Cuba: Getting Serious about Reform?

By Ricardo Torres*

Miguel Diaz Canel_Cuba

Cuban President, Miguel Díaz-Canel Bermúdez/ Cubadebate/ Flickr/ Creative Commons License (not modified)

The economic reform proposals that the Cuban government announced on July 16 sound promising, but they feel very similar to past efforts, and authorities have yet to demonstrate commitment to implement them in a manner that matches today’s serious global and national conditions. The measures come at a time that Cuba is experiencing its worst economic crisis in 30 years. According to the Economic Commission for Latin America and the Caribbean (CEPAL), the country’s imports fell 41 percent in the first five months of 2020 – more than any other country in the region except Venezuela. The commission predicts the island’s gross domestic product will decline 8 percent this year – a conservative estimate in view of its dependence on tourism, remittances (almost all from the United States), and distant trading partners.

  • The announced measures are too general to permit a detailed analysis of their potential impact, but a substantial number of them represent a more flexible interpretation of policies agreed upon during the Seventh Party Congress in 2016. They feature a 180-degree shift of focus on the private sector and cooperatives, which just two years ago the government was taking steps to severely limit. The greater use of the U.S. dollar – an inevitable consequence of the severe balance-of-payments crisis – is also noteworthy.

The political and economic moment calls for measures that are bold enough to change expectations – reduced because of past non-performance – and produce real results. After years of false starts, the government’s willingness to make the reforms a reality remains in question. The biggest doubts deal with how far the authorities will go toward restructuring state enterprises – an unavoidable step for any true transformation. The government faces five immediate challenges to managing the current crisis and ensuring a positive impact from the package of reforms.

  • Convincing domestic and foreign public opinion that this time reform is for real and will be sufficient and permanent. Decisions over the past four years have been erratic, undermining the conceptualización that then-President Raúl Castro announced in 2016 as an “updating” of “the theoretical bases and essential characteristics of the economic and social model.”
  • Creating and consolidating new, agile, and effective mechanisms for decision-making. The country lacks a system for guaranteeing that the best ideas for transformation reach the highest levels of government, are examined, and are adopted in a timely fashion. Ensuring that bureaucrats do not distort the policies is also essential.
  • Avoiding the hidden traps of some measures that have already been tried, which will remind Cubans of the worst moments of the Special Period in the 1990s. The dollarization scheme implemented back then, for example, was complicated by rule changes the government made midstream. Authorities also rejected the necessary restructuring of the enterprise system and public sector. Cuba survived – collapse was avoided – but emerged without a sustainable economic model. Genuine development was not achievable.
  • Achieving a critical mass of changes that become self-reinforcing and overcome trenchant ideological resistance and create enough momentum to refloat the economy. In the 1990s, Cuba benefited from a world economy that was growing – radically different from today. The current situation requires much greater internal efforts.
  • Adding social justice as a priority in the reform package. Although a central talking point in official discourse, it is either totally missing from the new strategy or implemented in ways that are not relevant to the new social structure of the island. Cuba needs a debate about modern social policies to address its multidimensional inequalities.

So far, the big winners in this new scenario are the private sector and cooperatives as well as people who have access to U.S. dollars. But the entrepreneurs face obstacles, such as the requirement that they use government-controlled enterprises in all foreign trade. The idea that the state intends to create its own micro, small, and medium enterprises also detracts from the reform message.

  • Expanded dollarization will further segment the productive sectors, but this time it probably will allow producers to purchase capital goods – an essential step in any process of stimulating production over the long term. The potential impact will be greater if combined with the promised, but often delayed, move toward a sustainable monetary and exchange scheme. The big question remains, however, if the government is serious about making it happen this time.

August 17, 2020

*Ricardo Torres is a Professor at the Centro de Estudios de la Economía Cubana at the University of Havana and a former CLALS Research Fellow.

Regionalism in the Time of Coronavirus: The Only Way Forward?

By Leslie Elliott Armijo*

Coronavirus Latin America

Map of the COVID-19 outbreak in Latin America as of 30 April 2020/ Pharexia/ Wikimedia Commons (modified)

To overcome the multiple challenges of the COVID‑19 crisis, Latin America’s leaders will need to build regional cooperation around pragmatic solutions – an elusive goal for countries with a legacy of disunity and weak collaboration. The coronavirus has hit at a moment of economic vulnerability. Regional growth averaged only 1.9 percent in 2010-19, worse than in the “lost decade” of the debt-crisis 1980s (2.2 percent). Labor productivity, which in 1960 was almost 250 percent of the world average, has fallen steadily in every subsequent decade, and in 2019 sat at a mere 90 percent of the global mean. Persistent squabbling among Latin countries has meant that major global trading states, including the United States and more recently China, could dictate the terms of bilateral trade and investment agreements in ways that favored these larger powers.

  • In negotiating global trade, Latin America and the Caribbean have shown little shared identity or cohesion, whether as a region or as sub-regions. As of late 2018, as global value chains coalesced around three regional hubs – China/East Asia, U.S./North America, and Germany/European Union – Mexico, Central America, and the Caribbean were linked to the U.S. but lacked bargaining power to seize more advantageous positions vis-à-vis the United States. South America has deindustrialized since the turn of the century, returning to its historic role of commodity exporter to all three hubs. Intra-regional trade as of 2017 was only 22 percent of all Latin American trade and had fallen since 2013.
  • This is a shaky foundation from which to face the health and economic challenges of COVID‑19. The IMF’s scenario, which assumes an optimistic return to business mostly-as-usual in the third quarter, predicts a contraction of GDP in 2020 of 5.2 percent in the region, driven by brutal collapses in the two largest economies, Brazil and Mexico, of -5.5 and -6.6 percent respectively. The extra-regional markets for Latin America’s exports certainly will shrink due to both short-term reasons of global depression and longer-term ones of enhanced economic nationalism abroad. Remittances and tourists from the U.S. and elsewhere will not return to their previous numbers for a long time.

A coronavirus-solidarity virtual summit last month showed that some regional leaders realize the need for joint action. Nine of 12 South American presidents participated, although Brazilian President Jair Bolsonaro – who has made intemperate and dismissive remarks about his fellow leaders – gave his seat at the video conference to his foreign minister, Ernesto Araújo.

  • Argentine President Alberto Fernández participated despite Bolsonaro’s snub (including on previous occasions) and his previously chilly relations with the sponsoring body, PROSUR, founded in 2019 by center-right Presidents Iván Duque of Colombia and Sebastián Piñera of Chile as an explicit counter to the pre-existing regional body, UNASUR, which leaned left during the presidency of Bolivia’s Evo Morales (now in exile in Argentina). In so doing, Fernández demonstrated the pragmatism and understanding that Latin American and Caribbean leaders often eschew: if you want to solve policy challenges, you must maintain dialogue with people with whom you disagree.

If there is any light at the end of this tunnel, it could be psychological, as crises tend to focus minds. The disruption in international relations beyond Latin America probably will accelerate the move away from the post-Cold War “unipolar moment” and fuel domestic economic nationalism that will shake up the three major global trading hubs – a reorganization in which the region could redefine its place. In this scenario the best defense for Latin America is a strong offense. As Alicia Bárcena, Executive Secretary of the UN’s Economic Commission on Latin America and the Caribbean (CEPAL), said recently, the region’s resilience likely depends on “investment in strengthening regional production chains” to create “complementarities in production structures and regional integration.”

  • Diplomacy enables states to share knowledge and engage in collective action to meet real cross-border challenges, including those of the current crisis. Regional solidarity does not require headquarters buildings, formal treaties, and summit pageantry, nor even similar domestic political systems. The considerable achievements of the loose, informal clubs known as the G7, the G20, and the BRICS prove the value of cooperative models that need not boast costly institutional scaffolding. The Association of Southeast Asian Nations (ASEAN), formed in 1967 by 10 countries that were at least as mutually suspicious of one another as they were of China, provides another lesson about somewhat effective regional cooperation that Latin America would do well to note.

April 30, 2020

* Leslie Elliott Armijo is an associate professor at the School for International Studies, Simon Fraser University, Vancouver. Her most recent book, coauthored with C. Roberts and S.A. Katada, is The BRICS and Collective Financial Statecraft (Oxford University Press, 2018).

Argentina: Yet Another Generalized Default?

By Arturo C. Porzecanski*

Argentine Vice President Cristina Fernández de Kirchner and Argentine President Alberto Fernández during a working meeting with governors last week/ Casa Rosada/ Creative Commons

The Argentine government’s current attempt to force investors to accept a punishing debt-restructuring plan puts the country at risk of yet another sovereign default on foreign-law, foreign-currency debt. The attempt validates the massive loss of confidence that took place last August, when local and foreign investors ran for the exits in the wake of the unexpectedly strong performance of the Alberto Fernández-Cristina Fernández de Kirchner ticket in the country’s presidential primaries.

  • Confidence had already been set back in early 2018, after a series of disappointments with how then-President Mauricio Macri was running overly loose fiscal and monetary policies that encouraged excess government borrowing and facilitated capital flight. Macri’s decision to turn to the IMF for a huge bail-out loan in exchange for a modest fiscal and monetary belt-tightening shored up confidence, but the prospect of Peronism’s return to high office undermined investor confidence anew, causing a steep plunge in Argentina’s stocks, bonds, and the currency from which it has not recovered.

Fernández had a window of opportunity to provide confidence to local and foreign investors – following the example set by Brazil’s Lula da Silva back in mid-2002, when his pulling ahead in presidential polls sparked the beginning of a market rout in that country. However, all that Fernández has done is blame Macri for all that was going wrong, denying that mistrust of Peronism was also a factor in deepening the financial and economic crisis.

  • Absent any reassurance, investors have been reluctant to show up at auctions of new peso- and dollar-denominated treasury bills, preferring to cash out of positions whenever those obligations matured. Therefore, even before Fernández took charge in December, Macri was forced on one occasion to unilaterally postpone repayments of treasury bills falling due.
  • Fernández has institutionalized the practice of deferring by decree the majority of payments coming due each month, thus defaulting time and again on most peso and dollar obligations subject to Argentine law and jurisdiction. Until very recently, however, he and the Governor of the Province of Buenos Aires, Axel Kicillof, were honoring their obligations contracted under New York law and jurisdiction.

The coronavirus disrupted a less investor-unfriendly alternative devised by Fernández to avoid a repeat of the massive default, financial isolation, and bruising legal defeats (in New York courts) that his predecessors had suffered during 2002-2015. The idea was for federal and provincial governments to develop debt-restructuring proposals and present them to bondholders by mid-March, in order to obtain by mid-April creditor approval of a deferral of payments coming due during 2020-23.

  • To cushion the blow of the pandemic, the debt-restructuring plan, delayed to mid-April, included terms and conditions that were substantially worse for bondholders. Investors holding $66 billion of bonds are being asked to write off some principal and most interest payments throughout the decades-long life of new bonds to be issued in exchange for existing ones, in a proposal that would impose (net present-value) losses on bondholders averaging at least 60 percent. The Province of Buenos Aires has presented a similarly aggressive debt-restructuring plan.

A critical mass of investors has spoken out against the government’s proposal, including outright rejections by three groups of bondholders who could block any deals. To ratchet up the pressure, the federal government skipped a $503 million payment due on April 22, setting the clock running on what could easily turn into Argentina’s ninth sovereign default on foreign-law, foreign-currency debt.

  • One constructive way for Argentina to break the impasse with its private creditors would be to ask fewer concessions from them by deciding to seek new financing from, or else a rescheduling of debt service due to, the IMF. This would be achieved by requesting support under a longer-term Extended Fund Facility. Because Argentina’s program with the Fund was a short-term standby facility, under which $44 billion were disbursed, the whole amount plus interest is to be paid back in full between now and 2024. These scheduled payments to the IMF amount to more than 40 percent of total foreign-currency payments the government of Argentina is supposed to make during 2020-24.
  • If the Fernández administration were willing to work with the IMF on an economic program that would impose fiscal and monetary discipline to kick in once the coronavirus pandemic is over, the government would not need such large concessions from its private investors. In fact, such a partnership with the Fund would pave the way for a gradual return of investor confidence and the reopening of its domestic bond market for renewed financing on a voluntary basis.

April 28, 2020

*Dr. Arturo C. Porzecanski is a Distinguished Economist in Residence at American University and a member of the faculty of the International Economic Relations Program at its School of International Service.

COVID-19 in the Caribbean: So Open, so Vulnerable

By Bert Hoffmann*

rows of empty beach chairs in Jamaica

Beach in Jamaica/ Marc Veraart/ Flickr/ Creative Commons License (not modified)

In the Caribbean, the COVID-19 crisis hits some of the world’s most open, specialized economies, forcing the region to rethink its development model. Eleven of the world’s 20 most tourism-dependent nations are in the Caribbean. The collapse of this sector leaves the import-dependent island states extremely vulnerable beyond the immediate health crisis and beyond the social and economic fallout from the current “shelter in place” rules and lock-down measures.

  • For most Caribbean nations, tourism is by far the most important economic activity. In small states like Barbados, St. Lucia, Antigua and Barbuda, and the Bahamas, tourism makes up more than 40 percent of GDP. In bigger countries like Jamaica, it accounts for more than half of exports and employs almost a third of the workforce. Many in the tourism industry cling to hopes of a speedy recovery, but this is not likely. Travelers’ confidence in cruise ships and exotic flight destinations will not fully rebound before vaccinations against the virus become readily available. Not only the low season this summer is lost, but also much of the crucial winter season.
  • The pandemic is also going to slash remittances from Caribbean emigrants. Most states have sizeable diaspora communities, and money transfers from abroad are a vital part of their economies. Unlike in the aftermath of hurricanes, migrants in the United States, Europe, or neighboring islands are affected by the same crisis. Many will also cancel visits “home.”

Current social policy measures may be able to mitigate some of the hardship, but foreign exchange buffers are hardly sufficient to maintain these on such a scale over a long time. Largely agricultural countries decades ago, most of the region today imports more than half the food they consume – seven CARICOM countries even more than 80 percent. With global supply chains and food production in the United States disrupted, imported food prices will rise. Reviving local farm tradition passes from a “romantic” niche concern to being a key issue of social policy.

  • In the Caribbean’s non-sovereign territories, the crisis underscores their population’s dependence on the welfare systems of the United States, France, the UK, and the Netherlands. At the same time, it casts a spotlight on persisting inequalities. Puerto Rico, for instance, has only one-fourth of intensive care unit beds per capita than the U.S. mainland, despite its much higher share of elderly residents.

The coronavirus crisis is bringing to the fore a number of long-term challenges for the Caribbean. If left solely to the logic of comparative advantages, the region’s world market integration tends to be one of specialization, not diversification. The downside is a high vulnerability to external shocks. In recent years, “resilience” became part of the vocabulary of Caribbean policymakers in the context of climate change, not to face global economic or health shocks. The current crisis demands thinking of “resilience” as a development goal in an even broader sense.

  • The pandemic also highlights the extent to which the Trump Administration takes the United States out of the game of soft policy approaches, and China finds a field left wide open. Beijing’s shipments of medical supplies and protective wear are a small investment, but they have a big impact in countries of some 100,000 inhabitants. Taiwan is also providing face masks and soft loans to those that still recognize it diplomatically. In contrast, what Washington seems to care about more than anything else is that the Caribbean nations should not accept Cuban doctors in to fight the disease.

April 20, 2020

* Bert Hoffmann is a Lead Researcher at the German Institute for Global and Area Studies (GIGA) and professor of political science at the Free University of Berlin’s Latin American Institute.

Cuba: Dealing with the Global Pandemic

By Ricardo Torres*

Cuban nurses carrying the Cuban flag

COVID-19 Response: Over 100 Cuban Nurses Arrive Barbados / Flickr / Public Domain

Cuba faces a “perfect storm” – a global health crisis – that poses the latest in a long list of challenges to its government, but a systematic destabilization of the country is highly unlikely, if not remote, for now. The COVID‑19 pandemic has caused an unprecedented disruption to the world economy, the devastating effects of which no country has escaped. The Cuban economy is critically dependent on tourism and remittances, two areas that have been deeply affected. Those countries from which visitors and cash flow to Cuba are greatest – the United States, Canada, Western Europe, and China – have been hit hard.

  • The shock is compounded by a drop in Cuba’s average annual growth from 2.7 percent in 2010‑15 to 1.4 percent in 2016‑19. The causes of that decline include the economic crisis in Venezuela; the cancellation of medical services agreements in Bolivia, Brazil, and Ecuador; the end of the international tourism bonanza; and the effect of new U.S. sanctions. Washington’s actions have complicated trade, foreign investment, and travel. The measures have limited remittances, reduced Cuba’s ability to import fuel, and clamped down on foreign firms operating in Cuba, such as through the first application of Title III of the “Helms-Burton Act.”
  • Another factor has been the disappointing results of Cuba’s internal economic reform, which has been wrapped up in political contradictions and a lack of clarity of its objectives. One costly flaw in these circumstances has been the government’s inability to stimulate industries that provide essential products, particularly food. Combined with the international challenges, including fresh, tough sanctions by the United States, this problem has contributed to a situation in which the Cuban people face growing shortages of all kinds of products, including food, medicines, and fuel.

The government’s response to COVID‑19 has evolved from caution to the gradual imposition of increasingly radical measures.

  • In mounting a medical response, the centralization and verticality of the Cuban model allows authorities to adapt plans and resources in the face of new priorities. The Cuban health system, for example, is known for its national coverage and access to resources (including 848 doctors and 5.5 beds per 100,000 inhabitants), and it has experience dealing with epidemics. Decisions have been taken around the concept of epidemiological vigilance, including closing the borders on April 2 and bolstering research, although the inability to carry out massive testing has been a weakness. The government has also guaranteed workers’ income and employment, except for parts of the private sector and informal economy, and expanded food-rationing to a broader list of products.

The economic impact in the medium term should not be underestimated. GDP growth will enter negative territory. Financial problems will surely deepen. Shortages of an array of basic necessities are going to worsen. Restructuring of foreign debt is necessary.

  • Internally, Cuban policymakers are going to have to take into consideration the new socioeconomic structure of the country and the need to focus support where it’s needed most. The crisis provides a good opportunity to give substance to longstanding rhetoric about improving agricultural production. Greater flexibility in regulating private businesses is also an obvious policy option. Accelerating and broadening digital access throughout society should also be a priority under the wisdom of “not putting off till tomorrow what can be done today.”

The Cuban Government is not presiding over a terminal crisis, however. Even considering the system’s weaknesses before the pandemic, this perfect storm is not its responsibility. For the medical challenge, Cuba is prepared and probably will overcome some of the criticisms made abroad about its medical missions, as brigades of Cuban doctors deploy to 19 countries. The country’s biotechnology industry also stands to make advances. It’s too early to say whether Cuba will be able to profit from these opportunities, but Havana may benefit from its willingness and ability to be a responsible international partner.

  • Washington’s policies also put it in sharp contrast with China, which continues to provide help during these difficult times. If the pandemic has made anything clear in Cubans’ minds, it’s that the United States is disqualifying itself as a positive force for change on the island.

April 17, 2020

*Ricardo Torres is a professor at the Centro de Estudios de la Economía Cubana at the University of Havana and a former CLALS Research Fellow.

 

Latin America: The Massive Challenge of COVID-19

By Carlos Malamud and Rogelio Núñez*

Bolsonaro & AMLO

Presidents Bolsonaro of Brazil and López Obrador of Mexico have been criticized for downplaying coronavirus concerns// Left: Palacio del Planalto/ Flickr/ Creative Commons (modified)// Right: PresidenciaMX/ Wikimedia Commons (modified)

Latin America has had several advantages as the COVID-19 virus has moved in – including the chance to learn the lessons of Asia and Europe – but it faces it with fundamentally weaker tools: under-resourced health infrastructures, slowing economies dependent on declining commodity prices, comparatively little ability to increase public spending, and politically weakened governments. The WHO numbers are rising and will grow steadily owing both to accelerating infection rates and more widespread testing.

Most governments have taken strong actions, including closing borders, imposing quarantines, and closing schools, but leaders face huge challenges. In many countries, their inability for years to respond to the growing social demands of the emerging middle classes, especially regarding health care, education, and other social services, have already led to major social unrest and incumbent weakness.

  • They’re going to confront the virus with grave institutional problems, including corruption and lack of financing, and a lack of popular goodwill. The worst are Venezuela, Nicaragua, and Haiti (a failed state), but Brazil and Mexico will be most deeply affected. Brazil already has a high infection rate, and Mexico’s will grow as well.
  • In Latin America’s presidential systems, most presidents have put their personal imprint on national policies. Their measures to slow the spread of the virus have faced little backlash. Brazilian President Jair Bolsonaro and Mexican President Andrés Manuel López Obrador have gone out of their way to appear oblivious to the scientific indicators that their countries could face catastrophe. Especially for politically vulnerable presidents – Chilean President Sebastian Piñera has a 10 percent approval rating – the virus entails great personal political risk.
  • Making things worse, regional organizations such as the South America Defense Council (part of UNASUR), the Pan-American Health Organization (PAHO), and the OAS have not yet provided effective international coordination. PAHO is sending “support teams” with unspecified mandates and no new resources. The Central American presidents have met digitally to coordinate strategies.

Failure of the early control measures could have dire health consequences. Health services are vulnerable and easily overwhelmed. The delayed arrival of the virus has given health officials time to prepare, and the best hospitals are in urban centers with greatest need. But the region has several Achilles’ heels, especially the shortage of facilities and resources.

  • “Universal coverage” is actually only “partial” in all but Costa Rica and Uruguay, according to a London School of Economics study. Some countries improved their preparedness in the wake of outbreaks of chikungunya, zika, dengue, and other contagious diseases, but most still lack the laboratories and field facilities to slow a virus of COVID-19’s scope.
  • Most seriously, many of the health systems lack the infrastructure to identify, treat, and isolate patients enough to slow the spread of such a highly contagious disease. The lack of efficient isolation facilities, coupled with shortages of trained personnel and essential supplies and equipment, leave the region – despite its short-term preparations – vulnerable to an outbreak much larger than in Asia, Europe and the United States.

Market crashes and likely recession in Asia, Europe, and the United States are causing collapse of the prices of Latin American exports and a series of profound pressures on economic growth in the region. Our colleague Federico Steinberg notes that the difference between a “soft-impact” scenario and a catastrophic one will depend on whether the virus is brought under control in the second quarter of the year.

  • Many observers believe the impact will be less severe in Latin America than Asia, but that assumes reasonable success keeping the crisis relatively short. Some decline is inevitable, however, because China, Europe, and the United States’ recovery will take time. Among the sobering predictions is that of the EU’s Director for Economic and Financial Affairs, who on March 13 said the EU and Eurozone will enter a recession this year with growth “considerably below zero,” but his reference to a good chance of a “normal” bounce back next year may be optimistic.
  • Experts expect food exports to suffer more and longer than energy and mineral exports, although the drop in oil prices to 1980s levels will squeeze Venezuela, Ecuador, Mexico, Colombia, Brazil and Argentina hard. New oil exploration in Brazil and fracking in Argentina has halted.

Most Latin American leaders are not oblivious to the trials ahead. On March 15, Colombian President Iván Duque said the virus will be “especially difficult for the Latin American countries” and “can overwhelm us.” The crisis requires the region to bring its principal comparative advantages – time and the ability to analyze the successful (and failed) tactics in Asia, Europe, and the U.S. – to bear to compensate for its structural weaknesses.

  • Latin America does not have the resources or mobilizational capacity that South Korea does to carry out a massive campaign to test and treat the population, but the region can avoid total catastrophe if it expands and maintains its drastic measures, adheres to the scientific evidence, and learns from other countries’ efforts to manage the outbreak.

March 26, 2020

* Carlos Malamud is a Senior Analyst for Latin America at the Elcano Royal Institute and Professor of Latin American History at the Universidad Nacional de Educación a Distancia (UNED), Madrid. Rogelio Núñez is a Senior Fellow at the Elcano Royal Institute and Professor at El Instituto Universitario de Investigación en Estudios Latinoamericanos (IELAT), Universidad de Alcalá de Henares. This article is adapted from their recent analysis published here on the Elcano Institute website.

This post has been updated to correctly identify the President of Chile.

USMCA: Devil’s in the Details on Automotive Content

By Frank L. DuBois*

Automated manufacturing of cars

Automated car manufacturing/ Steve Jurvetson/ Flickr/ Creative Commons License

The automotive trade regime in the recently completed U.S.-Mexico-Canada Trade Agreement (USMCA) – “NAFTA 2.0” – will create headaches for many manufacturers but appears unlikely to deliver the big boost in jobs it promises. Much of the focus of the negotiations was on changing the automotive rules of origin (ROOs) to encourage more auto manufacturing in the United States and Canada and make it difficult for automakers to shift production from high-wage locations to low-wage factories in Mexico. Under the new rules, some manufacturers will see significant changes in operational strategies while others will be less impacted.

According to the agreement, a 2.5 percent tariff will be applied to the import value of cars (25 percent for light trucks) if the vehicles don’t meet the new ROOs:

  • 70 percent Regional Value Content (RVC) rather than 62.5 percent under the old rules.
  • 40 percent of the Labor Value Content (LVC) of vehicles (45 percent in the case of light trucks) must be made in plants that employ workers making at least $16 per hour.
  • 70 percent of the value of steel and aluminum used in the vehicle must be of regional origin.

The Kogod Made in America Auto Index (KMIAA), which I’ve been compiling for seven years, challenges assumptions used when calculating the U.S. content of a car, including some used as marketing strategies to portray products as being more “American” than what a buyer might think.

  • KMIAA results and rankings differ significantly from those indices that evaluate domestic content solely based on where a car is assembled, without taking into account the country of ownership of the brand. (Japanese, Korean and German car manufacturers are treated the same as U.S. manufacturers despite non-US R&D and profits that are repatriated back to the home country). Location of manufacture of engines and transmissions, which account for approximately 21 percent of vehicle value, may also not be addressed in other indices. Likewise, assembly labor accounts for around 6 percent of vehicle value.
  • The index reveals the complicated nature of content calculations. Toyota assembles only one vehicle at its plant in Tijuana – the Tacoma light truck with an engine of either U.S. or Japanese origin (depending on displacement) and a transmission of either U.S. or Thailand origin. Toyota has made the same truck in San Antonio, Texas, but recently announced that all of Tacoma production will be moving to the Mexican factory. Toyota is likely to reduce its non-North American sourcing (fewer engines and transmissions from Asia), and restructure supply chains to place a premium on U.S. parts and power train sourcing. Other manufacturers face greater shifts. The Audi Q5, for example, currently has 79 percent Mexican parts content and only 3 percent U.S. parts.

Producers’ operational responses are likely to run the gamut from full compliance to limited changes. Some automakers may simply pay the WTO tariff of 2.5 percent for access to the U.S. market. A separate requirement that at least 40 percent of the value of cars be made in plants with $16 per hour labor will be problematic given that wages in Mexican auto plants average $3 to $4 per hour. Producers will have to decide whether to raise wages in Mexican plants, shift sourcing to U.S. and Canadian plants, or attempt to develop ways to game the system by shifting some high-wage expenses into the labor value category. While the new rules may boost some manufacturing jobs in the U.S. and Canada, they will raise costs leading to lower auto sales, and have nowhere near the impact that their boosters have promised. Again, the devil is in the details.

March 5, 2020

* Frank L. DuBois is an Associate Professor of Information Technology and Analytics at American University’s Kogod School of Business. Data for the KMIAA comes from data automakers provide under the American Automotive Labeling Act (AALA) and from field visits to car lots in the DC metropolitan area.

Guyana’s “New Decade” Begins in March

By Wazim Mowla*

President David Granger speaking at a UN Women's Meeting

Guyana President David Granger Speaking at a Global Leaders’ Meeting on Gender Equality and Women’s Empowerment in 2015 / Flickr / Creative Commons License

Guyana’s national and regional elections on March 2 will be its most consequential in 30 years as a huge increase in oil revenues and international interest puts the country in a brighter spotlight, but the country’s new leadership – while having greater resources and opportunities – will still face vexing challenges that oil dollars won’t solve. Guyana continues to discover more oil and has produced its first commercial crude shipment in December 2019. ExxonMobil anticipates that the country will reach a capacity of 120,000 barrels per day this year, and the International Monetary Fund (IMF) estimates an 86 percent increase in GDP. This growth has energized the election campaigns.

  • Eleven political parties are campaigning, with the A Partnership for National Unity + Alliance for Change (APNU+AFC) coalition and the People’s Progressive Party/Civic (PPP/C) at the clear head of the pack. Reliable poll data is scarce, but incumbent President David A. Granger (APNU+AFC) appears confident in his reelection. He is proposing a new “contract with the people” under which he will use oil revenues to increase conditional cash transfers for food, housing, and transportation to residents in the populous coastal areas as well as invest in projects benefiting the 10 percent of Guyanese who live inland .
  • Representing the PPP/C is presidential candidate Dr. Irfan Ali, whose party narrative is that it helped build Guyana without oil and gas and will continue this progress by expanding social programs with the additional revenue. Specifically, Ali wants to reopen sugar estates that Granger closed, sparking protests by the Guyana Agricultural Workers Union (GAWU). To demonstrate its intention to tackle crime, the party has selected Brigadier (retired) Mark Phillips as its Prime Ministerial candidate.

Within the context of Guyana’s highly publicized racial divisions, both political parties are calling for national unity. APNU+AFC has traditionally drawn most of its support from the Afro-Guyanese population (about 30 percent of the population), while the PPP/C leans on the support of Indo-Guyanese citizens (about 40 percent) – while the mixed races (20 percent) and indigenous (10 percent) usually the swing voters who determine the election. The historic racial divisions within the domestic political elite have remained unnaturally suppressed during this election season – perhaps because, for the time being at least, oil is dominating the national dialogue. All political parties understand that Guyanese citizens care more about benefits than the party in power.

While projecting an optimistic vision of Guyana’s future, both major political parties certainly know that oil revenues will not resolve all of country’s problems when it enter what Granger has called its “Decade of Development.” Ethnopolitical divisions are certain to reemerge after the election, and managing suspicions about the use of oil revenues will pose a significant challenge to the victors, especially because the country’s current institutions do not afford the transparency and checks and balances necessary for calming anxieties. The new government is going to have to devise difficult policies on dealing with climate change, the damage to Guyana’s human capital, and the security risks threatening the country’s development.

  • Guyana’s sea level is rising faster than the global average. Large parts of the population live in areas 20 to 40 inches below sea level where groundwater extraction and wetland drainage worsen flooding. Inconsistent weather patterns are disrupting agricultural production, and the country’s sea walls do little to prevent the devastation of crops.
  • Guyana has one of the highest suicide rates in the world – an average of 44 per 100,000 people each year – and gender-based violence is also an increasingly serious problem. A recent survey by the Guyana Bureau of Statistics found that about half of all Guyanese women has experienced or will experience intimate-partner violence.
  • The country also needs to find solutions to threats from outside. The crises in Venezuela and Haiti have already triggered a costly refugee flow, and officials fear the country will become a hotspot for drug and human trafficking and organized crime. Experts expect the oil industry to attract illegal immigration from other Caribbean countries, Venezuela, and South America in search of job opportunities. Once the elections are over, political leaders will have to turn their attention to these troubling realities.

February 21, 2020

* Wazim Mowla is a graduate student at American University, specializing in Caribbean Studies.

Guatemala: Fiscal Challenges Await New President

By ICEFI and CLALS*

Guatemalan President Alejandro Giammattei is sworn in, January 14, 2020

Guatemalan President Alejandro Giammattei is sworn in, January 14, 2020/ US Embassy Guatemala/ Flickr/ Creative Commons/ https://bit.ly/2GeHS0U

Guatemalan President Alejandro Giammattei, inaugurated on January 14, faces a deeper public finance crisis than previously estimated, putting even greater pressure on him to undertake fiscal reforms and start the slow and difficult process of fiscal stabilization and recovery.

  • The Giammattei administration has inherited a fiscal mess from former President Jimmy Morales, during whose four-year administration public spending on principal social needs didn’t surpass 8 percent of GDP (7.9 percent in 2019). Despite slow, slight growth in the education budget in 2015-2019 and a growing population, the number of students enrolled at the elementary and high school level actually contracted. Spending on health – in a country with half of its children suffering from chronic malnutrition, one of the lowest health service levels, and one of the highest infant and maternal mortality rates in the world – remained around 1 percent of GDP. The military budget under Morales, however, expanded considerably, allowing the Armed Forces to purchase weapons and a ship and to at least try repeatedly to buy military aircraft.

The fiscal situation is worsened by the persistent inability of the national tax authority (SAT) to achieve its collection goals for almost a decade, as well as by the array of amnesties and fiscal privileges approved by the National Congress in 2015-19. As a result, the Morales administration ran up fiscal deficits from 1.1 percent of GDP in 2016 to 2.5 percent in 2019 – accelerating the increase in the stock of public debt from 24.7 percent of GDP in 2017 to 27.0 percent in 2019 – Guatemala’s highest in recent history.

  • Making things worse, the debt was principally handled through issuance of Treasury Bonds sold on the national and international markets at terms – higher rates and shorter maturity periods – less favorable to the Guatemalan government. Last September Congress passed a law, supposedly to formalize cattle growers and ranchers (a sector well known for not paying taxes), that many observers say is so badly written that it opens the door to more tax fraud and even money laundering by powerful drug cartels. ICEFI and even some members of Congress note this has the potential to cause even greater revenue losses in 2020.

Budgetary pressures seem very likely to continue rising this year, further complicating the new president’s challenges. The Constitutional Court in late November ruled that the Executive Branch must correct the way it calculates the transfers that the Constitution requires the Central Government make to the municipalities, the Judiciary, the San Carlos University (Guatemala’s only public university), and the federated and non-federated sports institutions. If this ruling is confirmed, it will generate a huge increase in those organizations’ budgets, seriously exceeding the government’s current fiscal capacity by more than US$1 billion (1.2 percent of GDP).

  • ICEFI’s analysis shows that the only way for the new government to overcome the public finance crisis is to undertake far-reaching fiscal reform – revitalization of tax administration, a credible fight against corruption and tax evasion, and correcting budget priorities. For a government more inclined to pro-business and liberal economic thinking, such reforms may represent a considerable political challenge.
  • President Giammattei also inherited a difficult political situation from his predecessor, whose conflict with the UN-supported International Commission against Impunity in Guatemala (CICIG) and whose alliance with persons widely believed to be involved in corruption further undermined popular confidence in the government. The new president will be judged harshly if he fails to demonstrate early on a commitment to fight corruption, increase transparency, and make government more accountable. Accusations that he himself has been involved in corruption are already arising. He faces these tough economic and political challenges – with diminished resources, fiscal chaos, and with the previous administration’s allies considerably strengthened – at a time that Guatemala can ill afford to continue to stumble from crisis to crisis.

January 23, 2020

* The Instituto Centroamericano de Estudios Fiscales conducts in-depth research and analysis on the region’s economies. Data and charts supporting this article can be found by clicking here. This is the fourth in a series of summaries of its analyses on Central American countries. The others are here, here and here.

Cuba: Facing a Tough New Year

By Eric Hershberg, William M. LeoGrande, and Max Paul Friedman*

Intensified U.S. sanctions and the crisis in Venezuela are forcing renewed belt-tightening in Cuba and hindering the government’s ability to undertake even its modest economic reform agenda, but the country is not entering a new “special period” and significant instability does not appear likely in 2020 despite some increased social tensions. The big losers from U.S. sanctions are the small private-sector businesses — B&Bs, restaurants, and entrepreneurs — providing services to U.S. visitors, an estimated 638,000 a year before the Trump Administration clamped down over the course of 2019. But the government has also been forced to make major cutbacks.

  • To cope with fuel shortages caused by U.S. sanctions against oil companies shipping Venezuelan oil to Cuba, the government reduced production in many factories to maintain energy supplies to consumers and avoid overly straining the power grid. Public transportation also faced drastic cuts, largely because of a lack of diesel fuel needed to distribute gasoline. Only some of the affected bus routes have since been restored.
  • Shortages of an array of necessities — from bread, coffee, meat, and many basic medicines to all energy products — have been severe and show no sign of abating as the economy sputters. Domestic demand for products that Cuba can produce, including electric bicycles and appliances, is strong, but financing is too tight. The government is phasing out the convertible peso (CUC) that it artificially pegged to the dollar and is establishing new hard-currency stores to capture dollars now flowing abroad as Cubans buy both consumer goods and inputs for domestic private enterprises in Panama and elsewhere at the rate of $25 million per month — hard currency the government desperately needs. Those dollars the government captures will supposedly be made available for domestic producers to import essential inputs. Cubans expect the CUC to become worthless paper sooner as some vendors now accept only foreign currency, and the street value of a dollar is now more than 1.15 CUC (compared to the official rate of 0.87 CUC).

One leading economist deemed 2019 to have been the worst year since 1993 — with growth essentially flat — and said the forecast for 2020 looks no better. State-owned enterprises are failing to perform efficiently despite years of rhetoric about rationalization and improvements. Foreign purchases, long hindered by a lack of hard currency, have been made even harder by the U.S. sanctions, as suppliers increasingly fear Washington’s scrutiny. The government has not responded to growing pressures by accelerating the sorts of meaningful reforms that have long been needed to increase production and efficiency.

  • Its strategy focuses on import substitution, according to a senior economic official, to reduce the need for hard currency by producing more consumer goods and inputs domestically. The tourism sector has boomed over the past decade, but more than half the hard currency revenue it generates goes to imported inputs. Cuba spends some $2 billion importing food while more than half its arable land lies fallow.
  • Financing investment needed to make import substitution a viable strategy is difficult. Cuban government officials speak of doubling domestic investment, now only 11-12 percent of GDP, but without increasing indebtedness — a huge task for such an inefficient economy. In addition to encouraging tourism enterprises to substitute local for imported inputs, the government hopes to improve conditions during 2020 by implementing a decades-old proposal to establish a closed dollar-based system in which companies retain a portion of revenues to finance investment and imports.
  • Foreign direct investment is the other potential but a largely elusive source for capital. Government fact sheets continue to emphasize the importance of the Mariel Special Export Zone, which has some 50 promised users, $2.5 billion in promised activity, and 7,000 promised jobs. Actual activity in the Zone, however, falls far short of that. The Trump administration’s activation of Title III of the Cuban Liberty and Democratic Solidarity Act (“Helms-Burton”), which allows the previous owners of property expropriated after the 1959 revolution to sue anyone benefiting from it, has made new investors hesitant.

While the economic outlook looks difficult indeed, there are few signs that the government is anxious about social frustrations and tensions becoming a serious challenge, much less an existential threat. The government continues to resist obvious (and relatively easy) reforms, such as allowing cuentapropistas licenses for multiple lines of business. Allowing the CUC to disappear gradually may be a precursor to addressing the years-old distortions caused by the country’s multiple currencies and exchange rates, but there’s still no sign that the government is ready to implement a unified peso. Havana apparently calculates that the country is hardly the pressure-cooker that U.S. policy aims to create by, as U.S. Secretary of State Pompeo reportedly told EU diplomats recently, “starving” the population so as to bring about a regime collapse.

  • Young independent journalists say that public organizing via social media is at times successfully pressing the government, which they deem largely ignorant of popular concerns, to revoke unpopular measures. Yet growing access to the internet may also serve to distract youth from more threatening forms of organizing. Giving people a sense of input on issues like the arts, animal rights, and sexual identity that do not threaten core government policies and processes is probably taking an edge off discontent.
  • The new year is likely to be difficult, particularly as the Venezuela crisis drags on, but, as observers say, “Cuba does ‘bad’ pretty well.” Hope is never a plan, but virtually everyone in Havana expresses hope that U.S. elections in November might bring back a pro-engagement U.S. policy that helps grow Cuba’s private sector and relieving pressure on sources of financing for Cuba to move ahead with its modest reform strategy.

January 7, 2020

*AU Professors Hershberg, LeoGrande, and Friedman traveled to Cuba in December.