Cuban Economic Policy Under the Raúl Castro Government”

山岡加奈子編『ラウル政権下のキューバ』調査研究報告書アジア経済研究所 2010 年 Chapter 2 “Cuban Economic Policy under the Raúl Castro Government” 1 Pavel Vidal Alejandro Abstract In the first two years of the Raul Castro's elective period (2008-2009), the economic policy confronted the downturn of the GDP growth. The economic boom that began in 2004 was stopped by several negative shocks– among them, the global crisis - that made visible the structural weaknesses of the growth and brought out previous mistakes of the economic policy. In 2008 the economy experienced significant external and internal imbalances. In 2009 the economic policy carried out an adjustment that allowed restoring to a great extent the balances, but it could not avoid the banking crisis. The economic policy, under Raul Castro's commandment, has been effective from the expenditure side, which is an important step to recapture credibility and financial stability. Nevertheless, there are few measures to encourage incomes and it is questionable to keep a policy of fixed exchange rate. Without a lender of last resort, viable alternatives are not visible for a solution in the short term of the current financial crisis. Therefore, a high probability remains for the Cuban economy to submerge in a stagnation or recession period, inevitable at this point for the economic policy. Key Words: Cuba, Latin America, global crisis, Raul Castro, economic policy, banking crisis. 1 Professor in Center for the Study of the Cuban Economy (Centro de Estudios de la Economía Cubana) at the University of Havana. He worked as an analyst in the Monetary Policy Division of the Central Bank of Cuba for seven years (1999-2006). His fields of specialization are monetary policy and time series econometric models. In 2007 he completed his PhD examining a new monetary policy strategy for Cuba using SVAR estimation. He has been professor of macroeconomics and econometrics and visiting scholar at universities and central banks in Latin America and Europe. He is also contributor of Inter Press Service (IPS) in Havana. Although taking full responsibility for this article, the author gratefully acknowledges comments from Kanako Yamaoka, Tomomi Kozaki and Carmelo Mesa-Lago. 23 1. Introduction On February 24, 2008, Raul Castro officially assumed as the president of the Council of State and Ministers of Cuba in replacement of his brother Fidel Castro. Since 2004 the Cuban economy had experienced a boom of the economic cycle with exports expansion, the increase of the Gross Domestic Product and fiscal income, and a light improvement of the real salary, keeping price stability and low unemployment. During the first two years of Raul Castro's elective period (2008-2009), the economic policy faced the abrupt reversion of this cycle stopped by several unfavorable shocks – among them the global crisis - that made visible the structural weaknesses of the economic growth and made evident the mistakes of the previous economic policy. Raul Castro receives also an economy with multiple shortcomings and distortions inherited from the internal crisis of the early nineties and the persistence of a state centralized economic model. On July 26, 2007, when he was still exercising temporarily the presidency, Raul Castro promised “structural and conceptual transformations” in the economy (Castro 2007). In several occasions he has expressed his willingness to solve the agricultural sector problems, to eliminate the monetary duality, to increase the still very low wage level, to reinforce the institutionalization of the economic system, to eliminate subsidies, to impel labor productivity, among other goals. After the first two years in charge, he has targeted some structural changes and a major group of institutional modifications, but still below the expectations and with a slow rhythm of implementation. Answering to this critical points of view Raul expressed at the end of 2009: "I have conscience of the expectations and honest preoccupations, expressed by the deputies and the citizens as for the speed and depth of the changes that we have to introduce in the functioning of the economy “; and he added that “… in the update of the Cuban economic model, in what we are working with an integral approach, there cannot be space to the risks of the improvisation and the hurry. It is necessary to walk towards the future, with firm and sure step, because simply we do not have right to be wrong” (Castro 2009). The Cuban economy has had to keep developing in an environment extremely complicated, since despite some measurements of flexibility of the Barack Obama's administration, the economic blockade persists with expensive consequences. In 2008 the economy experienced significant external and internal imbalances. In 2009 the economic policy carried out an adjustment that allowed restoring to a great extent the balances, but could not avoid the consequences on the financial system. The principal challenge that the economic policy faces 24 nowadays, is the Cuban banking crisis, which is affecting the external and internal commerce, worsening the weak financial position of the country, feeds new imbalances and threatens to provoke the biggest economic crisis of the island since the disappearance of the Soviet Union. The main goal of this article is to evaluate the economic policy under Raul Castro’s commandment in the period 2008-2009. In order to accomplish this goal, the following sections are structured. In section 2, the macroeconomic situation is summarized and compared to tendencies during the decade of the Gross Domestic Product, the external sector, and wages and employment. Section 3 is dedicated to fiscal policy; the causes of the fiscal imbalance in 2008 are explained, the actions to reduce it in 2009 and the new adjusted budget for 2010. Section 4 deals with monetary policy; in addition to evaluating the inflation, the money supply and the exchange rates; the characteristics, costs, and possible future of the monetary duplicity of the Cuban peso and the convertible peso are commented, as well as, the changes that Raul Castro has implemented in the mechanisms for foreign exchange control and centralization. Section 5 is dedicated to explaining the banking crisis, its determinants and implications. Section 6 does a summary of the institutional changes accomplished by Raul Castro and section 7 explains the structural transformations. Sections are not independent; they try to analyze into the transmission channels of different policies, for finally, in the section 8 appraise summarily the outcomes of the measures taken during this period and its fundamental challenges. This analysis has data limitations. Some of the evaluated topics are very new and others would require a more detailed empirical examination. Nevertheless, an effort has been made to compile the most updated data, compare it with the tendencies of the decade, and Raul Castro's own speeches are used as reference of the emphasis and intentions of the economic policy. In order to facilitate the comprehension of readers not familiar with the Cuban economy, some essential explanations are made about the Cuban economic model and complementary references are recommended. 2. Macroeconomics Compared to the period 2001-2003 of lower economic growth, from the year 2004 the Cuban real Gross Domestic Product (GDP) accelerated itself and reached in 2005 and 2006 growth rate of 11.2% and 12.1%. From 2007 began a tendency to the deceleration until 2009 in which a growth of 1.4% is 25 obtained. The terms of trade and exports of goods and services contributed significantly with the expansion of the economy from 2004 by relaxing the external constraints (Graph 1).2 Graph 1. Real GDP, current exports of goods and services and term of trade, 2000-2009. (index 2000=100. GDP in percentage variation, right axis) Source: Elaborated by the author based upon the Cuban National Statistic Office data, (ONE) (2008 and 2009a) The exports increase is explained principally by the new agreements with Venezuela, especially, the exportation of medical services that annually contribute about 6 billion dollars, three times the tourism contribution. The exports of medical services is part of a wider project of regional integration known like ALBA (Bolivarian Alliance for the Peoples of Our America), integrated by Venezuela, Ecuador, Bolivia, Nicaragua and some Caribbean islands, among them Cuba.3 The slowdown of the GDP from 2007 to 2009 can be explained by four fundamental factors: The exports of Cuban medical services and other services had an initial boom in 2004 along with the appearance of a new market in Venezuela guaranteed by governmental bilateral 2 Various authors have empirically verified in the Cuban case, the relationship between the economic growth and the external sector, proper of a small open economy. Some of them are Moreno-Brid (2000), Mendoza and Robert (2002), Alonso and Sánchez-Egozcue (2005) and Vidal and Fundora (2008). 3 The increment of the external income to the Island allowed to impulse a huge investment process organized by Fidel Castro, known as the Battle of Ideas emphasizing the development of health, education and transformation on the production and consumption of energy, known as the Energetic Revolution. For an examination of the Cuban economy during the period of time 2000-2006 see Dominguez, Pérez and Barberia (2007) and Pérez (2006). 26 agreements. Nevertheless, the potential level of Cuban exports to Venezuela seemed to be stagnated in few years, over all, after covering the limited

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