How does the Cuban economy compare with other Latin American economies?
Mario Gonzalez-Corzo*, Cuba Insight, a publication of The Cuban Studies Institute
After more than three decades of gradual economic reforms, Cuba’s heavily-centralized economy remains embattled by insufficient output levels, declining levels of capital accumulation and factor productivity, the lack of global competiveness, high levels of external sector dependency (particularly agricultural and food imports), demographic pressures (e.g., a declining and aging population), the poor state of its physical and technological infrastructure, repressed inflation, the distortions caused by monetary dualism, and notable declines in the (real) purchasing power of its population since the early 1990s.
To analyze the relative decline of Cuba’s economic importance since the 1970s, the Inter-American Development Bank (IADB) recently published a research paper by Cuban-born economist, Pavel Vidal Alejandro comparing the Cuban economy with 10 selected Latin American (AL-10) economies during the 1970-2014 period.
The paper uses three important macroeconomic indicators to compare the Cuban economy with the AL-10 economies: (1) gross domestic product (GDP), (2) GDP per capita, and (3) total factor productivity (TFP).
It shows that compared to the economies of the 10 Latin American countries included in the study, between 1970 and 2014, the relative weight (or importance) of the Cuban economy (measured in terms of GDP, GDP per capita, and TFP) has declined significantly.
Cuba’s lagging economic performance is attributed to three (3) factors: (1) below-average capital accumulation, (2) insufficient labor force growth rates, and (3) lower total factor productivity (TFP).
The Cuban economy compared to the 10 Latin American economies (AL-10):
1. The Cuban economy has not been able to fully recover from the impact of the economic crisis of the 1990s:
Between 1989 and 1994, Cuba’s gross domestic product (GDP) (measured in current dollars, using Purchasing Power Parity – PPP) declined 50%; this figure is significantly higher than the 35% contraction in GDP reported by Cuba’s National Statistics Office (Oficina Nacional de Estadísticas e Información, ONEI) during the same period.
The value of merchandise exports and merchandise imports declined 51% and 69%, respectively, during the 1989-1994 period.
The so-called “Special Period” was fact an economic depression without precedent among the AL-10 countries. The shock experienced by the Cuban economy between 1989 and 1994 cannot be solely attributed to the collapse of the Socialist Camp in 1989 and the disintegration of the Soviet Union in 1991; since the mid-1980s, the Cuban economy started to show signs of declining GDP growth, and GDP per capita, as well as lower export and import capacity.
Compared to 1989, and despite receiving substantial economic support from Venezuela after 2000, Cuba’s GDP has deteriorated significantly in recent years:
Measured on a PPP basis, using current dollars, Cuba’s GDP reached an estimated $67.4 billion in 2014; this figure was 21% lower than in 1989 and 25% below the GDP reported in 1985.
In 1989 Cuba had a GDP per capita of $8,093. The country’s GDP per capital fell 63.3% to $2,967 in 1994 (the worst year of the economic crisis of the 1990s). While GDP per capital reached $6,025 in 2014, it remained 25% below the level reached in 1989 and 35% lower than in 1985.
2. In terms of size (measured by GDP and GDP per capita), the Cuban economy has fallen behind the economies of the 10 Latin American countries (AL-10) included in the study.
Measured in current dollars, using PPP, Cuba’s GDP was 5.3 times larger than the average GDP of the AL-10 countries in 1970.
This ratio declined to 4.0 times in 1989, and to 1.5 times in 2011.
Based on its productive capacity, in 2011 the Cuban economy was 29% smaller than the Dominican economy and 39% smaller than the economy of Ecuador.
Cuba’s GDP per capita was 6% lower than the regional average in 2011.
Uruguay’s and Panama’s GDP per capita in 2011 was twice the size of Cuba’s GDP per capita, while Costa Rica’s GDP per capita was 69% higher on that year.
The Dominican Republic’s GDP per capita in 2011 was 46% higher than Cuba’s GDP per capita, and Ecuador’s GDP per capital was 18% higher.
3. Cuba’s total factor productivity (TFP) has lagged the TFP levels of the AL-10 countries included in the study, having a detrimental effect on its GDP growth rates and GDP per capita.
Total factor productivity (TFP) offers a comprehensive measure of productivity and reflects the effect of educational attainment on labor productivity.
During the 1960-1989 period, when the Cuban economy had strong linkages with the Soviet economy and the economies of the Council for Mutual Economic Assistance (CMEA), total factor productivity exceeded the regional average.
By 1990. However, Cuba’s TFP was equal to the regional average.
In 2011, Cuba’s TFP was 64% lower than levels reached in 1989.
More recent Cuban TFP data suggest that economic reforms have moved TFP towards convergence with the regional average, but it still remains below 1989 levels.
In 2011, Panama’s TFP was 68% higher than Cuba’s, and total factor productivity in the Dominican Republic was 35% higher.
Principal factors that explain of Cuba’s lackluster economic growth and declining economic importance:
1. Cuba’s insufficient levels of capital accumulation explain 64% of the differences in GDP growth between the island and the AL-10 economies.
2. The relatively-low growth rates in the size of Cuba’s labor force (or economically-active population – EAP) explain 21% of the differences in GDP growth when compared to the AL-10 economies.
3. Lower levels of total factor productivity (TFP) explain 15% of the differences between Cuba’s GDP growth rates and the growth rates of the AL-10 economies.
1. Adopt reform policies to increase (or incentivize) capital accumulation.
2. Implement reforms to increase productivity in the State and non-State sectors, such as:
a. Reducing the size of State-owned enterprises (SOES), and restructure their role in the economy,
b. Stimulating, incentivizing, partnerships or joint ventures between privately-owned enterprises and foreign companies or investors,
c. Reforming the legal framework that currently regulates self-employed workers and cooperatives,
d. Gradually phase out the current dual currency system and replace it with a single currency to eliminate existing distortions caused by monetary dualism, and simultaneously address existing fiscal imbalances to minimize the potential shocks resulting from monetary unification,
e. Gradually reduce (and eventually) eliminate subsidies and other distortionary policies that affect the Cuban economy.
* Mario Gonzalez-Corzo is Associate Professor, Department of Economics and Business, Lehman College, City University of New York (CUNY) and Research Associate, Cuban Studies Institute.
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