What Is Driving Cuba’s Economic Crisis? Economist Emily Morris Explains

"Hi, everyone. My name is Liz Oliva Fernandez, and today we are going to be speaking with Emily Morris," said Liz Oliva Fernández, journalist with Belly of the Beast.

"Emily, you have been coming to Cuba since the 90s—early 90s. How do you compare Cuba's economic crises from the 90s with the economic crisis that we are facing now?" she asked.

"Well, in some ways, it's similar. The crisis is a crisis of the lack of foreign exchange and the inability to import essential items," said Emily Morris, development economist at the UCL Institute of the Americas.

"But the situation is different in that the social structure is different. In those days, everybody was suffering pretty equally. Nobody had access to food, or practically nobody, and so on. Whereas now, you've got more remittances coming in. You've got more private enterprises. And as well as private enterprises, you have an awful lot of people working in the informal economy. And so there are some people who are doing okay, but then there are some people who are suffering extremely severely now. So the level of inequality is greater," Morris said.

"And so it feels very different. There's much more kind of, I suppose, less shared hardship than there was before and more resentment, more kind of social tension between one group and another than there was before," she added.

"What drives Cuba's economy?" Oliva Fernández asked.

"There's the domestic economy and the external economy, and the external economy is the earnings from foreign exchange are what pay for the essential fuel and the essential food. And that's where the economy has been hit," Morris said.

"So what Cuba earns its foreign exchange from is, nickel, tourism, the sale of professional services abroad, which is, mainly medical services, and some things from medicines, a bit from tobacco, a bit from rum, but really it's the services sector that brings in most of the foreign exchange," the economist continued.

"And so of course Cuba was hit very, very hard like the rest of the Caribbean, when tourism collapsed or disappeared during Covid. But the other countries in the region have actually recovered. They bounced back because the tourists came back as soon as the flights were restored, whereas that hasn't happened in Cuba. So the tourism is really important, not just for the overall level of foreign exchange, but also because tourism brought in money to the street, to people directly to the private sector, and they're the ones that have been suffering so much," she said.

"What does the Cuban government do with the money that they receive, for example, from tourism?" the journalist asked.

"Well, the Cuban government takes on a very large burden. Most countries in the world, they don't have such an extensive free health service, education service, universities, culture, and all the rest of it, as well as subsidized food, subsidized electricity, subsidized goods of all sorts. And so the Cuban state actually takes on a burden, which it can't really fully fulfill at the moment because it doesn't have enough money," Morris said.

"So when people ask, where does the money go? There's a kind of sense among Cubans because they've expected those things for so long, because they've had them for so long, because it's a government commitment, a promise. They get very impatient. But actually sustaining those things is very expensive," she added.

"So it's a difficult situation. The government finds itself overstretched, at the moment. And it's actually spending more than it's taking in taxation, just providing the basic things that it's committed to providing. And so there's a large fiscal deficit and a large fiscal deficit, which is monetized, mostly means that that feeds into inflation. But they're desperately trying to reduce the deficit, to reduce inflation. And so they're really caught without sufficient spending, to provide the basic services. So it's a budgetary tension. And it's also a foreign exchange tension because, particularly what they don't have is foreign exchange to buy those things that have to be bought from abroad," Morris said.

"It's really hard to get economic data from the government," Oliva Fernández said. "Why isn't the government more transparent about the numbers?"

"Well, I mean, a lot of the numbers are published that the National Statistics Office does publish numbers, and they're kind of quite useful. But the National Statistics Office, like any national statistical office, requires quite a lot of resources to run well. It's got shortages of staff, it's got shortages. It's suffering the same power cuts that everybody else is suffering from," Morris said.

"It has to, the people have to travel around the country. So essentially they are overstretched, the National Statistics Office. And then there's also the problem of a lack of transparency generally. And that is you can say to some extent governments don't like divulging too much or that it's expensive, it's burdensome to do so. But also in the case of Cuba, there is this issue of being under threat from outside and the US policy makers saying explicitly that they will use information about the Cuban economy to try to weaken it," the economist said.

"The national statistics are the ones that the government uses as well. And so they're, in a way, hampered in their decision making by the dearth of close, careful, survey led data, which would help them to make policy better. So this is a real problem," Morris added.

"But the other problem, on top of all the other problems, is that because of the way that the economy is run, there's a very large informal sector. And the informal sector in any economy is very difficult to track. And so it doesn't appear in the official figures, but it's actually a very large part of how people manage. And so in a way, the government figures don't actually tell you what's happening on the ground. And nor do they tell you really the amount of economic activity that there is," she said.

"Are sanctions real, or are they just an excuse to hide corruption or mismanagement?" Oliva Fernández asked.

"I mean, they are very real, and I have interviewed business people who have been put off. Some of them have been put off by Cuban regulations. It's a slow process of approving investments, but mainly in terms of trade, it's really U.S. sanctions that is the main deterrent," Morris said.

"Because of U.S. sanctions, it's very difficult for Cuba to borrow money short term just to cover a short term trade transaction. If they can't find the money to do that, then they end up being late with their payments. And once you're late with your payments, then that goes as a bad mark in your record. And so then your trader or whatever won't want to trade with you again. And so the fact that Cuba can't get access to international finance, which because of sanctions, means that their payments record is worse than it would otherwise be. And so it has an indirect effect on deterring businesses from doing any kind of transactions with Cuba. So there's a spiral effect, there's a circular effect. And the sanctions, if you like, the sanctions are something that there is a policy decision being made, obviously in the US, but that if the sanctions were removed, the spiral of debt and nonpayment and, the withdrawal of foreign businesses would be solved," the economist said.

"And you could say, well, then, you know, the problem is the restrictive Cuban laws and so on. At the moment, there's no actual incentive for the Cuban Foreign Ministry to be more open to foreign exchange or to foreign investment, because the foreign investors aren't coming anyway. And so if there wasn't this barrier, then there would be some purpose in reviewing and improving the system," Morris added.

"Does the government bureaucracy contribute to the economic problems?" the journalist asked.

"There's bureaucracy at different levels, and the bureaucracy at the higher level—in a way, the decision making—it seems to be slow, not well communicated, not clear what the strategy is. And so this has left people feeling very much that there isn't any real strategy," Morris said.

"I think that that is to do with the structure of the decision making. But it's also to do with the emergency, because if you're in the middle of an emergency, you're reacting every day to what today's crisis is, and there's a crisis every day. And so if they're trying to allocate resources in a hurry according to what delivery didn't arrive or what power station has stopped working today, or because there's a shortage of some essential part or some essential fuel or food or whatever that hasn't come, if you like, the ministries are so occupied with the day to day management of the economy," she continued.

"And so that kind of top down way of managing the economy becomes very frustratingly slow and cumbersome in the context of an emergency. So it's not a central planning system, it's a central allocation of resources. But nobody's really doing planning properly because they don't know how much money they're going to have next week or how many resources they're going to have next week. They're just trying to make a decision," Morris said.

"My main question, like being a Cuban who lived in Cuba, is, we have been in crisis our entire life, but it not always feels the same. There is a kind of feeling that now the situation is getting worse. What is your opinion about how has been changed in the last five-ten years in Cuba?" Oliva Fernández asked.

"Well, the crisis, this current crisis definitely started in 2019. During the Trump first Trump administration, there was a series of measures taken to try to make life economically more difficult for Cuba. By the end of 2019, the effect on the deliveries of oil were felt very clearly. The non-delivery of oil, first power cuts and so on, and the economy started to go down because there wasn't enough fuel. And so then in the midst of that kind of downturn, you had the state sponsors of terrorism and. Well, and you have, first you had Covid, then you had the state sponsor terrorism, taking on a whole series of, further blows, if you like, to the economy," Morris said.

"By 2010, there was starting to be more of a sense of normality. People were starting to do new things. There was the opening up to, you know, selling houses, getting cars, all of those things had started to kind of move things and then the opening up to private enterprise. And then finally in 2021, in the midst of the crisis, the opening up of private companies. All of that was happening. All of those reforms were happening and the economy was growing. And as I said, the international reserves were being accumulated and debt was being serviced finally. And so there was a sense of kind of returning, finally returning to, to the beginning of normality and and that's what's been frustrating. That's why it's so frustrating for Cubans, particularly for young people, you know, the boom in international visitors, in tourism that happened during the Obama years was particularly, had a big impact on young people in terms of their sense, you know, you could now travel abroad if you knew somebody, at least people were coming over, people making friendships, people making links with people in the United States and all of that became more difficult since then," the economist said.

"And so it's not surprising to me at all that so many people said, well, you know, I've had enough of this," she added.

"So there was a huge outflow of people, which has caused, has actually compounded the problem in Cuba. For example, in the statistics office, they've lost people in universities, they've lost people. You know, the way where Cuba is best hope for getting out of this crisis is to harness what it's invested on for so long, which is the education research capacity, the science that can actually bring Cuba out of the crisis. So many of the young people who are well qualified and could have helped with that process have now left the country, which is a kind of a tragedy for Cubans," Morris said.

"How do you compare the salaries in Cuba with other countries?" Oliva Fernández asked.

"Well that's a, that's a, that's a million dollar question, because the people's salaries in this country, the salary that you have covers, you know, that's your basket of goods that you buy just from your salary. And the salaries are very, very low compared to the price of the goods that you buy with them. Without a doubt, it's very, extremely tight," the economist said.

"The household salary is, extremely low, extremely low in Cuba. It's so low that people, you know, in the press, they talk about Cubans living on $10 a month or whatever like that. And what I say to them is, if they were really living on $10 a month, they would be starving to death. That's true. A lot of people are short of food, but they're not starving to death. So why is that? Because of, you know, there's certain amount of your food, which is, subsidized and, and so on," Morris said.

"It's, important to note that with your salary, you don't have to pay for your health, you don't pay health insurance, you don't pay, for university education. So, so many things that are subsidized or free in Cuba. And so how do you compare that with what people live on in other countries? It's very, very difficult. So the Cuban government produces figures, it shows household spending from the salaries in the official economy, not in the informal economy, of course. And then they show another figure which shows household consumption, and that includes health and education and all of the value of all of the things that are subsidized. And that is a completely different figure," she continued.

"Because, you know, you need to measure consumption. In fact, in globally, when they're trying to measure poverty levels, the World Bank has a measurement. It's $2 a day. And critics of that measure said that's not actually a good measure, because what you should be measuring is not people's income, but what they consume, which effectively was what Cubans are doing, the Cuban government is doing. It's saying, okay, what's the household consumption? What's the consumption per head, which is much bigger than the salary. So if you look at it that way, you could say, well, then the Cubans, if they were converted into a market economy, you could say they pay a very high rate of taxation, effectively a large part of what they, have, what they earn, what they consume is provided directly by the government. They don't pay for it, but effectively they are paying for it, if you like, yeah?" Morris said.

"What have U.S. sanctions mean for a country like Cuba?" the journalist asked.

"The sanctions? Well, I mean, the sanctions are deliberately trying to sabotage the Cuban economy, and they've been quite effective at doing that. So, you know, every every international transaction is difficult to make because of the sanctions. Clearly, Cuba is very close to the United States. The United States is Cuba's natural partner. You know, most countries trade mostly with their nearest economies. It's not just the nearest economy, it's the biggest economy in the world. And so to be cut off from the US is, is devastating. But to be cut off effectively from most other partners as well, in many, many ways, but also even in an unpredictable way, is devastating for the Cuban economy. And you can see it in every aspect of life," Morris said.

"One of the things that I've been doing is working in the academic sector, trying to do research, collaboration. Cuba has a very, well established, very highly qualified researchers in many areas. Just even to do that, we have, you know, the universities, the university lecturers, are stopped from getting a visa waiver to go to the United States. So many of them won't come to Cuba. The universities' banks won't run payments to Cuba. And so trying to get a grant is actually very, very difficult, nearly impossible. So you have to work around that. And so you know, even in the academic field, which is not supposed to be affected by sanctions, is deeply affected by sanctions," the economist said.

"To try to quantify the amount—and people have tried to quantify it—but the total isn't the sum of all of those little things. It's the interrelationship between them. It's the relationships that would have been made between entrepreneurs in this country and entrepreneurs in the United States, between researchers here and over there. All of those things would have been possible. All of the things that would have been possible that you haven't even imagined and not included in those numbers that the Cubans present every year to the United Nations," Morris said.

"And so it's a fraction of the real cost to the Cuban economy, in my view. So it would just be a different world if there weren't sanctions," she added.

"How are the sanctions against Cuba different from the sanctions against another countries like Vietnam, for example? And I say this because a lot of people like critics of the Cuban government said that even Vietnam under the sanctions was able to grow," Oliva Fernández said.

"Vietnam is close to China. I mean, that's the simple answer. Vietnam is not the natural closest partner to the United States, it had other alternatives for international trade," Morris said.

"The other thing is the way that US sanctions work: clearly, you know, cutting off trade and financial relations to the United States is very important. But also the way that they work, the way that they're phrased leaves many questions unanswered. And so it acts as a very effective deterrent to third countries, from doing business with Cuba. And Cuba's a small economy. I mean, it's, you know, it's any but it's less than 10 million people now. And so international companies, international financial institutions, I mean private ones, they're not going to risk the possibility of losing any part of their U.S. business by trading with Cuba. So, for example, the airlines, if you fly to, to Cuba, are you going to lose your landing slots in the United States? This is something that you're risking. And you wouldn't risk it because Cuba's it's quite a significant but it's a small, small, very small market compared to even just to, to Miami, you know. So why would you do that? You know, these are people making rational business decisions. And they're just saying, well, you know, we you know, we won't do Cuba now, we won't do Cuba for this year or next," the economist said.

"Critics for the government don't believe that the sanctions really affect the Cuban economy. And they say that the sanctions are only an excuse; they say that other countries don't want to trade with Cuba because Cuba don't pay them. Is that true?" the journalist asked.

"If you're going to buy something, you have to pay in advance before you get the stuff delivered, before you sell it. And so you have to have credit, you have to have a trade credit to do that. And so, you know, international trade, international business runs on credit, on finance. And if you have a bad payments record, you have to pay more for your finance. So the cost of finance is adjusted according to the risk. So if you've got a bad payments record you have to pay more. If you have to pay more, it's harder to pay. Yeah? If you suffer an economic shock, which effectively is what the US sanctions keep doing one thing after another. If you suffer an economic shock, you can't pay well. What any other country in the world would do would be to turn to another source of finance. Well, when you're turning to another source of finance and it's either not there because the banks won't cover you or it's a very high rates of interest and you're paying those high rates of interest to finance, then you know, you're caught both ways," Morris said.

"So it's like trying to run an engine when the oil keeps running out. And when that happens, then the parts just don't move. And that's what we're doing. We've got an old machine and it has to be continually, you know, try to kick it back into into action. You know, it's like a just like that. And it as well, if you don't have the oil then you damage the parts. And that's the same as well. You damage your payments record. You damage your access to more finance to improve things in the future. So that's a really big problem. And like I say, you know, the recovery in a way, people aren't going to see a lot of the benefits of the recovery for a while because it's absolutely essential for the central bank to build up reserves, because it must build up reserves, because it must improve its payments record in order to regain access to any international finance," she said.

"What would you say that is the main cause of Cuban crisis—economic crisis?" Oliva Fernández asked.

"The main cause is U.S. sanctions. And I say that not just because of the direct effect of U.S. sanctions, but if you think about the non recovery from the Covid decline, okay. What happened? Cuba has no access to international finance from the multilateral organizations and so on. And so it has no way of recovering. At the same time, there's been a concerted effort by the US administration to reduce the number of people and visitors coming from the United States," Morris said.

"You know, Cuba has the same dancing as the same buildings and has the same things as it always had. But people don't find Cuba attractive. Why? Because the image has been tarnished by all of the kind of bad news, this so-called sonic attack. So all of these things kind of accumulate to kind of create a negative picture of Cuba. So, so I'd say that the crisis is caused by U.S. sanctions and then the state sponsors of terrorism, was devastating has been devastating, remains devastating," the economist said.

"And that is a politically motivated designation, without a doubt. And so, you know, so U.S. sanctions includes that even though that's not a trade sanction, that's just a listing of Cuba as a state sponsor of terrorism. But it has so many repercussions, not just on trade with the U.S., but with on trade on the rest of the world and on finance in particular," she added.

"So even though the state sponsor of terrorism is a US designation, financial institutions all over the world, and particularly in the Western world, they have transactions with the United States. And so if the US has sanctions against Cuba, a red flag comes up in the compliance department and says, that's dangerous, we might get sanctioned. And so any business trying to do business with Cuba will find that the bank won't process its payments. And so, you know, that's a real deterrent. And they say, why not. They say, oh, sanctions. They don't say US unilateral sanctions, they say sanctions. It's a sanctioned country because that's why the red flag goes up," Morris said.

"And so the company, they may look into it in more detail. And they'll see it was only a unilateral sanction by the US. But they also know that the US, the reach of the US is very wide. A lot of countries, a lot of companies actually process their payments through the US, even if they don't even have business in the US," she continued.

"So the state sponsor of terrorism affects everything. And I say that without any hesitation. You know, even banks, some banks in China and Russia would find themselves wary of doing business with Cuba. You know, Russia less so now because they've got sanctions themselves as opposed. But yeah, that kind of pushes Cuba closer to Russia. Which is kind of, it's a paradox, isn't it? Because the US are trying to, yeah, make Cuba less of a threat or they think it's a threat or they want to, bring it into the US fold, but actually they're pushing it towards Russia and China and the other the rest of the world, because that's the only way Cuba can do business," Morris said.

"Critics of the Cuban government, even yourself, are saying that Cuba needs to do some reforms. Forget about the embargo, let's do some reforms. And that's the way to get over the obstacles that the sanctions like terrorism list and everything is putting on Cuba's economy. What is your take on that?" Oliva Fernández asked.

"If you liberalize the economy, you you increase the private sector, all the rest of it, but you still have distorted exchange rate, distorted prices. What you will produce is an economy in which, some kind of intermediation or exploiting the difference in prices in one area and in another area is more profitable than actually doing anything productive," Morris said.

"So price reform is an essential component of this process. And I'd say it is something which needs to be integrated into the whole process. So rather than liberalization in terms of private enterprise letting it grow and all the rest of it, I think that the attention needs to be on relative prices. And as I said, if you change relative prices and people have adjusted their lives, companies have adjusted that that way of operating to one set of prices and you move it to another set of prices, that means that everything has to change. And if you're changing things and there's going to be winners and losers, if you come back to the same thing, you're stuck. So there needs to be a strategy for moving towards a single exchange rate, a single, a single set of prices," the economist said.

"Is Cuba a corrupt country?" the journalist asked.

"I think it's certainly true there's a lot of black markets in Cuba. Black markets, you know, people stealing things to sell in the black markets and so on creates ideal conditions for corruption at the low level. So the person who runs the warehouse or stands the security guard or whatever will take whatever money they can take from the person who's stealing. You would anticipate that as an economist, you would anticipate that that would happen. But the question is really about what what level of corruption it there is and where is it. So from what I can see—and I am an outsider and it's quite a secretive government for all the, the national security reasons that we know and all the rest of it—but there's no there's no evidence that there's severe corruption at the top. And what there is evidence of is that there, there's a shortage of foreign exchange, that the government is trying to deal with a shortage economy," Morris said.

"And so a lot of the shortages on the street among people who are talking about it, they say, oh, well, somebody must be taking this money from us. Somebody must be taking it. I don't think the problem is somebody taking it. I think the perception might be that somebody is taking it, but the reality is that there is no money and the resources aren't there. And so but since the government is not as transparent as it could be, not as clearly communicating, of course, trust in the government suffers under those circumstances," she said.

"Now, the place, I think, where the most of the accusations are gathered around is around this GAESA conglomerate, which is very big, not transparent at all, linked to the military, at least nominally, but linked to the military in the sense that it doesn't have to report in the same way as other enterprises and all the rest of it. And it is very big and it has a large, large empire. And I think that that there's probably a danger of, you know, of corruption in an organization like that just because of its lack of transparency. You know, even does it fully answer to the, the government auditors, you know, to what extent is it fully audited? That I don't know. But I can see why people are concerned about it," Morris added.

"Are you hopeful about the future? Are you hopeful about Cuba's economy?" Oliva Fernández asked.

"It's not an easy path. For as long as the U.S. is maintaining the sanctions, it's not an easy path. If the U.S. were to lift sanctions, the Cuban economy, I think within five years would be prosperous. I don't I don't have any doubt about that, you know," Morris said.