Cuba is a lot poorer than the government reports, a new study shows
Nora Gámez Torres, El Nuevo Herald
Cubans suffered near-famine and almost daily power blackouts, and tens of thousands took to the sea aboard homemade boats during the economic crisis in the 1990s known as the “Special Period.”
The government eventually acknowledged that after losing all Soviet subsidies and trade with the former socialist bloc, its Gross Domestic Product (GDP) dropped by 35 percent during the crisis.
Cubans who have long suspected that the crisis was actually much worse than the government admitted appear to have been right.
A new study by the Inter-American Development Bank (IADB) shows that Cuba's GDP, in fact, dropped by “more than 50 percent” during those years, and that the impact of the crisis is still being felt.
“The Cuban GDP stands at 23 percent below the pre-crisis level of 1989 and 35 percent below the 1985 level,” says the study conducted by a team directed by Pavel Vidal, a Cuban economist teaching at Javeriana University in Colombia.
The study also shows that Cuba is much poorer than its government's data would indicate, because it overestimates the value of the Cuban peso by artificially making it equal to one U.S. dollar.
The government issues two currencies – the Cuban peso and the Cuban Convertible Peso (known as CUC) – and uses different rates of exchange depending on the type of economic activity. One dollar could be roughly counted as one peso or 24 pesos, depending on the sector.
Vidal created a formula that tries to calculate an average exchange rate based on the size in the GDP of each sector of the island's economy that handles CUCs or pesos.
The study estimated per capita GDP for 2014, the last year calculated, at “$3,016, much lower than the $7,177 that could be derived directly from the Cuban national accounts using the official exchange rate.”
The official figure brought Cuba close to the GDP of Colombia that year, while Vidal's estimate places Cuba with a GDP similar to Bolivia, El Salvador and Guatemala.
“I have been studying the Cuban economy for more than 55 years, and there's no study more important than this one,” said Carmelo Mesa Lago, emeritus economics professor at the University of Pittsburgh. “We economists had reached the same conclusions, but the difference is that he proved it.”
“When you have multiple exchange rates, and the difference between the strongest and weakest rates is very large, as it is in the cases of Cuba and Venezuela, the distortion of relative prices is phenomenal and that makes it very difficult to correctly measure economic realities,” said Augusto de la Torre, a former World Bank chief economist for Latin America and the Caribbean who teaches at Columbia University in New York.
“In this context, the work that Pavel Vidal does is heroic and super useful. He uses available indicators to try to reconstruct what could be a key series of macroeconomic variables,” de la Torre added.
Economists have long debated the credibility of statistics issued by the Cuban government and then published by international entities like the World Bank and the International Monetary Fund.
“The bias in estimates of the Cuban GDP in dollars is not just by the Cuban government,” said Vidal, “but by multiple institutions that have tried to look at the issue and run into the difficulty of arriving at a correct number because of the dual currencies and the absence of comparative statistics about prices.”
Cuba is not a member of the World Bank, and therefore the data published by the government is not independently confirmed by the international entity. If Cuba ever joins one of the international financial institutions, it could receive technical assistance to produce more reliable data, de la Torre said.
Vidal's new GDP estimates may not influence possible foreign investors, more interested in the future of the business climate in Cuba than the past. But they could certainly lead to changes in Cuba's standing in international rankings like the United Nations' Human Development Index, which measures a country's standing in terms of health, education and living standards.
“The Human Development Index has been systematically overestimating the per capita Gross Domestic Product of Cuba. If they pay attention to this study, Cuba will drop by a lot in the Index,” said Mesa Lago.
High emigration and low investments and productivity are holding back economic growth.
Other sections of the Vidal study show that low productivity is one of the factors holding back the Cuban economy.
Using his formula to reconsider relative national prices and the rate of purchasing power parity (PPP), Vidal re-calculated Cuba's annual GDP from 1970 until 2014. Then he compared those numbers with the data from 10 countries with similar populations: Bolivia, Costa Rica, Ecuador, Guatemala, Honduras, Jamaica, Panama, Paraguay, Uruguay and the Dominican Republic.
He concluded that Cuba had lost ground to those countries during those years.
“In 1970, the Cuban GDP in PPP dollars was 5.3 times higher than the average of the region's economies of similar size, and in 2011 it was only 1.5 times higher,” Vidal told el Nuevo Herald. “As Cuba fell back, other economies grew and rose up the ranks like Ecuador, Dominican Republic, Panama and Costa Rica.”
The lack of investments largely explains the drop in Cuba's revenues. Cuba has one of Latin America's lowest investment rates, an average of 12.7 percent of its GDP over the past 20 years.
But other factors like high emigration and low birth rates also had a grave impact on the economy. Government figures show nearly 660,000 Cubans emigrated from 1995 to 2017. More than 56,000 came to the United States in 2017 alone – most of them of working age.
“The calculations reflect the macroeconomic costs of emigration, the low birth rate and the aging of the population, which adds another disadvantage when compared to other economies in the region,” Vidal said. “While the economies of similar size in the region grew by 3.8 percent [per year] in the last two decades, Cuba did it at 1.7 percent. Demographic factors account for 25 per cent of that difference.”
Chief IADB economist Juan José Ruiz said Vidal's study also showed that despite Cuba's economic peculiarities, the island confronts problems similar to those faced by others in the region.
“There is something in Latin America's cycle of volatility, investment, assignment of resources and the workings of labor markets that explains why productivity grows very little even when the political economy systems are so different,” Ruiz said.
In the case of Cuba, “the advances produced by the Cuban revolution in terms of social progress have marched in parallel with a great loss of economic efficiency,” the Vidal study concluded.
And the economic reforms launched by Raúl Castro have not managed to turn things around.
Although productivity has been recovering from the “very sharp depression” of the Special Period in the 1990s, the speed of the recovery has “slowed down” since Castro replaced brother Fidel in 2006.
Vidal suggested a number of measures to free the economy and promote growth, among them a broader opening to foreign capital, more freedom for the private sector and the elimination of the two-currency system. All those steps were mentioned to one degree or another in Castro's original proposals to improve the economy.
“Cuba is not condemned to grow by 1.5 percent. Cuba can grow by 3 to 4 percent if it makes better use of its resources and has a system that can attract more investments, and opens itself more to the world,” said Ruiz. “That's the positive message of this study.”
Several economists consulted by el Nuevo Herald agreed that the calculations by Vidal and his team are estimates that will surely be debated among economists, and cannot take the place of rigorous statistics provided by the government.
Vidal's work “is very useful in the absence of more traditional and reliable statistics, but its results must be taken with a grain of salt because it is an estimation based on partial or incomplete information,” said de la Torre.
“Until Cuba has a system of national accounts like those used in the United Nations, it will always be difficult to compare Cuba with other countries,” he said.
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