How Can the Cuban Economy Grow in the Coming Decades?

During most of the 20th century, one of the most important factors impelling economic growth in Latin America, including Cuba, was an increased labor force (Bértola & Ocampo, 2012).  Yet the island today shows signs of an advanced demographic transition characterized by low fertility and mortality levels and high life expectancy.

In recent years, there has been growing interest in the relationship between demographic changes and economic performance, given the compelling influence off the former on the development process. Changes in population age distribution alter the balance between groups of people in economically active and inactive ages.  This has a powerful impact on the availability and trajectory of the labor force.

Demographic Changes and Economic Performance

Using a simple model, Gross Domestic Product (GDP) per capita growth can be broken down into four factors:

• The growth rate of output per worker (labor productivity) reflecting the effects of investments in human and physical capital.

• The increase in the labor force participation rate of those of working-age. If we assume that the labor force participation rate has been historically higher and relatively stable for men, then the so-called “gender bonus” corresponds to the increase in female participation in the labor force.

• The growth rate of the working-age population.

• The rate of increase of the total population.

The demographic bonus (dividend) or opportunity refers to the period in which the proportion of people of potentially working-age grows steadily relative to those of potentially inactive ages (dependents). Dependency ratios drop to historic lows when the proportion of older people has not yet increased substantially. These circumstances are particularly favorable for development, since the possibilities for saving and investment in economic growth increase, provided that the state takes appropriate measures in the areas of health, family planning, employment, financial policies, and human capital. In this economic model, the dividend would be calculated as the difference between the change in labor force participation rate in relation to the change in the total population.

The Demographic Dividend in Cuba

In Cuba, the fundamental manifestation of the demographic dividend in Cuba occurred from approximately 1973 to 1995 followed by a brief recurrence between the late 1990s and 2012 (Albizu-Campos, 2019), but it was wasted. The Economic Commission for Latin America and the Caribbean (ECLAC) estimates (Martínez, Miller & Saad, 2013) that Cuba’s economic behavior between 1980 and 2010 was unique. Beyond achieving meagre, although positive, economic growth rates, the contribution of population factors to the economy was dominated by the demographic dividend, while the gender bonus ^[1] represented a minimal share. This result is striking, given that Cuba considers itself a leader in policies aimed at promoting female participation in all spheres of economic and social life.

This demographic stage was marked by two completely different periods. Until 1990, the massive entry of working-age people into the labor force provided the state relatively high investment levels, between 25-30% of GDP, but which resulted in relatively low returns. The inefficiency of the investment and productive processes, in general, revealed that a sizeable portion of these resources was unexploited.  This is obvious from the very low work productivity that resulted.

The consequences of the enormous external dependency on the Soviet Union and Eastern Europe, and their subsequent collapse, ushered in a new stage.  Nevertheless, during this period Cuba almost entirely wasted the valuable demographic dividend at its disposal.

The Collapse of Physical Capital

Beginning in 1990, the share of physical capital per worker^[2] collapsed due to the combination of low investment volumes along with the moral obsolescence of part of the existing industrial plant and the declining use of installed capacity. Therefore, the data on physical capital stock in Cuba are approximations based on gross assumptions that may be imprecise. However, most experts agree there was a sustained increase in the capital stock until the early 1990s, followed by a notable reduction that then plateaued and increased slightly starting in the 21^st century

Palacios (2021) estimates that the physical capital endowment only increased by 5.7% between 1989 and 2014. This results in an average annual growth rate of just 0.2%. If the labor force increased at a similar rate during the period, then the capital endowment per worker remained constant at best. Under these conditions, physical capital barely contributes to driving economic growth. In studies that establish a comparison with Latin America, the lower endowment of physical capital per worker accounts for 55% of the differences in GDP per capita between Cuba and the countries considered in the sample (Vidal, 2020).

Limiting Partial Reforms

Heaped on the depressed investment levels were the partial economic reforms of the 1990s, which limited job creation in such “emerging” sectors as tourism and foreign investment. Those sectors could have increased the labor force participation rate and generated an endogenous capital accumulation process. But, the tourism industry opted for a model based on state-owned hotel chains offering predominantly all-inclusive “tourist packages” tied to international tour operators. This limited the spillover to the local population and its productive fabric. Moreover, the tax system then imposed on the private businesses known as cuentapropistas (the “self-employed”) was especially severe for those offering services in a foreign currency (Ritter, 2000).

Although during the first decade of tourism expansion there was some coordination with domestic tourist enterprises, from the 2000s on these linkages weakened (Figueras & Pajón, 2021).  In contrast, over the past decade, international tourism has diversified beyond “sol y playa” (sun and sand) to include cities and towns, and has incorporated the burgeoning private sector into its value chain.

Misconceptions about the role the private sector could play in the economy prevented a sustainable expansion and curtailed the possibility of creating hundreds of thousands of jobs. First, the state created enormous obstacles to self-employment, which hampered its growth, such as a biased and unpredictable regulatory framework, no access to the banking system, and a regressive and unfair tax system. Moreover, the taxes then imposed on cuentapropismo (self-employment) meant that smaller businesses were subject to higher effective tax rates (Ritter, 2000), which stunted their expansion and generation of new jobs, all in the context of an economic crisis when new jobs were needed. Perhaps even more paradoxically, the opening of a space for the private sector was restricted to elementary activities, mostly of little added value (although some were very lucrative due to the peculiarities of the Cuban context at the time). These conditioning factors impeded an increase in returns from the substantial investment Cuba had made in human capital.

Consolidating a New Model

If the past poses largely insurmountable obstacles to economic growth in Cuba, the future looks even more challenging.  During the decade from 2010–2019, the country could have laid the foundations for a transition to a new productive economic model - one that offered more opportunity to its labor force. The period from Barack Obama’s presidential inauguration until his visit to Cuba in March 2016 can be considered the most favorable to date in terms of external conditions for Cuba’s development, at least since 1985. However, the country’s domestic policies did not sufficiently adapt to take advantage of the unique opportunity presented by this political opening.

Labor market trends were already worrisome when Cuba announced the “updating” of its economy in 2010, as the initial impact of low population growth and sustained emigration became increasingly noticeable. Although the working-age population was barely growing, formal employment in the state sector stagnated so that the labor force participation rate began dropping.

At that time, the government announced a proposal to reduce government employment by 1.5 million jobs, which received a lot of attention for several reasons. First, the size of the state sector is one of the hallmarks of the post-1959 Cuban process, as the government sector and state enterprises were obsessively designed to be the dominant employers.  Moreover, the government announced a more flexible framework for the cuentapropistas (self-employed) in September 2010 (before the Communist Party Congress in April 2011), all of which was interpreted as a sign that Cuba would be headed toward profound changes.

Necessary Reforms Never Materialized

Progress was certainly achieved in some areas, albeit always with the threat of backsliding. Between 2009 and 2020, almost 1.2 million jobs were eliminated in the state sector, including from state-owned enterprises, social services, and public administration. Also, during that period, the working-age population increased by 255,000 people, representing some 177,000 new jobs that had to be created to keep the unemployment and labor participation rates constant. Cooperatives and the private sector created about 726,000 new jobs in that period, yet all of these jobs were insufficient to absorb the effects of the contracting state sector and the new arrivals in the labor market.

As a result, both informal work and emigration increased. The government clearly stated that its intention was to relieve itself of responsibilities considered “excessive”, but it did so without creating a corresponding space for citizens to work in the private sector. In a paper published around the time that Raúl Castro’s economic reform was launched, the Inter-American Development Bank warned that one obstacle to improving productivity in Latin America is the large number of small companies (many of them informal) engaged in simple activities without opportunities for growth (Pagés, 2010). Their small size and stagnation made it impossible for them to accumulate capital, innovate or access external markets.

All in all, the necessary reforms never materialized in Cuba.  Instead, more than a decade later, the situation has worsened. The labor force participation rate increased steadily until 2015, peaking at 7.2 million inhabitants, but has since fallen by more than 2%, while the median age of the labor force has continued to increase.

As a consequence, the demographic dependency ratio ^[3]has gone from 524 in 2006 to 596 in 2021, and is projected to reach 807 in 2030. The government itself has recognized that more than a million citizens capable and willing to work do not have formal employment. The COVID-19 pandemic only accentuated an existing trend.

Emigration and a Rising Median Age

Cuba is no stranger to emigration, yet recent data is alarming. According to official Cuban figures, between 1990 and 2020 more than 910,000 people left the island. According to data from United States agencies, the total number of Cuban emigrants is even greater when including all of their possible destinations, as well as those migrants currently in transit. These figures are much higher than the natural growth of the population and drive the demographic decrease of the labor force. An estimated 80% of Cuban emigrants are between 15 and 59 years old (Albizu-Campos & Díaz-Briquets, 2023).

All current projections indicate negative growth, both for the population as a whole and for the labor force. This will result in a progressive deterioration of the dependency relationship. Demographic variables can only change in the long term; their trends continue for decades.  A sudden increase in the birth rate, proposed by some as a remedy, would, to the contrary, increase the pressure for a minimum two decades, as it would increase the dependency ratio. The good news is that both economic activity and labor productivity can change in the medium term if the state were to implement effective policies.

Increasing the Rate of Economic Activity as a Remedy

Fewer people of working age and an increase in their median age means less labor mobility. This is bad news because the economic structure must adapt, which implies the transfer of labor between sectors of the economy. For example, unmet demand in light manufacturing, personal and household services, and business services present enormous potential for job creation in these activities, but a smaller labor force makes it harder to meet these labor needs. Moreover, a labor force with a higher median age is less willing to change occupations or able to learn new skills.  The educational system also needs to adapt to prepare adult workers with the necessary skills and to reorient itself to promote lifelong learning.

Nonetheless, lower labor force availability can be offset by increasing the rate of economic activity.  In other countries, current policies are increasingly oriented towards tapping the gender bonus.  Given the adverse demographic scenario in Cuba, the ECLAC study identified it as a potential key source of growth for Cuba.  The scarce monetary and professional development incentives in the Cuban labor market are a problem that cuts across many aspects of society and requires attention, if Cuba is to increase its rate of economic activity. Tapping the gender bonus implies considering the economic contribution of unpaid domestic and healthcare work and advancing gender equality in the labor market swiftly.

Too often, Cuban women are concentrated in “feminine” occupational categories according to the gendered division of labor.  Likewise, vertical segregation is obvious in the great concentration of women in lower level positions, despite having similar qualifications to their male counterparts. If the gap in economic activity rates between the two genders could be halved from 2020 levels, this would add around 300,000 additional members of the labor force.

Real Reform is Needed

Finally, increasing labor productivity appears to be the most durable and sustainable response to the development challenge given the current circumstances in Cuba; but it requires a more complex cocktail of interrelated measures, adopted and monitored constantly for efficacy over time. It is indispensable for a nation to invest in physical and human capital. Nonetheless, the availability of investment resources does not by itself guarantee favorable results, as demonstrated during the Cuban boom from Soviet capital in the 1980s. Centralized planning is especially ineffective in channeling investment to productive ends. Capital accumulation requires another regulatory framework – one that enables and promotes it unambiguously.

Recently, the prevailing approach has been based on expanding access to foreign capital by taking loans and attracting foreign direct investment. While the business environment can be improved in both of these areas, the effective use of the resources attracted continues to depend on the type of economic model in effect.

Without true reform, Cuba will become dangerously indebted. And foreign investment, which comes at a cost, has been shown to only favor development within a framework of public policies with a clear intention to increase productivity and that serve to complement national capital. The ideological problem with the Cuban model is that it equates “national” with “state-run”.

In a favorable environment, the private sector can simultaneously create better jobs and attract new sources of capital that are not available to the public sector. More importantly, successful ventures generate resources to finance future development. The capacity for job creation by the private sector has been evident since 2010, despite the challenging conditions in which it operates. By their nature, these private sector activities require investment per job that is several orders of magnitude lower than is the norm in large state-owned enterprises and in joint ventures with foreign enterprises operating with foreign capital.

Labor productivity will also depend on aligning labor force training with available jobs, and this should be reflected in policies aimed at expanding human capital. This is essential - as is expanding the private sector’s ability to carry out the most complex activities. More and better jobs are needed for the Cuban labor force. Increased productivity will provide the necessary resources for economic expansion and also free up workers to provide the care required by the growing, aging segment of the population - without compromising long-term economic growth.

Conclusion

Cuba is not condemned to perpetual low growth and widespread impoverishment. However, changes—some radical—are needed now to mitigate negative effects from the past and increase the potential for long-term growth.  Whether the Island can follow this necessary path is a political question.

References

Albizu-Campos, J. C. (2019). Hacia una política de población orientada al desarrollo humano. En R. Torres, & D. Echevarría, Miradas a la Economía Cubana. Un plan de desarrollo hasta 2030 (págs. 123-136). La Habana: Ruth Casa Editorial.

Albizu-Campos, J. C., & Díaz-Briquets, S. (23 de Febrero de 2023). Cuba y la emigración. La salida como voz. Obtenido de Cuba Capacity Building Project.

Bértola, L., & Ocampo, J. A. (2012). The Economic Development of Latin America since Independence. Oxford: Oxford University Press. 

Figueras, M. A., & Pajón, D. (2021). Pensar el turismo en Cuba en una etapa poscovid. En R. Torres, & D. Echevarría, Miradas a la Economía Cubana. Elementos claves para la sostenibilidad. (págs. 115-130). La Habana: Ruth Casa Editorial.

Martínez, C., Miller, T., & Saad , P. (2013). Participación laboral femenina y bono de género en América Latina. Santiago de Chile: CEPAL.

Pagés, C. (2010). The Age of Productivity. Transforming the economies from the bottom up. New York: Palgrave Macmillan.

Palacios, J. C. (2021). Internal and external constraints of the Cuban Productive Sector. Growth and Change, 52, 492-517.

Ritter, A. (2000). El régimen impositivo para la microempresa en Cuba. Revista de la Cepal, 145-162.

Vidal, P. (2020). Where the Cuban economy stands in Latin America. Cuban Studies, 49, 97-118

[1] Economic benefit associated with increasing female participation in formal employment, given that historically there has been a gap in economic activity rates by gender.

[2] The value of machines, equipment, tools, and physical infrastructure such as roads, telephone lines, and ports available on average for each employee in the economy.

[3] A rough measure of the potential labor supply, accounting for the number of dependent (non-working-age) people in relation to those of working age.