Economy of Republic of Cuba: Assessment of Economy and its Challenges in medium term

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Anirudh Kannan | UCD Michael Smurfit Graduate Business School| October 22, 2015

Economy of Republic of CubaASSESSMENT OF ECONOMY AND ITS CHALLENGES IN MEDIUM TERM


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Executive SummaryIndividual Assignment for Business & Financial Environment [41300], requires the assessment of the current

state of a chosen economy or global economy in terms of key economic and social indicators (35%). The 5

biggest issues/challenges which are believed to be facing that economy in the medium-term have been

outlined (35%). Explanation of how these challenges could be addressed by policy makers (30%). Suitablegraphical analysis and references are included wherever applicable.

IntroductionCuba, officially known as the Republic of Cuba, is a country in theCaribbean comprising the main island of

Cuba, theIsla de la Juventud and severalarchipelagos.Cuba remained a colony of Spain until theSpanish

American War of 1898, after which it gainednominal independence as a de facto U.S. protectorate in 1902.

The Republic of Cuba endured increasingly radical politics and social strife and came under the dictatorship

ofFulgencio Batista in 1952. Growing unrest and instability led toBatista's ousting in January 1959,which

afterwards established a communist government under the leadership ofFidel Castro.Since 1965 the

country has been governed by theCommunist Party of Cuba till now.

Cuba's economy has aplanned economy,a planned economy is aneconomic system in which decisions

regarding production and investment are embodied in a plan formulated by a central authority, usually by a

public body such as a government agency. Cuban economy is dominated by state-run enterprises which

means that the Cuban government oversees, though there remains significant foreign investment and

personal enterprise in Cuba. Most of themeans of production are owned and run by the government, and

most of the labor force is employed by the state, although in recent years, the Communist Party has

encouraged the formation ofcooperatives and self-employment. Capital investment is restricted and

requires approval by the government. The Cuban government sets most prices and rations goods to

citizens. Cuba has a dual currency system, whereby most wages and prices are set in Cuban pesos (CUP),

while the tourist economy operates withConvertible pesos (CUC), set at par with theUS dollar.

Before Fidel Castro's 1959 revolution, Cuba had an extremely unequal economy, with large capital outflows

to foreign investors but the country's economy had grown rapidly in the early part of the century, fueled by

the sale of sugar to the United States. On Oct. 19, 1960, President Eisenhower signed a partial embargo on

exports to Cuba, the first step towards the US policy that exists even today. It embargo was put because

CubanationalizedAmerican-owned Cuban oil refineries without compensation. Cuba nationalized the

refineries following Eisenhower's decision to cancel 700,000 tons of sugar imports from Cuba to the U.S.

The U.S only exports food and medicines to Cuba since then. The country has made significant progress

towards a more even distribution of income since the Revolutionand being placed under economic

embargo by the United States. Following the collapse of the Soviet Union, Cuba's GDP declined by 33%between 1990 and 1993, partially due to loss ofSoviet subsidies and to a crash in sugar prices in the early

1990s, yet Cuba has managed to retain high levels of healthcare and education.
https://en.wikipedia.org/wiki/Caribbeanhttps://en.wikipedia.org/wiki/Isla_de_la_Juventudhttps://en.wikipedia.org/wiki/Archipelagoshttps://en.wikipedia.org/wiki/Spanish%E2%80%93American_Warhttps://en.wikipedia.org/wiki/Spanish%E2%80%93American_Warhttps://en.wikipedia.org/wiki/Spanish%E2%80%93American_Warhttps://en.wikipedia.org/wiki/Platt_Amendmenthttps://en.wikipedia.org/wiki/Fulgencio_Batistahttps://en.wikipedia.org/wiki/Cuban_revolutionhttps://en.wikipedia.org/wiki/Fidel_Castrohttps://en.wikipedia.org/wiki/Communist_Party_of_Cubahttps://en.wikipedia.org/wiki/Cubahttps://en.wikipedia.org/wiki/Planned_economyhttps://en.wikipedia.org/wiki/Economic_systemhttps://en.wikipedia.org/wiki/Means_of_productionhttps://en.wikipedia.org/wiki/Worker_Cooperativehttps://en.wikipedia.org/wiki/Convertible_pesohttps://en.wikipedia.org/wiki/US_dollarhttps://en.wikipedia.org/wiki/Nationalizationhttps://en.wikipedia.org/wiki/United_States_embargo_against_Cubahttps://en.wikipedia.org/wiki/United_States_embargo_against_Cubahttps://en.wikipedia.org/wiki/Nationalizationhttps://en.wikipedia.org/wiki/US_dollarhttps://en.wikipedia.org/wiki/Convertible_pesohttps://en.wikipedia.org/wiki/Worker_Cooperativehttps://en.wikipedia.org/wiki/Means_of_productionhttps://en.wikipedia.org/wiki/Economic_systemhttps://en.wikipedia.org/wiki/Planned_economyhttps://en.wikipedia.org/wiki/Cubahttps://en.wikipedia.org/wiki/Communist_Party_of_Cubahttps://en.wikipedia.org/wiki/Fidel_Castrohttps://en.wikipedia.org/wiki/Cuban_revolutionhttps://en.wikipedia.org/wiki/Fulgencio_Batistahttps://en.wikipedia.org/wiki/Platt_Amendmenthttps://en.wikipedia.org/wiki/Spanish%E2%80%93American_Warhttps://en.wikipedia.org/wiki/Spanish%E2%80%93American_Warhttps://en.wikipedia.org/wiki/Archipelagoshttps://en.wikipedia.org/wiki/Isla_de_la_Juventudhttps://en.wikipedia.org/wiki/Caribbean


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Assessment of Current StateCubas economic freedom score is 28.7, making its economy one of the worlds least free. Its overall score is

0.2 point higher than last year, with deteriorations in trade freedom, fiscal freedom, monetary freedom, and

freedom from corruption counterbalanced by an improvement in business freedom. Cubas stagnant

economy can be assessed in terms of some key economic and social indicators. The economic indicatorswhich have been studied for this assignment include GDP, GDP per Capita, GDP growth rate, GNP/GNI,

Population, Inflation, Exports, Imports, Exchange Rate and the Social Indicators include Mortality Rate,

Fertility Rate, Life Expectancy at Birth, Employment and Literacy.

According to Economic and Social Balance of 50 Years of Cuban Revolutionby Mesa-Lago, Cubas

performance has been overwhelmingly negative with regard to the economic indicators. Cubas position fell

within the region for 87% of those indicators and for the rest of the 13% it remained the same, meanwhile

Cuba's social indicators showed a more positive development.

GDP

GDP per Capita


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GNI (GNP)

GDP Growth Rate


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Imports & Exports

Inflation: GDP Deflator


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In 2014, the GDP of The Republic of Cuba was $128.5 billion which ranked 76 in the world but the actual

GDP Growth Rate was merely 1.3% which ranked 177 in world. Public Debt grew from 37.5% of GDP in

2013 to 40.6% of GDP in 2014. The service sector makes up 81.9% of GDP, the industrial sector 14.3% and

the agricultural sector 3.8%. The key agricultural products include sugar, tobacco, citrus, coffee, rice,

potatoes and beans and the Major Industries include petroleum, nickel, cobalt, pharmaceuticals, tobacco,

construction, steel, cement, agricultural machinery, sugar.

Major exports include petroleum, nickel, medical products, sugar, tobacco, fish, citrus, coffee and major

imports include petroleum, food, machinery and equipment, chemicals.

UN places Cuba among the countries with the highest human development in the world, that infant

mortality on the island (4.2 for every thousand live births) is the lowest in the continent (lower than that

of the United States and Canada), and that it has one of the highest life expectancies (79 years).

Some of the key social Indicators are as follows.


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Mortality Rate: Adult (male), Adult (female) & infant

Fertility Rate:

Population, Total.


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Life Expectancy at Birth (Male, Female & Total)


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Unemployment with primary, secondary & tertiary Education (% of total unemployment)

Literacy Rate, Adult


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Five Challenges faced by Economy in Medium TermFidel Castro was the face of the revolution. But now he leaves behind a difficult legacy. Despite its

successes in education, Cuba is plagued by a serious economic crisis. Some of the key challenges

faced by the economy in Medium Term are as follows.

1). Effect of US Trade Embargo

Cuban government estimates that the embargo costs the island itself $685 million annually. Theembargo

harms the people of Cuba, not the government as intended. Cubans are denied access to technology,

medicine, affordable food, and other goods that could be available to them if the United States lifted the

embargo. A report by the American Association for World Health found that doctors in Cuba have access to

less than 50% of the drugs on the world market, and that food shortages led to a 33% drop in caloric intake

between 1989 and 1993.

2) Too much Dependency on Venezuela

In colonial times, Cuba was slave to Spain, then to the US and, after the revolution, to the Soviet Union.

Now it is dependent on Venezuela and its President Hugo Chavez -- but that's only discussed behind closeddoors in Cuba. A legacy of the Commandante, from which the country is already suffering.

"Economic growth in recent years has reached almost 40 percent. But most of this is generated by services

abroad -- mainly in Venezuela," says social scientist Omar Everleny. At the moment, roughly 30,000 Cuban

experts -- from doctors to engineers -- are in Venezuela. Their work is being well rewarded and according to

experts at the CEEC, their pay constitutes Cuba's most significant source of revenue.

3) Low Standard of Living

Even though Cuba ranks quite well in World HDI rankings, the standard of living is quite poor in Cuba and

there are always shortages of even the most everyday items.

The primary problem, though, is that in Cuba things may be tightly controlled but little is produced. Fidel

Castro has not succeeded in transforming his unquestionable success in educational policy into economicdynamism.

4) No Economic Freedom

Cubas economic freedom score is 28.7, making its economy one of the worlds least free. Its overall score is

0.2 point higher than last year, with deteriorations in trade freedom, fiscal freedom, monetary freedom, and

freedom from corruption counterbalanced by an improvement in business freedom. Cuba is ranked least

free of 29 countries in the South and Central America/Caribbean region, and its overall score is significantly

lower than the regional average. Over the 20-year history of the Index, Cubas economic freedom has been

stagnant near the bottom of the repressed category. Its overall score improvement has been less than 1

point over the past two decades, with score gains in fiscal freedom and freedom from corruption offset by

double-digit declines in business freedom and investment freedom. Despite some progress in restructuring

the state sector since 2010, the private sector remains constrained by heavy regulations and tight state

controls. Open-market policies are not in place to spur growth in trade and investment, and the lack of

competition continues to stifle dynamic economic expansion. A watered-down reform package endorsed by

the Cuban Communist Party has trimmed the number of state workers and expanded the list of approved

professions, but many details of the reform remain obscure.


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5) Poverty

Top of the list comes low wages and high prices. Salaries typically range from 400 (non-convertible) Cuban

pesos a month for a factory worker to some 700 for a doctor. But that amounts to only 16-28 CUCs ($17-30)

at the unofficial (but legal) exchange rate. Pesos are good mainly for buying the subsidised official rations,

handed out through the CDRs. Each month these comprise 5lbs (2 kilos) of rice per person, half a litre of

cooking oil and, when available, beans, sugar, sardines, pork, chicken, soap and toothpaste. This lasts only a

week or so. Other things can be bought nowadays in Cubabut at a price.

To make ends meet, Cubans are forced to rely on a vast informal economy. It is greased by remittances from

abroad, which are estimated at between $500m and $1 billion a year. Everyone has their business on the

side, says a transport inspector in Aguada de Pasajeros, a dusty farming town of small one-storey houses

that would not look out of place in the poorer countries of Central America.

[http://www.economist.com/node/10727899]

Confrontation of these Challenges by Policy-Makers.The primary challenge which the policy-makers i.e. the communist government should try to overcome is

the blockade or The Trade Embargo. It would bring about important positive changes, especially in Cuba's

foreign economic relations. Lifting the blockade is important, and it would bring positive things to the

island. It will also create big challenges for Cuba. In a post-blockade scenario, Cuba's biggest challenge will

be to maintain both national and economic sovereignty. Cuba would need to move forward in its level of

productivity and efficiency, in order to guarantee international competitiveness. This way, they might attain

a less asymmetrical relationship with a world power such as the U.S.

The Cuban economy is still recovering from a decline ingross domestic product of at least 35% between

1989 and 1993 due to dependence on Soviet Union. The breakdown of USSR led to Special period in Cuba.

Now, Venezuela is the new Soviet Union for Cuba which is not good. Cuban leaders and policy makers

should realise that so much dependency on Venezuela can be a threat to its own economy.

The Policy Makers should push the standard of living up the vertical scale. This can be done by taking

measures to increase the wages and bringing the cost of living down.

Looking ahead, now is the time for the Cuban government to accelerate reforms. Among possible short-

and long-term policy priorities.

More aggressively reform domestic price mechanisms to increase agricultural production and alleviate

some pressures on the balance of payments;

Further expand the domestic private sector, especially regarding professional services, to allow middle

class Cubans to work for themselves as architects, lawyers and private consultants and open space for

more creative innovation and youthful employment;

Offer a more welcoming hand to foreign investment which willopen access to new technologies and

markets;and

Gradually engage with the international financial institutions.
https://en.wikipedia.org/wiki/Gross_domestic_producthttp://www.brookings.edu/research/papers/2012/12/cuba-economy-feinberghttp://www.brookings.edu/research/papers/2012/12/cuba-economy-feinberghttp://www.brookings.edu/research/papers/2012/12/cuba-economy-feinberghttp://www.brookings.edu/research/papers/2012/12/cuba-economy-feinberghttps://en.wikipedia.org/wiki/Gross_domestic_product


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Liberalization and privatization of businesses, enterprises, agencies, public services or public properties

from the public sector to the private sector will be also a great measure if taken by the government which

will actually bring economic freedom to Cuba. The current private sector should be deregulated and open-

market policies should be brought in. These few reforms can actually boost Cubas GDP and GDP growth

rate.


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Economy of Republic of Cuba: Assessment of Economy and its Challenges in medium term

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