On natural resources and raw materials

One of the quintessential challenges for Cuba’s policymakers is to be able to increase the economy’s productivity. However, it should be emphasized that productivity does not mean just any kind of productivity, but the right kind. That is, all economic activities are qualitatively different and offer dissimilar opportunities for innovation and industrial upgrading. To specialize in natural resources activities (such as sun and sand tourism and mining) and low-tech services do not generate much income for a developing country (Chang 2010; Palma in Cimoli et al. 2009, pp. 203—38; Reinert 2007).

There is nothing intrinsically wrong with a country using its stock of natural resources as an export item and as a source of short-term finance, so badly needed in early development stages. However, the history of economic development is the tale of countries trying to catch up with more technologically advanced nations, or as Malerba (2006) states, the history of countries “catching up in different sectoral systems” (pp. 16—21), in order to acquire higher technological capabilities. Historical evidence shows that almost no country has been able to develop into a sophisticated economy by relying solely on the export of raw materials or services (Chang 2007, 2008, 2010; Reinert 1999, 2007). To understand that, it is important to acknowledge the qualitative difference between economics activities.

Raw material activities are to be classified within the realm of decreasing returns activities (Reinert 1999, 2007).That is, while manufacturing activities present opportunities to achieve higher value-added products through innovation, raw materials-based activities are based on a limited stock of resources. For example the amount of productive exploitable land will gradually shrink, as the need of more production increases. Introducing technological innovation in these activities alone will tend to reduce the prices of raw materials (agricultural product, minerals etc.) in the international markets. This, the rest remaining equal, will tend to diminish export gains and national real wage averages. In order to remain profitable, these activities must be embedded in a successful industrial economy (ibid.). “A country with a broad-based manufacturing sector is more likely to take advantage of new opportunities than one which has specialized in a few primary based products” (Rodrik 2006, p. 12).

The same happens with services. These sorts of activities generally show low levels of both productivity and tradability (and therefore with low levels of scalability) (ibid.). Contrasting with domestic services, tradable economic activities provide scale opportunities for an economy (particularly a small one) in such a way that it can expand output without running into diminishing returns. No matter how productive a restaurant, a rental house or a barber can be, it won’t be enough to raise the real wage levels or to increase international competitiveness.⁴⁶

As William Baumol stated years ago, it takes four musicians as much playing time to perform a Beethoven string quartet today as it did in 1800 (Baumol and Bowen 1966). Domestic low-tech services do not provide much scope for innovation and therefore for productivity improvements. The conditions of production themselves preclude any substantial change in productivity. Therefore, increasing the share of low-tech services within the economy could lead to a decrease in the export earnings, which in turn means to become more dependent on external borrowing.To be sure, some services (engineering, consulting etc.) could provide the economy with new windows of innovation and more tradability opportunities; however they depend on the existence of a productive manufacturing sector. While manufacturing activities can increase productivity' through mechanization and automation, traditional domestic services tend to remain more or less the same and have little chance of increasing overall productivity of the economy. However, Cuba’s manufacturing landscape went in the opposite direction and in the present is barely non-existent, again, with exception of pharmaceuticals and related products, along with a couple of relatively low-end manufactures (furniture, beverages etc.) (Table 6.1).

As the case of pharmaceutical products indicates, investing in non-traditional tradable activities means that an economy is absorbing more sophisticated technologies and is increasing its chances of participation in the international market with more elaborated products of higher long-term productivity potentials. It also brings other opportunities such as trained workers and managers who can be employed in other firms, “and they provide inputs (and demand) for other activities which may not have started up otherwise. The social value of such investments greatly exceeds their private value” (Rodrik 2006, p. 2).

Cuba experienced a sudden decline in its foreign earnings during the last few years, which resulted from a very poor export performance.This, aggravated by other factors,⁴⁷ had an impact on economic growth and in the country's ability to honor its financial obligations to external creditors. External debt has increased since 2004, with the exception of 2018, according to CIA Factbook.⁴⁸ But the country was able to maintain this in-debt trend as long as the ratio of external solvency' remained controlled by the growth of GDP. When the growth trend stopped, then the necessity for adjustment became apparent.

Even when many authors give much more meaning to the reduction of debt, which is of course a very important goal, some sort of intuitive sense is

Table 6.1 Changes in physical output in Cuba’s manufacturing subsectors, 1989—2014

(Percentage change in physical production levels, 1989—2016) 1989 = 100

Source: Oficina Nacional de Estadisticas, Cuba (ONEi) (2019) Data available until 2016.

telling us that growth is more important. In the case of Cuba this means coming up with the necessary institutional transformation that allows creating higher capabilities in value added manufacturing activities. That’s the reason why to promote innovation through related and unrelated diversification, and consequently, the formation of backwards and forward linkages within the domestic economy, should be part of the Cuban economic policy design. The actual challenge for Cuba is to be able to absorb more sophisticated technologies and to increase its participation in the international market with more elaborated products. Increasing the degree of value added manufacturing of resource- based exports helps build an export structure with higher long-term productivity' potentials (Palma in Cimoli et al. 2009, pp. 203—38).

As already referred to above, the most recent version of the guidelines recognizes the need to engage in technology and industrial policy in order to boost productivity, diversify exports and substitute imports. The document mentions explicitly' the goals of developing the nanotechnology', the electronic industry', metal transformation, etc. This is the right direction, but the fact is that up to date, except the biotech industry, the Cuban strategy has been based in low-ends. Still today policymakers insist in calling tourism industry as the locomotive of the economy, even when signals of the sectors relatively lack of dynamisms are apparent. The fact remains that during the period 2011— 2016 the gross fixed capital formation amounts to (constant prices 1997) circa 14 percent, which is below the historical average for the group of upper middle income countries (circa 20—25 percent), to which Cuba belongs (according to the World Bank classification).