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The Cuban economy is in a bad state. Over the past three years it has been hit hard by the U.S. embargo of Venezuela (which undercuts Caracas’ ability to provide badly needed external support), the Trump administration’s imposition of economic sanctions on Cuba itself, and the COVID-19 pandemic shut down the tourist industry throughout most of 2020. The economy is expected to contract by six percent this year, with considerable uncertainty hanging over 2021. Add to this mix the U.S. elections; if Democratic challenger Joe Biden is elected there could be a reset in relations, which could help the tourist sector but see greater action on human rights, while a second term of Republican Donald Trump could bring an even greater tightening of U.S. policies with the end-game being regime change in Havana. Cuba is likely to be high on the U.S. foreign policy agenda for whoever sits in the White House in January 2021.
Cuba – Real GDP Growth Rate %
A Sagging Economy
The Cuban economy’s performance throughout the last decade has been disappointing on many fronts, putting the island-state behind much of Latin America and the Caribbean. Despite the revolution coming to power in 1959, Cuba has remained considerably dependent on external props to maintain a generally inefficient command economy, dominated by large state-owned companies backed by the Communist Party’s inner court and the military. A convoluted foreign exchange system only worsens matters. Although a private sector exists, it has only been allowed out of necessity during periods of extreme economic stress, such as the Special Period in the 1990s following the collapse of the island’s main source of foreign aid, the Soviet Union.
In 2020 most Cubans have undergone more than one period of shortages of goods, including chicken, eggs, rice and other staples. This last round of long lines and bare shelves gave rise to The Economist magazine calling Cuba, “Queueba”. A country that was once a major agricultural powerhouse, Cuba imports close to two-thirds of its food at an annual cost of USD $2 billion. At the same time, the economy’s main sources of foreign exchange revenue are professional services— driven by the export of medical professionals, tourism, and remittances. Although these sectors earn valuable currency for the country, they do not cover the trade balance deficit, meet local demands for many products such as food, or allow Cuba to be address its infrastructure needs.
Cuba’s fundamental problem is that the Revolution has been largely financed by first the Russians and then the Venezuelans as well as through the many sacrifices of the Cuban people. With the increasingly troubled nature of Venezuelan assistance after 2014, the hope for the Cuban economy was that the normalization of relations with the United States would bring in a wave of U.S. tourists. Indeed, following President Barack Obama’s 2015 visit to the island tourism increased considerably. According to economist Carmelo Mesa-Lago, gross tourism revenue (without subtracting the value of imports) peaked at USD $3.2 billion in 2018.
Hopes of U.S. tourism bailing out the Cuban Revolution, however, ended with the Trump presidency in 2017. Strongly influenced by the anti-Castro Cuban-American community, the Trump administration labeled Havana as part of the “Troika of Tyranny”, which also included leftwing authoritarian governments in Venezuela and Nicaragua. The Trump administration’s sanctions against Caracas dovetailed nicely with putting Cuba under pressure, in particular, making it more difficult to send Venezuelan oil to the Caribbean island.
The Trump administration’s restrictions on U.S. tourism (such as the suspension of cruises and prohibitions from staying in government-run hotels) to Cuba also hurt: in 2019, Cuba received 9.3 percent fewer tourists than in 2018; the 2019 target of five million tourists was unfulfilled by 15 percent. The Trump administration took other measures, such as stopping U.S. travelers from bringing home Cuban cigars and rum and making it more difficult to send remittances to Cuba—the country’s second highest source of hard currency. Moreover, in a move to scare foreign investors away from Cuba, President Trump refused to sign a waiver under the 1996 Helms-Burton Act which would disallow U.S. citizens the right to sue mostly European companies that operate out of hotels, tobacco factories, distilleries and other properties that Cuba nationalized. Previous U.S. presidents had waived this part of the Helms-Burton Act to avoid complications with European allies.
Adding to the list of problems in 2019, professional services exports were hit hard by changes in the governments of Bolivia, Brazil, and Ecuador, which ended their use of Cuban doctors and technicians. These led to an estimated annual loss of around USD $1 billion in revenue although some of that loss could be clawed back by the end of 2020 as Cuban medical teams were in high demand during the pandemic.
It is in this context that Cuba was hit by the COVID-19 pandemic. This resulted in a lengthy shutdown of the country, including its tourist sector. Cuba has done a relatively good job of containment. According to the World Health Organization, Cuba has had around 6,700 confirmed cases and 128 deaths due to COVID-19, compared to the Dominican Republic’s 125,008 confirmed cases and 2,226 deaths and Venezuela’s 90,100 confirmed cases and close to 800 deaths. Hopes for a gradual reopening of the island’s tourist trade now hinge on the security situation brought about by the second wave of the pandemic in North America and Europe.
Are China and Russia willing to pay for Cuba’s communism?
Cuba’s options for a new external patron are not inspiring. The Maduro government in Venezuela is struggling to remain in power and its oil industry is deeply troubled. That leaves China and Russia.
Although China has assumed a significant role in the Cuban economy through trade and investment and the forgiveness of USD $10 billion in debt, it has not demonstrated an appetite to bankroll Cuba’s dysfunctional system. President Xi Jinping and other high-ranking Chinese officials stopping off in Havana for a photo opportunity is one thing; it is another to sink several billion dollars into an economy which lacks key natural resources and whose leadership refuses to take Beijing’s advice to mix market economics with single-party Leninist rule. Additionally, China’s Venezuelan experience did not leave Beijing hungry for sinking large sums of money into another badly managed economy.
Russia has demonstrated a renewed interest in Cuba, but has balked at assuming its once formidable role of maintaining Fidel Castro’s revolutionary show. Russia is willing to offer credit-for-arms sales, project development for rail and power utilities, debt-forgiveness in writing off USD $32 billion in 2014, and visits by the Russian Navy and high-ranking government officials. China and Russia’s involvement in Cuba has geopolitical value in poking at U.S. security concerns, but Cuba’s ruling class have parked their country in an unattractive developmental cul-de-sac that has a large price tag attached; Beijing appears to have little interest and Russia cannot afford it.
The U.S. Elections
Another major factor hanging over the Cuban economy is the U.S. election. In a rally in Florida in late September 2020, President Trump stated, “I canceled the Obama-Biden sellout to the Castro regime.” Over the past four years U.S. policy has hardened considerably; another four years of a Trump administration would probably see greater efforts to squeeze the Communist regime, hoping to spark some type of regime change. This policy would also be closely linked to ongoing pressure on the Maduro regime in Venezuela, with the view that if one dictatorship is felled, the other will follow. Decades of a U.S. economic embargo dating back to the early 1960s failed to bring down the Castro regime; it remains questionable that four more years will provide a different outcome.
A Biden victory would probably lead to a rapprochement between Havana and Washington. It appears that a broader Latin American and Caribbean policy would be marked by a repudiation of the Trump administration’s hardball, new Cold War approach and driven by more of a sense of mutual respect and shared responsibility. It would probably benefit Cuba in two ways; there is a strong chance that some of the economic sanctions introduced by the Trump administration would be rolled back, allowing a more normal economic relationship—which in Cuba means tourism—and a softer approach to negotiating change in Venezuela stands a good chance of the Maduro government remaining in power longer and perhaps being able to maintain a flow of oil to its Caribbean ally. At the same time, a Biden administration might be able to extract more out of the Cuban government after having experienced four challenging years of U.S. measures. Timing is an important factor in diplomacy.
Despite Cuba’s poor economic outlook, there is hope. Cuba’s educational system has produced a class of medical professionals, who remain important to generating foreign exchange reserves and could provide a foundation for a broader regional medical hub. At the same time, the country’s entrepreneurs, called cuentapropistas, have since their emergence in the 1990s survived inconsistent and often hostile government policies. And they have been hit hard by a tightening of U.S. sanctions and the COVID-19 pandemic, which hurt tourism and related businesses upon which they depend. A loosening of U.S. economic measures, along with headway on COVID-19, would probably help revitalize private sector activity.
Part of the solution to Cuba’s economy resides in unlocking more of the private sector. Much will have to change for the Cuban private sector to rebound and eventually assume a greater role in the country’s direction. One badly needed reform would be to allow the cuentapropistas to incorporate. Indeed, the Cuban private sector has lobbied the government since 2007 for the right to incorporate, which would make it easier for them to sign contracts and conduct business with banks. The government has done little on this front, freezing the private sector out of long-term credit, which is essential for any sustained expansion.
Cuba has entered the 2020s much in the same fashion as it did in the 1990s; the world is a more uncertain place, its main economic backer is riven by a major economic collapse, and its relations with its northern neighbor are tense. But there are differences. Fidel Castro is dead and his brother Raúl is 89. The country is headed by Miguel Díaz-Canal, the first non-Castro family member to preside over the country. Although Cuba is still a police state, it is more open to the outside world through the internet and travel. Cubans have a greater understanding of the world around them than before. The pandemic has probably reinforced some of the closed nature of the polity in the short-term, but Cuba desperately needs to open up for the economy to work. If not, prospects for finding another willing donor to a failing economic experiment are going to be hard to find in a post-COVID world.