Macroeconomic Policy in Cuba: History, Problems, and the Agenda for the Future

Macroeconomic Policy in Cuba: History, Problems, and the Agenda for the Future

Ernesto Hernández-Catá (Independent Researcher, USA)
DOI: 10.4018/978-1-4666-6224-7.ch018
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Abstract

This chapter examines the evolution of macroeconomic policies in Cuba during the past 25 years. It analyzes the changes in fiscal policy from its wild gyrations in the early 1990s to the period of stability from 1994 to 2004, and to the crisis of 2008 and its sequel. It then examines the strategy of the Central Bank of Cuba and the tension between its anti-inflationary objective and its obligation to finance a substantial part of the fiscal deficit. It also emphasizes the need for new, modern instruments of monetary control, and the need to equip the central bank to become a lender of last resort. Finally, the chapter discusses the current multiple exchange rate system, its discriminatory nature, and its harmful effects on resource allocation, equity, and the interpretation of statistics.
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Fiscal Policy

A Brief History

Fiscal policy in Cuba went through considerable changes in the period under review

  • Following the elimination of Soviet aid in 1990, Cuba’s budget deficit surged as the authorities foolishly sought to replace real Soviet subsidies with domestic budgetary subsidies financed by monetary expansion (Figure 1).They only succeeded in aggravating an already deep contraction, as the interaction between widespread price controls and high monetary growth resulted in a huge monetary overhang, forced saving, inflationary taxation and extensive rationing.

  • In 1994 someone (it may have been Spanish advisor Solchaga or future Cuban Prime Minister Lage, or both) convinced the authorities they were approaching a cliff at a breakneck pace. Somehow, the government agreed and moved decisively to stabilize the economy: subsidies for enterprise losses were slashed and the fiscal position was dramatically improved. In turn, the sharply reduced financing requirement of the government made it possible to lower the rate of monetary expansion.

  • From 1995 to 2004 the fiscal position was under control. As shown in Figure 1, the overall fiscal deficit was kept in the range of 2% to 3 ½% of GDP while the current transactions balance (the overall balance minus government investment) went into surplus, and has remained in surplus ever since except for the crisis year 2008. (This concept of current surplus has some theoretical merits, as it represents the change in government net worth, but its validity hinges crucially on the assumption that government investment is productive).

  • In 2004-2005, the government backtracked on many of the measures of liberalization and reform adopted in the previous period, and the overall deficit moved a little above the upper end of its apparent policy range for the first time in a decade. Then, in 2008 during the middle of a world financial crisis, devastating hurricanes, a plunge in the price of nickel, and the euphoria caused by massive inflows of Venezuelan money, someone in Havana lost his bearings and the overall deficit surged to 7 ½ % of GDP. Not surprisingly, this was accompanied by a serious balance of payments crisis followed by a domestic banking crisis (see Section 2, below).

  • In 2009 Raul Castro, now in full control of economic policy, decided the situation had deteriorated enough, so the deficit was lowered to 2% of GDP in 2011. Preliminary data indicate that the deficit may have widened to 3.8% of GDP in 2012. Pavel Vidal (2010, 2012, 2013) has written several outstanding pieces on macro-economic policy during Raul Castro’s administration.

Figure 1.

Overall fiscal deficit and current transactions’ balance (in percent of GDP)

In summary, fiscal policy was irresponsible in 1990-1993, and restrained and disciplined from 1994 to 2004. It slipped badly in 2008, but order was restored during the period 2010-11.

Key Terms in this Chapter

Price Control: Determination of the prices of goods and services by administrative decisions rather than market forces.

Monetary Aggregates: Groupings of financial system liabilities under various definitions (e.g., currency plus demand and saving deposits).

Monetary policy: Control of the monetary aggregates and interest rates by the central bank with a view to stabilizing the economy.

Multiple Exchange Rates: A system that includes two or more exchange rate of the national currency.

Fiscal policy: Management of government revenue, expenditure and debt.

Exchange Rate System: Legal and regulatory arrangements governing the external value of the national currency.

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