The Magnitude of the Economic Crisis in Cuba and the Causes of the Recent Protests

Causes of the Crisis and Protests

Extremists reduce the causes of the crisis to a single culprit: for the Cuban government, it is the U.S. embargo (known in Cuba as the “blockade”). For the most radical exiles in Miami, only the communist system is to blame. In reality there are multiple causes, summarized below (Mesa-Lago and Svejnar, 2020).

1. The inefficient centrally planned economic system and the deep state dominance over the market and non-state property, which has failed throughout the world including in Cuba. Raúl Castro attempted market-oriented structural reforms, but they happened very slowly and were plagued with obstacles, disincentives, taxes and policy zig zags, so they had no tangible effects on the economy. The government has rejected the successful Sino-Vietnamese “market socialism” model. President Miguel Díaz-Canel supports continuity, but at the beginning of 2021 he decreed the monetary-exchange unification. Although necessary, it was begun at the worst economic moment. So far, it has only generated adverse effects.
    
2. The serious economic and humanitarian crisis in Venezuela has radically reduced its financial relationship with Cuba: a 24% decrease in purchasing Cuban professional services (the island's primary source of foreign-currency revenue); a 62% reduction in oil shipments with favorable terms (which covered 50% of Cuban needs); and an $8 billion drop in direct investment (Mesa-Lago and Vidal, 2019). This relationship reached its peak in 2012-2013 at US $ 16,017 million and decreased by half by 2018. In relation to GDP, it contracted from 22% to 8% and the decrease continued in 2019-2020. 
    
3. The Cuban economy has been unable to finance its imports with its own exports due to the drop in domestic production, which makes it unsustainable. The total value of Cuban exports contracted by 65% in 1989-2019, while imports increased as did the merchandise-trade deficit. For example, Cuba’s economic relationship with China reached its zenith in 2015-2016, when it became Cuba’s primary trading partner, briefly surpassing Venezuela. Their trade relationship represented 17% and 20%, respectively, but decreased by 36% from 2015-2019 (14% of trade). The main reason was a negative trade balance—Cuba exports much less than it imports from China, representing a deficit of US $2 billion in 2015, leading China to reduce its exports to Cuba by almost half (ONEI, 2016 to 2020).
    
4. The tough measures imposed by Donald Trump’s administration, which reversed President Barack Obama’s process of rapprochement with Cuba and reinforced the embargo, have paralyzed investment. This includes the application of Title III of the Helms-Burton Act, which had been suspended every six months by previous presidents (including Trump) and that allows the suing of foreign companies that have “trafficked” with assets confiscated by the Cuban government. Other measures were the restriction of flights to Cuba and the banning all cruises; the imposition of a limit on remittances and prohibiting Western Union from sending remittances to a Cuban agency run by the military; the tightening of sanctions on international banks that do business with Cuba; and the reinstatement of the country on the list of State Sponsors of Terrorism.
   
   Thus far President Biden has not lifted those sanctions. Obama's policy of rapprochement with Cuba, which I supported, resulted in numerous concessions from the U.S. without Cuba yielding one iota. On the contrary, the Cuban leadership continued to criticize the U.S. government for maintaining the embargo that Obama did not have the authority to eliminate, since the Republicans had a majority in both houses (Mesa-Lago, 2015).
    
5. The pandemic is now at its highest number of cases and deaths despite inoculating the population with two vaccines produced in Cuba (the efficacy of neither has been proven). COVID-19 has virtually eliminated all international tourism. The government requires travelers to pay in advance for an “isolation package” to stay in hotels during a quarantine period.
   
   The pandemic has also prevented the travel of so-called “mules,” people who previously traveled back and forth carrying remittances, food, and other goods for relatives or for informal sale in Cuba. The combination of Trump's measures and COVID-19 has led to the departure of Spanish tourism companies such as Meliá and Bankia.
    
6. The implementation, at the beginning of 2021, of the “currency and exchange rate unification” which, although in the long term should yield positive results, in the short term has aggravated many of the previous problems, such as a huge increase in inflation, pressure to increase unemployment, a notable rise in the price of goods, and a severe shortage of food and medicine, which we describe in more detail below.
    

Factors That Have Facilitated the Protests

Previously, the only notable protest in Cuba was the 1994 “Maleconazo.” The current protests occurred in fifty cities and were far more expansive. Four factors contribute to the extent and magnitude of these demonstrations:

Internet and social networks.
They did not exist in 1994 and are now widely used among the population. The videos from San Antonio de los Baños, Palma Soriano, Alquízar, Matanzas, and Havana show a large number of protesters with cell phones in their hands. In San Antonio de los Baños, where the protests originated, a man is seen urging protesters to share the videos in other provinces, which happened very quickly.

The closing of the “exhaust valve.”
Every time the government faced a dire economic situation in the past, it allowed the disgruntled the option of leaving the island—from Camarioca (1965), when hundreds of boats came to Cuba from the United States to retrieve family and friends, to the Rafter Crisis (1994) three decades later, when authorities allowed 100,000 Cubans to escape on rudimentary rafts and boats, to be admitted to the United States. Obama abolished “Wet Foot, Dry Foot,” which previously allowed Cubans who reached U.S. soil to enter the country. Trump tightened restrictions on Cuban immigrants. Homeland Security Secretary Alejandro Mayorkas has warned that the Coast Guard will capture and deport people to Cuba if there is another exodus. Closing the exhaust valve increases the pressure inside the country.

The absence of a charismatic leader.
When the “Maleconazo” occurred, Fidel Castro appeared among the protesters to convince them to stop protesting, extolling all the good things that the Revolution had brought to the people (simultaneously allowing a mass exodus). Raúl Castro, now retired, did not appear in public during the recent protests, though he did go on television the following Monday, to help Miguel Díaz-Canel.

The alienation of young people.
People born after the Revolution do not share many of the ideas of the elders; they are tired of hardships and repeated unkept promises. They desire a better life, use social networks effectively, and support the motto “Homeland and Life” rather than “Homeland or Death.”

Indicators of the Socio-Economic Crisis

The most recent official statistics from Cuba available are from the 2019 Statistical Yearbook (ONEI, 2020); the 2020 figures were not yet posted on the Internet when this essay was completed; and only some figures had been cited by the Cuban authorities.

Macroeconomic indicators.
The Gross Domestic Product (GDP), which was virtually stagnant since 2016, decreased by 0.2% in 2019 and fell 10.9% in 2020; the annual average for the period from 2016-2020 was -1.3%. With adequate growth, it would take three years to recover from the lost five-year period (Graph 1). The 10.9% drop in 2020 is the largest after -14.9% in 1993, the worst year of the crisis in the 1990s (Gil, 2001).

According to ECLAC (2021), the decline in Cuba in 2020 was the most dramatic after Venezuela (30%) and higher than the regional average of 6.8%. The Cuban government projects growth of 6% in 2021, but in the first half of the year it fell by 2% (Gil, 2021), so it would require an increase of 8.2% in the second half of the year to reach 6% overall. ECLAC (2021) predicts 2.2% for the whole year, the lowest growth rate after Haiti, and which would require a growth of 4.4% in the second semester.

Graph 1

Change in GDP between 2006 and 2020 (in constant prices)

In 2021, the fiscal deficit is projected to increase to 30% of GDP, the highest since the 1990s. One expert estimates Inflation in 2021 between 270% and 470% (Luis, 2021) and another estimates it at 474% (Vidal, 2020), the highest inflation rate after Venezuela. Monetary liquidity in the hands of the population exceeded the value of GDP in 2019, which had not happened since the 1990s (ONEI, 2020). With that surplus measured in national pesos (CUP)^[1],there is virtually nothing to buy. Making purchases requires dollars — as long as they are deposited in banks that issue a magnetic card to buy in foreign currency stores — or euros or another hard currency. The vast majority of Cubans do not have access to these currencies.

On June 10, the government prohibited people from making bank deposits in dollars, giving a grace period of eleven days to do so with the dollars that the population already held (Mesa-Lago, 2021b). For this reason, the value of the dollar on the black market has depreciated (the official rate has gone from 24 to 65), while the value of the euro has appreciated (from the official rate of 29.2 to 82).

Cuba does not have substantial domestic savings and its gross capital formation went from 25% of GDP to 12% between 1989 and 2018; and the government has set a capital formation of 25% in order to achieve adequate economic growth. Its international reserves, although unpublished, must be at a very low level or virtually exhausted due to the economic crisis. For this reason, there are no resources to face the increase in import costs, and space for fiscal policies is limited. Finally, Cuba lacks a lender of last resort that could help it financially in the unification as it does not belong to the IMF, the World Bank, or the IADB.

Physical production.
The industrial production index, which had partially recovered since 2013, decreased to 61.3% in 2019, 38.7% lower than in 1989 (Graph 2).^[2] The sugar industry decreased to 30%, textile production to 7% and fertilizers to 4% (ONEI, 2020). Oil production decreased 19% from 2010-2018 and natural gas production declined 23% from 2015-2019 (ONEI, 2011-2020), which increased Cuba's dependence on imported energy. The oil shortage has led to the return of power outages lasting seven or more hours, which also occurred during the crisis in the 1990s.

Of a total of 22 key products in agriculture, livestock, fishing/seafood, mining, and manufacturing, 19 of them decreased in 2019 compared to 2018, ten were below the 1989 level and 11 were below previous production peaks (Mesa-Lago and Svejnar, 2020). In 2021, the sugar harvest was one of the lowest in history (“Una de las peores…,” 2021), yielding only 792,000 tons, compared to around eight million in the 1980s. Of that total, 600,000 was destined to domestic consumption and 400,000 must be exported to China, which means that domestic consumption must be reduced by 200,000 tons.
 

Graph 2

Industrial Production Index between 1989 and 2019 (1989 = 100)

External sector.
In 2019, the value of exports was 62% lower than in 1989, while imports were 22% higher and the deficit in the trade balance of goods grew 187%. In 2020, there was a 30% drop in exports and 40% in imports, which somewhat reduced the deficit in the balance of goods. The surplus in the balance of goods and services decreased by 73% between 2014 and 2019, from US $ 3.7 billion to US $994 million. This was due to the fact that the value of professional services (the country's main source of income in a foreign currency) dropped from 13.8% to 7.2% of GDP between 2012 and 2019 (ONEI, 2015 to 2020) due to Venezuela reducing the purchase of services, as well as to doctors who left Bolivia, Brazil, Ecuador, and El Salvador.

In 2020, external remittances (the secondary source of income in a foreign currency) were 35% below 2019. Gross income from tourism (the third source of foreign currency) fell 80% in 2020 compared to 2017. Between January and May 2021, there were a million fewer tourists (11% less) than in the same period in 2020. Hotel bed occupancy was only 48% in 2019 (ONEI, 2020, 2021a). The main cause of the declines was the pandemic, followed by Trump's sanctions, which restricted travel and remittances (Mesa-Lago, 2021a).

Cuba did not pay its debt that had been renegotiated with the Paris Club in October 2019, and the latter imposed a 9% penalty on its balance, although it has postponed payment (we ignore for how long). Cuba also defaulted on its renegotiated debt with Russia, which suspended its investment projects. Foreign direct investment was virtually paralyzed due to the tightening of the embargo and Trump’s implementation of Title III, as mentioned.

Social indicators.
The labor participation rate decreased from 76% to 65% between 2011 and 2019. Open (visible) unemployment in 2019 was 1.3%, one of the lowest in Latin America and the world, but in 2010 Raúl Castro acknowledged that there was a surplus of labor in the state sector (hidden unemployment or underemployment) which at first was said to be equivalent to 500,000 workers, but in 2015 was projected at 1.8 million workers.

Only 500,000 people were let go from their positions, leaving more than a million unnecessary jobs, equivalent to 29% of the workforce; visible plus hidden unemployment totaled 30% (Mesa-Lago, 2021a). The monetary unification was supposed to result in the closing of enterprises with losses and in the consequent increase in visible unemployment, but the government decided to give a transition year for the enterprises to eliminate their losses. In order to subsidize enterprises with losses, 18 billion CUP were assigned in the budget; there is no guarantee that by the end of 2021, the enterprises that had operated at a loss will make a profit.

In 2019, real wages (adjusted for annual inflation) were 64.3% of the 1989 level, so the population’s purchasing power decreased by 36% (Graph 3). The average salary of 879 CUP per month in 2019 was equivalent to US $37, insufficient to cover basic needs. Another 50% drop in the real value of wages is projected for 2021 (Vidal, 2020). The real pension in 2019 was 47% of the 1989 level — that is, half its value (Graph 2).

The average nominal pension in 2019 was 362 CUP per month (ONEI, 2020), equivalent to $ 15 per month, insufficient to cover basic food needs. Retirees and pensioners are among the poorest groups in the population; to survive, they must receive remittances or help from relatives, or become informal workers. Due to the monetary unification in 2021, both wages and pensions were raised, but huge inflation exceeded those increases.
 

Graph 3.

Value of the State Salary and the Real Average Pension, in 1989-2019 (Index 1989 = 100)

In 1989, Cuba was among the top countries in Latin America regarding its health indicators, but the crisis of the 1990s adversely affected them and, despite an improvement, many have not recovered to their previous levels; access to and quality of health services has severely deteriorated (Mesa-Lago and Díaz-Briquets, 2021).

Although there are no official figures on the incidence of poverty, all previous analysis indicates that it must have increased substantially, which would mean that the social assistance to protect the vulnerable population should expand; but in reality that assistance decreased between 2005 and 2019 from 5.3 to 1.5 beneficiaries per 1,000 inhabitants and from 2.3% to 0.4% of GDP (see Graph 4) (Mesa-Lago and Svejnar, 2020; Mesa-Lago, 2021).
 

Graph 4

Social Assistance Indicators between 2014 and 2019

Finally, the fall in the production of agriculture, livestock, and fisheries, combined with the reduction of food imports due to the shortage of foreign currency, has caused an acute food shortage. Rationing, which previously ensured a meager food quota for Cubans, has been gradually reduced. Food items on the ration card are now sold freely at prices four or five times the rationed price. State stores that sell in foreign currencies charge a profit of 240%, but due to the crisis and the reduction in imports, there is less and less food on the shelves.

It is impossible to buy food and medicine with CUP. Typical items in the Cuban diet such as rice, beans, and pork are not available or are very expensive. As the official supply has deteriorated, the black market has expanded, and so have its prices. A pound of chicken imported from the United States or Brazil at the cost of one dollar sells for seven times that price; the price of a bottle of cooking oil has multiplied four times, a package of hot dogs three times, and powdered milk, which was only sold to children and the elderly, 120 times (Frank, 2021).

I hope that these protests force the government to engage in social dialogue with the people to avoid a worse situation.

Sources

Economic Commission for Latin America and the Caribbean--ECLAC (2021): La paradoja de la recuperación en América Latina y el Caribe, Santiago de Chile.

Comité Estatal de Estadísticas—CEE (1991): Anuario Estadístico de Cuba 1989, Havana.

Frank, Marc (2021): “Roaring inflation compounds Cubans’ economic woes,” Reuters, June 16.

Gil, Alejandro (2021): Minister of Economy and Planning, quoted by AFP, “Cuba seeks...,” July 4.

Luis, Luis R. (2021): “Inflation in Cuba,” Association for the Study of the Cuban Economy (ASCE), May 19.

Mesa-Lago, Carmelo (2015): Normalización de Relaciones entre EEUU y Cuba: Causas, Prioridades, Progresos, Obstáculos, Efectos y Peligros, Madrid, Real Instituto Elcano de Estudios Internacionales, Documento de Trabajo No. 6/2015. May 8.

______ (2021a): “La unificación monetaria y cambiaria en Cuba: Normas, efectos, obstáculos y perspectivas”, Madrid, Real Instituto Elcano de Estudios Internacionales, Documento de Trabajo 2/2021,” February.

______ (2021b): “Desentrañando la suspensión de depósitos en dólares en efectivo en los bancos cubanos,” OnCuba, Miami, June 21.

Mesa-Lago, Carmelo and Vidal, Pavel (2019): El impacto en la economía cubana de la crisis en Venezuela y las políticas de Trump, Madrid, Instituto Elcano de Asuntos Internacionales, Documento de Trabajo. May.

Mesa-Lago, Carmelo and Svejnar, Jan (2020): The Cuban Economic Crisis, its Causes and Possible Policies for the Transition, Miami, FIU Vaclac Havel Program for Human Rights & Diplomacy, October 2020.

Mesa-Lago and Díaz Briquets (2021): “Healthcare in Cuba: Sustainability Challenges in an Aging System,” Journal of Latin American Studies, Vol. 53, No.1, February

Monreal, Pedro (2021): “Los malos datos industriales….” Facebook, Havana, July 20.

National Office of Statistics and Information — ONEI (1995 to 2020): Cuban Statistical Yearbook 1996 to 2019, Havana.

______ (2021a): Arribo de Viajeros. Visitantes Internacionales. Enero-mayo. Havana, June.

______ (2021b): Industria Manufacturera en Cuba. Indicadores Seleccionados. Enero-diciembre 2020. Edición julio 2021 (Havana)

Vidal, Pavel (2020): Cuba Standard, Economic Trend Report Fourth and First Quarters 2020/2021.

^[1] Before the monetary unification in January 2021, there were two currencies: the CUP and the CUC (called the “convertible peso” although it was not traded in the international market). One CUC was equivalent to 24 CUP and was similar to the U.S. dollar. The unification devalued the CUP by 70%.

^[2] At the time this esay was completed, ONEI (2021b) had just published the Industry section with figures for 2020, but it excluded the Industrial Output Index in that year, for the first time since the Index was published. However, it showed declines in several key manufacturing areas in 2019–2020: fertilizers –94%, cement –24%, natural gas –5.9% and electricity –5%. Oil also decreased 3.7% in 2018–2019. Monreal (2021) predicts that industrial production in 2021 will be lower than in 2020.