Three ideas on the Cuban economic collapse

The person in charge

The impact of the U.S. sanctions on Cuba is a phenomenon that has not been studied with sufficient scientific rigor to establish its percentage as a cause of the current situation. Let's elaborate a little on this.

Broadly speaking, the most solid explanations revolve around qualitative ideas that discuss limitations in access to financing and similar dynamics, as well as some economic models that calculate potential economic flows, especially related to tourism. From the first group, there are no models projecting how much access to financing has been lost, or assumptions based on those data and results in terms of impact.

Regarding the second group, the models indicate annual losses (more accurately, revenue not earned by the Cuban economy) ranging from 1 billion to as much as 4 billion, depending on the source. However, these analyses are based on the assumption that without restrictions on tourism to Cuba, the destination would be competitive enough to generate all of those revenues. And that is a challenging assumption to prove, given the high competitiveness of other destinations in the Caribbean basin.

Then, assuming these models to be accurate, the high percentage of imports needed to satisfy tourism, of up to 80%, makes all those revenues inefficient. The economy would have a net foreign exchange balance of between 200 and 800 million annually.

Thus, assuming the highest possible figures from before and an optimal reinvestment scenario (total reinvestment of profits), with its current productivity, Cuba would take 35 years to reach the per capita income levels that the Dominican Republic has today.

This means that the country must have started a development plan based on tourism revenue before it had the full hotel capacity to support it. It is worth noting that the Dominican Republic is the strongest economy in the Caribbean basin, but it holds a middling position across Latin America and the Caribbean in terms of per capita income.

Nonetheless, let's extend a vote of confidence to the authorities, even if it's just for analysis. By applying statistical models to the data of the Cuban economy, it is found that the importation of food has a significant dependency on the total exports of the economy; however, at certain levels of growth, income increases faster than food imports. In other words, beyond a certain income level, the benefit for Cubans in Cuba regarding the supply of imported food slows down.

At the same time, these data indicate that food imports have little causal relationship with tourism revenues. That is to say, no matter how much foreign currency from tourism increases, there will not be a corresponding response in food imports. In fact, in previous times, with double the tourism income compared to an earlier point, there hasn't been a doubling in food imports.

And regarding investment, another key element to understand the above, the data indicates that there is a statistical correlation (even though they are multicausal phenomena) between tourism revenue and investments; however, the sector that captures the most foreign currency is the hotel construction sector.

All of the above means that, although there is no data to determine the amount of the flows that the Cuban economy has lost, there is enough information to assert that the Cuban government does not have a policy of improving the living conditions of residents in terms of food and investment in these when there are higher revenues.

Therefore, we do not know the percentage of the sanctions, but it is clear that the Cuban government is 100% responsible for the crisis because its economic policy, according to the data, does not utilize resources to address this situation or improve the living conditions of Cubans in Cuba (it does not increase food imports and prioritizes sectors that are not appropriate).

The cause

Defining a cause always depends on the level of analysis. In this case, I will define it based on how much needs to change in order to resolve the current situation in Cuba. The answer is one: the system.

I would like to clarify, so that it is not interpreted in the ideopolitical realm. By "system," I refer to the logic that prevents optimal or better decision-making, the establishment of favorable rules for wealth creation, and the very emergence of economic actors who generate it. In other words, the cause of the current situation is an authoritarian political system that:

1. no tiene incentivos en evitar citizen discomfort (and the deterioration of living conditions) de estos).
2. It does not have expansionist ambitions like the Chinese communist elite, which is seeking economic growth.
3. It limits the creation of businesses and mechanisms to promote them where there is a need to be addressed.
4. prevents the country from integrating into the international financial system, and therefore, from accessing the resources needed to attempt to overcome the current situation.

The solution

The Cuban government cannot do anything to significantly improve the current situation. Milestones such as doubling exports (something impossible under current conditions) would barely impact food consumption. Cuba has the worst economy in Latin America in terms of per capita income, a paralyzed business system that needs a boosted industrial revolution, hidden unemployment of around 90%, and investment needs to restore the country’s infrastructure of approximately 60 billion USD.

These investment amounts, along with the demand for labor and know-how that the Cuban economy requires to implement such investment, cannot be solely covered by the current economic capacity of the island.

Accessing the aforementioned resources implies Cuba's integration into the international financial system, creating conditions for the return of part of the diaspora and the exile, and establishing economic institutions, particularly an efficient banking system. All of this is only possible outside of the Cuban political system.

Therefore, the only economic solution that the Cuban government has to reverse the current collapse (a more appropriate term than crisis) is to create an economic and political transition that allows for the design and implementation of a reconstruction plan for the country.