A turning point for the Cuban Economics in a time of social unrest

The PCC calls for a demonstration against the US embargo in the centre of the island in May 2021 [PCC].

Pandemic crisis pushes for long-overdue economic reforms, but may be ineffective due to fears of out-of-control openness 

07.06.2021 / The Cuban government has been wanting to undertake economic reforms for years, but the distraction of the aid provided by Chavez's Venezuela and the internal doubts about the model of economic openness delayed firm decisions. The Venezuelan collapse, first, and especially the pandemic, later, have brought the Cuban Economics to a breaking point that is forcing it to take measures, because the island's population is beginning to show some concern. framework Raul Castro's departure from the scene constitutes an opportunity for change, but the uncertainties of the future can stiffen any transition, no matter how modest it may be.

article / María Victoria Andarcia

After a particularly complicated 2020, Cuba took significant steps in the first months of 2021. In February, the government announced a massive expansion of permits for private initiative in different economic sectors. The Minister of work, Marta Elena Feito, announced that the list of sectors in which private enterprise would be authorised to operate would grow from 127 to more than 2,000 and that the state would reserve exclusivity in only 124 areas, which she did not detail. 

With the development of "cuestapropismo", approximately 600,000 workers were employed in private activities in Cuba, 13% of the labour force. The vast majority of these initiatives are linked to the tourism industry, which has been affected by Donald Trump's tightening of sanctions and especially by the Covid-19 pandemic, which practically wiped out tourism in the Caribbean. According to ECLAC, at the height of the pandemic, 250,000 self-employed workers had suspended their licence from work. This unemployment is preventing the self-employed sector from being able to take on the public sector workers that the state wants to shed in order to slim down loss-making activities.

The Cuban Ministry of Economics puts the economic decline suffered by the island in 2020 at 11% of GDP, the worst since the dissolution of the Soviet Union, which left Cuba without the support of its economic breadwinner and led to the time of extreme hardship known as the "special period". Already in 2019 there was hardly any growth. In 2020 there was a 30 per cent reduction in imports, which has exacerbated the growing shortages of basic commodities and price inflation on the island, also driven by the exchange rate readjustment.

Monetary reform

1 January 2021 was "day zero" of the monetary and exchange rate reform, 62 years after the triumph of the revolution led by Fidel Castro. This is the most complex economic reform undertaken by the country in the last three decades, after years of waiting. Since the "special period", two currencies had been in circulation in Cuba: the Cuban peso (CUP) and the convertible (CUC), equivalent to the dollar, which has been eliminated with the merger of the two currencies. The currencies were exchanged at different rates: for state enterprises, one dollar or CUC was equivalent to one Cuban peso, while for the population, the exchange rate was 24 pesos to the dollar. Unification has been accompanied by the fixing of a single exchange rate of 24 Cuban pesos to the dollar, the first official devaluation of the peso since 1959.

Rising inflation has affected the price of many products and services. While there has been an increase in salaries in the state sector, the price of electricity has increased threefold, water sixfold and bread and flour twentyfold.

The disappearance of the CUC has been compensated for by the opening of shops where one can buy with "freely convertible currencies", thus protecting the free circulation of the dollar and implying, at final, a covert dollarisation (in addition, a black market in foreign currency continues to operate, where the dollar is worth almost double the official exchange rate). These are establishments for tourists, but where the nomenclature can also buy products that are not available to the rest of the population. This has even contributed to internal criticism of a status of inequality, as Raúl Castro himself acknowledged in April in his speech to the 8th Communist Party . speech before the VIII congress of the Communist Party of Cuba (PCC).

Rising prices and growing inequality are contributing to a social malaise that is giving rise to increasingly timid public complaints. This is occurring in a context of isolated protests, such as that of the artists' guild, which speak of a growing unease that economic reforms should satisfy in the medium term deadline but which, if applied without decision or if they are not effective, could lead to a frustration of expectations.

In fact, the government's conviction in promoting economic reforms has so far been rather weak. In 2011, at the PCC's VI congress , in which Raúl Castro consolidated his leadership after succeeding his brother in 2008, a path of economic reforms was approved but only partially implemented. The aid provided by Chávez's Venezuela during the boom years led to the postponement of the most urgent measures, in what in reality amounted to a lost decade.

The island's Economics is highly dependent on foreign trade, although it is not a market Economics . The goods it exports are limited to its natural resources and traditional products with little processing: nickel, zinc, sugar, tobacco and rum. Services are the main item of Cuban exports, especially health services sent to Venezuela and other countries of similar ideological orientation. The need to import raw materials, oil and foodstuffs conditions the growth of the island's Economics . The USSR was a lifeline, above all because of its contributions of oil, as later happened with Venezuela, whose crude oil Cuba refined and exported as a gift, thus improving the flow of foreign currency.

Relations with the United States

The Venezuelan collapse was followed by increased pressure from the Trump administration. Although the US has maintained an embargo on the island since 1962, Barack Obama sought a mutual rapprochement that led in 2015 to the re-establishment of diplomatic relations. The embargo remained in place, as its lifting depends on congress, but Obama encouraged its relaxation through presidential decrees that increased contacts between the two countries, with the resumption of commercial flights, the authorisation of greater purchases on visits to the island and the promotion of tourism. source In addition, it allowed family travel to Cuba and facilitated remittances, which constitute an important source of foreign currency for Cuba, after income from professional services abroad and tourism. Thus, remittances increased by 143% between 2008 and 2017 (from USD 1.447 billion to USD 3.515 billion). 

Trump maintained diplomatic recognition (although neither Obama nor he appointed an ambassador) and the sending of remittances, but reversed most of the decrees approved by Obama and also applied several rounds of sanctions. These included, among others, the suspension of visas for Cubans and the expansion of the list of Cuban companies run by the Armed Forces with which Americans cannot interact (even as tourists). 

With the arrival of Joe Biden in the White House, it was hoped that relations between the historic enemies would improve again, but months later there are still no signs of change and Obama's former vice-president has not returned to Obama's strategy towards Cuba, but maintains the sanctions pressure of his immediate predecessor.

China and Russia

If in relations with the Obama Administration, Raúl Castro was looking for a new sponsor to somehow replace Venezuela, as Venezuela had replaced the USSR (in fact, secret negotiations with Obama began when the death of Hugo Chávez opened up uncertainties about Venezuela's future), Washington's slamming of the door may lead to greater rapprochement with Russia or China. Such rapprochement has been taking place in recent years, but for the moment there is no definite dependence on Moscow or Beijing.

If Russia's return to the Caribbean can be circumscribed to the availability military access (in Nicaragua, Cuba and Venezuela), in the case of China, there is a clear commercial stake. China has become the island's second most important commercial partner partner. Several Chinese companies such as Huawei and Haier have helped the Cuban telecommunications system development . Beijing recognises Cuba's strategic importance, given its geographic proximity to the United States, and can leverage this relationship to challenge its American enemy.

Both the deepening of this link and a firm step forward in economic reforms, perhaps imitating Vietnam in opening up the market without abandoning communism (Vietnamese communism, however, is a model with ballast), will depend on the new generation of leaders. Raúl Castro, more inclined to reform than his brother Fidel, did not push the process forward decisively because the boom in commodity prices, from which Cuba benefited very directly through Venezuelan oil, relativised its urgency. This is now being considered, but the new Cuban president, Miguel Díaz-Canel, to whom Raúl Castro also passed his last position in April as first secretary of the PCC, does not have the internal authority or the ascendancy over the army, which controls a large part of the Economics, that the Castros enjoyed.

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