CUBA: ECONOMIC GROWTH AND INTERNATIONAL LINKAGES CHALLENGES FOR MEASUREMENT AND VULNERABILITIES IN A BIMONETARY ECONOMY

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1 CUBA: ECONOMIC GROWTH AND INTERNATIONAL LINKAGES CHALLENGES FOR MEASUREMENT AND VULNERABILITIES IN A BIMONETARY ECONOMY Gabriel Di Bella and Andy Wolfe 1 This paper assesses sources of economic growh in Cuba during he period , wih he purpose of idenifying facors behind long-erm growh dynamics, as well as hose explaining shor-erm growh developmens. The period chosen covers wha is known as he Special period afer he collapse of he Sovie Union ( ), as well as he recovery period ha ensued (he Transiion period). The fac ha he analysis is based on he pos-1990 period, insead of a longer one, is jusified by he srucural differences characerizing he Cuban economy before and afer In paricular, he pos-1990 period is characerized by srong srucural change, in which he economy had o adap o losing he preferred saus ha i enjoyed among COMECON counries. In broad erms, such saus was refleced in susained deficis in he balance of goods and non-facor services wih COMECON counries (in paricular he former Sovie Union), which helped fuel relaively high invesmen raes. In conras, he pos-1990 period is characerized by relaively low invesmen raes, coupled wih very variable, bu mosly posiive ne expors of goods and non-facor services. In urn, he Special and Transiion periods each has is own defining characerisics. In his connecion, he period is characerized by significan negaive growh raes of GDP, increasing unemploymen raes, decreasing labor force paricipaion raes, declining invesmen raes, increasing obsolescence of he physical capial sock, and srongly decreasing capial sock uilizaion. In conras, he period since 1996 has been characerized by posiive economic growh, decreasing unemploymen raes, increasing labor paricipaion raes, and increasing capial sock uilizaion. Invesmen raes, however, remained relaively low, hough marginally higher han during he firs half of he 1990s. Of special noe is he significan role ha ne expors have played, in paricular since I is for his reason ha he paper also assesses he srengh of inernaional facors behind he pos-1995 recovery of he Cuban economy, wih an eye oward idenifying sources of vulnerabiliies. Such an analysis depends, o a large exen, on he qualiy of informaion used. In he case of Cuba, he exisence since he second half of he 1990s of he dual moneary and exchange rae sysem (in which a converible currency, he Peso Cubano Converible, CUC, coexiss wih a non-converible currency, he Peso Cubano, CUP) inroduces challenges o he measuremen of naional income (Di Bella and Wolfe, 2008). In paricular, he use of official exchange raes in he compilaion of naional accouns (he pracice followed by he Naional Saisics Office) may bias downwards he share of radable secors in oal GDP, which re- 1. We hank Juan Bel, Luis Locay and paricipans a ASCE s annual conference for helpful commens. The views expressed in his paper are hose of he auhors and should no be aribued o he Inernaional Moneary Fund, is Execuive Board, or is managemen. 354

2 Cuba: Economic Growh and Inernaional Linkages suls in an underesimaion of he exen o which he counry is vulnerable o exernal shocks. In addiion, he uilizaion of official exchange raes may bias upward he share of wages in naional income and downward he share corresponding o he remuneraion of capial. In order o accoun for he impac of he dual moneary and exchange rae sysem in Cuba s naional income, he analysis in his paper uses using wo daa ses. For he sub-period afer he inroducion of he CUC, he firs daase comprises he official naional accouns and labor daa published by he Naional Saisics Office. The alernaive daase, in urn, includes an adjusmen o he naional income series o capure he (esimaed) exen o which differen producive secors income and expendiure accouns are denominaed in CUCs and/or CUPs. The resuling flows are expressed in a common currency (which could be eiher he CUP or he CUC), using unofficial bu legal exchange raes insead of official exchange raes. Alhough he resuling series consiues only a rough approximaion of he rue underlying accouns, i provides a benchmark agains which he analysis using official daa can be compared. Needless o say, an accurae assessmen of facors conribuing o growh is imporan for a number of issues, including poenial GDP growh forecasing, he susainabiliy of long-run fiscal policy, and he solvency of enilemen programs (Gordon, 2003). Alhough here are pleny of examples of growh accouning exercises in he lieraure, his paper consiues a firs effor in he case of Cuba. Similarly, i consiues a firs aemp a measuring he srengh of linkages beween Cuba s economy and is rading parners (boh in goods and non-facor services) a a counry level. The analysis finds ha a significan porion of he growh dynamics since 1996 has been explained by an increase in he uilizaion of facors of producion oward more normal levels afer he collapse in heir use during he firs half of he 1990s. Afer such shorerm facors are accouned for, long-erm growh prospecs appear poor. The long-erm growh oulook is even poorer (wih per capia growh raes of abou zero), once he adjusmen o he naional income accouns is made; hese resuls may be in par explained by he same underlyingfacor: he poor rack record on invesmen over he las wo decades. In addiion, he recovery in economic aciviy, in paricular since 2003, depends srongly on expors of non-ourism services. Since he marke for such expors is highly concenraed, he recovery in GDP is highly vulnerable o a decrease in exernal demand for his ype of services. In his connecion, when expors of non-ourism services are excluded, he observed gains in oal facor produciviy during he las years dissappear. The paper is organized as follows. The firs secion describes he daa ses used. The second describes he mehodology used for long and shor-erm growh accouning and he analysis of inernaional linkages and resuling vulnerabiliies. The hird secion presens he resuls of he analysis. The final secion discusses and concludes. DATA The availabiliy and qualiy of economic daa in Cuba has made growh accouning exercises and vulnerabiliy analysis very difficul o underake. In erms of qualiy, one of he main sumbling blocks is ha naional accouns saisics compiled during mos of he period used he Maerial Produc Sysem (MPS), a echnique developed in he former Sovie Union and used by mos cenrally planned economies. The use of he MPS complicaes growh accouning exercises and cross-counry comparisons. Afer he collapse of he Sovie Union, he MPS echnique was abandoned in favor of SNA1993, he echnique used by nearly all economies oday. In his connecion, Cuba s Naional Saisics Office (Oficina Nacional de Esadísicas, ONE), has recenly began publishing naional accoun saisics for he period afer 1995 (see ONE 2008, and ONE, 2009). In spie of any problems ha he daa may have (including he absence of longer ime series, high frequency daa, as well as some accouning problems derived from he dual moneary and exchange rae sysem), he daa allows he characerizaion of economic developmens pos-1995, including growh accouning exercises and inernaional comparisons. The daa from he period was consruced by linking ONE daa wih daa published by he Inernaional Labor Organizaion (ILO), and he Unied Naions Saisics Division (UNSD). 355

3 Cuba in Transiion ASCE 2009 METHODOLOGY Growh rends are analyzed in he conex of a general equilibrium Ramsey model. The model was adaped o allow for wo kinds of labor, one ha is more specialized and produces exporable services, (e.g., docors, eachers, ec.), and one ha is less specialized and is employed domesically. The model also allows for (exogenous) increases in human capial ha increase he effeciveness of labor, as well as increases in oal facor produciviy. I also incorporaes an index of uilizaion of he capial sock. Such modificaions were inroduced in order o beer accoun for counry-specific issues, as well as o obain a measure of oal facor produciviy ha is as clean as possible, i.e., no affeced by shor-erm facors (see Annex I). The calculaion of long-erm growh raes for oal facor produciviy and human capial yields a rough measure of long-erm per capia growh. Moreover, he idenificaion of he parameers of he aggregae producion funcion allows us o gauge he conribuion of each facor of producion o shor-erm GDP growh. The model is calibraed using wo alernaive daa ses. The firs se corresponds o he official daa published by ONE, including labor and naional accoun saisics, as described in he previous secion. The second se includes an adjused ime series for naional income saisics for he period afer he CUC was inroduced, based on he official daa. The second daa se is consruced wih he purpose of accouning for he impac of he dual moneary and exchange rae sysem in he income and expendiure accouns of each economic secor. 2 While official naional accoun saisics, as well as price levels, are measured in CUPs a official exchange raes, he alernaive series consruced here is calculaed in CUCs, using he unofficial bu legal CUP/CUC exchange rae o conver CUPs ino CUCs. The use of he unofficial bu legal exchange raes serves o rebalance he shares of radable and non-radable secors in he economy, as well as he hose corresponding o he remuneraion of labor and capial. A simple example (Table 1) will serve o illusrae he consequences of using unofficial bu legal exchange raes insead of official exchange raes o express flows in a common currency. The firs secion of he ex able shows figures in CUPs a official exchange raes, in a manner analogous o he way official income saisics are consruced. The second secion is expressed a CUPs a unofficial bu legal exchange raes, afer aking ino consideraion he effec of he dual exchange raes in he prices of goods and facors of producion. Table 1. Naional Accouns and Exchange Raes: A Simple Example a Flows in CUPs a official exchange raes Secor A Mosly Tradable Secor B Mosly Non-Tradable Producion Gross Revenues Quaniy (unis) Price Inermediae Consumpion Cos of Non-Facor Inpus Quaniy (unis) Price Value Added Remuneraion of Labor Labor Effor (in man hours) Wages Remuneraion of Capial Flows in CUPs a unofficial bu legal exchange raes Secor A Mosly Tradable Secor B Mosly Non-Tradable Producion Gross Revenues Quaniy (unis) Price Inermediae Consumpion Cos of Non-Facor Inpus Quaniy (unis) Price Value Added Remuneraion of Labor Labor Effor (in man hours) Wages Remuneraion of Capial The model was also calibraed using a hird daa se comprising official naional accouns daa, bu excluding expors of non-ourism services. 356

4 Cuba: Economic Growh and Inernaional Linkages Table 1. Naional Accouns and Exchange Raes: A Simple Example a (Con d) Flows in CUCs a unofficial bu legal exchange raes Secor A Secor B Mosly Tradable Mosly Non-Tradable Producion Gross Revenues Quaniy (unis) Price Inermediae Consumpion Cos of Non-Facor Inpus Quaniy (unis) Price Value Added Remuneraion of Labor Labor Effor (in man hours) Wages Remuneraion of Capial a. Secor A is assumed o be 70 percen radable; Secor B is assumed o be 70 percen non-radable. For simpliciy, non-radable prices are assumed o be se in CUPs a official exchange raes, while radable goods prices are se in CUCs. Inermediae Consumpion of boh secors are assumed o be 50 percen radable and 50 percen non-radable. Wages are assumed o be se in CUPs a official exchange raes. An unofficial bu legal exchange rae of 22 CUP/CUC is used. The hird secion of he able is expressed in CUCs a unofficial bu legal exchange raes. In he example, i is assumed ha Secor A is mosly radable (70 percen of is producion is sold a prices denominaed in CUCs), while Secor B is mosly nonradable (only 30 percen of is producion is sold a prices denominaed in CUCs). I is furher assumed ha ransacions quoed in CUPs are conduced a official exchange raes and ha boh secors purchase 50 percen of non-facor inpus in he CUC marke. Finally, o calculae he shares of he remuneraion of facors of producion (Capial and Labor) in oal income, i is assumed ha wages are oally se in CUPs. The main resuls of using unofficial bu legal exchange raes insead of official exchange raes (Table 2) include: Nominal GDP in CUCs a official exchange raes (idenical o ha in CUPs, as he official CUP/ CUC exchange rae is equal o one, Column 1), is larger han ha calculaed a unofficial bu legal exchange raes (Column 3) The proporion of he (mosly) radable secor in oal GDP increases and ha of he (mosly) nonradable secor decreases (Column 2 or 3 agains Column1). The larger proporion of he radable secor in GDP ha resuls when unofficial bu legal exchange raes are used implies ha he economy will be more vulnerable o exernal shocks. Moreover, given a pah for exernal disurbances, he volailiy of GDP growh will be higher han when official exchange raes are used. The share of he remuneraion of capial in oal GDP increases, and ha of labor decreases (Column 2 or 3 agains Column 1). Table 2. Naional Accouns and Exchange Raes: A Simple Example In CUPs/CUCs (Official ER) (1) In CUPs (Unofficial ER) (2) In CUCs (Unofficial ER) (3) GDP (In pesos) Tradable Secor / GDP (In percen) Capial Remuneraion / GDP (In percen) The alernaive daa se ha was consruced for Cuba s naional income accouns follows a procedure broadly similar o he example described above. In paricular, here were assumpions for: The proporion of goods produced by each economic secor ha is sold in he CUC markes a unofficial bu legal exchange raes and ha sold in CUP markes a official exchange raes. The raio beween he gross value of producion and value added for each economic secor. The proporion of radable and non-radable nonfacor inpus used by each economic secor, including wha proporion consiues ourigh impors; his required he consrucion of a Leoniefype inpu-oupu marix. The proporion of he remuneraion o labor denominaed in CUCs. The deails of he alernaive daa se consrucion are included in Annex II. RESULTS Shor-erm Growh and Exernal Sources of Vulnerabiliy Real GDP growh has averaged abou percen during (Table 3), depending on wheher 357

5 Cuba in Transiion ASCE 2009 official or alernaive daa are used. This relaive low growh masks wo disinc periods. A firs sub-period ( ) of negaive GDP growh, jus afer he collapse of he Sovie Union, and a second sub-period ( ) of recovering GDP, in which growh averaged percen. The second sub-period can, in urn, be furher divided in wo. From 1996 o 2003, growh averaged abou 3.5 percen per year, while during growh picked up srongly o raes exceeding 8 percen per year on average. 3 Table 3. Conribuion o Shor-erm Growh (period averages, in percen per year) official daa alernaive official daa daa alernaive daa GDP Growh (per capia) Exporable Service a Domesic Employmen c TFP Physical Capial a. Correced for Human Capial Sources of shor-erm per capia oupu growh, vary somewha when official or alernaive daa are used. In his connecion, when official daa is used, exporable labor explains lile more han 1 percenage poin ou of he 1.6 percen average per capia growh for This figure climbs o more han 1.6 percenage poins of he 1.7 percen average per capia growh when he alernaive daa se is used. The larger conribuion of exporable labor means lower conribuions of oal facor produciviy (TFP) and domesic labor han hose when official daa is used. Physical capial conribuion is negaive using boh daases, suggesing a shrinking capial sock. The decrease in he capial sock raio reflecs he srong decrease in invesmen raes afer 1990, and convergence o a new seady sae capial sock raio (Figure 1).The decrease in physical capial per capia, ogeher wih increases in he labor paricipaion rae suggess ha he relaive price of capial o labor has increased seadily since This is likely he consequence of a number Figure Source: Auhors calculaions. Cuba. Invesmen raes and Capial Sock Raios Gross Fixed Capial Formaion (In percen of GDP) Physical Capial (Raio on GDP) K/Y SS 2 K/Y SS of facors, including he end of cheap capial ransfers from he Sovie Union, domesic insiuional rigidiies, as well as geopoliical resricions. For he period , economic performance is markedly differen (highlighing he imporance of he difficulies during he Special period). Ou of a per capia average annual growh (using official daa) of abou 5 percen, increases in per capia physical capial conribued abou 0.5 percenage poins (mainly hrough increases in is uilizaion rae), increases in effecive (i.e., human capial correced) hours worked by he exporable services labor conribued abou 1.6 percenage poins, increases in effecive hours worked in he domesic economy (mainly hrough increases in labor paricipaion raes and decreases in he rae of unemploymen) conribued abou 1 percenage poin per year, and TFP conribued abou 2 percenage In he figures below, lines labeled wih a 1 correspond o esimaes using official figures, while hose labeled wih a 2 correspond o esimaes using alernaive figures. 358

6 Cuba: Economic Growh and Inernaional Linkages poins per year. he alernaive series, ou of a per capia annual average increase of abou 5.2 percen, he corresponding conribuions were abou 0.9 percenage poins for physical capial, 2.2 percenage poins for effecive hours worked in he exporable services, abou 0.6 percenage poins for effecive hours worked in he domesic economy, and a TFP recovery of abou 1.5 percenage poins per year. The conribuion of differen facors of producion under eiher daa se sugges ha he economy had a relaively large unused capaciy by he mid 1990s, and hus, ha an imporan par of he growh observed corresponds o increases of he uilizaion of physical capial (proxied by energy consumpion), increases in he labor force paricipaion rae and decreases in unemploymen (Figure 2). The resuls also sugges ha an increase in he share of workers producing exporable services conribued significanly o he resumpion of growh (30 percen using official figures and abou 45 percen using he alernaive series). Figure Source: Auhors Calculaions Cuba: Measures of Economic Aciviy 2 66 Unemploymen Rae Esimaes (righ, percen of labor supply) Labor Force Paricipaion and Unemploymen Rae H-P Filer Labor Force Paricipaion Rae (lef, percen of working age populaion) Energy Consumpion (In GWh) Acual Growh volailiy has been very high during , exceeding 3.7 percenage poins when official figures are used and climbing o 5.7 percenage poins when he alernaive daa se is used (Table 4). The high growh volailiy is explained in par by he exisence of he low/high sub-periods referred o above. The exra volailiy observed when he alernaive series is used resuls from he higher proporion of he radable secor in oal GDP (abou 50 percen compared wih less han 40 percen when official figures are used). Looking a an even more refined period of he las 5 years, he pickup in average growh and is volailiy, in par, reflecs an increase in he conribuion of ne expors o growh, which in iself has been highly volaile. This is in srong conras wih he pre-1990 period in which he balance of goods and non-facor services was consisenly in defici. According o official figures, he conribuion of ne expors of goods and non facor services o growh has increased o more han 1.5 percenage poins in he period ; in paricular ne expors o Venezuela, appear o have accouned for abou 45 percen of oal growh during he period In his regard, he conribuion of Venezuela o Cuban growh appears o have increased by a facor of en in as compared wih Such a significan increase is mosly underpinned by an increase in non-ourism service expors ha more han compensaed he increase in oil impors. In parallel, he imporance of oher rading parners has decreased; in paricular, he conribuion o growh of ne expors of goods and non-facor services o he EU-4 (Spain, Ialy, France and Germany), which has urned negaive, reflecing he fac ha impors of goods and services from hese counries more han offse ourism receips during (Figure 3). The conribuion of goods-producing secors o he growh recovery during has been very low, and in some cases close o zero (Table 5). Regardless of wheher official or alernaive series are used, he conribuion of agriculure, fishing, livesock and mining combined amouned o abou only 0.1 percenage poins o he growh of abou percen during Moreover, manufacuring and consrucion combined conribued only 0.7 percenage poins (using official figures) and 0.6 percenage poins (using 359

7 Cuba in Transiion ASCE 2009 Figure Cuba: Exernal Accouns Source: Auhors calculaions based on daa from ONE and UNSD. Table 4. Ne Expors Conribuion o Growh (In percenage poins) Venezuela EU-4 Toal Expors and Impors of Goods and Non-Facor Services (In percen of GDP) Impors Expors Cuba. Seleced Macroeconomic Indicaors (Average ; in percen of GDP, unless oherwise indicaed) official daa alernaive daa Average growh rae (in percen) Growh Volailiy (percenage poins) Expors of GNFS Expors of Goods Tourism Expors Non-Tourism Services Expors Impors of GNFS Ne Expors Tradable Secors Non-Tradable Secors alernaive figures). In conras, he conribuion o growh of public services (including hose Cuba expors, like educaion, healh and spors) has conribued close o half of oal growh (2.5 percenage poins), when official figures are used and abou 60 percen of oal growh (3.1 percenage poins) when alernaive figures are used. Tourism-relaed aciviies conribued abou 20 percen of oal growh (beween 0.8 and 1.1 percenage poins). Table 5. Cuba. Conribuion o Growh: Supply Side (Average , in percen of GDP) official daa alernaive daa GDP Agriculure and Mining Manufacuring and Consrucion Tourism-relaed Public Adminisraion a Res a. Including Exporable Services (Educaion, Healh, Spors) Employmen has become more dependen of he public secor and, services-producing secors more generally. This is in line wih developmens in GDP composiion. Indeed, while oal employmen grew a an annual average rae of abou 1.4 percen per year during (equivalen o a creaion of a oal of 390,000 jobs), he share of employmen of goods-producing firms in oal employmen decreased by abou 5 percenage poins (wih a ne employmen decrease ha exceeded 100,000 jobs). In conras, employmen in public, personal and social services increased by abou 480,000 jobs during he same period, wih is share in oal employmen climbing o abou 42 percen, up 7 percenage poins since Public finances have become increasingly dependen on non-ourism services expors, he vas majoriy of which appear o come from Venezuela. These revenues sared a levels of abou 11 percen in , jumped o he percen range in , and hen skyrockeed o more han 30 percen in The evoluion of hese revenues has a counerpar in expors of non-ourism services, in he increase in he share of service-producing secors in GDP and he increase in he share of service-producing secors in oal employmen. The remuneraion of capial as a share of income has averaged 54 percen when using official figures, bu his figure climbs o 68 percen when using he alernaive daase. Consequenly, while he remuneraion of labor comprises abou 46 percen of naional income when using official saisics, i decreases o abou 32 percen when using he alernaive series. Mos imporanly, he remuneraion of labor employed abroad (i.e., ha resuling from he expors of 360

8 Cuba: Economic Growh and Inernaional Linkages non-ourism services) averaged 7 percen of income using official saisics, bu climbs o 10 percen of income when using he alernaive daa se (see able wih calibraion resuls in Annex I). The remuneraion of each facor of producion as a share of oal income is essenial for he analysis of growh, boh from a shor and long-erm perspecive. This is he case, as he funcional form assumed for he producion funcion, a sandard Cobb-Douglas, uses such shares as parameers. Long-Term Growh An analysis of long-erm growh accouning poins o significan underlying weaknesses. Conclusions on long-erm per capia growh are dependen on he daa se employed, and can only be idenified in ranges, reflecing he fac ha he resuls are sensiive o he iniial capial sock chosen. The iniial value for he sock of capial is relevan, as a higher value would resul in a lower conribuion of capial o growh, and hus, in a higher esimaed TFP conribuion. Conversely, a lower iniial capial sock would resul in a higher capial conribuion o growh and lower esimaed TFP (Table 6). Table 6. Conribuion o Long-erm Growh (percen per year) official daa alernaive daa GDP Growh (per capia) [ 0.91, 1.99 ] [ -0.12, 1.33 ] TFP [ 0.06, 1.14 ] [-0.96, 0.48 ] Human Capial official figures, he TFP conribuion o longerm growh (i.e. a seady sae values for per capia capial and consan labor force paricipaion, unemploymen and uilizaion of capial sock raes) would be in a range beween 0 and 1 percenage poin per year. Wih human capial growh (proxied by average schooling years of he labor force) conribuing abou 0.8 percen per year, oal long-erm annual per capia growh would fall beween 0.9 and 2 percen. he alernaive series, however, TFP conribuion could be negaive, ranging from -0.9 o 0.5 percenage poins per year. When added o a human capial conribuion of abou 0.8 percenage poins, he resuling per capia long erm growh would range beween somehing slighly below zero (-0.1) and abou 0.5 percen per year. The assumpion consisen wih he upper bound of he growh range is ha he iniial capial sock (i.e., in 1990) is an average beween he seady sae capial sock pre-1990 and he pos-1990 seady sae. This assumpion is consisen wih he view ha afer he collapse of he Sovie Union, only a porion of he Cuban capial sock became unusable. The lower bound of he growh range reflecs a sronger assumpion wih regard o he effec of he collapse of he Sovie Union on he obsolescence of he Cuban capial sock. I assumes ha, a porion of he capial sock equivalen o he difference beween he old and new seady saes became obsolee. 4 Figure 4 shows he esimaed TFP pah for he period using official figures (labeled as 1 ), and alernaive figures (labeled as 2 ); he esimaions shown correspond o he upper bound obained using boh daa ses as referred o above. The char includes an addiional line (labeled as 1 ) ha corresponds o he esimaed TFP pah ha would resul from calibraing he model using official oupu daa, ne of non-ourism exporable services. The resuls seems o indicae ha mos TFP gains in he period pos-2005 (using boh official and alernaive daa ses) are associaed wih he large (and possibly unsusainable) increase in expors of nonourism services. As he rae of increase of such expors diminishes, TFP growh will decrease, and could even urn negaive if he large levels of non-ourism expors begin o decrease. A possible facor explaining he weakness in TFP migh be relaed o he very low levels of per capia physical capial in Cuba, and quesions as o is qualiy. 4. While he model aemps o isolae TFP from shor erm developmens, i is possible ha TFP is reflecing non long-erm facors. Afer he collapse of he Sovie Union (a long-erm developmen), TFP decreased srongly, by abou 25 percen, and remained low a such low levels unil abou 2002, when i began o pick up. The increase afer 2002, however, appears o be correlaed wih he srong increase in expors of non-ourism services, a porion of which is accouned in he producion funcion. As ne expors sabilize, i is possible ha TFP will remain consan or even decrease in he years ahead., which would resul in a furher reducion in he assessed long-erm per capia GDP growh rae. 361

9 Cuba in Transiion ASCE 2009 Figure Cuba. Toal Facor Produciviy (Index 1990=1) 1 1' 2 Figure Gross Fixed Capial Formaion (Percen of real GDP, Official Figures) 90h Percenile 50h Percenile 10h Percenile Producive capial is a source of TFP and long-erm growh, as i resuls in beer and more efficien organizaion of producion, and yields oher ypes of aggregae exernaliies. Cuba s invesmen rae, however, is very low by inernaional sandards, having averaged abou 12.5 percen of real GDP during he recovery period ( ). Indeed, in a panel for he period and ha includes 157 counries, Cuba s invesmen rae has been consisenly below he lowes 10 h percenile during he period In addiion, he invesmen rae has no significanly picked up during he recen high-growh period, suggesing he exisence of srong consrains o capial accumulaion (Figure 5). The long-erm picure is clouded even more when observing he composiion and possible qualiy of invesmen, as machinery and equipmen, (a channel for invesmen-specific produciviy, as Greenwood, Hercowiz and Krusell (1997), emphasize) has averaged only 2.6 percen of GDP during he period The average invesmen rae picks up somewha (o abou 14.5 percen of GDP during ), bu remains low, when he alernaive daase is used, as invesmen in machinery and equipmen is mosly impored and a significan par of invesmen in he ourism secor is made in he CUC-relaed secor. Clearly, if consrains o capial accumulaion were lifed, long erm growh would likely increase. DISCUSSION AND CONCLUSIONS Growh and Is Sources Economic developmens in Cuba during he las 20 years can only be undersood afer accouning for he srong shor-erm impac and srucural changes ha 10 5 Cuba he fall of he former Sovie Union imposed on he Cuban economy. In his connecion, shor-erm growh dynamics were srongly affeced by developmens in wo disinc phases. In he firs phase ( ), when growh collapsed, large porions of he capial sock became obsolee, he inensiy of uilizaion of he capial sock plummeed, he unemploymen rae increased significanly, and labor force paricipaion raes decreased srongly. In he second phase ( ), when he economy sabilized, he inensiy of uilizaion of he capial sock increased, he unemploymen rae decreased, and he labor force paricipaion rae increased. In he background of he shor-erm growh dynamics, here are a play oher facors of a longererm naure, which ac as deerminans of he long-erm growh picure. In paricular: Human capial growh has been growing, a abou 0.8 percen per year. Physical capial has converged o a lower seady sae, reflecing significanly lower invesmen raes in he period afer 1990 in comparison o ha before This has resuled in lower levels of physical capial per capia, likely reflecing he higher cos of capial wih respec o ha of labor. The composiion of GDP and ha of he labor force have changed oward service-producing secors, decreasing he significance of he goods producing secors in he economy. This appears o reflec an increase in he imporance of ne expors 362

10 Cuba: Economic Growh and Inernaional Linkages in GDP, hough i remains o be seen if his is a susainable source of growh. TFP has decreased srongly following he collapse of he former Sovie Union and has recovered only recenly owards 1990 levels. The srengh of he TFP recovery is sensiive o wheher naional income saisics are calculaed using official or unofficial bu legal exchange raes, as well as o he iniial (i.e., 1990) level of he capial sock. The fac ha he TFP recovery occurs simulaneously wih he srong increase in ne expors of nonourism services o Venezuela may be flagging ha par of wha is measured as TFP increases pos migh no be permanen. All in all, long erm growh raes are low and probably close o zero. This migh be he resul of consrains (exernal and domesic) o invesmen and capial sock accumulaion. Vulnerabiliy and Exernal Linkages The collapse of he Cuban economy ha ensued wih he fall of he Sovie Union illusraes how srong a role exernal facors can play in domesic economic developmens. In his connecion, he reasons for he srongly negaive GDP growh raes during he firs half of he 1990s were likely muliple, bu i surely reflecs he economy s lack of diversificaion regarding is rading parners. The dependence of he Cuban economy on he Sovie block was muli-dimensional. I involved no only cheap impors of capial and energy, bu also a sor of economic inegraion ha lef a subsanial par of he capial sock obsolee afer he special relaionship beween Cuba and he former Sovie Union ended. While GDP sabilized and recovered somewha beginning in 1996, growh raes remained, on average, relaively low considering he srong decreases ha had been observed during he firs half of he 1990s. I was only afer 2004, when expors of non-ourism services began o increase srongly, ha pre-1990 GDP levels were reached. Venezuela appears o be he main desinaion of nonourism service expors and a srong engine of shorerm growh, as ne expors from Cuba increased srongly during he las five years. In parallel, he economy appears o have become increasingly dependen on such exernal sales, wih he observed gains in employmen, GDP and fiscal revenues srongly linked o he expor of such services. Alhough a a significan lower scale han ha observed before he 1990s, he lack of diversificaion in Cuba s expor markes for non-ourism services increases he vulnerabiliy of Cuba s economy. In his connecion, no only is he GDP growh rae subjec o greaer volailiy, bu also he srengh of he GDP recovery migh be capped, as he high growh raes in non-ourism expors o Venezuela are likely o decrease and heir levels sabilize. Moreover, he degree of his vulnerabiliy depends on Venezuela s abiliy o keep is purchases from Cuba a heir curren high levels ha, in urn and o a large exen, reflecs he (highly volaile) inernaional price of oil and Venezuela coninuing is curren policy o he island. REFERENCES Di Bella, G., and Andy Wolfe (2008), A Primer on Currency Unificaion and Exchange Rae Policy in Cuba: Lessons from Exchange Rae Unificaion in Transiion Economies, in Cuba in Transiion Volume 18. Gordon, R., (2003), Exploding Produciviy Growh: Conex, Causes and Implicaions, Brookings Papers on Economic Aciviy, Vol. 2003, No. 2, pp Greenwood, J., Z. Hercowiz, and P. Krusell (1997), Long-Run Implicaions of Invesmen-Specific Technological Change, American Economic Review, Vol. 87, No. 3, pp Ljunqvis, L., and T. Sargen (2004), Recursive Macroeconomic Theory. Second Ediion. The MIT Press, Cambridge, Massachuses. 363

11 Cuba in Transiion ASCE 2009 Oficina Nacional de Esadísicas (2008), Anuario Esadísico de Cuba 2007, La Habana, Cuba. Oficina Nacional de Esadísicas (2009), Anuario Esadísico de Cuba 2008, La Habana, Cuba. Propao, J., (2004), El Sisema de Cuenas Nacionales. Visión desde la Economía Aplicada. Segunda Edición. Ediciones Macchi, Buenos Aires. 364

12 ANNEX I The Economic Environmen The economy is deerminisic and is populaed by a represenaive household, a represenaive firm and a governmen, which acs as a cenral planner. The cenral planner objecive is o maximize he household s (discouned) uiliy derived from consumpion: 0 ' UC ( ) (1) UC ( ) ln( C) (2) where C is aggregae consumpion, and is 0 ' 1 he discoun facor. Final oupu resuls from a consan reurns o scale Cobb-Douglas producion funcion: H N Y zf( uk, K, H, L, L ) z z( ukk) H ( L) [(1 ) L] (3) where, Y is aggregae oupu, and is a measure of oal-facor, or neural, produciviy, z wih 0 and. Aggregae labor effor (in hours) is denoed by L 1, 2, , which is assumed o be exogenous and known, while indicaes he proporion of he labor force in he non-ourism, radable, services indusry. In urn, L N (1 ) (1 ), where N denoes nonsleeping hours of he working age populaion, is he (exogenous and known) labor paricipaion rae, and is he (exogenous and known) unemploymen rae. There are wo ypes of capial, physical capial, K, whose uilizaion is denoed by u k, (assumed o be known and exogenous), and human capial, H which will be measured by he average number of years of educaion of he labor force. Also, i is assumed ha z, H, N where denoes he z H N z H (gross) growh rae of neural produciviy,, is he (gross) growh rae of human capial, and N denoes he (gross) growh rae of he working age populaion. Final oupu can be used for consumpion and invesmen, : I Y C I. (4) The sock of physical capial evolves according o, K 1 K (1 ) I, (5) where, is he depreciaion rae. Balanced Growh Pah Condiions and Calibraion Through an appropriae change of variables, he problem in (1)-(5) can be ransformed in one in which all endogenous variables are saionary in seady sae. This can be done by defining x, for X / Y 1/ X, where is C, I, K, Y 11 Y z H, N he (gross) rae of oupu growh, and H, NH N. The producion funcion (3) implies ha oupu per effecive hour will grow, along a balanced growh pah (BGP) a a (gross) rae equal o: 1/ 1 y z. (6) In urn, if one is ineresed in oupu per hour, equaion (6) should be modified o incorporae he rae of growh of human capial, as follows: 1/ 1 y z H. (7) The change of variables poined ou above resuls in he following BGP condiions 1 ( / Y )[ 1 2 3y / k (1 )], (8) 365

13 Cuba in Transiion ASCE 2009 ( 2 / 3) 1 ( 2 / 3) (9) i / y k / yy (1 ), (10) c/ yi / y 1, (11) The 9 unknowns associaed wih he BGP condiions (8)-(11) are, β,,,,,,, and Y 2 3 c/ y i / y k / y ; hus, he soluion of he sysem (8)-(11) requires calibraing 5 parameers, which will be chosen so hey coincide wih heir observed average values during he period considered. The variables chosen for calibraion are:,,,, and. Once he Y 2 3 i / y parameers are deermined, oal neural produciviy, z, can be calculaed from equaion (3), and he conribuions o long-erm growh can be calculaed eiher from (6) or (7), depending on wheher one is ineresed in oupu per effecive hour worked, or oupu per hour worked. Table 7. Calibraion Resuls official daa alernaive daa i/y alfa N alfa H dela gamma Y s / y c/y bea k / y gamma Z

14 ANNEX II An Alernaive Series for GDP The procedure ha was followed o consruc he alernaive GDP series is as follows: 1. A firs marix was consruced including he proporion of goods produced by each economic secor ha is sold in he CUC markes a unofficial bu legal exchange raes, and he proporion ha is sold in CUP markes a official exchange raes. Such marix was consruced aking ino consideraion he composiion of expors of goods and non-facor services. In paricular, he proporion of goods sold in CUC markes a unofficial exchange raes for he ourism-relaed aciviies and for public social and personal services was allowed o change hrough ime o reflec developmens in boh Tourism-relaed receips and non-ourism service expors. 2. A second marix was consruced ha includes he raio beween he gross value of producion and value added for each economic secor. Such raios are available from Inpu-Oupu ype marices ha are unavailable in he case of Cuba. To solve ha problem, he raios were approximaed by he corresponding raios of he Venezuelan economy. 3. A hird marix was consruced ha specified he proporion of radable and non-radable non-facor inpus from oher economic secors used by each economic secor, including wha proporion consiues ourigh impors. Again, hese raios were approximaed by heir corresponding raios for he case of he Venezuelan economy, bu hey were correced o accoun for he specific composiion of he Cuba s impors of goods and non-facor services. his required he consrucion of a Leonief-ype inpu-oupu marix. 4. Finally, a marix was consruced o include he proporion of he remuneraion o labor denominaed in CUCs for each economic secor. In his connecion, labor employed abroad (or in he ourism-relaed aciviies) was assumed o receive heir remuneraion (before axes) in CUCs, while labor employed in domesic aciviies was assumed o receive heir wages in CUPs a official exchange raes. 367