With the fortunes of the global economy now looking more uncertain than before, and the outcome of Cuba’s broad internal debate on economic policy still unknown, it is not easy to forecast the Cuban economy in the next five years. In this context, the Economist Intelligence Unit’s annual publication, Country Forecast: Cuba, is hedged with more provisos than usual. However, the exercise provides a basis for assessing the likelihood of a set of different scenarios, and their impact on the forecast. This article sets out and explains the central scenario, then considers some alternatives.
Cuban growth, according to this forecast, will be driven by domestic demand—that is, investment and, to a lesser extent, household consumption. The past three years have seen exceptional externally-driven growth, which is not likely to be repeated. Unlike the 2004-06 period, the external balance will not make a net positive contribution to GDP growth, as import demand will outpace export expansion. In terms of output, the pattern will also alter: where services have been leading in the past five years, lagged by relatively subdued growth of industry and a contraction in the agricultural sector, we expect the next five years to see more balanced growth. However, given the low levels of production compared with potential, and chronic productivity problems, the upturn in industry and agriculture will be relatively modest. The assumptions upon which the forecast rest are, first, the fundamental political one: that there is no change of government. This is based on an assessment of the current balance of political and social forces within Cuba, and on the assumption that there will be no intervention from outside. We consider that a response by the existing government to pressures for “adjustment” of the existing system is more likely than a change of government. This view seems to be borne out by the process of broad discussion launched by Raúl Castro, which will lead to new steps to reform the system in the coming year. The second assumption concerns the overall orientation of economic management. At present it is unclear how far-reaching any measures in response to the debate will be, but our central scenario envisages significant but not radical change. Initiatives might include measures such as wage and price adjustments that improve incentives, some changes in the way that agriculture and food distribution are organised, and an increase in the accountability of enterprise managers. Efficiency gains arising from these adjustments are included in our forecast, and are tied to the acceleration in real wage growth. Our third assumption is about macro-economic stability. We consider that the Central Bank, which has been keeping a close eye on financial regulation and monetary management, will continue its cautious approach. We assume only a slight revaluation of the Cuban peso, given the risks to price stability and sharp impact on relative incomes of any radical adjustment. This will help to avoid price instability and keep real household spending from rising by more than around 6% a year. The forecast also rests on assumptions about external conditions. The Economist Intelligence Unit’s global forecast envisages a slight slowdown in global economic growth, which implies that commodity prices will fall from current high levels. The impact of lower nickel prices on export revenue will be offset by a similar moderation in oil import prices. (Fluctuations in the sugar price will have relatively little effect on Cuban performance.) We assume that economic ties with Venezuela will continue to flourish, and that the supply of capital goods and new credits from China will not wane. The most dramatic risks are obvious: political collapse, a US invasion or a political upset in Venezuela would all cause severe economic upheaval. But the risk of any of these occurring is low. A radical reduction of US economic sanctions is also relatively distant, although it may be more likely. But the assumptions that need most careful consideration, because alternatives are much more probable, concern economic policy. What would be the impact if the government were to introduce more far-reaching reforms following the debates? And how might sudden changes in prices or the exchange rate affect economic performance? Cuban growth is currently being held back by relatively limited inflows of foreign capital (despite the recent increase in credits from China and Venezuela) and lack of dynamism of the domestic economy. In recent months there have been indications that the opening to foreign investment may be widened. The overall framework, in which each potential investor has to gain explicit government approval, does not seem to be under review, but the range of types of partnership may be about to grow. This could bring a new wave of investment in tourism and infrastructure. More importantly, it has the potential to lead to a broader insertion of the Cuban economy into the global market. It suggests that whereas current links are restricted to a few sectors, a much broader range of goods and services might become more internationally integrated. The impact of such a reorientation of foreign investment policy might be felt first in export growth, past experience has shown that the secondary effects, in terms of technology transfer and diversification from the initial activity, could be greater.
An important barrier to the using prices, wages and profit as drivers to improve productivity has been the dual currency system. Our forecast assumes that it will remain in place for the next five years, but this scenario is looking increasingly unlikely. The distortions created by the use of two currencies not only hamper economic efficiency but also account for much of the income inequality and contribute to corruption. It seems that the balance in the calculation of risk and benefit is shifting, making it possible that the monetary authorities might take a radical step. The economic consequences would depend on the manner of the reform. At best, unification could provide a strong boost to economic dynamism. If coupled with realignment (and possibly some liberalisation) of prices, it would lift the real incomes of peso earners and stimulate a strong supply response with little impact on inflation or the external balance. The Economist Intelligence Unit’s forecast is constantly under review. It aims to present the most likely scenario, and at the moment it envisages a slowdown in growth over the next five years. But conditions and prospects will change even in the absence of radical political upheaval. In the coming months, economic policy debates will need to be watched carefully for signs of new initiatives. With its highly educated workforce and improving infrastructure, Cuban growth potential is strong. It is possible that, with bold policy measures to remove some of the obstacles, a new economic take-off could be approaching. |
