Cuba Economy Stagnating, But Could Get Worse

More Americans traveled to Cuba in the last year than ever before, thanks to the opening of diplomatic relations between the United States and Cuba and the easing of travel restrictions. Despite the surge in tourism, however, Cuba’s economy continues to stagnate and even contracted in 2016 due to mismanagement by the Cuban government. With the possibility of a cut in Venezuelan subsidies or a reversal of US policies, Cuba’s situation could get worse, Worldpolicy.org reported.

Tourism brings in approximately $3 billion to Cuba annually, about the same amount as remittances. These, along with the export of Cuban doctors and subsidized oil from Venezuela, sustain the Cuban economy. 

In the last two years, the number of self-employed “cuentapropistas” (Argentina, Cuba, Uruguay) has expanded. More and more Cubans are turning to the tourism sector, which gives them access to the more valuable Convertible Cuban Pesos, one of the two currencies in circulation in Cuba, as well as foreign currency. Instead of making $40 a month as a state-employed professor or doctor, Cubans are making more than that in a day by hosting tourists in their homes or driving taxis. These opportunities have provided a glimmer of hope for many Cubans. 

 The Internal Reality 

Today, 30% of the Cuban work force is in the non-state sector, according to economist Carmelo Mesa-Lago who recently spoke about Cuba at the Atlanta Federal Reserve Bank. Still, the expansion of the Cuban “private sector” will only go so far. Without economic and fiscal reforms, state-owned enterprises, smaller cooperatives, and even joint ventures with foreign firms will continue to stagnate and operate inefficiently.  

In the agriculture sector, for example, large tracts of land go unfarmed. Cuban economist Omar Perez, who also spoke recently at the Atlanta Fed, described Cuban farmers with land from the government who cannot farm because they lack tractors and seed, neither of which they can import themselves. Perez believes this is an ideological issue as much as an economic one—the Cuban government would rather import rice from a farmer in Vietnam than enrich a Cuban farmer and undermine the socialist system. As a result, Cuba has to import approximately 70-80% of its food.

This is the internal reality of Cuba’s centrally planned, non-market economy. Cuba limps along with small, incremental economic changes on the margins, while the Cuban government refuses to implement reforms necessary to boost productivity. 

The looming external realities, however, are increasingly urgent. Venezuela’s collapsing economy has resulted in deep cuts to petroleum exports to Cuba, now at just around 50,000 barrels per day, which is half what it was just two years ago. If Venezuela’s economy continues to decline, Cuba risks losing another benefactor as it did when it lost billions in Soviet subsidies in the 1990s. Without energy from Venezuela, Cuba could see a return of the “Special Period” when rolling blackouts were often and cars on the road were few.

 Chinese Satellite Option 

Meanwhile, the chances of the US embargo being lifted under a Donald Trump administration are slim to none. More likely, the new US president and his team will reverse President Barack Obama’s policies that sought to expand travel and trade with Cuba as a way to both help the Cuban people and prod their government along to implement much-needed reforms. If the Trump administration reverses US-Cuba policy and tightens sanctions on Cuba—whether through travel, trade, or remittances—Cuba risks losing the new flow of American tourists and capital that has expanded the non-state sector and helped many ordinary Cubans.

The Trump administration might be tempted to believe these external factors will finally force internal change in Cuba—that a collapsing economy will finally bring down the Castro regime and that a new generation of Cuban leaders will enact real political and economic reforms. But this would be underestimating Cuba and its propensity to double down, take austere new measures if necessary, and wait for the next benefactor to fill the void. 

Economist Perez does not discount the very real possibility that this situation would “open the door” for China to step in.

Those who know Cuba well, have worked for the Cuban government, or have studied the Cuban model for decades know that the country is more likely to take the Chinese satellite option if it means hanging on to the Cuban system rather than caving to what inevitably would be seen as US imperialism. Already, the Cuban government has sought Chinese foreign investment in a variety of sectors, and China is Cuba’s second-largest trading partner. Imagine Chinese missiles in Cuba in exchange for subsidies. It sounds far-fetched yet also familiar. 

Many nations will cow to US demands, but one would be miscalculating if they think Cuba will. Yes, Cuba’s economy is stagnating—even declining by many measures—and certainly it is not changing as fast as we would like, but the picture moving forward could be worse.

 Debt Repayment

The Cuban government reportedly paid $5.2 billion in 2016 to meet its commitments after an extensive restructuring of its foreign debt in the midst of an ongoing economic crisis not likely to improve this year.

While the Cuban government and the Economic Commission for Latin America and the Caribbean, which uses the same official figures, predicted that the gross domestic product will grow by 2% this year, economist Pavel Vidal predicts a decrease of between -1.4 and -0.3%, according to the latest report by the Cuba Standard Economic Trend Index.