By Varshika Prasanna
Since 1959, Cuba has been a socialist republic — one of the last remaining socialist countries in the world today — and has survived under a communist authoritarian regime for over six decades. The Cuban government controls more than 90% of the country’s economy and is responsible for basic necessities such as food, healthcare, education, transportation and housing. Unfortunately, the government has not been very efficient in some areas, including the basic necessities, and Cubans have been dealing with a scarcity of basic goods and endless lines to obtain them. Furthermore, the housing conditions in Cuba are particularly terrible as Cuba is extremely vulnerable to hurricanes and tropical storms. There is a severe housing shortage in Havana and most of the available units are in dilapidated conditions.
Due to the government’s inefficiencies in the allocation of resources, the Cuban economy has stagnated for years and contracted 11% last year alone. This contraction can be primarily attributed to the coronavirus pandemic which has disrupted tourism, a main driver of the economy. Sanctions imposed by the United States under the Trump Administration have also contributed to the worsening economic conditions in Cuba. As a result, the communist-run country of Cuba is bankrupt. It failed to pay its restructured debt last year, and is struggling to find credit. The communist model has clearly failed in helping Cuba achieve economic growth.
Recently, the Communist Party’s official spokesperson announced that the Cuban economy would open the economy to allow private involvement in most sectors that have been state-controlled. The list of authorized activities has expanded from a mere 127 to more than 2000. Clearly, this change has been implemented out of necessity. The Cuban government intends to open up key sectors such as agriculture, energy or communications to foreign investment and allow small businesses to engage in manufacturing, exports and expand into larger enterprises.
The President Miguel Díaz-Canel’s plans to get the economy back on track by implementing reforms that encourage an increase in exports and a decrease in imports to improve the trade deficit, as well as stimulating domestic demand. The primary objective of opening up the economy to the private sector is to use the productive forces of the private sector to aid in development. This step towards economic reform opens up almost all economic activity on the island to some form of private involvement. Small business owners will finally be able to grow their businesses into medium sized enterprises. Unfortunately, the largest businesses in Cuba are in the tourism industry, which is severely hard hit due to COVID-19. Hence, it could be a long time until the change is noticeable in the daily lives of the Cuban people. Once the pandemic is over, the presence of small businesses will definitely boost the tourism industry which will improve the economy.
In addition to deregulation of state businesses and foreign investment, the crisis resulted in devaluation of the peso and reorganization of the monetary system. For almost 30 years, 2 currencies have been circulating in Cuba — the peso and the convertible peso (CUC), both officially valued at 1 to 1 with the dollar. The currencies were exchanged at various rates: one to one for small businesses, 24 pesos to 1 CUC for public and joint ventures. The government set up this finance system in the 1960s to prove that a socialist political conscience and productivity could be pursued simultaneously. This system helped Cuba get through the failure of the Soviet Union, but it also masked the real economic situation. In order to take a step towards improving its financial health, Cuba has eliminated the CUC and switched to a single exchange rate. The government has also opened up stores that accept dollars, but only via a bank card. This partial dollarization has been implemented as a temporary measure to provide stability to families, especially those who receive remittances, and help get the economy back on track.
Cuba also devalued the peso to 24 peso to the dollar. A European diplomat claimed that the peso should ideally be devalued to around 40 to 50 to the dollar, the current informal market rate. However, further devaluation will be postponed due to complaints about high utility prices. To resolve this issue, capitalist countries facing a trade deficit often turn to the International Monetary Fund. IMF lending provides countries in distress with some breathing room to implement policies in a systematic manner to restore stable economic conditions. However, USA’s sanctions against Cuba prevent it from seeking IMF aid. The IMF usually advocates for devaluation and reduction in subsidies to promote market competitiveness. The government has announced a gradual reduction of subsidies to state companies, utilities and basic goods. In order to cushion the impact on the people, price controls have been implemented, as well as an increase in state wages and pensions. Cuba’s budget deficit will most likely triple to 18-20% of the GDP. This deficit is financed by state owned banks.
The steps taken by the Cuban government are certainly towards economic growth and improvement of the welfare of the Cuban people. However, whether the Cuban government will actually follow through with these plans, and whether the Cuban people will be positively impacted, only time will tell. □
- Image source
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- Frank, M. (2021, January 27). Analysis: Cuba needs deeper economic reform, creditors say. Retrieved from https://www.reuters.com/article/us-cuba-economy-reform-idUSKBN29W1OF
- Frank, M. (2020, December 11). How Cuba’s monetary reform will take place and impact the economy. Retrieved from https://www.reuters.com/article/cuba-economy-reform-explainer/how-cubas-monetary-reform-will-take-place-and-impact-the-economy-idUSKBN28L2AD
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