The COVID-19 health emergency has economic implications for all countries, but its impact isn’t symmetrical. Although it is a typical characteristic of developing countries, the Cuban economy is very sensitive to the availability of foreign exchange, on which imports depend. External purchases are key to sustaining consumption and production. A crisis of these proportions can only worsen the already precarious state of the island’s balance of payments.
The blow will be resounding. The International Monetary Fund (IMF) predicts a 6.1% drop in GDP in developed economies. The World Trade Organization (WTO) anticipates a decline in trade of up to a third. The Economic Commission for Latin America and the Caribbean (ECLAC) forecasts a 5.6% drop in production in the region. These figures are much worse than in the 2009 recession. At the sectoral levels, tourism and aviation are among the most affected. The World Tourism Organization (UNWTO) advances a severe collapse in travel. For now, the European Union plans to keep the community borders closed until September. The economies most dependent on the sector will suffer a higher impact, including the Caribbean and, of course, Cuba.
The economic impact
The island’s productive activity had been slowing down markedly since 2016. Economic growth halved between 2016 and 2019, compared to the 2010-2015 period. Factors such as the economic crisis in Venezuela, the cancellation of contracts for medical services (Brazil), the end of the boom in international tourism, the effect of new sanctions from the United States and the contradictions of the domestic economic reform intervened. Pondering on one or the other factor continues to be a subject of wide debate in the country. For the average citizen, the clearest symptom of economic problems is the increasing shortage of products of all kinds, including essential items such as food, medicine and fuel. These effects were already felt since December 2018. The authorities had introduced energy saving measures as early as in the summer of 2016.
Among Cuba’s main trading partners, only China has a prediction of positive growth for 2020, and it is 1.2%. Venezuela and Spain (first and fourth trading partners) are among the most affected. In the case of Venezuela, with the added effect of the collapse of oil prices. CEPAL itself estimates a contraction of 3.7% of the Cuban GDP, a figure that will surely be revised downwards in the middle of the year. The scenario is very complex, although a return to the infamous Special Period of the early 1990s is unlikely. The productive fabric is more diversified, the economy is more integrated with the rest of the world, and households are not as dependent on the State to meet their vital needs. In fact, a very significant part of their income comes from remittances, foreign visitors or international businesses. The island is more resilient, but its inhabitants are less tolerant of material constraints.
The impact comes through multiple channels. The economic contraction in the main economic centers pulls down external demand. A unique aspect of the Cuban economic structure is that more than two thirds of exports are directly related to health and people (medical services, medicines, tourism). Nickel sales may be seriously affected by the collapse of investments and construction. Metal and sugar were already suffering low prices, which may become even more depressed. At first glance, the reduction in the price of oil looks like good news for a net importer like Cuba, but a more careful analysis relativizes that appraisal. Several of its closest partners, such as Venezuela, Angola, Algeria, Qatar or Russia, will be severely affected, which may rebound against trade and credit.
In this scenario, the pharmaceutical industry would have a better outlook. The great unknown is medical services, since the conditions for Cuba to “monetize” this health emergency are not clear. The sales formula for health services based on the sending of professionals took off as of 2005 in the Venezuelan market. Since its inception, it has been based on intergovernmental agreements, in many cases favored by political accord between governments. In recent years, it has come under different criticism, although not all have the same motivations. There are recognizable ideological lines in the origin of these detractions, in addition to the fact that they are aimed at one of the country’s main sources of income.
The most critical point is the form of payment to professionals. The most common deductions assume that more than half of the total payment is transferred to the Cuban State. An analysis of the matter requires a comprehensive approach to the conditions of service provision, and the fact that the financing of higher education is borne by the central budget, that is, it is paid by all of society. Countries with more advanced welfare states tend to have relatively high taxes on wages, which in countries like Germany can be as high as 50%. Due to the fact that Cuba seems to have a competitive advantage in the provision of medical services, the sustainability of this model should be a matter of the utmost importance, and this depends on the availability and motivation of the personnel. If the COVID-19 epidemic induces a long-term increase in health spending, in a context of shortage of health personnel, Cuba could find a market niche. In any case, the penetration of more lucrative and stable markets will require the readjustment of the business model, including the hiring requirements for professionals.
Tourism is a fundamental activity for the island. And it is also for many homes and small businesses. Extending border closures is a major threat, as can permanent changes in travel habits. Each closing month represents a loss of about 140 million dollars. Until February, the arrival of visitors already showed a clear downward trend. On the other hand, although foreign investment did not show the expected progress and the U.S. sanctions had increased the risk associated with this activity, the deterioration of international financial conditions is a new stumbling block. Cuban authorities can be expected to seek additional relief from their creditors. Before the epidemic, Cuba had negotiated a postponement of the payment of part of its 2019 commitment related to the Paris Club.
Traditionally, Cuban emigrants have been considered to be very faithful to their families, but mass unemployment in the United States, where the vast majority of that diaspora lives, will have an indisputable impact. For example, The Havana Consulting Group calculates decreases of between 20-30% in the flows. Informal channels are currently canceled. A collateral effect is that the strengthening of the formal channels will channel additional resources to the island’s financial system.
Towards a new stage in economic policy
Cuba is entering this global recession phase with major vulnerabilities that could not be resolved in this last decade of reforms and have been exacerbated by pressure from the White House. The authorities should avoid the mistake of confusing the revaluation of the public and the effectiveness of a centralized management, clearly essential in these circumstances, with the necessary and unpostponable reform of the Cuban economic model.
The response package must look at the starting situation of households, which is very different from the scenario of three decades ago. Social stratification has grown, so not everyone will be affected in the same way. According to experts, 16% of Cuban households would have trouble meeting some basic needs. In this context, the combination of universal measures together with others focused on risk groups is required. The ability to implement fiscal or monetary incentive packages is very limited. The deficit in the public accounts has shot up and the monetary liquidity in the hands of the population has grown 10 percentage points since 2013, a clear symptom of repressed inflation. In these circumstances, aspects to be taken into account are proposed for a minimum program that simultaneously allows coping with the emergency and rescuing economic reform.
If the enormous hotel investment was not in correspondence with decreasing linear occupancy rates, in the current conditions there is only room for a thorough rethinking of its pace and magnitude. Tourism will in any case be a key sector in the recovery, but the overdependence of an activity has proven to be disastrous on too many occasions. This may be an opportunity to rethink the sectoral bases of the productive structure in the coming years. How does the country position itself if permanent changes in travel patterns take place?
The current context provides an unsuspected opportunity for monetary and exchange reform. The sudden decrease in economic activity and the increase in rationing would facilitate the introduction of the necessary changes. On the political level, any adverse effect would not be more serious than those derived from the stumbling blocks of retail trade and the general shortage. The big lesson is that tomorrow may be too late: after decades of postponing the transition to a more sensible monetary scheme, conditions have only worsened.
Beyond specific aid, the authorities must devise a universal scheme for the protection of families’ income and consumption that includes incentives for formalization and covers the different vulnerable groups: workers in sectors whose level of activity decreases sharply and where teleworking is not possible (services, non-essential manufacturing); people over 60―more than 20% of the Cuban population is in this category―, of which 343,000 live alone; informal employment and workers hired in the private sector. Furthermore, telework is a limited option not only due to the structure of the occupations, but due to the delay in the communications infrastructure. Schemes can be tested with the banking system to lessen the impact on the budget. Expanding rationing is inevitable in the short term and serves the goal of extending some protection to those who don’t qualify for direct monetary support. In turn, a limited list of products protects public finances and enables supply circuits to be maintained to enable business, public and private activity. The most obvious distortion is that the social protection model has remained anchored in a past of income equality that will not be reproduced in the near future.
Right now, the economy needs maximum flexibility to facilitate job recovery. Since 2010, leaving aside the informal sphere, the private sector has been the largest generator of jobs, and its contributions to the budget have multiplied by four. But self-employment faces challenges on many fronts. On the one hand, the regulatory framework remains highly restrictive, even contradictory with respect to the stated objectives of the reform. For example, in a country in need of a thorough restructuring of state-owned companies, the tax code penalizes businesses that hire more employees. The approved categories for the sector have little to do with the educational profile of the workforce. Cuba recognizes investment in education as one of its greatest achievements. The absence of an in-depth debate on the subject and the limited resonance of the spaces where it does take place feed stereotyped and poorly informed perceptions of its role in the economy and especially the economic future of the nation.
Any attempt at revitalization must consider those weaknesses along with others specific to the current situation. An immediate problem is access to supplies, for which attempts could be made to solve it by expanding the list of products that are sold in foreign currency. This step had been taken previously, the novelty would be to promote the use of foreign currency in investment and job creation. For this, it is important to dispel uncertainty about the future of business. The advancement of some legal norms of the legislative calendar that are directly linked to productive activity could be explored, such as the Law on Enterprises, Associations and Trading Companies, whose approval is only planned for 2022. The most notable lack of focus on the sector has been the impossibility of integrating it organically into the productive and social system, despite countless speeches that demand the banishment of stereotypes. In this framework, the country is called to continue confronting growing disruptions.
The opportunities of the pandemic
The pandemic leaves clear lessons regarding the need to accelerate the deployment of reliable networks and online services. Many private businesses, formal and informal, are dedicated to programming and creating information and communication technology (ICT) services, while too many professionals and technicians are leaving the island. This may be an opportunity to agree on a joint agenda to strengthen infrastructure and related services, including platforms for online purchases, the launch of which has been characterized by instability and poor service. The association may extend to delivery services, where several ventures already operate. Customer service is another area in which association schemes could be devised, through the management of call centers.
In line with the above, it would be advisable to regulate the prices and distribution of agricultural products through joint committees between the authorities and the private and cooperative sector. The objective must be to maximize production and guarantee the arrival of products to consumers. Outdated price controls and their application divorced from real conditions have worsened the shortage. This could be combined with a new approach to land ownership and administration, which has been unnecessarily postponed due to ideopolitical lags. Cuba has returned again and again to the agricultural issue, twice since 1990, without achieving the declared objective of considerably increasing the level of self-reliance. It seems clear that the current approach is not paying off, the problems are serious and go beyond production. In this area, the approval of legal norms included in the legislative calendar could also be considered, such as the Law on Land and the management model of the agricultural sector, marketing of agricultural inputs, equipment and services (considered only for 2022).
The closing of borders also severely affects the individual import of merchandise, one of the supply channels used by many private enterprises. Panama, Mexico, Guyana, the United States, Haiti and Russia were very popular destinations for Cubans to purchase products. Total purchases have been estimated to be between 1.5 billion and 2 billion dollars annually. Only in the Colon Free Zone, in Panama, orders were made valued at several hundred million dollars. Since the relaxation of the immigration law, Cuban travel abroad has more than doubled. Once air traffic begins to normalize, consideration could be given to relaxing the limits established for the import of merchandise, to ease the shortage and enable another channel of supply for the private sector.
Cuba is facing a dilemma. Either it shuts itself in and ends up burying the change agenda that aroused so much enthusiasm at the beginning of the last decade, or it reconciles with a heterogeneous social fabric that allows it to unleash the potential of an enterprising and sacrificed people. Another crisis can be managed or the transformations can be relaunched towards a model of social progress and prosperity.
Unlike the dark moments of the 1990s, the private and cooperative sectors combine volume and sophistication. Its external networks are denser and more diverse. Cuba has long been more than restaurants and beautiful beaches, rental houses and good music. It would be regrettable to equate the management of the pandemic with the economic program that the country needs to give content to the promises of well-being and development. For now, there are signs in one or another direction. Social networks, which have become a mirror of national reality, also exude optimism and hopelessness. The Cuban government is not responsible for the pandemic, but everything it failed to do or half did affects the conditions in which it reaches this complex scenario. Exceptional circumstances can serve to forge the necessary consensus. The puzzle must be read in political terms.
*This article was originally published in Nueva Sociedad.