Cuba's Glum Economic Forecast
For all of my adult life I have been hearing that Cuba will blossom economically when Fidel Castro passes away. Now that time has come, and it seems Cuba will continue to struggle.
At a superficial glance, the case for Cuban optimism is obvious. So many Cuban-Americans have impressed the world with their business skills and entrepreneurial drive. If comparable talents were let loose in Cuba itself, one might expect similar results, just as China, after dismantling the most inefficient parts of its communism, began to catch up to the overseas Chinese.
One way to approach Cuba’s economic fate is to consider the Caribbean region as a whole. For the most part, it has seen mediocre results since the financial crisis of 2008. Economic problems have plagued Puerto Rico, Trinidad, Jamaica, Haiti and Barbados, with only Jamaica seeing a real turnaround.
The core problems of the region include high debt, weak commodity prices, lack of economies of scale and an inability to upgrade tourist facilities to compete with the U.S., Mexico and further-flung locales. Cuba cannot service its foreign debt, and losing most of its support from Venezuela has been a massive fiscal problem.
Perhaps the country most like Cuba in the Caribbean, in terms of history, heritage and ethnic composition, is the Dominican Republic. Currently, it has a nominal gross domestic product of somewhat over $6,000 per capita, depending which source you prefer. That’s far from the bottom tier of developing economies, but it’s hardly a shining star. And Cuba will take a long time to attract a comparable level of multinational investment, or to develop its tourist facilities to a comparable level of sophistication. Well-functioning electricity and air conditioning cannot be taken for granted in Cuba, especially after the major decline in energy supplies from Venezuela.
The most optimistic forecast for Cuba is that, after a few decades of struggle and reorientation, it will end up at the income level of the Dominican Republic.
If you are wondering, the World Bank measures Cuban GDP at over $6,000 per capita, but that is based on a planned economy and an unrealistic exchange rate. In reality, Cuba probably is richer than Nicaragua, where GDP per capital is approximately $2,000, but we don’t know by how much. Cuba does have relatively high levels of health care and education, but we’ve learned from post-Soviet reform experiences that it is easy for a nation to lose those advantages. There are already shortages of many basic health care items, including medical technology and antibiotics.
Alternatively, to better understand Cuba’s future, look at its exports. Medical services are about 40 percent of exports, but some of the main buyers, such as Brazil, Algeria and Angola, are expected to reduce their demand.
Sugar prices surged in 2016, but they are still well below their 2012 levels, and commodity prices do not seem to be on the verge of a major comeback. Other Cuban agricultural exports include citrus, fish, cigars and coffee, but those are rarely paths to riches. The reality is worse yet, namely that Cuba has to import 70 to 80 percent of its food, which eats up valuable foreign exchange.
Cuba is simply not in a good position to ramp up production. For instance, the demand for coffee in the U.S. has grown sharply, and some global supplies have been sluggish, so there is an opportunity. Still, there are more countries making quality coffee than ever before, and it’s hard to see Cuba’s corrupt institutional framework, even after Castro, allowing them to take markets from the highly experienced business cultures of Brazil or Colombia.
As for industrial production, the country’s output remains below half of its pre-1989 levels. Rates of savings and investment are at about 10 percent, about half of Latin American averages, and the legal framework is hostile to direct foreign investment. The election of Donald Trump also has introduced uncertainty about U.S. policy toward the island.
Perhaps most importantly, Cuba has not yet repudiated either communism or Fidelism. Cuba expert Richard E. Feinberg describes the stasis as such: “Bureaucratically, over 50 years the Cuban state has become so multilayered, so burdened with thick red tape and so risk-averse that the decision-making procedures are broken.” In other words, Castro was hardly the only problem, and it is not obvious that an ideological turnaround is in the offing.
Had Cuba not had a communist revolution in 1959, it could have been one of the most successful Latin American economies. But the past matters, and turning back the clock is easier said than done. Right now, the place seems impossibly far from being the next Costa Rica, much less the Singapore of the Caribbean.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the author of this story:
Tyler Cowen at email@example.com
To contact the editor responsible for this story:
Jonathan Landman at firstname.lastname@example.org