Tuesday, July 05, 2005

The near-term prospects for Cuba's economy

With all the recent talk about the embargo on Cuba and the travel restrictions, I thought it might be productive to write a little bit about the Cuban economy. My reasons for justifying the ongoing sanctions against Cuba are various and include moral ones. But setting those aside for the moment, the objective economic sanctions is to coerce the Castro regime into making fundamental changes to it's political system. But Castro understands that any changes to that system (any cracks in it) will lead to his downfall. He was an outspoken critic of Gorbachev's "openness" and "reform", Castro felt it would mean an end to communism in the Soviet Union and he was right. So since Castro isn't going to change, I think tightening the economic screws on Cuba can help create such a feeling discontent among Cubans that would outweigh their fear of reprisals and create a popular uprising against the regime. It's not beyond the realm of possibility. In the early 90's there was an uprising in Havana now known as the Maleconazo.

Cuba has been trading with several countries since the fall of the USSR, allowing joint ventures with foreign companies. These joint ventures are always favorable to the Cuban entity, which is always a state run organization since there are no entrepreneurs in Cuba (virtually no private businesses are allowed to exist). Recently Cuba has announced it is unilaterally ending a lot of the smaller and mid-sized joint ventures and in most cases owes the foreign entity a significant sum.

Cuba has a huge external debt and is viewed as bad risk by firms such as Dunn & Bradstreet and Moody's. This is because Cuba has very little hard currency. Cuba's industries (except tourism) are in a shambles. This is a direct result of the inefficiencies inherent to a communist command economy. Additionally, many of Cuba's chief agricultural products are not scarce on the world market. So Cuba has little to offer the world today other than its beaches, it's women, and Venezuelan oil (more on that later).

Cuba currently has a major problem generating enough energy for it's 11.5 million inhabitants. Daily blackouts of 12-16 hours a day are the norm. This creates an incredible pressure on the people who can't even save leftovers (if they're lucky enough to have any) in their fridge. The power plants in Cuba are of obsolete Soviet design and spare parts are almost impossible to get.

The people of Cuba themselves are becoming more daring in their protest of the regime. People like Dr. Oscar Elias Biscet were imprisoned because they were openly against the regime, something few have been historically willing to be.

As time goes on and Castro keeps burning his trading partners (he has to because he can't pay them) he'll be looking for more and more lifelines. That's why he's so interested in bringing down the embargo. He wants American agricultural products (which he has access to now on a cash up front basis) on credit. If there's one reason ordinary Americans should be for the embargo it's because giving Castro credit will result in a farm subsidy boondoggle that will cost the taxpayers billions of dollars while Castro and the subsidized farmers laugh all the way to the bank.

One of the lifelines that have fallen into Castro's lap has been the idiotic leader of Venezuela, Hugo Chavez. Venezuela is an oil exporting country that "sells" to Cuba (at below market prices) some 70,000 barrels a day more than it can currently consume. The problem is that Cuba doesn't have enough refining capability. So Cuba sells the surplus oil on the world market making a tidy profit. I wonder if all the people that voted for Chavez knew they'd be subsidizing a whole 'nother country? The partnership with Venezuela has meant that Castro has been able to roll back the minimal market reforms of what he called the "special period" of the early and mid 90's. Venezuela has been "investigating" the possibility of putting a defunct Soviet-designed oil refinery in Cienfuegos online again. They have been conducting this "investigation" for two years and have come no closer to solving the problem. Experts believe that refinery is a lost cause and that leveling it and starting from scratch is the only answer. Either way it's going to cost a lot of money.

The good news is that as Venezuela moves towards a Cuban-style economy, it will suffer the same inefficiencies that Cuba suffers. Not that Venezuela was seen as a model of efficiency before Chavez (his election was the result of economic conditions prevalent in much of Latin America with substantially more have-nots than haves), but his policies will only take Venezuela backwards and trying to support two countries with these discredited economic policies will only serve to accelerate the process of decline.

The people of Venezuela are starting to become concerned with the "Cubanization" of many sectors of public life such as education. So in my humble opinion Castro's fate lies squarely in the hands of Hugo Chavez. If Chavez' rule were to end and a more sane economic policy put in place, Cuba's days of freeloading off Venezuela would be over. If Chavez manages to hang on for a few years then so will the Castro regime. But the outcome is inevitable. Chavez cannot squander his country's natural resources and repress his people indefinitely. For one thing Venezuela is not an island. The Venzuelan economic model is not viable in the long run and there is no USSR to subsidize it.

There's one wildcard in the whole situation and that is China. China has recently said it was going to invest substantial sums in Cuba's nickel industry. But China has a lot of its own problems and subsidizing Castro doesn't have to be one of them.

US agricultural sales to Cuba are down, perhaps reflecting the crunch that the stricter embargo policies have put the regime in. Now is not the time to weaken the embargo. But it is the time to keep an eye on Venezuela and perhaps try to put Hugo Chavez in the proverbial box. At the same time the US should lobby China against floating Castro any money. The US is a much larger trading partner than Cuba could ever be and don't think for a minute that China doesn't know this.


gansibele said...

Excellent post, right on the money. Especially the China angle.

Chavez benefits too. Things such as the "barrio" doctors are great propaganda tools.

China is showing signs of wanting to test its strenght in a political showdown with the US (Taiwan, Unocal). Cuba could end up where it was, a piece in the game among two superpotencies.

Howarde said...

Very informative and, as always, the wild card is China.