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The Misery of Cuban Merchandise Exports and the Sustainability of the Balance of Payments


The Misery of Cuban Merchandise Exports and the Sustainability of the Balance of Payments

Ernesto Hernández-Catá

The evolution of Cuba’s merchandise exports since the early 1990s is a source of deep concern. The value of exports stagnated during the 1990s and fell in relation to GDP, mostly because of the collapse in sugar exports. The dismal performance of merchandise exports, together with rapid growth of imports, contributed to a deterioration of the negative trade balance. Since the turn of the century, the continued weakness of exports of goods was offset by a surge in exports of services, most of which represented payments by Venezuela and other “friendly” countries for the work of Cuban professionals—manly medical practitioners, but also educators, soldiers, and security thugs.  Most of these payments were captured by the Cuban government, a form of tax without representation that has been condemned worldwide. Some, but not all, of this surge in exports of services was in payment for Cuban imports of oil, primarily from Venezuela and, to a lesser extent, from Algeria. But some of it was paid not in petroleum but probably in cash or through other means. The worsening political and economic situation in Venezuela, and the ending of the agreement to send doctors to Brazil, illustrate the vulnerability of the Cuba’s external position to politically based trade and financial agreements.

The impact of the deteriorating the trade position on Cuba’s current account balance was also compensated in part by a strong increase in private remittances from abroad, although this was offset by sizeable payment on Cuba’s external debt obligations and (apparently) by a  mysterious large current transfers to unidentified countries.

Falling exports of goods.

Fig. 1 shows the evolution of merchandise exports since the late 1980s. The top blue line represents total exports, the bottom red line non-oil exports, and the difference between the two lines represents oil exports. In the 1980s Cuban exports were quite large owing to huge Soviet subsidies for sugar and nickel and the provision of guaranteed markets in the USSR and its satellites. Following the breakdown of the Soviet Union, Cuban exports collapsed, reaching a low point in 1993. During the 1990s both total and non-petroleum exports stagnated.

Cuban oil exports were small through the end of the XX century, but began to climb  during the 2000s, reaching a peak in 2011.This resulted from the Accord between Cuba and Venezuela which led to a sharp increase in exports of petroleum products—refined or blended in Cuba using Venezuelan crude, and then re-exported, mostly to Venezuela. After 2012, however, the value of Cuban oil exports fell sharply, as the world price of oil collapsed and Venezuela cut shipments to Cuba by about half—thus denying Cuba’s export industry much of the crude oil required for its blending and refining operations. The rise and fall of total exports during the 2000s fully reflected the behavior of oil exports.

Source: ONEI and author’s estimates

The data show another remarkable development: non-petroleum exports have been almost flat from 1993 to 2018 (Fig. 1), and they fell in relation to GDP by more than 8 percentage points, from 10.7% in 2003 to 2.5% in 2018 (Fig. 2)—an extraordinarily weak performance during a period of rapidly expanding world trade.

Looking at the composition of non-oil exports, the most striking feature is that shipments sugar exports have almost vanished, falling from $4463 million in 1985 to $758 million in 2003, and to $184 million in 2018. During that period, sugar exports fell at an average annual rate of 3%, while non-oil exports rose by 2.7%. The saving grace was that mining exports (mainly nickel) tripled, during this period, from $240 million to $746 million, erasing about one fourth of the drop in shipments of sugar. The other sub-sectors (non-sugar agriculture, fisheries, coffee and beverages, and tobacco products) declined rapidly. Within that group, the modest rise in tobacco exports partly offset declines in the other items. With the exception of mining, the growth in exports of non-sugar products was minimal or negative. Moreover, there is no indication that new products have contribution in any way to the performance of exports.

Source: ONEI

In sum, the performance of Cuban non-oil exports from the end of Soviet subsides to the present has been very weak. To be sure, this resulted in large measure from the special factors that accounted for the collapse of sugar exports—which in turn, reflected the sad story of the entire sector. Sugar production had been very high during the 1980s owing largely to Soviet subsidies, but they fell dramatically from 8.12 million metric tons (MT) in 1989 to 3.3 million MT in 1995. Production stagnated through the end of the XXth century, but excess capacity continued to prevail following Fidel Castro’s foolish decision to provided large and costly subsidies to the sector. Finally, in 2002 the government launched a comprehensive plan to downsize the sugar

Industry, with the aim of reducing excess capacity and achieving efficiency and competitiveness in the sector. Almost half of the sugar mills were shut down, and acreage was sharply reduced. Sugar output continued to decline, from 3.8 million MT in 2002 to 1.2 million MT in 2011. Output has recovered modestly since then, but has remained below the 2 million MT mark, despite of a rise in world market prices. This story is well told by Pérez-López (2016) and by Alvarez and Pérez-López (1992). Throughout much of the period, the catastrophic performance of the sugar industry has reflected the failure of the communist modes of agricultural production, and of Soviet technology.

Aside from the problems affecting sugar, three factors contributed to the poor performance of non-oil exports.

  1. The inefficiency of the state-controlled agricultural sector. Public enterprises were hindered by controls on their output prices, operated in an uncompetitive environment, and lacked incentives (for managers as well as for workers) to produce efficiently. The state monopoly on foreign trade has constrained the ability of state firms to obtain foreign currencies to finance imported inputs and to expand their presence in foreign markets

  1. The interference of government agencies in the operation of private producers and agricultural cooperatives like the Basic Units of Cooperative Production (UBPCs) and even the somewhat more independent Cooperatives of Credit and Services (CCS).

  1. The severe discrimination of the exchange rate system against exporters. Beginning in 1994, Cuban households bought and sold dollars against non-convertible pesos (CUPs) at a floating exchange that probably mirrored market conditions. Throughout the 2000s, the exchange rate for households has been fairly stable at around 22 CUPs per US dollar, although less appreciated rates were introduced for the tourism and sugar industries. In sharp contrast, the exchange rate for enterprises (and notably for exporting firms) has remained fixed at the highly overvalued official rate of 1 CUP per dollar, implying a huge competitive disadvantage in world markets.

Some of the difficulties facing the sector have been moderated by various reforms, including the right of independent private farmers to cultivate land in usufruct. But major difficulties remain.  Resolving the first two problems mentioned above would require a fundamental policy change that appears unlikely at this stage. As regards the third problem, the authorities have announced their intention to liberalize the exchanger system. Unfortunately, because of the gradualist approach they adopted, there has been very little progress in liberalizing and unifying the exchange system.[1] Thus, the self-inflicted discrimination against exports continues.

Rising imports

Fig. 3 shows the evolution of total imports (top blue line) and non-petroleum imports (bottom red line), with the difference between the two representing oil imports. As in the case of exports, imports fell sharply from 1989 to 1994, reflecting the end of Soviet subsidies (mostly on oil imports) and cuts in the supply of non-oil imports. After that, however, non-petroleum imports increased almost continuously (except for a spike in 2008). The increase was broadly based among groups of products. It was particularly high for machinery and equipment (which rose at an average annual rate of 51% from 1993 to 2018), manufactured goods (32%), and chemical products (28%). Imports of foods and beverage increased at an annual rate of 14%.

From 1993 and through until the early 2000s non-oil imports recovered from their post-Soviet collapse, with fairly little change in petroleum imports. From then on the evolution of imports was dominated by oil trade. Petroleum imports increased rapidly through 2014, a period of “Venezuelan euphoria”, but then fell sharply through the end of the period, reflecting declines in both volume and price. The spike in 2008 resulted from an unsustainable rise in aggregate demand (that led to a severe payments crisis); and the almost equally sharp fall in 2009 reflected the corrective measures that followed. In this connection, it should be noted that Cuban imports reflect not only the evolution of aggregate demand, but also the degree of tightness of government controls, and the availability of credit.

Surging services exports.

In the period from the turn of the century to 2012, the stagnation of non-oil exports coupled with rapid growth of imports led to large trade deficits. How is it then that the overall balance of payments did not implode? The answer is provided in Fig. 4: since the early 2000s the large and deepening trade deficits has been more than offset by the strong growth of services exports. This  reflected several factors:

  1. By far the most important was the seven-fold increase in exports of professional services to Venezuela, Brazil, Algeria and other countries. (See table 1)

  2. To a far lesser extent, the rise in tourism. Revenue from tourism and international transportation rose from $1946 in 2000 to $2968 in 2018, an average annual growth rate of 19%.

  3. Moving from the balance of goods and services to the current account, the growth of private remittances almost certainly helped to offset part of the trade deficit. But there is uncertainty about the magnitude of these remittances, an issue examined in the following section.

Sharply increasing exports of professional services

For the first time in history, and at the insistent request of foreign creditors, ONEI has published data on the composition of these exports. But the data sis only for only for the year 2018.; ONEI does not publish historical information for earlier years. An attempt to construct a time series for these earnings is shown in Table 1.[2] It is generated by subtracting tourism, international travel, communications, and other services from total exports of services. Historical data for total services and tourism are provided by ONEI. Estimates for communications and other services are obtained by using ONEIs recently published data for 2018, and generating past numbers using Venezuelan data on communications and nominal GDP for other services. The services of Cuban professionals are then obtained as a residual. They show a giant increased from $1.2 billion in 2004 to a peak of $9.3 billion in 2013, before falling to $7.3 billion in 2018.

Source: ONEI and author’s calculations

It is not easy to assess the structure of professional exports by type of activity. An estimate based on ONEIs numbers for 2018 (examined in detail in the Annex), suggests that about 80% of totalexports of professional services relate to health practitioners, 16% to a category that probably includes security specialists and military officers, 3% to educators, and 1% for persons involved in culture and sports.

The approach pursued in Table 2 is to subtract from ONEIs net current transfers an estimate of private remittances provided by Emilio Morales. As shown in Table 2, these estimates grow from 1 billion in 2001 to $3.7 billion in 2018.[3] This leave a large and inexplicable deficit on other, unknown, current transactions. Even if you believe that Morales’ estimates of remittances are too high, the conclusion would remain qualitatively unchanged: even if remittances had remained constant at their 2001 level of $1011 million, an implausibly pessimistic assumption, the negative number for the mysterious “other transfers” would still amount to roughly $800 million in 2018.

Another way to solve the puzzle is to assume that, after 2001, ONEI simply omitted private remittances from its estimate for current transfers. This not impossible. But the notion that the Cuban authorities would show an estimate of the current account surplus that is smaller than what they know it to be in reality does not make much sense.

Source: ONEI and author’s calculations

A fragile current account.

Tale 2 displays the main components of the current account. It shows net services more than offsetting a rising trade deficit from 2009 on. Net investment income (a consistently negative number including mostly payments on Cuba’s external debt) exceeds net current transfers. The current account is in deficit through 2009, shifts into a surplus in 2012, and deteriorates though 2018, although it remains in surplus.

Table 2. Cuba: Balance of Payments on Current Account(Million US dollars)200120082009201220132016201720181Current account-553-2308-162238218501796115010512Goods and services, net-864-17361246377129912463203619372aTrade balance-3076-10373-5917-7970-9207-7756-8605-87852bServices balance16628637716311741121961021510641107223Current transfersn/a482235-394-2206172092093aPrivate remittances, net101114471653260528353445357536923bOther current transfersn/a-965-1418-2999-3055-2828-3366-34834Investment income-502-1055-1643-995-922-1284-1095-1095

Source: ONEI, author’s estimates, Emilio Morales (2019) and data provided by him to the author.

Looking ahead, the key question is whether the existing pattern of international trade is sustainable. As shown in Fig. 2 and Table 2, services exports have already declined from their peak in 2012, as earnings from Cuban doctors in Venezuela have declined. A further decline is expected for 1919 owing to the end of the arrangement with Brazil. Further declines are possible if, for example, a new Algerian government were to follow the same course as Brazil.[4] (See the scenarios in Hernández-Catá, 2020)

The key question is how Cuba will deal with the effects of the drop in oil imports from Venezuela. Part of the problem might be solved by new agreements with countries like Russia, but this is very unlikely to fully replace imports from Venezuela.  Unless the government is willing to accept weak growth for an indefinite future together with rationing and power failures, Cuba eventually will have to purchase oil from the world market. But this will require new sources of foreign exchange. Which brings us back to the need to encourage non-oil exports and thus to liberalize the exchange rate system.

In late October 2018, the authorities introduced new regulations that reduce the importance of  the inconvertible (CUP) as well as the ‘convertible’ (CUC) pesos, while expanding the role of the dollar. Households would be allowed to use bank cards to purchase goods with dollars in newly created consumer markets. Moreover, certain state enterprises selling in those markets would be allowed to use the dollars they earn to purchase imported inputs without official approval. As rightly pointed out by Vidal (2019), these measure are an expedient to deal with the effects of the Venezuelan crisis in the short term. They are not a step towards the long promised unification and liberalization of the CUP’s exchange rate. In fact they add a third currency to the mix, thus increasing the complexity and the distorting effects of what is now not a dual but a multiple exchange rate system. It is too early to guage the effects of the new rules, but they seem unlikely to end the disrcrimn0nation against goods exports.

Annex. Estimating the composition of exports of professional services

In the 2019 issue of its annual report, ONEI reported for the first time data on the composition of exports of services, but only for 2018. These numbers are shown in the first column of Table 3 and rearranged to arrive at a proxy for exports of professional services. The second column shows the estimates obtained by subtracting tourism and international travel (from ONEI), communications and other services (form the first column), from total exports of services (also from ONEI). This is the methodology underlying Table 1. It is not obvious, however, to extract from ONEIs numbers for 2018 the composition of Cuban professionals abroad. In table 3, the underlined numbers for professional categories are constructed by grouping the (non-underlined) ONEI numbers in a way that makes intuitive sense but is clearly subject to error.

A surprising aspect of table 3 is that ONEI’s numbers for total exports of services and for tourism and international travel (both reported in the first column) differ from those published by ONEIs in its traditional tables. The latter numbers are used to construct the estimates shown in the second column of table 3. The difference between the two set of numbers are shown in the third coplumn.Table 3. Cuba: Composition of services exports in 2018(Million U.S. dollars)(A)(B)(,C)ONEITable 1DifferenceestimatesaestimatesbTOTAL1129011764-474Compensation of professionals80287309719Health and social assistance6399…Education250…Support services1319…Culture and sports61…Tourism and international transportation18562969-1113International transportation280…Support of transportation235…Hotels, food and beverages.970…Docking fees91…Retail trade279…Telecommunications and information7227220Other services684764-80Financial services156…156Other identified services c78…156Unclassified450…450Source: ONEI and author’s estimatesa From ONEI, Cuadro 5.17; the selection of items making up the underlined totals are made by the author.b From ONEI, Cuadro 15.15c Legal services, other professional services, leasing, research and development, maintenance andrepairs.

References.

Duany, Jorge (2019?)Viajes, remesas y trabajo por cuenta propia. Relaciones económicas entre los cubanos emigrados y su país de origen”. Instituto de investigaciones cubanas. Universidad Internacional de la Florida.

Eckstein, Susan Eva and  Lorena Barbería (2000). ”Cuban American Cuba visits: public policies, private practices.”  Cambridge Mellon Report. Inter-Committee on International Migration, Center of International Studies, Massachusetts Institute of Technology. Quotes by Jorge Duany (2019?).

Hernández-Catá, Ernesto (2019). “Cuba’s Swaps of Petroleum for Doctors and the impact of Cutbacks in Venezuelan Oil Deliveries”. Forthcoming in Cuba in Transition, Volume 28. Association for the Study of the Cuban Economy. Miami FL.

Morales, Emilio (2019). “Remesas. Una ruta de inversión para los Cubanos?” Havana Consulting Group. (September).

Pérez-López, Jorge (2016). “The restructuring of the Cuban Sugar Agro-Industry: a Progress Report. Cuba in Transition, Volume 26. Association for the Study of the Cuban Economy. Miami, FL.

Pérez-López, Jorge, and José Alvarez (2002) editors. Reinventing the Cuban Sugar Agroindustry. Lexington Books.

Vidal Pavel (2019). “Cuba: redolarización de la economía y el fracaso del CUC”. Yahoo Mail on Android. October 19.

Endnotes

[1] There have been reports that a special (less appreciated) exchange rate had been introduced for at least part of the sugar and tourism sectors. ONEI has not published data on this rate.

[2] As mentioned above, the bulk of these earnings is confiscated by the Cuban government—a form of exploitation of workers by the Marxist bureaucracy condemned by free trade unions worldwide and by the International Labor Office, and more recently by Brazil).

[3] These are cash remittance only. Morales’ (2019) estimated total remittances, including cash and in-kind, at 6.6 billion in 2017, compared with Luis Luis’ (2019) regression-based estimate of $4.1 billion.  Duany (2019, Cuadro 3) reports remittances of approximately $ 3.5 billion in 2017, about the same as Morales (2019) number used in Table 2. However his numbers for the period before 2009 (mostly below $1 billion) appear to be on the low side, since ONEI reported remittances of more than $1 billion in 2001.

[4] If the declines in professional services exports to Venezuela are the counterpart of a fall in oil imports from Venezuela, there would be no net effect on the balance of payments.