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Sunday, March 18, 2012

Does the Embargo Affect Cuba's GDP?

It seems reasonable to suspect that the embargo would have a crushing impact on Cuba's output, so this effect should show up in a comparison of Cuba with its closest neighbours. Most trade theorists would agree that cutting off the largest and closest trading partner will seriously reduce a small economy's performance (usually indicated by GDP per capita). This does not seem to have happened, because Cuba is right in line with its regional peers, Jamaica and Dominican Republic.

The UN is virtually the only data source on Cuban GDP as the government does not consistently publish this figure. I graphed each country's real per capita output using UN data, and added Puerto Rico even though it is fully integrated with the US economy (not really a trading partner so much as another state).


Cuba - red; Jamaica blue; Dominican - green

 
While Puerto Rico is alone at a much higher level, the other three islands form a tight group. Cuba starts the period (1970 - 2008) midway between Dominican Republic and Jamaica but ends the period ranking first. Dominican Republic grows along with Cuba and only Jamaica fails to progress over the 38 years.


It seems reasonable to expect that Cuba’s worst circumstances for growth would be under the embargo along with no majority trading partner. And yet in the most recent period, with exactly those conditions and a tightened embargo, Cuba has seen its highest growth. 

This argues against the idea of economic harm from restraint of trade. Jamaica is free to trade with everyone in the world, has an English language advantage in US markets and is even a member of the Commonwealth since 1962, and yet has seen a steadily deteriorating growth rate for over half a century. Dominican Republic and Puerto Rico are more typical in that they had fluctuating positive growth over the decades although Puerto Rico clearly has an economic advantage in being fully integrated with the US.
 
The structural shift from agriculture to manufacturing and eventually to services is associated with higher long term GDP growth in countries across the Caribbean and across the globe. In other words, less agriculture is strongly correlated with higher national income. The issue for Cuba is that it fits so very neatly into this world-wide economic pattern of modest income during a structural shift away from agriculture. This means that the idea of unique and significant harm to Cuba from the American embargo is highly implausible. Its economic performance matches so many other American trading partners with a similar industrial structure that the embargo clearly has not singled out Cuba from its regional or global cohorts.

So the ultimate question regarding the impact of the embargo is whether Cuba's economy would have soared if it had been allowed to continue selling sugar and cigars to the US for decades. The global experience shows that trade with the US would not suffice. Likewise trade in agricultural and manufactured goods with any other country would not suffice. Instead it seems that Cuba could have fared better had it transformed its economy more quickly toward the international export of services.

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