Amid all the talk of where Raul Castro might take Cuba, the state of the island’s economy after nearly 50 years of communism is one point on which almost everyone seems to agree: Fidel is passing his brother a leaking vessel. “A failing economy”, says the BBC; “plagued by a serious economic crisis”, according to Der Spiegel. “Stagnant” and “crippled” are other adjectives of choice.
Certainly the Cuban economy did fail. The end of the Soviet Union caused it to shrink by at least 35%, on conservative estimates, and initiated the “special period”, marked by energy shortages, intensified food rationing, the introduction of some market reforms – and the island responding to fertilizer shortages by becoming a top location for organic agriculture.
But now the special period is over, and according to Cuba’s official growth figures, the economy is in anything but a state of decline. The country’s National Statistical Office published rapid recovery growth rates of 11.8% for 2005 and 12.5% in 2006. In 2007 that rate slowed to a mere 7.5% – down from the expected 10%, with adverse weather conditions, oil and food price hikes and global financial instability, according to minister of economy and planning Jose Luis Rodriguez – but it was still among the region’s top five.
Could Cuba be the Caribbean’s economic tiger?
Lies and statistics
For analysts linked to the emigre community, perhaps the simplest response to the challenge of the Cuban numbers is plain disbelief.
“First of all, Cuba uses an accounting methodology that follows the old Soviet conception of Gross Social Product, and that includes a lot of double counting,” says Jose Azel, senior research associate at the University of Miami’s Institute for Cuban and Cuban-American Studies (ICCAS). “And then there is the question of mendacity. We just don’t really believe a lot of the figures. They report 10% GDP growth in the last quarter, but we can’t see anything in the economy that explains where that growth would come from.”
The case against Cuba’s official growth figures is set out most thoroughly by Carmelo Mesa-Lago, emeritus professor of economics at the University of Pittsburgh and a prolific writer on Cuban economics. According to Mesa-Lago, the “economic miracle” of the last three years is actually the result of two statistical manipulations.
Manipulation number one: the figures from 1985-2000 use 1981 as a base year for estimating GDP at constant prices. From 2001 on, the base year switched to 1997. This meant an average increase of 56.5% in reported GDP for the years in which figures were given on both bases (1989-2000). For example, in 2000 total GDP calculated in 1981 prices was Ps16.6 billion. In 1997 prices it was Ps26.5 billion – 60% higher. Mesa-Lago says this difference cannot be explained just as a refactoring for accumulated inflation between the old and new base years.
Manipulation number two: in 2003 Cuba moved away from the UN methodology for calculating GDP to its own new methodology. The new Cuban system adds in the value of free social services and price subsidies on rationed goods. According to Mesa-Lago, the additions in fact double count the value of these state-provided goods. “The two mentioned overvaluations make Cuba’s GDP new series virtually worthless,” says Mesa-Lago.
The economist attempts to undo these effects in his paper The Cuban economy in 2006-7, published in the proceedings of the Association for the Study of the Cuban Economy (ASCE). First, as he puts it, he subtracts the 56.5% difference in GDP between the two series from the published growth rate. He then makes a further subtraction to account for the double-counting he identifies. His two subtractions cut 2006’s giddy 12.5% growth down to 4.4% – lower than the regional average of 5.3% estimated by the Economic Commission for Latin America and the Caribbean (Eclac).
However, even without getting deep into the methodology underlying Mesa-Lago’s procedures, he admits that his extrapolation is rather a shot in the dark. He notes that the UN’s regional Eclac body has suspended its publication of Cuban growth figures, saying that the Cuban methodology is “under assessment”.
“If Eclac can’t estimate the figures, no one can,” he says. “My 4.4% is really just speculation. The basic fact is that it is not possible to compare Cuban GDP with the rest of the world. I don’t doubt that there has been growth in recent years. The issue is how much – and we really don’t know.”
This claim of incomparability is strongly denied by the Cuban authorities. “Cuban GDP can be perfectly compared to that of any other in the world,” said economy minister Rodriguez in a statement on the 2006 results in Cuba’s state newspaper Granma, “based on the fact that value has been assigned to the basic social services of health and education, so that it can be accurately measured and compared to those capitalist economies in which those services are sold as merchandize.”
And in fact the Cuban economy ministry did itself publish a second growth figure for 2006 – of 9.5% – excluding social services and trade.
Other analysts agree that growth has been considerable. For example, Stuart Culverhouse, chief economist at Exotix, a London-based specialist broker which trades Cuban distressed debt, says that he takes the Cuban figures to be reasonably reliable. “It is possible there is some overstating in the new methodology for accounting for services,” he says, “but the principle of accounting for services which may in some cases better be thought of as bartered services rather than paid for with cash is not wrong in itself. In any case, whatever the exact numbers, there has certainly been strong growth since 2004.”
That view also seems to be shared by an organization that you wouldn’t necessarily expect to see eye to eye with Havana – the CIA, according to its World factbook, puts the island’s growth at 7% in 2007. That would make Cuba the fifth fastest-growing Latin economy – behind Argentina, Venezuela, Panama and Peru.
From where?
Supposing we accept the idea of “strong growth” in the Cuban economy, the question is, where did it spring from?
Agriculture is certainly not the place to look. The Cubans themselves talk of “unsatisfactory results”. The national daily Granma reported on the 2006 results that “Cuba is still highly dependent on food imports, given that in the last two years imports in that sector have increased to 35%.”
“Agriculture is certainly the biggest weak spot in the Cuban economy,” says former US diplomat Wayne Smith, director of the Cuba programme at the Center for International Policy, a Washington think tank which opposes the embargo. “That is usually the case with Socialist economies, which have historically suffered their biggest problems trying to get farmers to work for wages.”
It is a long while since Cuba relied on the sugar crop – and although recent high sugar prices haven’t hurt, production is still a shadow of what it was (1.4 million tons in 2006 compared to 4 million tons in 2000).
Tourism has been a major driver over the last two decades – gross tourism revenue back in 1989 was just $168 million; in 2000 that figure was $1.95 billion, with 1.8 million visitors as against 270,000. After a dip in 2001 and 2002, it climbed to $2.32 billion in 2005. But this was the peak year – the last two years’ revenues have levelled off to just over $2.2 billion.
As tourism has steadied, a big boost has come from global metals prices – particularly nickel, which has been Cuba’s biggest value export good since 2000. Nickel output has in fact declined slightly, say Mesa-Lago and other analysts, but soaring world prices have more than compensated. This is another area where figures are not too clear, though analysts say nickel revenue may now rival tourism.
But, say analysts, movements in all these sectors pale in comparison with the big new driver of export revenues. “The figures I tend to follow most closely are exports,” says Culverhouse, “and the figures there tend to be the clearest. If we look back to 2002/2003, export revenues were around $4 billion per year. Now they are above $10 billion. But exports of goods are maybe only a third of the total, and even with the rise in nickel revenues they have remained relatively stable. The dramatic growth has been in exports of services.”
V for Venezuela
If estimating Cuban growth figures means venturing into the realm of speculation, there is one area where the crystal balls are really powering into overdrive. That is the contribution made by Cuba’s Oil for Professionals deal with Venezuela.
Early trade agreements signed by the Chavez government and Cuba provided the island with oil at below-market cost, in return for which Cuba sends perhaps 30,000 Cuban doctors and other professional staff to work in Venezuela’s misiones – social projects providing free healthcare and education.
“To my mind, the role of Venezuela as benefactor is critical,” says Mauro Leos, senior sovereign analyst at rating agency Moody’s. (Moody’s is the only rating agency to rate Cuban debt, having initiated coverage in 1998). “Cuba has substantial dependence on imported oil. With world oil prices where they are now, the withdrawal of that link could break the back of the economy.”
Venezuela sends around 100,000 barrels a day, at $27 per barrel. In 2006 when the oil price averaged $64, the deal saved Cuba $1.4 billion, calculates Mesa-Lago. He further adds that, since 2005, Venezuela has directly paid the salaries of the Cuban staff.
“We don’t know how many Cubans are working in Venezuela,” he says, “or how much they are paid. But to my mind there is nothing else that can explain the jump in export service revenues since 2005. Venezuela is both subsidizing the price of its oil, and then paying the salaries as well. Added together, the subsidy is more generous than anything Cuba got from the USSR.”
According to Venezuelan president Hugo Chavez, speaking on his Alo, Presidente programme on September 30, 2007, the lives saved by Cuban doctors more than outweigh that “subsidy”. “It has no price,” he argued. “What is worth more, the barrels of oil we sell to Cuba or this?”
No island is an island
Subsidy or fair recompense, there is no doubting the importance of Venezuela’s friendship. Chalk this up with all the other reasons the US has to grind its teeth at Hugo Chavez. But unfortunately for those who like to keep their villains in one basket, Cuba’s circle of friends is growing.
There is China, of course, with 14.9% of Cuba’s trade in 2006 (against 35.4% for Venezuela). Though China has not always lived up to its promises – a $500 million investment in the Las Camariocas nickel plant agreed in 2004 did not come to fruition (Venezuela stepped in instead).
EU countries and Canada have been other major trade partners – and figures on trade volumes almost certainly understate their role. Data on Foreign Direct Investment as of June last year show 73 joint ventures with Spanish companies (Melia hotels is the best-known example), followed by 38 from Canada (typically mining companies) and 29 Italian. There are no statistics on the value of these investments.
Meanwhile, according to data collated by the University of Miami’s Cuba Transition Project (CTP), European banks provided the bulk of $2.36 billion in foreign private capital invested in Cuba as of March 2007. “Today, quietly and behind the scenes, more hard currency flows in and out of Cuba via European financial capitals than through Beijing or Caracas,” reveals the CTP.
Much of that finance is likely to be in the form of short-term bank loans, and rates are unlikely to be anything you might consider a subsidy, as according to Exotix estimates, Cuba has stacked up $14 billion external debt beginning with a 1986 moratorium.
Culverhouse notes: “There is increasing interest in that old debt, and also some trading in more recent loans and trade finance paper, as people follow the headlines and look for change on the cards. With US investors unable to buy, the main customers are likely to be European funds and specialist investors.”
But the fastest growing source of friends for Cuba has been its Latin American neighbours. Brazil’s President Lula was in Havana in January to sign oil exploration and trade accords that come with loan offers of up to $1 billion. February saw rapprochement with Mexico, as the republic agreed to restructure $400 million of its debt.
And the blockade?
Notwithstanding doubts about government statistics, $89 billion is the most recent figure put by Cuba on the cost of the blockade to date (as of September 2007). “The truth is, at least in private, the Cubans now see the blockade as not much more than an inconvenience,” says Wayne Smith. “The embargo doesn’t stop Cuba trading. If anything, it just gives the government someone to pin the blame on when they don’t meet targets.”
Walter Molano, chief economist at emerging markets specialist investment bank BCP Securities in Connecticut, takes a different view. “Cuba has enormous economic potential,” he says. “It has an excellent education level, a highly skilled workforce, and decent infrastructure. All this could lead to a serious growth spurt if Cuba was free to trade with the huge economy that’s sitting on its doorstep.”
While he acknowledges the central relationship with Venezuela and recent successes in re-engaging with the world economy, for Molano the choices the US makes now hold the key to Cuba’s economic future.
“The embargo really does matter,” he says. “For example, when a Canadian firm makes a decision to do business in Cuba, it knows that is a choice of Cuba over the US. The power of action to unlock the potential of the economy really doesn’t lie with the Cuban system – but with us in the US.”