

This situation has its roots in the heyday of Soviet subsidies, and Cuba’s subsequent reaction as economic support evaporated with the collapse of the Soviet Union.

Rather than focusing on growth or economic stability, the government reacted to the blow by choosing to preserve wages and full employment, via subsidies to state enterprises and the provision of basic services – such as ration cards for food, free education, free health care. Between 1990 and 1993, the country’s GDP shrank by 35%, the fiscal deficit ballooned and the central bank financed it monetarily.

Things have improved since then, but the economy has never fully recovered. Since Soviet subsidies ended, says Máttar, Cuba has remained significantly undercapitalized – a problem compounded annually for 20 years. Its infrastructure has grown obsolete and less productive.

Structural economic problems inherited during the 1990s persist, embodied in the scarcity of hard currency, the distortions in the pricing system that derive from the overvaluation of the official exchange rate and the lack of convertibility of the Cuban peso, the dual currency and the segmented markets, the meagre performance of the sugar industry and agriculture, and the inefficiency of public entities.

One structural reform that could revamp parts of the economy – laws allowing private ownership of property – is now being openly discussed. A major change is afoot, says Chepe: “Since the end of November, the official communist paper Granma has been publishing letters from readers demanding radical changes in the structure of property, and the defenders of the status quo and of a supposed socialism.”

Some official agreement has been forthcoming. In a country where nearly every shop – from the ice cream parlour to the cinema – is state-owned, it came as a shock when an official report said, “State companies must be efficient and so must have resources to be so. The rest should adapt to more adequate forms of property given the resources available.”

“It’s typical in Cuba for controversial economic changes to be spread in the form of rumours as a way to gauge reactions before the government commits,” says an observer.

Rumours are raging, and there is speculation about moves to privatize bakeries, garages and coffee shops. But, excepting the talk, nothing of this sort has happened to date.

EMBARGOED

But one cannot look at the Cuban need for capital and investment without looking at one of the most politicized factors in the Cuban economy: the US embargo. It would be wrong to believe that the embargo is the source of all Cuba’s ills. But while lifting it would not change things overnight, it is a condition precedent for Cuba’s significant economic improvement, says Juan Triana, university professor and one of the country’s foremost economists.

The embargo hurts Cuba in several ways. The most obvious is the prohibition of trade with the US. That said, limited trade exists. Cuba buys most of its agricultural imports from the US, under an embargo modification made in 2000. But it’s a one-way street – Cuba cannot export north.

Even more biting is the impact on non-US corporations that fear the consequences stateside of involvement in Cuba. Banking giant ING pulled out of Cuba immediately after the US Office of Foreign Asset Control placed its Cuba subsidiary on its ominous black list of “Specially designated nationals and blocked persons”, even though, sources report, Cuba was a profitable market for the bank.

Triana points out a subtler, yet insidious consequence: perfectly good economic policy will be trumped by embargo posturing. “All economic decisions in Cuba have to pass a political scrutiny of their impact on relations with the United States, and if they in any way advance the foreign interest, they fail,” he says.

But perhaps the worst consequence of the embargo is that so long as the US blocks Cuba, the island will have no access to any of the development banks and multilateral institutions. These are the most likely to be able to provide the significant capital injection that Cuba desperately requires. Their involvement would also bring capacity building – much needed in a closed-off country that sees many of its brightest emigrate.

Cuba’s protestations that it’s not interested in membership in these institutions are disingenuous. The choice, by now, is probably between joining or sinking alone. Even Brazil, in a somewhat awkward move, advocated Cuban membership in the IMF, and the Organization of American States accepted Cuba for inclusion last year (though the inclusion was never consummated).

But the rhetoric of staunch independence lives on, reading more pathetically every year. Even while delivering the bad news of 2008’s performance in front of the National Assembly, Georgina Barreiro Fajardo, minister of finance and prices, stubbornly stuck to the party line, dismissing international financial help. “We will not apply the recipes imposed by the main international financial organizations, aimed at eliminating the social programmes that guarantee access to education, health, safety and social assistance.”

The problem is that Cuba, without any prodding by the IFIs (international financial institutions), has already failed on all these guarantees, once hailed as socialist successes by sympathizers around the world. On the ground in Cuba, complaints about subpar education and bad medicine abound, often accompanied by a melancholic smile.

THE FIRST MOVE

The inauguration of US president Barack Obama in January last year revived hopes of change to the rules governing the embargo. Yet little of what could have been done has been implemented so far.

The delay is due, many suspect, to Obama having bigger foreign and domestic problems to solve than relations with an island of 11 million, says Mario González-Corzo, an economics professor at the City University of New York.

But there is no reason to believe that Obama’s initial overtures to Cuba – allowing increased travel for Cuban-Americans to the island and easing restrictions on remittances – should not continue. But any further steps will require a degree of willingness on both sides to play ball, which has yet to be seen.

Rafael Hernández, a politologist and prominent Cuban intellectual, doubts any opening: “It is baffling that there would be any expectations with respect to Obama, in a country that has experienced the effects of other democratic presidents, from Kennedy to Clinton.”

Non-economic issues such as human rights, or the release of five Cuban citizens held in the US and proclaimed heroes in Cuba, cloud even the most pragmatic conversation on bilateral aperture. “The driver for change will have to be the US,” says a former official of the Cuban Ministry of Foreign Affairs, suggesting that Cuba, for political reasons, will not make the first move. “If the US found a way to relax the embargo, then Cuba would find it hard to justify an obstinate stance to its population.”

While the US has been unreasonable in its Cuba policy ever since its first assassination attempt on Fidel Castro, both parties need to take conciliatory steps. They missed a chance in February when US and Cuban diplomats met in Havana to discuss migration issues. The session was torpedoed, said the minister of external relations, by the US “calling in dozens of its mercenaries... in line with the support for the counter-revolution and the promotion of subversion.” Whatever that might mean, that’s not the way to go.

The revolution continues. But each bickering is a lost opportunity for change in a country that desperately needs it.

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